Grade 12 Economics Exam
June 2015
Paper 2 (Microeconomics)
Time: 120 Minutes
Marks: 150
INSTRUCTIONS
1
Answer FOUR questions as follows:
SECTION A: COMPULSORY QUESTION (+/- 10 minutes)
SECTION B: TWO QUESTIONS OUT OF THREE OPTIONS (+/- 45 minutes)
SECTION C: ONE QUESTION OUT OF TWO OPTIONS (+/- 35 minutes)
2
Write the number of the question next to each answer.
3
Number the answers according to the system used in this question paper.
4
Start each question on a NEW PAGE. Leave one to two lines open between subsections of each question.
5
Read each question carefully.
6
A neat and systematic presentation of facts is required.
7
Answer in full sentences.
8
Do not answer more than the required number of questions. Only the required
number of questions, in the order in which they have been handed in, will be marked.
9
Use only a black or blue pen (graphs / diagrams may be done in pencil).
10
Non – programmable pocket calculators may be used.
THIS QUESTION PAPER CONSISTS OF 7 PAGES AND ONE ANSWER SHEET
1
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 Cost per unit of output is called … cost.
A
marginal
B
average
C
total
1.1.2 When the market price is less than marginal cost the producer will … production in
order to maximise profits.
A
decrease
B
increase
C
stop
1.1.3 Which one of the following is / are not applicable to perfect competition?
A
The business has a perfectly inelastic demand curve.
B
Each business decides for itself how much to produce.
C
Individual businesses are very small in comparison with the market as a
whole.
1.1.4 The demand curve for a monopolist is the same as the … curve.
A
average revenue
B
total cost
C
marginal revenue
1.1.5 Where the … is at its minimum, the business will produce efficiently.
A
ATC
B
AVC
C
MC
1.1.6 Government intervention in the market ensures sufficient staple food for the poor by
setting … prices.
A
maximum
B
minimum
C
limited
1.1.7 An example of a cartel is …
A
the Organisation of Petroleum Exporting Countries (OPEC)
B
International Monetary Fund (IMF)
C
World Health Organisation (WHO)
1.1.8 Social cost =
A
private cost + external cost
B
private cost + opportunity cost
C
private cost + explicit cost
(8 x 2 = 16)
2
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
COLUMN B
1.2.1 Price discrimination
A
a price maker
1.2.2 Oligopoly
B
The rent that an entrepreneur pays.
1.2.3 Long – run
Price of product drops below the average variable
cost (AVC)
Businesses have considerable control over the price
D
of a product.
A situation where identical products are sold at
E
different prices to different consumers.
Responsible for preventing dumping of surplus
F
production.
The cost incurred by a third party to an economic
G
transaction.
Responsible for anti-competitive policy in South
H
Africa.
Cost incurred when production increases by an
I
additional unit
A period of production where all factors of
J
production become variable.
(8 x 1 = 8)
1.2.4 WTO
1.2.5 Monopoly
1.2.6 Externality
1.2.7 Explicit cost
1.2.8 Shutdown point
1.3
C
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.
Collusion; brokerage; fixed; equilibrium; normal; economic; colluding;
interdependent; market structure; price mechanism; administered; prescribed
1.3.1 An arrangement between businesses with the aim of limiting competition.
1.3.2 The organizational features of perfect and imperfect markets.
1.3.3 When one business is aware of the reaction of other businesses when changing
prices or output, they are …
1.3.4 The cost that remains the same even if the output changes.
1.3.5 Prices controlled by government-appointed authorities.
1.3.6 A firm makes a(n) … profit when it covers the explicit costs and the implicit costs of
production.
(6 x 1 = 6)
[30]
3
SECTION B (ANSWER TWO QUESTIONS FROM THREE)
QUESTION 2 (Start this question on a NEW PAGE)
2.1
Differentiate between normal and economic profit without referring to the average
revenue and / or the average cost curves. No graphs required.
(2 x 2 = 4)
Normal: total cost of production equal to total revenue from sale of output - breakeven
Economic: firm makes more than normal profit, total revenue greater than total cost
2.2
Study the graphs below and answer the questions that follow.
Graph A
Graph B
2.2.1 Which one of these two graphs refer to the firm making a normal profit? (2)
Graph A
2.2.2 Briefly explain why the AR and MR curves in graph A is the same curve. (4)
Individual firm is price taker, cannot influence the market price – individual firm can
only ask market equilibrium price
2.2.3 Which of these two graphs refers to a firm in a monopolistic competitive market?
Explain.
(4)
Graph B. demand curve not perfectly elastic (horizontal). Demand curve – inverse
relationship between price and quantity demanded. MR not equal to AR.
2.3
Study the extract and answer the questions that follow:
4
2.3.1 Why is alcohol classified as a demerit good?
(2)
Overproduced and over consumed
2.3.2 Define the concept market failure.
(2)
When firms do not produce the quantity of output that would have been produced
under the conditions of perfect competition
2.3.3 What other measure would you propose to solve drug and alcohol abuse by adults?
(2)
Sin taxes, education about effects of alcohol abuse, etc.
2.3.4 What negative effects will the ban on liquor marketing have on retail?
(4)
Alcohol sales will decrease
Effects on other related industries - advertising, retail, hospitality, tourism industry
2.4
Briefly discuss three conditions for a perfect market to exist and explain why the JSE,
although close, cannot be regarded as perfect.
(2 x 4 = 8)
Many buyers and sellers
No barriers to entry
Homogenous products
Perfect information
No transport cost
No government intervention
Discuss any three of the above.
JSE not perfect, why? Imperfect information, etc.
2.5
Governments in many countries use competition policies to protect consumers and
to promote the efficient use of scarce resources. Discuss two responsibilities of the
Competition Commission.
(4 x 2 = 8)
Investigating the behavior of firms accused of restrictive business practices
Allowing or disallowing mergers and acquisitions to go ahead
Making recommendations to the Competition Tribunal for approval
[40]
5
QUESTION 3 (Start this question on a NEW PAGE)
3.1
Differentiate between the shapes of the Total Revenue (TR) curve in a perfect market
and that of an imperfect market.
(2 x 2 = 4)
Perfect market – price constant therefore TR=QxP, curve always on increase
(positive slope); TR increases as Q increases
Imperfect market – downward sloping demand curve, lower price – higher quantity
demanded and vica versa; TR curve positively sloped, TR increases as quantity
increases but marginal revenue decreases until MR=0, if firm continuous to produce
more the MR < 0.
3.2
Study the following graph and answer the questions that follow:
3.2.1 Name the market structure in the above graphs.
(2)
Imperfect market, monopolistic competitive market
3.2.2 Explain the difference between the short run and the long run situations. (4)
Short run: individual firm able to make economic profit
Long run: individual only make normal profit as more firms enter market an price
decreases till all economic profit disappears
3.2.3 Explain what will happen in the long run if the firm makes a loss in the short run.
(4)
Firms will leave the market in search for better opportunities in other markets. Supply
will decrease (shift to left) and market price will increase – selling price for individual
firm in market will increase until remaining firms make normal profit
3.3
Study the extract and answer the questions that follow:
6
http://www.japantoday.com/category/opinions/view/obesity-as-a-market-failure
3.3.1 Define the concept of an oligopoly.
(2)
Market structure in which the market is controlled by a small group of firms
3.3.2 Why does unregulated markets lead to food oligopolies?
(4)
“… in a market without rules, the winners of a competition find it more profitable and
rationale to suppress the very competition that made them win. This often translates
into a gradual decline of smaller economic actors, which are pushed out or swallowed
up through mergers and acquisitions …”
3.3.3 Why can the existence and in fact the growth of oligopoly markets be regarded as
market failures?
(4)
Definition of market failure suggests that market failure occurs when quantity
produced is different from quantity produced under perfect competition.
“Through market concentration and the rise of food oligopolies that flood the market
with cheap, unhealthy, ultra-processed products …” – more produced than under
conditions of perfect competition.
3.4
Explain the process that economists use to conduct a cost-benefit analysis.
(2 x 4 = 8)
Work out the private cost of production
Work out the external cost of production
Work out the social cost
Work out the private benefits of consumption
Work out the external benefits
Work out the social benefit
7
Compare money value of total cost with money value of total benefits
MSB > MSC go ahead with project
MSC > MSB re-evaluate project
3.5
Discuss how the kinked demand curve attempts to explain why firms in an oligopoly
market tend to keep their prices constant. In your answer you need to make use of a
well-labelled graph.
(4 x 2 = 8)
Kinked demand curve represented by curve Dd
Above price P1 the firm sees it demand curve as being relative price elastic
If it raises prices other firms will not follow
Firm will thus lose market share to other firms
Below price P1 the firm sees demand as relative inelastic
If it reduce price other firms will follow
Sell little more but will not be maximizing profit anymore
[40]
8
QUESTION 4 (Start this question on a NEW PAGE)
4.1
4.2
Briefly discuss two examples of non-price competition in imperfect markets.
Product differentiation
Product proliferation
Advertising
Packaging
Brand loyalty
Etc.
(2 x 2 = 4)
Study the graph below and answer the questions that follow:
4.2.1 Define the concept of a monopoly.
(2)
Market structure in which there is a single seller / producer
4.2.2 What type of monopoly is depicted by the graph? Motivate your answer. (4)
Natural monopoly, where demand is maximized the AC has still not reached minimum
point. Firm can therefore never produce at productive efficiency.
4.2.3 Briefly explain why monopolies, in general, negatively affect consumers. (4)
4.3
Study the extract below and answer the questions that follow:
The South African Competition Commission has called for six oil companies – Shell, BP,
America’s Chevron, France’s Total and domestic producers Sasol and Engen – to stand before
the South African Competition Tribunal for collusion.
An investigation that begun in 2009 revealed that the six companies to have kept diesel prices
artificially high, using the South African Department of Energy’s maximum price guideline as their
benchmark.
The Commission accused the firms of “extensive exchanges of commercially sensitive
information”, such as monthly fuel sales, to enable them to “track each other’s sales and to align
their strategies in the market”.
The investigation found that confidential information exchanges had been occurring since the
1980s, and from 2005, went through the South African Petroleum Industry (SAPIA).
The companies were also accused of colluding to influence the regulatory environment of South
Africa's fuel market, attempting to raise barriers to entry for new firms in order to maintain the
status quo.
9
The scandal has had far-reaching effects in South Africa, since diesel is used heavily by the
transport industry, the mining industry, fisherman, and farmers.
Each company faces penalties of up to 10 per cent of the companies’ annual South African
turnover if found guilty by the Competition Tribunal.
http://www.newstatesman.com/business/business/2012/10/shell-and-bp-accusedcollusion-south-africa
4.3.1 Define the role of the Competition Tribunal.
(2)
Tribunal is a body that decides whether or not to approve the recommendations of
the Commission.
4.3.2 In your own words what were these companies accused of?
(4)
They are accused of keeping diesel prices artificially high.
They are also accused of attempting to raise barriers to entry for new firms in order
to maintain the status quo.
4.3.3 What are the possible consequences of these accusations - why does the
Competition Commission and Competition Tribunal regard it as their duty to
intervene?
(4)
Consequences for consumers: effects on transport industry, mining industry,
fisherman and farmers
Consequences for oil companies: penalties of up to 10% of annual SA turnover
4.4
Explain, by means of a neatly labelled graph, the relationship between the
shutdown point and the supply (MC) curve of the individual firm in a perfect market.
(4 x 2 = 8)
10
4.5
Explain with the aid of a graph why the individual firm in perfect competitive market
will always maximize profit where MR = MC?
(4 x 2 = 8)
[40]
11
SECTION C (ANSWER ONE ESSAY QUESTION FROM TWO)
Start this question on a NEW PAGE
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
It is often argued that monopolistic competition lead to a less efficient allocation of resources.
 Discuss market clearing in a monopolistic competitive market by comparing short and
long run possibilities. Make use of well labelled graphs to illustrate your answer. (26)
 How will non-price competition between food outlets like Wimpy, McDonalds, Burger
King, Steers, Spur, etc. ensure their operational success in this monopolistic competitive
market?
(10)
(40)
QUESTION 6
Market failure results in either the over-production and over-consumption of output or the
under-production and under-consumption of output. When the market fails, intervention is
required. The only institution capable of intervening with market failure is the government.
 Discuss how the government can intervene in an attempt to address market failures.
(26)
 Briefly discuss how the government intervened in order to address the over provision of
demerit goods in post-apartheid South Africa. Make use of a graph to illustrate your
answer.
(10)
(40)
12
Grade 12 Economics Exam
June 2015
Paper 2 (Microeconomics)
ANSWER SHEET
NAME: _______________________________
A
1.1.1
B
C
X
1.1.2
X
1.1.3
X
TEACHER: SH / CCS / WHS
1.3.1
NORMAL PROFIT
1.3.2
MARGINAL COST
1.3.3
MAXIMUM PRICES
1.3.4
MARGINAL COST
1.1.4
X
1.3.5
MARKET STRUCTURE
1.1.5
X
1.3.6
COLLUSION
1.1.6
X
1.1.7
X
1.1.8
X
1.2.1
A
1.2.2
F
1.2.3
J
1.2.4
D
1.2.5
K
1.2.6
C
1.2.7
B
1.2.8
G
13