Calculators/Sakrekenaars: Yes

Requirements for this paper/Benodigdhede vir hierdie vraestel: Other resources/Ander hulpmiddels:
Answer scripts/ Multi-choice cards (A5)/
X x
Antwoordskrifte: Multikeusekaarte (A5):

Attendance slips (Fill-in paper)/ Multi-choice cards (A4)/

X
Presensiestrokies (Invulvraestel): Multikeusekaarte (A4):

Scrap paper/ Graph paper/

Rofwerkpapier: Grafiekpapier:

Type of assessment/ Semestertest Qualification/ BCom; BSc

Tipe assessering: Kwalifikasie:
Module code/ ECON221 Duration/ 1 hour 30 min
Modulekode: Tydsduur: 1 uur 30 min
Module description/ Microeconomics/Mikroekonomie Max/ 40
Modulebeskrywing: Maks:
Examiner(s)/ Dr Anton van Wyk Date/ 06/10/2022
Eksaminator(e): Ms Mariska Aucamp Datum:
Mr Jacques de Jongh
Mr Manelisi Sambo
Internal/Interne Prof Derick Blaauw Time/ 10h00
moderator(s): Tyd:
External moderator(s)/ N/A
Eksterne moderator(s):

Submission of answer scripts/Inhandiging van antwoordskrifte: Ordinary/Gewoon

INSTRUCTIONS

1. Answer ALL questions in sections A & B

2. The ceteris paribus condition applies to all questions.
3. Read and fully understand a question before answering.
4. Where possible, provide examples.
5. It is in your best interest to write neatly and legibly.

ECON221 – Test 1 1/5

 SECTION A: MULTIPLE CHOICE QUESTIONS [10]

(1 MARK EACH)
QUESTION ANSWER
1 C
2 A
3 A
4 D
5 C
6 B
7 C
8 D
9 A
10 A

SECTION B: SHORTER THEORY QUESTIONS [15]

Answer all the questions in this section.

Question 1 [4]

1.1 Production function: (1)

Function showing the highest output that a firm can produce for every specified combination
of inputs.

1.2 Amortization (1)

Policy of treating a one-time expenditure as an annual cost spread out over some number of
years.

1.3 Price taker (1)

Firm that has no influence over market price and thus takes the price as given.

1.4 Expansion path (1)

Curve passing through points of tangency between a firm’s isocost lines and isoquants.

Question 2 [2]

With regards to production theory how is the short run defined and also describe how it differs
from the long run?

2.1 (2)
The short run is the period in which at least one of the firm’s inputs are fixed (1 mark), while
the long run is defined as the period in which all the firm’s inputs are variable (1 mark). Note
that the difference is not a matter of calendar time. The difference between the short run and
the long run may vary from industry to industry.

ECON221 – Test 1 2/5

Question 3 [5]

3.1 Use a diagram to explain the relationship between average product and marginal product. (5)
Discuss in detail.

The marginal product of a variable input or factor of production (e.g., labour) is the additional
output (units) produced by employing one additional unit of the variable input (0.5). The
average product of a variable input or factor of production (eg labour) is the average output
(units) produced per unit of the variable input employed (0.5). If the marginal product is
greater than the average product, the average product increases (0.5). If the marginal
product is lower than the average product, the average product decreases. The two are
equal where the average product is at a maximum (0.5). See the diagram below.

• 0,5 marks for product per unit ,

• 0,5marks for inputs,
• 0,5 marks for Average product,
• 0,5 marks for Marginal product

Question 4 [4]

4.1 Explain why any firm maximises profit, or minimises losses, when marginal cost is equal to (4)
marginal revenue.

If marginal revenue (MR) is greater than marginal cost (MC), it implies that the last unit
adds to total profit (1 mark). Conversely, if MC is greater than MR the last unit reduces the
total profit (because a loss is made on the last unit). (1 marks)

If MR > MC, it pays to expand production. If MC > MR, it pays to reduce production (1 mark).
Where MR = MC maximum total profit (or minimum total loss) is achieved and there is no
incentive to expand or contract production (1 marks).

ECON221 – Test 1 3/5

 SECTION C: Calculations [15]

Answer all the questions in this section. / Beantwoord al die vrae in hierdie afdeling

Question 1 [3]

Thandi's Fashion Boutique production function for dresses is 𝑦𝑦(𝐾𝐾, 𝐿𝐿) = 𝐾𝐾 1⁄2 𝐿𝐿1⁄3 , where K is the number of
sewing machines and L is the amount of labor hours employed. Thandi pays R90 per labor hour and sells
each dress for R487.50. Also, Thandi currently has 4 sewing machines.

1.1 With the information given above, complete the attached table. Round all you answers to (2)
two decimals.

√𝑲𝑲
y L 𝑴𝑴𝑴𝑴𝑳𝑳 = R487.50(𝑴𝑴𝑴𝑴𝑳𝑳 )
𝟑𝟑𝑳𝑳𝟏𝟏⁄𝟑𝟑
2 1 0.67 325 ~ 326.65
5.43 20 0.25 119.70 ~ 121.90
6.84 40 0.19 92.60 ~ 95.05
7.83 60 0.17 82.85 ~ 83.03
8.62 80 0.15 73.10 ~ 75.45
0.5 marks 1 mark 0.5 marks

1.2 How many units of labor hours will Thandi employ for the value of the marginal product of (1)
labor to become less than the cost of a labor hour?
60 labour hours

Question 2 [3]

Debonairs Pizza jointly produces pizzas and calzones. The joint function is: 𝐶𝐶𝑃𝑃,𝐶𝐶(𝑞𝑞1,𝑞𝑞2) = 4𝑞𝑞1 + 0.8𝑞𝑞2 −
150𝑞𝑞1 1⁄5 𝑞𝑞2 .1⁄5 , where q1 is the number of pizzas and q2 is the number of calzones Debonairs Pizza
produces. If Debonairs Pizza produces pizza alone, the cost function is: 𝐶𝐶𝑃𝑃(𝑞𝑞1) = 4𝑞𝑞1 and if it produces
calzones alone, the cost function is 𝐶𝐶𝐶𝐶(𝑞𝑞2) = 0.8𝑞𝑞2 .

2.1 Calculate Debonairs Pizza’s degree of economics of scope if they produce 1024 pizzas and (2)
243 calzones
𝐶𝐶𝑃𝑃(𝑞𝑞1) + 𝐶𝐶𝐶𝐶(𝑞𝑞2) − 𝐶𝐶𝑃𝑃,𝐶𝐶(𝑞𝑞1,𝑞𝑞2)
𝑆𝑆𝑆𝑆 = (0.5 mark)
𝐶𝐶𝑃𝑃,𝐶𝐶(𝑞𝑞1,𝑞𝑞2)

150(1024)1⁄5 (243)1⁄5
= (0.5 mark)
4(1024)+0.8(243)−150(1024)1⁄5 (243)1⁄5
= 0.72 (1 mark)

2.2 What does the answer in Question 2.1 indicate? (1)

Since the measure is positive (0.5), Debonairs Pizza enjoys economies of scope (0.5) for
pizza and calzone production.

ECON221 – Test 1 4/5

Question 3 [4]

A production process using two inputs, labour and capital, can be written as:
Q = 5LK MPK = 5L MPL = 5K
where Q represents output per day (tons). The unit costs of inputs are R150 for labour (L) and R1,000 for
capital (K).
3.1 Determine the least cost combination of L and K when output is produced at the rate of 1000 (4)
tons per day and determine the required outlay for 1000 tons per day.

The least cost combination of inputs occurs where the ratio of prices of inputs equals the
marginal rate of technical substitution of one input for another.

𝑃𝑃𝐿𝐿 5𝐾𝐾
The price ratio is: = = 0.15 (0.5 mark)
𝑃𝑃𝐾𝐾 5𝐿𝐿

𝑀𝑀𝑀𝑀𝐿𝐿 5𝐾𝐾
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = = = 0.15 (0.5 mark)
𝑀𝑀𝑀𝑀𝐾𝐾 5𝐿𝐿

𝐾𝐾 = 0.15𝐿𝐿 (0.5 mark)

The output rate is 1000 = Q, thus:

1000 = 5𝐿𝐿𝐿𝐿 = 5𝐿𝐿(0.15𝐿𝐿) = 0.75𝐿𝐿2 (0.5 mark)

𝐿𝐿 = √1333.33 = 36.51 units (0.5 mark)

𝐾𝐾 = 0.15(36.51) = 5.48 units (0.5 mark)

The total outlay needed to purchase the inputs to satisfy this production rate is:

𝐼𝐼 = 𝑃𝑃𝐿𝐿 𝐿𝐿 + 𝑃𝑃𝐾𝐾 𝐾𝐾

= 150(36.51) + 1000(5.48) (0.5 mark)

= R5476.50 + R5480

= R10956.50 total outlay per day (0.5 mark)

Question 4 [5]

Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is
highly competitive, with boxes currently selling for $100 per thousand. Conigan's total and marginal cost
curves are:

TC = 3,000,000 + 0.001Q2
MC = 0.002Q
where Q is measured in thousand box bundles per year.

4.1 Calculate Conigan's profit maximizing quantity. Is the firm earning a profit? (3)
Given the competitive nature of the industry, Conigan should equate P to MC.
100 = 0.002Q
Q = 50,000 (0.5 marks)
To determine profit:

ECON221 – Test 1 5/5

 π = TR - TC (0.5 marks)
TR = PQ
TR = $100 ∙ 50,000
TR = 5,000,000 (1 mark)
TC = 3,000,000 + 0.001(50,000)2 (0.5 marks)
TC = 3,000,000 + 2,500,000
TC = 5,500,000
π = 5,000,000 - 5,500,000
π = -500
Conigan is losing $500,000 per year. (0.5 marks)

4.2 Determine wether or not the firm should shutdown or continue with its operations. (2)
To determine if the firm should operate or shutdown, we must compare P to AVC.

AVC =
TVC = TC - TFC (0.5 marks)
TVC = 5,500,000 - 3,000,000
TVC = 2,500,000 (0.5 marks)
AVC = $50
AVC = 50; P = $100 (0.5 marks)
The firm should operate since P > AVC (0.5 marks)

TOTAL / TOTAAL: 40

ECON221 – Test 1 6/5