UNIVERSITY OF KWAZULU-NATAL SCHOOL OF

ACCOUNTING, ECONOMICS & FINANCE

Intermediate Microeconomics (ECON202)

CLASS RECORD TEST: 26 October 2023

DURATION: 60 MINS TOTAL MARKS: 100

INSTRUCTIONS TO CANDIDATES

 Candidates are required to attempt all questions.

 Record all your answers to the 20 Multiple Choice Questions on the separate
MCQ answer sheet provided.
 Only HB pencil may be used on the MCQ answer sheet.
 Each correctly answered MCQ is worth 5 marks. Negative marking will NOT
be used in this test.
 This paper consists of ?? pages including the cover page.

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MULTIPLE CHOICE QUESTIONS [100 Marks]
Use the scenario below to answer Questions 1 and 2.
Every week, Angela loves going to the library to study economics and going out for movies
with her friends. Her utility function for studying economics, S, and the number of times she
goes out with her friends to watch movies, M, is 𝑈𝑈 = 2𝑆𝑆 0.2 𝑀𝑀0.8 . It costs Angela R50 to visit
the library to study economics and it costs R100 to go out with friends for movies. Angela has
a weekly budget of R500. Assume S is on the vertical axis and M is on the horizontal axis.
1.What is Angela’s budget line equation?
a) 500 = S + M.
b) Y = 0.2S + 0.8M.
c) S = -2M + 10.
d) 500 = 2M – 50S.
e) M = 1 + 2S.

2. What is Angela’s marginal rate of substitution?

a) MRS = - S/M.
b) MRS = - 4S/M.
c) MRS = 0.8S/M.
d) MRS = M/S.
e) MRS = -2S/2M.

Use the scenario below to answer Questions 3 and 4.

Hadebe is a security guard at UKZN Howard Campus. Hadebe derives utility from his
consumption of goods (Y) and his enjoyment of leisure hours (N) on a daily basis. Hadebe
has no unearned income and so he can only afford to buy goods if he works. UKZN pays
Hadebe an hourly wage of R80. UKZN needs security guards 24 hours a day. However,
Hadebe can choose any number of hours of work per day between zero and 24. The price of
goods in Rands that Hadebe buys is set equal to 1 (i.e. 𝒑𝒑𝒑𝒑=𝑹𝑹𝑹𝑹) and hours of work by Hadebe
can be denoted by (H). Assume Y on the vertical axis and N on the horizontal axis.
3. What is Hadebe’s daily budget constraint equation?
a) Y = 80 + 24N.
b) Y = 1920 – 80N.
c) Y = 80N – 24H.
d) Y = 1920 + 24N.
e) Y = 24H +1920N.

4. Assume Hadebe works a ‘six to six’ shift (12 hours a day), what would be his daily optimal
bundle of goods and leisure respectively?
a) R80 consumption of goods and 12 hours of leisure.
b) R60 consumption of goods and 24 hours of leisure.
c) R500 consumption of goods and 6 hours of leisure.
d) R880 consumption of goods and 0 hours of leisure.
e) R960 consumption of goods and 12 hours of leisure.

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5. How much labour does a firm require to produce q = 1000 when capital is fixed at 5 in the
short run and they have a production function equal to 𝑞𝑞 = 200𝐿𝐿0.5 𝐾𝐾 0.5 ?
a) L = 5.
b) L = 2.5.
c) L = 200.
d) L = 2.25.
e) L = 1000.

6. A natural monopoly occurs when:

a) multiple firms produce identical products and compete fiercely in the market.
b) a single firm has exclusive control over a natural resource used in production,
whether or not this firm achieves economies of scale.
c) there is a lack of competition due to high fixed costs and declining average costs
over a large output range.
d) firms collaborate to set prices and restrict output in order to maximize profits.
e) the Competition Authority enforces strict regulations to prevent any single firm from
gaining a dominant position in the market.

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Consider the diagram below showing air tickets from San Francisco to New York for
the only operator on this route called “Silver Wings” (the diagram furthest to the right
shows what would happen if this market was operated by a single-price monopolist
whilst the other two diagrams shows the monopolist segmenting the market, based on
when tickets are purchased). Use this diagram to answer questions 7 and 8.

Source: boycewire.com

7. Which of the following is true with respect to ‘Silver Wings’?

a) It charges a higher price to those consumers with a higher price elasticity of

demand.
b) It charges a lower price to those consumers who are less sensitive to the price.
c) The company charges a price of $300 to those consumers with the more price
elastic demand.
d) The company charges a price of $150 to all consumers, regardless of their price
elasticity of demand.
e) The company charges a price of $150 to those consumers who have a greater
price elasticity of demand.

8. ‘Silver Wings’ is an example of:

a) a perfectly competitive firm.

b) a monopolistically competitive firm.
c) a firm practising third-degree price discrimination.
d) a firm practising first-degree price discrimination.
e) a firm practising second-degree price discrimination.

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Use the figure below to answer question 9:

9. The above figure shows the payoff to two firms, A and B, of releasing two versions of a
new product. What is Firm B's best response if Firm A decides to release the low-price
version?
a) Firm B does not have a best response strategy.
b) Firm B chooses the low-price version.
c) Firm B chooses the high-price version.
d) Both low-price and high-price versions are best responses for firm B.
e) Firm B’s best response cannot be determined.

10. In the South African automotive industry, the sales of the four largest firms are as
follows:

Honda Motor Southern Africa: R1 200 million

Isuzu Motors South Africa: R900 million
Suzuki Auto South Africa: R800 million
Volvo Car South Africa: R700 million

If the total sales in the South African automotive industry are R5 000 million, what is the
Four-firm concentration ratio (CR4) for this industry?

a) 33,3%.
b) 72%.
c) 20%.
d) 24%.
e) 28%.

11. Suppose two people with the same level of income and wealth have different discount
rates. Londiwe has a very high discount rate and Nosipho has a very low discount rate.
Which one of the following is TRUE?

a) Londiwe is more likely to borrow than Nosipho.

b) Londiwe is less likely to borrow than Nosipho.
c) Londiwe and Nosipho will borrow the same amount.
d) Neither Londiwe nor Nosipho would be borrowers.
e) None of the above.

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12. You have R1,000,000 which you plan to put into a bank for one year. Bank A pays 6%
interest compounded annually. Bank B pays 3% interest after six months and a further 3%
at the end of the year. How much bigger is the total interest payment by the end of the year
in bank B than in bank A?

a) There is no difference in the interest payments.

b) R90.
c) R900.
d) R9,000.
e) R60,900.

13. The Net Present Value approach to investment results in an investment being
undertaken only if:

a) its net present value is positive.

b) its net present value is zero.
c) it has a positive cash flow.
d) its internal rate of return equals the rate of interest.
e) its internal rate of return is greater than the interest rate.

14. Suppose that Henry refuses a bet with an expected gain of R100. What can we
conclude about Henry’s attitude to risk?

a) Henry is definitely risk preferring.

b) Henry is definitely risk neutral.
c) Henry is definitely risk-averse.
d) Henry may be either risk-neutral or risk preferring.
e) Henry may be either risk-neutral or risk-averse.

15. This month, an estate agent earns zero with a probability of 15%, R20,000 with a
probability of 55% and R35,000 with a probability of 30%. What are her expected earnings?

a) R0.
b) R10,500.
c) R11,000.
d) R20,000.
e) R21,500.

16. Many people do not fully insure against risk because:

a) they are risk averse.

b) the insurance companies are all dishonest.
c) they are risk neutral.
d) the insurance offered is less than fair.
e) the insurance offered is more than fair.

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17. Sanele wants to insure his house, which is worth R1 million, against the risk of fire.
There is a 5% probability that his house will burn next year. If a fire does occur, his house
will be worth R200 000. If Sanele is offered insurance to fully insure his house against fire
risk next year for an insurance premium of R40 000, one can conclude that:

a) the insurance is fair.

b) the insurance is less than fair.
c) the insurance is more than fair.
d) Sanele is probably risk-averse.
e) the insurance company is greedy.

18. If a production process creates positive externalities, a competitive market produces too
few positive externalities because the producer:

a) does not pay all the costs of the externalities.

b) does not receive compensation for the externalities.
c) places too high a price on society's benefits from positive externalities.
d) produces more than the social optimum.
e) None of the above.

19. Suppose two neighbours share a park. One neighbour, Sandile, leaves rubbish in the
park. This bothers the other neighbour, Nokwanda. According to Coase's theorem, the
optimal level of rubbish in the park can be achieved if:

a) Sandile is fined by the government.

b) Sandile has the right to leave rubbish, and Nokwanda cannot do anything about it.
c) Sandile has the right to leave rubbish, and Nokwanda can pay him to limit his
dumping.
d) Nokwanda moves.
e) Sandile moves.

20. If the social cost of producing fertilizers is greater than the private costs, then we can be
sure that:

a) a positive externality exists.

b) fertilizer production should be subsidised.
c) the price of fertilizer is too high.
d) a negative externality exists.
e) fertilizer production is less than socially optimal.