WAEC Economics 2012 past questions and answers

Choosing among different methods (e.g. labour- or capital-intensive) is the problem of how to produce.

The visible balance compares visible exports and imports, which is the balance of trade.

A shift of the whole curve is a change (increase or decrease) in demand.

Quantity changes by a larger percentage than price, so the coefficient is above 1: elastic.

The consumer is in equilibrium when MU_A/MU_B = P_A/P_B.

The mode is the value that occurs most often.

When a good costs very little of one's income (e.g. salt, matches), price changes hardly affect how much is bought.

A demand schedule is a table of quantities buyers will purchase at various prices at a given time.

Each extra unit gives less satisfaction, so the consumer will buy more only at a lower price.

The demand for both falls together because they are used together: joint (complementary) demand.

Below equilibrium, quantity demanded exceeds quantity supplied: excess demand (shortage).

In a free market, prices determined by demand and supply allocate resources.

Qd = 20 − ½(12) = 20 − 6 = 14 units.

Average utility = total utility ÷ units = 22 ÷ 4 = 5.5 utils.

The law concerns a consumer's satisfaction from successive units of a good.

In the short run some inputs can be varied while others stay fixed; adding variable inputs to fixed ones causes diminishing returns.

Fewer deaths with the same births means population grows.

MC first falls (increasing returns) and then rises (diminishing returns), giving a U shape.

Price above AVC pays all variable costs, and what is left over pays only part of the fixed cost because price is below AC.

With limited liability shareholders' private property cannot be used to pay the company's debts.

Little capital is needed to start a small business, so many people can set one up.

A public company raises capital by selling (equity) shares to the public.

The entrepreneur organises the other factors and bears the risk.

A patent is a legal right, so the monopoly it creates is a legal monopoly.

A monopolist is a price maker and can fix either price or output.

The retailer's main job is selling goods in small quantities to final consumers.

Net migration = immigrants − emigrants.

At optimum population resources are fully used, so there are not large unexploited resources.

Insurance pools premiums from many people to share the losses of a few.

Early marriage lengthens the child-bearing period and increases births.

Peasant farmers work small, scattered plots with simple tools and family labour.

Poor roads, power and water raise costs and hold back industry; labour and natural resources are plentiful.

Fragile, bulky or perishable products are costly or risky to transport, so firms locate near their buyers.

By the expenditure method, Y = C + I + (X − M) (net exports), plus G where government is included.

National income is net national product at factor cost (GNP less depreciation, valued at factor cost).

GNP − depreciation = NNP.

Each has what the other wants, so there is a double coincidence of wants and barter can take place.

A price index tracks changes in the general price level, i.e. in the value of money.

Natural growth rate = birth rate − death rate.

The central bank buys and sells government securities to change banks' cash and credit.

Agro-service stations help farmers; the other options explain why policies fail.

Planned spending greater than expected revenue is a deficit budget.

Excise duty is levied on goods produced within the country.

Controlling population growth helps development; the others hold it back.

An improvement means export prices rise relative to import prices, so imports become cheaper relative to exports.

Making at home what was imported reduces imports.

Promoting exports increases foreign earnings and reduces a deficit.

Tariffs and quotas shield new local industries from foreign competition.

Harmonising oil prices is OPEC's work, not a development bank's.

(a) At price P₂ the profit-maximising output is Q₂, where MC = MR₂ (point E).
(i) At Q₁, MR₂ is greater than MC, so producing more units adds to profit; Q₁ is not the best output.
(ii) At Q₃, MC (point H) is greater than MR₂, so the last units add more to cost than to revenue and reduce profit.
(b) Profit = (price − average cost) × quantity = (P₂ − AC at Q₂) × OQ₂ = EB × OQ₂, the rectangle between P₂ and the AC curve above OQ₂: supernormal (abnormal) profit.
(c)(i) Q₁, where MC = MR₁ (point A).
(ii) Normal profit only.
(iii) At Q₁, AR = AC (price equals minimum average cost); normal profit is included in average cost, so there is no supernormal profit.
(d) Perfect competition (AR = MR are horizontal lines: the firm is a price taker).

Profit is maximised where MC = MR; profit is the gap between AR and AC times quantity.

(a)(i) Direct taxes = company income tax 150.00 + personal income tax 80.00 = $230.00 m
(ii) Indirect taxes = customs and excise 300.20 + VAT 100.00 = $400.20 m
(iii) Non-tax = rents, royalties and profits 75.00 + fees and specific charges 60.80 = $135.80 m
Total revenue = $766.00 m
(b)(i) Capital expenditure = schools and hospitals 200.00 + roads 180.90 = $380.90 m
(ii) Recurrent expenditure = general administration 220.10 + foreign missions 50.00 + transfer payments 65.00 = $335.10 m
Total expenditure = $716.00 m
(c) Revenue (766.00) is greater than expenditure (716.00), so the budget is a surplus of $50.00 m.

Capital spending creates lasting assets; recurrent spending is regular running cost.

(a) Y becomes cheaper, so more Y is bought; since X is used with Y, demand for X increases (curve shifts right).
(b) Higher disposable income raises demand for X if it is a normal good (shift right); if X is inferior, demand falls.
(c) Less supply of P raises its price, so consumers switch to X: demand for X increases.
(d) Higher income tax reduces disposable income, so demand for X (a normal good) decreases (shift left).

Each factor shifts the whole demand curve for X.

(a) The law states that even if one country is more efficient than another in producing all goods, both gain from trade if each specialises in producing the good in which it has the greater relative advantage (lowest opportunity cost) and trades for the other. Explain with an example of two countries and two goods.
(b) Any two: it assumes no transport costs; assumes free trade (ignores tariffs and quotas); assumes perfect mobility of factors within a country and immobility between countries; assumes constant costs (ignores diminishing returns); considers only two countries and two goods; assumes full employment; ignores the need for self-sufficiency in strategic goods.

Use opportunity cost to show which country should specialise in which good.

(a) Money is anything that is generally acceptable as a medium of exchange and in settlement of debts.
(b) Transactions motive; precautionary motive; speculative motive.
(c) Transactions: level of income; frequency of payment of income; price level; habits of spending.
Precautionary: level of income; uncertainty about the future (emergencies); availability of credit; age and family size.
Speculative: rate of interest; expectations about future bond prices/interest rates; level of wealth.

Two determinants for each of the three motives.

(a) Economic activities are the things people do to earn a living or satisfy wants with scarce resources (production, distribution, consumption). An economic system is the way a society organises its resources and institutions to carry out these activities and decide what, how and for whom to produce (e.g. capitalism, socialism).
(b)(i) Production: the creation of goods and services (utility) to satisfy human wants, including moving them to consumers.
(ii) Distribution: the movement of goods from producers to consumers through wholesalers, retailers, transport, etc. (also the sharing of income among factors).
(iii) Consumption: the using up of goods and services to satisfy wants.

Activities are what people do; a system is how society organises them.

(a)(i) Elasticity of demand is the degree of responsiveness of quantity demanded to a change in any of its determinants (price, income, prices of other goods).
(ii) Price elasticity of demand is the responsiveness of quantity demanded to a change in the good's own price: % change in quantity demanded ÷ % change in price.
(b) Any four: availability of substitutes; nature of the good (necessity or luxury); proportion of income spent on it; number of uses; habit; durability; time period; whether purchase can be postponed.
(c)(i) A relatively flat downward-sloping demand curve (a small price change gives a larger change in quantity).
(ii) A vertical demand curve (quantity does not change whatever the price).

Label axes on both sketches.

(a) A market is any arrangement through which buyers and sellers of a commodity are in contact to exchange it at a price.
(b) Any three: a single seller; no close substitutes; barriers to entry; the firm is a price maker; the firm is the industry; can practise price discrimination; can earn abnormal profit in the long run.
(c) Any three: patents and copyrights; government licence/legislation (statutory monopoly); control of a scarce raw material; large economies of scale (natural monopoly); huge capital requirement; mergers and cartels; exclusive franchise.

Sources of monopoly power are the barriers that keep rivals out.

(a) A minimum (floor) price is a price fixed by government above the equilibrium, below which the good may not be sold, usually to protect producers. Diagram: D and S curves crossing at P_e; a horizontal line at P_min above P_e; quantity supplied exceeds quantity demanded, showing a surplus.
(b) Any five: government buys up the surplus (buffer stock); storage facilities for the surplus; export of the surplus; output quotas to restrict production; laws and penalties against selling below the price; subsidies for processing into other products; destroying or giving away surplus as aid; encouraging local consumption.

The surplus at the minimum price must be absorbed or controlled.

(a) A supply schedule is a table showing the quantities of a commodity that a seller (or sellers) is willing and able to offer for sale at various prices at a given time.
(b) Add the quantities supplied by all sellers at each price. Example: at N10, A supplies 20, B 30, C 50 → market supply 100; at N20, A 30, B 40, C 60 → 130; at N30, A 40, B 50, C 70 → 160.
(c) Any three: Giffen goods; goods of ostentation (prestige/Veblen goods); goods whose price is expected to rise further; goods bought in ignorance (price taken as a sign of quality); necessities in an emergency.

Market supply is the horizontal sum of individual supplies at each price.

(a) Wants are desires for goods and services, not necessarily backed by money; effective demand is a want backed by willingness and ability to pay at a given price.
(b) A demand schedule is a table of quantities demanded at different prices; a demand curve is the graph of that schedule.
(c) Individual demand is the quantity one consumer buys at various prices; market demand is the total of all individual demands at each price.
(d) A change in demand is caused by factors other than the good's own price and shifts the whole curve; a change in quantity demanded is caused by a change in the good's own price and is a movement along the same curve.

Give both sides of each pair.

(a) The output (product) method adds up the money value of all final goods and services produced by all sectors (agriculture, mining, manufacturing, services) in the country in a year; to avoid double counting, only final goods or value added at each stage are counted.
(b) GDP at market prices + net factor income from abroad = GNP at market prices; − depreciation = NNP at market prices; − indirect taxes + subsidies = NNP at factor cost (national income).
(c) Any two: double counting; difficulty of valuing subsistence output not sold; inadequate and unreliable data; difficulty in deciding which goods are final; changes in prices; illiteracy of producers who keep no records.

Show the adjustments step by step from GDP to NNP at factor cost.