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CECC TEST 1 with answers 2020

The document outlines a test for a Mathematical Economics course at the University of Limpopo, covering topics such as supply and demand functions, equilibrium price and quantity, and the effects of price floors and ceilings. It includes specific questions requiring calculations and analyses related to consumer and producer surplus, as well as the impact of taxes and subsidies. The test is structured with clear instructions and marks allocation for each question.

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15 views

CECC TEST 1 with answers 2020

The document outlines a test for a Mathematical Economics course at the University of Limpopo, covering topics such as supply and demand functions, equilibrium price and quantity, and the effects of price floors and ceilings. It includes specific questions requiring calculations and analyses related to consumer and producer surplus, as well as the impact of taxes and subsidies. The test is structured with clear instructions and marks allocation for each question.

Uploaded by

nsovowaylon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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UNIVERSITY OF LIMPOPO

SCHOOL OF ECONOMICS AND MANAGEMENT


DEPARTMENT OF ECONOMICS
CECC 021 – MATHEMATICAL ECONOMICS I

TEST NO: 01 TIME: 14:50 – 16:30

DATE: 12 MARCH 2020 DURATION: 1H:40

VENUE: M1 MARKS: 65

INSTRUCTIONS

 ALL monetary values should be given in South African Rands.


 Draw your graphs with a pencil and label with a pen. Writing with an erasable pen is
prohibited. Round answers off to 1 decimal place.
QUESTION 1 [30]

Given the following supply and demand functions:

Qd  10.2  0.4Pd

Qs  3  0.3Ps

a) Rearrange both functions in the form: P  f 1 (Q) (2)


Inverse Demand Function
Pd  25.5  2.5Qd

Inverse Supply Function


Ps  10  3.3Qs
b) Calculate the equilibrium quantity and price. (3)
At Equilibrium, Pd  Ps :
 QE  2.67  2.7 Units

Substitute (QE  2.7) into either function:


Ps  10  3.3(2.7)
 PE  18.91  R18.9

c) If the government imposes a price floor of R20.50 per unit in this market, analyse its
impact thereof. (5)
With a Price Floor of R20.50:
Qd  2 Units

Qs  3.18  3.2 Units

Qs  Qd (3.2  2  1.2 Units Excess Supply)

d) What if the government imposed a price ceiling of R16.45 instead? Analyse what
would happen. (5)
With a Price Ceilling of R16.45:
Qd  3.62  3.6 Units

Qs  1.95  2 Units

Qd  Qs (3.6  2  1.6 Units Excess Demand)


e) Provide brief commentary about the importance of a price floor VS a price ceiling
and who benefited from either (if at all) in both c) and d) above. (5)
- A Price Floor (Minimum Price) is mainly provided to protect producers or suppliers
of a commodity. It could be suppliers of goods and services (in the form of
minimum prices) or suppliers of labour (in the form of minimum wages). These
minimum prices are pegged above the equilibrium price. They are meant to
benefit the suppliers and in d) above, the suppliers didn’t necessarily benefit
because they were getting (R18.9*2.7=R51) and after the price floor, consumers
are only demanding 2 units. Which means they are going to have to sell the 2 units
at R20.50 and make revenue of (20.50*2=R41)

- A Price Celling (Maximum Price) on the other hand is meant to protect consumers
against exploitatively high prices. These prices are known as maximum prices and
are pitched below the equilibrium price. In c) above, it is tempting to say that the
consumers benefited but we all know that in a market with maximum prices, there
will always arise a black market within that formal market and black maketeers
will buy up everything and the price will increase to above equilibrium and that
ultimately hurts the very same consumers who were meant to benefit in the 1st
place.

f) Sketch both functions derived in (a) on the same set of axis, clearly showing market
equilibrium as well as both the effects of the price floor and the price ceiling. (10)

QUESTION 2 [35]

Consider the following functions and answer the questions that follow:

Qd  100  2.5Pd
Qs  41.6666667  1.66666667Ps

a) Rearrange both functions in the form: P  f 1 (Q) (2)


Inverse Demand Function
 Pd  40  0.4Qd

Inverse Supply Function


 Ps  25  0.6Qs
b) Calculate the equilibrium quantity and price. (3)
At Equilibrium, Pd  Ps :
 QE  15 Units

Substitute (QE  15) into either function:


 PE  R34
c) Calculate the values of Consumer and Producer surplus. (4)

Consumer Surplus:
CS  45

Producer Surplus:
PS  67.5

d) Suppose that the government imposes a tax of R5 per unit.


Calculate the new PE and QE (4)
With a Tax of R5 per Unit:
 Ps  30  0.6Qs [New Supply Function adjusted for tax]

Now at Equilibrium, Pd  Ps :
 QE  10 Units

Substitute (QE  10) into either function:


 PE  R36
e) Show (calculate) the distribution of the tax imposed. Who carries most of the
burden between consumers and producers? (4)

36  34
Consumer pays: 100  40%
5
The consumer always pays the equilibrium price, hence paying R36 which is an increase of
R2 from the original R34 before the tax.

34  31
Producer pays: 100  60%
5
The producer always receives the equilibrium price minus the tax and hence that price is:
R31 (R36-R5). Compared to the R34 the producer received before the tax, this is a reduction of R3.

So  The producers are clearly carrying most of the tax burden.


f) Now suppose that the government chooses to give a subsidy of R4.50 per unit
instead. What would be the new PE and QE ? (4)
With a Subsidy of R4.50 per Unit:
 Ps  20.5  0.6Qs [New Supply Function adjusted for subsidy]

Now at Equilibrium, Pd  Ps :
 QE  19.5 Units

Substitute (QE  19.5) into either function:


 PE  R32.2

g) Show (calculate) the distribution of the subsidy. Who receives more? (4)
Consumer receives a benefit of :
Consumer Benefit  40%
In Monetary Terms  34  32.2  R1.8

Producer Benefit:
Producer Benefit  60%
In In Monetary Terms  36.7  34  R2.7

h) Sketch ALL the relevant functions on the same set of axis; clearly showing market
equilibrium, consumer and producer surplus as well as the impact of the tax and
subsidy in this market. (10)

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