Grade 12 Economics Exam
June 2014
Paper 2 (Microeconomics)
Time: 90 Minutes
Marks: 150
SECTION A (COMPULSORY)
QUESTION 1
1.1
For each question there are three possible answers, A, B and C. Choose the one
you consider correct and record your choice in the appropriate space on the
ANSWER SHEET attached to the question paper.
1.1.1 Where the … is at its minimum, the business will produce efficiently.
A
ATC
B
AVC
C
MC
1.1.2 Advertisements make the demand for products in a monopolistic competitive market
more …
A
unitary elastic
B
elastic
C
inelastic
1.1.3 By imposing price controls, the government can … the economic profit of producers
to make the industry more competitive.
A
increase
B
reduce
C
eliminate
1.1.4 The government can introduce … to improve the mobility of labour.
A
subsidies
B
wage increases
C
training schemes
1.1.5 An enterprise with a downward demand curve that can make a normal profit only in
the long run, is a …
A
monopolist
B
monopolistic competitor
C
oligopolist
1.1.6 Market failures occur when …
A
B
C
prices and quantities are not according to consumer’s preferences
when the interest rate is too high
when the government intervenes
1.1.7 Social cost =
A
private cost + external cost
B
private cost + opportunity cost
C
private cost + explicit cost
1.1.8 When the market price is less than marginal cost the producer will … production in
order to maximise profits.
A
decrease
B
increase
C
stop
(8 x 2 = 16)
1.2
Choose a description from COLUMN B that matches an item in COLUMN A.
Write only the letter (A – J) next to the question number (1.2.1 – 1.2.8) on your
ANSWER SHEET.
COLUMN A
1.2.1
G
1.2.2
D
1.2.3
J
1.2.4
A
1.2.5
C
1.2.6
B
1.2.7
E
1.2.8
I
Negative externality
Monopolistic competition
Explicit cost
Public goods
Marginal cost
Market structure
Price discrimination
OPEC
COLUMN B
Goods that are subject to the condition of nonexcludability.
Organisational features of perfect and imperfect
B
markets
Cost incurred when production increases by an
C
additional unit
A
D A market structure with many buyers and sellers
A situation where identical products are sold at
different prices to different consumers.
Industries where economies of scale are so large
F
that a single business can supply the market.
River bed damage from improper commercial
G
forest-harvesting practices
E
H A market structure with only on seller
I
An example of a cartel.
J
The rent that an entrepreneur pays.
(8 x 1 = 8)
1.3
Complete the following statements by using the words provided in the list
below. Write only the word next to the question number (1.3.1 – 1.3.6) on your
ANSWER SHEET.
Demerit goods; economic; normal; restrictive; expansionary;
interdependent; public goods; CBA; Gini coefficient; SARS
colluding;
1.3.1 A firm makes a(n) … profit when it covers the explicit costs and the implicit costs of
production. Normal
1.3.2 A(n) … business practice is a practice that interferes with the perfectly competitive
market, for example fixing selling prices or dividing markets. colluding
1.3.3 When one business is aware of the reaction of other businesses when changing
prices or output, they are … interdependent
1.3.4 The government uses tax to finance the provision of … public goods
1.3.5 … are excludable. Demerit goods
1.3.6 … is a systematic process for calculating and comparing the benefits and costs of a
project, decision or government policy. CBA
(6 x 1 = 6)
[30]
SECTION B (ANSWER TWO QUESTIONS FROM THREE)
QUESTION 2
2.1
Name any TWO options available to the government in order to deal with the effects
of monopoly pricing.
(2 x 2 = 4)
Monopoly will produce where MR=MC (profit maximisers) - government can
intervene and enforce MC pricing (they will have to subsidise) or AC pricing
where monopolist will only be making normal profits.
2.2
Study the graphs below and answer the questions that follow.
2.2.1 Name the market structure in the above graphs.
(2)
Imperfect – monopolistic competitive market
2.2.2 Explain the difference between the short run and the long run situations. (4)
SR – economic profit / LR – normal profit only
2.2.3 Explain what will happen in the long run if the firm makes a loss in the short run.
(4)
In the LR non profitable firms will leave the market, the number of suppliers in
the market will decrease and the supply will drop. As supply decreases the
prices will rise until AR=AC. At this point only normal profits will be made and
no firm will have any further incentive to leave the market. No new entrants
expected as only normal profits are being made!
2.3
Study the extract and answer the questions that follow:
“More generally, the notion of “externalities” is so ambiguous, so inconsistent, and so fraught with
contradictions, that it is useless as an analytical concept. It merely raises the cost of production,
without offering any real benefits. That makes everyone poorer, and nobody richer.
If you can show that someone caused you quantifiable harm by violating your rights, you’re
perfectly entitled to both compensation and action to prevent future violation, under the existing
laws of market economies. Those laws don’t remedy market failure; they establish markets by
asserting and protecting property rights. No appeal to externalities is necessary.
An appeal to externalities, however, is an admission that you’re unable to prove who caused the
harm, how they caused the harm, what harm was caused, to whom the harm was caused, how
much harm was caused, or how future harm can best be prevented. Inability to demonstrate any or
all of these offers no legal or moral basis for violating the rights of free people by coercive
government intervention.”
(Source: Daily Maverick, 8 May 2014)
2.3.1 Define the concept externalities.
(2)
Costs or benefits of a transaction that affect economic agents who are not
directly involved in the transaction.
2.3.2 Discuss briefly any two methods that the government can use to limit negative
externalities.
(4)
Taxes on production / consumption …
Quotas on production
Triple bottom line accounting, calculating the cost of environmental
sustainability …
Moral persuasion by creating awareness …
Legal action against perpetrators
2.3.3 According to the extract externalities is not an economically viable argument for
government intervention. Do you agree? Motivate your answer.
(4)
If Yes, answer should not merely copy extract – need motivation
If No, provide reasons for government intervention re externalities eg. (social
cost = private cost + external cost)
2.4
Differentiate between a merit good and a demerit good. Make use of examples to
illustrate your answer.
(2 x 4 = 8)
Merit goods: goods that society feels should be consumed by citizens
because it increases the welfare of the individual and of society as a whole.
Demerit goods: goods that society feels its citizens should not consume as it
is harmful for the individual and society.
2.5
Explain WHY the profit maximizing firm will produce at the point where: MR = MC.
(4 x 2 = 8)
To the left of point d:
Production of an additional unit will cause marginal profit as MR>MC – incentive for
producers to increase production
To the right of point d:
Production of an additional unit will cause marginal loss as MC>MR – no incentive
for producer to produce more than point d (4 units on graph).
[40]
QUESTION 3
3.1
Name TWO characteristics of public goods.
Non-excludable
Non-rivalry
3.2
Study the following graph and answer the questions that follow:
(2 x 2 = 4)
3.2.1 Identify the market structure in question.
(2)
Perfect market, MR constant
3.2.2 Assuming the firm intends to maximize profits, at what level of output would this firm
produce?
(2)
Output level U, point J (MR=MC)
3.2.3 Identify the total profit that the firm would generate at the profit maximizing level of
output.
(2)
JHMN
3.2.4 Which curve represents the supply curve? Identify the origin of the supply curve, i.e.
the shutdown point.
(4)
MC, shutdown point: AVC intersect with MC – output level S
3.3
Study the extract and answer the questions that follow:
A probe shows top construction companies fixed state and other contracts worth billions of Rands,
City Press reported on Sunday.
Affidavits detail a decades-long, formal kickback and price-fixing racket that allegedly involved
prominent names in the industry.
At least 11 affidavits were made by executives from Stefanutti Stocks to the Hawks serious
economic offences investigator and the National Prosecuting Authority, the newspaper reported.
The statements were also handed to the Competition Commission for its probe into construction
industry tender-rigging, thought to involve contracts worth at least R30bn.
(Source: News24, 3 February 2013)
3.3.1 Name any other industry that have been investigated by the Competition
Commission for price fixing in South Africa.
(2)
Cement, bread, airlines, etc
3.3.2 How will the alleged price-fixing and other market failures affect the consumer in
this industry?
(4)
Collusion erodes competition in the market. Consumer will thus not benefit
from competition between producers, i.e. lower prices. Allocative inefficiency
as the product is under supplied and thus under consumed by the market.
3.3.3 Briefly discuss two of the aims of competition policy in South Africa .
(4)
To prevent existing monopolies and other powerful firms to abuse their
power.
To regulate the growth of market power through mergers and acquisitions.
To prevent the application of restrictive practices by oligopolists.
3.4
Briefly outline the role of non-price competition under conditions of monopolistic
competition.
(2 x 4 = 8)
Explain any two:
Product differentiation …
Location …
Advertising …
Etc.
3.5
Explain the process that economists use to conduct a cost-benefit analysis.
(4 x 2 = 8)
CBA:
Calculate social cost (calculate private cost & external cost)
Calculate social benefit (work out the private benefits & external benefits)
Compare social cost to social benefits
Make decision based on CBA
[40]
QUESTION 4
4.1
Name TWO variables that an economist must take into consideration when
measuring the social benefit of a project when doing a cost-benefit analysis.
(2 x 2 = 4)
Private benefits & external benefits
4.2
Study the graph below and answer the questions that follow:
4.2.1 Identify the market structure in question.
(2)
Oligopoly market
4.2.2 Briefly discuss two characteristics of this market structure.
(4)
Few firms …
Differentiated products …
Barriers to entry …
Incomplete information …
Interdependence …
4.2.3 Briefly explain the consequence of a decrease in the price level by the individual
firm.
(4)
Assume market price to be OP and market quantity QE. The oligopolistic firm
assumes that its competitors will react to a price decrease by lowering their
prices. Firm will thus not be able to increase market share by lowering prices.
4.3
Study the extract below and answer the questions that follow:
South Africa has been slow to develop a strong telecommunications industry because of unfair
competition in the market. However, recent changes may help the country catch up with other
developing countries. The reason is that Telkom, the telecommunications industry leader, came to
an agreement with the Competition Commission which could mean an end to Telkom’s market
dominance.
Telkom has the most developed telecommunications services in Africa, with internet connection
rates as fast as 1002 kbit/s. Most of its infrastructure is built on copper loops, fiber optic loops, and
wireless connections. Other companies cannot compete in terms of infrastructure. Telkom has
abused its dominance in the telecommunications industry for the past 15 years by charging high
service fees. This has helped Telkom’s bottom line, but made the economic growth in South Africa
slower than it should have been. The Competition Commission has been trying for years to even
out competition in the telecommunications industry, but has not been successful until recently.
4.3.1 Which market structure does Telkom represent?
Monopoly market
(2)
4.3.2 Briefly discuss two barriers to entry potential entrants to the telecommunications
market might experience.
(4)
Capital / infrastructure …
Legislation / licensing …
4.3.3 Explain the effect on this type of market structure has on consumer and producer
surplus in comparison to a perfectly competitive industry
(4)
Consumer surplus reduced by area A & B
Producer surplus increases by A but reduced by C
Deadweight loss or welfare loss of B & C
4.4
Differentiate between price leadership and cartel formation.
(2 x 4 = 8)
Price leadership: When a firm that is the leader in its sector determines the
price of goods or services. Price leadership can leave the leader's rivals with
little choice but to follow its lead and match these prices if they are to hold
onto their market share
Cartel: a specific arrangement among otherwise competitive firms to limit
output, to set prices, or to share a market.
4.5
Explain the impact of positive externalities on costs / prices and quantities of goods.
Make use of a graph to illustrate your answer.
(4 x 2 = 8)
[40]
SECTION C (ANSWER ONE ESSAY QUESTION FROM TWO)
Your answer will be assessed as follows:
STRUCTURE OF THE ESSAY:
Introduction
Body:
Main part: Discuss in detail/In-depth discussion/Examine/
Critically discuss/Analyse/Compare/Evaluate/Distinguish/
Explain/Assess/Debate
Additional part: Give own opinion/Critically discuss/Evaluate/
Critically evaluate/Draw a graph and explain/Use the graph given
and explain/Complete the given graph/Calculate/Deduce/
Compare/Explain/Distinguish/Interpret/Briefly debate
Conclusion
TOTAL
MARK ALLOCATION:
Max. 2
Max. 26
Max. 10
Max. 2
40
QUESTION 5
Use graphs to help you explain and analyse the various short-run equilibrium positions for
an individual business in a perfect market.
(40)
QUESTION 6
A monopoly is a good example of a market where profit maximization implies underprovisioning and overcharging of goods and services. This type of market is usually an
unregulated market that fails to produce an ideal state of affairs.
Write an essay explaining in detail the reasons or causes for market failures.
(40)
Grade 12 Economics Exam
June 2014
Paper 2 (Microeconomics)
ANSWER SHEET
NAME: _______________________________
A
B
C
D
TEACHER: SH / WD / WHS
1.3.1
1.1.1
1.3.2
1.1.2
1.3.3
1.1.3
1.3.4
1.1.4
1.3.5
1.1.5
1.3.6
1.1.6
1.1.7
1.1.8
1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6
1.2.7
1.2.8