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ECONOMICS OBJ
1. indirect taxes.
2. buying more raw materials.
3. high degree of uncertainty.
4. offer more than one product from various sectors for export.
5. higher than marginal revenue.
6. balance of payments.
7. inferior goods
8. average cost curve
9. S
10. average fixed cost
11. gives incentives for innovation
12. Its holders are creditors to the company
13. Complete independence of each nation
14. Capital account section
15. buying more at a higher price
16. fixing production quotas for all member countries.
17. peasant farming.
18. legally exploit the loopholes in tax laws to pay less tax.
19. Shareholders’ funds.
20. rice has a greater opportunity cost of production than maize.
21. price inelastic.
22. structural unemployment.
23. specific tax.
24. consume less to increase marginal utility.
25. cause the value of money to rise
26. has few substitutes
27. central planning committee
28. R
29. technical economies
30. reducing or removing export duties
31. source of raw material
32. Consumers income level
33. lower than proposed expenditure
34. vertically sloped
35. it is recognized as a corporate entity
36. decreases
37. geographical mobility of labour
38. subsidy on farm equipment has increased
39. real composition of output is not fully known
40. resources are inadequate
41. Promissory notes
42. an increase in equilibrium quantity while equilibrium price is fixed
43. its total surface area cannot be changed
44. Component bar chart
45. shut down completely
46. supply of goods to decrease
47. marginal product of the variable factor rises and later falls
48. encourage cassava farmers
49. unemployment in the importing country
50. inclusion of wages of house-keepers
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SECTION A: ANSWER ONE(1) QUESTION ONLY
(1a)
Equilibrium Price = Pₛ
Equilibrium Output = Q𝘸
(1b)
The AR = MR curve represents the market’s demand curve.
(1c)
The firm is operating in a perfectly competitive market and experiencing economic loss in the short run.
Reason: In perfect competition,
Average Revenue (AR) = Marginal Revenue (MR)= Equilibrium Price = Demand
(1di)
Total Revenue = Pₛ × Q𝘸
This is represented by the area of the rectangle OPₛLQ𝘸O
(1dii)
Total Cost = Pᵤ × Q𝘸
This is represented by the area of the rectangle OPᵤJQ𝘸O
(1diii)
Loss = (Pᵤ – Pₛ) × Q𝘸
This is represented by the area of the rectangle PₛPᵤJQ𝘸Pₛ
(1e)
The firm is experiencing short-run losses. If this persists, it may shut down to prevent further losses. If many firms exit, market supply decreases, potentially raising prices and helping surviving firms cover costs, moving the industry toward long-run equilibrium.
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(2a)
Terms of Trade = (Price Index of Exports/Price Index of Imports) × 100
2020:
Terms of Trade = (180/150) × 100 = 120%
2021:
Terms of Trade = (160/200) × 100 = 80%
(2bi)
Favourable: 2020
Reason: The terms of trade in 2020 is 120%, which is greater than 100%. This means Country X can obtain more imports for a given quantity of exports, indicating an economic advantage.
(2bii)
Unfavourable: 2021
Reason: The terms of trade in 2021 is 80%, which is less than 100%. This means Country X needs to export more to obtain the same quantity of imports, indicating a disadvantageous trade position
(2c)
(i) Primary Products vs Manufactured Goods: If Country X exports primary products while importing manufactured goods, the terms of trade are generally determined against primary producers and in favour of industrial countries.
(ii) Backward Technology/Low Productivity: Countries with backward technology have relatively low productivity, leading to higher costs of production and a disadvantageous bargaining position in international trade
(2d)
Current Account Balance = Balance of Trade + Balance of Invisible Trade
$812,500 = $4,062,500 + Balance of Invisible Trade
Balance of Invisible Trade = $812,500 – $4,062,500
Balance of Invisible Trade = -$3,250,000
Explanation: The balance of invisible trade represents the difference between exports and imports of services (invisibles). If the balance of invisible trade is $812,500, this indicates a surplus in service transactions, meaning the country exports more services than it imports.
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SECTION B: ANSWER THREE(3) QUESTION ONLY
(4a)
Minimum price control, also known as a price floor, is a government-imposed lowest legal price below which a specified good or service cannot be sold or bought. It is set above the equilibrium price to protect producers, especially agricultural producers, from income fluctuations caused by factors such as poor harvests.
(4b)
(i) To Protect Farmers’ Income: Minimum prices ensure that farmers receive a guaranteed price for their produce, preventing income loss during bumper harvests when market prices might fall sharply.
(ii) To Prevent Distress Sales: By setting a minimum price, farmers are discouraged from selling their produce at very low prices due to urgent need for cash, thus avoiding exploitation by buyers.
(iii) To Stabilize Agricultural Markets: Minimum prices help reduce price volatility and encourage farmers to invest in production by providing price certainty before the sowing season.
(4c)
(i) Surplus Production: Setting a minimum price above equilibrium can lead to excess supply as farmers produce more, but demand decreases at the higher price, causing unsold surpluses.
(ii) Government Burden of Procurement: To maintain the minimum price, the government often has to buy the surplus produce, which can be costly and require large storage facilities.
(iii) Market Distortions and Inefficiencies: Minimum prices can distort natural market forces, potentially leading to wastage, reduced incentives for efficiency, and sometimes black markets if the controls are not well managed.
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(5a)
Production costs refer to all the expenses a firm incurs in the process of producing goods or services. These include payments for raw materials, labor, machinery, rent, utilities, and other inputs necessary for production.
(5b)
Real cost includes the total effort, sacrifice, and resources used in production, including opportunity costs while explicit cost refers to the actual financial payments made during production, such as wages and rent.
(5c)
Fixed Input refers to inputs in production whose quantity does not change with the level of output in the short run. For example, the size of a factory or the number of machines remains constant regardless of how much is produced WHILE variable Input refers to inputs whose quantity varies directly with the level of output. For instance, raw materials and labor hired on an hourly basis increase as production increases.
(5d)
(i) Fixed Cost:
These are costs that do not change with the level of output. Whether production is high or low, fixed costs like rent and salaries remain constant.
(ii) Variable Cost:
These are costs that vary directly with output. As production increases, expenses like raw materials and electricity also rise.
(iii) Total Cost:
This is the sum of fixed and variable costs. It represents the overall expense incurred in producing a given level of output.
(iv) Marginal Cost:
This is the additional cost of producing one more unit of output. It helps firms decide whether increasing production is profitable.
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(6a)
A monopoly is a market structure where there is only one producer or seller of a particular good or service, with no close substitutes.
(6b)
(i) High Barriers to Entry: Significant obstacles such as large capital requirements, control over essential resources, or government regulations prevent other firms from entering the market.
(ii) Legal Monopoly or Government Grant: The government may grant exclusive rights to a firm through patents, copyrights, or licenses, giving it sole control over production and sales.
(iii) Control of Key Resources: When a firm owns or controls a resource essential for production, it can prevent others from competing, thus establishing a monopoly.
(6c)
From this graph, the monopolist is at equilibrium, where his marginal cost (MC) is equal to marginal Revenue (MR). At the point of equilibrium, the quantity produced is OQ while the price is OP. At that point he is able to cover both the AC and MC. The super -normal profit can now be determined thus: Total Revenue = OPOQ
Total Cost = OCOQ
Profit = TR – TC = OPOQ – OCOQ
Quantity =PCSE or the shaded portion
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(7a)
(i) Treasury Bills (T-Bills): Short-term debt securities issued by the government to raise funds. They are considered low-risk investments and typically mature in a few months .
(ii) Commercial Paper (CP): Unsecured promissory notes issued by corporations to meet short-term financing needs, usually with maturities ranging from a few days to a year .
(iii) Certificates of Deposit (CDs): Time deposits offered by banks and credit unions, with a fixed interest rate and maturity date
(7b)
(i) Money Market
A manufacturer will seek funds from the money market when it requires short-term financing to meet immediate operational needs, such as purchasing raw materials or managing cash flow gaps. For example, a company might issue commercial paper to quickly raise funds for inventory replenishment. The money market provides highly liquid, low-risk instruments with short maturities (usually less than one year), making it suitable for temporary funding needs.
(ii) Capital Market
A manufacturer will seek funds from the capital market when it needs long-term financing for major investments like expanding production facilities or acquiring new machinery. For example, issuing bonds or equity shares helps raise substantial capital for such projects. The capital market offers funds with longer maturities, which align with the extended time horizon of capital investments.
(7c)
(i) Providing Long-Term Financing: Development banks provide long-term loans and investments to support infrastructure projects, industrial expansion, and agricultural development, which are crucial for economic growth .
(ii) Promoting Entrepreneurship: They offer financial and technical assistance to new businesses and entrepreneurs, fostering innovation and creating employment opportunities .
(iii) Supporting Social Development: Development banks finance projects that improve social infrastructure, such as schools, hospitals, and affordable housing, contributing to better living standards and social equity .
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(8a)
A regressive system of taxation is one in which the tax rate decreases as the taxpayer’s income increases, meaning that lower-income earners pay a higher proportion of their income in taxes compared to higher-income earners. In other words, the fraction of income paid as tax falls as income rises, placing a heavier relative burden on the poor.
(8b)
(i) Equity
Equity in taxation means fairness in how the tax burden is distributed among taxpayers. It requires that people with similar ability to pay should be taxed similarly (horizontal equity), and those with greater ability to pay should contribute more (vertical equity). This principle ensures justice by aligning tax payments with taxpayers’ capacity or benefits received from government services.
(ii) Certainty
The principle of certainty states that taxpayers should clearly know how much tax they owe, when it is due, and how it should be paid. This reduces ambiguity and prevents arbitrary taxation, ensuring that the tax system is predictable and transparent.
(iii) Economy
Economy in taxation means that the cost of collecting taxes should be kept as low as possible relative to the revenue generated. This principle aims to minimize administrative expenses and compliance costs for both the government and taxpayers.
(8c)
(i) To Raise Revenue: Taxes are the primary source of government income used to fund public goods and services such as infrastructure, education, and healthcare.
(ii) To Redistribute Income: Governments use taxation to reduce income inequality by imposing higher taxes on the wealthy and providing social welfare programs for the poor.
(iii) To Regulate the Economy: Taxes can influence economic behavior by discouraging harmful activities (e.g., tobacco taxes) or encouraging investment and savings through tax incentives
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