WAEC Economics 2010 past questions and answers

Air is a free gift of nature with no price; the others are scarce and must be paid for.

A factory serves consumers indirectly through the goods it makes, not by personal contact.

Capitalism is based on private ownership and individual decisions guided by prices.

The arithmetic mean = sum of values ÷ number of values.

In order: 5, 6, 8, 9, 10; the middle value is 8.

Higher income lets buyers purchase more at every price, so demand (for a normal good) increases.

Normal goods are bought in larger quantities as income increases.

More is supplied at higher prices, so the supply curve slopes upward: a positive slope.

At equilibrium price there is neither a surplus nor a shortage.

The supply curve shifts left, creating a shortage at the old price, so the price rises.

Total utility stops rising when the extra unit adds nothing, i.e. when marginal utility is zero.

Each extra unit adds less satisfaction, so total utility rises at a slower and slower rate.

Under division of labour each worker does one part of the job and depends on others to finish the product.

Total cost is the sum of fixed cost and variable cost.

Land earns rent.

A public company raises capital by selling shares to the general public.

The public sector is owned by government, including nationalised industries.

A sole trader need not publish accounts, so business secrets are kept.

A perfect competitor's price equals MR, and it produces where MR = MC, so P = MR = MC.

Wholesalers give credit to retailers, not directly to final consumers.

The working ages are 16–60: 27% + 25% = 52%.

Too few people to make full use of the resources means under-population.

Collective bargaining is negotiation between unions and employers to settle disputes.

Pay differences come from training, skill and demand and supply, not from being non-teaching staff as such.

Government supports farmers with research, policy and infrastructure; it does not pay farmers' wages.

Simple implements are a feature of small-scale peasant farming, not an advantage of large-scale farming.

A national minimum wage applies everywhere in the country, so it does not decide where a firm locates.

There is no 'Domestic National Product'; GNP, GDP and NDP are standard measures.

Net domestic product is GDP less depreciation.

Counting the same output more than once makes national income look larger than it is.

The supply of money is the total amount of money in circulation.

Keynes's motives for holding money are transactions, precautionary and speculative.

Higher income taxes cut disposable income and therefore excess demand.

Rising prices reduce what fixed money incomes can buy, so real income falls.

Bank notes issued by the central bank must by law be accepted in payment.

The central bank does not lend to the general public; it uses bank rate, reserve requirements and open market operations.

The central bank is the sole issuer of a country's currency.

As lender of last resort the central bank lends to commercial banks that cannot get funds elsewhere.

People can under-declare income to avoid paying direct taxes.

Excise duty is a tax on goods produced within the country.

Treasury bills are short-term government borrowing and so form part of the national debt.

Buyers keep buying despite the higher price, so sellers can pass most of the tax on to them.

Dumping is selling abroad more cheaply than at home (often below cost).

The balance of payments has a current account, a capital account and a monetary movements account.

A deficit means total payments abroad exceed total receipts from abroad.

Keeping to agreed output quotas stops oversupply and keeps oil prices stable.

Cameroon is in Central Africa and has never been a member of ECOWAS.

The forms of integration are free trade area, customs union, common market and economic union; there is no 'customs market'.

The WHO deals with health, not economic matters.

(a) MU = TU_n − TU_n−1
F = 29 − 15 = 14; D = 42 + 12 = 54; G = 65 − 54 = 11; H = 75 − 65 = 10; E = 75 + 0 = 75
(b) Marginal utility (as the price the traveller is willing to pay) on the vertical axis against number of bottles on the horizontal axis; plot 15, 14, 13, 12, 11, 10, 0 against 1–7: a downward-sloping curve labelled DD with title and scale.
(c) Each extra bottle gives less satisfaction than the one before (MU falls from 15 to 0). A rational consumer buys more only if the price falls to match the lower marginal utility (MU = P), so more is bought only at lower prices: the demand curve slopes downward from left to right.

Demand is derived from the MU curve because the consumer buys where MU = price.

(a) Fixed cost = total cost at zero output = $50.
(b)(i) MC = TC_n − TC_n−1: 1 → 5; 2 → 7; 3 → 13; 4 → 21; 5 → 29; 6 → 37; 7 → 41; 8 → 45
(ii) Profit is maximised where MC = MR = price = $21: output = 4 crates.
(c) The farm is a price taker: its demand (AR = MR) curve is a horizontal straight line at $21 for all quantities, i.e. perfectly elastic; label axes (price, quantity).

Fixed cost is the cost when nothing is produced; at a given market price, MR = price.

(a) When demand for the product is inelastic (coefficient < 1): to sell more the producer must cut price, and the percentage fall in price is greater than the percentage rise in quantity sold, so total revenue falls (e.g. farm produce in a bumper harvest). Illustrate with a steep demand curve or a numerical example (e.g. price falls from N10 to N5, quantity rises from 10 to 12: TR falls from N100 to N60).
(b) When demand is elastic (coefficient > 1): a small fall in price brings a more than proportionate rise in quantity sold, so total revenue rises. Illustrate with a flat demand curve or numbers (e.g. price falls from N10 to N8, quantity rises from 10 to 20: TR rises from N100 to N160).
(Also: if price stays constant, as for a perfect competitor, more output always raises revenue.)

Link the effect on total revenue to the elasticity of demand.

(a) An increase in supply is when more of a commodity is offered for sale at each price because of a change in factors other than its own price (e.g. better technology, lower costs); the supply curve shifts to the right.
(b) Fish and beef are substitutes. Diagram 1 (fish market): supply shifts right from S0 to S1, so the price of fish falls and more fish is bought. Diagram 2 (beef market): consumers switch from beef to cheaper fish, so demand for beef shifts left from D0 to D1; the price of beef falls (and less beef is bought).

Two diagrams: one for fish, one for beef, showing the shifts and new prices.

(a) Consumer equilibrium is the position where a consumer, with a given income and given prices, gets the maximum total satisfaction and has no reason to change the way he spends his income.
(b) He spends his income so that the marginal utility per naira is the same for all goods: MU_A/P_A = MU_B/P_B = … and all his income is spent. If MU per naira is higher for one good, he buys more of it and less of the others until they are equal (equi-marginal principle). For one good, he buys until MU = price.

State the equi-marginal condition and the budget constraint.

(a)(i) Primary production: extracting resources directly from nature, e.g. farming, fishing, mining, lumbering.
(ii) Secondary production: changing raw materials into finished or semi-finished goods, e.g. manufacturing, construction, refining.
(iii) Tertiary production: providing services, e.g. trade, banking, transport, insurance, teaching, medicine.
(b) Any two: low level of technology; shortage of capital; abundant natural resources and land; low level of education and skills; small market for manufactured goods; colonial pattern of producing raw materials for export; poor infrastructure.

Give an example with each type.

(a) A partnership is a business owned by two to twenty persons (up to fifty for professional firms) who contribute capital, share profits and losses, and run it under an agreement (partnership deed).
(b) Advantages (any two): more capital than a sole trader; division of labour and pooling of skills; shared risks and losses; easy to form; greater continuity.
Disadvantages (any two): unlimited liability (except limited partners); disagreements among partners; limited capital compared with companies; lack of continuity on death or withdrawal of a partner; slow decisions; shares cannot be transferred freely.

Two of each, briefly explained.

(a) Privatization is the transfer of ownership and control of government-owned enterprises, wholly or partly, to private individuals or companies.
(b) Any four: to provide essential services that private firms cannot afford (e.g. power, railways); to control strategic industries (defence, oil); to prevent private monopoly and exploitation; to create employment; to ensure balanced development of all regions; to raise revenue; to protect national interest from foreign domination; to provide social welfare.

Government enters areas where private investors cannot or should not operate alone.

(a) Location of industry is the choice of a particular place where a firm sets up its factory. Localization of industry is the concentration of many firms of the same industry in one area (e.g. textile firms in one city).
(b) Advantages (any three): reduces rural-urban migration; creates employment in rural areas; brings development and amenities to rural areas; cheap land and labour; nearness to raw materials; reduces congestion and pollution in cities.
Disadvantages (any two): poor infrastructure (roads, power, water); far from markets; shortage of skilled labour; high transport costs; lack of banking and other services.

Location is about one firm; localization is about many firms of one industry.

(a)(i) Measure of value (unit of account): money is used to express the value of all goods and services as prices, making comparison and accounting easy.
(ii) Store of value: money can be kept and used later to buy goods, since it does not perish.
(b) Measure of value: rising prices change the value of money constantly, so it no longer measures value accurately; prices must be revised often and comparisons over time become difficult.
Store of value: money loses purchasing power over time, so people prefer to hold real assets (land, buildings, goods) rather than money; savings lose value.

Inflation weakens both functions because the value of money keeps falling.

(a) A commercial bank is a profit-making financial institution that accepts deposits from the public, lends money and provides other services such as payment by cheque.
(b) Any four: open market operations (selling securities to reduce banks' cash); bank rate/monetary policy rate (raising the rate to make borrowing dearer); cash reserve ratio; liquidity ratio; special deposits; selective credit control (directing loans to priority sectors); moral suasion; credit ceilings.

Explain how each tool reduces (or increases) banks' ability to lend.

(a) Incidence of tax is where the burden of a tax finally rests, i.e. the person who actually bears it.
(b) Any four (canons of taxation): equity – tax according to ability to pay; certainty – amount, time and method of payment known; convenience – collected at a time and in a manner convenient to taxpayers; economy – cost of collection low compared with yield; flexibility/elasticity – yield can be adjusted to needs; simplicity – easy to understand; productivity – yields enough revenue; neutrality.

Adam Smith's four canons are equity, certainty, convenience and economy.