55 questions. Try each one, then open the answer to check yourself and read the explanation.
Which of the following is central to the definition of Economics?
Answer: C (Scarcity)
Economics is about choosing how to use scarce resources.
When the production possibility curve shifts outwards, the economy experiences
Answer: A (growth.)
An outward shift means the economy can now produce more of both goods: economic growth.
Land as a factor of production is made useful through the
Answer: A (application of human effort.)
Land is a gift of nature, but it yields output only when people work on it.
In a free market economy, resources are allocated through the
Answer: B (price mechanism.)
Prices set by demand and supply direct resources in a free market.
Use figure 1 to answer the question. The diagram in Figure 1 above depicts a
Answer: C (component bar chart.)
Each bar is divided into parts, so it is a component bar chart.
Figure 2 shows change in demand for commodity X which is a normal good. Which of the following caused the change in demand from D1D1 to D2D2?
Answer: B (Rise in the price of a substitute)
Demand shifted right; a dearer substitute makes people buy more X.
Use Figure 3 to answer the question. The curves D0D0 and S0S0 are the initial demand and supply curves respectively. What happens when government provides subsidy to producers?
Answer: A (The supply curve will shift from S0S0 to S2S2)
A subsidy lowers producers' costs, so supply increases: the curve moves right from S0S0 to S2S2.
In Figure 4 above, YZ represents
Answer: B (excess supply.)
At price P1, above equilibrium, buyers want q1 (Y) but sellers offer q3 (Z): the gap YZ is excess supply.
Goods are described as inferior if their demand
Answer: C (decreases as income increases.)
Demand for inferior goods falls when income rises.
A consumer is in equilibrium when
Answer: B (he maximizes his satisfaction from spending his income.)
Consumer equilibrium is getting the most satisfaction from a given income.
Goods that are abundant in supply usually have low
Answer: B (marginal utility.)
When a good is plentiful, an extra unit adds little satisfaction: low marginal utility (e.g. water).
An increase in supply means that
Answer: B (more is sold at the same price.)
An increase in supply means more is offered at the same price: the curve shifts right.
If an increase in the price of crude oil led to an increase in the prices of kerosene and grease, then kerosene and grease are in
Answer: A (joint supply.)
Kerosene and grease both come from refining crude oil, so they are in joint supply.
A seller increased the quantity he offered for sale from 200 units to 250 units when price of his product increased by 12.5%. What is the price elasticity of supply of his product?
Answer: A (2.00)
% change in quantity = 50/200 × 100 = 25%; Es = 25 ÷ 12.5 = 2.
If an increase in the supply of beef increased the supply of hides, then beef and hides are in
Answer: B (joint supply.)
Beef and hides come from the same animal: joint supply.
If a beef market is in equilibrium at $4.00 per kg, an increase in price to $6.00 per kg may cause
Answer: A (surplus in the market.)
Above equilibrium price, more is supplied than demanded, giving a surplus.
A large firm may experience diseconomies of scale if there is
Answer: A (difficulty in coordinating decisions.)
When a firm gets too big, management and coordination become difficult and raise unit costs.
Increasing returns to scale suggests that
Answer: B (a firm can make more profit by increasing output.)
With increasing returns, output rises faster than inputs, so unit costs fall as output grows.
If the average fixed cost (AFC) of producing 5 bags of rice is $20.00, the average fixed cost of producing 10 bags will be
Answer: C ($10.00)
Fixed cost = 5 × 20 = $100; AFC for 10 bags = 100 ÷ 10 = $10.
Use the table below (Table 1, the total revenue schedule of a firm) to answer the question.
Output (units) | 50 | 60 | 70 | 80 | 90
Total revenue (TR) $ | 85 | 102 | 119 | 136 | 153
What is the unit price of the firm's output?
Answer: D ($1.70)
Price = TR ÷ output = 85 ÷ 50 = $1.70.
Use the table below (Table 1, the total revenue schedule of a firm) to answer the question.
Output (units) | 50 | 60 | 70 | 80 | 90
Total revenue (TR) $ | 85 | 102 | 119 | 136 | 153
What is the firm's marginal revenue?
Answer: C ($1.70)
MR = 17 ÷ 10 = $1.70 for each extra unit.
Organization and entrepreneurship are vested in different persons in a
Answer: D (public company.)
In a public company, shareholders bear the risk while hired directors and managers organise the business.
The public sector in a mixed economy is not always efficient because of
Answer: A (bureaucratic practices.)
Red tape and slow decision-making make public enterprises inefficient.
Which function of the wholesaler enables him to stabilize prices?
Answer: A (Warehousing goods)
Storing goods when plentiful and releasing them when scarce keeps prices steady.
In the long run, as individuals receive higher wages, it causes
Answer: D (supply of labour to decrease.)
Beyond a point, higher wages let people afford more leisure, so they offer less labour (backward-bending supply).
Which of the following problems has the least effect on agricultural productivity in West Africa?
Answer: C (Urban-rural migration)
Movement of people to rural areas adds farm labour; the others reduce productivity.
The location of iron and steel industry at a place is due to
Answer: A (easy access to raw materials.)
Iron ore and coal are heavy and bulky, so iron and steel works are sited near them.
Import substitution as a strategy of industrialization is the
Answer: B (development of local firms to produce local goods that are imported.)
Import substitution means producing at home goods that used to be imported.
Which of the following are intermediate products?
Answer: A (Cement and steel)
Cement and steel are used to make other goods; the rest are final goods.
How is NNP at factor cost derived from GNP at market prices?
Answer: B (GNP − Depreciation − Indirect taxes + Subsidies)
Subtract depreciation to get NNP, then remove indirect taxes and add subsidies to change market prices to factor cost.
Which of the following factors may lead to under-estimation of national income figures?
Answer: D (Subsistence production)
Output consumed by the producers themselves is not sold or recorded, so national income is understated.
Inflation may occur if
Answer: C (wage increase is granted without increase in productivity.)
Higher wages without more output raise costs and prices (cost-push inflation).
Money would cease to be a good store of value when
Answer: C (prices of goods and services are rising rapidly.)
Rapid inflation quickly destroys the value of money that is kept.
Governments in West Africa can curtail inflation by
Answer: B (selling securities in the open market.)
Selling securities takes money out of circulation and reduces spending.
The central bank can reduce the ability of commercial banks to give out loans by
Answer: A (raising the bank rate.)
A higher bank rate makes borrowing dearer for banks and their customers.
Tools of monetary policy do not include
Answer: D (tax and public expenditure.)
Taxes and public spending are fiscal policy tools.
During inflation, the appropriate fiscal measure to adopt is to
Answer: B (increase direct taxes.)
Higher direct taxes cut disposable income and spending without directly raising prices.
Mr. X and Mrs. Y pay $500.00 and $1,400.00 as taxes on their earnings of $5,000.00 and $7,000.00 respectively. The system of taxation employed is
Answer: D (progressive tax.)
Mr X pays 10% and Mrs Y 20%: the rate rises with income.
Expenditure on food takes a large proportion of incomes of people in
Answer: C (developing countries.)
Poor households spend most of their income on food (Engel's law).
A country should embark on development planning to ensure that
Answer: C (its scarce productive resources are efficiently utilized.)
Planning directs scarce resources to their best uses.
A country is allowed to import just 50,000 tonnes of rice annually. This describes
Answer: D (quota.)
A limit on the quantity that may be imported is a quota.
Dumping is selling goods in a foreign market at a price
Answer: A (below what is sold at the home market.)
Dumping is selling abroad more cheaply than at home.
The principle of comparative advantage encourages a country to
Answer: B (engage in trade if it can produce a commodity at a lower cost.)
A country gains by producing and trading what it can make at a lower opportunity cost.
In order to discourage the importation of manufactured goods, a country should adopt
Answer: D (import substitution strategy.)
Producing manufactured goods locally reduces the need to import them.
A free trade area is one in which
Answer: A (each member operates its own barriers against non-members.)
In a free trade area members trade freely with each other but each keeps its own tariffs against outsiders.
The foremost objective of the International Bank of Reconstruction and Development (IBRD) is to
Answer: C (grant long term loans for infrastructure.)
The World Bank's main work is long-term lending for development projects such as infrastructure.
The exploitation of mineral resources constitutes which form of production?
Answer: A (Primary production)
Mining takes resources directly from nature: primary production.
Table 1 below shows the number of workers engaged by an agricultural firm over a period of time. Study it and answer the questions that follow.
Number of workers | Total product | Marginal product | Average Product
0 | 0 | 0 | 0
1 | 20 | 20 | 20
2 | 50 | 30 | Z
3 | 70 | 20 | 23.3
4 | 80 | Y | 20
5 | 80 | 0 | 16
6 | X | −9.8 | 11.7
(a) Calculate the values of X, Y and Z.
(b) At what level of employment of labour does the firm experience: (i) increasing returns; (ii) decreasing returns; (iii) negative returns?
(c) State the law of diminishing returns.
(d)(i) On a graph sheet, draw the total product and marginal product curves. (ii) State any two relationship between the two curves in (d)(i) above.
(a) X = TP5 + MP6 = 80 − 9.8 = 70.2 (or AP × 6 = 11.7 × 6 = 70.2); Y = 80 − 70 = 10; Z = 50 ÷ 2 = 25
(b)(i) Increasing returns: from the 1st to the 2nd worker (MP rises from 20 to 30).
(ii) Decreasing returns: 3rd and 4th workers (MP falls from 30 to 20 to 10 but is positive).
(iii) Negative returns: the 6th worker (MP = −9.8).
(c) If more and more units of a variable factor are added to a fixed factor, the marginal product will at first rise but will eventually fall (and may become negative).
(d)(i) Workers on the horizontal axis, product on the vertical axis; plot TP (0, 20, 50, 70, 80, 80, 70.2) and MP (20, 30, 20, 10, 0, −9.8); label both curves.
(ii) Any two: when MP is rising, TP rises at an increasing rate; when MP is falling but positive, TP rises at a decreasing rate; when MP is zero, TP is at its maximum; when MP is negative, TP falls.
MP = change in TP; AP = TP ÷ workers.
Figure 1 below represents the production possibility curve of a nation. Use it to answer the questions that follow.
(a) What is the opportunity cost of: (i) producing 30 units of cocoa; (ii) increasing textile production from 30 to 40 bales?
(b) Interpret the following points as found in the graph: (i) point Y; (ii) point G; (iii) point X.
(c) List three conditions that can enable the nation to produce at point X.
(d) State two basic economic concepts illustrated in the diagram above.
(e)(i) Define production possibility curve. (ii) What does the slope of the production possibility curve indicate?
(a)(i) Producing 30 tons of cocoa means producing none of the other good: the opportunity cost is 60 units (all the textiles/textbooks that could have been produced).
(ii) Moving from H (25 cocoa, 30 bales) to G (20 cocoa, 40 bales): 5 tons of cocoa are given up.
(b)(i) Y (inside the curve): resources are unemployed or used inefficiently.
(ii) G (on the curve): resources are fully and efficiently used; an attainable best combination.
(iii) X (outside the curve): unattainable with present resources and technology.
(c) Any three: improved technology; discovery of more resources; increase in labour or capital; better education and skills; foreign aid or investment.
(d) Any two: scarcity; choice; opportunity cost; efficiency.
(e)(i) A curve showing the combinations of two goods an economy can produce when all its resources are fully and efficiently employed with given technology.
(ii) The opportunity cost of producing more of one good in terms of the other given up (the rate of transformation).
Read the opportunity cost as the amount of one good given up for the other.
(a) Define consumer goods.
(b) Explain the following forms of capital with an example each: (i) fixed capital; (ii) social capital; (iii) circulating capital.
(c) Outline three reasons for the low level of savings in a country.
(a) Consumer goods are goods bought by households for direct satisfaction of their wants, e.g. food, clothes, furniture.
(b)(i) Fixed capital: durable producer goods used many times in production, e.g. machines, buildings, tractors.
(ii) Social capital: capital owned by the community/government for public use, e.g. roads, schools, hospitals, bridges.
(iii) Circulating (working) capital: goods used up in one round of production or held as stock, e.g. raw materials, fuel, cash for wages.
(c) Any three: low incomes; high dependency ratio/large families; inflation; poor banking habits and few banks in rural areas; low interest rates on savings; high cost of living; conspicuous consumption and social obligations; lack of confidence in banks.
Fixed capital is used again and again; circulating capital is used up.
(a) Distinguish between the following pairs of terms: (i) capital expenditure and recurrent expenditure; (ii) fiscal policy and monetary policy.
(b) Explain four reasons why the government of a country imposes taxes.
(a)(i) Capital expenditure is government spending on long-lasting assets that add to productive capacity, e.g. roads, schools, dams. Recurrent expenditure is regular spending on running government, e.g. salaries, maintenance, interest.
(ii) Fiscal policy is the use of government taxation and spending to influence the economy; monetary policy is the use of money supply, interest rates and credit by the central bank to influence the economy.
(b) Any four: to raise revenue; to redistribute income; to discourage consumption of harmful goods; to protect infant industries (import duties); to control inflation; to correct balance of payments deficits; to influence location of industries; to control monopolies.
Taxes raise revenue and are also tools of economic policy.
(a) Define tariff.
(b) State the following laws: (i) The law of absolute cost advantage; (ii) The law of comparative cost advantage.
(c) Outline any four assumptions behind the law of comparative cost advantage.
(a) A tariff is a tax imposed on imported (or exported) goods.
(b)(i) Absolute advantage: a country should specialise in producing goods it can produce more efficiently (at lower absolute cost) than other countries, and trade for others.
(ii) Comparative advantage: even if a country is more efficient in all goods, both countries gain if each specialises in the good in which it has the greater relative advantage (lowest opportunity cost).
(c) Any four: two countries and two goods; no transport costs; free trade (no barriers); perfect mobility of factors within a country but immobility between countries; constant costs/returns; full employment; perfect competition; labour is the only factor (labour theory of value).
Comparative advantage is based on opportunity cost.
(a) What is money?
(b) Explain the following concepts: (i) value of money; (ii) demand for money.
(c) Identify any four determinants of transactions demand for money.
(a) Money is anything generally acceptable as a medium of exchange and in settlement of debts.
(b)(i) Value of money: its purchasing power, the quantity of goods and services a unit of money can buy; it moves opposite to the general price level.
(ii) Demand for money: the desire to hold money in cash (liquidity preference) rather than other assets, for transactions, precautionary and speculative motives.
(c) Any four: level of income; frequency/interval of income payments; general price level; habits and spending patterns; size of family; availability of credit; level of economic activity.
Transactions demand depends mostly on income and how often it is paid.
(a) Distinguish between competitive demand and joint demand.
(b) Using diagrams, explain how the following factors will affect the equilibrium price and quantity of commodity R in the market: (i) an increase in the price of the complement of commodity R; (ii) an increase in the price of a substitute of commodity R; (iii) imposition of an indirect tax on commodity R.
(a) Competitive demand is demand for goods that are substitutes (e.g. tea and coffee): a rise in the price of one raises demand for the other. Joint demand is demand for goods used together (e.g. car and petrol): a rise in the price of one reduces demand for both.
(b)(i) Dearer complement: demand for R falls; D shifts left; equilibrium price and quantity of R both fall.
(ii) Dearer substitute: demand for R rises; D shifts right; equilibrium price and quantity of R both rise.
(iii) Indirect tax: supply of R falls; S shifts left (upwards by the tax); equilibrium price rises and quantity falls.
Each diagram shows the original and new curves with the old and new equilibrium price and quantity.
Ask whether the factor shifts demand or supply, and in which direction.
(a) Differentiate between subsistence farming and commercial farming.
(b) State four features of subsistence farming.
(c) Outline two positive and two negative effects of mining on the economy of West Africa countries.
(a) Subsistence farming is small-scale farming mainly to feed the farmer's family, with simple tools; commercial farming is large-scale farming mainly for sale and profit, using machines, hired labour and much capital.
(b) Any four: small farm size; simple tools (hoe, cutlass); family labour; low output; little capital; mixed cropping; little use of fertiliser/improved seeds; production mainly for family consumption.
(c) Positive (any two): foreign exchange earnings; government revenue (royalties, taxes); employment; infrastructure development in mining areas; raw materials for industry.
Negative (any two): land degradation and destruction of farmland; water and air pollution; displacement of communities; neglect of agriculture; conflicts over resource control; health hazards.
Subsistence farming feeds the family; commercial farming feeds the market.