Professional Documents
Culture Documents
Time:
Total marks:
Examiner:
Internal Moderators:
External Examiner:
Katherine Eyal
Catherine Kannemeyer
Gideon Du Rand
Instructions:
1. There are 30 multiple choice questions in this exam. MCQs that are correctly answered will earn you 3 marks, while each incorrectly answered question attracts a
penalty of 1 negative mark.
2. All questions are compulsory.
3. Please answer part B, C and D in 3 separate new books.
3. In relation to the two scenarios shown in A) and B) above, which of the following
statements apply?
(i) Good X increases in price if the critical threshold, X, is exceeded
(ii) Good X decreases in price if the critical threshold, X, is exceeded
(iii) Assuming X is exceeded, the new price is applied to the entire consumption
bundle in scenario A
(iv) Assuming X is exceeded, the new price is applied to the entire consumption
bundle in scenario B
(v) The absolute price of Y changes beyond X in scenario B
4. The solution to a Lagrangian optimisation problem yields the following demand equation for Good X:
X =
mp2
where m is income, p1 is the price of Good X and p2 is the price of Good Y.
p1
Which of the following statements are true as regards the preceding demand equation?
Use the diagrams below, showing indifference curves and budget lines, to answer
question 5.
5. Good X and Y are substitutes and good X is a normal good. Which of the graphs
below show good X to have these two characteristics when the price of good X is
increased?
(A) Graph A
(B) Graph B
(C) Graph C
(D) Graph D
Use the graph below, showing a Hicks decomposition, to answer questions 6 and 7.
6. If the initial budget constraint is BK, which of the following statements apply?
9. If goods X & Y
(i) are easily substitutable we expect a large income effect in response to any price
change
(ii) are easily substitutable and X becomes more expensive than Y, we expect a
large substitution effect
(iii) cost the same one would consume equal amounts of both
(iv) are perfect complements, they must be consumed in fixed proportions
(v) are salt and pepper, expenditure on which comprises a small share of total
income, we would expect both the income effect and substitution effect to be
small if the price of either good changed
Which of the following statements apply?
(A) (i) & (iii) only
(B) (ii) & (iv) only
(C) (iii) & (v) only
(D) (ii), (iv) & (v) only
10. Which of the following statements are true?
(i) It is possible that a consumer will pick the same market basket when faced
with a choice of a cash grant or a food voucher of equal value
(ii) Cash grants shift part of the budget line to the right but a food voucher would
shift the entire budget line to the right
(iii) A cash grant always allows the consumer more choices than a subsidized price
of equal value for one commodity
(iv) A cash grant always allows the consumer fewer choices than a subsidized price
of equal value for one commodity
(v) The government should provide cash grants if individual consumers know best
how to fulfil their most immediate needs
(A) (i) & (iv) only
(B) (ii) & (iii) only
(C) (i), (iii) & (v) only
(D) (ii), (iii) & (iv) only
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11. In the short run, a profit maximizing firm will respond to a reduction in the wage
rate by
(A) hiring more labour
(B) hiring more capital
(C) hiring less labour
(D) decreasing output
12. When we compare monopsony and perfect competition in the labour market, we can
say that
(A) under monopsony, wages are higher and employment is lower than the levels of
wages and employment seen under perfect competition
(B) under monopsony, wages are lower and employment is higher than the levels of
wages and employment seen under perfect competition
(C) under monopsony, wages are higher and employment is higher than the levels of
wages and employment seen under perfect competition
(D) under monopsony, wages are lower and employment is lower than the levels of
wages and employment seen under perfect competition
13. Tendai grows marijuana in his student flat. He hires students (labour) as employees
to tend the plants (from his very large group of friends), and the marijuana is grown
in a cupboard (capital). There is only one cupboard in the flat, and Tendai does not
currently have the funds to buy another one or to move to a bigger flat with more
cupboards. For him, the long run is equal to
(A) the amount of time it takes to buy another cupboard
(B) the amount of time it takes to acquire more customers
(C) the amount of time it takes to hire an additional employee
(D) the amount of time it takes to grow 1 kilo of marijuana
14. Thomas Malthus prediction of mass starvation resulting from diminishing marginal
returns to labour has not been fulfilled because
(A) the law of diminishing marginal returns did not hold in this case
(B) Malthus ignored other factors like technological change
(C) relative to Malthus day, a larger percentage of todays labour force works in
the agricultural sector
(D) All of the above
16. The vertical distance between the average total cost and the average variable cost
curves at any level of output will always be
18. Some sports writers are sure that rookies of the year will not repeat their performance the following year. Which of the following are they relying on to make this
judgement?
(A) Bounded rationality
(B) Psychophysics of perception
(C) Anchoring and adjustment
(D) Regression effect
19. Nosiphos utility function is given by U = M 1/2 . Nosipho has a choice: take R100 in
cash or take a gamble based on the flip of a (fair) coin. If Nosipho takes the gamble,
the outcomes are as follows: heads, she wins R225; tails, she wins R49. Nosipho will
21. Other things remaining the same, in the long run as compared to the short run
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23. Suppose an industry has 30 firms each with supply curve P = 20 + 90Qi . What is
the industry supply curve?
(A) P = 2/3 + 3Q
(B) P = 20 + 90Q
(C) P = 20 + 3Q
(D) P = 3/2 + Q/3
24. If a firm could perfectly price discriminate
(A) the marginal revenue curve would be the same as the demand curve
(B) the marginal revenue curve would lie below the demand curve
(C) the marginal revenue curve would lie above the demand curve
(D) there would be no marginal revenue function
Use the graph below to answer Question 25.
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25. The above figure shows the demand and marginal cost curves for a monopoly. Under
monopoly, the dead weight loss to society equals
(A) a + b + c
(B) a + b + c + d + e + f
(C) c + f
(D) none of the above.
26. You are given the four payout options shown below for a toss of a coin. If you are
using a maximum strategy, which option do you choose?
(A) Heads you win R500, tails you lose R100
(B) Heads you win R1,000, tails you lose R110
(C) Heads you win R50, tails you lose R25
(D) Heads you win R5, tails you lose R0
Use the following information to answer Questions 27 to 30. In a simple Cournot
model, two firms A and B face an identical market demand curve: P = 75 3Q.
Total costs are zero.
27. The reaction curve of Firm B is given by
(A) QB = 75 3QA
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The first panel shows you the effects of the two policies superimposed on one another, and
the bottom panel illustrates the effect of each policy separately.
The South African government is considering two possible interventions in the education market in South Africa. Prior to any policy being implemented, schooling is initially
at s1 . The two proposals under consideration are outlined below.
For the representative individual, (i) illustrates the impact of option 1, and (ii) the impact of option 2, on schooling. Option 1 allows the representative individual an amount (s2 )
of free schooling tenable at public schools. Option 2 provides the representative individual
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with free schooling up to an amount s2 , which can be redeemed at any school (public or private). The amount of schooling can be thought of as the quality or quantity of education
(skills) obtained.
The following three questions are all intimately related - read all three carefully
before starting to avoid duplication of effort.
(a). Describe the type of policy being employed and the optimal amount of schooling in
(i) as shown by the budget constraint oppq.
[5 marks]
(b). Describe the type of policy being employed and the optimal amount of schooling in
(ii) as shown by the budget constraint opr.
[5 marks]
Reference to the prescribed reading, Hoxby (2009) would be advantageous in answering question c below.
(c). Please compare the final consumption of education in (i) to (ii). Why might the
observed difference in the optimal amount of schooling differ between the policies?
Do you expect to see this pattern for all individuals? How do the level of funding
(relative to the initial expenditure on schooling) and individual preferences influence
the outcome?
[20 marks]
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(a). How many cupboards (K) should you rent, and how many students (L) should you
hire, given the following information:
Q(K, L) = 2 KL
PK = 2000, PL = 8000
[10 marks]
(b). How many kilos of marijuana do you end up producing for the party?
[2 marks]
(c). Describe the problem in (a). graphically. Please ensure you label all the relevant
parts of your graph.
[5 marks]
(d). Does your production function display increasing, decreasing or constant returns to
scale? Give reasons for your answer.
[3 marks]
(e). Is the concept of decreasing returns to scale more of a real world phenomenon, or an
academic concern? Give reasons for your answer.
[4 marks]
(f). Why might a firm see its marginal and average cost decline in the long run, as the
firm increases output? Give two brief reasons. What do we call this phenomenon
of falling marginal and average costs? Would we expect to see older or newer firms
more likely to exhibit signs of this phenomenon? Give reasons for your answer.
[6 marks]
END OF PART C: 30 Marks in Total
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Depart
Return
Cost
Quote 1
2 May 2012
3 May 2012
R8 268
Quote 2
2 May 2012
17 May 2012
R6 100