2018 ECON2001 Exam
2018 ECON2001 Exam
Year of study
(Arts & Science leave blank) SECOND YEAR
SECTION A
Instructions:
1) Section A consists of 8 multiple choice questions. This section carries a weighting of 30%.
2) Four marks will be awarded for a correct answer and zero for an incomplete or incorrect answer.
3) Complete the MCQ card during the duration of the examination. Under no circumstances will you be given additional
time at the end of the examination to fill in the card.
1. With good 1 measured on the X-axis and good 2 measured on the Y-axis, which of the following changes in
economic circumstances result in a steeper budget line with the vertical intercept unchanged?
A. A z percent decrease in the price of good 2 combined with a z percent decrease in income.
B. A z percent increase in the price of good 2 combined with a z percent decrease in income.
C. A z percent decrease in the price of good 2 combined with a z percent increase in income.
D. A z percent decrease in the price of good 2 combined with a z percent increase in income.
E. None of the above.
2. Mulalo consumes goods x and y. Her indifference curves are described by the formula y=k/(x+7). Where
k is a constant, with higher values of k corresponding to better indifference curves. This information implies that:
A. Preferences for consumers who face the same prices generally become the same at the margin (point of
utility maximization).
B. If a utility maximizing consumer specializes in good 1, good 2 could be a neutral or bad.
C. The number of units of the good on the horizontal axis that a consumer is willing to give up to get one
more unit of the good on the vertical axis is equal to the absolute value of the slope of the indifference
curve.
D. To rule out multiple interior solutions, it is necessary and sufficient to assume that preferences are strictly
convex.
E. It is possible for convex (not strictly) preferences to result in either interior or corner solutions.
2
4. Bee’s utility function is given as 𝑈(𝑥1 , 𝑥2 ) = 𝑥1 + 𝑥2 2 . His budget constraint is 𝑃1 𝑥1 + 𝑃2 𝑥2 = m. His
demand for 𝑥1 is:
𝑚
A. 2𝑃1
𝑚𝑃1
B. 𝑃1 2 +𝑃2 2
𝑚
C. 𝑃1 +𝑃2
𝑚
D. 𝑃1
if 𝑃1 < 𝑃2 and 0 if 𝑃2 < 𝑃1
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ECONOMICS IIA (ECON 2000/7) – Microeconomics Final Examination– 2018
i. In practice economists usually combine data on choices of many individuals using statistical procedures in
order to trace the shape of consumers’ indifference curves, and hence the underlying preferences.
ii. The strong axiom of revealed preference is a necessary but insufficient condition to recover well-behaved
consumer preferences.
iii. The weak axiom of revealed preference implies that if bundle X is chosen while bundle Y is affordable,
then bundle Y should only be chosen when bundle X is unaffordable.
iv. The theory of revealed preferences involves using assumptions about consumer preferences to derive
individual choices.
A. ii only.
B. i and ii only.
C. ii and iv only.
D. ii and iii only
E. i, iii, and iv only.
6. In order for the revealed preference approach to provide more informative comparisons of market baskets we
need to assume that the consumer’s indifference curves are:
A. concave.
B. strictly convex.
C. incomplete.
D. intransitive.
E. None of the above.
7. Mary has homothetic preferences. When her income was R1 000, she bought 40 books and 60 newspapers. When
her income increased to R1 500 and prices did not change, she bought:
8. Li consumes good 1 and good 2, suppose there is a decrease in price of good 1. Which of the following utility
functions leads to an entire change in Li’s demand for good 1 that is due to the substitution effect?
A. 𝑈(𝑥1 , 𝑥2 ) = 𝑥1 2 + 𝑥2 2
B. 𝑈(𝑥1 , 𝑥2 ) = min( 4𝑥1 , 𝑥2 )
C. 𝑈(𝑥1 , 𝑥2 ) = 3√𝑥1 + 𝑥2
𝑎
D. 𝑈(𝑥1 , 𝑥2 ) = 𝑥1 𝑥2 𝑏
E. None of the above.
School of Economic and Business Sciences Page 4 of 5
ECONOMICS IIA (ECON 2000/7) – Microeconomics Final Examination– 2018
SECTION B
Instructions
1) Section B is worth 80 marks. Answer ALL Questions.
2) The mark allocations are indicated in the square parentheses.
3) Section B carries a weighting of 70%.
4) Use large, neat and well-labelled diagrams wherever necessary.
5) In questions involving calculations, part marks will be awarded where solutions are incorrect but the formulae and
other workings are shown, provided these are correct or partly correct. For follow-on calculation questions, students
will not be penalised twice; that is, the next sub-question will be marked based on the incorrect solution from the
previous sub-question, provided that this incorrect solution makes economic sense.
6) Round off all workings and final solutions to two decimal places, if necessary.
[1.1] Molefe indicated that he preferred a Mercedes-Benz automobile over a Toyota Tazz. However, when he
converted all his savings into South African rands, he went on to buy a Toyota Tazz. Explain this apparent
inconsistency using the theory of consumer behaviour. [4]
[1.2] Distinguish between ordinal and cardinal utility and discuss why economists prefer ordinal utility over
cardinal utility. [4]
[1.3] Briefly discuss the two basic characteristics of well-behaved preferences. [4]
[1.4] Discuss the strong axiom of revealed preference. Use diagrams and explain all the concepts included in your
answer. [8]
Que’s utility function is U(x, y) = min( 2x, 8y ) and price of x is R2 per unit and price of y is R4 per unit, and income is
R40.
[2.1] What is the amount of good y relative to the amount of good 𝑥 in Que’s optimal consumption bundles? [2]
[2.2] Find Que’s optimal bundle, and illustrate your answer in a well-labelled budget constraint-indifference curve
diagram. [8]
[2.3] Now assume the government provides Que with a lump-sum subsidy of R60. What are the new demanded
quantities of x and y? [3]
[2.4] Define homothetic preferences and verify whether Que’s preferences are homothetic. [4]
[2.5] ED perceives good x and good y as perfect substitutes. His indifference curves are steeper than his budget lines;
good x is measured on the X-axis. Using economic intuition, and well-labelled diagrams, derive Engel curves for
good x and good y. State all your assumptions. [13]
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ECONOMICS IIA (ECON 2000/7) – Microeconomics Final Examination– 2018
Ty’s preferences for good x and good y are summarized by the utility function: U(x, y) = x 2/5 y 3/5 .
[3.1] Calculate Ty’s marginal rate of substitution of good y for good x (MRSxy). [3]
[3.2] Is the absolute value of (MRSxy) increasing or decreasing in x? How do we interpret this in economics?
[2]
[3.3] Derive Ty’s inverse demand functions for x and y. Assume that the price of x is px , the price of y is py and
Ty’s income 𝑖𝑠 m. Show all steps to your answer. [8]
[3.4] Briefly discuss the useful economic interpretation of the inverse demand function with reference to interior
solutions. [3]
[3.5] Given that the price of x i. e px is R2, the price of y i. e py is R3 and Ty’s income i. e m is R10, solve for Ty’s
optimal bundle with reference to part of your solution to [3.3]. [2]
[3.6] Suppose there is a shortage of good x in town such that its price is increased to px = R4, calculate the total
change in demand, and dissect it into income and substitution effects [use the Slutsky substitution effect].
[12]