58 questions. Try each one, then open the answer to check yourself and read the explanation.
The action of government to forgo road construction in order to provide more health facilities denotes
Answer: B (opportunity cost.)
The roads given up are the opportunity cost of the health facilities.
In Economics, a market is defined as any
Answer: D (arrangement whereby the buyers and sellers are in contact.)
A market is any arrangement that brings buyers and sellers into contact; it need not be a place.
Which of the following is not a function of an insurance company?
Answer: D (Collection of deposits from the public for investment.)
Taking deposits from the public is a function of banks, not insurance companies.
A debenture holder earns
Answer: C (fixed interest.)
A debenture is a loan to a company, so its holder earns fixed interest.
All economic systems must decide what to produce because
Answer: C (resources are limited in supply.)
Scarce resources cannot produce everything, so every society must choose what to produce.
Trade between two countries is known as
Answer: A (bilateral trade.)
Bilateral trade is trade between two countries; multilateral trade involves many.
In the balance of payments of a country, tourism is classified under
Answer: B (invisible trade.)
Tourism is a service, so it is part of invisible trade in the current account.
General rise in the price level induced by increased price of inputs is referred to as
Answer: B (cost-push inflation.)
Higher input costs push up prices: cost-push inflation.
Which of the following is a function of merchant banks?
Answer: D (Underwriting and issuing of shares.)
Merchant banks help companies issue and underwrite shares; the other functions belong to the central bank.
Demand is elastic when percentage change in
Answer: A (quantity demanded is greater than percentage change in price.)
Elastic demand means quantity responds more than proportionately to price (coefficient > 1).
A budget is balanced when expected total revenue is
Answer: C (equal to expected expenditure.)
A balanced budget has planned revenue equal to planned expenditure.
A co-operative society is a
Answer: B (self-help business organization.)
Members pool their resources to help themselves, run democratically (one member, one vote).
The value of money is affected by the
Answer: B (price level.)
When the price level rises, money buys less, so its value falls.
Which of the following is a function of money?
Answer: C (Store of wealth.)
Money can be kept and used later, so it serves as a store of wealth (value).
Which of the following is an asset of a commercial bank?
Answer: D (Treasury bills.)
Treasury bills are investments the bank owns; deposits, capital and reserves are liabilities.
An increase in the supply of a commodity X automatically results in an increase in the supply of another commodity Y. This is a case of
Answer: B (joint supply.)
Goods produced together from one process are in joint supply.
Why would an individual increase his level of consumption during inflationary periods?
Answer: A (The real value of any amount saved falls over time.)
Savings lose value as prices rise, so people prefer to spend now.
The type of monopoly that develops as a result of uneven distribution of resources is called
Answer: B (natural monopoly.)
Control of a resource found only in one place gives a natural monopoly.
A major disadvantage of partnership form of business is that
Answer: A (every partner has to be consulted during decision-making.)
Consulting all partners slows down decisions and can cause disagreement.
Goods which have to be paid for are known as
Answer: B (economic goods.)
Economic goods are scarce and command a price.
Goods are said to be in competitive demand when they are
Answer: A (substitutes.)
Substitutes compete for the consumer's spending.
In the long-run, factors of production are considered to be
Answer: C (variable.)
In the long run all factors can be changed.
An agricultural production process which uses more machinery relative to labour is referred to as
Answer: B (capital intensive farming.)
Using more machines (capital) than labour is capital-intensive.
Which of the following will enhance productivity in an economy?
Answer: B (Technological change.)
Better technology raises output per unit of input.
Post harvest losses in West African countries can be reduced if
Answer: C (better storage facilities could be provided.)
Losses after harvest come mainly from poor storage, so better storage reduces them.
Which of the following best explains what to produce?
Answer: C (Which goods and services to be produced.)
'What to produce' is deciding which goods and services (and how much) to make.
The demand for money is described as a
Answer: C (derived demand.)
Money is wanted for what it can buy, so its demand is derived.
Which of the following is the main outcome of a trade union's interference with the wage rate? Wages are
Answer: D (increased but employment levels are reduced.)
When a union pushes wages above the market level, employers hire fewer workers.
The introduction of tariffs and quotas
Answer: B (increase the demand for locally made goods.)
Imports become dearer or scarcer, so people buy more local goods.
A government that wants to get more revenue will increase the tax on commodities with a
Answer: B (low price elasticity of demand.)
With inelastic demand, people keep buying after the tax, so revenue rises.
Which of the following is involved in the money market?
Answer: C (Commercial banks.)
The money market deals in short-term funds, where commercial banks, discount houses and the central bank operate.
Demand pull inflation can aptly be described as
Answer: C (persistent rise in prices due to increase in expenditure.)
Demand-pull inflation comes from too much spending chasing too few goods.
All rates of interest in a country are influenced by the
Answer: A (bank rate.)
The central bank's bank rate sets the base for all other interest rates.
When the marginal product is negative, the total product will be
Answer: D (decreasing.)
A negative marginal product means each extra worker reduces total output.
Physical productivity is affected by all the underlisted factors except the
Answer: D (price of output.)
Physical productivity is output per unit of input; the selling price affects revenue, not physical output.
If a commodity has a high marginal utility, its market price will be
Answer: B (high.)
People will pay more for a good whose last unit gives high satisfaction, so its price is high.
Price fluctuation is a feature of
Answer: B (imperfect market.)
In an imperfect market different sellers charge different, changing prices for the same good.
Which of the following statements is not a feature of a monopoly?
Answer: B (Buyers and sellers are price takers.)
Being a price taker is a feature of perfect competition; a monopolist is a price maker.
The following are advantages of sole proprietorship except
Answer: C (assurance of raising huge capital for expansion.)
A sole trader usually finds it hard to raise large capital.
Which of the following controls a limited liability company?
Answer: D (The board of directors.)
The board of directors, elected by shareholders, controls the company.
Given that Qd = 80 − 2p where Qd is quantity demanded and P is the price, what quantity would be demanded when the price (P) is $3?
Answer: D (74 units.)
Qd = 80 − 2(3) = 80 − 6 = 74 units.
Which of the following can be used to calculate the price elasticity of demand?
Answer: A ((percentage change in quantity demanded)/(percentage change in price.))
Price elasticity of demand = % change in quantity demanded ÷ % change in price.
The main advantage of large scale production is that
Answer: A (unit cost of production falls.)
Economies of scale lower the average cost of each unit.
Gold, diamond, iron ore and limestone are collectively referred to as
Answer: B (mineral resources.)
These are minerals taken from the earth.
Points outside a production possibility curve indicate
Answer: A (unattainable production levels.)
Present resources and technology cannot reach points beyond the curve.
The International Bank for Reconstruction and Development (IBRD) is important to developing nations because it
Answer: B (offers loans for public projects.)
The World Bank (IBRD) lends to governments for development projects such as roads and power.
The output and cost of production of rice (in bags) are presented in the table below. Use the information in the table to answer the questions that follow:
Output of rice (in bags) | 0 | 1 | 2 | 3 | 4
Total Variable Cost (TVC) $ | 0 | 5 | 7 | 10 | 20
Total Cost (TC) $ | 7 | 12 | 14 | 17 | 27
(a) Calculate the (i) Average Fixed Cost (AFC) at output levels 0, 2 and 4. (ii) Marginal Cost (MC) at all levels of output.
(b) If the price of a bag of rice were $10, (i) calculate the profit/loss at all levels of output. (ii) at what output level(s) is the maximum profit made?
(c) Draw the marginal cost curve (the use of graph sheet is essential).
(a)(i) Fixed cost = TC − TVC = $7. AFC = 7/Q: at 0, 7/0 is undefined (infinitely large); at 2, $3.50; at 4, $1.75.
(ii) MC = TCn − TCn−1: 1st bag $5; 2nd $2; 3rd $3; 4th $10.
(b)(i) Profit = TR − TC: 0 bags: 0 − 7 = −$7 (loss); 1: 10 − 12 = −$2; 2: 20 − 14 = $6; 3: 30 − 17 = $13; 4: 40 − 27 = $13.
(ii) Maximum profit of $13 at 3 and 4 bags (the 4th bag has MC = $10 = price, adding nothing to profit).
(c) Output on the horizontal axis, cost on the vertical axis; plot MC 5, 2, 3, 10 against outputs 1–4 (at mid-points or at each output) and join: a curve that falls then rises; label MC.
Fixed cost is TC at zero output; profit is greatest where MC = price.
The table below shows the scale of preference of a student – Mr. Smith whose disposable income is $7.00. Use the information in the table to answer the questions that follow.
Items Needed | Price ($)
Textbook | 5.00
Shirt | 2.00
Shoes | 3.00
Trousers | 3.00
Notebook | 1.00
School fees | 7.00
Mattress | 10.00
(a)(i) What will Mr. Smith spend his money on? (ii) Explain your answer in 2(a)(i).
(b)(i) What is the opportunity cost of Mr. Smith's decision in 2(a)(i)? (ii) Explain your answer in 2(b)(i).
(c)(i) If Mr. Smith's disposable income increases to $10.0, what will he spend it on? (ii) What is the opportunity cost of the decision in 2(c)(i)?
(d) Define "scale of preference" and "opportunity cost".
(e) What is the importance of a scale of preference?
(a)(i) The textbook ($5) and the shirt ($2).
(ii) They are his first two wants on the scale of preference and together cost exactly his $7.
(b)(i) The shoes.
(ii) Shoes are the next item on his scale that he must forgo because his income is used up: the best alternative forgone.
(c)(i) Textbook, shirt and shoes ($5 + $2 + $3 = $10).
(ii) Trousers, the next item forgone.
(d) Scale of preference: a list of a person's unsatisfied wants arranged in order of importance. Opportunity cost: the alternative forgone when a choice is made (the next best alternative sacrificed).
(e) Any of: helps the consumer make rational choices; ensures the most pressing wants are met first; helps get maximum satisfaction from limited income; helps in planning and budgeting; helps governments and firms set priorities.
Satisfy wants in order from the top of the list until the income is spent.
(a) What is: (i) peasant farming; (ii) commercial farming?
(b) Describe five ways in which agriculture contributes to the economic development of your country.
(a)(i) Peasant farming: small-scale farming on small plots using simple tools and family labour, mainly to feed the family with a little surplus for sale.
(ii) Commercial farming: large-scale farming mainly for sale and profit, using modern machines, hired labour and much capital.
(b) Any five: provides food for the population; supplies raw materials to industries; earns foreign exchange through exports; provides employment; source of government revenue (export duties, taxes); market for industrial goods; source of savings and capital; releases labour to other sectors as it modernises.
Describe each contribution, not just list it.
(a) Distinguish between small-scale production and large-scale production.
(b) Describe any five internal economies of large-scale production.
(a) Small-scale production is production of a small output with little capital, few workers and simple methods, usually serving a local market. Large-scale production is production of a large output with much capital, many workers, division of labour and machines, serving wide markets.
(b) Any five: technical economies (large efficient machines, division of labour); managerial economies (specialist managers); financial economies (easier, cheaper credit); marketing economies (bulk buying of inputs and bulk selling, advertising spread over many units); risk-bearing economies (diversification); research economies; welfare economies (better staff facilities raise productivity).
Internal economies are cost savings from the firm's own growth.
(a) Explain any four benefits of industrial development in an economy.
(b) Outline any four measures that will encourage industrial growth in your country.
(a) Any four: creates employment; increases national income and living standards; diversifies the economy away from primary products; saves foreign exchange through import substitution and earns it through exports; provides market for agricultural raw materials; develops skills and technology; increases government revenue; leads to infrastructure development.
(b) Any four: provision of infrastructure (power, roads, water); tax holidays and other incentives; protection of infant industries (tariffs); easy access to credit through development banks; political stability and security; training of skilled manpower; encouraging foreign investment; research and development; stable macroeconomic policies.
Explain how each benefit helps the economy grow.
(a) Differentiate between direct and indirect taxation.
(b) Highlight any five advantages of indirect taxation to developing countries.
(a) Direct taxation is imposed on the incomes and property of individuals and firms and paid directly to government by those who bear it (e.g. income tax, company tax). Indirect taxation is imposed on goods and services; it is paid to government by producers or importers but the burden can be shifted to consumers through higher prices (e.g. VAT, import duties, excise duties).
(b) Any five: difficult to evade because included in prices; convenient – paid in small amounts when buying; wide coverage – everyone who buys pays, including the informal sector; cheap and easy to collect; can discourage consumption of harmful goods; can protect infant industries (import duties); flexible – rates can be changed easily; yields large revenue.
Direct taxes fall on income; indirect taxes fall on spending.
(a) What is competitive supply?
(b) With the aid of illustrations, differentiate between a supply schedule and a supply curve.
(c) Explain how the supply of a commodity is affected by the following: (i) an improvement in technology; (ii) a rise in input prices; (iii) a rise in the prices of other commodities; (iv) an increase in government subsidies on production.
(a) Competitive supply occurs when goods compete for the same resources, so producing more of one means producing less of the other (e.g. cocoa and coffee on the same land).
(b) A supply schedule is a table showing quantities supplied at different prices (illustrate with a small table); a supply curve is the graph of that schedule, sloping upward from left to right (illustrate with a sketch).
(c)(i) Better technology lowers costs, so supply increases (curve shifts right).
(ii) Higher input prices raise costs, so supply decreases (shift left).
(iii) Higher prices of other goods make them more profitable, so producers switch resources away and supply of this commodity falls.
(iv) Subsidies reduce costs, so supply increases (shift right).
A schedule is a table; a curve is its graph.
(a) State two characteristics of monopolistic competition.
(b) With the aid of diagram(s), explain why a firm in monopolistic competition is unable to earn abnormal profits in the long run.
(c) Differentiate between natural monopoly and legal monopoly.
(a) Any two: many sellers; differentiated products (brands); free entry and exit; some control over price (downward-sloping demand); heavy advertising.
(b) In the short run a firm may earn abnormal profit (AR above AC at the output where MC = MR). Because entry is free, new firms producing close substitutes enter; each firm's demand (AR) curve shifts left and becomes more elastic until it is tangent to the AC curve. At the long-run equilibrium MC = MR and AR = AC, so only normal profit is earned. Diagram: AR tangent to the falling part of AC above the output where MC = MR.
(c) Natural monopoly arises from natural factors such as sole control of a natural resource or economies of scale so large that one firm serves the market most cheaply. Legal monopoly is created by law, e.g. patents, copyrights, licences or statutory grants to one firm.
Free entry removes abnormal profit in the long run.
(a) Highlight the difference between creeping inflation and hyper inflation.
(b) List any four negative effects of inflation.
(c) Outline four ways in which the government of your country can control inflation.
(a) Creeping inflation is a slow, mild rise in the general price level (a low single-digit rate a year); hyperinflation is a very rapid, uncontrollable rise in prices (e.g. hundreds of per cent) that destroys the value of money.
(b) Any four: reduces real incomes of fixed-income earners; discourages saving; hurts creditors and benefits debtors; makes exports less competitive, worsening the balance of payments; causes uncertainty and discourages investment; encourages hoarding and speculation; redistributes income unfairly; can lead to industrial unrest.
(c) Any four: raise taxes; cut government spending; raise interest/bank rate; open market sale of securities; raise reserve requirements; increase production/supply of goods; price control; wage restraint (incomes policy); import goods in short supply.
Control measures reduce demand or increase supply.
(a) What is perfect competition?
(b) With the aid of diagrams, compare the short run equilibrium positions of a perfect competitor and an imperfect competitor.
(c) State any two features of an imperfect market.
(a) Perfect competition is a market with many buyers and sellers of a homogeneous product, free entry and exit and perfect knowledge, so each firm is a price taker.
(b) Perfect competitor: horizontal AR = MR line; equilibrium where MC = MR with MC rising; price = MR; may earn abnormal profit, normal profit or loss in the short run. Imperfect competitor (monopolist): downward-sloping AR with MR below it; equilibrium where MC = MR, but price (read from AR) is above MR and MC; output is lower and price higher than under perfect competition. Each diagram should show the curves, equilibrium output and price, and the profit area.
(c) Any two: few sellers or a single seller; differentiated products; barriers to entry; imperfect knowledge; firms are price makers; advertising; price discrimination possible.
Key difference: P = MR for a perfect competitor, P > MR for an imperfect one.
(a) Distinguish between cash ratio and special deposits.
(b) Explain how cash ratio and special deposits are used as instruments of monetary policy.
(c) Describe any two instruments of fiscal policy in West Africa.
(a) Cash ratio is the proportion of a commercial bank's total deposits that it must keep as cash (in its vaults or with the central bank). Special deposits are extra amounts the central bank orders commercial banks to deposit with it, which cannot be used for lending.
(b) To reduce money supply (fight inflation) the central bank raises the cash ratio or calls for special deposits, reducing the funds banks can lend and their ability to create credit; to expand money supply it lowers the cash ratio or releases special deposits.
(c) Any two: taxation – raising or lowering taxes to reduce or increase spending; government expenditure – increasing or cutting spending to influence demand and employment; public borrowing/debt management; budget (deficit or surplus budgeting); subsidies.
Monetary policy works through banks' lending; fiscal policy through taxes and spending.
(a) Outline any four problems of barter economy.
(b) How has the introduction of money solved the problems outlined in 12(a) above?
(a) Any four: double coincidence of wants; lack of a common measure of value; indivisibility of goods; difficulty of storing wealth (perishable goods); no standard for deferred payment; difficulty of transporting goods.
(b) Money as a medium of exchange removes the need for double coincidence of wants; as a unit of account it gives a common measure for valuing goods; it is divisible into small units so any quantity can be bought; as a store of value it allows wealth to be kept; as a standard of deferred payment it makes credit and borrowing easy; it is portable.
Match each barter problem with the function of money that solves it.