Quiz 12 of 16

2016 Economics WAEC Theory Past Questions

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Question 1

The following data shows the budget of a hypothetical country in 2006.

Study data and answer the questions that follow:

Revenue ($ million)
Company tax 240
Workers’ income tax 160
Excise duties 80
Taxes on exports 100
Value added tax 150
Import duties 90
Non-tax revenue 40

Expenditure ($ million)
Construction of roads 100
Building of schools 120
Payment of workers’ salaries 150
Government administration 200
Maintenance of health facilities 220
Extension of electricity to rural areas 180
Maintenance of official vehicles 70

(a) How much revenue was realized from:

(i) direct taxes

Solution

Company tax + Worker’s income tax

= 240 + 160 = $400m

(ii) indirect taxes  

Solution

Exercise duties + Taxes on exports + Value added tax + Import duties

= 80 + 100 + 150 + 90 = $420 million

 

(b) Calculate the total:

(i) recurrent expenditure

Solution

= Payment of workers’ salaries + Government administration + Maintenance of health facilities + Maintenance of official vehicles

= 150 + 200 + 220 + 7= = $640 million

(ii) capital expenditure  

Solution

= Construction of roads +  Building of schools + Extension of electricity 

= 100 + 120 + 180 = $400 million

 

(c) What percentage of total revenue was collected as indirect tax?  

Solution

indirect tax = $420

Total revenue (400 + 420 + 40) = $860

Therefore, % = \( \frac{420}{860} \: \times \: \frac{100}{1} \)

= 48.84%

 

(d) State two examples of non-tax revenue  

Answer

Non – tax revenue includes tolls, grants, court fines & fees, licenses, royalties, aids, interest, dividends, rents and profit.

 

(e) What was the budget surplus or deficit? Explain your answer. 

Solution

Total revenue = $ 860 million

Total expenditure = $ 1040 million

$ 860 million – $ 1040 million = $ -180 million.

It is a budget deficit since the total expenditure exceeds revenue.

Question 2

The utility schedule of a consumer for a brand of ice cream is shown in the table below. Use the information to answer the questions that follow:

Units consumed Total utility (TU) Marginal utility (MU)
0 0
1 10 10
2 19 R
3 P 6
4 30 5
5 31 S
6 Q 0
7 29 -2

(a) Calculate the values of P, Q, and S.

Solution

P = TU3 = TU2 + MU3

TU3 = 19 + 6 = 25

Q = TU6 = TU5 + MU6

 TU6 = 31 + 0 = 31

R = MU2 = \( \frac {\Delta TU}{\Delta Q} \)

= \( \frac {TU_2 \: – \: TU_1}{2 \: – \: 1} \)

= \( \frac {19 \: – \: 10}{2 \: – \: 1} \)

R = \( \frac {9}{1} \)

R = 9

S = MU5 = \( \frac {\Delta TU}{\Delta Q} \)

= \( \frac {TU_5 \: – \: TU_4}{5 \: – \: 4} \)

= \( \frac {31 \: – \: 30}{5 \: – \: 4} \)

S = 1  

 

(b) Given that the price of ice cream is $ 1.00 per unit, at what level of consumption is the consumer in equilibrium? Explain your answer.

Answer

The consumer attains equilibrium at the 5th level of consumption where the marginal utility is equal to one. For one commodity, the consumer attains equilibrium when MU = price. At the 5th level, MU = 1, and the price is given as $1.00.

 

(c) Use a graph sheet, draw the marginal utility curve.

Answer

 

(d) State the law of diminishing marginal utility.

Answer

The law of diminishing marginal utility states that as a consumer consumes more and more units of a commodity, the satisfaction derived from each additional unit of the commodity diminishes.

Question 3

(a) What is a production possibility curve?

Answer

Production possibility curve is a diagram showing the possible combinations of two commodities that can be produced with a given unit of resources and technology in an economy during a period of time.

 

(b) Draw a production possibility curve and indicate any:
(i) Point P, where resources are fully utilized;
(ii) Point U, where resources are underutilized;
(iii) Point X, where production is not feasible.

Answer

P = resources are fully utilized

U = resources are underutilized

X = production is not feasible

 

(c) Explain any two factors that can make production at Point X feasible.

Answer

i. Increase in resources

ii. Improvement in technology

iii. An increase in the supply of productive resources e.g. money, time, factor input

iv. introduction of new ideas and methods

v. Human capital development

vi. Reallocation of resources to the production of capital goods.

 

(d) Why is the production possibility curve negatively sloped?

Answer

The downward slope of the production possibility curve indicates the principle of opportunity cost involved in the production of more of one of the commodities

Question 4

(a) What is:

(i) peasant farming?

Answer

Peasant farming is small-scale farming in which the output of the farm is both for subsistence and sale. This type is practiced by peasant farmers on small farm holdings. The output of the farm is both for subsistence and for sale. The supply of labour is mostly by the farmers and their family members.

(ii) Co-operative farming?

Answer

Cooperative farming is a system of farming where small-scale farmers pool their human and material resources together in order to enjoy the benefits of their cooperation by sharing their produce in an agreed proportion. They also enjoy some incentives from the government due to their cooperation in addition to the provision of market facilities for their produce.

 

(b) Identify any five ways through which the government can assist peasant farmers.

Answer

Ways government can assist peasant farmers to include:

i. Granting subsidies – farm inputs and implements should be sold to the farmers at a subsidized rate.

ii. Provision of storage facilities – for example, silos, cold rooms, etc.; so as to minimize post-harvest losses.

iii. Employment of extension workers to provide training for the farmers.

iv. Land reforms which make larger land available to farmers should be implemented.

v. Provision of social amenities in the rural areas to prevent rural-urban migration.

vi. Control of pests and diseases – government should assist farmers to control pests and diseases. Chemicals and pesticides should be supplied at subsidized rates.

vii. Adequate pricing policy should be implemented in order to stabilize farmers’ income.

viii. The agricultural bank should be established to provide credit facilities to the farmers’

ix. Agro-based industries should be established to make use of the farm produce

x. Government should assist farmers in the marketing of their agricultural products by making available marketing facilities such as improved transportation systems and the establishment of market stalls in rural areas among others.

Question 5

(a) What is price elasticity of supply?

Answer

Price elasticity of supply is the degree of responsiveness of supply to changes in the price of the commodity. It is measured as

ES = \( \frac{\% \: change \: in \: supply}{\% \: change \: in \: price} \)

 

(b) Differentiate between joint supply and competitive supply.

Answer

Joint supply refers to the supply of two or more commodities that are derived or produced from the same source e.g. the supply of petrol leads to the supply of engine oil, kerosene, gas, and other petroleum products. It is also known as complementary supply.

While competitive supply is the supply of two or more commodities that serve as a close substitute or alternative to one another. E.g. omo and elephant blue detergent, blue band and margarine, etc. An increase in the supply of one leads to a decrease in the supply of the other. It is also known as substitute supply.

 

(c) Explain any four determinants of elasticity of supply.

Answer

Determinants of supply are

i. Cost of production – it influences the elasticity of supply. The higher the cost of production, the lower the output and supply. Goods with a higher cost of production input tend to be more inelastic while goods with a lower cost of production inputs tend to be more elastic.

ii. Time – Supply of goods tend to be more inelastic in the short run as time elapses, the more elastic it becomes e.g agricultural produce.

iii. Nature of the product – Durable goods tend to have a more elastic supply while perishable goods tend to have inelastic supply because they cannot be stored for long.

iv. Cost of storage – goods are produced and stored in anticipation of demand. The higher the cost of storing goods, the more elastic the supply will be.

v. Mobility of factors of production – if the factors of production are mobile, the price elasticity of supply tends to be more elastic.

vi. Market discrimination – goods that can be sold at different prices in different markets tend to be more elastic while supply will be inelastic for goods that can be sold in only one market.

Question 6

(a) Define:

(i) Building Society

Answer

Building society is a financial institution whose primary objective is to accept deposits and provide loans to customers to buy or build their own houses. It is also known as a mortgage bank.

(ii) Central Bank.

Answer

Central bank is a bank established by the federal government to keep a country’s financial system under control and close supervision in order to carry out its monetary policy.

 

(b) Highlight any five instruments of the Central Bank in regulating the supply of money

Answer

The instruments used by the central bank in regulating the supply of money are:

i. Open market operation: this is the process by which the central bank buys and sells short and long term government securities in the money and capital market in order to increase or decrease the lending ability of the banks

ii. Cash ratio or reserve ratio – this is the ratio of total demand deposit liabilities which all banks are required to keep with the central bank. The percentage is usually fixed by the central bank

iii. Liquidity ratio – this is the percentage of banks’ total demand deposit liabilities which must be maintained or kept in liquid or easily realizable form in order to meet customers’ demand for their deposits.

iv. Bank rate/interest rate – it is the rate of interest at which commercial banks and other institutions lend or borrow money in the economy. It is also the rate at which the central bank lends to a commercial bank.

v. Selective credit (special directive) – the central bank may decide to issue a special directive to the banks as to which economic goal to pursue and the banks are expected to comply with such directive.

vi. Moral suasion – this is a gentle appeal to commercial banks by the central bank as to the economic policy they should pursue without the backing of the law.

vii. Special deposit – the central bank can mandate banks to make special deposits with it so as to mop up excess liquidity when the need arises.

Question 7

(a) Who is a discriminating monopolist?

Answer

A discriminating monopolist is one that charges different prices for the same commodity in different markets.

 

(b) Explain any four conditions necessary for a monopolist to practice price discrimination.

Answer

The conditions necessary for a monopolist to practice price discrimination are:

i. Break the market into separate units and each unit must be physically different from others.

ii. Control the supply of products in various markets.

iii. Be able to stop the resale of his product anywhere in the markets.

iv. Ensure that no single buyer buys from both markets.

v. The demand in one market must be elastic, while the other is inelastic.

vi. Higher transportation cost – if the cost of transportation is high, it will stop consumers from moving (from one market to the other).

vii. Little cost of separating the markets should be minimal so that it does not erode the profit.

viii. Ignorance on the part of the consumer – if the consumer is not aware of the price in other markets, the monopolists can charge higher prices.

 

(c) Explain any two benefits enjoyed by a discriminating monopolist.

Answer

A discriminating monopolist enjoys the following benefits:

i. Increase in sales as a result of a wider market.

ii. Increase in revenue earnings.

iii. Decrease in cost of production – since the monopolist produces on a large scale, the average cost of production is reduced.

iv. Reduction in wastage – since the monopolist sells in different markets, the possibility of wastage is reduced.

Question 8

Explain the following National Income concepts:

(a) Gross Domestic Product (GDP)

Answer

Gross Domestic Product (GDP) – this refers to the total monetary value of goods and services produced within a country during a given year by her citizen and non-citizens resident in the country. GDP = C + I +G

 

(b) Gross National Product (GNP)

Answer

Gross National Product (GNP) – this refers to the value of the goods and services produced within a country during a net plus year income from abroad. GNP = C + I + G + (X – M),

Where:

C = Consumption expenditure

I = Investment expenditure

G = Government expenditure

X = Exports

M = Imports

(X – M) = Net imports

 

(c) Cost of living

Answer

Cost of living – it is the general price level of goods and services that determines how much an average household needs to meet basic necessities of life.

 

(d) Per Capital income

Answer

Per capita income – it is the national income of a country divided by its total population. It gives the average income in a country and it serves as an economic indicator of the standard of living. It is the income per head of the population.

Per capita income = \( \frac{National \: income}{Total \: population} \)

 

(e) Standard of living

Answer

Standard of living – it is the volume of available goods and services at the disposal of individuals and therefore shows the level of welfare. It is measured by per capita income. There is an inverse or negative relationship between the cost of living and the standard of living.