UNIVERSITY OF CAPE TOWN
SCHOOL OF ECONOMICS
ECO3020F
Advanced Microeconomics and Macroeconomics
SUPP EXAM
28 July 2021
Total marks for this supp exam: 180 marks
Required time for the supp exam: 3 hours
Given time for the online submission: 20 minutes
Structure of the supp exam : This exam contains TWO sections. Section A
(Microeconomics) and Section B (Macroeconomics). There are TEN (10) questions. All
questions are compulsory. The value of each question and sub-questions is indicated in
parenthesis. Begin each new question on a different page.
Instructions for the online submission
1. You should download the supp exam paper (that you can find as an attachment on
the assignments tab on vula) and save the supp exam paper on your device. That
means you will go offline to answer the questions either via a computer program such
as Microsoft Word or take pictures of your handwritten answers and when you finish
you should upload these on the Assignments tab in Vula).
2. On the top of your questions page, fill in your details (name, surname, student
number).
3. On this word document, you should type in your answers adding pictures of your
handwritten graphs. Once you have finished with all the questions have a final look
and upload your file on the assignments tab on vula.
• In case you cannot add your graphs in the same file, you can upload your graphs
on the assignments tab in different files making sure that your name, surname,
student number appear on all your submitted files. Your written answers still need
to be in one file.
• In the unlikely event that you encounter problems, you should email your
problems to: ECO3020F@uct.ac.za .
NAME:
SURNAME:
STUDENT NUMBER:
SECTION A: MICROECONOMICS [90 marks]
There are six questions in this section. You must answer all questions. Begin each new
question on a different page.
QUESTION 1 [16 marks] USE A NEW PAGE
1. Fehr et al. perform experiments to test the effects of explicit incentives versus implicit
motives on worker productivity in a context of asymmetric information. Explain the
experiment used by Fehr et al. to test this and explain the logic behind the treatments
in the experiment.
[8 marks]
NOTE: You are not expected to provide the details of the experimental design. Focus
your description of the experiment only on the key differences in treatments.
2. Consider a market for second-hand cars with asymmetric information on the quality
of the cars as described in Akerlof’s Market for Lemons framework. Explain what,
and how, Akerlof’s Market for Lemons predicts would happen to this market.
[8 marks]
QUESTION 2 [12 MARKS] USE A NEW PAGE
1. Critically discuss whether UCT’s affirmative action policy in student admissions as
described in Kerr et al (2017) is an equitable and effective way of reducing persistent
racial inequality in South Africa.
Use the evidence on social class mobility in South Africa (as discussed in class) as
well as Kerr et al (2017) to motivate your answer. Discuss two reasons in support of
your answer.
[12 marks]
QUESTION 3 [18 MARKS] USE A NEW PAGE
Person A and Person B are gold miners who share the same gold mine and face the tragedy of
the commons. The utility functions for Person A and Person B are represented respectively by:
1 ! "
(𝑟 )
4
1
𝑢# = 2𝐺 # − (𝑟 # )"
4
𝑢 ! = 2𝐺 ! −
The amount of gold each person extracts from the mine, 𝐺 ! and 𝐺 # , is represented by their
production functions as:
𝐺 ! = 𝛾(1 − 𝜃𝑟 # )𝑟 !
𝐺 # = 𝛾(1 − 𝜃𝑟 ! )𝑟 #
where 𝛾 > 0 and 𝜃 > 0, and the fraction of the day each miner spends mining is represented by
𝑟 ! and 𝑟 # .
1. Solve for the uncoordinated Nash Equilibrium mining effort level. Focus on Person A
in answering this question.
[9 marks]
2. Now consider Person A as an altruist with an altruism parameter represented by 𝛼
such that 0 ≤ 𝛼 ≤ 1. Assuming 𝛼 = 1 in the utility function below, solve for Person
A’s best response function.
𝑢 ! = 2𝐺 ! −
[9 marks]
1 ! "
(𝑟 ) + 𝛼(𝑢# )
4
QUESTION 4 [16 MARKS] USE A NEW PAGE
Consider a society populated only by Person A and Person B. This society has 10 units of Good
X and 15 units of Good Y, both of which must be distributed between Person A and Person B.
In this society, the initial distribution of the two goods is Pareto Inefficient. At this initial
endowment (point z), Person A has 13 units of Good Y and 1 unit of Good X. Person A and
Person B are identical with utility functions defined as 𝑢 ! = 𝑢# = 𝑥 $.& 𝑦 $.& . Assume further
that Person B has Take-It-Or-Leave-It (TIOLI) power.
1. Graphically illustrate this situation indicating the initial endowment, the final
allocation of Good X and Good Y, and the Pareto Improving Lens. Label the final
allocation as FA and limit your graph to 2 indifference curves for each person. Make
sure your graph is fully labelled and clear.
2. Explain how TIOLI power leads to the final allocation FA.
[9 marks]
[7 marks]
QUESTION 5 [16 MARKS] USE A NEW PAGE
Use the Edgeworth Box below for this question. The initial endowment is represented in the
box by point e.
1. Explain how the Walrasian Auctioneer process results in point w as the final allocation
of endowments.
[10 marks]
2. Curve 1, Curve 2, and Curve 3, represent a collection or locus of points at which a
specific condition is satisfied. Briefly describe the condition specified by each of the
curves.
[6 marks]
QUESTION 6 [12 MARKS] USE A NEW PAGE
1. Explain how risk exposure and expected income affect risk preferences.
[6 marks]
2. Consider the graph below.
Using the points labelled in the figure, indicate the line segment (a vertical or
horizontal distance between two points) which represents:
a) The insurance premium.
[2 marks]
b) The decreased risk exposure from insurance.
[2 marks]
c) The increased risk taking from insurance.
[2 marks]
SECTION B: MACROECONOMICS [90 marks]
There are four questions in this section. You must answer all questions. Begin each new
question on a different page.
Question 7 [30 marks] USE A NEW PAGE
a) Assuming that the representative consumer behaves as a lender, use the two-period
model for consumption and savings to explain and show diagrammatically the effects
of a decrease in the real interest rate on current consumption (c), future consumption
(c’) and savings (s).
[15 marks]
b) “Budget deficits are always bad”. Do you agree with this statement? Critically discuss.
[15 marks]
Question 8 [15 marks] USE A NEW PAGE
a) If the real exchange rate is constant, what does that mean for the nominal exchange
rate?
[5 marks]
b) Does a depreciation of the exchange rate always lead to an improvement in the current
account?
[10 marks]
Question 9 [30 marks] USE A NEW PAGE
a) Assuming that the US interest rate is the world interest rate, use the Williamson model
of a small open economy with money to illustrate the impact of a rise in real US interest
rate on the South African goods market, labour market and money market under a
flexible exchange rate. Describe briefly in words and use relevant diagrams.
[20 marks]
b) What would happen if the South African exchange rate was fixed? Answer with a short
description and graphs.
[10 marks]
Question 10 [ 15 marks] USE A NEW PAGE
a) Is the coronavirus an example of what causes business cycles according to the real
business cycle model? Explain.
[4 marks]
b) Explain the impact of the coronavirus on South African output in the short run. [11
marks]
END OF QUESTIONS