UNIVERSITY OF THE FREE STATE: BLOEMFONTEIN CAMPUS

EECM3714: INTRODUCTORY MATHEMATICAL ECONOMICS

DEPARTMENT OF ECONOMICS
ALTERNATIVE TEST: 15/4/2016
ASSESSORS: Mr J. Geldenhuys (0514012904) & Mrs. D. Ndlovu (0514012764)
MODERATOR: Prof. P. Burger
MARKS: 50; TIME: 120 MINUTES
Die Afrikaanse vraestel is op die keersy. | The Afrikaans paper is on the reverse.
This test paper consists of 3 questions on 2 pages. A formulae sheet is attached to the back of this paper.
This test counts 40% of your module mark and 24% of your final mark.
INSTRUCTIONS
1. Answer all of the questions; label and number questions and subsections of questions clearly.
2. Write legibly in ONLY black or blue ink, and DO NOT write in the margins of the answer sheet.
3. Show all steps and calculations used to obtain final answers.
4. Round all answers to the nearest THREE decimal places. For greater accuracy, use radicals and
fractions in your calculations.
QUESTION 1 [14]

1.1) Suppose that the demand and supply of copper (1) and iron (2) are:

= 7200 − 4 +3 , = 12 − 1200

1
= 1800 + −3 , =3 − 400
3

Use the equilibrium condition ( = , = 1,2) to find the equilibrium prices ( , ) of copper and iron.
(2)

1.2) Suppose that the supply of carrots is = 1.5 , while the demand for carrots is = . Find and
interpret the price elasticity of supply ( ) at the equilibrium price and quantity. (4)

1.3) Suppose that consumption grows continuously. How many years will it take for consumption to
increase by 75% if the growth rate were 4.25% p.a.? (2)

1.4) Calculate the future value of monthly deposits of R500, made for 30 years, at a nominal interest rate of
4% p.a. Then find the value of the monthly withdrawals that can be made from this annuity for a period of
20 years, at a nominal interest rate of 5% p.a. (4)

1.5) Geologists estimate that there are currently 300 million tons of copper left on Io, while the current level
of extraction and consumption of copper on Io is 5 million tons of copper per year, which is projected to
increase by 6% p.a. After how many years will the copper reserves on Io be exhausted? (2)

QUESTION 2 [15]

2.1) Suppose that a firm’s short-run production function is = 10√ − .

1
2.1a) Find the level(s) of that maximise the firm’s average product of labour (APL). Write down the APL
function, then write down the first-order condition for the maximisation of APL, then find the level(s) of
that satisfies this first-order condition, and lastly verify that the second-order condition for the maximisation
of the firm’s APL is met. (6)

2.1b) Show that the average product of labour (APL) is equal to the marginal product of labour (MPL) at the
level(s) of obtained in (2.1a). (3)

2.2) Suppose that a firm’s short-run production function is = 3 . , while its cost function is = 2 .
Furthermore, the firm can sell its output in a perfectly competitive market at = 40. Write down the firm’s
profit function (HINT: write the profit function so that profit is a function of ), then write down the first-
order condition for the maximisation of the firm’s profit, as well as the level of that satisfies this first-
order condition, and check that the second-order condition for profit maximisation is met at this level of .
(6)

QUESTION 3 [21]

3.1) ACME Corporation produces hammers and screwdrivers at its plant on Triton, while it sells these
hammers and screwdrivers in perfectly competitive markets at = 15 per hammer and = 9 per
screwdriver. Furthermore, the cost of producing hammers and screwdrivers is
= .04 + .01 + .01 + 4 + 2 + 500 ( denotes the number of hammers produced, while
denotes the number of screwdrivers produced).

3.1a) Write ACME’s profit function. (1)

3.1b) Write down the first-order condition for the maximisation of ACME’s profit. Also find the levels of
and that satisfy this first-order condition for profit maximisation. (4)

3.1c) Are the second-order conditions for profit maximisation satisfied at these levels of and (from
(3.1b))? Show/Explain. (4)
.! .! " .!
3.2) Suppose that Wayne Industries’ hourly production function is = + , while its hourly cost
function is = 3 + 4

3.2a) Use the Lagrange multiplier (LM) method to find the levels of and that minimises Wayne
.!
Industries’ hourly cost function, subject to the hourly production quota 2 = + .! " .!. Write down the
Lagrange function, # ; then write down the first-order condition for this constrained cost minimisation
problem. Then find the levels of and that satisfy this condition. Lastly, find and interpret the value of the
Lagrange multiplier, $. (8)
)
3.2b) Show that %&'( = at the levels of and obtained in (3.2a). (4)
*

TOTAL=50