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Faculty of Economic and Management Sciences / Fakulteit Ekonomiese en Bestuurswetenskappe
Department of Economics / Departement Ekonomie
Examination period: 1st semester / Eksamenperiode: 1ste semester
EKN 110
Duration /Duur: 2 hours/ure
Date/Datum: 3 June/Junie 2012
Total/Totaal: 75 marks/punte
Date of perusal / Datum van insae:
18 June/Junie 2013: Venues and times will be announced on ClickUP and on the notice board of the
department. Lokale en tye sal op ClickUP bekend gemaak word en op die kennisgewingsbord van die
departement.
Note / Neem kennis:
1) Supplementary exams are granted automatically for a final mark  40 but < 50. / Hereksamens
word outomaties toegestaan vir ’n finale punt  40 maar < 50.
2) The supplementary exam takes place on 26 June 2013 at 07:30. Venue allocation will be
announced on ClickUP. / Die hereksamen vind plaas op 2826 Junie 2013 om 07:30. Lokaaltoedeling
sal op ClickUP bekend gemaak word.
3) Lecturers and administrative staff are not allowed to give candidates their mark prior to the official
publication. / Dosente en administratiewe personeel word nie toegelaat om kandidate se finale punte
aan hulle bekend te maak voor die amptelike publisering daarvan nie.
INSTRUCTIONS / INSTRUKSIES:
1) Answer all the questions. / Beantwoord al die vrae.
2) Please use SIDE 1 of the orange mark-reading sheet to record your answers to section A. Follow
the instructions for completion as indicated at the top of the form. / Gebruik asseblief KANT 1 van die
oranje merkleesvorm om Afdeling A te beantwoord. Volg die instruksies vir voltooiing soos aangedui
bo-aan die vorm.
3) Please take care in coding your student number correctly! / Lê asb. sorg aan die dag om jou
studentenommer korrek te kodeer!
4) Use the answer book to answer section B. / Gebruik die antwoordboek om Afdeling B te
beantwoord.
5) Indicate the language used to answer the paper on the answer book, top-left hand corner. / Dui
asb. die taal waarin jy die vraestel beantwoord aan op die antwoordboek, links bo-aan.
6) Add the question numbers 1 to 9 to the left-hand side column of the designated table, bottom-right
of the answer book. / Vul die vraagnommers 1 tot 9 in, in die linkerkantste kolom van die toepaslike
tabel, regs-onder op die antwoordboek.
7) The question paper consists of 13 pages (page 2-7 English and 8-13 Afrikaans. / Die vraestel
bestaan uit 13 bladsye (bladsy 2-7 Engels en 8-13 Afrikaans).
Internal examiners /
Interne eksaminatore:
Mr J van Rensburg
Mr G Kashalala
Mr C Mwabutwa
Mr FJ Scholtz
Mr L Stander
Mrs S Kilambo
Prof M Breitenbach
External examiner / Eksterne eksaminator:
Dr Roula Inglesi-Lotz
_________________________________________________________________________________
Please turn the page over / Blaai asseblief om
1
SECTION A – MULTIPLE CHOICE QUESTIONS
A.1
A.
B.
C.
D.
[Total: 25]
A decrease in the rate of interest:
lowers the opportunity cost of holding money and leads to an increase in the quantity of
money demanded by savers.
raises the opportunity cost of holding money and leads to an increase in the quantity of money
demanded by savers.
lowers the opportunity cost of holding money and leads to a decrease in the quantity of
money demanded by savers.
raises the opportunity cost of holding money and leads to a decrease in the quantity of money
demanded by savers.
Correct answer A
A.2
A.
B.
C.
D.
The ________ demand for money arises out of the need to hold money as a medium of
exchange. This kind of demand for money also depends on the ________.
precautionary; interest rates
speculative; interest rates
precautionary; national income
transactions; national income
Correct answer: D
A.3
A.
B.
C.
D.
If the nominal wages of grade 1-3 teachers in South Africa rose by 5.5 percent in 2010 and
the price level increased by 7.5 percent, then their real wages have:
decreased by 2 percent.
increased by 2 percent.
increased by 3 percent.
increased by 8 percent.
Correct answer: A
A.4
A.
B.
C.
D.
If government programs to assist the poor are successful at equalizing the income distribution,
then the Lorenz curve should shift ________and the Gini coefficient should _________.
away from the diagonal; decrease
away from the diagonal; increase
toward the diagonal; increase
toward the diagonal; decrease
Correct answer: D
2
A.5
A.
B.
C.
D.
Refer to the above diagram. If line b represents the pre-tax and transfer distribution of income
in South Africa, we would expect the post-tax and transfer distribution to be:
line (a)
line (b)
line (c)
line (d)
Correct answer: A
A.6
A.
B.
C.
D.
Which of the following will likely accompany an expansionary monetary policy?
A higher prime interest rate
A lower Repo rate
A higher Repo rate
Higher income tax rates.
Correct answer: B
A.7
A.
B.
C.
D.
The level of GDP will tend to increase when:
reserve requirements are increased.
there is an increase in the repo rate.
the Reserve bank buys government securities in the open market.
the Reserve bank sells government securities in the open market.
Correct answer: C
A.8
Use the following to answer the question below:
R
Refer to the above diagram. In short-run equilibrium, the monopolistically competitive firm shown
will set its price:
3
A.
B.
C.
D.
below ATC.
above ATC.
below MC.
below MR.
Correct answer: B
A.9
An example of human capital discrimination would be:
A. restricting or prohibiting a minority from entering a higher-paying occupation.
B. a member of a minority group receiving an inferior education.
C. higher unemployment rates for minorities.
D. paying a minority less than other workers.
Correct answer: B
A.10
A.
B.
C.
D.
Employment discrimination puts the economy inside its production possibilities curve
because discrimination:
redistributes income from low-paid to high-paid persons.
promotes present consumption rather than production of capital goods.
arbitrarily blocks women and certain minorities from higher-productivity, higher-wage jobs and
thus keeps the economy from producing its maximum output.
often causes inflation, which reduces the nation's real output.
Correct answer: C
A.11
A.
B.
C.
D.
If a variable input is added to some fixed input, beyond some point the resulting extra output
will decline. This statement describes:
economies and diseconomies of scale.
inefficiency.
the law of diminishing returns.
the law of diminishing marginal utility.
Correct answer: C
A.12
A.
B.
C.
Economies and diseconomies of scale explain:
the profit-maximising level of production.
why the firm’s long-run average total cost curve is U-shaped.
why the firm’s short-run marginal cost curve cuts the short-run average variable cost curve at
its minimum point.
D. the distinction between fixed and variable costs.
Correct answer: B
A.13
A.
B.
C.
D.
Brenda says: "You would have to pay me R50 to go watch this rugby game." For Brenda, the
marginal utility of the event is:
zero.
positive but declining.
positive but less than the ticket price.
negative.
Correct answer: D
4
A.14
A.
B.
C.
D.
A consumer makes purchases of an existing product X such that the marginal utility is 10 and
the price is R5. The consumer also tries a new product Y and at the current level of
consumption it has a marginal utility of 8 and a price of R1. The utility-maximizing rule
suggests that this consumer should:
increase consumption of product X and decrease consumption of product Y.
increase consumption of product X and increase consumption of product Y.
increase consumption of product Y and decrease consumption of product X.
decrease consumption of product Y and decrease consumption of product X.
Correct answer: C
A.15
A.
B.
C.
D.
Assume the price of product Y (the quantity of which is plotted on the vertical axis) is
initially R15 and the price of X (the quantity of which is plotted on the horizontal axis) is
initially R3. Assume money income is initially R60. If the prices of Y and X now increase to
R30 and R6 respectively and money income increases to R120, then the budget line will:
shift rightward and become steeper
shift rightward and become flatter.
shift rightward but its slope will not change.
be unchanged.
Correct answer: D
A.16
A.
B.
C.
D.
Which is a reason why there is no advertising by individual firms under pure competition?
Firms produce a homogeneous product.
The quantity of the product demanded is large.
The market demand curve cannot be increased.
Firms do not make long-run profits.
Correct answer: A
A.17
A.
B.
C.
D.
If a firm is a price taker, then the demand curve for the firm's product is:
equal to the total revenue curve
perfectly inelastic.
perfectly elastic.
unit elastic.
Correct answer: C
A.18
A.
B.
C.
D.
Farmer Jones is producing wheat, and must accept the market price of R6.00 per bushel. At
this time, her average total costs and her marginal costs both equal R8.00 per bushel. Her
average variable costs are R5 per bushel. In choosing her optimal output, farmer Jones
should:
increase output.
increase selling price.
produce zero output and close down.
reduce output but continue production.
Correct answer: D
A.19 If a pure monopolist is producing at that output where P=ATC, then:
A. its economic profits will be zero.
B. it will be realizing losses.
5
C. it will be producing less than the profit-maximising level of output.
D. it will be realizing an economic profit.
Correct answer: A
A.20
A.
B.
C.
D.
In the short-run, a monopolist’s economic profits:
are always positive because the monopolist is a price-maker.
are usually negative because of government price regulation.
are always zero because consumers prefer to buy from competitive sellers.
may be positive or negative depending on market demand and cost.
Correct answer: D
A.21
A.
B.
C.
D.
Ben says that: "An increase in the tax on beer will raise its price." Holly argues that: "Taxes
should be increased on beer because college students drink too much." We can conclude that:
Ben’s statement is normative but Holly’s positive.
Holly’s statement is normative by Ben’s positive.
both statements are normative.
both statements are positive.
Correct answer: B
A.22
A.
B.
C.
D.
As a student of economics, when you speak of scarcity, you are referring to the ability of
society to:
employ all of its resources.
consume all that is produced.
satisfy economic wants given limited resources.
continually make technological breakthroughs and increase production.
Correct answer: C
A.23
A.
B.
C.
D.
The production possibilities curve bows outward from the origin because:
opportunity costs decrease as the production of a good increases.
opportunity costs increase as the production of a good increases.
more production of one good results in more production of the other good.
resources are of uniform quality.
Correct answer: B
A.24
A.
B.
C.
D.
In a production possibilities table, the most valued or optimal point for society is determined
by:
a combination of products at the midpoint of the table.
a combination of products at the ends of the table
the equality of marginal benefits and marginal costs.
the maximization of opportunity costs
Correct answer: C
A.25
For most products, purchases tend to rise with an increase in buyers' incomes, and to fall with
a decrease in buyers' incomes. Such products are known as:
A. inferior goods
B. direct goods
C. average goods
6
D. normal goods.
Correct answer: D
7
SECTION B – WRITTEN QUESTIONS
[Total: 50]
Question B.1
[2 marks x 5=10]
The Reserve Bank of South Africa (SARB) is considering raising the repo rate in the near future.
Explain and give reasons for the effect of such measure on the following variables:
i. The market rate of interest
ii. Bank deposits
iii. Investors’ loans and investment spending (I)
iv. Consumption spending
v. Aggregate Demand (AD)
Answer B.1 (1 mark for the change + 1 mark for the explanation in each)
i.
Rate of interest will increase. Because the banks will obtain credit from SARB at a higher
rate, they will also charge their customers higher prices.
ii.
Bank deposits will increase. Because bank customers will be attracted by the high interests
rates on deposits
iii.
Loans will decrease. Because it will now cost more and will decrease the amount customers
borrow.
iv.
Aggregate consumption will decrease because people will be attracted to save and earn high
interest rate leaving less money for transaction, and people will borrow less for consuming
goods on credit.
v.
AD will decrease/fall because C and I form major part of AD, if they decrease, AD will
decrease.
Question B.2
[1 mark x 5=5]
In the graphs below the numbers in parentheses after the AD1 , AD2 , and AD3 labels indicate the level
of investment spending associated with each curve, respectively. (All numbers are in billions of
rand).
i.
ii.
Complete the following sentences:
The interest rate and the level of investment spending in the economy are at point D on the
investment demand curve. To achieve the goal of a non-inflationary full-employment output
Qf in the economy, the Reserve bank should:
The interest rate and the level of investment spending in the economy are at point B on the
8
iii.
iv.
v.
investment demand curve. To achieve the goal of a non-inflationary full-employment output
Q f in the economy, the Reserve bank should:
The interest rate and the level of investment spending in the economy are at point C on the
investment demand curve. To achieve the goal of a non-inflationary full-employment output
Q f in the economy, the Reserve bank should:
The economy is at equilibrium at point X on the aggregate demand and aggregate supply
graph. What should the Reserve bank do to achieve the goal of a non-inflationary fullemployment output Q f in the economy?
The economy is at equilibrium at point Y on the aggregate demand and aggregate supply
graph. What should the Reserve bank do to achieve the goal of a non-inflationary fullemployment output Q f in the economy?
Answer B.2 (1 mark for each)
i.
ii.
iii.
iv.
v.
decrease aggregate demand by increasing the interest rate from 4 to 6 percent.
decrease the interest rate from 8 to 6 percent.
make no change in the interest rate.
increase the interest rate from 4 to 6 percent
decrease the interest rate from 8 to 6 percent
Question B.3
[1 mark x 5=5]
Use the following cost information for the Hoola Hoop Sport Shop to complete the following
sentences:







Entrepreneur's potential earnings as a salaried worker = R75, 000
Annual lease on building = R60, 000
Annual revenue from operations = R550, 000
Payments to workers = R180, 000
Utilities (electricity, water, disposal) costs = R20, 000
Entrepreneur's potential economic profit from the next best entrepreneurial activity = R100,
000
Entrepreneur's forgone interest on personal funds used to finance the business = R60, 000
i.
ii.
iii.
iv.
v.
Hoola Hoop's explicit costs are:
Hoola Hoop's implicit costs, including a normal profit are:
Hoola Hoop's total economic costs (explicit + implicit costs, including a normal profit)
are:
Hoola Hoop's accounting profit is:
Hoola Hoop's economic profit is:
Answer B.3 (1 mark for each)
i.
ii.
iii.
iv.
v.
R260 000.
R235 000
R495 000
R290 000
R55 000
Question B.4
[5 marks]
When the price for a winter jacket is R500, the quantity demanded reaches 100 units but when the
price increases to R1000 then the quantity demanded decreases to R75.
9
i. What is the formula for the price elasticity of demand (Not the midpoint formula)? (1)
ii. Calculate the price elasticity of demand for winter jackets AND interpret
(2)
iii. Based on your previous answer, what strategy would you suggest to the supplier of
winter jackets that wants to increase the company’s revenue?
(2)
Answer B.4
i.
1 mark
ii. ed= -0.25. The demand for winter jackets is inelastic (| |
) (1 mark for correct
number and 1 for interpretation).
iii. The company should increase (1 mark) its price (1 mark) in order to increase its total
revenue.
Question B.5
[3 marks]
In the labour market shown above, discuss what will happen if a minimum wage level is set at Wm.
Answer B.5
Employment will decrease from B to A (1 mark)
The supply of labour will increase from B to C (1 mark)
A surplus of labour will exist equal to AC (1 mark)
Question B.6
[12 marks]
Use the table below to answer the following questions
1
2
3
4
5
6
Output
0
1
2
3
4
5
6
7
8
Price
(A)
240
220
200
180
160
(F)
120
Total cost
0
60
100
160
(D)
340
460
600
(G)
Total revenue
0
260
(B)
660
800
900
(E)
980
960
Marginal revenue
Marginal cost
260
220
180
140
100
60
20
-20
60
40
(C)
80
100
120
140
160
10
i.
ii.
iii.
iv.
Answer B.6
i.
ii.
iii.
iv.
Calculate the missing values for (A) to (G)
(7)
At which level of output, will the firm maximise its profits? Why?
(2)
How much profit will the firm make at the profit-maximising point?
(1)
If the Fixed Cost (FC) is equal to R20, then calculate the Average Variable Cost
(AVC) at the profit-maximising point.
(2)
(A)=260
(B)=480
(C)=60
(D)=240
(E) =960
(F)=140
(G)=760
(1 mark each x 7= 7 marks)
At level of output =5 (1 mark) because at that level, MR=MC (1 mark).
Profit=TR-TC=900-340=560 (1 mark)
TC=FC+VC=> 340=20+VC=> VC=320 at Q=5; AVC=VC/Q=320/5=64 (2 marks)
Question B.7
[10 marks]
Discuss and illustrate graphically what will happen to the equilibrium price and quantity of Gouda
cheese if:
i.
The price of cheddar cheese (a substitute good) increases.
(5)
ii.
A study by a prestigious American University reports that Gouda cheese deteriorates
the condition of people with heart problems.
(5)
Answer B.6
i.
Price of cheddar cheese increases (substitutes) Quantity demanded of cheddar
decreases Demand for Gouda increases Demand curve shifts to the right
Equilibrium price increases, Equilibrium quantity increases.
1 point: Demand for Gouda increases
1 point: Equilibrium price increases
1 point: Equilibrium quantity increases.
1 point: Initial equilibrium in the graph
1 point: moving D curve to the right in the graph
= 5 marks
ii.
Demand for Gouda decreases Demand curve shifts to the left Equilibrium price
decreases, Equilibrium quantity decreases.
1 point: Demand for Gouda decreases
1 point: Equilibrium price decreases
1 point: Equilibrium quantity decreases.
1 point: Initial equilibrium in the graph
1 point: moving D curve to the left in the graph
= 5 marks
11