WAEC SSCE - Economics - 2013

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When the marginal product is negative, it means that the additional unit of input leads to a decrease in the total output. In this case, the total product will be decreasing, meaning that each additional input is producing less output than the previous one. Therefore, the answer is "decreasing."

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To find out the quantity demanded (Qd) when the price (P) is $3, we simply substitute P = $3 into the given equation Qd = 80 - 2P. Qd = 80 - 2(3) Qd = 80 - 6 Qd = 74 Therefore, the quantity demanded (Qd) when the price (P) is $3 is 74 units.

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A co-operative society is a self-help business organization. It is owned, controlled, and managed by a group of individuals who come together voluntarily to achieve a common economic goal. Members of a co-operative society pool their resources together to start and run a business enterprise that benefits all members equally. The society is run democratically, with each member having an equal say in decision-making processes. The aim of a co-operative society is to improve the economic and social well-being of its members through mutual assistance and collaboration. The profits earned by the society are distributed equitably among the members, based on their level of participation and contribution to the society's success.

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Physical productivity refers to the quantity of output produced per unit of input used. The factors that affect physical productivity are the state of technology, quantity of inputs, and quality of inputs. The state of technology determines the efficiency of production processes, while the quantity and quality of inputs affect the level of output that can be produced. However, the price of output does not directly affect physical productivity since it is a measure of the amount of output produced per unit of input, and not the price at which the output is sold. Therefore, the answer to the question is "price of output".

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In the long term, factors of production are considered to be variable. This means that all factors of production, such as labor, capital, and land, can be adjusted or changed according to the needs of the firm. Unlike in the short term, where some factors of production are fixed and cannot be changed, in the long term, a firm can change the amount of all its inputs. For example, it can increase or decrease the size of its factory, hire or fire workers, or invest in new machinery. The ability to adjust all factors of production in the long term allows firms to optimize their production process and achieve maximum efficiency.

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A debenture holder earns fixed interest. A debenture is a type of bond or debt instrument issued by a company or organization to raise capital. When an investor buys a debenture, they are essentially lending money to the issuer. In return, the issuer pays the debenture holder a fixed rate of interest for a specified period of time, usually until the debenture matures. This fixed interest payment is the main source of earnings for a debenture holder.

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Student's grants and scholarships are not included in measuring national income by the income approach. This is because grants and scholarships are considered transfer payments and not payments for productive activities. Transfer payments are payments made by the government to individuals without any goods or services being exchanged in return. National income is the total income earned by a country's citizens, including wages, profits, rents, and interest, from their participation in productive activities. Therefore, student grants and scholarships, which are not payments for productive activities, are not included in the calculation of national income by the income approach.

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The main advantage of large scale production is that the unit cost of production falls. This is because when a company produces goods in large quantities, it benefits from economies of scale. These economies of scale mean that the average cost of production decreases as output increases, due to factors such as the ability to purchase raw materials in bulk, division of labor and specialization, and the use of machinery and technology. As a result, the cost per unit decreases, allowing the company to produce goods at a lower cost and potentially sell them at a lower price or earn a higher profit margin.

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The International Bank for Reconstruction and Development (IBRD) offers loans for public projects, which is important to developing nations. These loans can be used to finance large-scale infrastructure projects such as highways, power plants, and water supply systems. The IBRD provides these loans at lower interest rates than many other sources of financing, and also offers technical assistance to help countries plan and implement projects. This can help developing nations to build up their infrastructure and improve their economies, leading to increased prosperity and a better standard of living for their citizens.

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The value of money is affected by the price level. When the price level in an economy increases, the purchasing power of money decreases, and vice versa. This is because when prices increase, each unit of currency can buy fewer goods and services, reducing the value of money. On the other hand, when prices decrease, the purchasing power of money increases, making each unit of currency able to buy more goods and services. Therefore, the price level is a key factor in determining the value of money.

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Post-harvest losses in West African countries occur due to various reasons such as poor storage facilities, inadequate transportation, and lack of proper processing facilities. To reduce post-harvest losses, better storage facilities could be provided. Good storage facilities help to prevent spoilage, pests, and disease attack, thereby increasing the shelf life of the produce. With better storage facilities, farmers can store their produce for longer periods and sell them at higher prices during peak demand periods. In addition, improved storage facilities can help reduce food waste, thereby contributing to food security and economic growth.

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Goods which have to be paid for are known as economic goods. Economic goods are the goods or services that are scarce, meaning there is not enough of them to satisfy all wants or needs, and therefore have a price attached to them. In contrast, free goods are those that are abundant and available without any cost, and physical goods refer to any tangible object that can be touched, seen or felt. Intangible goods, on the other hand, are those that cannot be seen or touched, such as services or intellectual property.

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Points outside a production possibility curve indicate unattainable production levels. This means that the resources available are not sufficient to produce at those levels, and thus they are beyond the economy's current capacity. It may be possible to achieve those levels of production with additional resources or improvements in technology, but at the current state, they are not feasible.

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A function of merchant banks is "underwriting and issuing of shares". Merchant banks are financial institutions that provide a range of services to companies and high net worth individuals. One of the services they provide is underwriting and issuing of shares. Underwriting involves the assumption of the risk of buying securities from the issuer and then reselling them to investors. This helps the issuer to raise capital and provides investors with access to new investment opportunities. Issuing of shares involves the creation and sale of new shares in a company, which can be done to raise capital for the company. By underwriting and issuing shares, merchant banks help companies to access capital markets and raise funds for various purposes.

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"What to produce" refers to the process of deciding which goods and services a society or business should produce to meet the needs and wants of its consumers or customers. It involves making choices about what goods and services should be produced, taking into account factors such as available resources, technology, and consumer demand. Therefore, the answer is: "Which goods and services to be produced."

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The demand for money is described as a derived demand. This means that the demand for money is not for its own sake but for the goods and services that it can be exchanged for. People hold money because they expect to use it to make transactions in the future. Thus, the demand for money is derived from the demand for goods and services. When the demand for goods and services increases, the demand for money also increases as people need more money to buy those goods and services.

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Gold, diamond, iron ore and limestone are collectively referred to as mineral resources. Mineral resources are naturally occurring substances found in the earth's crust that have economic value. They are typically mined and processed to extract valuable minerals and metals that are used in various industries, such as construction, manufacturing, and technology. Some examples of mineral resources include gold, silver, copper, iron ore, and coal. Mineral resources are important to the economy of many countries as they contribute to economic growth and development.

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Price fluctuation is a feature of an imperfect market. In an imperfect market, there is a lack of perfect competition, and prices are subject to change due to factors such as supply and demand, production costs, and market power. This is different from a perfect market, where prices are determined solely by supply and demand and are not subject to fluctuations. Supermarkets and common markets are not necessarily imperfect markets, although they can be. Market failure, on the other hand, occurs when a market does not allocate resources efficiently, leading to a loss of social welfare.

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A budget is balanced when the expected total revenue is equal to the expected total expenditure. This means that the budget is in equilibrium, with no deficit or surplus. It indicates that the government or organization has planned their income and spending in a way that ensures they do not spend more than they can afford. When the expected revenue is greater than the expected expenditure, it is called a surplus budget, and when the expected revenue is less than the expected expenditure, it is called a deficit budget.

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Demand pull inflation can be described as persistent rise in prices due to increase in expenditure. It occurs when the demand for goods and services in an economy exceeds its supply, causing the prices of those goods and services to increase. As demand increases, producers are forced to increase their prices in order to maximize profits, and consumers continue to pay higher prices as long as their demand for the goods or services remains high. This cycle can continue until the economy reaches a point where the supply of goods and services can no longer keep up with demand, at which point inflation may become unsustainable.

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Cost-push inflation is a general rise in the price level caused by an increase in the price of inputs (such as wages and raw materials) that businesses need to produce their goods and services. As the cost of production increases, businesses are forced to raise their prices in order to maintain their profit margins, which in turn leads to an increase in the general price level of goods and services. This is different from demand-pull inflation, which is caused by an increase in demand for goods and services that outstrips their supply, and imported inflation, which is caused by a rise in the price of imported goods and services.

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All economic systems must decide what to produce because resources are limited in supply. This means that there are not enough resources available to produce all the goods and services that people want. As a result, every economic system must decide what goods and services are most important to produce with the limited resources available. This decision-making process is crucial for allocating resources efficiently and maximizing the benefits of production. The choice of what to produce depends on a range of factors including consumer preferences, resource availability, technology, and the economic system in place.

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A government that wants to get more revenue will increase the tax on commodities with a low price elasticity of demand. This is because goods with a low price elasticity of demand have relatively inelastic demand, meaning that consumers will continue to purchase them even if the price increases. Therefore, the government can increase taxes on such goods without significantly affecting the quantity demanded by consumers, resulting in more revenue for the government.

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The formula used to calculate price elasticity of demand is: \(\frac{\text{percentage change in quantity demand}}{\text{percentage change in price}}\) Therefore, the option that can be used to calculate price elasticity of demand is: \(\frac{\text{percentage change in quantity demand}}{\text{percentage change in price}}\) This formula measures the responsiveness of quantity demanded to a change in price. If the result is greater than 1, demand is considered elastic, meaning that a change in price leads to a proportionally larger change in quantity demanded. If the result is less than 1, demand is considered inelastic, meaning that a change in price leads to a proportionally smaller change in quantity demanded.

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The situation described in the question is known as joint supply. Joint supply is a phenomenon that occurs when the production of one commodity leads to the production of another commodity. In this case, an increase in the supply of commodity X leads to an increase in the supply of commodity Y. Joint supply occurs because the two commodities are produced using the same inputs, and the production of one commodity generates a byproduct that can be used to produce the other commodity. An example of joint supply is the production of beef and leather. When a cow is slaughtered for its meat, the skin can be used to produce leather, so an increase in the supply of beef leads to an increase in the supply of leather. Joint supply is different from competitive supply, which occurs when two commodities compete for the same inputs. In the case of competitive supply, an increase in the supply of one commodity leads to a decrease in the supply of the other commodity.

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The statement that is not a feature of a monopoly is "Buyers and sellers are price takers". In a monopoly, there is only one seller of the commodity, and the seller has the power to set their own price since there are no competitors. Additionally, new entrances to the market are usually restricted, and there is no competition to force the seller to lower their price. Buyers, therefore, have no choice but to buy from the monopoly seller at the price they have set. The term "price takers" is used to describe buyers in a perfectly competitive market where they have no power to influence the market price and must accept the prevailing market price. However, in a monopoly, buyers are not price takers as there is only one seller and no other prices to compare it with.

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The correct answer is "assurance of raising huge capital for expansion". Sole proprietorship is a type of business ownership where one person owns and runs the business. Some advantages of sole proprietorship include quick and easy decision-making, keeping its business affairs private, and a high level of commitment from the owner. However, one disadvantage is the limited ability to raise capital, which makes it difficult to expand the business beyond the owner's personal resources. Therefore, the statement "assurance of raising huge capital for expansion" is not an advantage of sole proprietorship.

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The bank rate influences all rates of interest in a country. The bank rate is the interest rate at which a country's central bank lends money to its commercial banks, and this rate affects the interest rates that commercial banks charge their customers for loans and other financial products. As a result, changes in the bank rate can cause a ripple effect throughout the economy, impacting everything from mortgage rates to credit card interest rates to savings account yields. The other options listed - population growth rate, wage rate, and mortgage rate - do not directly impact all interest rates in a country in the same way as the bank rate.

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Technological change is likely to enhance productivity in an economy. This is because it allows for the creation of new and improved methods of production, which in turn can lead to increased efficiency, reduced costs, and higher output. By contrast, the use of obsolete capital is likely to hinder productivity, as outdated machinery and equipment can be inefficient and costly to maintain. Expansion of land under cultivation can increase output, but this is subject to diminishing returns over time, while an increase in the labor force can also boost output but may lead to lower wages and increased competition for jobs.

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Commercial banks are involved in the money market. The money market refers to the market for short-term borrowing and lending of funds, typically for a period of up to one year. Commercial banks participate in this market by borrowing and lending money to other banks or financial institutions. They also issue short-term financial instruments such as certificates of deposit (CDs) and commercial paper to raise funds. Building societies are more focused on mortgage lending, development banks provide long-term financing for infrastructure projects, and the stock exchange is a market for buying and selling stocks and other securities.

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Tourism is classified under the invisible trade in the balance of payments of a country. Invisible trade refers to international transactions that do not involve the transfer of tangible goods or services. Instead, it includes transactions related to services such as transportation, tourism, and financial services. Since tourism involves the exchange of services, it falls under the invisible trade category in the balance of payments. Other examples of invisible trade items include remittances, royalties, and fees for intellectual property rights.

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The option that is not a function of an insurance company is "collection of deposits from the public for investment." Insurance companies do not collect deposits from the public for investment. Instead, they collect premiums from policyholders to pool resources together against risks. Insurance companies also mobilize funds through premiums collected and encourage investment by providing security of capital.

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Goods are said to be in competitive demand when they are substitutes for each other. This means that the goods can be used for the same purpose and satisfy the same wants or needs, so consumers can choose between them based on price, quality, availability, and other factors. For example, if the price of coffee increases, consumers may switch to tea, which is a substitute for coffee. In this case, coffee and tea are in competitive demand because they are substitutes for each other.

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Trade between two countries is known as bilateral trade. It refers to the exchange of goods and services between two countries. Bilateral trade can occur through direct trade or indirectly through third-party countries. This type of trade allows countries to specialize in producing and exporting goods that they have a comparative advantage in, and to import goods that they may not produce efficiently. It also helps to create economic ties between countries and can foster diplomatic relations.

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Exchange control is a government policy that regulates the flow of foreign currency in and out of a country. It is aimed at maintaining stability in the foreign exchange market and preventing currency speculation, among other things. Therefore, exchange control is used to regulate foreign trade by controlling the inflow and outflow of foreign currency.

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The action of the government to forgo road construction in order to provide more health facilities denotes opportunity cost. This is because the government has to give up the construction of roads which is the next best alternative or option that is forgone in order to provide more health facilities. The concept of opportunity cost is based on the idea that resources are scarce, and therefore, when one alternative is chosen, another alternative must be given up. In this case, the government has chosen to prioritize the provision of health facilities over the construction of roads, implying that the opportunity cost of providing more health facilities is the foregone construction of roads.

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(a) Two characteristics of monopolistic competition

• Many sellers and buyers: there are numerous firms, each small relative to the market, so no single firm can dominate.
• Product differentiation: firms sell similar but not identical products (through branding, packaging, quality or service), which gives each firm a small degree of control over its own price.

(Other acceptable points: freedom of entry and exit in the long run, and heavy reliance on non-price competition such as advertising.)

(b) Why no abnormal profit in the long run

The key reason is freedom of entry into the industry. In the short run a firm can earn abnormal (supernormal) profit where price exceeds average cost. Because there are no barriers to entry, these profits attract new firms into the industry. As new firms enter and offer close substitutes, they take customers away from the existing firm. This causes the existing firm's demand (average revenue) curve to shift to the left and become more elastic.

Entry continues until abnormal profits are competed away. Long-run equilibrium is reached when the firm's average revenue curve is just tangent to its average total cost curve. At that tangency point price equals average cost, so the firm earns only normal profit, while it still produces at the profit-maximising output where marginal revenue equals marginal cost.

On the diagram: the downward-sloping AR curve touches the U-shaped AC curve at exactly one point directly above the output where MR = MC. Here \( P = AC \), so abnormal profit is zero. Any attempt by the firm to raise price loses too many customers to rivals; any tendency toward profit invites fresh entry.

(c) Natural monopoly versus legal monopoly

• Natural monopoly arises because of the technical nature of the industry: very large economies of scale and heavy fixed costs mean that a single firm can supply the whole market at a lower average cost than several firms could. Examples are electricity, water and railway supply.
• Legal monopoly exists because the law grants and protects exclusive rights to one producer, for example through patents, copyrights, or a government franchise or licence. Its power comes from statute, not from cost conditions.

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(a) Creeping inflation versus hyper-inflation

Creeping (mild) inflation is a slow, gradual and persistent rise in the general price level, usually in low single-digit percentages per year. It is manageable and can even accompany healthy economic growth. Hyper-inflation is an extremely rapid, severe and uncontrolled rise in prices, where the value of money collapses so quickly that prices may double within days or weeks. The essential differences are the speed and the severity: creeping inflation is slow and tolerable, hyper-inflation is galloping and destructive.

(b) Four negative effects of inflation

• It reduces the purchasing power of money, so real income falls.
• It hurts people on fixed incomes (pensioners, salary earners) and creditors, while borrowers who repay in cheaper money gain.
• It discourages saving, because money saved loses value over time.
• It creates uncertainty that discourages long-term investment and can worsen the balance of payments as exports become dearer.

(c) Four ways government can control inflation

• Monetary policy: the central bank raises the bank rate, sells securities through open-market operations, and raises the cash-reserve ratio to reduce the money supply.
• Fiscal policy: the government reduces its own spending and raises taxes to cut excess demand.
• Income (prices and wages) policy: restrain wage increases so that costs and demand do not push prices up.
• Output policy: increase the production and supply of goods and services (and encourage necessary imports) so that supply keeps pace with demand.

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(a)(i) Peasant farming is small-scale farming carried out mainly by a family on a small piece of land, using crude tools and simple methods, with output produced largely for the family's own consumption and only a small surplus for sale.

(a)(ii) Commercial farming is large-scale farming carried out for the purpose of sale and profit, using modern inputs (machines, improved seeds, fertilizers) and hired labour, with output produced mainly for the market.

(b) Five ways agriculture contributes to economic development

• Provision of food: it supplies the food needed to feed the growing population and maintain a healthy, productive labour force.
• Employment: it provides jobs and income for a large proportion of the population, especially in rural areas.
• Raw materials for industry: it supplies inputs such as cotton, cocoa, palm produce and rubber to local manufacturing industries.
• Foreign exchange earnings: the export of agricultural produce earns foreign exchange used to import capital goods.
• Source of government revenue: taxes, duties and marketing-board earnings from agriculture provide revenue for the government.

Agriculture also provides a market for industrial goods and a source of savings and capital for investment.

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(a) Perfect competition is a market structure in which there are very many buyers and sellers dealing in a homogeneous (identical) product, with freedom of entry and exit, perfect knowledge, and no single participant able to influence price. Each firm is therefore a price taker.

(b) Short-run equilibrium: perfect competitor versus imperfect competitor

Both firms maximise profit at the output where marginal cost equals marginal revenue (MC = MR), and both may earn abnormal profit, normal profit or a loss in the short run. The differences lie in the demand (average revenue) curve:

• For the perfect competitor, the firm faces a horizontal (perfectly elastic) demand curve at the ruling market price, so \( P = AR = MR \). Equilibrium output is where MC cuts this horizontal line from below.
• For the imperfect competitor (for example a monopolist or monopolistic competitor), the demand curve slopes downward, and marginal revenue lies below average revenue. Here price is read off the AR curve above the MC = MR output, so \( P > MR \).

On the diagrams the perfect competitor's price line is a flat line touched by MC; the imperfect competitor's AR and MR are two separate downward-sloping lines, with equilibrium output below MC = MR and price taken up on the AR curve.

(c) Two features of an imperfect market

• Product differentiation or a single/few sellers, so firms are price makers rather than price takers.
• Barriers to entry and imperfect knowledge among buyers and sellers.

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(a) Competitive supply. Competitive supply exists when two or more commodities are produced using the same resources, so that producing more of one means producing less of the other because they compete for the same limited factors of production. For example, a farmer using the same land can grow either maize or yam, so more maize means less yam.

(b) Supply schedule versus supply curve. A supply schedule is a table showing the various quantities of a commodity that producers are willing to supply at different prices. A supply curve is the graphical representation of that schedule, plotted with price on the vertical axis and quantity on the horizontal axis; it normally slopes upward from left to right, showing that more is supplied at higher prices.

Plotting these points and joining them gives an upward-sloping supply curve.

(c) Effects on the supply of a commodity

• (i) An improvement in technology: raises productivity and lowers cost, so supply increases (the curve shifts to the right).
• (ii) A rise in input prices: raises the cost of production, so supply decreases (the curve shifts to the left).
• (iii) A rise in the prices of other commodities: makes those other goods more profitable, so resources are switched away and the supply of this commodity falls (competitive supply).
• (iv) An increase in government subsidies: lowers the producer's effective cost, so supply increases (the curve shifts to the right).

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(a) Four problems of a barter economy

• Double coincidence of wants: a person must find someone who both has what he wants and wants what he has, which is difficult and time-wasting.
• Lack of a common measure of value: there is no single unit in which to express and compare the worth of different goods.
• Indivisibility of certain goods: some goods (for example a cow) cannot be split to pay for a small item without losing value.
• Problem of storing value and deferred payment: perishable goods cannot store wealth, and it is hard to make or settle debts fairly over time.

(b) How money solved these problems

• As a medium of exchange, money removes the need for a double coincidence of wants: goods are sold for money, and money buys any other good.
• As a measure (unit) of value, money provides a common denominator so the value of all goods can be expressed and compared in prices.
• Because money is divisible into small units, goods of any size or value can be bought and change given easily.
• As a store of value and a standard of deferred payment, money lets people keep purchasing power for the future and make and settle debts conveniently.

Thus each function of money directly answers a specific weakness of barter.

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(a) Small-scale versus large-scale production.

(b) Five internal economies of large-scale production

• Technical economies: the firm can use large, specialised and efficient machines, spreading their cost over a large output and lowering unit cost.
• Managerial economies: it can employ specialist managers each in charge of one function, raising efficiency.
• Financial economies: being large and reputable, it can borrow large sums easily and at lower interest rates.
• Marketing (commercial) economies: it buys raw materials in bulk at discounts and sells in large quantities, reducing buying and selling costs per unit.
• Risk-bearing economies: it can diversify its products and markets so that a loss in one area is offset by gains in another.

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(a) Cash ratio versus special deposits

The cash ratio (cash-reserve ratio) is the proportion of a commercial bank's total deposits that it is legally required to hold as cash reserves with the central bank. Special deposits are extra funds that the central bank calls upon commercial banks to lodge with it, over and above the normal reserves; these deposits are frozen and cannot be used for lending. In short, the cash ratio is a standing proportion of deposits, while special deposits are additional, deliberately immobilised sums.

(b) How they are used as monetary-policy instruments

Both work by altering the volume of funds banks have available for lending, and therefore the money supply:

• When the central bank raises the cash ratio, banks must keep a larger share of deposits idle, so their excess reserves and lending capacity fall; the money supply contracts. Lowering the ratio has the opposite, expansionary effect.
• When the central bank calls for special deposits, it removes cash from the banks and freezes it, directly reducing their ability to create credit and so tightening the money supply. Releasing special deposits eases credit.

Both are therefore used to curb excessive lending during inflation and to encourage lending during a slump.

(c) Two instruments of fiscal policy in West Africa

• Taxation: government varies direct and indirect taxes to influence demand; raising taxes reduces spending power to fight inflation, lowering them boosts demand.
• Government expenditure: government raises or lowers its own spending on projects and services to expand or contract aggregate demand (often combined with public borrowing and a budget surplus or deficit).

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(a) Four benefits of industrial development

• Employment creation: industries provide jobs, reducing unemployment and raising incomes.
• Increased national income and growth: industrial output adds to Gross Domestic Product and raises the standard of living.
• Diversification of the economy: industry reduces over-dependence on agriculture or a single export such as oil.
• Saving of foreign exchange: local production of goods formerly imported (import substitution) and export of manufactures saves and earns foreign exchange.

Industrial development also promotes technological progress and the growth of infrastructure.

(b) Four measures to encourage industrial growth

• Provision of infrastructure: reliable electricity, good roads and water reduce the cost of production.
• Provision of finance and credit: establishing development banks and giving loans at low interest to industrialists.
• Favourable tax policy and incentives: tax holidays, subsidies and duty-free import of machinery attract investors.
• Protection of infant industries: imposing tariffs and quotas on competing imports to allow local industries to grow.

Manpower training and ensuring a stable political climate also encourage industrial growth.

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(a)(i) Average Fixed Cost (AFC)

Fixed cost = Total Cost − Total Variable Cost. At every output level, fixed cost = $7.

Output, Q (bags)	Fixed Cost ($)	AFC = FC/Q ($)
0	7	Undefined
2	7	7/2 = 3.50
4	7	7/4 = 1.75

(a)(ii) Marginal Cost (MC)

Using successive changes in total cost:

Output (bags)	MC ($)
0	7
1	12 − 7 = 5
2	14 − 12 = 2
3	17 − 14 = 3
4	27 − 17 = 10

(b)(i) Profit or loss when price = $10 per bag

\(TR = P \times Q = 10Q\), while \(\text{Profit} = TR - TC\).

Output (bags)	TR ($)	TC ($)	Profit/Loss ($)
0	0	7	−7 (loss)
1	10	12	−2 (loss)
2	20	14	6 (profit)
3	30	17	13 (profit)
4	40	27	13 (profit)

(b)(ii) Maximum profit of $13 is made at output levels of 3 bags and 4 bags.

(c) Marginal Cost Curve

The MC curve is obtained by plotting the points \((0,7), (1,5), (2,2), (3,3)\) and \((4,10)\), and joining successive points.

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Mr Smith's disposable income is \$7.00. A scale of preference lists wants in order of priority, and he satisfies the most pressing wants first.

(a)(i) He will buy the Textbook (\$5) and the Shirt (\$2), which together cost exactly \$7.

(ii) These are the two items highest on his scale of preference that his \$7 can afford; buying them exhausts his income while satisfying his most urgent wants.

(b)(i) The opportunity cost of that decision is the Shoes (\$3), the next item on his scale that he had to forgo.

(ii) Opportunity cost is the next best alternative sacrificed. Having spent all \$7 on the textbook and shirt, he gives up the shoes, so the shoes are the real cost of his choice.

(c)(i) If income rises to \$10, he can add the shoes: Textbook (\$5) + Shoes (\$3) + Shirt (\$2) = \$10.

(ii) The opportunity cost is now the Trousers (\$3), the next item forgone.

(d) Definitions

• Scale of preference: a list of an individual's wants arranged in the order of their relative importance or urgency.
• Opportunity cost: the next best alternative that is given up when a choice is made.

(e) Importance of a scale of preference

• It guides rational choice by ranking wants in order of priority.
• It ensures the most pressing wants are satisfied first with limited income.
• It promotes efficient allocation of scarce resources and avoids waste.
• It makes the opportunity cost of a decision clear.

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(a) Direct versus indirect taxation. A direct tax is levied directly on the income, wealth or profit of individuals and firms, and the burden (impact) cannot be shifted onto another person; the person assessed actually bears it. Examples are personal income tax, company (corporate) tax and capital gains tax. An indirect tax is levied on goods and services, and its burden can be shifted, wholly or partly, from the producer or seller onto the final consumer through a higher price. Examples are value added tax (VAT), import duties and excise duties.

(b) Five advantages of indirect taxation to developing countries

• Difficult to evade: since the tax is included in the price of goods, anyone who buys the good pays it, so evasion is hard.
• Convenient to pay: it is paid in small amounts as goods are bought, so the burden is hardly felt.
• Wide coverage: it reaches almost everybody, including those in the informal sector whose incomes cannot easily be assessed.
• Can discourage harmful goods: heavy duties on goods such as alcohol and tobacco reduce their consumption.
• Easy and cheap to collect: it is collected at a few points (ports, factories, points of sale), lowering administrative cost, and yields large, elastic revenue.