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ECS2601/201/2/2017

Tutorial letter 201/2/2017

Microeconomics
ECS2601

Semester 2

Department of Economics

IMPORTANT INFORMATION:
This tutorial letter contains the answers to
Assignment 01.

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Open Rubric
Dear Student

Please note the contact details of the lecturer responsible for this module:

Telephone
Telephone number
Name of lecturer E-mail address number
(outside SA)
(inside SA)
Ms. A. Breytenbach breyta@unisa.ac.za 012 433 4706 +27 12433 4706

Please only direct content-related queries to your lecturers. If you have any other problems
with this module, please contact the university administration (see below for details).

Send an e-mail to info@unisa.ac.za or an SMS to 32695 (students in South Africa only the
cost per SMS is R1,00). Alternatively, fax your questions to 012 429 4150.

CONTENTS
ANSWERS TO ASSIGNMENT 01 (Unique number: 753790)

SOLUTIONS TO ASSIGNMENT 01
The first assignment was based on study units 1 to 7.

The correct answers are as follows:


Question

1. [3] 6. [4] 11. [3] 16. [2]


2. [4] 7. [4] 12. [1] 17. [2]
3. [1] 8. [2] 13. [2] 18. [4]
4. [2] 9. [4] 14. [2] 19. [3]
5. [3] 10. [3] 15. [1] 20. [1]

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1. The correct answer is [3].

The quantity demanded of the product will increase by 10% (=10% increase in income x
income elasticity of 1.0). Given that the price of the product is assumed not to change, total
expenditure will increase by 10%. Since both total expenditure on the product and income
have increased by 10%, the proportion of income spent on this product remains unchanged.

2. The correct answer is [4].

If there is a situation of excess supply, then the price will tend to fall to restore equilibrium.
As the price falls the quantity supplied will fall (in line with the law of supply). We also know
that the quantity demanded will increase until the equilibrium is restored with quantity
demanded = quantity supplied.

3. The correct answer is [1].

Price elasticity of demand = (% change in Q)/ (% change in P)


Q2 Q1 2500 2000
Q Q2 2 2000 2500 2
Ep 1 Ep
P2 P1 30 40
P1 P2 2 40 30 2
2

9
2

= 7

7

= 9

= -0.78

4. The correct answer is [2].

Step 1:
Q1 200 10(40)

= 200

3
Q2 200 10(50)

= 300

Step 2:
Price elasticity of supply = (% change in Q)/ (% change in P)

Q2 Q1 300 200
Q Q2 2 200 300 2
Ep 1 Ep
P2 P1 50 40
P1 P2 2 40 50 2
2
5
2
9

9

5

= 1.8

5. The correct answer is [3].

Cookies Rusks
Units TUc MUc MUc/Pc TUr MUr MUs/Pr
0 0 0
10 10 14 14
1 10 14
8 8 10 10
2 18 24
6 6 8 8
3 24 32
4 4 6 6
4 28 38

Anna will be in equilibrium if she consumes two cookies and three rusks (both at R1 each).
For this combination MUc/Pc = MUr/Pr = 8 for both products and all of the R5 ([2 x R1] + [3 x
R1] = R5) is spent.

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6. The correct answer is [4].

Option 1 implies that the marginal product (MP) is negative; as more labourers are employed
total product decreases. Option 2 indicates increasing MP (50, 60, 70 and 80). Option 3
indicates constant MP (50 throughout). Option 4 indicates decreasing MP (50, 40, 30, 20).

7. The correct answer is [4].

TC = ATC x Q = (AVC + AFC) x Q = (R30 + R5) x 10 = R350

8. The correct answer is [2].

AFC = TFC/Q = R350/7 = R50


AVC = ATC AFC = R150 R50 = R100

9. The correct answer is [4].

Statement 4 is false. Short-run costs are the costs to a firm of producing different output
levels up until some future date. Before this date, the firm will not have time to vary the
quantity of every input it uses but after this date the firm will have time to vary the quantity of
every input it uses. Short-run costs will not be lower than long-run costs, because there is
nothing a firm can do in the short run that it cannot do in the long run. To see why
statements 1, 2, and 3 are true, suppose a firm needs two years to vary the quantity of every
input it uses, so that the short run of this firm lasts two years. This firm might well quote the
short-run and long-run costs of producing any output level per hour, per day, per week, or
per month over the next two years. These would be its short-run costs, and after those two
years, it would be its long-run costs.

10. The correct answer is [3].

When a firms production process exhibits increasing returns to scale, the output increases
more than doubles when all inputs are doubled. The isoquants move closer together as
inputs are increased along the line.

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11. The correct answer is [3].

Statement 3 is true. This is the definition of a fixed input. The quantity of it that a firm can
use in the short run is fixed.

12. The correct answer is [1].

Statement 1 is the correct definition of the law. Statement 2 is false because the returns may
initially increase, for example in cases where extra workers can initially exploit the
possibilities of teamwork. Statement 3 is false, partly because the returns may initially
increase, and partly because the law of diminishing marginal returns refers to adding extra
amounts of a single variable input. Statement 4 is false because the law of diminishing
marginal returns refers to adding extra amounts of a single variable input. Although
statement 4 is a false definition of the law, and so an incorrect answer to this question, it is
in fact a true statement.

13. The correct answer is [2].

If bread is a Giffen good and the price of bread increases, Bob will purchase more bread. His
spending on bread will go up (he is buying more and each unit costs more than it did before).
This means he must be spending less on sushi than he did before.

14. The correct answer is [2].

We can show that the slope of the isoquant, that is the marginal rate of technical substitution
(MRTS), is related to the marginal product of labour (MPL) and capital (MPK).

MRTS = - change in capital input / change in labour input


= -K/ L (for a fixed level of q, because output is constant along the same isoquant)

If we substitute capital by using more labour, while keeping the level of output constant,
the additional output from increased use of labour = (MPL)( L)
and the reduction output from decreased use of capital = (MPk)( K).

Therefore, along the isoquant,


(MPL)( L) + (MPk)( K) = 0 (1.1)
(MPL) / (MPk) = - (K/ L) = MRTS (1.2)

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ECS2601/201

From equation (1.2), we can see if MPL and MPk are both positive constant, the slope of the
isoquant (MRTS) will also be a downward-sloping straight line.

15. The correct answer is [1].

Statement 1 is false. A rise in the price of a fixed input increases a firm's total costs, even
though it cannot alter the quantity of this input that it uses in the short run. As its total cost for
each output level increases, the average cost of each output level increases, so its SAC
curve shifts upwards.

16. The correct answer is [2].

Any point on an isoquant shows a combination of two inputs that the firm might use. The
quantity of output on that isoquant is the quantity of output that will be produced if the firm
produces that output in a technically efficient way.

17. The correct answer is [2].

The consumer could gain more utility by consuming more A and less B, as stated in 2.

Utility is maximised when the marginal utility per rand is equal between good A and B.
For good A, MUA/PA = 100/5 = 20
For good B, MUB/PB = 160/10 = 16
Since MUA/PA is greater than MUB/PB, utility can be increased by consuming more of good A
and less of good B.

18. The correct answer is [4].

Statement 4 is false. The line must pass through the origin, because if the consumer's
income falls to zero, the consumer could not buy any A or any B. The line must also slope
upwards as it leaves the origin and at low income levels both products must be normal
goods. The line will slope backwards or downwards at higher income levels if one product
becomes an inferior good.

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19. The correct answer is [3].

The substitute effect always leads to an increase in quantity demanded of the relatively
cheaper good. The income effect however, depends on the nature of the good. For
example if the good is inferior, the income effect will lead to an increase in consumption as
real income falls following a price rise.

20. The correct answer is [1].

Statement 1 is false. The income effect concerns the way in which a change in price alters a
consumer's decisions by altering the consumer's purchasing power.

****************

Please do not hesitate to contact me if you do not understand any of the explanations given
in this tutorial letter.

Wishing you success in your studies.

Your lecturer
Ms. A. Breytenbach