Tutorial 2 Microeconomics 2026
Multiple choice
1. In a choice of technology model with labour and electricity inputs, if
there is a relative increase in the price of labour compared to the
price of electricity, which of the following statements is / are
correct?
i. If the relative price of labour rises, labour-intensive technologies
will be favoured.
ii. If the relative price of labour rises, electricity-intensive
technologies will be favoured.
iii. Entrepreneurs who are early adopters of more electricity-
intensive technologies will earn an innovation rent.
iv. Those firms that favour labour-intensive technologies will earn
an innovation rent.
v. Through a process of diffusion labour-intensive technologies
would be expected to spread to other producers.
A. Only (i) and (v) are correct.
B. Only (ii) and (iii) are correct.
C. Only (ii) and (iv) are correct.
D. Only (i) and (iii) are correct.
E. Only (v) is correct.
2. In the following diagram there are two technologies, A and B, which
can produce 100 tons of steel. There are two price scenarios. In
Scenario 1 (dotted line), the wage and the coal price are £10 and
£20 respectively. In Scenario 2 (solid lines), the coal price drops,
and the wage and the coal price are £10 and £5 respectively. Based
on the information provided, which of the following are correct.
i. At point J, 4 tonnes of coal are required to produce 100 tonnes of
steel and the total cost is £80.
ii. At point M, 5 workers are used to produce 100 tonnes of steel and
the total cost is £80.
iii. When the coal price drops, at point B the cost of producing 100
tonnes of steel falls from £80 to £40.
iv. When the coal price drops, at point B the cost of producing 100
tonnes of steel falls from £80 to £50.
v. The drop in the coal price means that coal-intensive technologies
become favoured as lowest cost, such as at point A.
A. Only (i) and (ii) are correct.
B. Only (i), (ii) and (iii) are correct.
C. Only (i) and (iv) are correct.
D. Only (iii) and (v) are correct.
E. Only (i), (iv) and (v) are correct.
Long Questions
Question 1 ( Past test Question ( 2025 Formal Test 1))
1.1Draw a diagram (including isocost curves) that shows the technology
choices of a profit maximising factory owner given the following facts. To
produce 100 units of output per day, technology A requires 20 workers
and 10 units of electricity and technology B requires 8 workers and 20
units of electricity. The wage per worker per day is R200 and the initial
cost per unit of electricity is R500, but the cost of electricity later falls to
R200 per unit (while wages remain unchanged).
(5 marks)
1.2If the revenue earned per 100 units is assumed to be constant at R10 000
per day, what will the firm’s profit be (i) if the firm uses technology A
before the price of electricity falls, (ii) if the firm continues with
technology A after the price of electricity falls and (iii) if the firm decides
rather to move to technology B after the price of electricity falls? (iv) What
factor would cause the entrepreneurial rent gained by the firm, if it shifts
to technology B, not to be permanent?
(4 marks)
1.3Explain briefly why a change in relative costs, in which energy costs fell
relative to labour costs, was one of the causes of the technology choices
that resulted in the Industrial Revolution.
(3 marks)
Question 2
Suppose John and Thabo are two restaurant owners. In one hour , John can
produce 100 hamburger Rolls and Thabo can produce 180 hamburger rolls
if they don’t produce any else. In one hour, John can produce 50
hamburger patties, and Thabo can produce 60 hamburger patties if they
don’t produce anything else. Suppose John and Thabo need both
hamburger rolls and hamburger patties.
a) Who has an absolute advantage in hamburger rolls. Why?
b) Who has an absolute advantage in hamburger patties. Why ?
c) Who has a comparative advantage in hamburger rolls, and who has a
comparative advantage in hamburger patties?
d) What should John specialise in, and what should Thabo Specialise
in?
e) Show the gains from specialisation and trade in this situation.