ECO2003F: Intermediate Microeconomics

Supplementary Examination
January 2011
TIME: 3 hours
TOTAL MARKS: 180

Calculators may be used in this examination.

This examination comprises TWO sections and 12 pages.
SECTION A: MULTIPLE CHOICE
This section comprises 30 MULTIPLE CHOICE questions.

Please make sure you record your student number in pencil on your MCQ sheet.
Negative marking applies. Each question counts 3 marks. 1 mark will be deducted for
each wrong answer.
Selecting more than one answer for the same question incurs a 1 mark penalty.
If you leave a question blank, you will not be penalised.
Only use pencil to fill in your MCQ sheet, and erase all unwanted marks thoroughly.

SECTION B: LONG QUESTIONS

This section comprises 2 sub-parts, A and B. Please answer sections these sub-sections in
separate answer booklets.

Section A (90 marks)

ANSWER SECTION A ON THE MCQ SHEET USING PENCIL
1. If a consumer prefers potatoes to rice and rice to mealie pap, then to satisfy the
assumptions of rational preferences she must prefer
a)
b)
c)
d)

Rice to potatoes
Mealie pap to rice
Potatoes to mealie pap
All of the above

2. A consumers willingness to trade one good for another can be expressed by his
a)
b)
c)
d)

indifference curve
marginal rate of substitution
Both (a) and (b)
Neither (a) nor (b)

3. Diminishing marginal rate of substitution can be seen when indifference curves

a)
b)
c)
d)

dont cross
are downward sloping
are concave to the origin
become flatter as we increase the quantity of the good on the x-axis

4. The assumption of completeness means that

a)
b)
c)
d)

the consumer can rank all possible consumption bundles

more of a good is always better
the consumer can rank all affordable consumption bundles
all preferences are met

5. If two bundles are on the same indifference curve, then

a) the consumer derives the same level of utility from each
b) the consumer derives the same ordinal utility but not the same cardinal utility from
each bundle
c) the marginal rate of substitution (MRS) between the two bundles is diminishing
d) no comparison can be made since the two bundles cannot really be compared

6. If Xolanis marginal utility of steak equals 10 and his marginal utility of salad equals 2,
then
a)
b)
c)
d)

he would give up five steaks to get the next salad

he would give up five salads to get the next steak
his optimal bundle will contain five times as much steak as salad
his optimal bundle will contain five times as much salad as steak

7. If a utility function between food (F) and clothing (C) is U = F C the marginal utility of
food equals
a)

F
C

b)

C
F

c) 0.5

C
F

d) 0.5

F
C

8. Clifford lives by the motto Eat and drink and be merry today for tomorrow does not
matter. If todays consumption is represented by x and tomorrows consumption is
represented by y, then which utility function best represents Cliffords preferences?
a)
b)
c)
d)

U=xy
U = x/y
U=x
U=y

9. Joes income is R500. The price of food is R2 per unit and the price of accommodation is
R100 per unit. Which of the following bundles is in Joes opportunity set?
a) The combination of 100 units of food and one unit of accommodation is in Joes
opportunity set
b) The combination of 50 units of food and five units of accommodation is in Joes
opportunity set
c) The combination of 200 units of food and two units of accommodation is in Joes
opportunity set
d) The combination of 150 units of food and three units of accommodation is in Joes
opportunity set

10. If the price of one good decreases while the price of the other good remains unchanged,
and the consumers income remains unchanged, what happens to the budget line?
a) The budget line rotates outwards from the intercept on the axis of the good that did not
change in price
b) The budget line swivels inwards from the intercept on the axis of the good that did not
change in price
c) The budget line shifts inwards without a change in slope
d) The budget line shifts outwards without a change in slope
11. Suppose the quantity of x is measured on the horizontal axis. If the price consumption
curve is vertical when the price of x changes then the demand for x is
a)
b)
c)
d)

of unitary elasticity
of constant elasticity
perfectly price inelastic
perfectly price elastic

For question 12 to 14 consider the following diagram. Note: The diagram is NOT draw to
scale
Chip rolls

10

20

Burgers

12. If Thembeka has R100 per month to spend on meals on campus, what is the price of
burgers?
a)
b)
c)
d)

R20
R10
R5
None of the above

13. If Thembeka has R100 per month to spend on meals on campus, what is the maximum
number of chip rolls that she can consume?
a)
b)
c)
d)

12.5
8
20
Cannot be calculated from the information given

14. What happens if Thembekas mother gives her three burgers per month?
a)
b)
c)
d)

The budget constraint shifts out, with a kink representing the amount of the gift
The budget constraint swivels out, with a kink representing the amount of the gift
The budget constraint is unaffected
The budget constraint has a flatter slope than before

Consider the following diagram for questions 15 and 16.

Ham

Pork
15. The diagram above shows Larrys preferences for ham and pork. Which of the following
statements is TRUE?
a)
b)
c)
d)

Ham is an inferior good

Pork is an inferior good
Pork is a Giffen good.
Both are normal goods

16. Which of the following statements is TRUE?

a)
b)
c)
d)

Larrys Engel curve for pork is backward bending

Larrys Engel curve for pork is downward sloping
Larrys Engel curve for pork is upward sloping
Larrys Engel curve cannot be derived with the information given
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17. An inferior good exhibits

a)
b)
c)
d)

a negative income elasticity

a downward sloping Engel curve
a decline in quantity as income rises
all of the above

18. When measuring the substitution effect one uses the change along
a)
b)
c)
d)

the new indifference curve

the old indifference curve
the budget constraint
all of the above

19. Jerry spends his entire income on cereal and tea. Every month he spends half of his income
on each of these goods. Jerrys income elasticity for cereal is 0.75. What is his income
elasticity for tea?
a)
b)
c)
d)

1.25
0.75
1
Unknown with information provided

20. The median household income is R50 000 per year. The typical household spends R125
per year on soap which has an income elasticity of 0.07. From this information you can
conclude that
a)
b)
c)
d)

soap is a luxury
soap is a Giffen good
the income effect from a change in the price of soap is large
the income effect from a change in the price of soap is small

Consider the following linear demand and cost functions.

Demand:
Costs:

P = 2400 150Q
TC = cQ

(C)
(D)

The above functions represent the Demand and Cost functions

for a fishery company, Eye. Eye has a monopoly over fishing in
its jurisdiction.

21. If Eye maximised its profit, what will be its corresponding total output?
a)
b)
c)
d)

Q = (2400-c)/450
Q = (2400)/300
Q = (2400)/450
Q = (2400-c)/300

22. Using Equations C and D, and assuming that c=300, what would Eyes corresponding
price (PM) and profit be in equilibrium?
a)
b)
c)
d)

PM = 1200, Profit = 6300

PM = 1350, Profit = 7350
PM = 1350, Profit = 9450
PM = 1200, Profit = 8400

23. Consider the graphs below. Which graph is the most correct representation of Eyes
Marginal Revenue, Demand and Marginal Cost curves?
Graph a)

Graph b)

Graph c)

Demand:
Costs:

Graph d)

Reminder: Equations C and D

P = 2400 150Q
TC = cQ

(C)
(D)

24. Now, imagine that equations C and D apply to a perfectly competitive market rather
than a monopolistic market by letting Eye be joined by n-1 other firms. Continue to
assume that c=300. As one of the firms in the perfectly competitive market, what will
Eyes output be now?
a)
b)
c)
d)

qeye=16/n
qeye=14/n
qeye=16
qeye=14

25. We know that we can measure the different levels of efficiency of Monopoly against
Perfect Competition using a measure of lost consumer surplus and lost producer
surplus. Having worked out total market output for the perfectly competitive market
and total market output for the monopolistic market, what is the value of the
deadweight loss when Eye holds a monopoly?
a)
b)
c)
d)

DWL = 7350
DWL = 4200
DWL = 3675
There is no deadweight loss because MC is constant

Now consider that D and C represent the general Demand and Cost functions
for firms operating in a duopoly. Eye is joined by a second firm, Jay. They
choose their outputs simultaneously and have the following profit functions.
eye = (2400 150(qeye+ qjay)) qeye - 300qeye
(F)
jay = (2400 150(qeye+ qjay)) qjay - 300qjay
(G)

26. Using functions F and G, find the reaction functions for Eye and Jay when they
maximise profit. Which of the following is the correct combination of reaction
functions?
a)
b)
c)
d)

Reye(qjay) = (2100-150 qeye)/300,

Reye(qjay) = (2100-150 qeye)/450,
Reye(qjay) = (2100-150 qjay)/450,
Reye(qjay) = (2100-150 qjay)/300,

Rjay(qeye) = (2100-150jay)/300
Rjay(qeye) = (2100-150jay)/450
Rjay(qeye) = (2100-150eye)/450
Rjay(qeye) = (2100-150eye)/300

27. In general, considering your work so far and considering what would happen if firms
chose their outputs sequentially to form a Stackelberg monopoly, or their prices
simultaneously to form a Bertrand duopoly, how would you rank the total industry
outputs from these different market structures?
a) QBertrand < QStackelberg < QCournot < QMonopoly
b) QCournot > QStackelberg > QBertrand > QMonopoly
c) QBertrand > QStackelberg > QCournot > QMonopoly
d) QStackelberg > QBertrand > QCournot > QMonopoly
28. Which of the following examples would not qualify or would qualify least as a
system in which increasing returns and lock-in might operate?
a) Improvements in Apple Macintosh computing technology
b) Apple Farming
c) Hi-tech Cider production
d) Instruction in Unix-Based (rather than Microsoft-based) computer operating
systems
29. In his article The Limits of Markets, which of the following points does Robert
Kuttner not emphasise in his argument?
a) Claims about markets suggest that privatizing and marketizing reconcile our civil
and social selves
b) Claims about markets misdescribe the dynamics of human motivation
c) Claims about markets ignore the fact that civil society needs realms of political
rights where some things are not for sale
d) Claims about markets ignore that markets price many things wrongly, implying that
perfectly competitive markets may not yield optimal economic outcomes
30. Examine the following myths.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.

Myth: Increasing returns are subject to return effects

Myth: High technology is mere knowledge and easy to transfer to other regions
Myth: Low technology is a local phenomenon and difficult to transfer to other
regions
Myth: All networks are subject to network effects
Myth: Current Nationally-based political structures wont last indefinitely
Myth: The internet comprises few combinatorial networks
Myth: The coming of the internet heralds a New Economy
Myth: Economies are defined by the Last Big Thing

Which of the above myths were specifically articulated by Arthur in his article Myths
and Realities of the High-Tech Economy?
a)
b)
c)
d)

i., iii., v., vi., and viii. only

ii., iv., v., and vii. only
ii., iii., iv., and vii. only
ii., iv., and vii. only
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Section A. Long questions [60 marks]

(Please note that there is another section of long questions after this in Section B.)
Question A1
A firms short run production function is given by
q = L2 for 0 L 2
and
q = 3 L L2 for 2 < L 7
where L denotes the amount of labour.
(a)
(b)
(c)
(d)

Sketch the production function.

[9]
Over what range of L is the marginal product of labour decreasing?
[3]
Over what range of L is the marginal product of labour negative?
[3]
Use calculus to find the maximum possible level of production. How much labour is
used to produce this maximum value of q?
[5]
[20]

Question A2
A firm has access to two production processes with the following marginal cost functions:
MC1 = 0.4q and MC2 = 2+ 0.2q.
If the firm wants to produce 8 units of output, how much should it produce with each process?
[10]

Question A3
Nobubele runs a firm that produces T-shirts. Her short-run cost function is given by
TC(q) = q2 + 25q +144.
If the market price is R35 per T-shirt, how many T-shirts will Nobubele produce? How much
profit/loss will she be making at this price? Will she shut down in the short run at this price?

[10]
Explain your answer.
Question A4
Suppose market demand in a perfectly competitive industry is Q = 1000 - 4p. If all firms have
2
LRAC = 50 - 5q + q , how many identical firms will there be when this industry is in long-run
equilibrium?
[12]

10

Question A5
A drought in Lesotho has sharply increased the price of water and, consequently, increased the cost of
growing tomatoes. Suppose one grower in the perfectly competitive tomato industry develops a hybrid
tomato that requires 1/2 as much water as the general variety. Assume that the drought is expected to
continue for two more years. What are the expected short-run and long-run effects of the hybrid tomato
on the profits of the grower who developed the hybrid? What are the short- and long-run effects on the
profits for the entire industry?
[8]

TURN OVER FOR PART B OF SECTION B

REMINDER ~ start a new answer book!

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Section B. More long questions [30 marks]

REMINDER ~ start a new answer book!
Question B1
Consider the following information on the South African cinema industry. Ster-Kinekor
claims to have over 70% of the market share of theatres, with Nu-metro and independent
theatres providing the remainder as shown in Column 1. But, Nu-metro claims to have a large
number of screens, because many of its theatres are multiplexes. A multiplex is a theatre with
many screens, rather than just few. The total share of screens for each provider is shown in
Column 2.

Ster-Kinekor
Nu-Metro
Independent
Cinemas
Totals

Market Shares
73%
25%
2%

Number of Screens
58%
35%
7%

100%

100%

Table B1: Markets Shares and Number of Screens in SA Cinema Industry

a) Imagine that in order to have a multiplex or even one theatre in an area, a firm needs to
have a government-issued licence in order to operate that theatre. Alternatively,
imagine that movie theatre companies club together and decide that in order to run a
movie theatre a firm must be on a specific registry. Milton Friedman discusses these
phenomena (as does the textbook) and how they lead to market power. Do licences and
registration of firms work to increase or decrease market power? In whose interests is it
to have these structures?
[15 Marks]
b) Ster-Kinekor has a policy that differentiates its cinemas into one of three kinds: Classic,
Junction and Nouveau. They also have a `members' program where members get
discounted tickets and accumulate points. Similarly, Nu-Metro, Ster-Kinekor's largest
competition, also differentiates its prices. Both cinemas have cheaper days: Tuesdays
for Ster-Kinekor and `Woza' Wednesdays for Nu-Metro. What do these behaviours
suggest about the cinema market in South Africa and about the potential for price
discrimination in the cinema industry? In so doing, briefly define and explain the
different models of price discrimination and whether you think the firms could
implement price discrimination given the data above.
[15 Marks]

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