UNIVERSITY OF THE FREE STATE: BLOEMFONTEIN CAMPUS

EECM71407
INTRODUCTORY MATHEMATICAL ECONOMICS
DEPARTMENT OF ECONOMICS
ADDITIONAL HALFHALF-YEAR EXAMINATION 2014:
2014: PAPER 1
ASSESSORS: Mr J. Geldenhuys (0514012904) & Mrs. D. Ndlovu (0514012764);
MODERATOR: Prof. P. Burger
MARKS:
MARKS 100; TIME:
TIME 240 MINUTES
Die Afrikaanse vraestel is op die keersy. | The Afrikaans paper is on the reverse.
This exam paper consists of four (4) questions on three (3) pages. This paper also includes a formulae sheet.
This paper counts for 100% of your exam mark and for 40% of your final mark.
INSTRUCTIONS
1. Answer all of the questions; label and number questions and subsections of questions clearly (e.g.
Question 1, 2.1, etc.).
2. Begin each question on a new page in your answer book.
3. Write legibly in ONLY black or blue ink, and DO NOT write in the margins of the answer book.
4. Show all steps and calculations used to obtain final answers.
5. Round all answers to the nearest THREE (3) decimal places. For greater accuracy, use radicals and
fractions in your calculations.
QUESTION 1 [25]
[25]

1.1) The inverse demand and supply of potatoes are = 450 2 , = 100 + 5 ( =price per ton;
=tons demanded/supplied). Now the government imposes a 20% (ad valorem) sales tax on potato
producers/sellers.
1.1a) Find the equilibrium prices and quantities of potatoes before and after the imposition of the 20% (ad
valorem) sales tax on potato producers. (4)
1.1b) Comment on the distribution of the tax burden (tax incidence) between the buyers and sellers of
potatoes. (2)
1.2) Consider the following system of equations:
=

and

. (9)

+ 11;

= , and then use Cramers rule to solve for

. Rewrite this system in the form

1.3) Suppose that consumption, investment and government expenditure on Alderaan are = 300 +
0.75( ), = 100 5000 , = 150, while taxes are = 0.5 . Furthermore, money supply and money
demand on Alderaan are !" = 504, !# = 200 1600 + 0.8 . Use the goods ( = & ) and money
market (!# = !") equilibrium conditions to write down the IS and LM functions for Alderaan. Then,
rewrite this system in the form ' = , where is a 2 2 matrix of coefficients, is a 2 1 vector and
' = ) *. Finally, use matrix inversion to solve for the equilibrium levels of national income and the interest

rate. (5)

1.4) Find the determinant (+,-( )) and the inverse (

) of , where

QUESTION 2 [32]
[32]

2 1
1
= /6 5 30. (5)
4 1 3

2.1) ACME Incorporated produces safes. Its production function is = 1212. 3 2. , while its wages are 25
(per hour) and capital costs are 50 (per hour). The firm must produce 240 units of output per hour to meet its
daily quota (implying that the production quota is 240 = 1212. 3 2. ).

2.1a) Use the Lagrange multiplier method to find the values of L and K that minimise ACMEs production
costs, subject to its production quota (write down the Lagrangian, then write down the first-order conditions for
constrained cost minimisation, then solve for L and K). Also find and interpret the value of the Lagrange
multiplier, 4. (7)

2.1b) Show that !5 6 =

7
8

at the cost minimising levels of L and K obtained above. (3)

2.1c) Does ACMEs production function exhibit diminishing returns to labour? Explain. (2)
2.2) Suppose that a perfectly competitive firm can sell its output at R4 per unit, while its production function is
= 512. 3 2. and its costs are = 101 + 53.

2.2a) Write down the profit function, as well as the first-order conditions for the maximisation of profit. Then,
solve for K and L (find the levels of K and L that maximise profits). (5)

2.2b) Evaluate the second partial derivatives of the profit function maximised in (2.2a). Are the second-order
conditions for the maximisation of profit met? Explain briefly. (4)
2.2c) What are the levels of revenue, cost and profit at the profit maximising levels of K and L? (2)
2.3) Suppose that the Trade Federation produces and sells two products, anvils and dynamite. The demand
= 20 0.5 , while the Federations costs
for anvils and the demand for dynamite are = 8 2 and
are 10 + 4 + 6 .

2.3a) Write down the profit function, as well as the first-order conditions for the maximisation of profit; then
solve for and . (5)
2.3b) Evaluate the second partial derivatives of the profit function maximised in (2.3a). Are the second-order
conditions for profit maximisation met? Explain briefly. (4)
QUESTION 3 [25]
3.1) Oscorp is a monopolist that produces and sells vaccines. Its marginal revenue (MR) and marginal cost
(MC) functions are !5 = 152.5 6 , ! = 1.5 30 + 175. Furthermore, TC=300 when q=0.

3.1a) Write down Oscorps profit function, and calculate Oscorps profit at the profit maximising level of
output. (4)
3.1b) At what price does Oscorp have to sell its output to maximise its profit? (2)
3.2) The demand and supply functions for sunflowers are

= 950

and

:. 2

. Calculate the

consumer (CS) and producer (PS) surplusses at the equilibrium price and quantity (assume that the sunflower
market is perfectly competitive). (6)

3.3) The marginal propensity to consume (MPC) is , .2.;< . If consumption is 25 if y=0, find the consumption
function. (2)
3.4) Suppose that Boitumelo lends R40 000 to pay for her studies, and that she agrees to pay back the student
loan in full in equal monthly instalments over 5 years, at a nominal interest rate of 12% p.a.
2

3.4a) Calculate the monthly instalments. (2)

3.4b) Calculate the total interest to be paid over the 5 years. (2)
3.5) Suppose that Sarel makes monthly deposits of R1000 for 10 years, and that the nominal interest rate
earned on these deposits is 5.5% p.a. What is the value of the monthly withdrawals that Sarel can make from
his accumulated savings (i.e. from the annuity after the 10 years have expired) for a period of 5 years, if the
nominal interest rate for these 5 years is 4% p.a.? (4)
3.6) Geologists estimate that the remaining global reserves of iron ore are 1 000 000 tons. Annual
consumption is currently 5 000 tons, growing at 6% p.a. How long will it take (in years) to exhaust the
remaining global iron ore reserves? (3)
QUESTION 4 [18]

4.1) Consider the production function

= (0.73 2. + 0.312. ) .

4.1a) Show that this production function is homogenous. (2)

4.1b) Does this production function exhibit increasing, decreasing or constant returns to scale? Explain. (2)
4.1c) Find an expression for the capital elasticity of output, given this production function. (2)
4.1d) Write down an expression for the isoquant

= 10 000. (2)

4.2) The demand for widgets is = 500 20

interpret the following partial elasticities of demand:

+ 5 = > . If

= 10,

= 20, > = 500 , calculate and

4.2a) Price elasticity of demand. (2)

4.2b) Cross-price elasticity of demand. (2)
4.2c) Income elasticity of demand. (2)

4.3) Suppose = ?(1) is the total (short-run) product function of a firm. Show that the average product of
labour (AP) is equal to the marginal product of labour (MP) at the point where AP reaches a maximum. (4)
TOTAL=100