TBA TBA TBA EXAMS OFFICE

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University of the Witwatersrand, Johannesburg

Course or topic number ECON1016 – 01

Course or topic name MICROECONOMICS FOR ECONOMISTS

Paper number and title
– ECONOMIC THEORY 1A

Examination to be held during

month of 2019

Year of study
(Arts & Science leave blank) FIRST YEAR

Degrees/Diplomas for which this course

is prescribed (BSc (Eng) should indicate BA, BCOM, B. ECON SCIENCE and
which branch) B. SCIENCE

Faculty/ies presenting candidates COMMERCE, LAW & MANAGEMENT,

HUMANITIES AND SCIENCE

Dr Kenneth Creamer (x78127), Dr Lyndal

Internal examiner(s) and telephone Keeton (x78065), Ezekiel Lengaram
extension number(s)
(x78116), Mr Ramilane Mohlakoane, and
Mzwanele Ntshwanti

External examiner(s) Prof Busani Moyo

Special materials required (graph/music/

drawing paper) maps, diagrams, tables, Calculator
computer cards, etc)

Time allowance
Hours | 2

Instructions to candidates (examiners

may wish to use this space to indicate, READ INSTRUCTIONS BEFORE
inter alia, the contribution made by this ANSWERING QUESTIONS
examination or test towards the year .
mark, if appropriate)
 Instructions

1. The exam consists of 2 sections: Section A (40 marks) and Section B (60 marks).
Both Sections must be answered.

2. Section A consists of 20 MCQs. Each correct answer is awarded 2 marks. There is

no negative marking. Section A is to be answered on the red MCQ card provided.

3. Section B is a written section. Section B is to be answered in the answer book

provided.

4. In deciding how long to spend on each question, consider the mark allocation as a
guide: 1 mark = 1 minute.

5. If you make a mistake on your MCQ card do not erase it. Ask for a new MCQ card.
Erasing can cause errors in the MCQ card marking process. Any errors due to an
erased answer will not be corrected for.

6. On the MCQ card please make sure that your student number is filled in at the
appropriate section (bottom left box).

7. Please start at Number 1 on the MCQ card and not at 101!

Eg: 1 2 3 4 5 6 7

8. GOOD LUCK!

© School of Economic and Business Sciences, University of the Witwatersrand

SECTION A: MULTIPLE CHOICE QUESTIONS __________________ 40 MARKS

Question 1
Which of the following is a normative statement?
A. The Judicial Commission of Enquiry into Allegations of State Capture is
investigating corruption in South Africa.
B. Corruption has reduced South Africa’s GDP.
C. South Africa has the second lowest corruption level in the world.
D. Corruption should be rooted out and stopped.
E. The NPA has a mandate to charge those accused of corruption.

Question 2
Use the diagram to answer question 2.

The movement from C to A indicates that:

A. The opportunity cost will be zero.
B. Some butter will have to be given up.
C. There would have to be an increase in the quantity of resources.
D. The cost of additional butter is increasing.
E. A PPF illustrates unlimited wants.

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Question 3

If, measured in 2010 constant prices, the Gross Domestic Product (GDP) of South Africa
was R3,099-trillion in 2016 and was R3,153-trillion in 2017, which of the following
statements is/are true?

(i) The nominal rate of growth of the South African economy was 1,7% from 2016 to
2017
(ii) The nominal growth of the South African economy was R54-billion from 2016 to
2017.
(iii) The value of the nominal GDP in 2017 is equal to R6,252-trillion
(iv) The real rate of growth of the South African economy was 1,7% from 2016 to
2017
(v) To calculate the real GDP, the nominal GDP must be adjusted in order to
eliminate the changes in prices of goods and services.

A. Only (i) is correct.

B. Only (i) and (ii) are correct.
C. Only (iii) is correct.
D. Only (iv) is correct.
E. Only (iv) and (v) are correct.

Question 4

In the Malthusian model what are the consequences of population growth?

(i) The average output per worker rises.

(ii) The average output per workers stays constant.
(iii) The average output per workers falls.
(iv) The economy tends to experience ever rising incomes.
(v) The economy tends to experience incomes which fall back to subsistence level.

A. Only (i) is correct.

B. Only (ii) is correct.
C. Only (iii) is correct.
D. Only (i) and (iv) are correct.
E. Only (iii) and (v) are correct.

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Question 5
Typically in comparing the Gini coefficients for market income and disposable income
which of the following statements is/are true?

(i) The Gini coefficient will be lower for market income than for disposable income.
(ii) There will be no difference between the Gini coefficients for market income and
disposable income.
(iii) The Gini coefficient will be lower for disposable income than for market income.
(iv) Taxes and transfers are taken into account when measuring the Gini coefficient
for market income.
(v) The Gini coefficient will be lower for disposable income than for market income
due to government policies on taxes and transfers.

A. Only (iii) and (iv) are correct.

B. Only (iii), (iv) and (v) are correct.
C. Only (iii) and (v) are correct.
D. Only (i) is correct.
E. Only (ii) is correct.

Question 6
For a specific year the 90/10 ratio, defined as the average income of the richest 10% of a
population divided by the average income of the poorest 10%, for South Africa is 72,8,
for Brazil is 28,7 and for Norway is 5,4. Which of the following statements is/are true in
this regard?

(i) Norway with a 90/10 ratio of only 5,4 has greater income equality than South
Africa and Brazil.
(ii) South Africa is a highly equal society with a 90/10 ratio of only 72,8.
(iii) South Africa with a 90/10 ratio of 72,8 has less income inequality than Brazil and
Norway.
(iv) Norway is a highly unequal society with a 90/10 ratio of only 5,4.
(v) South Africa with a 90/10 ratio of 72,8 has greater income inequality than Brazil
and Norway.

A. Only (i) is correct.

B. Only (ii) and (iv) are correct.
C. Only (iii) is correct.
D. Only (i) and (v) are correct.
E. Only (v) is correct.

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Question 7
Suppose that the cross-price elasticity of demand for good A with respect to good B is
given as –0.75. Good A and good B are ___________If the price of good B rises by 4%,
the quantity demanded of good A will____________:
A. Complements; fall by 18.75%.
B. Substitutes; rise by 18.75%
C. Substitutes; fall by 30%.
D. Complements; rise by 3%.
E. Complements; fall by 3%.

Question 8
The market for maize meal is characterized by the following demand and supply
equations: 𝑄𝐷 = 800 – 10𝑃 and 𝑄𝑆 = 50𝑃 – 1,000, where P is the price per bag of
maize meal and Q measures the quantity of maize meal. What is the size of the
deadweight loss if the government imposes a price ceiling of R25 per bag of maize meal?
A. R3,750
B. R4,418
C. R6,000
D. R8,900
E. R7,500

Question 9
Use the following diagram to answer the question below.

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Which of the following statements is FALSE?

A. Indifference curve U2 provides a higher level of utility than indifference curve U1.
B. Bundle C is preferred to bundle D.
C. Bundle A is preferred to bundle C.
D. The consumer is indifferent between bundle A and bundle D.
E. The indifference curves are transitive.

Question 10
Molefe is buying shirts and shoes such that the marginal utility of shirts is 12 and the
marginal utility of shoes is 3. Shirts are priced at R80 while shoes are priced at R20. It
can be concluded that Molefe is:

A. Spending too much on shirts and not enough on shoes.

B. Spending his income in such a way as to maximize his utility.
C. Spending too much on shoes and not enough on shirts.
D. Switching some funds from shirts to shoes will maximize his utility.
E. Spending beyond his budget constraint.

Question 11

Use the following diagram to answer the question below.

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Which of the following is correct about marginal cost and average cost?

(i) At point A, marginal cost is at minimum.

(ii) At point B, marginal cost equals average cost.
(iii) At point C, average cost is at minimum.
(iv) At point A, average cost equals marginal cost.
(v) At point C, marginal cost equals average cost.

A. Only (i) and (iii) are correct.

B. Only (i), (iii), and (v) are correct.
C. Only (iii) is correct.
D. Only (ii), (iv), and (v) are correct.
E. Only (i), (ii), and (v) are correct.

Question 12

Which of the following is correct about isocost and isoquant?

A. The slope of the isocost is the relative price of factor inputs and the slope of the
isoquant is the marginal rate of technical substitution of factor inputs.
B. The slope of the isocost is the marginal rate of technical substitution of factor
inputs and the slope of the isoquant is relative price of factor inputs.
C. When the relative price of factor inputs equals the marginal rate of technical
substitution of factor inputs, the firm has a perfectly elastic demand for factor
inputs.
D. When the marginal product of capital per interest is greater than the marginal
product of labour per wage, the firm receives more return from labour than
capital.
E. When the marginal product of capital per interest is less than the marginal product
of labour per wage, the firm receives more return from capital than labour.

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Question 13

Given the following demand function: P = a – bQ, which of the following statements is
correct about elasticity and total revenue? (a, b > 0.)

a
A. When Q > 2b , demand is elastic and total revenue is decreasing.
a
B. When Q > b , demand is inelastic and total revenue is increasing.

C. When Q = ab , demand is unit elastic and total revenue is zero.

a
D. When Q < 2b , demand is elastic and total revenue is increasing.
a
E. When Q < 2b , demand is inelastic and total revenue is zero.

Question 14

Which of the following statements is/are correct about perfectly competitive and purely
monopolistic markets?

(i) In a perfectly competitive market both buyers and sellers believe that their own
actions have no effect on the market price, and a pure monopolist sets the price.
(ii) The demand curve for a perfectly competitive firm and a pure monopolistic firm
is horizontal.
(iii) In a perfectly competitive market, the market price equals marginal cost, and a
purely monopolistic firm sets its price above its marginal cost.
(iv) Both perfectly competitive market and purely monopolistic market compete on
product quality.
(v) Purely monopolistic market has excess capacity.

A. Only (i) and (iii) are correct.

B. Only (ii), (iii), and (iv) are correct.
C. Only (i), (iii), and (iv) are correct.
D. Only (iii) and (v) are correct.
E. Only (i), (iii), and (v) are correct.

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Question 15

The following graph represents a firm operating in a monopolistically competitive

market.

What is the firm’s short-run profit?

A. R0
B. R2000
C. R14000
D. R8000
E. R12000

Use this information to answer question 16 and 17.

Suppose that a profit-maximizing monopoly faces a demand curve given by P = 10 −

1
Q and its total cost function is given by TC = Q2 + 4Q.
2 d

Question 16

What is the social loss created by the firm?

A. 0.8
B. 0.2
C. 2
D. 0.4
E. 2.5

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Question 17

What would be the market-clearing quantity for this monopoly?

A. 6
B. 1
C. 4
D. 2
E. 2.4

Question 18

Which of the following is/are correct for an oligopolistic market in general?

(i) An oligopolistic firm believes that rivals will match price cuts but not price
increases.
(ii) The kinked demand curve indicates asymmetric information about a price change.
(iii) Collusive behaviour is illegal.
(iv) Profit is maximized when price equals marginal cost.
(v) Changes in the prices of rivals have no effect on firm’s individual demand
schedule.

A. Only (iii), (iv), and (v) are correct.

B. Only (i) is correct.
C. Only (i) and (ii) are correct.
D. Only (ii), (iii), and (v) are correct.
E. Only (iii) is correct.

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Question 19

Firm A sells 20 litres of water that gives an individual supernatural power and the water
can be used for cleansing. Its short-run output supply and labour demand is given in the
table below. Firm A sells each 20 litres for R20 and pay a wage rate of R100 to its labour.

Workers Output Marginal Product

of labour
1 10 10
2 24 14
3 44 20
4 60 16
5 72 12
6 80 8
7 84 4

How many workers would maximize employment and what is the firm’s extra profit at
the point at which employment is maximized?

A. Workers = 6 and extra profit = R120.

B. Workers = 7 and extra profit = R80.
C. Workers = 4 and extra profit = R160.
D. Workers = 6 and extra profit = R60.
E. Workers = 5 and extra profit = R140

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Question 20

The following diagram shows the demand and supply of labour faced by a firm operating
in a competitive labour market.

Which area represents the workers economic rent for this firm?

A. Area ABE.
B. Area 0W*E.
C. Area 0L*E.
D. Area W1 BL1 .
E. Area BCE.

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SECTION B: WRITTEN QUESTIONS 60 MARKS

Question 1 (11 marks)

Suppose that Serena and Venus make tennis balls and tennis rackets. Serena can produce
40 tennis balls per hour or 4 tennis rackets per hour whilst Venus can produce 80 tennis
balls per hour or 5 tennis rackets.
a. What is the difference between absolute advantage and comparative advantage?
(2 marks)

An individual has a comparative advantage compared to another in the production of a

good if she has a lower opportunity cost in producing it. An individual has an absolute
advantage in producing a good if he or she is more efficient at producing that good
compared to someone else.

b. Who has absolute advantage in producing tennis balls?

(1 mark)
Venus has absolute advantage in producing tennis balls.

c. Determine who has a comparative advantage in producing tennis rackets and who
has comparative advantage in producing tennis balls.
(4 marks)

The production Matrix will look like this:

Serena Venus
Tennis Balls 40 80
Tennis Rackets 4 5

Serena’s opportunity cost for tennis balls will be:

4R: 40 B subsequently the cost of 1 ball would be 4/40 = 1/10 or 0.1
Thus for 1 Tennis Ball produced by Serena, she will forego 1/10 or 0.1 tennis
rackets

Venus’s opportunity cost for tennis balls will be:

5R: 80 B subsequently the cost of 1 ball would be 5/80 = 1/16 or 0.0625
Thus for 1 Tennis Ball produced by Venus, she will forego 1/16 or 0.0625 tennis
rackets

Serena’s opportunity cost for 1 racket will be 10 Balls.

Venus’s opportunity cost for 1 racket will be 16 Balls.

As a result from the above, Venus has a comparative advantage in making Tennis
Balls whilst Serena has a comparative advantage in Tennis Rackets.

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 d. Suppose Serena and Venus choose to specialise in the good for which they have a
comparative advantage and trade at a price of 1 racket for 15 balls. Who will gain
from this specialisation at this trade price?
(4 marks)

The mutually beneficial trade price for rackets is 10 Balls < Racket < 16 Balls. If they
choose to specialize Venus will produce Balls, whilst Serena will produce or make
rackets. For 2 Tennis rackets, Serena will get in return 30 Tennis Balls having 2 Rackets
and 30 Balls. Whilst Venus will have 50 Tennis Balls and two Rackets. Both Players will
gain from Trade as each will have one of each respective good instead of just one good
(Ball or Racket).

Question 2 (9 Marks)

a. Explain what is meant by individual’s endowments and outline an example of

how endowments can play a role in influencing an individual’s earning potential?
(3 marks)

Endowments are the facts about an individual that may affect his or her income, such as
the physical wealth a person has, such as, land, housing, or a portfolio of shares.
Endowments also include the level and quality of schooling, special training, the
computer languages in which the individual can work, work experience in internships,
citizenship, whether the individual has a visa allowing employment in a particular labour
market, the nationality and gender of the individual, and even a person’s race or social
class background. Examples of endowments that influence an individual’s earnings
potential are as follows:
‒ Financial wealth and physical assets they own: For example, land or the
buildings and machinery of a company on which they may receive profits
or rents, and which they can use as collateral.
‒ Schooling and work experience, which affects their value to an employer
and therefore their earnings on the labour market.
‒ Race, gender, age, and other aspects that may affect wages, access to
credit, or other exchanges. In this sense racial or gender or other forms of
categorial discrimination could serve to limit an individual’s endowments
and could be used to explain wage discrimination, etc.
‒ Citizenship and whether the individual has a visa, which determine
whether they can legally work in a particular country and therefore their
earnings on the labour market.

b. Explain how intergenerational inequality is transmitted and what the

consequences are of a high measure of intergenerational elasticity.
(6 marks)

Intergenerational transmission of economic difference, or inequality, is the process by

which the economic status of adult sons and daughters comes to resemble the economic

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status of their parents. The transmission process takes many forms: Children inherit the
wealth of their parents; children of rich parents have access to superior education
opportunities; parents and children tend to share similar preferences, social norms, and
knowledge, skills and social connections.

Intergenerational elasticity measures the percentage difference in the second generation's

status associated with a 1% difference in the adult generation's status. An elasticity of 0.5,
for example, means that if one father is 10% richer, then his child, when grown up, will
be on average 5% richer than the other child. The higher the intergenerational elasticity,
the greater the degree of intergenerational transmission of economic status and the greater
the level of intergenerational inequality. In a society with a high intergenerational
elasticity intergenerational mobility is slow.

Question 3 (10 marks)

Use the following diagram to answer the questions below:

a. On BC1 the price of chicken nuggets is R20 and the price of biltong is R10.
What is the new price of chicken nuggets reflected in BC2?
(2 marks)

Income is R200. New price of chicken nuggets is R40.

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 b. What is the size of the income effect of the price change?
(2 marks)

The income effect reflects the movement from A' to B, or a 3-unit decrease in
consumption of nuggets.

c. What is the size of the substitution effect of the price change?

(2 marks)

The substitution effect reflects the movement from A to A', or a 1-unit decrease in the
consumption of nuggets.

d. Are chicken nuggets a normal good or an inferior good? Why?

(2 marks)

Chicken nuggets are a normal good because a decrease in purchasing power caused the
consumer to buy fewer nuggets.

e. Is biltong a normal good or an inferior good? Why?

(2 marks)

Biltong is an inferior good because the decrease in purchasing power caused the
consumer to buy more biltong.

Question 4 (20 marks)

Suppose that Eskom acts as a 3rd degree price discriminating monopolist by segmenting
its customers into two groups (rural and urban based). The demand for electricity for the
3
rural-based customers is given by 𝑃 = 20 − 4 𝑄𝑑 and the demand for electricity for the
4
urban-based customers is given by 𝑃 = 30 − 5 𝑄𝑑 . The monopolist has a marginal cost of
MC = 2Q + 8. Assume Q, P > 0.

a. Which customer base has more willingness to pay for electricity? Justify your
answer.
(2 marks)

The urban-based customers have more willingness to pay for electricity than the rural-
based customers since their demand is relatively inelastic than the rural-based customers.

b. Calculate the profit-maximizing level of output for each customer base.

(7 marks)
The necessary condition for profit-maximization; MC = MR,
Rural-based customers:
MC = 2Q + 8

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 3
TR = (20 − 4 Q)Q
3
MR = 20 − 2 Q
3
20 − 2 Q = 2Q + 8
24
Q∗ = 7
Urban-based customers:
MC = 2Q + 8
4
TR = (30 − 5 Q)Q
8
MR = 30 − 5 Q
8
30 − 5 Q = 2Q + 8
55
Q∗ = 9

c. Which customer base pays a higher price at the profit maximizing level of output?
Is this result consistent with your answer in (a) above?
(5 marks)
3 24
Rural-based: P = 20 − 4 ( 7 ) = R17.42
4 55
Urban-based: P = 30 − 5 ( 9 ) ) = R25.11
The urban-based customers pay a higher price. Yes, since the monopolist charges a
higher price to customers with a relatively inelastic demand.

d. Draw a fully-labelled graph to illustrate the market for the rural-based customers.
(6 marks)

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 Diagram representing market for rural-based customers

Question 5 (10 marks)

Suppose that the market inverse demand function is given by P = 60 − Q, and there are
two firms operating in an oligopolistic market facing the following total costs;
Firm 1: TC1 = q1 2
Firm 2: TC2 = 15q 2 + q 2 2

a. Explain the difference between the Bertrand and Cournot models.

(3 marks)
In the Cournot model of oligopoly, each firm treats the output of the other firm as given.
√
In the Bertrand model of oligopoly, each firm treats the prices of rivals as given. √
In both models, each firm will incorporate the other firms’ decision in its decision
making about profit maximization. √

b. Derive each firm’s profit function.

(2 marks)

Firm 1: given q 2 , firm 1’s profit function is given by

π1 = (60 − q1 − q 2 )q1 − q1 2 √
Firm 2: given q1 , firm 2’s profit function is given by
π2 = (60 − q1 − q 2 )q 2 − 15q 2 − q 2 2 √

c. Derive each firm’s best reaction function.

(5 marks)

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Firm 1: Given q 2 , firm 1’s profit-maximizing output level solves
𝑑π1
= 60 − 2q1 − q 2 − 2q1 = 0 √
𝑑q1
Therefore, firm 1’s best reaction to q 2 is
1
q1 = 15 − 4 q 2 √√
Firm 2: Given q1 , firm 2’s profit-maximizing output level solves
𝑑π2
= 60 − q1 − 2q 2 − 15 − 2q 2 = 0 √
𝑑q2
Therefore, firm 2’s best reaction to q1 is
45 1
q 2 = 4 − 4 q1 √√

SECTION B TOTAL: 60 MARKS

REMEMBER TO FILL IN YOUR STUDENT NUMBER ON YOUR BOOKLET!

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