NAMIBIA UNIVERSITYOF SCIENCE AND TECHNOLOGY

FACULTY OF MANAGEMENTSCIENCES

DEPARTMENT OF ACCOUNTING ECONOMICS ANDFINANCE

QUALIFICATION: BACHELOR OF ECONOMICS HONOURS DEGREE

QUALIFICATION CODE: O8HECO LEVEL: 8

COURSE CODE: AMI810S COURSE NAME: ADVANCED MICROECONOMICS

SESSION: JUNE 2018 PAPER: THEORY

DURATION: 3 HOURS MARKS: 100

FIRST OPPORTUNITY EXAMINATION QUESTION PAPER

EXAMINER(S) Prof. Tafirenyika Sunde (NUST)

MODERATOR: Prof. J.P.S Sheefeni (UNAM)

INSTRUCTIONS

1. AnswerALL the questions.

2. Write clearly and neatly.

3. Number the answers.

PERMISSIBLE MATERIALS

1. Ruler

2. Calculator

THIS QUESTION PAPER CONSISTS OF 3 PAGES

QUESTION 1 [25 MARKS]

a)

b)

Using the budget constraint and the indifference map, demonstrate

how you would derive the optimal consumer choice for a consumerconsuming eggs and oranges. Note that eggs should be on thehorizontal axis and oranges on thevertical axis. [5]If both eggs and oranges are normal goods, show what happensto theconsumer optimal choice when the consumer’s income used topurchase both goodsincreases. [5]Demonstrate and explain what happens to the consumer optimalchoice when theprice of eggs falls ceteris paribus. [5]State the general budget line, use it to determine the slope of thebudget line, the point where the budget line crosses the vertical axis,the point where the budget line crosses the horizontal axis, and drawthis budgetline in the eggs, oranges space. [5]What are network externalities, and why are they important inunderstanding demand by individual consumers? [5]

QUESTION 2 [25 MARKS]Suppose that two investments have the same three payoffs, but theprobability associated with each payoff differs, as illustrated in the table

below:

Payoff Probability (Investment A) Probability (Investment B)

$300 0.10 0.30$250 0.80 0.40$200 0.10 0.30

(a) Find the expected return and standard deviation of each

investment. [6](b) Jill has the utility function U=57, where I denote the payoff.

Which investmentwill she choose? [6](c) Ken has the utility function U=5J/I. Which investment will he

choose? [7](d) Laura has the utility function U=5/l’. Which investment will she

choose? [6]

QUESTION 3 [25 MARKS]a) What do you understand by (i) Pareto efficient allocation and (ii)

welfare theorems? [10]b) Using carefully labelled diagrams, discuss what you understand by

efficiency in consumption, efficiency in production and efficiency inproduct mix? Explain the implications of each the above concepts.

[15]

QUESTION 4 [25 MARKS]Two computer firms, A and B, are planning to market network systems foroffice information management. Each firm can develop either a fast, high-quality system (High), or a slower, low-quality system (Low). Market researchindicates that the resulting profits to each firm for the alternative strategiesare given by the following payoff matrix:

Firm B

High Low

High 50, 40 60, 45Firm

A Low 55, Do 1S, 20 (a) If both firms make their decisions at the same time and follow maximin

(low-risk) strategies, what will the outcome be? [5](b) Suppose that both firms try to maximize profits, but that Firm A has a

head start in planning and can commit first. Now what will be theoutcome? What will be the outcome if Firm B has the head start inplanning and can commitfirst? [5]

(c) Getting a head start costs money. (You have to gear up a largeengineering team.) Now consider the two-stage game in which, first, eachfirm decides how much money to spend to speed up its planning, and,second, it announces which product (H or L) it will produce. Which firmwill spend more to speed up its planning? How much will it spend?Should the other firm spend anything to speed up its planning? Explain.

[S](d) What is a “tit-for-tat” strategy? Why is it a rational strategy for the

infinitely repeated prisoners’ dilemma? [10]

(e)