58 questions. Try each one, then open the answer to check yourself and read the explanation.
The study of economics is important to every society because it
Answer: B (helps in the utilization of scarce resources.)
Economics teaches how to use scarce resources wisely.
A consumer with $10 needs a dress, a pair of shoes, a handbag and jewelry costing $20, $10, $7 and $3 respectively. The opportunity cost of buying the pair of shoes is the
Answer: C (handbag and jewellery.)
Spending all $10 on shoes means giving up the handbag and jewellery, which together cost $10 and were the next affordable choice.
The distinguishing function of an entrepreneur is
Answer: C (risk-bearing.)
Managers can plan and control; only the entrepreneur bears the risk of the business.
When a commodity market operates without government interference, commodities are distributed through
Answer: B (the operation of price mechanism.)
In a free market, prices decide who gets what.
One way of obtaining the median of a given data is to
Answer: D (arrange the data in either ascending or descending order and find what item divides the set in two equal parts.)
The median is the middle value after the data are put in order.
An increase in the rice harvest, all things being equal, may cause
Answer: B (price to fall substantially.)
A bigger harvest increases supply, so the price falls.
The demand for wood and labour is an example of
Answer: C (derived demand)
Wood and labour are wanted for what they help produce (e.g. furniture).
What will be the reaction of consumers in a market if there is a fall in the price of the substitute commodity X?
Answer: C (Demand for commodity X will decrease)
If X's substitute becomes cheaper, consumers switch to it and demand for X falls.
An increase in market supply is caused by the following factors except
Answer: B (an increase in the price of the commodity)
A rise in the good's own price increases quantity supplied, not supply.
The coefficient of price elasticity of supply of land is usually
Answer: C (zero)
The supply of land is fixed, so it does not respond to price: elasticity 0.
The price of soap rose from $10 to $20 causing a trader to increase her supply from 50 to 120 boxes per week. This makes supply
Answer: C (fairly elastic.)
Quantity rose 140% for a 100% price rise: Es = 1.4, greater than 1 (fairly elastic).
A leftward shift in the supply curve for a commodity indicates
Answer: B (a decrease in supply.)
A shift to the left means less is supplied at every price.
Market supply may increase if there is an increase in the
Answer: D (subsidies on raw materials.)
Subsidies lower production costs, so supply increases.
Governments can increase farmers' incomes by
Answer: B (fixing minimum prices.)
A guaranteed minimum price protects farmers' income.
When market supply increases, the equilibrium price
Answer: B (falls and quantity rises.)
More supply lowers price and raises the quantity traded.
The supply of mangoes is represented as P = 0.3Q, where P is the price ($) and Q is the quantity. What is P when Q is 50?
Answer: B ($15.00)
P = 0.3 × 50 = $15.
The output of an extra unit of an input is referred to as
Answer: B (marginal product of the input)
Marginal product is the extra output from one more unit of input.
The law of diminishing returns is applicable to the
Answer: B (variable factors of production.)
The law describes what happens to the returns of the variable factor added to fixed factors.
A firm incurred the following costs in production. Use the information in the table to answer the question.
Output (bags of rice) | 0 | 10 | 20 | 30 | 40 | 50 | 60
Total Cost ($) | 100 | 200 | 300 | 380 | 440 | 520 | 600
The fixed cost of production is
Answer: A ($100.)
Fixed cost is the cost at zero output: $100.
A firm incurred the following costs in production. Use the information in the table to answer the question.
Output (bags of rice) | 0 | 10 | 20 | 30 | 40 | 50 | 60
Total Cost ($) | 100 | 200 | 300 | 380 | 440 | 520 | 600
The average cost of producing 40 bags of rice is
Answer: B ($11)
AC = 440 ÷ 40 = $11.
The relationship between the marginal revenue (MR) and the average revenue (AR) of a monopolist is that the marginal revenue curve
Answer: B (slopes down to the right and is below the AR curve.)
A monopolist must cut price to sell more, so MR falls faster and lies below AR.
A major source of finance to the Railway Corporation in West African countries is
Answer: B (government subvention.)
Public corporations depend mainly on government grants (subventions).
Separation of ownership of resources and their control is mostly found in
Answer: C (joint stock company.)
Shareholders own a joint stock company while directors and managers run it.
By-passing the middlemen in the chain of distribution can lead to
Answer: A (a problem of unemployment of labour)
Middlemen employ many people; removing them leaves those workers jobless.
Two factors which can improve the efficiency of labour are
Answer: C (work environment and health status of workers)
Good working conditions and healthy workers raise output per worker.
The age distribution of a country's population is shown below. Use the information to answer the question.
Age group (years) | Population
0 – 15 | 30%
16 – 40 | 45%
41 – 60 | 15%
Over 60 | 10%
What is the percentage of the working population?
Answer: B (60%)
Working ages 16–60: 45% + 15% = 60%.
The age distribution of a country's population is shown below. Use the information to answer the question.
Age group (years) | Population
0 – 15 | 30%
16 – 40 | 45%
41 – 60 | 15%
Over 60 | 10%
What is the dependency ratio?
Answer: A (2:3)
Dependants (0–15 and over 60) = 40%; workers = 60%; 40 : 60 = 2 : 3.
The supply of land for agricultural purpose can be increased through
Answer: B (reclamation and irrigation.)
Reclaiming swamps and irrigating dry land make more land usable for farming.
Non-economic factors that influence the location of firms include
Answer: D (the activities of politicians in deciding location of firms.)
Political decisions are not based on costs or markets, so they are non-economic factors.
Which of the following is not an argument for the policy of privatization in West Africa?
Answer: B (Government is able to participate and control the operation of the privatized businesses)
Privatisation reduces government control, so this is not an argument for it.
The following data relates to the national income of a country. Use it to answer the question.
Gross domestic product = $2800
Net factor income from abroad = $250
Depreciation = $700
Indirect taxes = $120
What is the country's Gross National Product (GNP)?
Answer: A ($3,050)
GNP = GDP + net factor income from abroad = 2,800 + 250 = $3,050.
The following data relates to the national income of a country. Use it to answer the question.
Gross domestic product = $2800
Net factor income from abroad = $250
Depreciation = $700
Indirect taxes = $120
What is the country's Net National Product (NNP) at factor cost?
Answer: C ($2,230)
NNP at factor cost = 3,050 − 700 − 120 = $2,230.
The standard of living in two countries can be compared using the
Answer: D (gross national product per head.)
Income per head allows for different population sizes, so it is the fair basis for comparing living standards.
Government can curb inflation by
Answer: D (selling securities in the open market.)
Selling securities takes money out of circulation.
Functions of money does not include
Answer: D (general acceptability.)
General acceptability is a quality (characteristic) of money, not a function.
Demand-pull inflation can be as a result of
Answer: C (deficit financing by the government.)
Deficit spending raises total demand above the supply of goods.
An increase in cash ratio by the central bank will
Answer: D (reduce the supply of money.)
Banks must keep more cash, so they lend less and money supply falls.
When a government cuts down her expenditure to reduce inflation, she has embarked on
Answer: A (a restrictive fiscal policy.)
Cutting government spending is a contractionary (restrictive) fiscal policy.
In order to enable the government of a country to increase its tax revenue, it will be advisable for it to increase taxes on
Answer: B (alcoholic beverages with inelastic demand.)
With inelastic demand people keep buying after the tax, so revenue rises.
People who dispose of their assets are expected to pay
Answer: B (capital gains tax.)
Capital gains tax is charged on profits from selling assets.
A floating exchange rate means that the exchange rate is fixed by the
Answer: B (forces of demand and supply)
A floating rate is set by demand for and supply of the currency.
A measure that can be adopted to correct a country's balance of payments deficit is to
Answer: C (adopt import substitution strategy)
Producing formerly imported goods at home cuts imports.
Records of a country's invisible trade are recorded in her
Answer: C (current account)
Services (invisibles) are part of the current account.
If a country's import bill is high, she can encourage exports by
Answer: A (allowing her currency to depreciate.)
A cheaper currency makes exports cheaper abroad.
If a country imposes a barrier on trade, the resultant effect will be
Answer: C (an increase in the demand for locally produced goods.)
Imports become dearer, so people buy more local goods.
A country may be able to earn more from exports if she
Answer: B (devalues her currency.)
Devaluation makes exports cheaper abroad so more are sold (if demand is elastic).
A customs union is an economic grouping which has
Answer: B (common tariffs against non-members.)
A customs union has free trade inside and a common external tariff.
Balance of payments and trade problems that arose after the world wars were resolved by the
Answer: B (International Monetary Fund.)
The IMF was set up to deal with balance of payments and exchange problems; the IBRD financed reconstruction.
Examples of land that are non-renewable include
Answer: C (some natural resources such as natural gas.)
Natural gas is used up and cannot be replaced.
Abundant natural resources do not contribute to economic growth in developing countries because of
Answer: D (mismanagement and corruption.)
Revenues from resources are wasted through mismanagement and corruption.
Table 1 below shows the distribution of the population of a country in various occupations. Study it and answer the questions that follow.
Occupation | Total
Shoe production | 30 million
Banking | 37 million
Fish processing | 19 million
Warehousing | 12.2 million
Mining | 16.1 million
Fish farming | 10.8 million
Food crop production | 15.6 million
Baking | 19 million
Laundry | 10.3 million
(a) Calculate the size of the entire labour force in the country.
(b) What percentage of the labour force is engaged in the: (i) primary sector; (ii) secondary sector (iii) tertiary sector?
(c) Calculate the ratio of the workers in mining to the workers in shoe production.
(d) Calculate the percentage of the people engaged in warehousing.
(e)(i) Identify the type of economy depicted in the table. (ii) Give a reason for your answer in 1(e)(i).
(a) 30 + 37 + 19 + 12.2 + 16.1 + 10.8 + 15.6 + 19 + 10.3 = 170 million
(b)(i) Primary (mining, fish farming, food crop production) = 42.5 million: 42.5/170 × 100 = 25%
(ii) Secondary (shoe production, fish processing, baking) = 68 million: 68/170 × 100 = 40%
(iii) Tertiary (banking, warehousing, laundry) = 59.5 million: 59.5/170 × 100 = 35%
(c) Mining : shoe production = 16.1 : 30 (about 0.54 : 1, or 161 : 300)
(d) 12.2/170 × 100 ≈ 7.2%
(e)(i) A developed (industrialised) economy.
(ii) Most of the labour force (75%) is in the secondary and tertiary sectors; only 25% is in primary production.
Sort each occupation into primary, secondary or tertiary before adding.
Table 2 below shows the unit prices and quantities of hats produced by a firm. Study it and answer the questions that follow.
Quantity | Unit Price ($) | Total Revenue ($) | Marginal Revenue ($) | Average Revenue ($)
10 | 180 | 1,800 | – | 180
20 | 150 | 3,000 | 120 | X
30 | U | 3,600 | 60 | 120
40 | 100 | V | W | Y
50 | 80 | 4,000 | 0 | 80
60 | 60 | 3,600 | −40 | 60
(a) Compute the values of U, V, W, X and Y.
(b) In what type of market is the firm operating? Explain your answer.
(c) If the firm's marginal cost is $60.00 at all levels of output, at what level of output will it be in equilibrium? Explain your answer.
(d) If a total cost of $600.00 is incurred when 50 units of hats are produced, determine the margin of profit or loss made.
(e) What is another name for marginal cost?
(a) U = 3,600 ÷ 30 = $120; V = 100 × 40 = $4,000; W = (4,000 − 3,600) ÷ 10 = $40; X = 3,000 ÷ 20 = $150; Y = 4,000 ÷ 40 = $100
(b) Imperfect competition (monopoly/monopolistic competition): price falls as more is sold, so AR slopes downward and MR is below AR.
(c) At 30 units, where MR = MC = $60; producing more would add less to revenue than to cost.
(d) At 50 units: TR = $4,000, TC = $600; profit = 4,000 − 600 = $3,400.
(e) Incremental cost (also called differential cost).
MR is per unit, so divide each change in TR by the change in quantity (10).
(a) What is economies of scale?
(b) Outline three internal economies of scale a firm can enjoy.
(c) State three factors that can influence where a firm is sited.
(a) Economies of scale are the advantages (lower average cost) a firm enjoys as its scale of production increases.
(b) Any three: technical; managerial; financial; marketing (bulk buying and selling); risk-bearing; research; welfare economies.
(c) Any three: nearness to raw materials; nearness to market; availability of labour; power and water supply; transport and communication; government policy; availability of land; security; external economies (existing industries).
Internal economies come from the firm's own growth.
(a) Define product retailing.
(b) Outline any three roles performed by the wholesaler to the manufacturer.
(c) Identify any three problems associated with distribution of products.
(a) Product retailing is the sale of goods in small quantities directly to final consumers.
(b) Any three: buys in bulk, saving the manufacturer the cost of many small sales; provides storage/warehousing; finances the manufacturer by paying promptly or in advance; gives market information on consumer tastes; advertises and promotes products; bears risks of price changes and damage; transports goods.
(c) Any three: poor roads and transport; inadequate storage; too many middlemen; hoarding and artificial scarcity; insecurity; poor communication; high cost of fuel; multiple taxes and levies; smuggling.
Wholesalers link manufacturers with retailers.
(a) Define price elasticity of demand.
(b) Distinguish between elastic demand and inelastic demand.
(c) Using diagrams, explain what happens to a trader's total revenue when his price falls, given that demand for his product is: (i) elastic; (ii) inelastic.
(a) Price elasticity of demand is the degree of responsiveness of quantity demanded to a change in the commodity's own price (% change in Qd ÷ % change in price).
(b) Elastic demand: quantity demanded changes by a larger percentage than price (coefficient > 1). Inelastic demand: quantity changes by a smaller percentage than price (coefficient < 1).
(c)(i) Elastic (flatter curve): a fall in price causes a more than proportionate rise in quantity, so total revenue rises; area OP2RQ2 is larger than OP1TQ1.
(ii) Inelastic (steeper curve): a fall in price causes a less than proportionate rise in quantity, so total revenue falls; the new rectangle is smaller.
Compare the revenue rectangles before and after the price fall.
(a) State three characteristics of perfect competition.
(b) With the aid of diagrams, explain the equilibrium positions of a perfectly competitive firm in the: (i) short-run; (ii) long-run
(a) Any three: many buyers and sellers; homogeneous product; free entry and exit; perfect knowledge; perfect mobility of factors; firms are price takers; no transport costs.
(b)(i) Short run: equilibrium where MC = MR (= AR = price) with MC rising. If AR is above ATC at that output the firm earns supernormal profit (shaded rectangle); if below ATC it makes a loss (but continues if price covers AVC).
(ii) Long run: free entry/exit removes supernormal profit or losses; equilibrium where MC = MR = AR = minimum ATC, so the firm earns only normal profit. Diagrams show the horizontal AR = MR line, U-shaped MC and ATC curves, and the equilibrium output.
In the long run, P = MR = MC = minimum AC.
(a) Explain how the Central Bank controls money supply through the use of: (i) open market operations; (ii) bank rate.
(b) Outline four functions performed by the Central Bank of your country.
(a)(i) Open market operations: to reduce money supply the central bank sells government securities to the public and banks, taking cash out of the system and reducing banks' ability to lend; to increase money supply it buys securities, releasing cash.
(ii) Bank rate: the rate at which the central bank lends to commercial banks; raising it makes borrowing dearer throughout the economy, so credit and money supply fall; lowering it does the opposite.
(b) Any four: issues currency; banker to government; bankers' bank; lender of last resort; controls money supply and credit; manages the national debt; manages foreign reserves and exchange rate; supervises banks; advises government on monetary matters; clearing house.
Selling securities and raising the bank rate both reduce money supply.
(a) Distinguish between domestic trade and external trade.
(b) Distinguish between terms of trade and balance of trade.
(c) Outline four causes of balance of payments deficit in a country.
(a) Domestic (home) trade is buying and selling within a country, using one currency; external (foreign) trade is buying and selling between countries, involving different currencies and customs formalities.
(b) Terms of trade is the rate at which a country's exports exchange for its imports (index of export prices ÷ index of import prices × 100). Balance of trade is the difference between the value of visible exports and visible imports.
(c) Any four: excessive imports; low export earnings/dependence on few primary exports; fall in world prices of exports; heavy debt servicing; capital flight/repatriation of profits; overvalued currency; inflation making exports uncompetitive; high spending on foreign services.
Terms of trade is about prices; balance of trade is about values.