POLYTECHNIC OF NAMIBIA
SCHOOL OF MANAGEMENT SCIENCES
DEPARTMENT OF ACCOUNTING, ECONOMICS & FINANCE
ECONOMICS OF AGRICULTURE (EOA611S)
TEST 1 (Full-Time)
Time: 1 hour
Marks 40
12 March 2014
Instruction: Answer all questions.
QUESTION 1 [10 MARKS]
1.1
a) Is an applied social science that deals with the usage of the resources (Land, labour,
Capital and Entrepreneurship) to produce food and fibre, and distribute to society for
consumption. Agricultural economics uses economic theory to find answers to
problems in agriculture.
(2)
b) When goods/services are produced in the least costly way then the economy have
attained Technical efficiency (producing maximum output by using minimum input).
(1)
c) Measure of an event or a quantity that can
take different values e.g. Price,
number of books.
(1)
d) Is the rate at which the consumer is willing to trade one good for another. Or the
Maximum amount of one good a consumer will sacrifice to obtain one more unit of
another good
(1)
1.2 There are at least 2 important characteristics of the agricultural industry making it distinct
from all the others.
I.
Cyclical nature of production: Caused by Physical and Biological factors.
I.
Biological Factors: Time it takes to raise livestock/ grow fruits.
II.
Physical Factors: Climate conditions & diseases effect on agric
production.
II.
Price instability : Caused by changes in agricultural product market. This factors
include:
I.
Producer decisions: Shifting between crops and livestock affect agric
prices.
II.
Competition in Agric industry: Competitive, with many producer but none
produce in large quantities to influence prices.
III.
Homogeneous product: Same products from all producers.
These conditions cause supply and demand to influence prices.
(5)
QUESTION 2 [10 MARKS]
2.1.
What can you conclude about the price elasticity of demand in each of the following
statements? State whether its elastic or inelastic.
.
a) This statement says that a 10% increase in price reduces the quantity demanded by
50%. That is, the price elasticity of demand is 50/10 = 5. Demand is elastic.
a) The fact that it was necessary for price to drop by 80% in order to sell one more unit
(an increase in quantity of 67%, using the midpoint method) indicates that the
demand for Jerry Garcia autographed lithographs is inelastic.
b) There is no substitute available, so demand is inelastic. (Although, over time, as
more used Krugman/Wells textbooks become available, the price elasticity of
demand will increase.)
c) Demand is unit-elastic: no matter what the price of coffee is, the total revenue to the
producer (which is my total expenditure on coffee) remains the same.
2.2.
Explain how the following incidents will impact the demand for mutton, and whether it will
cause a shift in or a movement along the demand curve.
a)
b)
c)
d)
e)
Demand for mutton will increase, shift of demand curve to the right
Demand for mutton will increase, shift of demand curve to the right
Qd decreases, movement along demand curve
Demand for mutton will decrease, shift of demand curve to the left.
Demand will increase immediately, shift of demand curve to the right.
(2)
(1)
(1)
(1)
(1)
QUESTION 3 [20 MARKS]
You are provided with the following information for a consumer: price of maize = N$4/kg;
price of apples = N$3/kg; monthly income = N$120. The consumer decides to buy 15 kg of
maize and 20 kg of apples each month, since this provides her with the most utility. Based
on this information, answer the following questions:
a) With the quantity of maize on the vertical axis and the quantity of apples on the
horizontal axis, graphically illustrate the consumer’s budget line.
(3)
b) Illustrate the point of consumer equilibrium on the diagram by drawing an appropriate
indifference curve onto the budget line defined in (a).
(3)
c) When will the consumer move to a new equilibrium point?
(3)
d) Graphically illustrate why a consumption bundle of 22.5 kg of maize and 10 kg of apples
would not provide the consumer with maximum utility, despite the fact that she uses up
the whole budget.
(2)
e) Derive the slope of the budget line?
(2)
f)
(4)
List four properties of indifference curves
g) Graphically depict an indifference curve for perfect complimentary goods.
(3)
The END!