WAEC Economics 2001 past questions and answers

The economic problem exists because resources are limited while wants are unlimited, so we must choose.

Under capitalism, individuals and private firms own the factors of production.

Quasi-rent is the extra earning of a factor whose supply is fixed only in the short run; it disappears when supply can adjust.

Land earns rent, labour wages, capital interest and the entrepreneur profit.

The entrepreneur decides what, how and how much to produce, and bears the risks (rather than avoiding them).

Range = highest value − lowest value.

In a capitalist (free market) economy, consumers' spending decides what is produced: consumer sovereignty.

How the population is spread over different areas of a country is its geographical distribution.

An ageing population has a low birth rate, so few young people are added and the population grows slowly.

Encouraging immigration adds people, so it increases rather than controls population growth.

When a worker concentrates on performing one task, he is specialising.

MP of the 4th unit = TP at 4 − TP at 3 = 48 − 40 = 8.

From the 2nd unit, MPs are 6, 9, 8 and 7, so highest − least = 9 − 6 = 3 (the table gives no TP at zero units, so the first unit's MP is not counted).

AP = TP ÷ units = 48 ÷ 4 = 12.

Total cost = total fixed cost + total variable cost.

A lower price raises the purchasing power of the same income (income effect), so more can be bought.

Demand for a good (e.g. a factor) because it helps produce another good is derived demand.

Gold is not needed for basic living; the others are everyday necessities.

Qd = 30 − 2 × 12 = 30 − 24 = 6 units.

Income elasticity of demand measures how quantity demanded responds to a change in income.

An upward-sloping supply curve shows that quantity supplied rises as price rises.

Monoculture means growing one main crop on the land.

Rural areas lack electricity, good roads, water and communications, which industries need.

A limited company raises capital by issuing shares (a private company to its members, not the general public).

Commercialisation makes a government-owned enterprise run on a profit basis without selling it to private owners.

The Nigerian Economic Society is a professional/learned society, not a workers' union.

Government can fix maximum prices by law to stop a monopolist charging too much.

A perfect market requires perfect knowledge, so ignorance of consumers is not one of its conditions.

Shareholders receive part of the company's profit as dividends.

Public corporations are financed with public money, so losses ultimately fall on the taxpayers.

Money serves as a unit of account (measure of value) for pricing goods.

The precautionary motive: people hold money to meet unexpected needs.

MV = PT: with V and T constant, the price level changes in the same proportion as the money supply.

Liquidity is how quickly an asset can be used to pay without loss; cash (bank notes) is already money.

Deflation is a persistent fall in the general price level.

The clearing house offsets cheques drawn on different banks and settles the balances daily.

When prices rise, a fixed income buys less, so fixed income earners lose.

Commercial banks specialise in short-term loans and overdrafts; development and mortgage banks give long-term loans.

More money chasing the same goods pushes prices up: demand-pull inflation.

Government finances spending by taxes, borrowing, grants, royalties and rents; mobilisation fees are paid by government to contractors, not received.

A direct tax is paid by the person on whom it is imposed, e.g. capital gains tax; duties and sales tax are indirect.

Tax evasion is illegally avoiding tax, e.g. by under-declaring income.

If demand is elastic, raising price would lose many buyers, so the producer must absorb most of the tax.

An ad valorem tax is a percentage of the value (price) of a commodity.

The oil boom drew labour and attention away from farming, leading to the neglect of agriculture.

Promoting exports earns more foreign exchange and reduces the deficit.

Trade among many different countries is multilateral; bilateral trade is between just two.

Differences in political and economic ideology (e.g. capitalist versus communist) lead to trade restrictions and embargoes.

Wealth is measured by real output per head: goods and services produced relative to population.

OPEC sets production quotas for members to influence oil prices.

(a) Plot military goods on one axis and civilian goods on the other; join (0, 200), (20, 160), (40, 120), (60, 80), (80, 40), (100, 0). The PPC is a straight line because each extra 20 tonnes of military goods always costs 40 tonnes of civilian goods.
(b) S and K are any points outside (to the right of / above) the curve, e.g. (60, 120) and (80, 100).
(c) M and N are any points inside the curve, e.g. (20, 80) and (40, 60).
(d) The downward slope shows opportunity cost: to produce more of one good, some of the other must be given up, because resources are scarce (here 2 tonnes of civilian goods per tonne of military goods).
(e) Production at S and K needs more resources or better technology than the country has at present, so it cannot be reached with the available resources.

Label the axes, plot all six points and mark S, K outside and M, N inside the curve.

(a)(i) Per capita income = GNP ÷ population: R = 2,500 ÷ 120 = $20.83; S = 12,000 ÷ 180 = $66.67; T = 4,000 ÷ 60 = $66.67; U = 6,500 ÷ 100 = $65.00; V = 2,500 ÷ 25 = $100.00.
(ii) Range = 100.00 − 20.83 = $79.17.
(iii) Country V (highest per capita income).
(b) Total population = 120 + 180 + 60 + 100 + 25 = 485 million. R = 120/485 × 100 = 24.74%; S = 37.11%; T = 12.37%; U = 20.62%; V = 5.15%.
(c) Bar chart: countries R–V on the horizontal axis, per capita income ($) on the vertical axis, with a title, a suitable scale and bars of equal width and spacing at heights 20.83, 66.67, 66.67, 65 and 100.

Millions cancel out, so per capita income is in dollars.

Free markets give incentive (profit motive) and so raise efficiency and productivity.
Public enterprises have performed poorly through waste, corruption and losses; privatisation reduces this burden on government.
Competition improves the quality of goods and services and lowers prices.
Consumer sovereignty: consumers' choices decide what is produced.
It attracts foreign and private investment and capital.
It encourages initiative, innovation and entrepreneurship.
Pressure from the IMF/World Bank (structural adjustment programmes) to deregulate.
It reduces government spending and budget deficits (fewer subsidies).

Give at least five reasons, each briefly explained.

(a) Underpopulation is a situation in which the population is too small to make the best use of the country's resources, so output per head is below what it could be (population below the optimum).
(b) When the country is underpopulated (below optimum).
When there are abundant unused natural resources (land, minerals).
When there is a shortage of labour.
When there is enough capital and technology to employ the extra people.
When a larger domestic market is needed to support large-scale industries.
When there is enough food and social amenities to support more people.
For defence/security needs of a large population.

Link (b) to the idea of optimum population.

(a) The law of diminishing marginal utility states that as a consumer takes more and more units of a commodity in succession, the extra satisfaction (marginal utility) from each additional unit falls, other things being equal. An example or table showing falling MU with constant or rising total utility.
Assumptions: units are identical, consumed continuously, tastes and income unchanged.
(b) A consumer with one good maximises utility where marginal utility equals price.
With several goods, utility is maximised when the last naira spent on each gives the same marginal utility: MUa/Pa = MUb/Pb = … (equi-marginal principle), with all income spent.
If MUa/Pa > MUb/Pb, the consumer shifts spending from B to A until the ratios are equal.

State the equi-marginal condition in (b).

Open market operations: selling securities to reduce money supply, buying to increase it.
Bank rate (minimum rediscount rate/monetary policy rate): raising it makes borrowing dearer and reduces credit.
Cash reserve ratio: raising the share of deposits banks must keep reduces their ability to lend.
Liquidity ratio: raising the required ratio of liquid assets reduces lending.
Special deposits: requiring banks to deposit funds with the central bank.
Selective credit control: directing credit to priority sectors and away from others.
Moral suasion: persuading banks to follow its policy.
Direct credit ceilings.

For each instrument say how it reduces or increases money supply.

(a) Fixed cost does not change with output and is paid even at zero output (e.g. rent, insurance); variable cost changes with output (e.g. raw materials, wages of casual labour).
(b) Marginal cost is the addition to total cost from producing one more unit (MC = TCn − TCn−1); marginal revenue is the addition to total revenue from selling one more unit (MR = TRn − TRn−1).
(c) Total cost is the whole cost of producing a given output (TFC + TVC); total revenue is the whole amount received from selling the output (price × quantity).
(d) Average cost is cost per unit (TC ÷ output); average revenue is revenue per unit (TR ÷ quantity), which equals price.

Define both terms in each pair and give a formula or example.

(a) Labour is human effort, physical or mental, used in producing goods and services for a reward (wages).
(b) Labour is a human factor and cannot be separated from the labourer.
Labour is perishable: a day's labour not used is lost.
Labour is mobile (occupationally and geographically).
Labour is not homogeneous: workers differ in skill and efficiency.
Supply of labour cannot be changed quickly; it depends on population.
Labour has weak bargaining power individually and can form trade unions.
Labour is an active factor; the reward is wages.

Explain each characteristic in a sentence.

Size of the market (demand) for the product.
Availability of capital.
Nature of the product (perishable or personal services favour small firms).
Managerial ability of the entrepreneur.
Availability of raw materials and other factors.
Level of technology used.
Type of business organisation (sole trader versus company).
Government policy (licensing, incentives, controls).
Economies and diseconomies of scale.

Explain each factor briefly.

(a) Economic integration is the coming together of two or more countries to remove trade barriers and co-operate on economic matters for mutual benefit, e.g. free trade area, customs union, common market, economic union.
(b) Customs union: member countries remove tariffs and other barriers on trade among themselves.
Members adopt a common external tariff on imports from non-members.
Goods move freely within the union.
Members agree on how to share customs revenue.
There is usually a common administrative body.
Factors of production do not necessarily move freely (that is a common market).

The common external tariff is what separates a customs union from a free trade area.

Perfect market: very many buyers and sellers; monopolistic market: one seller (or a few sellers with differentiated products).
Perfect market: products are identical (homogeneous); monopolistic: product has no close substitutes or is differentiated.
Perfect market: free entry and exit; monopolistic: barriers to entry.
Perfect market: firm is a price taker; monopolist is a price maker.
Perfect market: perfect knowledge; monopolistic: imperfect knowledge.
Perfect market: demand curve facing the firm is horizontal (AR = MR); monopolistic: downward sloping (MR below AR).
Perfect market: only normal profit in the long run; monopolist can earn abnormal profit in the long run.
Price discrimination and advertising are possible in a monopolistic market but not in a perfect market.

Set out the differences point against point.

(a) A balance of payments deficit occurs when a country's total payments to other countries (for imports, services, transfers and capital outflows) are greater than its total receipts from them in a given period.
(b) Drawing down the country's foreign exchange reserves.
Borrowing from the IMF.
Borrowing from other countries, foreign banks or the World Bank.
Selling foreign assets/investments.
Attracting foreign investment and grants/aid.
Rescheduling or deferring payments of external debts.

'Financing' means paying for the deficit, not correcting it.