FINAL EXAMINATION

PROGRAMME Master of Business Administration (General)

MODULE Managerial Economics

YEAR One (1)

INTAKE July 2016

DATE 30 May 2017

TIME 09h00 – 12h00

DURATION 3 hours

TOTAL MARKS 100

INSTRUCTIONS TO THE CANDIDATE

1. Questions must be attempted in the answer book provided.

2. All queries should be directed to the invigilator; do not communicate or attempt to communicate with any
other candidate.
3. You have THREE HOURS to complete this paper. You are not allowed to leave the examination room within
the first hour and in the last 15 minutes of this examination.
4. This is a CLOSED BOOK examination.
5. Read ALL instructions carefully.

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SECTION A [40 MARKS]
Answer ALL questions in this section.

QUESTION 1 (20 Marks)

Read the extracts below and answer ALL the questions that follow.

CUBA: The Castro legacy

Marian Tupy of the Cato Institute, a think-tank in Washington, sent out a note last week under the title “Castro’s
accomplishments in Cuba a load of nonsense”. Tupy pointed out among other things that GDP per capita in Cuba had
remained well below the average for Latin America and the Caribbean for the past 40 years. Chile and Cuba had shown
roughly similar GDP per capita levels in the 1970s, but Chile’s figure is now almost double that of Cuba.

Much has been written about Cuba’s purportedly excellent education system, but Tupy shows that literacy rates rose faster
in other Latin American and Caribbean states than in Cuba. As regards Cuba’s much-praised healthcare system, Tupy is
able to demonstrate that between 1960 and 2015 life expectancy in Cuba rose more slowly (25%) than the average (34%)
for the broader Latin American and Caribbean region. In terms of living standards, Tupy points out that car-ownership
levels in Cuba fell between the 1950s and the late 1990s while rising quickly in Brazil, Ecuador, and Colombia.

In 2015 the Brookings Institution, another think-tank, reported that the average take home salary in Cuba was
approximately US$20 per month – less than 10% of Mr Ramaphosa’s proposed new minimum wage for South Africa. This
is a figure confirmed by the Cuban statistical agency as being in the right zone for civil service salaries. In 2014,
Associated Press reported that doctors would see their salaries rise to US$67 per month and nurses to US$25.

The Castro regime survived as long as it did partly through the brutal repression of civil rights.
Extract from: “Cuba under Castro was a hellhole” Frans Cronje (http://www.politicsweb.co.za/)
05 December 2016

MAURITIUS

Mauritius is one of the most successful economies in Africa and one with the highest GDP per capita. The country’s
success is a result of trade led development supported by exports of textiles, sugar and tourism. In recent years, Mauritius
was able to attract foreign direct investment due to its skilled labour force and good infrastructure.

The Gross Domestic Product (GDP) in Mauritius expanded 2.50 percent in the second quarter of 2016 over the same
quarter of the previous year. GDP Annual Growth Rate in Mauritius averaged 3.82 percent from 2001 until 2016, reaching
an all time high of 9.80 percent in the first quarter of 2003
(Extract from tradingeconomics.com)

1.1 Taking the above extracts into consideration discuss the drivers of economic growth in developing economies.
(10 marks)

1.2 Discuss the relationship between social and economic policies, economic growth and living standards in a society.
(10 marks)

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QUESTION 2 (20 Marks)
Read the extract below and answer all the questions that follow.

Amazon Go Will Kill Dreary Lines, Not “Our Jobs”

Self-checkout kiosks at the supermarket? Who wants to stand in a line? The very idea is so barbaric.

Amazon has figured out how you can shop by grabbing what you want and simply walking out. No, it’s not that age-old
innovation called shoplifting. When you walk into their new “Amazon Go” grocery store (the first one opens in Seattle in
early 2017), you first scan a smartphone app to let the system know you’re in.

Then, when you place an item in your bag, a system integrating artificial intelligence, cameras, and sensors detects exactly
what you selected and adds it to your digital cart. If you change your mind and put it back on the shelf, the system will
delete the item from your account. Then, you can just go. Just walk out with your groceries. Upon exiting the premises, the
system will charge your Amazon account. Transaction complete.

If this takes off and spreads, standing in checkout lines simply won’t be a thing anymore. Just like that, Amazon will have
eliminated a universal pain point. Everybody needs groceries, and nobody likes standing in line. Louis CK has this hilarious
bit about waiting in line and mentally projecting pure hate at random people standing ahead of him. It wouldn’t have over a
million YouTube views if it wasn’t a common experience.

Job-Killer?

“But what about the cashiers?” some lament. The New York Post thundered that Amazon Go would be the “next major job
killer to face Americans.” Are such critics really willing to spend a good chunk of their lives standing in line just to artificially
preserve cashier jobs?

Amazon Go is simply finishing what Piggly Wiggly started. Consider the historical context. Store workers used to be an
even bigger part of the shopping process. The customer used to give a shopping list to a clerk, who would then himself
have to rummage through the store and collect the items. In 1916, Piggly Wiggly innovated the first “self-service” grocery
store, in which shoppers browsed the aisles themselves. Customers found the new model to be more convenient and time-
saving, so it swept the industry. Amazon Go is simply finishing what Piggly Wiggly started, developing the first fully self-
service grocery store by eliminating the cashier.

If we are to scupper Amazon Go for the sake of cashiers, why not go even further back in time? Why not create endless
work for store clerks by abolishing the supermarket and restoring full-service grocery stores? Imagine the lines then:
throngs of humanity spilling out of Kroger and Publix, miserable customers gripping their rain-soaked shopping lists, as job-
guaranteed clerks sullenly fill up shopping carts inside.

Did Piggly Wiggly’s disemployment of grocery gophers represent a permanent impoverishment of American workers? No.
It just meant that stores were no longer bidding so much labor away from rival employers. Those rivals had their own
dreams of life-enhancing products and services: dreams that had hitherto remained unrealized for want of help. But now,
thanks to Piggly Wiggly’s labor-saving innovation, workers were available enough to bring those new projects to life:
projects like the electrification of the country (the light switch was invented in 1918) or the manufacture of blenders and
pop-up toasters (both invented in 1919).

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New Frontiers of Possibility

Amazon Go will enrich us, not only by freeing up the time of customers, but also by freeing up the labor of cashiers, which
can then be applied toward the creation of completely new goods and services. Who knows what modern marvels will be
made newly feasible when start-ups and other rivals are finally able to hire a full team?

Such hitherto-impossible life-improvements are what constitute the rising living standards and higher real wages of a
progressing economy. You can only get material progress when you allow change, and you can only have change if you
don’t flip out and pass a law every time someone faces the possibility of getting laid off.

If you really want to hold onto a world of bored cashiers and boring lines, there’s a non-impoverishing way of doing so.
Work to repeal the minimum wage laws that artificially accelerate the automation-based displacement of low-skill jobs. It is
probably no coincidence that Amazon Go is starting in Seattle, a city which sharply raised its minimum wage in 2015.

As you finish up your shopping, spend some of your idle time standing in checkout lines imagining a world in which you
never have to stand in a checkout line again.
(Adapted from: Dan Sanchez (https://fee.org/articles/amazon-go-will-kill-dreary-lines-not-our-jobs/) Friday,
December 09, 2016)

2.1 Given that the article alludes to the fact that minimum wages lead to unemployment (through automation), use a
micro-economic analysis of how such a price floor could affect employment levels. (10 marks)

2.2 The removal of international trade barriers have a similar effect to the technological advancements as discussed in
the article. It eliminates some types of employment because of lower costs. Discuss the roles and responsibilities
of government when low cost producers enter the market. (10 marks)

SECTION B [60 MARKS]

Answer ANY THREE (3) questions in this section.

QUESTION 3 (20 Marks)

3.1 Discuss the major elements of the circular flow of production, income and spending in an economy. (10 marks)

3.2 With the aid of a diagram discuss how the market clearing price (equilibrium price) is established on a market
operating under perfect market conditions. (10 marks)

QUESTION 4 (20 Marks)

4.1 Discuss the THREE (3) methods of calculating GDP. (10 marks)

4.2 With the aid of a diagram, discuss cost push inflation and contrast it to the monetarist view of inflation (10 marks)

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QUESTION 5 (20 Marks)

5.1 Discuss with reasons why there is movement along a demand curve and a shift of a demand curve. (10 marks)

5.2 Economic Growth can be seen as a key macroeconomic goal. Discuss how this may be achieved within a country
of your choice. Indicate the obstacles in achieving this goal. (10 marks)

QUESTION 6 (20 Marks)

6.1 Discuss the consequences of government actions relating to holding producers accountable when they pollute the
environment. (10 marks)

6.2 Explain taxation, the criteria of a “good” tax and the effect of tax on economic growth of an economy. (10 marks)

END OF PAPER

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