WAEC SSCE - Economics - 2007
Question 1 Report
A summary of all the receipts and payments of a country in international transaction is called
Answer Details
A summary of all the receipts and payments of a country in international transactions is called the balance of payment. It is a record of all the economic transactions between residents of a country and the rest of the world over a given period, typically a year. The balance of payments is divided into two main accounts: the current account and the capital account. The current account measures the flow of goods and services in and out of a country, while the capital account measures the flow of investment and financial transfers. The balance of payments is used to determine whether a country has a surplus or deficit in its international transactions, which can have important implications for its economy.
Question 2 Report
which of the following financial institutions was originally known as a Building Society?
Answer Details
The financial institution that was originally known as a Building Society is the Mortgage Bank. A Building Society is a type of financial institution that provides loans to individuals for buying or building houses. It raises funds by accepting deposits from its members, which it then uses to provide mortgage loans at low-interest rates. As the name suggests, a Mortgage Bank is a financial institution that specializes in providing mortgage loans to individuals and businesses. It raises funds by issuing bonds, accepting deposits, and borrowing from other financial institutions. Therefore, the correct option is "Mortgage banks."
Question 3 Report
Which of the following institutions assists the government in managing the national debt?
Answer Details
The institution that assists the government in managing the national debt is the Central bank. The Central bank is responsible for implementing monetary policy on behalf of the government. One of the key functions of the Central bank is to regulate the money supply and interest rates in the economy. This involves managing the national debt, which refers to the total amount of money owed by the government to its creditors. The Central bank plays a key role in managing the national debt by buying and selling government securities, which helps to control the supply of money in the economy and influence interest rates. This in turn affects the cost of borrowing for the government and its ability to manage its debt.
Question 4 Report
To promote the development of agricultural sector, government of West African countries should
Answer Details
To promote the development of the agricultural sector, governments of West African countries should support the marketing of farm produce. This can be done through creating efficient and affordable transportation systems to connect farmers to local and international markets. Governments can also provide storage facilities and promote the use of modern farming technologies to improve productivity and increase yield. By doing so, farmers will be encouraged to produce more, earn more income, and ultimately contribute to the economic growth of their countries. Discouraging foreign investment and reducing tariffs on food imports may lead to a reduction in demand for locally grown produce, and may negatively affect the agricultural sector in the long run. Encouraging rural-urban drift may also be counterproductive, as it may result in a depletion of the agricultural labor force, which is critical to the sector's development.
Question 5 Report
The satisfaction derived from the use of a commodity is its
Answer Details
The satisfaction derived from the use of a commodity is its utility. Utility refers to the level of satisfaction or pleasure that an individual derives from the consumption or use of a particular commodity or service. It is a subjective measure and varies from person to person. The concept of utility is important in economics because it helps to explain why individuals make certain choices when they have limited resources. Consumers tend to choose goods and services that provide them with the highest level of utility or satisfaction, given their income and the prices of goods and services in the market. Therefore, the concept of utility plays a central role in the study of consumer behavior and demand in economics.
Question 6 Report
The Malthusian theory of population does not concern itself with
Answer Details
The Malthusian theory of population is a theory about the relationship between population growth and resources. It states that population grows geometrically, while resources (especially food) grow arithmetically. The theory emphasizes the existence of positive checks (such as famine, disease, and war) that limit population growth. However, the theory does not concern itself with the development and growth of manpower, which is more related to the economic growth of a society.
Question 7 Report
The most important quality of money is that it must be
Answer Details
The most important quality of money is that it must be generally acceptable. This means that people should be willing to accept it as a medium of exchange in transactions. Without this quality, money would not be useful as a means of payment for goods and services. Money can be scarce, portable, and durable, but if people do not accept it as a valid form of payment, it would not function as money. Therefore, being generally acceptable is the most important quality that money must possess.
Question 8 Report
The practice whereby a business is owned by two or more independent firms is termed
Answer Details
Joint venture is the practice whereby a business is owned by two or more independent firms. In a joint venture, two or more companies agree to combine their resources, knowledge, and expertise to undertake a particular business venture or project. Each company shares the risks and rewards of the venture and has a stake in its success. Joint ventures are common in international business, where companies from different countries come together to explore new markets, develop new products, or gain access to new technology.
Question 9 Report
The lower the price of a commodity, the greater the quantity demanded. This is based on the assumption that the consumers’
Answer Details
Question 10 Report
International trade depends on the concept of?
Answer Details
International trade depends on the concept of comparative cost advantage. This means that different countries have different production costs and therefore can produce certain goods more efficiently and at a lower cost compared to other countries. When countries specialize in producing goods they have a comparative cost advantage in, they can trade with other countries to obtain goods they don't produce efficiently or at all. For example, if Country A is better at producing wheat and Country B is better at producing cloth, Country A can specialize in producing wheat and trade it with Country B in exchange for cloth. This allows both countries to consume more goods at a lower overall cost compared to producing everything domestically. Comparative cost advantage helps to increase efficiency and maximize production across different countries, leading to increased economic growth and development.
Question 11 Report
which of the following is true under rapid inflation? People
Answer Details
Under rapid inflation, people hardly want to lend money. This is because the value of money decreases rapidly, and so the money that is lent out may not be worth as much when it is repaid. This makes lending money a risky proposition, and so people may avoid doing it. Additionally, people may prefer to spend their money rather than lend it out, as the cost of goods and services may increase rapidly, making it more expensive to buy them later. Therefore, they may prefer to use their money to purchase goods and services immediately rather than hold onto it.
Question 12 Report
If the price of goods X rises and the quantity demanded of goods Y increases then the two goods X and Y must be
Answer Details
Question 13 Report
one characteristics of labour is that it is
Answer Details
One characteristic of labor is that it is mobile. This means that workers have the ability to move between different jobs, industries, and locations based on their skills, preferences, and the availability of employment opportunities. The mobility of labor is an important feature of modern labor markets, as it allows workers to find employment that matches their skills and interests, and helps firms to find workers with the skills they need. However, the mobility of labor can be limited by factors such as geographic location, language barriers, and immigration policies. In addition, certain types of jobs may require specific skills or training, which can make it difficult for workers to switch between industries or occupations. Overall, the mobility of labor is an important characteristic that helps to ensure that labor markets are efficient and that workers and firms are able to find the best possible matches for their needs.
Question 14 Report
the return of investment that is just sufficient to satisfy the owner of a business is called?
Answer Details
The return of investment that is just enough to make a business owner satisfied is called "normal profit." It is the minimum amount of profit required to keep the business running and compensate the owner for their time and effort. Normal profit takes into account the opportunity cost of the owner's time and capital, which means the amount they could have earned by investing their resources elsewhere. Normal profit is different from economic profit or excess profit, which represents the profit earned over and above the normal profit level.
Question 15 Report
The main objective of privatizing a government business is to
Answer Details
The main objective of privatizing a government business is to increase the level of efficiency. When a government-owned business is privatized, it is transferred to private ownership and management. Private companies are motivated by profit and are therefore more likely to operate the business more efficiently, reducing costs and improving productivity. Private companies are also able to access capital markets more easily than government-owned businesses, enabling them to invest in new technology and expand operations. As a result, privatization can lead to increased competition, improved services, and lower prices for consumers. However, it is worth noting that privatization may not always lead to positive outcomes, and the decision to privatize should be carefully considered based on the specific circumstances of the business in question.
Question 16 Report
which of the following is a characteristics of monopoly
Answer Details
The characteristic of monopoly is "a single seller." A monopoly is a market structure where only one company or entity controls the supply of a particular good or service. Since there is no competition, the monopolist has the power to set prices and control the market. This is different from a market with many sellers, known as a perfect competition, where no single company has the power to influence prices or control the market.
Question 18 Report
Patents are examples of
Answer Details
Patents are examples of legal barriers to entry. A patent is a legal right granted to an inventor or assignee that gives them exclusive rights to make, use and sell their invention for a certain period of time, usually 20 years from the date of filing. By having a patent, the inventor can prevent others from making, using or selling their invention without their permission, which can create a legal barrier to entry for potential competitors. This means that the inventor has a temporary monopoly on their invention and can potentially earn higher profits. Overall, patents are a way to encourage innovation by protecting the rights of inventors and providing them with the potential to earn returns on their investment. They also serve as a legal barrier to entry, limiting competition and potentially allowing the inventor to establish a dominant position in the market.
Question 19 Report
A foreign exchange market deals in
Answer Details
A foreign exchange market is a market where currencies from different countries are bought and sold. It is a global decentralized market that determines the exchange rate between different currencies. Individuals, companies, and governments participate in the foreign exchange market to buy and sell currencies for various reasons, such as trade, investment, tourism, or speculation. The exchange rate is determined by the supply and demand of each currency in the market. Therefore, the correct option is "currencies".
Question 20 Report
The Net National Product (NNP) is Gross National Product (GNP) less
Answer Details
The Net National Product (NNP) is the Gross National Product (GNP) minus the depreciation of capital during a specific period. GNP is the total value of goods and services produced by the nationals of a country, either inside or outside the country's borders, within a particular period. In contrast, NNP is the total income earned by the nationals of a country, including depreciation, within the same period. Depreciation refers to the wear and tear of capital goods such as machinery, equipment, and buildings used in production during a specific period. Since capital goods depreciate over time, their value decreases as they are used. Thus, depreciation represents the reduction in the value of capital during a particular period. Therefore, the correct option is "depreciation."
Question 21 Report
What must be added to variable cost to give total cost?
Answer Details
To obtain the total cost of producing a certain quantity of output, you need to add the fixed cost to the variable cost. Fixed costs are the costs that do not change with the level of output, such as rent, insurance, or salaries. Variable costs, on the other hand, are the costs that vary with the level of output, such as the cost of raw materials, labor, or electricity. Thus, adding the fixed cost to the variable cost will give you the total cost of producing a specific level of output. Therefore, the correct option to choose is "fixed cost" to get the total cost.
Question 22 Report
The practice of selling goods overseas and often below the cost of production is known as
Answer Details
The practice of selling goods overseas and often below the cost of production is known as "dumping." Dumping occurs when a company exports a product to another country at a price that is lower than the price charged for the same product in its domestic market. This can be done for a variety of reasons, such as to gain market share, to eliminate competition, or to dispose of excess inventory. Dumping is often viewed as an unfair trade practice, as it can harm domestic producers and create an uneven playing field in the global market.
Question 23 Report
If the population of a country is low and the Gross National Product is high, the per capita income will be
Answer Details
Per capita income is calculated by dividing the Gross National Product (GNP) by the population of a country. If the population of a country is low and the Gross National Product (GNP) is high, it means that there is a small number of people who are producing a high amount of goods and services, which leads to a high per capita income. In this scenario, there is a higher share of national income per person, which could translate into better living standards, higher purchasing power, and a higher overall quality of life. Therefore, the answer is "high."
Question 24 Report
A negative effect of the presence of a large number of middlemen in the distributive network is
Answer Details
The presence of a large number of middlemen in the distributive network can lead to a higher price of goods, which is a negative effect. Middlemen add their own profit margin to the cost of goods, increasing the final price that consumers pay. This can result in inflated prices that are not reflective of the actual cost of production or distribution. As a result, consumers may end up paying more for goods than they would if there were fewer middlemen involved in the process. This can be especially problematic for consumers in low-income households, who may be disproportionately affected by high prices.
Question 25 Report
When population is classified according to professions, it is called
Answer Details
When population is classified according to professions, it is called occupational distribution of population. This refers to the distribution of people across various occupations or job categories within a particular geographical location or country. This type of classification allows us to understand the distribution of skills, expertise and labour across different sectors of the economy, and is used by policymakers and researchers to make decisions regarding workforce development, training, and economic planning. It also helps to identify areas where there may be labour shortages or surpluses, and to address issues of income inequality and access to employment opportunities.
Question 26 Report
One of the advantages of capitalism is that
Answer Details
One of the advantages of capitalism is that it assures efficient allocation of resources. Capitalism allows individuals and businesses to make their own economic decisions based on market demand and supply. Competition between businesses in a capitalist system drives innovation and efficiency, which leads to the production of goods and services that are demanded by consumers at the lowest possible cost. In a free market capitalist system, resources are allocated based on their most productive use, meaning that resources are not wasted and are utilized to their maximum potential. As a result, capitalism helps to create wealth and raise living standards for individuals and society as a whole.
Question 27 Report
Revenue is the
Answer Details
Revenue is the total money realized from sales of goods or services. It is the income a company or organization generates from its business activities before deducting any expenses or costs. Revenue is a key financial metric that is used to measure the financial performance of a business. It is calculated by multiplying the price of each unit sold by the total number of units sold. For example, if a company sells 100 units of a product at $10 per unit, its revenue would be $1,000. Revenue is an important factor in determining a company's profitability and financial health.
Question 28 Report
The reward which accrues to labour for participating in production is
Answer Details
The reward which accrues to labour for participating in production is a "wage". Wages are the payment that workers receive for their labor, usually in the form of money. It is the compensation given by the employer to the employee in exchange for the work done. Wages are generally paid on an hourly, daily, or weekly basis, and are usually set by negotiation between the employer and employee, or determined by industry standards or government regulations.
Question 29 Report
Which of the following is an example of direct tax?
Answer Details
Income tax is an example of a direct tax. Direct taxes are taxes that are paid directly by individuals or entities to the government, based on their income or assets. Income tax is a tax on an individual's income and is calculated as a percentage of their income. Direct taxes are considered progressive, as they are based on the ability to pay, meaning that those who earn more income pay a higher percentage of their income as tax compared to those who earn less income. Import duties, export duties, and purchase tax are examples of indirect taxes, which are taxes that are collected by intermediaries such as manufacturers, wholesalers, and retailers and passed on to consumers as part of the price of goods and services.
Question 30 Report
Long-term loans can be secured from
Answer Details
Long-term loans can be secured from development banks. Development banks are financial institutions that provide long-term loans to businesses and governments for development projects such as infrastructure, education, and healthcare. Unlike commercial banks that mainly provide short-term loans, development banks have a specific mandate to provide long-term financing to support economic development. They often offer lower interest rates and longer repayment periods compared to other financial institutions. Therefore, businesses and governments looking for long-term financing to invest in development projects often turn to development banks as a source of funding.
Question 31 Report
ECA means
Answer Details
ECA stands for Economic Commission for Africa. It is a United Nations regional commission established in 1958 with the mandate of promoting the economic and social development of its member states, fostering intra-regional integration, and promoting international cooperation for Africa's development. Its headquarters is in Addis Ababa, Ethiopia, and it has 54 member states.
Question 32 Report
If tax takes a large proportion of the income of people with lower income, the tax is
Answer Details
If tax takes a large proportion of the income of people with lower income, the tax is considered regressive. This means that the burden of tax falls heavier on lower income earners than higher income earners. In other words, the tax rate decreases as income increases. This type of tax system is often criticized for being unfair as it puts a heavier burden on those who can least afford it.
Question 33 Report
in a situation where demand is perfectly elastic , imposition of tax on a commodity to raise its price will result in
Question 34 Report
The population of a country in a certain year was fifty million and her per capita income was $2,050. What was the national income?
Answer Details
To calculate the national income, we can use the formula: National Income = Per Capita Income x Population Using the information given in the question, we can substitute the values and get: National Income = $2,050 x 50,000,000 National Income = $102,500,000,000 Therefore, the national income of the country in that year was $102,500 million, which is option C in the given choices. In simple terms, we can say that the national income is the total income earned by all the residents of a country, including individuals, businesses, and the government. It is calculated by multiplying the per capita income, which is the average income earned per person, by the total population of the country.
Question 35 Report
The value of money is generally measured in relation to the
Answer Details
The value of money is generally measured in relation to the general price level. In other words, the value of money is determined by the amount of goods and services it can buy. If the price of goods and services goes up, the value of money goes down because it can buy less. Conversely, if the price of goods and services goes down, the value of money goes up because it can buy more. This relationship between the value of money and the general price level is known as purchasing power.
Question 36 Report
The three principal economic unit in any system are
Answer Details
The three principal economic units in any system are households, firms, and governments. Households are the primary consumers and own the factors of production, such as labor and capital. They buy goods and services produced by firms and supply their labor to firms in exchange for wages. Firms are the primary producers of goods and services, and they hire labor and buy capital from households. Firms are motivated by profits and aim to maximize them by producing goods and services that are in demand by households and other firms. Governments play a crucial role in the economy by regulating and overseeing economic activity, providing public goods and services, and levying taxes to finance government spending. Overall, the interactions between households, firms, and governments determine the overall level of economic activity and the distribution of goods and services in an economy.
Question 37 Report
Given that TR is total revenue, then TRn -TR (n-1) can be used to find the
Answer Details
The expression TRn - TR (n-1) represents the change in total revenue resulting from an increase in the level of output from n-1 units to n units. Therefore, this expression is used to calculate the marginal revenue of producing the additional unit of output. Marginal revenue is the additional revenue generated from selling one more unit of a product. Hence, TRn - TR (n-1) is the formula for calculating marginal revenue.
Question 38 Report
One advantages if international trade is that
Answer Details
One advantage of international trade is that it makes a variety of goods available to consumers. Countries can produce goods they are most efficient in and trade them with other countries, leading to a wider variety of products available to consumers. This allows consumers to have access to goods they would not be able to produce domestically, either due to lack of resources, technology or expertise. In addition, international trade promotes competition, which can lead to lower prices and improved quality of goods, as domestic producers compete with foreign producers. Thus, international trade not only provides consumers with more choices but also improves the quality and affordability of the products they buy.
Question 39 Report
Which of the following contributes the highest amount of foreign exchange to the economy of West African nations?
Answer Details
Among the options given, tourism is likely to contribute the highest amount of foreign exchange to the economy of West African nations. This is because West Africa is home to several popular tourist destinations, including beautiful beaches, wildlife parks, cultural sites, and historical landmarks. Tourists from all over the world visit West Africa to experience its unique culture, history, and natural beauty, and in turn, they spend money on hotels, transportation, food, souvenirs, and other local goods and services. This creates jobs and income for the local population and generates foreign exchange for the economy. While other sectors such as extraction and farming are also important, they may not generate as much foreign exchange as tourism due to factors such as fluctuating commodity prices and global demand.
Question 40 Report
An example of a producer goods is a
Answer Details
A producer good is a type of good that is used to produce other goods and services rather than for consumption. An example of a producer good is a hammer, as it is a tool used by workers to produce other goods such as furniture, buildings, or machinery.
Question 41 Report
A country whose economy is buoyant is likely to have
Answer Details
A country with a buoyant economy is likely to have a strong currency. A strong economy typically means that there is a high demand for the country's currency, which in turn raises the exchange rate. This can make imports cheaper, which can help to further stimulate economic growth. Additionally, a strong currency can attract foreign investment and can also help to improve the country's balance of payments. Therefore, a strong currency is generally seen as a positive sign for a country's economy.
Question 42 Report
Which of the following are examples of transfer payments?
Answer Details
Transfer payments refer to payments made without any corresponding goods or services in return. Therefore, the only option listed that fits the definition of a transfer payment is "gifts and donations." Rents and rates refer to payments made in exchange for the use of land or property. Profits and dividends refer to payments made to the owners of a company or investment. Internal and external debts refer to money owed by a borrower to a lender, with interest charged for the use of that money.
Question 43 Report
A certain amount of money is needed for everyday expenditure like buying of goods, transportation and others. This is
Answer Details
The answer is "transaction demand for money." Transaction demand for money is the amount of money that an individual or business needs for everyday transactions, such as buying goods and services. It is a form of demand for money that arises out of the need to conduct regular economic transactions. The other types of demand for money are the precautionary demand for money, which is the need for money to meet unexpected contingencies, and the speculative demand for money, which is the need for money to make financial investments.
Question 44 Report
a country where labour is not sufficient to make proper use of natural resources is said to have an
Answer Details
If a country doesn't have enough people to work and make full use of its natural resources, it is said to have under-population. This means that there are not enough workers to fully utilize the resources available in that country. It can be a hindrance to the country's economic growth and development because they may not be able to take advantage of their natural resources to their full potential.
Question 45 Report
A non-bank financial intermediary which is regarded as a pool of risks is the
Answer Details
An insurance company is a non-bank financial intermediary which is regarded as a pool of risks. This is because an insurance company pools together premiums from individuals and businesses, and uses that money to pay out claims to those who experience losses or damages covered by their policies. By doing this, the insurance company spreads the risk of loss among many policyholders, reducing the financial impact on any individual. The insurance company is able to operate in this way because it uses statistical data to calculate the likelihood of various events occurring and sets premiums accordingly.
Question 46 Report
The demand for beans in bags is given by the function Q - 36 + 0, 4P = 0. Where P is price in naira and Q is quantity, find Q when P = 20 naira.
Answer Details
The demand function for beans in bags is given as: Q - 36 + 0.4P = 0 We are given P = 20 naira, therefore: Q - 36 + 0.4(20) = 0 Q - 36 + 8 = 0 Q = 28 bags Therefore, when the price of beans in bags is 20 naira, the quantity demanded is 28 bags. Hence, the answer is 28 bags.
Question 47 Report
when a firm is nationalized ,
Question 48 Report
Monetary control measure are coordinated by
Answer Details
Monetary control measures are coordinated by the central banks. Central banks are responsible for formulating and implementing monetary policy to achieve certain macroeconomic objectives such as price stability, full employment, and economic growth. They use various monetary control measures such as adjusting interest rates, reserve requirements, and open market operations to influence the money supply and credit conditions in the economy. Commercial banks and other financial institutions may implement these measures, but they do so under the guidance and supervision of the central bank.
Question 49 Report
which of the following is a middleman in the chain of distribution?
Answer Details
A retailer is a middleman in the chain of distribution. They purchase goods from wholesalers or producers and sell them directly to consumers. The retailer serves as a link between the producers and the consumers by providing a convenient location for customers to purchase goods and a means for producers to reach a wider market. Retailers may add value to the products they sell by providing services such as packaging, promotion, and after-sales support.
Question 50 Report
(a) Define elasticity of supply
(b) When is supply described as (i) elastic (ii) inelastic
(c) Outline any two factors that influence elasticity of supply.
(a) Elasticity of supply. Elasticity of supply measures the degree of responsiveness of the quantity supplied of a good to a change in its price. It is calculated as:
\[ E_s = \frac{\text{percentage change in quantity supplied}}{\text{percentage change in price}} \]
(b) When supply is:
- (i) Elastic. Supply is elastic when a small change in price causes a more than proportionate change in quantity supplied, so \( E_s > 1 \).
- (ii) Inelastic. Supply is inelastic when a change in price causes a less than proportionate change in quantity supplied, so \( E_s < 1 \).
(c) Two factors that influence elasticity of supply.
- Time period. The longer the time available, the more producers can adjust output to a price change, so supply is more elastic in the long run than in the short run.
- Nature of the good and ease of storage. Durable goods that can be stored have a more elastic supply, whereas perishable goods (which cannot be held back) have an inelastic supply. (Other valid factors: availability of spare productive capacity, cost and ease of changing output, and mobility of factors of production.)
Answer Details
(a) Elasticity of supply. Elasticity of supply measures the degree of responsiveness of the quantity supplied of a good to a change in its price. It is calculated as:
\[ E_s = \frac{\text{percentage change in quantity supplied}}{\text{percentage change in price}} \]
(b) When supply is:
- (i) Elastic. Supply is elastic when a small change in price causes a more than proportionate change in quantity supplied, so \( E_s > 1 \).
- (ii) Inelastic. Supply is inelastic when a change in price causes a less than proportionate change in quantity supplied, so \( E_s < 1 \).
(c) Two factors that influence elasticity of supply.
- Time period. The longer the time available, the more producers can adjust output to a price change, so supply is more elastic in the long run than in the short run.
- Nature of the good and ease of storage. Durable goods that can be stored have a more elastic supply, whereas perishable goods (which cannot be held back) have an inelastic supply. (Other valid factors: availability of spare productive capacity, cost and ease of changing output, and mobility of factors of production.)
Question 51 Report
(a) Distinguish between labour and labour force.
(b) State four reasons for the differences in earnings among workers.
(a) Labour versus labour force.
- Labour is any human physical or mental effort, whether paid or unpaid, that is directed towards the production of goods and services. As a factor of production it is the human effort used in production.
- Labour force is the total number of people in a country who are of working age (for example 15 to 64 years), who are able and willing to work, and who are actually working or available for work. It excludes children, the aged, the sick, full-time students, and those unwilling to work.
In short, labour is the effort supplied, while the labour force is the number of people available to supply that effort.
(b) Four reasons for differences in earnings among workers.
- Differences in skill, training, and qualifications. Highly skilled and well-trained workers (for example doctors, engineers) earn more than unskilled workers because their services are scarce and more productive.
- Nature and risk of the job. Jobs that are dangerous, unpleasant, or require heavy responsibility usually attract higher pay to compensate the workers.
- Demand for and supply of the particular labour. Where the demand for a type of labour is high relative to its supply, wages rise; where labour is abundant relative to demand, wages are low.
- Bargaining power (trade unions). Workers in strong trade unions can negotiate higher wages than unorganised workers. (Other valid points: differences in experience, location of work, and government wage legislation.)
Answer Details
(a) Labour versus labour force.
- Labour is any human physical or mental effort, whether paid or unpaid, that is directed towards the production of goods and services. As a factor of production it is the human effort used in production.
- Labour force is the total number of people in a country who are of working age (for example 15 to 64 years), who are able and willing to work, and who are actually working or available for work. It excludes children, the aged, the sick, full-time students, and those unwilling to work.
In short, labour is the effort supplied, while the labour force is the number of people available to supply that effort.
(b) Four reasons for differences in earnings among workers.
- Differences in skill, training, and qualifications. Highly skilled and well-trained workers (for example doctors, engineers) earn more than unskilled workers because their services are scarce and more productive.
- Nature and risk of the job. Jobs that are dangerous, unpleasant, or require heavy responsibility usually attract higher pay to compensate the workers.
- Demand for and supply of the particular labour. Where the demand for a type of labour is high relative to its supply, wages rise; where labour is abundant relative to demand, wages are low.
- Bargaining power (trade unions). Workers in strong trade unions can negotiate higher wages than unorganised workers. (Other valid points: differences in experience, location of work, and government wage legislation.)
Question 52 Report
Explain each of the following: (a) Nationalization, (b) Commercialization, (c) Privatization and (d) Joint ventures.
These four terms describe different arrangements of business ownership and control.
- (a) Nationalization. This is the transfer of ownership and control of a privately owned business or industry to the government (the state). The enterprise, formerly in private hands, becomes public property and is run in the interest of the whole nation.
- (b) Commercialization. This is the reorganisation of a government-owned enterprise so that it is run on business (profit-making) principles, without being sold to private owners. The enterprise remains state-owned but must cover its costs and operate efficiently like a private firm, with reduced government subsidy.
- (c) Privatization. This is the transfer of ownership and control of a public (government-owned) enterprise wholly or partly to private individuals or firms, usually through the sale of its shares. It is the opposite of nationalization.
- (d) Joint ventures. This is a form of business in which two or more parties (for example the government and private investors, or a local firm and a foreign firm) come together to own, finance, and manage a business enterprise, sharing the capital, risks, control, and profits according to agreement.
Answer Details
These four terms describe different arrangements of business ownership and control.
- (a) Nationalization. This is the transfer of ownership and control of a privately owned business or industry to the government (the state). The enterprise, formerly in private hands, becomes public property and is run in the interest of the whole nation.
- (b) Commercialization. This is the reorganisation of a government-owned enterprise so that it is run on business (profit-making) principles, without being sold to private owners. The enterprise remains state-owned but must cover its costs and operate efficiently like a private firm, with reduced government subsidy.
- (c) Privatization. This is the transfer of ownership and control of a public (government-owned) enterprise wholly or partly to private individuals or firms, usually through the sale of its shares. It is the opposite of nationalization.
- (d) Joint ventures. This is a form of business in which two or more parties (for example the government and private investors, or a local firm and a foreign firm) come together to own, finance, and manage a business enterprise, sharing the capital, risks, control, and profits according to agreement.
Question 53 Report
(a) Outline any three disadvantages of monopoly
(b) In what two ways can monopoly be controlled?
(a) Three disadvantages of monopoly. A monopoly is a market in which a single seller controls the entire supply of a product that has no close substitutes.
- Higher prices and consumer exploitation. Being the only seller, the monopolist can restrict output and charge a price higher than would prevail under competition, so consumers pay more.
- Inefficiency and poor quality. With no competitors to challenge it, the monopolist has little incentive to cut costs, improve quality, or innovate, so resources may be used inefficiently.
- Restriction of output and consumer choice. The monopolist may deliberately produce less than the market needs to keep prices high, and consumers are denied variety since there is only one supplier. (Other valid points: it may earn abnormal (excess) profits at the public's expense and can lead to unequal distribution of income.)
(b) Two ways monopoly can be controlled.
- Government price control (regulation). The government can fix a maximum price for the monopolist's product so that it cannot exploit consumers.
- Anti-monopoly legislation and encouragement of competition. The government can pass laws that break up monopolies, prevent restrictive practices, or remove import restrictions so that competing goods enter the market. (Nationalization of the monopoly and taxation of its excess profits are also acceptable.)
Answer Details
(a) Three disadvantages of monopoly. A monopoly is a market in which a single seller controls the entire supply of a product that has no close substitutes.
- Higher prices and consumer exploitation. Being the only seller, the monopolist can restrict output and charge a price higher than would prevail under competition, so consumers pay more.
- Inefficiency and poor quality. With no competitors to challenge it, the monopolist has little incentive to cut costs, improve quality, or innovate, so resources may be used inefficiently.
- Restriction of output and consumer choice. The monopolist may deliberately produce less than the market needs to keep prices high, and consumers are denied variety since there is only one supplier. (Other valid points: it may earn abnormal (excess) profits at the public's expense and can lead to unequal distribution of income.)
(b) Two ways monopoly can be controlled.
- Government price control (regulation). The government can fix a maximum price for the monopolist's product so that it cannot exploit consumers.
- Anti-monopoly legislation and encouragement of competition. The government can pass laws that break up monopolies, prevent restrictive practices, or remove import restrictions so that competing goods enter the market. (Nationalization of the monopoly and taxation of its excess profits are also acceptable.)
Question 54 Report
(a) What is an Economic system?
(b) Explain any three characteristics of a mixed economic system.
(c) State any two disadvantages of a mixed economic system.
(a) Meaning of an economic system. An economic system is the organised way in which a society uses its scarce resources to decide what goods to produce, how to produce them, and for whom they are produced, that is, how production, distribution, and consumption are arranged in that society.
(b) Three characteristics of a mixed economic system. A mixed economy combines features of capitalism (free market) and socialism (state control).
- Co-existence of private and public ownership. Individuals own and run private businesses while the government also owns and controls certain key enterprises and utilities.
- Government intervention in the market. Prices are largely determined by the forces of demand and supply, but the government intervenes through regulation, taxation, subsidies, and price controls to protect the public interest.
- Pursuit of both profit and social welfare. Private firms produce for profit, while the state provides essential services (such as education, health, and roads) for the welfare of citizens rather than for profit.
(c) Two disadvantages of a mixed economic system.
- Conflict between the two sectors. Excessive government control and regulation can discourage private investment and initiative, while too little control lets private firms exploit consumers, so striking the right balance is difficult.
- Bureaucracy and inefficiency in the public sector. Government-owned enterprises are often poorly managed, slow, and wasteful, leading to inefficiency and losses.
Answer Details
(a) Meaning of an economic system. An economic system is the organised way in which a society uses its scarce resources to decide what goods to produce, how to produce them, and for whom they are produced, that is, how production, distribution, and consumption are arranged in that society.
(b) Three characteristics of a mixed economic system. A mixed economy combines features of capitalism (free market) and socialism (state control).
- Co-existence of private and public ownership. Individuals own and run private businesses while the government also owns and controls certain key enterprises and utilities.
- Government intervention in the market. Prices are largely determined by the forces of demand and supply, but the government intervenes through regulation, taxation, subsidies, and price controls to protect the public interest.
- Pursuit of both profit and social welfare. Private firms produce for profit, while the state provides essential services (such as education, health, and roads) for the welfare of citizens rather than for profit.
(c) Two disadvantages of a mixed economic system.
- Conflict between the two sectors. Excessive government control and regulation can discourage private investment and initiative, while too little control lets private firms exploit consumers, so striking the right balance is difficult.
- Bureaucracy and inefficiency in the public sector. Government-owned enterprises are often poorly managed, slow, and wasteful, leading to inefficiency and losses.
Question 55 Report
Study the diagram below carefully and use the given information to answer the questions that follow:
(a) Determine: (i) the profit maximizing output; (ii) the firm's profit if it produces 600 units of output; (iii) the total cost if the firm produces 400 units.
(b) Calculate the (I) total revenue (ii) profit of the firm at the output level of 900 units
(c) What will happen if a firm's market price falls below its average variable cost?
The diagram shows a firm in perfect competition. The marginal revenue line MR is horizontal at \(\$10\), so price \(P = MR = \$10\). The average total cost curve ATC is U-shaped with its minimum of \(\$6\) at an output of \(600\) units, and it reads \(\$8\) at \(400\) units. The rising marginal cost curve MC cuts the MR line at \(900\) units. These read-off values drive the working below.
(a)(i) Profit-maximising output
A firm maximises profit where marginal cost equals marginal revenue while MC is rising. On the diagram MC cuts MR at:
\[MC = MR = \$10 \ \Rightarrow\ Q = \mathbf{900\ \text{units}}\](a)(ii) Profit if the firm produces 600 units
At \(600\) units, \(ATC = \$6\) (the lowest point of the ATC curve) and \(P = \$10\).
\[TR = P \times Q = 10 \times 600 = \$6{,}000\]\[TC = ATC \times Q = 6 \times 600 = \$3{,}600\]\[\text{Profit} = 6{,}000 - 3{,}600 = \mathbf{\$2{,}400}\](a)(iii) Total cost if the firm produces 400 units
At \(400\) units the ATC curve reads \(\$8\):
\[TC = ATC \times Q = 8 \times 400 = \mathbf{\$3{,}200}\](b)(i) Total revenue at 900 units
\[TR = P \times Q = 10 \times 900 = \mathbf{\$9{,}000}\](b)(ii) Profit at 900 units
Reading the ATC curve at the profit-maximising output of \(900\) units gives approximately \(ATC \approx \$8\):
\[TC = ATC \times Q = 8 \times 900 = \$7{,}200\]\[\text{Profit} = TR - TC = 9{,}000 - 7{,}200 = \mathbf{\$1{,}800}\](c) What happens if market price falls below average variable cost
If price falls below average variable cost, the firm cannot even cover the running (variable) costs of producing. Every unit sold would then add to its losses on top of the fixed costs it must pay anyway. The sensible decision is to shut down (cease production) in the short run: by producing nothing the firm loses only its fixed cost, which is smaller than the loss it would make by continuing. The point where \(P = \text{minimum } AVC\) is therefore called the shut-down point.
Answer Details
The diagram shows a firm in perfect competition. The marginal revenue line MR is horizontal at \(\$10\), so price \(P = MR = \$10\). The average total cost curve ATC is U-shaped with its minimum of \(\$6\) at an output of \(600\) units, and it reads \(\$8\) at \(400\) units. The rising marginal cost curve MC cuts the MR line at \(900\) units. These read-off values drive the working below.
(a)(i) Profit-maximising output
A firm maximises profit where marginal cost equals marginal revenue while MC is rising. On the diagram MC cuts MR at:
\[MC = MR = \$10 \ \Rightarrow\ Q = \mathbf{900\ \text{units}}\](a)(ii) Profit if the firm produces 600 units
At \(600\) units, \(ATC = \$6\) (the lowest point of the ATC curve) and \(P = \$10\).
\[TR = P \times Q = 10 \times 600 = \$6{,}000\]\[TC = ATC \times Q = 6 \times 600 = \$3{,}600\]\[\text{Profit} = 6{,}000 - 3{,}600 = \mathbf{\$2{,}400}\](a)(iii) Total cost if the firm produces 400 units
At \(400\) units the ATC curve reads \(\$8\):
\[TC = ATC \times Q = 8 \times 400 = \mathbf{\$3{,}200}\](b)(i) Total revenue at 900 units
\[TR = P \times Q = 10 \times 900 = \mathbf{\$9{,}000}\](b)(ii) Profit at 900 units
Reading the ATC curve at the profit-maximising output of \(900\) units gives approximately \(ATC \approx \$8\):
\[TC = ATC \times Q = 8 \times 900 = \$7{,}200\]\[\text{Profit} = TR - TC = 9{,}000 - 7{,}200 = \mathbf{\$1{,}800}\](c) What happens if market price falls below average variable cost
If price falls below average variable cost, the firm cannot even cover the running (variable) costs of producing. Every unit sold would then add to its losses on top of the fixed costs it must pay anyway. The sensible decision is to shut down (cease production) in the short run: by producing nothing the firm loses only its fixed cost, which is smaller than the loss it would make by continuing. The point where \(P = \text{minimum } AVC\) is therefore called the shut-down point.
Question 56 Report
(a) What is economic integration?
(b) Highlight any three problems of economic integration in west Africa.
(a) Economic integration. Economic integration is an arrangement in which two or more countries in a region come together and agree to reduce or remove trade barriers (such as tariffs and quotas) among themselves and to co-operate in economic matters, in order to form a larger single market and promote their joint economic development. Examples of its forms include free-trade areas, customs unions, common markets, and economic communities such as ECOWAS.
(b) Three problems of economic integration in West Africa.
- Differences in currencies. Member states use different currencies with different values, and the absence of a single convertible currency makes trade and payments among them difficult.
- Loss of revenue from import duties. Removing tariffs on goods from member countries reduces the customs revenue that governments depend on, so some states are reluctant to comply fully.
- Production of similar goods. Many West African countries produce and export similar primary products (for example cocoa, groundnuts, crude oil), so they compete with rather than complement one another, which limits intra-regional trade.
(Other valid problems: language and colonial-heritage differences, poor transport and communication links, political instability, and smuggling.)
Answer Details
(a) Economic integration. Economic integration is an arrangement in which two or more countries in a region come together and agree to reduce or remove trade barriers (such as tariffs and quotas) among themselves and to co-operate in economic matters, in order to form a larger single market and promote their joint economic development. Examples of its forms include free-trade areas, customs unions, common markets, and economic communities such as ECOWAS.
(b) Three problems of economic integration in West Africa.
- Differences in currencies. Member states use different currencies with different values, and the absence of a single convertible currency makes trade and payments among them difficult.
- Loss of revenue from import duties. Removing tariffs on goods from member countries reduces the customs revenue that governments depend on, so some states are reluctant to comply fully.
- Production of similar goods. Many West African countries produce and export similar primary products (for example cocoa, groundnuts, crude oil), so they compete with rather than complement one another, which limits intra-regional trade.
(Other valid problems: language and colonial-heritage differences, poor transport and communication links, political instability, and smuggling.)
Question 57 Report
(a) What is economic integration?
(b) Highlight any three problems of economic integration in west Africa.
(a) Economic integration. Economic integration is an arrangement in which two or more countries in a region agree to remove or reduce trade barriers (such as tariffs and quotas) among themselves and to co-operate economically, so as to create a larger combined market and promote their joint economic growth and development. Its common forms are the free-trade area, customs union, common market, and economic community such as ECOWAS.
(b) Three problems of economic integration in West Africa.
- Different currencies and payment difficulties. Member states use different, often non-convertible currencies, which complicates trade and settlement of payments among them.
- Loss of customs (tariff) revenue. Governments that depend heavily on import duties are reluctant to abolish tariffs on goods from member states because doing so reduces their revenue.
- Similarity of products. West African countries mostly produce and export similar primary commodities, so they compete for the same foreign markets instead of trading with one another, which keeps intra-regional trade low.
(Other acceptable problems: differences in official language, poor transport and communication networks, political instability, and widespread smuggling.)
Answer Details
(a) Economic integration. Economic integration is an arrangement in which two or more countries in a region agree to remove or reduce trade barriers (such as tariffs and quotas) among themselves and to co-operate economically, so as to create a larger combined market and promote their joint economic growth and development. Its common forms are the free-trade area, customs union, common market, and economic community such as ECOWAS.
(b) Three problems of economic integration in West Africa.
- Different currencies and payment difficulties. Member states use different, often non-convertible currencies, which complicates trade and settlement of payments among them.
- Loss of customs (tariff) revenue. Governments that depend heavily on import duties are reluctant to abolish tariffs on goods from member states because doing so reduces their revenue.
- Similarity of products. West African countries mostly produce and export similar primary commodities, so they compete for the same foreign markets instead of trading with one another, which keeps intra-regional trade low.
(Other acceptable problems: differences in official language, poor transport and communication networks, political instability, and widespread smuggling.)
Question 58 Report
(a) State the law of diminishing return
(b) What is (i) marginal product (ii) average product?
(c) Explain any three factors that determine the size of firms.
(a) Law of diminishing returns. The law states that as more and more units of a variable factor (for example labour) are added to a fixed factor (for example land), a point is reached beyond which the extra (marginal) output from each additional unit of the variable factor begins to fall, other things being equal. It is also called the law of variable proportions.
(b) Definitions.
- (i) Marginal product. The addition to total output resulting from employing one more unit of the variable factor: \( MP = TP_n - TP_{n-1} \).
- (ii) Average product. Total output divided by the number of units of the variable factor employed: \( AP = \dfrac{TP}{L} \).
(c) Three factors that determine the size of firms.
- Availability of capital. Firms that can raise large amounts of capital (for example through the sale of shares or bank loans) can expand to a large size, while those with limited finance remain small.
- Size of the market. A large demand for the firm's product allows large-scale production, whereas a small or localised market keeps the firm small.
- Nature of the product and technology. Goods that need heavy machinery and mass production (for example cars, cement) favour large firms, while goods requiring personal skill or catering to varied tastes (for example tailoring, catering) favour small firms. (Other valid factors: managerial and organisational ability, and government policy.)
Answer Details
(a) Law of diminishing returns. The law states that as more and more units of a variable factor (for example labour) are added to a fixed factor (for example land), a point is reached beyond which the extra (marginal) output from each additional unit of the variable factor begins to fall, other things being equal. It is also called the law of variable proportions.
(b) Definitions.
- (i) Marginal product. The addition to total output resulting from employing one more unit of the variable factor: \( MP = TP_n - TP_{n-1} \).
- (ii) Average product. Total output divided by the number of units of the variable factor employed: \( AP = \dfrac{TP}{L} \).
(c) Three factors that determine the size of firms.
- Availability of capital. Firms that can raise large amounts of capital (for example through the sale of shares or bank loans) can expand to a large size, while those with limited finance remain small.
- Size of the market. A large demand for the firm's product allows large-scale production, whereas a small or localised market keeps the firm small.
- Nature of the product and technology. Goods that need heavy machinery and mass production (for example cars, cement) favour large firms, while goods requiring personal skill or catering to varied tastes (for example tailoring, catering) favour small firms. (Other valid factors: managerial and organisational ability, and government policy.)
Question 59 Report
(a) Give two major views of Rev. Thomas Malthus in population theory.
(b) How relevant are his views to the economic realities of West African countries?
(a) Two major views of Rev. Thomas Malthus.
- Different rates of growth. Malthus held that population, if unchecked, grows in a geometric progression (1, 2, 4, 8, 16...) while the means of subsistence (food) grows only in an arithmetic progression (1, 2, 3, 4, 5...). Population therefore tends to outstrip the food supply.
- Checks on population. Because food cannot keep pace, population is brought back into line by two kinds of checks: positive checks (famine, disease, war, and other causes of high death rates) and preventive checks (moral restraint such as late marriage and celibacy that lower the birth rate).
(b) Relevance to West African economic realities.
- Points that support Malthus. Many West African countries have high birth rates and rapidly growing populations that press food supply, land, housing, and social services, so rapid population growth outrunning output is a real concern.
- Points that weaken Malthus. Malthus did not foresee modern advances that have raised food output faster than he predicted, so the theory overstates the danger: improved farming methods, high-yielding seeds, irrigation, and fertilizers have expanded food supply; family-planning and birth-control programmes now curb births without famine or war; food can be imported from surplus countries; and industrialisation and technology create output he ignored.
Balanced conclusion: Malthus's warning about population pressure on resources is partly relevant to West Africa, but his gloomy prediction is not fully realised because science, trade, and deliberate population policy have loosened the food constraint he assumed to be fixed.
Answer Details
(a) Two major views of Rev. Thomas Malthus.
- Different rates of growth. Malthus held that population, if unchecked, grows in a geometric progression (1, 2, 4, 8, 16...) while the means of subsistence (food) grows only in an arithmetic progression (1, 2, 3, 4, 5...). Population therefore tends to outstrip the food supply.
- Checks on population. Because food cannot keep pace, population is brought back into line by two kinds of checks: positive checks (famine, disease, war, and other causes of high death rates) and preventive checks (moral restraint such as late marriage and celibacy that lower the birth rate).
(b) Relevance to West African economic realities.
- Points that support Malthus. Many West African countries have high birth rates and rapidly growing populations that press food supply, land, housing, and social services, so rapid population growth outrunning output is a real concern.
- Points that weaken Malthus. Malthus did not foresee modern advances that have raised food output faster than he predicted, so the theory overstates the danger: improved farming methods, high-yielding seeds, irrigation, and fertilizers have expanded food supply; family-planning and birth-control programmes now curb births without famine or war; food can be imported from surplus countries; and industrialisation and technology create output he ignored.
Balanced conclusion: Malthus's warning about population pressure on resources is partly relevant to West Africa, but his gloomy prediction is not fully realised because science, trade, and deliberate population policy have loosened the food constraint he assumed to be fixed.
Question 60 Report
| Oranges | Total Utility | Mangoes | Total Utility |
| 1 | 100 | 1 | 50 |
| 2 | 190 | 2 | 95 |
| 3 | 270 | 3 | 135 |
| 4 | 340 | 4 | 170 |
| 5 | 400 | 5 | 200 |
| 6 | 450 | 6 | 225 |
| 7 | 490 | 7 | 245 |
| 8 | 520 | 8 | 260 |
The table above shows Mr. Y's schedule of total utility for oranges and mangoes. The prices of oranges and mangoes are at $1.00 each. Mr. Y has $10 00 to spend on the goods.
Use the information contained in thetable to answer the questions that follow
(a) Calculate the marginal utility for all the levels of consumption for the goods.
(b) At equilibrium, how many (i) oranges (ii) mangoes, will the consumer buy?
(c) (i)State the law of diminishing marginal utility. (ii) State the marginal condition for utility maximization.
(a) Marginal utility \( MU_n = TU_n - TU_{n-1} \) for each good.
| Unit | Oranges TU | Oranges MU | Mangoes TU | Mangoes MU |
|---|---|---|---|---|
| 1 | 100 | 100 | 50 | 50 |
| 2 | 190 | 90 | 95 | 45 |
| 3 | 270 | 80 | 135 | 40 |
| 4 | 340 | 70 | 170 | 35 |
| 5 | 400 | 60 | 200 | 30 |
| 6 | 450 | 50 | 225 | 25 |
| 7 | 490 | 40 | 245 | 20 |
| 8 | 520 | 30 | 260 | 15 |
(b) Equilibrium. With both prices equal to \$1.00, the equi-marginal condition \( \dfrac{MU_o}{P_o} = \dfrac{MU_m}{P_m} \) reduces to \( MU_o = MU_m \), and the consumer must spend the whole \$10 (so \( Q_o + Q_m = 10 \) units at \$1 each).
The marginal utilities are equal at \( MU = 40 \): the 7th orange gives 40 and the 3rd mango gives 40. This uses \( 7 + 3 = 10 \) units, exactly the \$10 budget.
- (i) Oranges bought: 7.
- (ii) Mangoes bought: 3.
(c)(i) Law of diminishing marginal utility: as a consumer consumes more units of a good, the additional (marginal) utility derived from each successive unit falls, other things being equal. Both columns above show MU declining.
(c)(ii) Marginal condition for utility maximisation: the consumer maximises satisfaction when the marginal utility per naira (or dollar) spent is the same for every good, \( \dfrac{MU_o}{P_o} = \dfrac{MU_m}{P_m} \), while the entire income is spent. This is the equi-marginal principle.
Answer Details
(a) Marginal utility \( MU_n = TU_n - TU_{n-1} \) for each good.
| Unit | Oranges TU | Oranges MU | Mangoes TU | Mangoes MU |
|---|---|---|---|---|
| 1 | 100 | 100 | 50 | 50 |
| 2 | 190 | 90 | 95 | 45 |
| 3 | 270 | 80 | 135 | 40 |
| 4 | 340 | 70 | 170 | 35 |
| 5 | 400 | 60 | 200 | 30 |
| 6 | 450 | 50 | 225 | 25 |
| 7 | 490 | 40 | 245 | 20 |
| 8 | 520 | 30 | 260 | 15 |
(b) Equilibrium. With both prices equal to \$1.00, the equi-marginal condition \( \dfrac{MU_o}{P_o} = \dfrac{MU_m}{P_m} \) reduces to \( MU_o = MU_m \), and the consumer must spend the whole \$10 (so \( Q_o + Q_m = 10 \) units at \$1 each).
The marginal utilities are equal at \( MU = 40 \): the 7th orange gives 40 and the 3rd mango gives 40. This uses \( 7 + 3 = 10 \) units, exactly the \$10 budget.
- (i) Oranges bought: 7.
- (ii) Mangoes bought: 3.
(c)(i) Law of diminishing marginal utility: as a consumer consumes more units of a good, the additional (marginal) utility derived from each successive unit falls, other things being equal. Both columns above show MU declining.
(c)(ii) Marginal condition for utility maximisation: the consumer maximises satisfaction when the marginal utility per naira (or dollar) spent is the same for every good, \( \dfrac{MU_o}{P_o} = \dfrac{MU_m}{P_m} \), while the entire income is spent. This is the equi-marginal principle.
Question 61 Report
Explain:
(a) (i) supply of money (ii) Value of money
(b) highlight the three motives for holding money.
(a)(i) Supply of money. The supply of money is the total stock of money in circulation in an economy at a given point in time. It is made up of currency (notes and coins) held by the public plus demand (current-account) deposits held with the commercial banks that are available for spending.
(a)(ii) Value of money. The value of money is the purchasing power of money, that is, the quantity of goods and services that a unit of money can buy at a given time. It varies inversely with the general price level: when prices rise (inflation), the value of money falls; when prices fall (deflation), the value of money rises.
(b) Three motives for holding money (Keynes's liquidity preference).
- Transactions motive. Money is held to meet day-to-day spending on goods and services between the receipt of one income and the next.
- Precautionary motive. Money is held as a reserve to meet unforeseen or emergency expenses such as illness, accidents, or sudden needs.
- Speculative motive. Money is held to take advantage of future changes in the prices of bonds and other assets, that is, to buy assets when their prices are expected to fall (interest rates to rise) and profit from the movement.
Answer Details
(a)(i) Supply of money. The supply of money is the total stock of money in circulation in an economy at a given point in time. It is made up of currency (notes and coins) held by the public plus demand (current-account) deposits held with the commercial banks that are available for spending.
(a)(ii) Value of money. The value of money is the purchasing power of money, that is, the quantity of goods and services that a unit of money can buy at a given time. It varies inversely with the general price level: when prices rise (inflation), the value of money falls; when prices fall (deflation), the value of money rises.
(b) Three motives for holding money (Keynes's liquidity preference).
- Transactions motive. Money is held to meet day-to-day spending on goods and services between the receipt of one income and the next.
- Precautionary motive. Money is held as a reserve to meet unforeseen or emergency expenses such as illness, accidents, or sudden needs.
- Speculative motive. Money is held to take advantage of future changes in the prices of bonds and other assets, that is, to buy assets when their prices are expected to fall (interest rates to rise) and profit from the movement.
