I'IRITIIBIR UNIVERSITY

OF SCIENCE HUD TECHNOLOGY

FACULTY OF MANANGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION: BACHELOR OF ECONOMICS

QUALIFICATION CODE:

07BECOLEVEL: 7

COURSE CODE: IMI61 ISCOURSE NAME: INTERMEDIATE

MICROECONOMICS

SESSION: AUGUST 2017 PAPER: THEORY

DURATION: 3 HOURS MARKS: 100

SUPPLEMENTARY / SECOND OPPORTUNITY EXAMINATION QUESTION PAPER

EXAMINER(S) MR. PINEHAS NANGULA

MR. EDEN TATE SHIPANGA

MS. KALILA MACKENZIE

MS KASNATH KAVEZERI

MODERATOR:ESlOfl Ngeendepi

INSTRUCTIONS

p—d . Answer ALL the questions in section A and B.

Write clearly and neatly.

. Number the answers clearly.wsv

PERMISSIBLE MATERIALS

1. Scientific calculator

2. Pen and Pencil

Rulerb)

THIS QUESTION PAPER CONSISTS OF 5_ PAGES (Including this front page)

SECTION A [20 MARKS]MULTIPLE CHOICE QUESTIONS

1. Which of the following is a correct representation of the budget constraint in a

world with only food and shelter, where M = income, Pf: price of food, P5 = shelter

price, S = the quantity of shelter, and F = the quantity of food.

a) M = PS (S) + Pf (F)

b) F = M/Pf — Pg/Pf (S)

c) S = M/Ps - Pf /PS(F)

d) F =

M(PS ) + PS /Pf (S)

All points on or below a budget constraint

a) are attainable with the given income.

b) are equally desirable.

0) represent market basket combinations that exhaust the income available.

d) are described, in part, by a, b, and 0 above.

If a man prefers Budweiser to Schlitz and Schlitz to Pabst, and if he is indifferent

between Budweiser and Miller, he must

a) prefer Miller to Pabst.

b) prefer Schlitz to Miller.

c) be indifferent between Schlitz and Miller.

d) be indifferent between Budweiser and Pabst.

An indifference curve is

a) collection of market baskets that are equally desirable to the consumer.

b) collection of market baskets that the consumer can buy.

c) a curve whose elasticity is constant for every price.

d) a curve which passes through the origin and includes all of the market baskets that the

consumer regards as being equivalent.

As long as all prices remain constant, an increase in money income results in

a) an increase in the slope of the budget line.

b) a decrease in the slope of the budget line.

c) an increase in the intercept of the budget line.

2

d) a decrease in the intercept of the budget line.

6. If the prices of both goods increase by the same percent, the budget line will

a) shift parallel to the left.

b) shift parallel to the right.

c) pivot about the x axis.

(1) pivot about the y axis.

7. A normal good can be defined as one which consumers purchase more of as

a) prices fall.

b) incomes fall.

0) incomes increase.

(1) the prices of other products increase

8. A price decrease and an increase in income are similar in that

a) both force the consumer to achieve a lower level of well-being.

b) both force the consumer to reach a lower indifference curve.

0) both move the budget line outward.

d) They are not similar at all.

9. Suppose that the price elasticity of demand for maple syrup has been estimated at -

2. If quantity demanded increased by 10 percent, price must have changed by

a) 5 percent lower.

b) 5 percent higher.

0) 10 percent lower.

d) 10 percent higher.

10. If the income elasticity of demand is +4

a) the good is an inferior good.

b) the good is an inelastic normal good.

0) the good is an elastic normal good.

(1) the good is an elastic inferior good

SECTION B [80 marks]

ANSWER ALL QUESTIONS IN THIS SECTION

Question One [30 marks]

a)

b)

C)

d)

A 10 percent increase in the price of automobiles reduces the quantity of automobiles

demanded by 8 percent. What is the price elasticity of demand for automobiles?[4 marks]

How will a change in income affect the location of the budget line? [3 marks]

How will an increase in the price of one of the goods purchased by a consumer affect the

location of the budget line? [3 marks]

Explain why for some goods, the long-run price elasticity of demand is greater than the

short-run price elasticity of demand. Give examples of goods that may display this

characteristic. [10 marks]

Sarah consumes apples and oranges (these are the only fruits she eats). She has decided

that her monthly budget for fruit will be N$50. Suppose that one apple costs N$0.25,while one orange costs N$0.50.

i. What is the expression for Sarah’s budget constraint? [2 marks]

ii. Draw a graph of Sarah’s budget line. [2 marks]

iii. Show graphically how Sarah’s budget line changes if the price of apples increases

to N$O.50. [2 marks]

iv. Show graphically how Sarah’s budget line changes if the price of oranges decreases

to N$0.25. [2 marks]

v. Suppose Sarah decides to cut her monthly budget for fruit in half. Coincidentally,the next time she goes to the grocery store, she learns that oranges and apples are

on sale for half price, and will remain so for the next month; that is, the price of

apples falls from N$0.25 per apple to N$0.125 per apple, and the price of oranges

falls from N$O.50 per orange to N$0.25 per orange. What happens to the graph of

Sarah’s budget line? [2 marks]

Question two [30 marks]

The current world production of oil is 250 million barrels per day and the current world priceof oil is N$726.10 per barrel. The price elasticity of demand (8) is -0.2 and the elasticity of

supply (11) is 0.3. Shiwa Investment is planning to enter the world oil market with a daily

production of 11 million barrels of oil per day. For simplicity, assume that the supply and

demand curves are linear

a)

b)

Use a well labelled diagram to analyse the effect of Shiwa Investment production on the

world price and quantity. [5

marks]Use the information provided above to determine the long-run demand and supply

4

functions that are consistent with pre-Shiwa Investment world output and price.

[10 marks]

0) Determine the post-Shiwa Investment long—run linear supply function [5 marks]

d) Use the demand function and the post-Shiwa Investment supply function to calculate new

equilibrium price and quantity. [5 marks]

6) Explain why the equilibrium quantity increases with less than 11 million. [5 marks]

Question four [20 marks]

a) For the following pairs of goods, would you expect the cross-price elasticity of demand to

be positive, negative, or zero? Briefly explain your answer.

i. Red umbrellas and black umbrellas [2 marks]

ii. Coca-Cola and Pepsi [2 marks]

iii. Grape jelly and peanut butter [2 marks]

iv. Chocolate chip cookies and milk [2 marks]

v. Computers and software [2 marks]

b) Suppose that the market for air travel between Chicago and Dallas is served by just two

airlines, United and American. An economist has studied this market and has estimated

that the demand curves for round-trip tickets for each airline are as follows:

03 = 10000 —

100PU + 99114

0;} = 10000 — 100PA + 9913”

where PU is the price charged by United, and PA is the price charged by American.

Suppose that both American and United charge a price of N$300 each for a round-tripticket between Chicago and Dallas. What is the price elasticity of demand for united

flights between Chicago and Dallas and interpret your answer? [10 marks]

All the best