WAEC Economics 2013 Theory Past Questions

Model answer

(a)(i) AFC = FC ÷ Q, where FC = TC − TVC = $7 at every level. At output level 0: AFC = 7/0 = ∞ (infinity) At output level 2: AFC = 7/2 = $3.50 At output level 4: AFC = 7/4 = $1.75 (ii) Marginal Cost (MC) = ΔTC ÷ ΔQ (change calculated from output level 1): MC at level 1 = (12−07)/(1−0) = $5 MC at level 2 = (14−12)/(2−1) = $2 MC at level 3 = (17−14)/(3−2) = $3 MC at level 4 = (27−17)/(4−3) = $10 (b)(i) Profit = TR − TC, where TR = price × quantity (price = $10): Level 0: (10×0)−7 = −$7 (loss) Level 1: (10×1)−12 = −$2 (loss) Level 2: (10×2)−14 = $6 (profit) Level 3: (10×3)−17 = $13 (profit) Level 4: (10×4)−27 = $13 (profit) (ii) Maximum profit ($13) is made when 3 or 4 bags of rice are produced. (c) The marginal cost curve is plotted with output level on the x-axis and MC ($) on the y-axis using the MC values calculated above (5, 2, 3, 10 at output levels 1–4); it takes the typical U-shape, falling then rising as output increases.

Model answer

(a)(i) Mr Smith will spend his money on the Textbook and Shirt, which cost $5.00 and $2.00 respectively (totalling his $7.00). (ii) The scale of preference reveals that the textbook and shirt are the items most needed by the student, since they appear first and second on his list of priorities — the scale of preference reveals the order of importance of items to the consumer. (b)(i) The opportunity cost of Mr. Smith's choice is shoes, trousers and notebook, because these three items together also sum to $7.00 — they represent the best alternative forgone. (c)(i) If his income increases to $10.00, Mr. Smith will purchase the Textbook, Shoes and Shirt, which together cost $10.00. (ii) The opportunity cost of this decision is trousers, notebook and part of the school fees that could have been paid for instead. (d) Scale of preference is the list of wants/items arranged in their order of importance/priority. Opportunity cost is the benefit of the best alternative forgone when a choice is made. (e) A scale of preference helps the economic agent to ration his limited resources in the best way, ensuring resources are spent on the most important items first, with the help of the scale of preference.

Model answer

SECTION B — answer as many as required by your examination centre

Model answer

(a)(i) Peasant farming is farming carried out on a small scale, involving the use of small farm holdings; it is mainly for self-subsistence. (ii) Commercial agriculture is farming activity that entails the production of crops for sale rather than for the farmer's own consumption alone. (b) Ways agriculture contributes to economic development include: (i) It provides employment opportunity for a large number of people. (ii) It generates more employment opportunities generally in the economy. (iii) It relieves fluctuations and ensures stability of incomes and government tax revenue. (iv) It brings about investments in infrastructure such as roads, electric power, pipe-borne water etc. (v) It serves as a source of foreign earnings (through export of cash crops). (vi) It provides food for the citizens and raw materials for industries.

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(a) Small scale production is production which does not require huge capital outlay; it results in a low level of output. Large scale production is production which requires a huge amount of capital and output level is always large. (b) Internal economies of large scale production are the cost-saving advantages which accrue to a firm as it increases its scale of production. They include: (i) Marketing economies — large firms purchase raw materials in bulk at low cost and spend less on transportation and advertisement per unit cost. (ii) Financial economies — large firms are more credit-worthy and can borrow at a lower interest rate, and can also sell shares to the public. (iii) Economies in Research and Development — large firms have enough resources to set up a research laboratory/department to improve product quality, introduce new products, or reduce the cost of production. (iv) Welfare economies — large firms have resources to provide welfare services for their workers, increasing labour efficiency and boosting output. (v) Managerial economies — large firms can afford the best managerial ability; managerial cost does not increase proportionately with output. (vi) Risk-bearing economies — large firms are able to withstand shocks and can spread their risk across many products.

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(a) Benefits of industrial development include: (i) Industrialization leads to diversification of the economy by making more occupations, goods and services available. (ii) It can serve as a tool for correcting balance of payment deficit by increasing foreign earnings and reducing importation. (iii) It generates more employment opportunities. (iv) It relieves fluctuations and ensures stability of incomes and government tax revenue. (v) It brings about investment in infrastructure such as roads, electric power, and pipe-borne water. (vi) It increases economic flexibility. (b) Measures to encourage industrial growth include: (i) Formulation of good economic policies. (ii) Rapid development of infrastructures. (iii) A functioning and well-developed financial system. (iv) Investment in human capital (human capital development). (v) Tax incentives to industries.

Model answer

(a) Direct taxes are levied on incomes, properties and profits of firms/individuals; they are not transferable to another party. Indirect taxes are levied on goods and services, and their burden is transferable (e.g. from seller to buyer). (b) Advantages of indirect taxation: (i) It is easy to collect. (ii) It is not easy to evade. (iii) It generates income for the government. (iv) It is used to correct consumption patterns (e.g. discouraging consumption of harmful goods via high taxes). (v) It is used to protect infant/local industries from foreign competition (via tariffs). (vi) It does not discourage people from working (unlike high direct/income taxes).

Model answer

(a) Competitive supply is the type of supply in which two (or more) products are produced with the same resources, so the supply of the two is competing for the same limited resources. (b) A supply schedule is a table which shows the different quantities supplied at various market prices (e.g., a weekly supply of eggs by a seller as price changes: at ₦100, 50 crates supplied; at ₦120, 70 crates; at ₦150, 90 crates; at ₦180, 110 crates). A supply curve is a curve/graph that shows the relationship between price and quantity supplied — it is the graphical presentation of the information in the supply schedule. (c)(i) An improvement in technology leads to an increase in supply — a rightward shift, because production becomes cheaper and faster. (ii) A rise in input prices causes a decrease in supply — a leftward shift, because a rise in input prices increases production cost. (iii) A rise in the price of other commodities can affect supply in two ways: if the two goods have joint supply, an increase in the price of one will lead to an increase in the supply of the other (they are produced together); if they have competitive supply, a rise in the price of one will lead to a fall in the supply of the other (as resources are diverted to the more profitable good). (iv) An increase in government subsidies on production will lead to an increase (outward shift) in supply, since it lowers the effective cost of production for producers.

Model answer

(a) Characteristics of monopolistic competition: (i) There are many buyers and many sellers. (ii) Products are differentiated. (iii) There is free entry and free exit into/from the industry. (b) A monopolistically competitive firm can earn abnormal profit in the short run: this is represented by the rectangle formed where price (P) exceeds average cost (C) at the profit-maximizing output (where MC = MR). This excess profit attracts new firms into the industry (since entry is free), and the increased competition/supply shifts the firm's demand curve to the left until price equals average cost and there is no more excess (abnormal) profit — i.e. in the long run the firm makes only normal profit, where price equals long-run average cost (LRAC). [Diagram: short-run price/cost curves MC, ATC, AR(D), MR with a shaded abnormal-profit rectangle collapsing to zero profit as the demand curve shifts left in the long run.] (c) A natural monopoly is one that develops as a result of exclusive access by one firm to a resource or technique of production. A legal monopoly is one brought about by a special privilege or exclusive right given to a producer or inventor of a product, such as a patent right or copyright.

Model answer

(a) Creeping inflation is a moderate but persistent rise in the price level, while hyperinflation is a very rapid rise in the general price level, which is also persistent (and far more severe/uncontrolled). (b) Negative effects of inflation: (i) It reduces workers' real income. (ii) It affects capital formation adversely. (iii) It discourages savings. (iv) It can worsen the balance of payments problem. (v) It makes planning difficult. (c) Ways government can control inflation: (i) Boosting production by giving subsidies to producers. (ii) Reduction in government expenditure. (iii) Increasing personal income tax. (iv) Increasing the interest rate. (v) Wage control or wage freeze.

Model answer

(a) Perfect competition is a market structure in which there are many buyers and a large number of sellers of a homogenous (identical) product. (b) Both a perfect competitor and an imperfect competitor attain equilibrium where MC = MR, and MC cuts MR from below. Both can make abnormal profit in the short run; the cost curves are the same, but the demand curves differ: for the perfect competitor, the MR and AR (demand) curves are the same (a perfectly elastic, horizontal demand curve), while for the imperfect competitor, the MR and AR curves are not the same (the demand/AR curve is downward-sloping, with MR below it). [Diagrams: short-run equilibrium for a perfect competitor showing a horizontal AR=MR line intersecting MC and ATC; short-run equilibrium for an imperfect competitor showing downward-sloping AR and MR curves intersecting MC.] (c) Features of an imperfect market: (i) The demand curve of the firm is downward sloping. (ii) Products are not homogenous (they are differentiated). (iii) There are entry barriers. (iv) There is no perfect information available to buyers and sellers.

Model answer

(a) The cash ratio is the minimum ratio between the cash reserves of commercial banks and their deposit liabilities to customers, prescribed by the Central Bank. A special deposit is additional cash that commercial banks are asked to deposit with the Central Bank when the minimum cash requirement is not enough to control money supply. (b) The cash reserve ratio is the ratio of the amount kept as reserve with the Central Bank to the total deposits, and it can be used to control money supply/aggregate demand indirectly. When government wants to reduce money supply, the Central Bank increases the reserve ratio so that commercial banks' ability to give loans is reduced; when government wants to increase aggregate demand, the Central Bank reduces the reserve requirement. Likewise, when there is inflation due to excess money supply, the Central Bank asks commercial banks for special deposit above the reserve requirement, to reduce aggregate demand, especially when there is inflation. (c) Instruments of fiscal policy include: Tax — government levies tax on people's income in order to control aggregate demand. Government spending — government increases its spending to raise aggregate demand and reduces its spending to reduce aggregate demand.

Model answer

(a) Problems of a barter economy: (i) Problem of double coincidence of wants. (ii) Non-divisibility of some commodities. (iii) No common standard/unit for deferred payment. (iv) No common unit of account. (v) Problem of storing wealth (some commodities are perishable). (vi) Non-portability of some commodities. (b) Money serves as a medium of exchange and there is no need for a coincidence of wants any more (money is generally accepted, unlike specific commodities). Money serves as a standard for deferred payment. Money serves as a unit of account. It is made of durable materials and can be used as a store of wealth. Money's essential attribute of portability solved the problem of non-portability found in barter.