Mistakes

Question 1

If the demand for a normal good (for example, steak) shifts to the left, the most likely reason is that:
* (A)consumer incomes have fallen.
* (B)cattle production has declined.
* (C)the price of steak has risen.
* (D) the price of cattle feed has gone up.

Answer 1

(A)consumer incomes have fallen.

Question 2

.Price ceilings and price floors:
* (A)cause surpluses and shortages respectively.
* (B)make the rationing function of free markets more efficient.
* (C)interfere with the rationing function of prices.
* (D)shift demand and supply curves and therefore have no effect on the rationing function of prices.

Answer 2

(C)interfere with the rationing function of prices

Question 3

If you know that the marginal utility per rand spent on product Alpha is less than the marginal utility per rand spent on product Beta, consumers who spend all their income on these two products can:
* (A)maximize total utility but not marginal utility.
* (B) maximize marginal utility but not total utility.
* (C) increase total utility by buying more of Beta and less of Alpha.
* (D)increase total utility by buying more of Alpha and less of Beta.

Answer 3

(C) increase total utility by buying more of Beta and less of Alpha

Question 4

If you purchase a gift worth R25 for your sister, but your sister would only pay R10 for the gift, then the total
* (A)utility of the gift is R10.
* (B)total utility of the gift is R15.
* (C) marginal utility of the gift is R15.
* (D)loss in value of the gift is R15.

Answer 4

(D)loss in value of the gift is R15.

Question 5

In response to a cost-reducing technological breakthrough in the production of its product, a profitmaximizing monopolist will normally:
* (A)increase price and decrease production.
* (B) not change its level of output or price.
* (C) decrease the price it charges for its product.
* (D)increase its output and practice price discrimination.

Answer 5

**(C) **decrease the price it charges for its product.

Question 6

Which statement is correct?
* (A)In the short run the pure monopolist will maximize total profits by producing at that level of output where the difference between price and average total cost is greatest.
* (B) In the short run the pure monopolist will charge the highest price it can get for its product.
* (C) Because of its ability to administer prices, the pure monopolist can increase its price and increase its volume of sales simultaneously.
* (D)Pure monopolists do not always realize economic profits.

Answer 6

(D)Pure monopolists do not always realize economic profits.

Question 7

If the supply of labour in a purely competitive labour market increases, the labour:
* (A)supply curve for a single employer will shift downward.
* (B)supply curve for a single employer will shift upward.
* (C)demand curve for a single employer will shift upward.
* (D)demand curve for a single employer will shift downward.

Answer 7

(B) the supply curve for a single employer will shift upward.

Question 8

How does the market system answer the following fundamental question: How will the system promote
progress?
* A. Through international agreements.
* B. Through the use of public and private partnerships.
* C. Through technological improvements and capital accumulation.
* D. By guaranteeing a profit.

Answer 8

C. Through technological improvements and capital accumulation.

Question 9

The marginal rate of substitution of beef for chicken is the
* A. number of units of chicken the consumer is prepared to give up obtaining one more unit of beef.
* B. number of units of beef the consumer is prepared to give up as income falls.
* C. number of units of beef the consumer must sacrifice to obtain one more unit of chicken.
* D. rate at which units of beef may be exchanged for units of chicken.

Answer 9

**A. **number of units of chicken the consumer is prepared to give up obtaining one more unit of beef.

Question 10

A normal profit is considered a cost because
* A. this is the minimum return required on capital invested to ensure continued supply of the product.
* B. it has elements of revenue and cost.
* C. it cannot be counted as revenue.
* D. it has to be paid to SARS.

Answer 10

A. this is the minimum return required on capital invested to ensure continued supply of the product.

Question 11

If a monopoly can experience economies of scale, it can
* A. lower cost and eliminate competitors, which reduces resource use.
* B. reduce the price below a pure competitor and improve resource allocation.
* C. raise the price above a pure competitor and improve resource allocation.
* D. raise the price and lower output, which increases resource use.

Answer 11

B. reduce the price below a pure competitor and improve resource allocation.

Question 12

If there is an increase in the nation’s money supply, the interest rate will
* A. rise, investment spending will fall, aggregate demand will shift right, real GDP will fall, and the price level will rise.
* B. fall, investment spending will rise, aggregate demand will shift right, real GDP will rise, and the price level will fall.
* C. rise, investment spending will fall, aggregate demand will shift right, real GDP will rise, and the price level will fall.
* D. fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

Answer 12

D. fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

Question 13

Calculate the Opportunity Cost

Karabo makes R250 a day as a waiter. She takes two days off work without pay to fly to another city to attend a concert of her favorite music group. The cost of transportation for the trip is R850. The cost of the concert ticket is R150. The opportunity cost of Karabo’s trip to the concert is.

Answer 13

R500

Question 14

Calculate the Opportunity Cost

After graduating from high school, Ron Willis plans to go to college. The college tuition is R15,000 a year.
But, instead of going to college, Ron could take a full-time job paying R20,000. If Ron decides to go to
college, what is his opportunity cost for attending for one year?

Answer 14

R20000

Question 15

Indicate wheteher MC, AVC, AFC and ATC will go up, down, or unchanged

A reduction in business property taxes.

Answer 15

MC : Down
AVC : No change
AFC : Down
ATC: Down

Question 16

Indicate wheteher MC, AVC, AFC and ATC will go up, down, or unchanged

An increase in the nominal wages of production workers.

Answer 16

MC : Up
AVC : Up
AFC : No change
ATC: Up

Question 17

Use a well-labeled graph to graphically illustrate the firms’s ATC, AVC and MC curves. By drawing different MR
curves corresponding to different price levels, Use symbols a, b and c to indicate points a – c below and a solid line
and label to indicate d below.
* a. (P2, Q2) – shut-down point;
* b. (P4, Q4) – break-even (normal profit) point; and
* c. (P5, Q5) – where the firm will make economic profits.
* d. The Short run supply curve of the firm.

Answer 17

In Notes, se under chapter 7, Marginal cost and short-run supply

Question 18

Explain/List briefly what will happen to:

• a. The quantity demanded for H if the price of H increases by 1%, given an Elasticity of Demand for H = 2.
• b. The total revenue of W when the price of W decreases, given the Elasticity of Demand for W = 0,5.
• c. The demand for X, if the price of Y increases, given the cross elasticity of demand between X and Y is positive.
• d. The quantity of A supplied when the price of A increases by 1%, given an Elasticity of Supply for A = 1,5.
• e. The demand for K, given a negative Income elasticity for K when Income increases.

Answer 18

• a. Quantity demanded of H will decrease with 2 %
• b. Revenue of W will decrease
• c. Demand for X will increase/ shift to the right (X and Y are substitutes)
• d. Supply of A will increase with 1,5%
• e. Demand of K will decrease (inferior good)

Question 19

Distinguish between the Cardinal and Ordinal approach of consumer theory by way of a formula indicating consumers equilibrium condition in each where they would maximise utility.

Answer 19

• Cardinal - MUx/Px = MUy/Py or they can say the WMUx = WMUy
• Ordinal - MRS (Change in X/ Change in Y) = Price ratio (Px/PY)

Question 20

Explain how (if at all) each of the following events affects the locations of a country’s production possibility curve:
* a) The quality of education increases.
* b) The number of unemployed workers increases.
* c) A new technique in the mining industry improves efficiency.
* d) A devastating earthquake destroys numerous production facilities.

Answer 20

• a) Increase productivity - outward shift to the right
• b) Curve no effect - production move inwards
• c) Curve shift outward to the right
• d) Curve shift inward to the left

Question 21

Distinguish between how a market system will solve the scarcity problem compared to a command system.

Answer 21

• A market system allows for the** private ownership** of resources and coordinates economic activity through market prices. Participants act in their own self-interest and seek to maximize satisfaction or profit through their own decisions regarding consumption or production. Goods and services are produced and resources are supplied by whoever is willing to do so. The result is competition and widely dispersed economic power.
• The command economy is characterized by** public ownership of nearly all property resources and
  economic decisions are made through central planning. **The planning board, appointed by the
  government determines production goals for each enterprise. The division of output between
  capital and consumer goods is centrally decided based on the board’s long-term priorities

2 marks for mentioning any two of the underlined remarks in first paragraph
2 marks for mentioning public ownership and central planning

Question 22

List four determinants that will influence the price elasticity of demand.

Answer 22

• Substitutability (Number of substitutes)
• Proportion of Income spend
• Type of product (Luxuries vs Necessities)
• Time

Question 23

List the tools of monetary policy and indicate how each one of them can be used to implement expansionary monetary policy.

Answer 23

• Open market operations ( Buy government bonds)
• Repo rate ( Decrease repo rate)
• Reserve requirement (Decrease reserve requirement)

Question 24

In 2003 the price of oil increased, which in turn caused the price of natural gas to rise. This 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.

Answer 24

B. substitute goods and the higher price for oil increased the demand for natural gas.

Question 24

The long-run average total cost curve:
A. displays declining unit costs so long as output is increasing.
B. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size.
C. has a shape which is the inverse of the law of diminishing returns.
D. can be derived by summing horizontally the average total cost curves of all firms in an industry

Answer 24

B. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size

Question 24

In the short run, a monopolist’s profits:
A. may be positive, negative, or zero.
B. are positive because of the monopolist’s market power.
C. are positive if the monopolist’s elasticity of demand is less than 1.
D. are positive if the monopolist’s selling price is above average variable cost

Answer 24

A. may be positive, negative, or zero.

Question 24

Let us suppose Luigi’s, a local supplier of pizza and pasta, has the following revenue and cost structure:
* Total revenue R3 000 per week
* Total variable cost R2 000 per week
* Total fixed costs R2 000 per week
Which one of the following would be most appropriate?

• A. Luigi’s should stay open in the long run.
• B. Luigi’s should shut down in the short run.
• C. Luigi’s should stay open in the short run.
• D. Luigi’s should shut down in the short run but reopen in the long run.

Answer 24

C. Luigi’s should stay open in the short run.

Question 25

The basic economic argument for greater income equality is that:

Answer 25

a more equal distribution of a given amount of income will increase the total utility of consumers.

Question 26

Currency in circulation is part of:
* A. M1 only.
* B. M2 only.
* C. M3 only.
* D. M1, M2 and M3.

Answer 26

D. M1, M2 and M3.

Question 27

When nominal GDP is R800 billion and, on average, each rand is spent four times in the economy over a year, the quantity of money demanded for transactions purposes will be:

Answer 27

R200 billion.

Question 28

Which would provide the most accurate description of events when monetary authorities increase the size of commercial banks’ excess reserves?
* A. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment.
* B. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment.
* C. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease.
* D. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase.

Answer 28

D.The money supply is increased, which decreases the interest rate, and causes investment spending,
output, and employment to increase.

Question 29

What is the impact on the supply of money when a loan is repaid?

Answer 29

It decreases

Question 30

If price is artificially set at R9 below Equilibrium price where Qd is 5 and Qs is 7, what will the effect on the market be? What term can we use describe this set price?

Answer 30

• a surplus of 2 units would occur
• price floor.

Question 31

The income elasticity coefficients of demand for motor vehicles and branded clothing have been estimated to be +3.4, +2.0 respectively. Interpret these coefficients

Answer 31

• An increase of 1% in income leads to 3.4% increase in quantity demanded of motor vehicles;
• an increase of 1% in income leads to a 2% increase in quantity demanded of branded clothing.

Question 32

Do you agree with the statement “There are no fixed costs in the long run; all costs are variable”?
Explain

Answer 32

Yes. (½) In the long run, an industry and individual firms can undertake all desired resource adjustments: they can change all amounts of inputs used. Also, there is enough time for new firms to enter and old firms to leave an industry. (½)

Question 33

Compare the 4 market models in table format.

Answer 33

In notes, see chapter 7, Under comparison of markets characteristics

Question 34

Explain and illustrate graphically how transactions demand and asset demand for money can be combined to determine total money demand. How is the equilibrium interest rate in the money market determined?

Answer 34

In notes, under chapter 10, see Demand and supply for money.

Question 35

Define asset demand for money and the role of money in this type of demand.

Answer 35

• Households may hold their financial assets in many forms, including bonds or money.
• Money functions as store of value.

Question 36

Define transactions demand for money and the role of money in this type of demand.

Answer 36

• The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP. Households keep money to purchase goods and services
• Money functions as medium of exchange.

Question 37

Which of the following is not a factor that would cause the production possibility curve of South Africa to shift to the right?
* A. Total labour quality has improved over time.
* B. The economy’s stock of capital increased.
* C. Entrepreneurial activity improved over time.
* D. The amount of labour used in the mining sector has increased.

Answer 37

D. The amount of labour used in the mining sector has increased.

Question 38

Suppose that the demand for good A goes up when the price of good B goes down. We can
say that goods A and B are:
A. Perfect substitutes.
B. Substitutes.
C. Unrelated goods.
D. Complementary goods.

Answer 38

D. Complementary goods.

Question 39

Which of the following causes a surplus to become smaller, ceteris paribus?
A. An increase in price.
B. An increase in supply.
C. A decrease in demand.
D. A decrease in price.

Answer 39

D. A decrease in price.

Question 40

All of the following are held to be constant when the supply curve for a product is drawn, except the:
* A. price of the product.
* B. state of technology.
* C. number of producers.
* D. price of inputs used to make the product.

Answer 40

A. price of the product

Question 41

A positive cross elasticity of demand coefficient indicates that:
A. a product is an inferior good
B. a product is a normal good
C. two products are substitute goods
D. two products are complementary goods

Answer 41

C. two products are substitute goods

Question 42

Graphically, producer surplus is measured as the triangle:
* A. under the demand curve and below the equilibrium price.
* B. under the demand curve and above the equilibrium price.
* C. above the supply curve and above the equilibrium price.
* D. above the supply curve and below the equilibrium price.

Answer 42

D. above the supply curve and below the equilibrium price

Question 43

When marginal utility is decreasing but positive, total utility is
A. increasing at a decreasing rate.
B. decreasing at a decreasing rate.
C. increasing at an increasing rate.
D. decreasing at an increasing rate.

Answer 43

A. increasing at a decreasing rate.

Question 44

In drawing a budget line it is assumed that
A. consumer preferences are fixed.
B. the prices of the two products are variable.
C. consumers income is fixed.
D. consumer willingness to move between the two products is fixed.

Answer 44

C. consumers income is fixed.

Question 45

Into which market structure is entry least difficult?
* A. pure monopoly.
* B. monopolistic competition.
* C. Oligopoly.
* D. regulated monopoly.

Answer 45

B. monopolistic competition.

Question 46

Draw the closed economic circular flow diagram.

Answer 46

In notes, chapter 2, under closed economy circlular flow diagram.

Question 47

If cross elasticity is positive, the goods are…

Answer 47

substitutes

Question 47

If cross elasticity is negative, the goods are…

Answer 47

Complementary

Question 47

If cross elasticity is zero, the goods are…

Answer 47

Independant/unrelated

Question 48

At the profit-maximising level of output, a monopolist will always operate where:
a) price is greater than marginal cost.
b) price is greater than average revenue.
c) average total cost equals marginal cost.
d) total revenue is greater than total cost.

Answer 48

d) total revenue is greater than total cost.

Question 49

2) Currency and cheque deposits are:
a) debts of the Reserve bank or of financial institutions.
b) redeemable for gold and silver from the Reserve bank System.
c) of intrinsic value which determines the relative worth of money.
d) the major components of the M3 definition of the money supply.

Answer 49

a) debts of the Reserve bank or of financial institutions.

Question 50

If the Reserve bank sells government securities to commercial banks in the open market:
a) the Reserve bank gives the securities to the commercial banks, and the commercial banks pay for them by writing a cheque that increases their reserves at the Reserve bank.
b) the Reserve bank gives the securities to the commercial banks, and commercial banks pay for them by writing a cheque that decreases their reserves at the at the Reserve bank.
c) commercial banks give the securities to the Reserve bank, and the Reserve bank pays for them by increasing the reserves of commercial banks at the Reserve bank.
d) commercial banks give the securities to the Reserve bank, and the Reserve bank pays for them by decreasing the reserves of commercial banks at the Reserve bank.

Answer 50

b) the Reserve bank gives the securities to the commercial banks, and commercial banks pay for them by writing a cheque that decreases their reserves at the at the Reserve bank.

Question 51

The level of GDP will tend to increase when:
a) reserve requirements are increased.
b) there is an increase in the repo rate.
c) the Reserve bank buys government securities in the open market.
d) the Reserve bank sells government securities in the open market.

Answer 51

c) the Reserve bank buys government securities in the open market