ECO110H and ECO110S Examination November 2004

UNIVERSITY OF CAPE TOWN

SCHOOL OF ECONOMICS

ECO110H and ECO110S

EXAMINATION
NOVEMBER 2004
TIME: 3 HOURS
MARKS: 180
SECTION
A

TOPIC
MCQs

QUESTIONS
1-30

Structured
Questions

1-5

MARKS
60
(60 minutes)
120
(120 minutes)

MULTIPLE-CHOICE QUESTIONS
Write your name on the MCQ answer sheet
Use pencil to mark your answers and student number in the prescribed
manner
STRUCTURED QUESTIONS

Four questions must be answered

Questions 1 and 2 are compulsory
2 of questions 3 to 5 must be answered.
Use a separate answer book for each question
Indicate clearly the number of each book, and the total number of
books handed in
Write your examination number in the top right hand corner of each
answer book
Write the question number clearly on the front of each answer book

ECO110H and ECO110S Examination November 2004

SECTION A: Multiple Choice Questions

Marks are awarded as follows:

Correct answer:
Incorrect answer:
Blank:

+2
-2/3
0

1. Cameras and film are:

A) substitute goods
B) complementary goods
C) independent goods
D) inferior goods
2. If a product is in surplus supply, its price:
A) is below the equilibrium level
B) is above the equilibrium level
C) will rise in the near future
D) is in equilibrium
Use the following to answer question 3.

S1

P ric e

S2

0
Q u a n tity

3. A decrease in supply is depicted by a:

A) move from point x to point y
B) a shift from S1 to S2
C) shift from S2 to S1
D) move from point y to point x
4. The price of oil increased by a large amount in 2000. This caused the caused the price of
natural gas to increase. This relationship can best be explained by saying that oil and natural
gas are:
A) complementary goods and the higher price for oil increased the demand for natural gas
B) substitute goods and the higher price for oil increased the demand for natural gas
C) complementary goods and the higher price for oil decreased the supply of natural gas
D) substitute goods and the higher price for oil decreased the supply of natural gas
5. At the point of intersection of the demand and supply curves for a product:
A) the "selling price" and the "buying price" need not be equal
B) the market may, or may not, be in equilibrium
C) a shortage, or a surplus, of the product might exist depending on the degree of
competition
D) the quantity that consumers are willing and able to buy, and the amount producers are
willing and able to sell, is the same

ECO110H and ECO110S Examination November 2004

6. The price elasticity of supply measures how:

A) easily labor and capital can be substituted for one another in the production process
B) responsive the quantity supplied of X is to changes in the price of X
C) responsive the quantity supplied of Y is to changes in the price of X
D) responsive quantity supplied is to a change in incomes
7. A leftward shift in the supply curve of product X will increase equilibrium price to a greater
extent the:
A) more price elastic the supply curve
B) larger the coefficient of the price elasticity of demand
C) more price elastic the demand for the product
D) more price inelastic the demand for the product
8. The absolute value of the price elasticity of demand coefficient is 0.2. Demand is thus:
A) perfectly price inelastic
B) perfectly price elastic
C) relatively price inelastic
D) relatively price elastic
Use the diagram below to answer question 9.

S
C

P ric e

B
A
D
0

E
Q u a n tity

9. An effective government price floor is best illustrated by:

A) price A
B) quantity E
C) price C
D) price B
10. The price of Y falls from R2.00 to R1.90 and the quantity of Y demanded increases from 100
to 120. The price elasticity of demand at the price of R2.00 is:
A) -4.00
B) -0.25
C) -1.00
D) -3.16
11. In which of the following instances does total revenue fall?
A) Price rises and supply is elastic
B) Price falls and demand is elastic
C) Price rises and demand is inelastic
D) Price rises and demand is elastic

ECO110H and ECO110S Examination November 2004

12. Which of the following statements is not correct?

A) A reduction in money income shifts the budget line to the right
B) A reduction in money income, accompanied by an increase in product prices, shifts the
budget line to the left
C) An increase in product prices will shift the budget line to the left
D) An increase in money income will shift the budget line to the right
Use the diagram below to answer question 13.

13. A decrease in the prices of both products C and D, ceteris paribus:

A) shifts the budget line outward on the horizontal axis, but leaves it anchored at "10" on the
vertical axis
B) shifts the budget line to the left
C) shifts the budget line to the right
D) has no effect on the budget line
14. An increase in the price of product A:
A) increases the marginal utility per rand spent on A
B) decreases the marginal utility per rand spent on A
C) does not affect the marginal utility per rand spent on A
D) causes utility-maximizing consumers to buy more of A
15. The law of diminishing marginal returns to labour states that:
A) as extra units of a variable resource are added to a fixed resource, the marginal product
declines beyond some level of employment of the variable resource
B) a competitive firm's long-run average total cost curve is U-shaped because of economies
and diseconomies of scale
C) the demand for goods produced by perfectly competitive industries is downward sloping
D) beyond some level of consumption the extra utility derived from additional units of a
product yields the consumer smaller and smaller extra amounts of satisfaction
16. Total fixed cost (TFC):
A) falls as the firm expands output from zero, but eventually rises
B) falls continuously as total output expands
C) varies directly with total output
D) does not change as total output increases or decreases.

ECO110H and ECO110S Examination November 2004

Use the information in the table below to answer question 17.

O u tp u t
1
2
3
4
5

AT
$4
2
2
3
3

C
0
7
9
1
8

The total fixed costs for the firm are $10.

17. The profit-maximizing level of output for this firm:
A) is 3
B) is 4
C) is 5
D) cannot be determined from the information given
Use the information in the table below to answer question 18.
N um ber of
w orkers
0
1
2
3
4
5
6

T o ta l
product
0
8

M a r g in a l
p rod u ct
-8
10

25
30
3
34

18. When two workers are employed:

A) total product is 20
B) total product is 18
C) average product is 10
D) total product cannot be determined from the information given
19. Suppose that a business incurs implicit costs of R200 000 and explicit costs of R1 million in
2003. If the firm sold 4 000 units of output at R300 per unit, its accounting profits are:
A) R100 000 and its economic profits are zero
B) R200 000 and its economic profits are zero
C) R100 000 and its economic profits are R100 000
D) zero and its economic losses are R200 000
20. If a perfectly competitive firm shuts down in the short run:
A) its loss will be zero
B) it will realize a loss equal to its total variable costs
C) it will realize a loss equal to its total fixed costs
D) it will realize a loss equal to its total costs
21. Suppose that at 500 units of output marginal revenue is equal to marginal cost. The firm is
selling its output at R5 per unit and average total cost at 500 units of output is R6. On the basis
of this information we:
A) can say that the firm should close down in the short-run
B) can say that the firm can produce and realize an economic profit in the short-run
C) cannot determine whether the firm should produce or shut down in the short-run
D) can assume the firm is not using the most efficient technology

ECO110H and ECO110S Examination November 2004

Use the diagram below to answer question 22.

22. The supply curve for this perfectly competitive firm in the short-run is:
A)
any point above M on the MC curve
B)
any point above K on the MC curve
C)
any point above R on the MC curve
D)
equal to the distance RM on the MC curve
Use the diagram below to answer question 23.

23. Demand is relatively price elastic:

A) in the P2P1 price range
B) in the 0P1 price range
C) in the P2P4 price range
D) only at price P2
24. Given the same average cost function, a monopolistic competitive firm charges:
A) the same price and produces the same output as a perfectly competitive firm
B) a higher price and produces a larger output than a perfectly competitive firm
C) a higher price and produces a smaller output than a perfectly competitive firm
D) a lower price and produces a smaller output than a perfectly competitive firm

ECO110H and ECO110S Examination November 2004

Use the diagram below, illustrating a monopoly firm, to answer question 25.

25. The monopoly profit:

A) cannot be determined from the information given
B) will be ae per unit
C) will be bc per unit
D) will be ac per unit
Use the diagram below to answer question 26.

26. The monopoly firm is allocatively efficient at output:

A)
M
B)
N
C)
Q
D)
R
27. If a monopolistically competitive industry changes into an oligopoly, we expect:
A) the four-firm concentration ratio to decrease
B) the four-firm concentration ratio to increase
C) the four-firm concentration ratio to remain the same
D) barriers to entry to weaken
28. Tariffs:
A) may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers
from foreign competition (protective tariffs)
7

ECO110H and ECO110S Examination November 2004

B) are also called import quotas
C) are excise taxes on goods exported abroad
D) are per unit subsidies designed to promote exports
29. Suppose that South Africa eliminates high tariffs on textiles made in China. As a result, we
would expect:
A) the price of Chinese textiles to increase in South Africa
B) employment to decrease in the Chinese textile industry
C) employment to decrease in the South African textile industry
D) profits to rise in the South African textile industry
Use the table below, showing the production possibilities tables for two countries, to answer question
30.

P o rk (to n s )
B e a n s (to n s )

P o rk (to n s )
B e a n s (to n s )

A
4
0

L a ta lia 's p r o d
B
3
5

u c tio n p o s s ib ilitie s
C
D
E
2
1
0
10
15
20

T r o m b o n ia 's p r o d u c tio n
A
B
C
8
6
4
0
6
12

p o s s ib ilitie s
D
E
2
0
18
24

30. Which of the following would be a possible terms of trade between Latalia and Trombonia?
A) 1 ton of beans for 1 ton of pork
B) 2 tons of beans for 1 ton of pork
C) 6 tons of beans for 1 ton of pork
D) 4 tons of beans for 1 ton of pork

ECO110H and ECO110S Examination November 2004

SECTION B: Structured Questions

Four questions must be answered from Section B.
Questions may be answered in any order and each question is to be answered in a
SEPARATE answer book.
All questions are for 30 marks each.

Structure of Section B
Compulsory questions
Question 1: Demand and Supply, and Elasticities
Question 2: Theory of the Firm (Production and Cost functions)
Two of the following three questions must be answered
Question 3: Trade and Imperfect Market Structures (Oligopoly and
Monopolistic Competition)
Question 4: Market Structure (Perfect Competition and Monopoly)
Question 5: Consumer Demand Theory and Applications of Market Analysis

Now turn over the page and answer the questions

ECO110H and ECO110S Examination November 2004

Question 1: Demand and Supply, and Elasticities

(30)

This question is compulsory

a)

Use a supply and demand diagram, for beef, to explain the effect of the
following on the equilibrium price and quantity, ceteris paribus.
Consumers of meat are horrified to hear that Mad Cow disease (a condition
that can cause death if infected meat is eaten) has been detected in South
African beef. At the same time farmers are required to destroy many of their
cattle and burn the remains of the animals. In addition to the costs of doing
this they must also use expensive new testing procedures.
(12)

b)

Use the data below to calculate the total revenue for the firm. Identify the
quantity and price at which the firm maximises total revenue. Use diagrams to
show the relationship between the price elasticity of demand and total revenue.
Price
0
1
2
3
4
5
6
7
8
9
10

Quantity
10
9
8
7
6
5
4
3
2
1
0
(18)

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ECO110H and ECO110S Examination November 2004

Question 2: Theory of the Firm (Production and Cost functions)

(30)

This question is compulsory

a)

Production functions describe the relationship between inputs and outputs. In

the short-run at least one of the inputs is fixed; if the firm wants to increase
output it can only do so by increasing the quantity of the variable factors of
production.
You are asked to advise the management of the firm, Snarks Unlimited. This
firm uses only capital and labour to produce snarks. Capital is the fixed factor
and labour is the variable factor.
The management of the firm has been taken by surprise by the success of their
product. They cannot keep up with the demand with their current labour force
of 100 workers, and they wish to increase output.
Your job is to advise the management on the effect of this strategy, given that
labour is the only variable factor of production.
Use two diagrams to explain the effect on total output (product) of an increase
in the size of the labour force. Refer specifically to both the marginal and
average outputs (products) and explain the relationship between the three
output (product) curves.
(15)

b)

The table below contains an incomplete set of short-run cost data for a firm
that produces widgets. Identify the missing data for cells (blocks) marked (i) to
(vii).
(7)
Quantity
0
1
2
3
4
5
6
TFC:
AFC:
TVC:
AVC:
TC:
ATC:
MC:

c)

TFC
20

AFC

(i)
(ii)

TVC
0
10
25
45
70
100
135

AVC

TC

ATC

(iv)

(v)

MC
(vi)

(iii)
(vii)

Total fixed cost

Average fixed cost
Total variable cost
Average variable cost
Total cost
Average total cost
Marginal cost

Explain why fixed costs have no effect on marginal costs in the short-run.
(8)
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ECO110H and ECO110S Examination November 2004

Answer any two of questions three, four and five

Question 3: Trade and Imperfect Market Structures (Oligopoly and
Monopolistic Competition)
a)

(30)

The diagram below illustrates the production possibilities curves for South
Africa and Mocambique.
25

Cars

20
15
10
5
0
0

10

20

30

40

50

60

70

80

90

100

Fish
South Africa

Mozambique

i)

Calculate the opportunity (real) cost of producing cars and fish in each
of the two countries.
(4)

ii)

In which product should South Africa specialize? Support your

argument with reference to the calculations you did for (i) above. (4)

b)

In the past many developing countries have used trade barriers. Critically
discuss two arguments used to justify the protection of domestic industries.
(10)

c)

Producers form cartels in order to maximise their joint economic profits. Use a
diagram to compare the profit made by a cartel compared to that of a
competitive industry.

Assume that the firms supply curves are perfectly elastic.

(12)

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ECO110H and ECO110S Examination November 2004

Question 4: Market Structure (Perfect Competition and Monopoly)

a)

A monopoly firm has market power.

Use a diagram to explain the meaning of this statement.

b)

(30)

(8)

In a perfectly competitive market economic profits and losses act as a signal to

firms. Profits encourage firms to enter, and losses to exit, an industry.
Use diagrams to show how perfectly competitive firms respond to an increase
in the market demand for their output in both the short-run and the long-run.
(22)

Question 5: Consumer Demand Theory and Applications of Market Analysis

(30)
a)
What is the key difference between a price floor and a price ceiling? Use
diagrams to show the conditions under which each of these interventions is
effective. What is the effect on the equilibrium price and quantity of each of
these interventions?
(15)
b)

The economy of Utopia has only two products, bread and milk. The price of a
loaf of bread if R1 and the price of a bottle of milk is R2.
Leighs total utility schedules, for each of the two goods, are given in the table
below. She has a budget of R10.
Quantity
0
1
2
3
4
5
6
7

TU (bread)
0
10
18
25
31
36
40
43

TU (milk)
0
24
44
62
78
90
96
100

(i)

Draw a diagram to illustrate Leigh's budget line. Put milk on the

horizontal axis and bread on the vertical axis.
(3)

(ii)

Identify the bundle of output that Leigh chooses to consume in order to

maximise her total utility in consuming the two goods.
(6)

(iii)

What
is the total utility that she derives (gets) from consuming bread and
milk?
(3)

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ECO110H and ECO110S Examination November 2004

(iv)

Draw a new diagram to show the effect on the budget line of a

simultaneous increase in the price of bread to R2, and an increase in
Leigh's budget to R20. Put milk on the horizontal axis and bread on the
vertical axis.
(3)

14