DEPARTMENT OF ECONOMICS ECONOMICS 110 –
SEMESTER TEST 2 - MEMORANDUM 22 MAY 2023
Question 1:
Wahari runs a small woodwork firm. He hires one helper at R10,000 per year, pays annual rent of
R15,500 for his shop, and spends R20,000 per year on materials. He has R50,000 of his own funds
invested in equipment that could earn him R2,500 per year if alternatively invested. He has been
offered R29,000 per year to work as a craftsmen for a competitor. He estimates his entrepreneurial
talents are worth R2,000 per year. Total annual revenue from woodwork sales is R150,000.
a. Calculate the accounting profit for Wahari’s woodwork firm. (2)
b. Now calculate Wahari’s economic profit. (2)
Answer: (1 mark for showing correct calculations and 1 mark for the answer)
a) AP = Totale Sales - Explicit Cost = 150 000 - (10 000+15500+20000) = 150 000 -
45500 = 71 000 R104500
b) EP = Totale Sales - Explicit Cost + Implicit Cost = 150 000 - ((10 000+15500+20000)
+ (2500+29000+2000)) = 150 000 - (45500 + 33500) = R71 000
Question 2:
Given the cost information below, answer the following questions.
Output Total Cost
0 R80.00
1 130
3 205
5 280
7 395
9 605
a. When output is 1, total variable cost is.
b. When output is 3, average fixed cost is.
c. When output is 5, average variable cost is.
d. When output is 7, average total cost is.
e. When output is 9, marginal cost is. (5)
Answers: (1 mark each)
a) TVC = TC - TFC = 130-80 = 50
b) AFC = TFC / QP = 80/3 = 26.67
c) AVC = TVC / QP = (TC - TFC) / QP = (280-80) / 5 = 40
d) ATC = TC / QP = 395/7 = 56,42
e) MC = Change in Total Cost / Change in QP = (605 - 395) / (9-7) = 105
Question 3:
Assume that Demand and Supply for a commodity is represented by the equations
P= 42 − 2Qd. P= −18 + 2Qs
where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price.
a. Using the equilibrium condition Qs = Qd, determine equilibrium price. (1)
b. Now determine equilibrium quantity. (1)
Answer:
42 − 2Qd = − 18 + 2Qs.
We now use the equilibrium condition for quantity: Qs = Qd = Q. We
substitute Q for Qd and Qs. This gives us:
42 − 2Q = − 18 + 2Q.
From here, we can solve for Q and then apply that to either equation to solve for P. Since
we are at equilibrium, P will be the same with both equations.
a) P = 12
b) Q = 15. ( 1 mark each)
Question 4:
Illustrate diagrammatically how will each of the following scenarios changes demand and or supply
and affect equilibrium price and quantity in a competitive market.
a) Continues loadshedding resulted in increasing inputs costs of firms. (3)
b) Increase in the price of a subsitute product. (3)
Answer:
a)
1 Mark for LEFT Shift in Supply - 1 mark each for indicating and Increase in P and decrease in Q
b)
1 Mark for RIGHT Shift in Demand - 1 mark each for indicating and Increase in P and increase in
Q
Question 5:
Danny !Dimes” Donahue is a neighborhood"s 9-year-old entrepreneur. His most recent venture is
selling homemade brownies that he bakes himself. At a price of R5.75 each, he sells 100. At a price
of R4.25 each, he sells 300. (Use the midpoint formula method and round your answer to two
decimal places).
a. What is the price elasticity of demand for Dimes brownies? (2)
b. Is demand elastic or inelastic over this price range? (1)
c. If demand had the same elasticity for a price decline from R4.25 to R3.75 as it does for the
decline from R5.75 to R4.25, would cutting the price from R4.25 to R3.75 increase or decrease
Danny"s total revenue? (1)
Answer:
a) Ed = (Q1 - Q0) / (Q1 + Q0)/2 / (P1 - P0) / (P0+P1)/2
(300-100)/(100+300)/2 / (4,25 - 5,75)/(5,75+4,25)/2
Ed = 0,5 / 0,15 = 3.33. (1 mark for showing calculations and 1 for the answer)
b) Elastic
c) Revenue will increase. (b and c 1 mark each)
Question 6:
Refer to the table below: Ariya likes to play golf or watch a movie. The number of times per year
that she plays depends on the price of playing a round of golf, Ariya's income, and or the cost to go
and see a movie instead of playing golf.
Years 2021 2022 2023
Price of Golf Quantity Demanded
R 45 20 25 30
R 30 25 30 50
Income per Year R 95 000 R 100 000 R 120 000
Price of a Movie Ticket R 50 R 60 R 70
a. Using the above data, calculate the cross elasticity of Ariya’s demand for golf at R45 given a
price change in movie tickets from 2021 to 2022. (1)
b. What relationship exist between movies and golf? (1)
c. Using the above data, calculate the income elasticity of Ariya’s demand for golf at R30 from
2022 to 2023. Is golf an inferior or normal good? (2)
(4)
Answer: ( 1 mark for a and b – 2 marks for c one for answer and one for normal)
a. At R45 cross elasticity = +1,25
b. Substitute goods
c. At R30 income elasticity = 3,33
Normal
Question 7:
Assume that the cost data in the following table are for a purely competitive producer:
Total Average Average
Output Variable Cost Total Cost Marginal Cost
0 R60.00
2 42.50 72.50 40.00
4 37.50 52.50 30.00
6 37.50 47.50 40.00
8 40.63 48.13 55.00
10 46.50 52.50 75.00
a. At a product price of R55.00, will this firm produce in the short run? (1)
a. Below what price will the firm shutdown? (1)
b. At what market price will the firm make a normal profit ? (1)
c. Between which market prices will the firm continue to produce but make a loss? (1)
d. Above what total output will the firm make an abnormal/economic profit ? (1)
Answer: ( 1 mark each)
a. Yes it’s above AVC minimum
b. R37,50 minimum AVC
c. R47,50 minimum ATC
d. R37,5 and R47,50
e. Above 6 = higher MC than minimum ATC
