Download SOLUTION: ECONOMICS, MAY 2014 SOLUTION 1 (a) (i) A

SOLUTION: ECONOMICS, MAY 2014
SOLUTION 1
(a) (i) A production possibilities curve shows the maximum combinations of two
goods that could be produced in a given time period with available resources and
technology.
(ii) Opportunity cost refers to the most desired goods and services that are
forgone in order to obtain something else with the same amount of resources.
Figure 1. A Production Possibility Curve
(b)
Units of
Capital
Goods
A
j
B
C
i X
X
h
X
X
X
g
X
X
0
*K
D
X
E
X
a
b
c
The curve AF shows a production X
possibilities curve
X
X (PPC).
dX
F
Units of Consumer
Goods
X
X
(i)
Point K in the diagram shows that given all its productive resources and
technology the economy cannot attain that output combination. This illustrates
that resources are scarce. The economy is limited to points on the production
possibility curve. Also if the society decides to move from point B to point C,
the society has to sacrifice ih of capital goods for ab of consumer goods
because the society’s resources are scarce so more of consumer goods
implies less of capital goods.
(ii)
Any point on the PPC such as B, C etc. are attainable and represent a variety
of output choices. Point B on the PPC, for example, indicates that the
economy can produce oa and oj of consumer goods and capital goods
respectively. The economy can decide or choose to be at point C producing
ob of consumer goods and oi of capital goods.
SOLUTION: ECONOMICS, MAY 2014
(iii)
Any choice by the economy to have more of one good involves opportunity
cost. If the economy chooses to produce more consumer goods then it must
reduce the production of capital goods. For example, if the economy
increases its production of consumer goods from oa (point B) to ab (point C)
then it must give up ji of capital goods. The opportunity cost of having more
consumer goods (ab) is the (ji) of capital goods forgone.
SOLUTION 2
(a) (i) MR =
Δ𝑇𝑅
Δ𝑄
TR1 – TR
Q1 – Q0
= 11 – 0 = 11
1–0
20 – 11 = 9
2–1
27 – 20 = 7
3–2
32 – 27 = 5
4–3
35 – 32 = 3
5–4
(ii)
MC =
Δ𝑇𝐶
Δ𝑄
TC1 – TC0
Q1 – Q0
=
17 – 10 = 7
1–0
18 – 17 = 1
2–1
21 – 18 = 3
3–2
30 – 21 = 9
4–3
48 – 30 = 18
5–4
SOLUTION: ECONOMICS, MAY 2014
(b) (i) The fixed cost is GH¢10. The firm incurs fixed cost only when output is zero.
(ii) When output is 3 tons the TVC equals GH¢11.0 (i.e. TC – TFC = 21 – 10 =
11)
(c) An imperfect (e.g. monopolistic competition, monopoly etc.) market because to
sell more the firm has to reduce price.
(d) No, because the two conditions for maximizing profit have not been achieved i.e.
MC = MR and MC must cut the MR from below.
SOLUTION 3
(a) The individual consumer is in equilibrium if the marginal utility of the commodity
equals the marginal utility of price or the marginal significance of price. This
condition is represented in the form of an equation below:
MU1 = 𝝀P1
The equilibrium condition above goes with a certain level of purchases of
commodity “X” which is represented by Q1.
Suppose there is a fall in the price of commodity “X” from P 1 to P2 other things
being equal. This leads to a situation of disequilibrium if the consumer maintains
his consumption at Q1. This is shown below:
MU1 > 𝝀P2
The implication of this is that the marginal utility derived from consuming
commodity “X” in the face of the fall in price of commodity “X” is now greater than
the marginal utility of price or the marginal significance of price.
For equilibrium to hold the marginal utility of the commodity should fall by the
same proportion. But for the MU1 to fall to MU2 the law of diminishing marginal
utility requires that more of the commodity should be consumed. In this situation,
the individual consumer will buy more of commodity “X”. In the process, the
marginal utility of the commodity to the individual diminishes from MU1 to MU2
until equilibrium is restored. This analysis gives us the second equilibrium of the
consumer depicted below:
MU2 = 𝝀P2
SOLUTION: ECONOMICS, MAY 2014
Again, the new consumer equilibrium requires a level of purchases of “X” greater
than Q1 denoted as Q2. The demand curve is negatively sloped because the
consumer experiences diminishing marginal utility.
From the analysis above as the price falls the consumer’s equilibrium is
disturbed. He consumes more of the commodity and experiences diminishing
marginal utility depicting an inverse relationship between price and quantity
demanded.
(b) An increase in the daily minimum wage will be expected to increase consumer’s
income. For a normal good, as consumers’ income increase demand for a
normal good will increase. This will shift the demand curve to the right as
depicted in the diagram below:
P
S1
E2
P2
E1
P1
A
D1
0
Q 1 Q2
D2
Q
In the diagram, the increase in the daily minimum increases demand from D1 to
D2. Holding supply constant, this produces shortage at 0P1. The equilibrium price
and quantity increase to 0P2 and 0Q2 respectively.
SOLUTION 4
(a) It shows the maximum combinations of two goods that we can obtain from a
given amount of inputs given a particular state of technology.
(b) (i) Two products are produced.
(ii) A given quantity of factors of production that are fully used
(iii) The best technologies available are employed in the production of the two
products.
SOLUTION: ECONOMICS, MAY 2014
(c) The efficient allocation attainable production points are point A, B, R and Z in this
context.
(d) These points are point of efficiency. Efficiency is achieving as much output as
possible from a given amount of inputs or resources. In other words, productive
efficiency is attained when the maximum possible output of one good is
produced, given the output of the other goods.
When resources are efficiently allocated, it is not possible to have more of one
good without reducing the production of the other good. For example, if the
society were to move from point A to point R, the production of cocoa has to be
reduced as a cost of increasing the production of yam because there are no idle
resources or the economy is in full employment.
(e) The curve depicts increasing opportunity cost because it is concave to the origin.
As transformation increase opportunity cost also increases.
(f)
Cocoa
per time
A/
A
0
B B/
Yam per
time
SOLUTION 5
(a) (i) Balance of payment is a statement of the money value of all transactions
between a country and the rest of the world during a given period, such as one
year.
(ii) The balance of payments may be classified into three categories namely the
current account, the capital account, the balancing item.
SOLUTION: ECONOMICS, MAY 2014
(b) (i) The balance of payments is said to be in surplus if the total receipts from the
transactions exceed total payments.
(ii) It is in deficit if total payments exceed total receipts from the transactions.
(c) Some of the fiscal measurement that can be taken to correct persistent balance
of payment deficits are:
(i)
Increasing the level of income tax in order to reduce disposable income.
(ii)
Increasing taxes on imported consumer goods in order to discourage the
consumption of imported goods.
(iii)
Reducing the level of taxes on imported raw materials and capital goods
so as to lower the cost of domestic production for export and consumption.
(iv)
Reducing export tax
(v)
Reducing excise duty on export related activities
(vi)
Subsidize export production for example by providing information on
demands of trading partners.
SOLUTION 6
(a) (i) GDEM = C + I + G + X – M
= 1400 + 1200 + 1500 + 1150 – 1230 = 4020 million
(ii) GNEM = GDEM + Net Property Income
= 4020 – 1200 = 2820 million
(iii) NNEM = GNEM – Depreciation
= 2820 – 150
= 2670 million
(iv) NNEF = NNEM – Indirect Business Tax + Subsidies
= 2670 – 180 +120
= 2610 million
SOLUTION: ECONOMICS, MAY 2014
(b) (i) A good deal of estimates of private consumption relies on population. In
addition, the reliability of the estimates depends on regular household surveys
that may be a very expensive venture.
(ii) Difficulties in estimating exports and imports values: under invoicing and
over invoicing of imports and exports makes it extremely difficult to determine
the actual value of net exports. This problem tends to grossly understate or
overstate the national income statistics.
iii) Multiple counting: This occurs when a unit of expenditure is counted more
than once. To eliminate this, only expenditure on final output is counted. For
example, we count the expenditure on shoes and not on the shoemaker’s
expenditure on leather because this will mean multiple counting.
(c) (i) An Index of Economic Welfare: National income estimates particularly the
per capita income is a very useful indicator of economic welfare.
(ii) Use of Economic Planning: National income estimates are used to
determine the savings and investments potentials of an economy. This
information helps the planners of the economy to determine the potential rate
of economic growth of a country.
(iii) Helps policy makers to understand the economic structure of a country.
The product approach provides detailed information on the contributions of
the various sectors and sub-sectors of the economy.
(iv) Used to approximate the potential demand: Per Capita income is used to
estimate demand for various commodities.
(v) National income estimates are used to determine the subscriptions of
nations to international bodies for example IMF, IBRD, UN, ECOWAS etc to
which they belong.
vi) National income estimates are also useful as a basis for inter-temporal and
international comparison of living standards. These estimates make it
possible for comparison of standard of living of two or more countries. In this
respect, the per capita income in real terms is normally used.
SOLUTION: ECONOMICS, MAY 2014
SOLUTION 7
(a) A government budget is an estimate of expected revenues and expected
expenditures for a given period in the future, usually one year.
(b) (i) Recurrent expenditure
Workers’ emolument
Fuel and maintenance of vehicles
Social security payments
GH¢m
480
300
50
GH¢830m
(ii) Capital (development) expenditure
New classroom buildings
Construction of feeder roads
Extension of electricity
GH¢m
600
450
200
GH¢1250m
(c) (i) Percentage of contribution of tax
Income tax
180
Company tax
350
Total direct taxes
GH¢530m
Total revenue = GH¢ 1420
530 x
1420
100
1
= 37.3%
Page 7 of 8
(ii) Percentage contribution of indirect taxes
GH¢m
Import duties
550
Excise duties
150
Taxes on exports
120
Total indirect tax
820m
820
1420
x 100 = 58.3
1
(d) The budget was in deficit of GH¢670m because total revenue was GH¢1,420m
while total expenditure was GH¢2,090m.
SOLUTION: ECONOMICS, MAY 2014