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ECO110H and ECO110S Examination November 2004

UNIVERSITY OF CAPE TOWN
SCHOOL OF ECONOMICS

ECO110H and ECO110S
EXAMINATION
NOVEMBER 2004
TIME: 3 HOURS
MARKS: 180
SECTION
A

TOPIC
MCQs

QUESTIONS
1-30

B

Structured
Questions

1-5

MARKS
60
(60 minutes)
120
(120 minutes)

MULTIPLE-CHOICE QUESTIONS
• Write your name on the MCQ answer sheet
• Use pencil to mark your answers and student number in the prescribed
manner
STRUCTURED QUESTIONS




Four questions must be answered
Questions 1 and 2 are compulsory
2 of questions 3 to 5 must be answered.
Use a separate answer book for each question
Indicate clearly the number of each book, and the total number of
books handed in
• Write your examination number in the top right hand corner of each
answer book
• Write the question number clearly on the front of each answer book

1

The price of oil increased by a large amount in 2000. or a surplus. S1 P ric e x S2 y 0 Q u a n tity 3. This caused the caused the price of natural gas to increase. and the amount producers are willing and able to sell. If a product is in surplus supply. At the point of intersection of the demand and supply curves for a product: A) the "selling price" and the "buying price" need not be equal B) the market may. Cameras and film are: A) substitute goods B) complementary goods C) independent goods D) inferior goods 2.ECO110H and ECO110S Examination November 2004 SECTION A: Multiple Choice Questions Marks are awarded as follows: Correct answer: Incorrect answer: Blank: +2 -2/3 0 1. its price: A) is below the equilibrium level B) is above the equilibrium level C) will rise in the near future D) is in equilibrium Use the following to answer question 3. This relationship can best be explained by saying that oil and natural gas are: A) complementary goods and the higher price for oil increased the demand for natural gas B) substitute goods and the higher price for oil increased the demand for natural gas C) complementary goods and the higher price for oil decreased the supply of natural gas D) substitute goods and the higher price for oil decreased the supply of natural gas 5. is the same 2 . A decrease in supply is depicted by a: A) move from point x to point y B) a shift from S1 to S2 C) shift from S2 to S1 D) move from point y to point x 4. of the product might exist depending on the degree of competition D) the quantity that consumers are willing and able to buy. or may not. be in equilibrium C) a shortage.

Demand is thus: A) perfectly price inelastic B) perfectly price elastic C) relatively price inelastic D) relatively price elastic Use the diagram below to answer question 9.90 and the quantity of Y demanded increases from 100 to 120.16 11. A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the: A) more price elastic the supply curve B) larger the coefficient of the price elasticity of demand C) more price elastic the demand for the product D) more price inelastic the demand for the product 8. S C P ric e B A D 0 E Q u a n tity 9.00 is: A) -4.00 B) -0.ECO110H and ECO110S Examination November 2004 6. The price elasticity of supply measures how: A) easily labor and capital can be substituted for one another in the production process B) responsive the quantity supplied of X is to changes in the price of X C) responsive the quantity supplied of Y is to changes in the price of X D) responsive quantity supplied is to a change in incomes 7.2. The absolute value of the price elasticity of demand coefficient is 0.00 D) -3.00 to R1. An effective government price floor is best illustrated by: A) price A B) quantity E C) price C D) price B 10. In which of the following instances does total revenue fall? A) Price rises and supply is elastic B) Price falls and demand is elastic C) Price rises and demand is inelastic D) Price rises and demand is elastic 3 . The price of Y falls from R2. The price elasticity of demand at the price of R2.25 C) -1.

ECO110H and ECO110S Examination November 2004 12. A decrease in the prices of both products C and D. 4 . accompanied by an increase in product prices. ceteris paribus: A) shifts the budget line outward on the horizontal axis. but eventually rises B) falls continuously as total output expands C) varies directly with total output D) does not change as total output increases or decreases. Total fixed cost (TFC): A) falls as the firm expands output from zero. but leaves it anchored at "10" on the vertical axis B) shifts the budget line to the left C) shifts the budget line to the right D) has no effect on the budget line 14. shifts the budget line to the left C) An increase in product prices will shift the budget line to the left D) An increase in money income will shift the budget line to the right Use the diagram below to answer question 13. 13. Which of the following statements is not correct? A) A reduction in money income shifts the budget line to the right B) A reduction in money income. the marginal product declines beyond some level of employment of the variable resource B) a competitive firm's long-run average total cost curve is U-shaped because of economies and diseconomies of scale C) the demand for goods produced by perfectly competitive industries is downward sloping D) beyond some level of consumption the extra utility derived from additional units of a product yields the consumer smaller and smaller extra amounts of satisfaction 16. The law of diminishing marginal returns to labour states that: A) as extra units of a variable resource are added to a fixed resource. An increase in the price of product A: A) increases the marginal utility per rand spent on A B) decreases the marginal utility per rand spent on A C) does not affect the marginal utility per rand spent on A D) causes utility-maximizing consumers to buy more of A 15.

Suppose that at 500 units of output marginal revenue is equal to marginal cost.ECO110H and ECO110S Examination November 2004 Use the information in the table below to answer question 17. If the firm sold 4 000 units of output at R300 per unit. On the basis of this information we: A) can say that the firm should close down in the short-run B) can say that the firm can produce and realize an economic profit in the short-run C) cannot determine whether the firm should produce or shut down in the short-run D) can assume the firm is not using the most efficient technology 5 . Suppose that a business incurs implicit costs of R200 000 and explicit costs of R1 million in 2003. If a perfectly competitive firm shuts down in the short run: A) its loss will be zero B) it will realize a loss equal to its total variable costs C) it will realize a loss equal to its total fixed costs D) it will realize a loss equal to its total costs 21. O u tp u t 1 2 3 4 5 AT $4 2 2 3 3 C 0 7 9 1 8 The total fixed costs for the firm are $10. The firm is selling its output at R5 per unit and average total cost at 500 units of output is R6. N um ber of w orkers 0 1 2 3 4 5 6 T o ta l product 0 8 M a r g in a l p rod u ct -8 10 25 30 3 34 18. When two workers are employed: A) total product is 20 B) total product is 18 C) average product is 10 D) total product cannot be determined from the information given 19. The profit-maximizing level of output for this firm: A) is 3 B) is 4 C) is 5 D) cannot be determined from the information given Use the information in the table below to answer question 18. its accounting profits are: A) R100 000 and its economic profits are zero B) R200 000 and its economic profits are zero C) R100 000 and its economic profits are R100 000 D) zero and its economic losses are R200 000 20. 17.

22. a monopolistic competitive firm charges: A) the same price and produces the same output as a perfectly competitive firm B) a higher price and produces a larger output than a perfectly competitive firm C) a higher price and produces a smaller output than a perfectly competitive firm D) a lower price and produces a smaller output than a perfectly competitive firm 6 .ECO110H and ECO110S Examination November 2004 Use the diagram below to answer question 22. The supply curve for this perfectly competitive firm in the short-run is: A) any point above M on the MC curve B) any point above K on the MC curve C) any point above R on the MC curve D) equal to the distance RM on the MC curve Use the diagram below to answer question 23. Demand is relatively price elastic: A) in the P2P1 price range B) in the 0P1 price range C) in the P2P4 price range D) only at price P2 24. 23. Given the same average cost function.

The monopoly profit: A) cannot be determined from the information given B) will be ae per unit C) will be bc per unit D) will be ac per unit Use the diagram below to answer question 26. If a monopolistically competitive industry changes into an oligopoly. we expect: A) the four-firm concentration ratio to decrease B) the four-firm concentration ratio to increase C) the four-firm concentration ratio to remain the same D) barriers to entry to weaken 28. 26. Tariffs: A) may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs) 7 . The monopoly firm is allocatively efficient at output: A) M B) N C) Q D) R 27. 25. to answer question 25.ECO110H and ECO110S Examination November 2004 Use the diagram below. illustrating a monopoly firm.

P o rk (to n s ) B e a n s (to n s ) P o rk (to n s ) B e a n s (to n s ) A 4 0 L a ta lia 's p r o d B 3 5 u c tio n p o s s ib ilitie s C D E 2 1 0 10 15 20 T r o m b o n ia 's p r o d u c tio n A B C 8 6 4 0 6 12 p o s s ib ilitie s D E 2 0 18 24 30. Suppose that South Africa eliminates high tariffs on textiles made in China. we would expect: A) the price of Chinese textiles to increase in South Africa B) employment to decrease in the Chinese textile industry C) employment to decrease in the South African textile industry D) profits to rise in the South African textile industry Use the table below. to answer question 30. showing the production possibilities tables for two countries.ECO110H and ECO110S Examination November 2004 B) are also called import quotas C) are excise taxes on goods exported abroad D) are per unit subsidies designed to promote exports 29. As a result. Which of the following would be a possible terms of trade between Latalia and Trombonia? A) 1 ton of beans for 1 ton of pork B) 2 tons of beans for 1 ton of pork C) 6 tons of beans for 1 ton of pork D) 4 tons of beans for 1 ton of pork 8 .

All questions are for 30 marks each. Structure of Section B Compulsory questions Question 1: Demand and Supply. Questions may be answered in any order and each question is to be answered in a SEPARATE answer book. and Elasticities Question 2: Theory of the Firm (Production and Cost functions) Two of the following three questions must be answered Question 3: Trade and Imperfect Market Structures (Oligopoly and Monopolistic Competition) Question 4: Market Structure (Perfect Competition and Monopoly) Question 5: Consumer Demand Theory and Applications of Market Analysis Now turn over the page and answer the questions 9 .ECO110H and ECO110S Examination November 2004 SECTION B: Structured Questions Four questions must be answered from Section B.

Use diagrams to show the relationship between the price elasticity of demand and total revenue. to explain the effect of the following on the equilibrium price and quantity. Identify the quantity and price at which the firm maximises total revenue. In addition to the costs of doing this they must also use expensive new testing procedures. ceteris paribus. for beef. Price 0 1 2 3 4 5 6 7 8 9 10 Quantity 10 9 8 7 6 5 4 3 2 1 0 (18) 10 .ECO110H and ECO110S Examination November 2004 Question 1: Demand and Supply. and Elasticities (30) This question is compulsory a) Use a supply and demand diagram. At the same time farmers are required to destroy many of their cattle and burn the remains of the animals. (12) b) Use the data below to calculate the total revenue for the firm. Consumers of meat are horrified to hear that Mad Cow disease (a condition that can cause death if infected meat is eaten) has been detected in South African beef.

Refer specifically to both the marginal and average outputs (products) and explain the relationship between the three output (product) curves. Use two diagrams to explain the effect on total output (product) of an increase in the size of the labour force. Identify the missing data for cells (blocks) marked (i) to (vii).ECO110H and ECO110S Examination November 2004 Question 2: Theory of the Firm (Production and Cost functions) (30) This question is compulsory a) Production functions describe the relationship between inputs and outputs. if the firm wants to increase output it can only do so by increasing the quantity of the variable factors of production. Your job is to advise the management on the effect of this strategy. (8) 11 . This firm uses only capital and labour to produce snarks. (15) b) The table below contains an incomplete set of short-run cost data for a firm that produces widgets. Capital is the fixed factor and labour is the variable factor. and they wish to increase output. (7) Quantity 0 1 2 3 4 5 6 TFC: AFC: TVC: AVC: TC: ATC: MC: c) TFC 20 AFC (i) (ii) TVC 0 10 25 45 70 100 135 AVC TC ATC (iv) (v) MC (vi) (iii) (vii) Total fixed cost Average fixed cost Total variable cost Average variable cost Total cost Average total cost Marginal cost Explain why fixed costs have no effect on marginal costs in the short-run. In the short-run at least one of the inputs is fixed. You are asked to advise the management of the firm. They cannot keep up with the demand with their current labour force of 100 workers. “Snarks Unlimited”. The management of the firm has been taken by surprise by the success of their product. given that labour is the only variable factor of production.

Assume that the firms’ supply curves are perfectly elastic.ECO110H and ECO110S Examination November 2004 Answer any two of questions three. Use a diagram to compare the profit made by a cartel compared to that of a competitive industry. (12) 12 . four and five Question 3: Trade and Imperfect Market Structures (Oligopoly and Monopolistic Competition) a) (30) The diagram below illustrates the production possibilities curves for South Africa and Mocambique. Critically discuss two arguments used to justify the protection of domestic industries. (4) ii) In which product should South Africa specialize? Support your argument with reference to the calculations you did for (i) above. (10) c) Producers form cartels in order to maximise their joint economic profits. 25 Cars 20 15 10 5 0 0 10 20 30 40 50 60 70 80 90 100 Fish South Africa Mozambique i) Calculate the opportunity (real) cost of producing cars and fish in each of the two countries. (4) b) In the past many developing countries have used trade barriers.

b) (30) (8) In a perfectly competitive market economic profits and losses act as a signal to firms. for each of the two goods. bread and milk. Leigh’s total utility schedules. (3) (ii) Identify the bundle of output that Leigh chooses to consume in order to maximise her total utility in consuming the two goods. (6) (iii) What is the total utility that she derives (gets) from consuming bread and milk? (3) 13 .ECO110H and ECO110S Examination November 2004 Question 4: Market Structure (Perfect Competition and Monopoly) a) “A monopoly firm has market power. Quantity 0 1 2 3 4 5 6 7 TU (bread) 0 10 18 25 31 36 40 43 TU (milk) 0 24 44 62 78 90 96 100 (i) Draw a diagram to illustrate Leigh's budget line. are given in the table below. She has a budget of R10. What is the effect on the equilibrium price and quantity of each of these interventions? (15) b) The economy of Utopia has only two products. Put milk on the horizontal axis and bread on the vertical axis. Use diagrams to show how perfectly competitive firms respond to an increase in the market demand for their output in both the short-run and the long-run. an industry. (22) Question 5: Consumer Demand Theory and Applications of Market Analysis (30) a) What is the key difference between a price floor and a price ceiling? Use diagrams to show the conditions under which each of these interventions is effective.” Use a diagram to explain the meaning of this statement. The price of a loaf of bread if R1 and the price of a bottle of milk is R2. and losses to exit. Profits encourage firms to enter.

ECO110H and ECO110S Examination November 2004 (iv) Draw a new diagram to show the effect on the budget line of a simultaneous increase in the price of bread to R2. (3) 14 . and an increase in Leigh's budget to R20. Put milk on the horizontal axis and bread on the vertical axis.