ECS2601 Assignment 1 (DETAILED ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED

ECS2601 Assignment 1 (DETAILED ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references. In your own words, explain how you understand the working of the market mechanism. Explain in your own words how price adjustments eliminate shortages and surpluses in a competitive market. (2) 1.2 Differentiate between any two of the following concepts: (4) (a) Substitution effect versus income effect (b) Normal good versus inferior good (c) Price elasticity of demand versus price elasticity of supply (d) Perfect substitutes versus perfect complements 1.1 In your own words, explain how price ceilings and price floors affect the functioning of a market. (2) 1.2 Differentiate between any two of the following concepts: (4) (a) Movement along a demand curve versus a shift of the demand curve (b) Normal goods versus luxury goods (c) Short-run versus long-run production (d) Accounting profit versus economic profit In your own words, explain how you understand the working of the market mechanism. 1.3 Discuss the likely shape of the following curves (include a graph in your explanation): (4) Differentiate between any two of the following concepts: (4) (a) Completeness and transitivity in relation to consumer choices (b) Inferior product versus a Giffen good (c) Infinite elastic and complete inelastic demand (d) Ordinal versus cardinal rankings (a) The Engel curve for a normal good (b) The total product curve in the short run when the law of diminishing returns applies (Make sure to clearly label all axes and explain the economic reasoning behind the shape.) Question 2: (10 marks) 2.1 Lerato spends all her monthly income on two goods: clothing and entertainment. The prices are PC = R200 per unit and PE = R100 per unit. Her income is R6000 per month. (a) Graphically illustrate the changes in Lerato’s budget line under the following scenarios: In your own words, explain how you understand the working of the market mechanism. i. Scenario 1 (B1): The price of clothing increases to R250 per unit, while entertainment remains unchanged. (3) ii. Scenario 2 (B2): Lerato receives a bonus of R3000 per month (apply this to the original budget constraint). (3) 3.3 If the supply equation is given as Q = -100 + 10P the price elasticity of supply between R15 and R25, calculated using the arc elasticity of supply, is (a) 0.5 (b) 2.5 (c) 1.0 (d) 2.0 3.4 Indifference curves are convex to the origin because of (a) the assumption that more is preferred to less (b) the assumption of completeness (c) transitivity of consumer preferences (d) the assumption of diminishing MRS 3.5 When the price of good X decreases (holding money income constant), which of the following correctly distinguishes the substitution effect from the income effect? (a) The substitution effect occurs because the consumer’s real income increases, while the income effect occurs because the good becomes relatively cheaper (b) The substitution effect occurs because the good becomes relatively cheaper compared to other goods, while the income effect occurs because the consumer’s purchasing power change. (c) The substitution effect only applies to inferior goods, while the income effect only applies to normal goods. (d) The substitution effect shifts the (Note: You may show all scenarios on one graph or use separate graphs. Clothing must be on the vertical axis and entertainment on the horizontal axis. Clearly label all budget lines and intercept values.) In your own words, explain how you understand the working of the market mechanism. (b) Calculate and comment on the slope of the budget line in both scenarios. (4) 2.1 Sarah spends all her income on two goods, namely textbooks and data bundles. The prices are PT = R250 per textbook and PD = R50 per data bundle. Her income is R5,000 per month. (a) Graphically illustrate the changes in Sarah’s budget line given the following scenarios: i. Scenario 1 (S1): The price of textbooks decreases to R200 per unit, while the price of data remains unchanged. (3) ii. Scenario 2 (S2): Sarah receives a scholarship that increases her monthly income by R1,500 (apply this to the original budget constraint). (3) (Note: You may show all scenarios on one graph or separate graphs. Clearly label all lines and show intercept values. Textbooks must be on the vertical axis and data on the horizontal axis.) (b) Calculate and comment on the slope of the budget line for both scenarios. (4) Question 3: MCQ (5 × 3 = 15 marks) [Provide a short explanation for your selected option.] 3.1 If the demand function for product X is Q = 500 − 5P, what is the price elasticity of demand at a price of R50 using the point elasticity formula? (a) -0.50 (Inelastic) (b) -1.00 (Unit elastic) (c) -1.25 (Elastic) (d) -2.00 (Elastic) [Provide a short explanation for your selected option.] 3.1 Suppose the demand function for product B is given by Q = 500 − 5P. Using the point elasticity method at a price of R40, the demand for product B is: (a) -0.40 (Demand is inelastic) (b) -1.00 (Unit elastic) (c) -0.67 (Demand is inelastic) (d) -2.00 (Demand is elastic) 3.1 You run a small business and would like to find out what the elasticity of your products are at different prices. Assume that the demand for good A is given by the equation Q=200 – 4P. Using the point elasticity method, and a price of R20, the demand for Good A is: (a) -0.67 (Demand is inelastic) (b) -1.50 (Demand is elastic) (c) -1.00 (Unit elastic) (d) -2.00 (Demand is elastic) 3.2 Which of the following statements is FALSE? (e) Price elasticity of demand is negative for most products. (f) Cross elasticity of demand is positive between complements. (g) Income elasticity of demand is positive for normal goods. (h) Price elasticity of supply is positive for most products 3.2 Which of the following statements is TRUE? Discuss the likely shape the indifference curves related to the following items will have (makes sure to also include a graph in your explanation): (4) (a) A household’s choice of buying any two consumables per week. (b) Left and right boxing gloves (a) A binding price ceiling results in a surplus. (b) A binding price floor results in a shortage. (c) An increase in income will always decrease demand. (d) A binding price floor results in excess supply. 3.3 If the supply function is Q = 50 + 5P, the price elasticity of supply between R10 and R20 using the arc elasticity formula is: (a) 0.50 (b) 1.00 (c) 1.67 (d) 2.00 3.4 The income effect of a price decrease for a normal good will: (a) Always reduce quantity demanded (b) Reinforce the substitution effect (c) Cancel out the substitution effect (d) Only apply to inferior goods 3.5 If two goods are substitutes, the cross elasticity of demand between them will be: (a) Negative (b) Zero (c) Positive (d) Equal to one 3.2 Which of the following statements is TRUE? (a) An increase in income shifts the supply curve to the right. (b) A decrease in input prices shifts the supply curve to the left. (c) An increase in the price of a substitute shifts the demand curve to the right. (d) A decrease in technology shifts the supply curve to the right. 3.3 If total revenue increases when price decreases, demand is: (a) Perfectly inelastic (b) Inelastic (c) Elastic (d) Unit elastic 3.4 The law of diminishing marginal returns states that: (a) Total product always decreases when more labour is added. (b) Marginal product eventually becomes negative. (c) Adding more of a variable input to a fixed input eventually reduces marginal product. (d) Average product always increases. 3.5 Which of the following best describes opportunity cost? (a) The monetary cost of producing a good (b) The total revenue earned from a decision (c) The next best alternative that is sacrificed (d) The accounting profit of a firm Question 4: (5 marks) [Provide a short explanation for your selected option.] 3.1 Suppose the demand function for product B is given by Q = 500 − 5P. Using the point elasticity method at a price of R40, the demand for product B is: (a) -0.40 (Demand is inelastic) (b) -1.00 (Unit elastic) (c) -0.67 (Demand is inelastic) (d) -2.00 (Demand is elastic) 4.1 Use your own example to explain the difference between fixed inputs and variable inputs in production. (2) 4.2 Explain the difference between returns to scale and diminishing marginal returns. (3) 3.2 Which of the following statements is TRUE? (a) A binding price ceiling results in a surplus. (b) A binding price floor results in a shortage. (c) An increase in income will always decrease demand. (d) A binding price floor results in excess supply. 3.3 If the supply function is Q = 50 + 5P, the price elasticity of supply between R10 and R20 using the arc elasticity formula is: Choose your own example to differentiate between a production function and an isoquant. Explain the difference between the Marginal rate of substitution (MRS) and the Marginal rate of technical substitution (MRTS) (a) 0.50 (b) 1.00 (c) 1.67 (d) 2.00 3.4 The income effect of a price decrease for a normal good will: (a) Always reduce quantity demanded (b) Reinforce the substitution effect (c) Cancel out the substitution effect (d) Only apply to inferior goods 3.5 If two goods are substitutes, the cross elasticity of demand between them will be: (a) Negative (b) Zero (c) Positive (d) Equal to one 4.1 Use your own example to differentiate between fixed costs and variable costs in production. (2) 4.2 Explain the difference between average total cost (ATC) and marginal cost (MC), and briefly describe their relationship on a cost curve diagram. (3) 1.3 Discuss the likely shape of the indifference curves for the following goods (include a graph in your explanation): (4) (a) Tea and coffee for a consumer who views them as close substitutes. (b) A printer and printer cartridges. NEW QUESTION 2: (10 marks) 2.1 Lerato spends all her income on two goods: electricity and groceries. The price of electricity is PE = R4 per unit and the price of groceries is PG = R50 per basket. Her monthly income is R3 000. (a) Graphically illustrate the changes in Lerato’s budget line under the following scenarios: i. Scenario 1 (B1): The government increases electricity tariffs to R5 per unit, while grocery prices remain unchanged. (3) ii. Scenario 2 (B2): Lerato receives a salary increase of R1 000 per month (apply this change to the original budget constraint). (3) (Note: Electricity must be drawn on the horizontal axis and groceries on the vertical axis. Clearly label all budget lines and show intercept values.) (b) Calculate and comment on the slope of the budget line for both scenarios. (4) Jason spends all his income on two items namely food and transport. The prices of food and transport are