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FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION: BACHELOR OF ECONOMICS

QUALIFICATION CODE: 07BECO LEVEL: 8

COURSE CODE: AMI81OS COURSE NAME: ADVANCED MICROECONOMICS

SESSION: JUNE 2017 PAPER: THEORY

DURATION: 3 HOURS MARKS: 100

FIRST OPPORTUNITY EXAMINATION QUESTION PAPER

EXAMINER(S) MR. PINEHAS NANGULA

MODERATOR.DR. BLESSING CHIRIPANHURA (UNIVERSITY OF NAMIBIA)

INSTRUCTIONS

1. Answer ALL the questions.

2. Write clearly and neatly.

3. Number the answers clearly.

PERMISSIBLE MATERIALS

1. Scientific calculator

Pen and Pencil

Ruler9’!“

THIS QUESTION PAPER CONSISTS OF __4_ PAGES (Including this front page)

QUESTION ONE [25 MARKS]

a) Explain the difference between each of the following terms: [12 marks]

i) a price consumption curve and a demand curve [3 marks]

ii) an individual demand curve and a market demand curve [3 marks]

iii) an Engel curve and a demand curve [3 marks]

iv) The income effect and the substitution effect [3 marks]

b) Consider the following four statements. Which might be an example of a positive

network externality? Which might be an example of a negative network externality?

[8 marks]

i) People eat hot dogs because they like the taste, and hot dogs are filling. [Zmarks]

ii) As soon as Zack discovered that everybody else was eating hot dogs, he stopped buying

them. [2 marks]

iii) Sally wouldn’t think of buying hot dogs until she realized that all her friends were eating

them. [2 marks]

iv) When personal income grew by 10 percent, hot dog sales fell. [2 marks]

c) Explain the difference between a positive and a negative network externality and give

an example of each. [5 marks]

QUESTION TWO [25 marks]

A homogeneous products duopoly faces a market demand function given by P = 300 - 30,

where Q = 01 + C22. Both firms have a constant marginal cost MC: 100.

a)

i. What is Firm 1’s profit-maximizing quantity, given that Firm 2 produces an output of50

units per year? [2.5 marks]

ii. What is Firm 1’s profit-maximizing quantity when Firm 2 produces 20 units per year?

[2.5 marks]

b) Derive the equation of each firm’s reaction curve and then graph these curves.

[5 marks]

c) What is the Cournot equilibrium price and quantity per firm in this market?

[5 marks]

d) What would be the equilibrium price in this market if it were perfectly competitive?

[5 marks]

e) What would be the equilibrium price in this market if the two firms colluded to set a

monopoly price? [5 marks]

QUESTION THREE [25 marks]

a) Suppose the equation Q: 100 — 2P represents a consumer’s monthly demand curve for

3

coke, where Q is the number of gallons of coke purchased when the price is [NS] per

gallon.

i) What is the consumer surplus per month if the price of coke is N$6.95? [2 marks]

ii) What is the increase in consumer surplus ifthe price of coke falls to N$5.55? [3 marks]

b) Consider the utility function U(X, y) = 2x2y3+ 4x

i) is the assumption that more is better satisfied for both goods? [4 marks]

ii) Does the marginal utility ofx diminish, remain constant, or increase as the consumer

buys more of x? Explain. [3 marks]

iii) What is MRSx, y? and compute it? [4 marks]

iv) Is MRSX,y diminishing, constant, or increasing as the consumer substitutesxfory alongan indifference curve? Explain fully. [4marl6]

v) On a graph with x on the horizontal axis and y on the vertical axis, draw a typicalindifference curve (it need not be exactly to scale, but it needs to accurately reflect

whether there is a diminishing MRSX, y ornot). Also indicate on your graph whetherthe

indifference curve will intersect either or both axes. Label the curve U1. [5 marks]

QUESTION FOUR [25 marks]

John has the utility function U(Z,B) = AZ‘IBB, where Z denotes the amount of food consumed

and B the amount of clothing. Now suppose that he has an income of N$100 per week and that

the price of clothing is Pb = N510 per unit. Suppose that the price of food is initially P21 = N$20

per unit and that the price subsequently falls to P22 =N$10 per unit.

Find income, substitution and total effects on food consumption in terms of 2, B, a and B, and

graph the results with food on horizontal axis and clothing on vertical axis. Food is a normal

good. Simplify your answers.

All the best