University of the Witwatersrand

School of Economics and Finance

Economic Theory 1A (ECON1016)

Microeconomics for Economists, Test 1

Date: 20 March 2020

Duration: 60 minutes + 5 minutes reading time

Question paper to be handed out when all students are seated, cover page (page 1) face-up.
Students may not read any of the questions until the chief invigilator announces the start
of the test.

Please carefully read the instructions on the

following page!

© School of Economic and Business Sciences, University of the Witwatersrand

 Instructions

1. The test consists of 2 sections: Section A and Section B. Both Sections must be
answered.

2. Section A consists of 10 MCQs. Each correct answer is awarded 2 marks. There is no

negative marking.

3. Section A is to be answered on the red MCQ card provided.

4. In deciding how long to spend on each question, consider the mark allocation as a
guide: 1 mark = 1 minute.

5. If you make a mistake on your MCQ card do not erase it. Ask for a new MCQ card.
Erasing can cause errors in the MCQ card marking process. Any errors due to an erased
answer will not be corrected for.

6. On the MCQ card please make sure that your student number is filled in at the
appropriate section (bottom left box).

7. Please start at Number 1 on the MCQ card and not at 101!

8. Section B is a written section and consists of three questions with subquestions. You
have to answer all questions in the provided answer book.

Eg: 1 2 3 4 5 6 7

9. GOOD LUCK!

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SECTION A: MULTIPLE CHOICE QUESTIONS __________________ 20 MARKS

Question 1

A country, Wakanda, produces two goods: loaves of bread and handbags. In 2016 the
prices of loaves of bread and handbags were $5 and $40 respectively. In 2017, the prices
increased to $6 and $45. The quantities produced of the two goods were 1000 and 200
respectively in both 2016 and 2017. From this information we can conclude that:

(i) The nominal GDP of Wakanda in 2016 was $13000

(ii) The real GDP of Wakanda is unchanged between 2016 and 2017.
(iii)The nominal GDP of Wakanda is unchanged between 2016 and 2017.
(iv) The nominal GDP growth rate between 2016 and 2017 is 15,38%
(v) The economy of Wakanda grew between 2016 and 2017 in both nominal and real
terms.

A. Only (i) is correct.

B. Only (i) and (iv) are correct.
C. Only (i), (ii), and (iv) are correct.
D. Only (i), (ii), (iii), and (iv) are correct.
E. All the above options are correct.

Question 2

In the following diagram there are two technologies, A and B, which can produce 100
tonnes of steel. There are two price scenarios. In Scenario 1 (dotted line), the wage and
the coal price are £10 and £20 respectively. In Scenario 2 (solid lines), the wage and the
coal price are £10 and £5 respectively. Based on the information provided, which of the
following is correct?

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(i) In Scenario 1, for technology B, 4 workers and 2 tonnes of coal are used at a total
cost of £80 to produce 100 tonnes of steel.
(ii) In Scenario 2, the relative price of workers and coal changes, but at B it still costs
£80 to produce 100 tonnes of steel.
(iii)In Scenario 2, the relative price of workers and coal changes, but the slope of the
isocost curve does not change from Scenario 1.
(iv) In Scenario 1, the lowest cost production is achieved at A.
(v) In Scenario 2, the lowest cost production is achieved at A.

A. Only (i) is correct.

B. Only (i) and (iv) are correct.
C. Only (i), (ii), (iii), and (iv) are correct.
D. Only (i) and (v) are correct.
E. Only (iii) and (v) are correct.

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Question 3
The following diagram shows the Lorenz curves for market income and disposable income
for the Netherlands in 2010. Disposable income is market income minus any taxes and plus
any government transfers. A’ is the area between the perfect equality line and the disposable
income Lorenz curve, while B’ is the area under the disposable income Lorenz curve. Based
on this information, which of the following statements are correct?

(i) There is perfect income equality in the Netherlands once disposable income is
taken into account.
(ii) The market income of the poorest 20% is about 10% of the total income.
(iii)The Gini coefficient for market income is higher than that for disposable income.
(iv) Taxes and transfers reduce income inequality in the Netherlands.
(v) After taxes and transfers, the poorest 50% of the population receive about 20% of
the total income.

A. Only (i) and (ii) are correct.

B. Only (ii) and (iii) are correct.
C. Only (iii) and (iv) are correct.
D. Only (iv) and (v) are correct.
E. Only (iii), (iv), and (v) are correct.

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Question 4

Use the data for the United States and Denmark in the table below, which indicates the %
of children in particular earnings quintiles (where 0,400 = 40%), to assess the truth of the
following statements about intergenerational inequality in earnings.

UNITED STATES
Children's earnings quintile
Father's
earnings
quintile
2nd 2nd
Richest
Poorest poorest Middle richest
20%
20% 20% 20% 20%

Poorest 20% 0,400 0,254 0,165 0,108 0,074

2nd poorest
20% 0,205 0,262 0,208 0,186 0,139

Middle 20% 0,181 0,204 0,250 0,202 0,162

2nd richest
20% 0,138 0,164 0,206 0,238 0,255

Richest 20% 0,098 0,117 0,166 0,259 0,360

DENMARK
Children's earnings quintile
Father's
earnings
quintile
2nd 2nd
Richest
Poorest poorest Middle richest
20%
20% 20% 20% 20%
Poorest 20% 0,253 0,205 0,195 0,181 0,167
2nd poorest
20% 0,237 0,236 0,196 0,185 0,145
Middle 20% 0,179 0,238 0,235 0,203 0,145
2nd richest
20% 0,165 0,195 0,217 0,22 0,203
Richest 20% 0,161 0,133 0,157 0,212 0,337

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Which is of the following statements is/are correct?

(i) In the United States 7,4% of children born to fathers in the poorest quintile rise to
be in the richest 20% of earners.
(ii) In Denmark 25,3% of children born to father’s in the lowest 20% of earners are
also to be found in the lowest 20% of earners.
(iii)In the United States 9,8% of children born to father’s in the lowest 20% of earners
earners are also to be found in the lowest 20% of earners.
(iv) In Denmark 16,7% of the children born to father’s in the richest 20% of earners
earners are also to be found in the richest 20% of earners.
(v) In the United States 36% of the children born to father’s in the richest 20% of
earners also earners are also to be found in the richest 20% of earners.

A. Only (i) and (ii) are correct.

B. Only (ii) and (iii) are correct.
C. Only (iii) and (iv) are correct.
D. Only (iv) and (v) are correct.
E. Only (i), (ii) and (v) are correct.

Question 5

Payoffs for person A and person B from growing rice and cassava are shown in the game
theory matrix (where 2, 2 means a payoff of 2 units for A and 2 units for B). Using game
theory analysis, which of the following statements is/are correct?

Person B Person B
Grow Rice Grow Cassava
Person A 2, 2 1,1
Grow Rice
Person A 4,4 2,2
Grow Cassava

(i) Person A’s dominant strategy is to grow Rice.

(ii) Person B’s dominant strategy is to grow Rice.
(iii) The outcome of the game will lead to a payoff of 2 units for person A and 2
units for person B.
(iv) The outcome of the game will lead to a payoff of 4 units for person A and 4
units for person B.
(v) This is an example of a prisoners’ dilemma game where cooperation is required
for a socially optimal outcome.

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 A. Only (ii) and (iv) are correct.
B. Only (ii) and (iii) are correct.
C. Only (ii) and (iv) are correct.
D. Only (iv) and (v) are correct.
E. Only (v) is correct.

Question 6

A ‘zero-sum game’ between person X and person Y describes a situation where:

A. If X gains R30 then person Y must also gain R30.

B. If X loses R30 then person Y must also lose R30.
C. Neither X nor Y can change what they have.
D. If X gains R30 then person Y must lose R30.
E. None of the above.

Question 7

Payoffs for arrested person C and arrested person D remaining silent instead of giving
evidence to the police are shown in the game theory matrix (where 0, -20 means a payoff
of 0 years in prison for person C and 20 years in prison for person D). Using game theory
analysis, which of the following statements is/are correct?

Person D Person D
Remain Silent Give evidence
Person C -1, -1 -20, 0
Remain Silent
Person C 0,-20 -10, -10
Give evidence

(i) The dominant strategy for person C is to give evidence.

(ii) The dominant strategy for person D is to remain silent.
(iii) The most likely outcome is that both person C and person D will give
evidence.
(iv) The optimal outcome is indicated where both person C and person D remain
silent.
(v) This is an example of an “invisible hand” game where the pursuit of self-interest
will lead to an optimal outcome.

A. Only (i) and (iii) are correct.

B. Only (i), (iii) and (iv) are correct.
C. Only (i), (iii), (iv) and (v) are correct.
D. Only (i) and (v) are correct.
E. Only (ii) and (v) are correct.

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Question 8

As per the figure which of the following statement(s) is / are true?

A. Only I, T and T, I are Pareto efficient.

B. Only I, I is Pareto efficient.
C. Only T, T is Pareto efficient.
D. Only I, T; I, I and T, I are Pareto efficient.
E. No allocations are Pareto efficient.

Question 9

Which of the following statements is/are correct regarding employment rent?

(i) An employment rent means that workers are not concerned about losing their
jobs.
(ii) An employment rent is equivalent to the amount which a worker will lose if he or
she loses their current job.
(iii)An employment rent is the amount by which a worker benefits when the net value
of his or her job exceeds the net value of his or her next best alternative.
(iv) An employment rent is linked to the amount the employer must pay for the rental
of office space.
(v) An employment rent enables employers to exert control over a worker.

A. Only (i) and (v) are correct.

B. Only (ii) and (iii) are correct.
C. Only (iv) is correct.
D. Only (iii) and (iv) are correct.
E. Only (ii), (iii) and (v) are correct.

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Question 10

Which of the following statements is/are correct about Adam’s best response curve
depicted in the figure?

(i) Increasing effort from 60% to 70% requires a bigger wage increase than
increasing effort from 80% to 90%.
(ii) The slope of Adam’s best response curve at B (MRT2) > the slope of Adam’s
best response curve at A (MRT1)
(iii) Adam will only choose to work if he is offered an hourly wage of R20 or
more.
(iv) If government increases the unemployment benefit to R22 per hour Adam’s
best response curve will shift upwards.
(v) Adam will give maximum possible effort in his job if he is paid R40 per hour.

A. Only (i) is correct.

B. Only (iii) is correct.
C. Only (ii) and (iv) are correct.
D. Only (iv) and (v) are correct.
E. Only (v) is correct.

REMEMBER TO FILL IN YOUR STUDENT NUMBER ON THE MCQ CARD!

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SECTION B: WRITTEN QUESTIONS 30 MARKS

Question 1 (6 marks)

1.1 Draw a diagram showing a student’s feasible frontier indicating the trade-off between
free time and the final grade and the student’s indifference between free time and his or
her final grade, with an optimal point at 19 hours of free time and a 57% final grade.
[2]
1.2 Explain what is indicated by the slope of the feasible frontier. [2]
1.3 Explain what is indicated by the slope of the indifference curve. [2]

Question 2 (6 marks)

In the ultimatum game played for R100 where the fairness norm is a R50-R50 split, John
will reject Jane’s offer if the amount that he is offered (y) is less than the satisfaction that
he will receive for rejecting the offer (R(50-y)), where R is John’s reciprocity motive.

2.1 Calculate the likely split if R = 1. [3]

2.2 Calculate the likely split if R = 0,5. [3]

Question 3 (18 marks)

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Based on the diagram above explain the following:

(a) What is represented by point Z? [4]

(b) What does Reabetswe’s reservation indifference curve, including points such as A
and Z, represent and why is it negatively sloped? [4]
(c) Compare points A and B to explain why Reabetswe’s reservation indifference
curve lies above her biological survival constraint? [4]
(d) Draw and explain what happens to Reabetswe’s reservation indifference curve
and point A if government increases survival rations to 3 bushels of grain per
period. [6]

SECTION B TOTAL: 30 MARKS

REMEMBER TO FILL IN YOUR STUDENT NUMBER ON YOUR BOOKLET!

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