Student Number

Module EECF1614 EFEC2614 EECF1614/

code Bfn Campus South Campus EFEC2614
Underline Qwa-Qwa Campus

UNIVERSITY OF THE FREE STATE

BLOEMFONTEIN CAMPUS

EECF1614/EFEC2614
DEPARTMENT OF ECONOMICS AND FINANCE

NUMBER: 0844543454 / 0724320897

EXAMINATION: Additional Mid-Year 2022

PAPER 1
ASSESSOR(S): Mrs L. Janse van Rensburg; Mrs J. Schlebusch; Mr A.
Magwiro; Mr E. Buthelezi
MODERATOR(S): Dr. C. Duvenhage
TIME: 2 hours MARKS: 100

INSTRUCTIONS:
 Write down your student number in the space provided at the top of each page.
 This paper consists of 4 questions on 15 pages and it also serves as your answer
sheet.
 Answer QUESTION 1 on the grid provided on page 2. NB! Only the grid will be
marked.
 Please answer questions in PEN. Answers in pencil will not be marked.
 Write down your answers on this paper at the space provided after each question.
 Read each question carefully, and draw graphs where necessary.
 Where applicable with calculations, round your FINAL answer off to two decimal
places.
 Do your calculations at the back of your answer sheet and not at spaces meant
for final answers.
 The following abbreviations are used: average total cost = ATC; average variable
cost AVC; marginal cost = MC; marginal revenue = MR; average revenue = AR;
production possibility frontier PPF; Price = P and Quantity = Q.

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1.1 A B C D

1.2. A B C D
Student Number
1.3. A B C D

1.4. A B C D GRID for answers to QUESTION 1

multiple-choice questions.
1.5. A B 1.1C A D B C D [ /60]
Indicate the correct
1.6. A B C D
answer with a cross, e.g.
1.7. A B C D

1.8. A B C D

1.9. A B C D

1.10. A B C D

1.11. A B C D

1.12. A B C D

1.13. A B C D

1.14. A B C D

1.15. A B C D

1.16 A B C D

1.17. A B C D
QUESTION 1
1.18. A B C D [2 x 30 = 60 marks]

1.19. A B C D To answer QUESTION 1 please use

the grid provided on page 2. Clearly
1.20. A B C D indicate the option of your choice with
a cross.
1.21. A B C D
1.1 “It is nonsense to assign top priority
1.22. A B C D to everything. No one can afford
everything. An optimal decision is
1.23. A B C D one that chooses the most
desirable alternative among the
1.24. A B C D possibilities that the available
resources permit.” Such a
1.25. A B C D statement best explains:
A. some production combination
1.26 A B C D outside the PPC.
B. *some production combination
1.27 A B C D along the PPC.
1.28 A B C D
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1.29 A B C D

1.30 A B C D
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C. some production combination inside the PPC.

D. shifting of the PPC outwards.

1.2 John spends all his income on petrol and hot dogs. When his income was R700,
the cost of one liter of petrol and one hot dog was R14.00 each. When the prices
of the two products doubled, John succeeded in negotiating for the doubling of
the income. The new income and prices enable John to:
A. achieve a higher indifference curve.
B. achieve a higher budget constraint.
C. *derive the same level of utility as before.
D. shift both the budget constraint and indifference curve in the same direction.

1.3 Monopolistic competition is characterized by:

A. many sellers, a homogenous product, and free entry of new firms.
B. few sellers, a differentiated product, and little free entry.
C. many sellers, a homogenous product, and no free entry of new firms.
D. *many sellers, a differentiated product, and free entry of new firms.

1.4 The change in quantity demanded of a good resulting from a change in its
relative price, exclusive of whatever change in quantity demanded may be
attributable to the associated change in real income is the:
A. income effect.
B. *substitution effect.
C. inferior effect.
D. marginal utility effect.

1.5 An income inelastic demand curve is one in which a 10% increase in income
causes
A. sales to increase by 12%.
B. sales to decrease by 16%.
C. production to increase by 16%.
D. *none of the above.

1.6 The demand and supply equations for milk in South Africa are algebraically
expressed as follows:
QD = 95 – 5P
QS = -10 + 10P
Assuming a free market, the consumer surplus amounts to:
A. R180
B. *R360
C. R420
D. R540

1.7 Applying the profit maximization condition, when:

A. *marginal cost is greater than marginal revenue, production must go down.

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B. marginal cost is greater than marginal revenue, production must go up.

C. marginal cost is greater than marginal revenue, we are certain that total cost
is greater than total revenue.
D. marginal cost is greater than marginal revenue, average cost is greater than
average revenue.

1.8 The short-run supply curve of a perfectly competitive firm is its:

A. Average total cost curve above the point where it intersects the average
variable cost curve.
B. Average variable cost curve above the point where it intersects the average
total cost curve.
C. Its marginal cost curve above the point where it intersects the average total
cost curve.
D. *Its marginal cost curve above the point where it intersects the average
variable cost curve.

1.9 Which one of the following is not a factor payment?

A. *Taxes
B. Wages
C. Rent
D. Interests

1.10 The slope of an indifference curve:

A. is the amount of one commodity the market requires an individual to give up in
order to obtain one additional unit of another commodity without any change
in the amount of money spent.
B. *represents the maximum amount of one commodity the consumer is willing
to give up in exchange for one more unit of another commodity and remain at
same level of satisfaction.
C. shows that, all the time, more is preferred to less – the axiom of monotonicity.
D. states that a lower price generally increases the amount of a commodity that
people in a market are willing to buy.

1.11 When the monopoly is maximizing profits, its marginal revenue will be:
A. be greater than price.
B. *be less than price.
C. be equal to price.
D. be equal to its average revenue.

1.12 Economist George Stigler once wrote that, according to the consumer theory,
‘if consumers do not buy less of a commodity when their income rises, they will
surely buy less when the price of the commodity rises.’ Such a statement tells us

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that for this commodity:

A. the income effect is always greater than the substitution effect.
B. the income effect is always smaller than the substation effect.
C. *the income effect reinforces the substitution effect.
D. the income effect opposes the substitution effect.

1.13 “The dairy farmers are individual decision-making units; so are the
consumers who purchase milk. How do they decide what courses of action are in
their own best interests? How are these millions of decisions coordinated by the
market mechanism, and with what consequences?” Questions like these are the
substance of:
A. normative economics.
B. positive economics.
C. *microeconomics.
D. macroeconomics.

1.14 Suppose the two points on the xy plane are A(3;8) and B(13;11). The gradient
of the straight line passing through the two points is
A. *0.3
B. -0.3
C. 3.0
D. 10/3

1.15 In a market where the demand curve is inelastic and the supply curve is
perfectly inelastic, a shift of the supply curve to the left,
A. *comes as an advantage to the suppliers.
B. comes as a disadvantage to the suppliers.
C. results in an increase in price accompanied by a decrease in total revenue.
D. results in an increase in total revenue accompanied by a decrease in price
level.

1.16 Sam quits his job as an airline pilot and opens his own pilot training school.
He was earning R40 000 as a pilot. He withdraws R10 000 from his savings
where he was earning 6 percent interest and uses the money in his new
business. He uses a building he owns as a hanger and could rent it out for R5
000 per year. He rents a computer for R1 200, buys office supplies for R500,
rents an airplane for R6 000, pays R1 300 for fuel and maintenance, and hires
one worker for R30 000. Sam's total revenue from pilot training classes this year
equaled R90 400. Sam's explicit costs this year equals:
A. R84 400.
B. *R39 000.
C. R55 000.
D. R45 600.

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1.17 If average fixed costs equal R60 and average total costs equal R120 when
output is 100, the total variable cost must be:
A. R40.
B. R60.
C. *R6 000.
D. R8 000.

1.18 Use the table below to answer question 1.18, 1.19 and 1.20. The table shows
the costs schedules for producing pizza.
Fixed Variable Total Marginal
Pizzas Cost (R) Cost (R) Cost (R) Cost (R)
0 100
1 5
2 13
3 10
4 140
5 20
6 85
7 215
By filling in the blanks in the table above, the fixed cost of producing 6 pizzas is
shown to be equal to:
A. *R100.
B. R150.
C. R200.
D. R185.

1.19 By filling in the blanks in the table in question 1.18, the average total cost of
producing 5 pizzas is shown to be equal to:
A. R100.
B. *R32.
C. R160.
D. R35.

1.20 By filling in the blanks in the table in question 1.18, the marginal cost of
producing the fourth (4th) pizzas is shown to be equal to:
A. R100.
B. R35.
C. *R17.
D. R32.

1.21 Which of the following statements is true?

A. The law of diminishing returns states that beyond some point the marginal
product of a variable resource continues to rise.

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B. The marginal product is the change in total output by adding one additional
unit of a fixed input.
C. *The law of diminishing returns states that beyond some point the marginal
product of a variable resource will decline.
D. When marginal cost is below average cost, average cost rises; when marginal
cost is above average cost, average cost falls.

1.22 A monopolist will maximize profits by:

A. setting his price as high as possible.
B. setting his price at the level that will maximize per-unit profit.
C. *producing the output where marginal revenue equals marginal cost.
D. producing the output where price equals marginal cost.

1.23 Use the figure below to answer question 1.23 and 1.24. The figure shows the
marginal revenue and cost per unit curves.

(Rand)

Refer to the figure above, if this firm is a perfect competitor and the product price
is R40, the firm's economic profit is maximum at an output of:
A. 20 units per day.
B. 40 units per day.
C. 60 units per day.
D. *80 units per day.

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1.24 If the price of the firm's product in the figure in question 1.23 is R15 per unit,
the firm should:
A. *shut down permanently.
B. stay in operation for the time being even though it is making a pure economic
loss.
C. continue to operate because it is still making a normal profit.
D. continue to operate because it is earning a positive economic profit.

1.25 Refer to the figure below to answer the question that follows.
y
8

D E
4

C
2 IC2

1
IC1

1 2 3 4 5 6 7 8 9 x

When the price of X is R80, the price of Y is R20, and the consumer’s income is
R160, the consumer’s optimal choice is D. Then the price of X decreases to R20.
The income effect can be illustrated as the movement from

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A. D to E.
B. D to C.
C. *C to E.
D. E to D.

1.26 Which of the following statement is true?

A. *In perfect competition, Average and Marginal revenue are identical.
B. In perfect competition, Average and Marginal cost are identical.
C. In perfect competition, Average price and Marginal cost are identical.
D. In perfect competition, only normal profit can be earned by a firm.

1.27 Diminishing marginal utility means that as you consume more of a good, other
things constant, the:
A. total satisfaction you obtain from consuming this good falls.
B. total amount produced falls.
C. marginal product falls.
D. *additional satisfaction you obtain from each additional unit of the good falls.

1.28 Refer to the figure below to answer the question that follows.

(Rand)

In the figure above, product price in this market is fixed at R35. This firm is
currently operating where MR > MC. What do you advise this firm to do?
A. This firm should shut down.
B. *This firm could increase profits by increasing output.
C. This firm could increase profits by decreasing output.
D. This firm should continue to operate at its current output.

1.29 If the units of variable input in a production process are 1, 2, 3, 4, and 5, and
the corresponding total outputs are 30, 34, 37, 39, and 40, respectively. The
marginal product of the fourth unit is:
A. *2.
B. 1.
C. 37.

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D. 39.

1.30 If the government imposes a price ceiling below the market equilibrium price,
which of the following will result?
A. There will be a surplus of the good.
B. *The quantity demanded will exceed the quantity supplied.
C. The quantity supplied will exceed the quantity demanded.
D. The demand curve will shift to the left.

QUESTION 2 [9 marks]

2.1 The following table shows the production possibilities for meat pies and
flowerboxes.

Combination Pies Flowerboxes Opportunity cost of Flowerboxes.

A 60 0
B 52 1 8 pies = R8
C 42 2 10 pies = R10
D 30 3 12 pies = R12
E 16 4 14 pies = R14
F 0 5 16 pies = R16

2.1.1 Suppose that the prices of flowerboxes and pies are R50 per flowerbox and
R1 per pie respectively. In the column marked as “opportunity cost of
Flowerboxes”, show the opportunity cost associated with the production of
each (additional) Flowerbox.
(5)
2.1.2 Name or explain the trend that you observe in the opportunity cost of
Flowerboxes when more Flowerboxes are produced. (1)

Increasing opportunity cost. As more flowerboxes are produced increasingly

more pies are sacrificed.

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_____________________________________________________________

2.1.3 By using the axis below, graphically illustrate the effect of technological
breakthroughs in both industries and explain how these breakthroughs
alleviate scarcity. You do not have to scale the axis. (3)

Pies

Flowerboxes
Technological breakthroughs alleviates scarcity because more of both products can
be produced.

QUESTION 3 [12 marks]

3.1 Assume that in South Africa, the supply curve for cocaine, an illegal addictive
substance, is elastic whilst its demand is perfectly inelastic:

3.1.1 If cocaine is mostly smuggled into the country, graphically show the impact of
increased security at the ports of entry on the equilibrium price, equilibrium
quantity and the revenue of cocaine suppliers. (3)

D S2 S1

Price 
(P)

Quantity (Q)

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The revenue of cocaine suppliers will increase.

3.1.2 If heroine is a close substitute for cocaine, how will the events in question
above effect the market for heroine? Graphically illustrate the change in
equilibrium price, -quantity. (3)

S1

Price
(P)



D2
D1


Quantity (Q)

3.2 Assume the price of cocaine, the price of a composite good (a good that
represents all other goods) and Felicia’s total monthly income are all measured in
hundreds of Rand and they are R2.00, R4.00 and R12.00 respectively. Use the
information in the table below and answer the following questions:

Units of cocaine Total utility form Units of composite Total utility from
cocaine good composite good.
1 9 1 16
2 15 2 28
3 18 3 36
4 20 4 40
5 21 5 42

3.1.1 Use consumer choice theory to calculate the combination of Cocaine and the
composite good that would maximise the consumer’s total utility. (4)

Quantity of Cocaine =____2__________________

Quantity of Composite good =____2__________________

3.1.2 Write down the consumer’s budget equation. Use C to donate Cocaine and G
to donate the composite good. Make C the dependent variable. (2)

2C + 4G = 12
C =___12 – 2G__________________________________

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QUESTION 4 [19 marks]

4.1Assume that a person consumes two goods, Coke and Snickers. Use consumer
theory graphs to demonstrate how the consumer adjusts his/her optimal
consumption bundle when the price of Coke decreases. Carefully label all curves
and axes to show what will happen to consumption if Coke is a normal good?
With Coke on the Y-axis, use arrows to clearly indicate the direction of
movements on the graph. (4)

Cok  
if the increase
e on the Coke axis >

than the increase on
the Snickers axis.

4.2Market research suggests that the demand Snickers

and supply curves of Vuvuzela
trumpets are typical straight lines which, when plotted, give an equilibrium price
and equilibrium quantity of R20 and 600 trumpets respectively. Suppose an
effective price floor of R30 leads to 400 trumpets being demanded and 800
trumpets being supplied. Use this provided information to:

4.2.1 Clearly plot the demand and supply curves of the trumpets showing the
equilibrium price, equilibrium quantity and the price when the quantity
demanded gets to zero. (4)
Price (P) 
50  S

30

20 

 D
400 600 800
Quantity (Q)
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4.2.2 Formulate the equations of the demand and the supply of the trumpets using
P for Price and Q for quantity making P the dependent variable.
(4)

Demand P = 50 – 0.05Q________________________________________

Supply P = _-10 + 0.05Q_______________________________________

4.2.3 Use the midpoint method to calculate the price elasticity of supply when the
R30 price floor is imposed. Further, classify and interpret the elasticity
coefficient. (3)
200
700 
Ed= =0.71
10
25

Classify: inelastic supply_________________________________________

Interpretation: The percentage increase in the quantity supplied is less than
the percentage increase in the price.______________________________

4.3 The market for vuvuzelas depicts a perfectly competitive market. Certainly,
there are many sellers, vuvuzelas are just identical, and no single individual can
influence the price. Draw a graph of a firm operating in this market, given that it is
making abnormal profits. Clearly indicate the total area that shows the abnormal
profit. (4)
MC 
2.
ATC
Abnormal/accounting
Price/ Profit 
Cost

P=D=AR=MR

ATC under
 P=D=AR=MR
 Abnormal profit
area
 MC correct

Quantity
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~END~

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