WAEC Economics 2010 Theory Past Questions

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Marginal Utility (MU) = ΔTU/ΔQ. F = TU2-TU1 = 29-15 = 14. D = TU3+MU4 = 42+12 = 54. G = TU5-TU4 = 65-54 = 11. H = TU6-TU5 = 75-65 = 10. E = TU6+MU7 = 75+0 = 75 (since marginal utility for the 7th bottle is 0, total utility remains 75).

Model answer

On the graph sheet, marginal utility (MU) is plotted on the vertical axis while the quantity (number of bottles) is plotted on the horizontal axis. Since price is constant, the average revenue, marginal revenue and price are all equal; the average revenue curve is the demand curve.

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The law of diminishing marginal utility states that marginal utility (that is, additional satisfaction) diminishes as more units of a commodity are consumed. Consumers assign a price to the marginal utility they derive from each unit consumed. Since lower satisfaction is expected from each extra unit than the one that precedes it, it means the value of the commodity falls; hence, he offers a lower price for that unit. Consumers buy more units of a commodity only if price falls, giving the demand curve its downward slope.

Model answer

The fixed cost is FC = TC - VC. That is, fixed cost is the difference between the total cost and the variable cost. If output is zero, variable cost will be zero, therefore fixed cost and total cost will be equal. At q=0, TC=$50, so FC=$50 when q=0.

Model answer

MC = ΔTC/ΔQ. Starting from when q=1: MC1=(55-50)/(1-0)=5. MC2=(62-55)/(2-1)=7. MC3=(75-62)/(3-2)=13. MC4=(96-75)/(4-3)=21. MC5=(125-96)/(5-4)=29. MC6=(162-125)/(6-5)=37. MC7=(203-162)/(7-6)=41. MC8=(248-203)/(8-7)=45.

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The equilibrium of the firm is the point where MC = MR. Since price is constant ($21), MR = P at equilibrium; this occurs when MC = P = $21, which occurs at output level 4. Thus, the profit maximizing output is 4.

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Since the price is constant at $21 per crate, the demand curve is a horizontal (perfectly elastic) line at price = $21, as is typical for a price-taking firm.

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The equilibrium of a consumer is the point where the consumer maximizes his satisfaction from spending his income.

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A consumer attains equilibrium when the marginal utility of each good consumed, divided by its price, is equal across all goods purchased (i.e. MUx/Px = MUy/Py = ... = MUz/Pz), and the consumer's total expenditure on all goods purchased equals his money income, so that the marginal utility per unit currency spent is equalized across all goods.

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(i) Primary production involves activities that involve direct interaction with nature, involving extraction of resources or materials from the land, e.g. farming, fishing, lumbering, mining. (ii) Secondary production involves conversion or change of raw material, the output of primary producers, to another product of higher quality. Activities in this sector include manufacturing, processing and construction, e.g. road construction, frying of garri, manufacturing of chemicals, refining of crude oil. (iii) Tertiary production involves the provision of direct and general services, e.g. teaching, driving, singing for commercial purposes.

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Primary production pre-dominates in developing countries because of: (i) shortage of capital, (ii) illiteracy, (iii) low capital accumulation, (iv) low or poor performance of the industrial sector to absorb workers, (v) low technology, (vi) inadequate capital to acquire equipment for manufacturing, (vii) poor infrastructural facilities (any two).

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Partnership is a form of business organization in which at least two people, but not exceeding twenty people, pool their resources together to run a business.

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Advantages: (i) Ability to raise more capital because of pooling of resources together (this makes it possible for the business to have a stronger financial base than the sole proprietor). (ii) Greater efficiency because of different skills and expertise in the business. (iii) Continuity is more guaranteed than in sole proprietorship. Disadvantages: (i) Unlimited liability of the partners. (ii) Disagreement and friction among the partners which slow down decision making. (iii) Limited capital base.

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Privatization is the process through which the ownerships of public enterprises are transferred to private individuals or group of individuals.

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Reasons why government participates in economic activities include: (i) Provision of essential commodities which private individuals may not produce because they are not profitable. (ii) Provision of commodities which require huge capital outlay and which private investors cannot undertake. (iii) To create jobs. (iv) To protect the citizens from exploitation by checking private monopolists. (v) For security purposes: private production of some goods are a threat to national security (any four).

Model answer

Location of industry refers to where an industry or firm sites due to the availability of favourable factors and it may be for political reasons. Localization of industry, on the other hand, refers to the concentration of firms of the same industry in an area - these firms are usually in the same industry but at times they may belong to different industries.

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Advantages of siting industries in rural areas include: (i) access to cheaper labour, (ii) discourages rural-urban migration by providing accommodation because of the ready availability of land in rural areas, (iii) it facilitates development of rural areas, (iv) easy access to raw materials, especially the agro-allied industry. Disadvantages include: (i) inadequate infrastructural facility, (ii) lack of skilled workers in the rural areas, (iii) low or small market for the firm's output, (iv) high cost of transportation of input and output to the city (any two).

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(i) Money as a measure of value: the value of goods and services are reflected in their prices, therefore money is used to measure the work or value of goods. Two goods may be of the same size but different prices; the value is not in the size but in the price, which is in terms of money. (ii) Money as a store of value: people produce goods and services which cannot be consumed all at once. The excess can be sold and kept as cash (money); people's assets can be kept for a longer period in the form of money.

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Inflation is a persistent rise in the general price level. When there is a rise in the general price level, the value of money falls. Therefore, with inflation, the value of money changes even though the value of the goods concerned has not changed, and money becomes a poor measure of value. Money as a store of value is affected when there is inflation because the value of the money kept as assets falls and loses its worth - it will be worth less than what was kept.

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Commercial banks are joint stock banks (financial institutions) that accept deposits from the public for safe-keeping and also grant loans to borrowers. They also keep people's valuables.

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Ways by which central banks control commercial banks include: (i) Use of cash reserve ratio: reserve ratio is the proportional of customers' deposits commercial banks are required to keep with the central bank; they use this to regulate the amount available for a commercial bank to give out as loans. (ii) Special directives: this involves the direct giving of instructions to commercial banks on the type of loans they should give and who they should give it to. (iii) Credit ceiling: this is the act of setting limits on the amount of loans the banks are allowed to give out. (iv) Open market operations: this involves the buying and selling of securities in the open market to the general public who draw the cheque for these transactions on their commercial banks.

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The incidence of taxes refers to where the initial and the final burden of tax lies.

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The principles of taxation, also called canon of taxation, include: (a) Economy: the process of collecting the tax should not require high cost. (b) Certainty: the tax payers should be fully aware of the amount they are asked to pay, when and how to pay it. (c) Neutrality: the tax should not be aimed at punishing or making life difficult for anybody. (d) Simplicity: the tax system (the law and the process) should be simple, not too complex to understand. (e) Equity: people should pay according to their ability to pay (any four).