THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) SOLUTION: ECONOMICS, NOVEMBER, 2014

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Arline Cain
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1 SOLUTION 1 (a) The Economic name of the table is a Production Possibility Curve or a Production Possibility Boundary or a Production Frontier or a Transformation Curve. (b) (iii) (iv) The opportunity cost of producing 1 ton of yam is = 2 tons of maize The opportunity cost of producing 3 tons of yam is = 12 tons of maize The opportunity cost of producing 50 tons of maize is 6 0 = 6 tons of yam The opportunity cost of producing 20 tons of maize is 6 5 = 1 ton of yam (c) If the country plans to increase maize production by 10 tons, then its current production alternative is B (1 ton of yam, 48 tons of maize) The opportunity cost of increasing maize by 10 tons is 3 1 = 2 tons of yam. (d) Corn Production per farming season Opportunity Cost of Yam in terms of maize per farming season 1 st ton 2 2 nd ton 4 3 rd ton 6 4 th ton 8 5 th ton 10 6 th ton 20 The table above shows the opportunity cost of yam in terms of maize as the country increases the production of yam. It is evident that as the production of yam is increased by 1 unit at a time, it s cost in terms of maize increases from 2 units through 6 units to 20 units. The behaviour of the opportunity cost of yam in terms of maize in this case is that of increasing opportunity cost. Page 1 of 8

2 SOLUTION 2 (a) The Law of Diminishing Returns to Variable Proportion states that other things being equal e.g. given technology and a fixed quantity of some inputs as the employment of an input increases (variable input), initially MP increases but eventually it diminishes. Or, all other things being equal e.g. state of technology, socio-cultural environment etc., as a variable input is increased, given fixed inputs, marginal product initially increases, but eventually diminishes. (b) (iii) (iv) The principle refers to the short-run where the producer uses fixed and variable inputs. All the inputs, apart from the variable input are held unchanged in quantity. The variable resource may be labour, tools, fertilizers any resource commonly engaged in production. The variable resource is applied unit by unit, and each unit is identical in amount and quality. It applies not only in agriculture, but also in manufacturing, retailing, advertising, mining etc. (c) The Marginal Product Curve and the Law of Diminishing Between O to B, the Phase of Increasing Returns to variable proportion: It means that the production function is depicting increasing MP as the variable input increases. Total Product increases at an increasing rate. At B, the Phase of Constant Returns to variable proportion: it shows constant MP as the variable input increases. Total Product increases at a constant rate. Page 2 of 8

3 (iii) (iv) (v) Between B to C, the Phase of Diminishing Returns to variable proportion: Marginal Product diminishes or decreases. Total product increases but at a diminishing or decreasing rate. At C, the phase of zero returns. The MP turns zero and TP attains its maximum. Beyond C the Phase of Negative Returns to variable proportion: Marginal Product turns negative as the variable input increases. Total Product increases at a negative rate or total product decreases. SOLUTION 3 (a) The following diagram illustrates the monopolists demand (D), marginal revenue (MR) and marginal cost (MC) curves. Figure 7: the Monopoly Demand (AR), Marginal Revenue and Marginal Cost Given the demand function as P=100 Q, to plot it we need to find the price and quantity intercepts. Therefore if Q = 0, P = 100. Likewise is P = 0, Q = 100. (b) The monopolist maximizes profit where MR = MC, hence 10 = 100 2Q. Q = 90/2 = 45. The equilibrium quantity (Q*) = 45. At the equilibrium with Q* = 45, equilibrium price (P*) = = 55. Page 3 of 8

4 Figure 7: The Monopoly Demand (AR), Marginal Revenue and Marginal Cost (c) Total revenue is TR = P*Q* = 55 x 45 kilos = 2,475 Total cost is TC = AC x Q* = 10 x 45 = 450 (iii) Profit = TR TC = 2, = 2,025 SOLUTION 4 (a) During a period of recession unemployment tends to increase. Consequently incomes fall therefore demand for textile will decrease shifting the demand curve to the left as shown in this diagram. Equilibrium price and quantity declined. Page 4 of 8

5 (b) When textile workers embark on a strike, production of textiles would cease for sometime therefore supply would decrease shifting the supply curve to the left thus increasing the equilibrium price but reducing equilibrium quantity. (c) A high tariff will increase the price of imported textile. All other things being equal, consumers would switch their expenditure on important textile to domestic textile. Demand will increase thus shifting the demand curve to the right as shown in this diagram. Both equilibrium price and quantity increases. (d) Cotton is a major input in textile production. A poor harvest means that textile producers would not get enough cotton for the manufacturer of textile therefore supply of textiles would decrease. The supply curve would shift to the left. Equilibrium price will increase but equilibrium quantity will fall. Page 5 of 8

6 SOLUTION 5 (a) Aggregate Expenditure as used here is the total planned or desired spending in the economy during a given period by the various sectors of the economy on newly produced final goods and services. (b) Aggregate expenditure in this economy is the sum of consumption (C), domestic investment (I) and government expenditure (G) expenditures (AE = C + I + G). It depicts a three sector economy or a closed economy with government activity. (c) Equilibrium income occurs when the total level of real output (Y) produced in the economy exactly matches the level of total spending (aggregate expenditure) in the economy. In other words, the equilibrium level of income or output is where the total quantity of goods and services supplied (Y) is precisely equal to total quantity of goods demanded. This is point A on the diagram. (d) The gap in this economy is an inflationary gap. An inflationary gap occurs when the equilibrium real aggregate income/output exceeds real potential output. In this economy the full employment output is 0Y2. It is evident that 0Y1 is greater than 0Y2 hence has an inflationary gap or real potential output is 0Y2 and the equilibrium real income or output is 0Y1. (e) In a close economy with G the multiplier (K) is given as K = 1 1 MPC (1 t) If in this economy the marginal propensity to consume (MPC) is 0.8 and the marginal propensity to tax (t) is 0.25 the K is K = (1 0.25) = 2.5 Page 6 of 8

7 SOLUTION 6 (a) In situation (a), the firm would be more inclined to invest in Ghana compared to Nigeria. This is because the higher rate of growth of per capita national income means on the average higher demand for goods and services. That is, aggregate demand in Ghana is rising, which translates into sales volumes increasing. Higher rates of growth of per capita national income might also mean that consumers are more optimistic about the future (greater job security) and this will also encourage greater levels of spending. The end result of this is that the firm is more likely to recoup his investment expenditure in Ghana, compared to Nigeria. (b) The condition in (b) makes Nigeria appears more attractive than Ghana. The effect of investment subsidies is to lower the cost of investment to the firm. All other things being equal, the lower the cost of investment the more willing a firm will be to invest and, the shorter the time interval between the investment expenditure and its recovery. (c) Contractionary fiscal policy via reduction in government spending lowers the rate of growth of national income whereas expansionary fiscal policy via increasing in government spending has the opposite effect. In the circumstances in (c), firm would be more willing to invest in Nigeria compared to Ghana. This is because, compared to Ghana, Nigeria will enjoy higher rates of growth of aggregate demand which may cause national income to increase. This may increase the demand for goods and services in Nigeria. Page 7 of 8

8 SOLUTION 7 (a) The domestic product may be presented as gross (GDP) or net (NDP) product. Gross implies that no capital consumption allowance has been made for the resources used up in producing the domestic product. In the process of producing the domestic output some capital are used up owing to wear and tear or obsolescence. When an allowance is made for capital depreciation or consumption, the gross domestic product becomes net domestic product. In other words GDP less depreciation equals net domestic product. Nominal GDP or money GDP measures the money values of all final goods and services that are produced in an economy over some period of time, usually one year. While real GDP values each year s output of the set of prices ruling in some particular year, called the base year. (b) Some uses of national income data include the following: Measuring economic growth: as national income figures are a measure of economic activity, the annual national income can be compared with previous years an impression is thereby gained about change in economic growth of the economy. Inter country comparison: the national income data offers opportunity to make comparisons between countries in terms of growth and welfare using the per capita income which is derived from the national income. (iii) Government planning: the information on expenditure, output and income provide an important analytical tool to government in the formation and evaluation of government policies. (iv) International organization: contributions to international agencies such as the UN, AU, ECOWAS etc are often based on the size of the countries GDP. (v) Requirement of foreign aid donors: countries seeking assistance in terms of finance and other resources from various countries and developing finance institutions have to produce evidence of efforts in the direction of economic growth and development. GDP and other related data are usually essential for the necessary discussions and negotiations. (vi) Monitor government: the economic development plans that government produce have various promises built into them of economic growth, development and improved welfare for the benefit of the affected population. GDP figures can be used to confirm the success of these efforts. Page 8 of 8

ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION. 4. Is free medicine given to patients in Govt. Hospital a scarce commodity?

ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION 1. What is the Slope of PPC? What does it show? 2. When can PPC be a straight line? 3. Do all attainable combination of two goods that