June 2009 unit 1 paper 2 answer

10,842 views

Published on

2 Comments
19 Likes
Statistics
Notes
  • These are very useful information, but i hate the fact that anyone cannot use it withut an email because we cant download..Why so?
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • why cant we download?
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Views
Total views
10,842
On SlideShare
0
From Embeds
0
Number of Embeds
610
Actions
Shares
0
Downloads
0
Comments
2
Likes
19
Embeds 0
No embeds

No notes for slide

June 2009 unit 1 paper 2 answer

  1. 1. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS CAPEECONOMICS stMay 21 2009 Unit 1 Paper 2 EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  2. 2. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONSJune 2009 – Unit 1 – Paper 21 a i) A market is defined as a group of buyers and sellers who interact with each otherfor the purpose of buying and selling a particular good or service.1 a ii) The demand curve shows the price consumers are willing to pay per unit fordifferent quantities of a good or service. The supply curve gives the prices wouldproducers are willing to accepts for different quantities of a good or service.Market EquilibriumP ($) D S PE E S D QE QuantityPoint E shows where the demand and supply curves intersect. This is market equilibrium,since at this point the quantity which consumers wish to purchase is equal to the quantitywhich producers are willing to offer for sale. The associated price at which this occurs isknown as the equilibrium price, or the market price which is shown by PE in the figure.The equality between demand and supply at the market equilibrium means that scareresources are being efficiently allocated towards the production of the good or service inquestion.Market DisequilibriumA disequilibrium is said to exist when there is inequality between quantity demanded byconsumers and quantity supplied by producers. This tends to occur when the existingprice does not correspond with the equilibrium price. There are two types of marketdisequilibriums. These are:  Surpluses or excess supply occurs where the price in the market is such that quantity supplied by producers exceeds quantity demanded by consumers. This occurs if the price is above the equilibrium price of PE in the figure. In this case an EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  3. 3. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS excess amount of resources are being allocated to the production of the good or service in question.  Shortages or excess demand occurs where price in the market is such that quantity demanded by consumers is greater that quantity supplied by producers. This occurs if the price is below the equilibrium price of PE in the figure.. In this case an insufficient amount of resources are being allocated to the production of the good or service in question.Decrease in DemandIf demand decreases, then a new equilibrium would be established at a lower price. Thiswould encourage producers to decrease the quantity supplied and less resources would beallocated towards the production of the good or service in question. In other words themarket ensures that as demand decreases, amount of resources allocated towards theproduction of the good or service would automatically decrease.1 b i)A price floor is implemented to ensure that producers receive a sufficient price for thegood or service which they supply to the market. The aim in this case is to enablesuppliers to earn an adequate level of income. As such the prise floor is usuallyimplemented above the equilibrium price.Wage D S $15 Price 0 Floor $10 E S D 400 1000 Quantity of milk Surplus of milkAlthough a price floor usually enables greater affordability to consumers, it tends toresult in a situation where a surplus exists, which means that suppliers would be left withunsold goods. Such a surplus represents an inefficient allocation of resources.1 c) The government may implement a price floor despite the negative side effect ofcreating a surplus since the increase in price might benefit the suppliers to a greaterextent than the decrease in quantity sold. This can occur if the product has an inelasticdemand which enables the suppliers to earn a higher level of income when the price floor EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  4. 4. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONSis implemented. Such a measure can be essential for the eradication of poverty eventhough it causes a misallocation of resources.2 a i) Supply can be defined as the total quantity of a good or service which produceroffer for sale at a particular price.2 a ii) This first law of supply states that as the price of a good or service is increased,producers would supply a larger quantity as long as all other variables are held constant.That is to say, there is an observed positive relationship between the price of final outputand the quantity produced by suppliers.2 a iii)As price changes, quantity demanded changes giving rise to a movement along thedemand curve. A fall in price resulting in an increased quantity demanded which istermed an extension of demand. An increase in price resulting in a decreased quantitydemanded which is termed a contraction of demand.An increase or decrease in demand, which results in a shift of the demand curve, isbrought about by a factor other than a change in price of the good or service underconsideration. These factors are called the conditions of demand. A rightward shiftindicates that an increased quantity is demanded at all price levels and is termed anincrease in demand. Leftward shifts, on the other hand, indicate that a decreased quantityis demanded at all price levels and are termed a decrease in demand.2 bi) The conditions of supply which:1) Price of factors of production2) Indirect taxes3) Subsidies4) The price of other goods (production substitute)5) Technology6) Exogenous factors – such as weather, crime, vehicular traffic congestion etc.2 b ii) Effects of changes in the conditions of supply:1) Price of factors of production – as factor prices increase, supply decreases and vice versa.2) Indirect taxes - as indirect taxes are imposed, supply decreases and vice versa.3) Subsidies - as subsidies are applied, supply increases and vice versa.4) The price of other goods (production substitute) – the supply of a good would decrease as the price of a production substitute increases and vice versa.5) Technology – as technology improves, supply increases and vice versa.6) Exogenous factors – the occurrence of adverse exogenous factors such as bad weather causes supply to decrease and vice versa.2 c) Reasons for change in supply:1 Price of factors of production – as factor prices increase, cost of production increases and the firm would be able to produce a smaller output level. As a result supply EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  5. 5. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS would shift to the left.2 Indirect taxes - as indirect taxes are imposed, the firm faces additional costs and the production declines as a result. This is shown by a leftward shift of the supply curve.3 Subsidies - as subsidies are applied, this helps the firm to reduce its costs as a result production increases. This is shown by a rightward shift of the supply curve.4 The price of other goods (production substitute) – Supply of one good would decrease as the price of a production substitute increases since firms would be encouraged to use its resources to product this good instead as more profits can be earned.5 Technology – as technology improves, the firm would be able to produce more output from its given resources and as a result supply increases.6 Exogenous factors – the occurrence of adverse exogenous factors such as bad weather causes supply to decrease since production would be disrupted. As a result supply would shift to the left.3 a i) Market structure refers to the type of competition which exists among firms in aparticular industry.3 a ii) In one extreme, there can be immense competition which is a state of perfectcompetition. At the other extreme, there can be no competition at all which occurs undermonopoly. In between these two extremes are: oligopoly and monopolistic competitionwhich refers to imperfect competition.3 a iii) Characteristics of Perfect Competition1. The market is large, meaning that there are a large number of consumers2. There are a large number of suppliers where each individual firm contributes a small proportion of the overall market supply.3. The market is liberal in the sense that any buyer and seller could freely conduct business in the market without any barriers to entry or exit.4. The output supplied by each firm in the market is identical. That is, there is product homogeneity throughout the market.5. Buyers and sellers have perfect knowledge of all market variables. As such, market participants are able to make well informed decisions and take full advantage of all opportunities in the market.3 b i) Number of Barriers to Product Type of Competition Sellers Entry and Exit Characteristic Perfect Competition Larger number No Homogeneous Monopoly One Yes No close substitute EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  6. 6. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS Heterogeneous – Substitutable apart from Oligopoly Few Yes perceived differences through branding Heterogeneous – Not easily Monopolistic substitutable due to real Many No Competition differences through product differentiation3 b ii) Type of Short Run Long Run Production Allocative Pricing Competition Profit Profit Efficiency Efficiency Perfect Price Any level Normal Yes Yes Competition Taker Price Monopoly Abnormal Abnormal No No Setter Price Oligopoly Abnormal Abnormal No No Setter Monopolistic Price Any level Normal No No Competition Setter4 a i) Private cost refers to the costs incurred by the producers directly involved inproduction, which basically comprises the costs of factor inputs employed which covers,rent wages, interest and normal profit. In addition to private cost the production andconsumption of goods may create additional costs which are faced by other individuals insociety who are neither consumers nor producers of the good or service in question.These third parties are said to face external cost or negative externalities. The costincurred by firms is referred to as private cost and that borne by third parties is termedexternal cost. The private costs and external costs sum to form social costs. 4 a ii) The consumption of public goods and services is characterised by non rivalry andnon excludability. Non-rivalry means that the good can be collectively consumed bymultiple consumers at the same time. Non-excludability means that consumers who do EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  7. 7. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONSnot pay for a good or service cannot be prevented from consuming it. In other wordsthere is the free rider problem when non-rivalry exists as consumers would be able toconsume the good or service for free. Merit goods and services are those which areprovided by the state to individuals in society on the basis of merit or need. This occursbecause merit goods and services generate significant spill over benefits or positiveexternalities.4 a iii) Positive externalities are benefits enjoyed by third parties who are not directlyinvolved in the consumption or production of the good or service. Negative externalitiesare costs faced by third parties who are not directly involved in the consumption orproduction of the good or service.4 a iv) Moral harzard occurs when an individual makes a suboptimal decision orundertakes a hidden action if the other party in the transaction cannot monitor his or herbehaviour all the time. Adverse selection refers to a suboptimal decision by one party in atransaction when there is a hidden attribute about a good or service which the other partyis aware off.4 b i) If left to the market, no private producer would be willing to supply goods andservices which are non-excludable. This is because no consumer would be willing to payfor the goods and services and producers would therefore not get any revenue. The freerider problem is the term often used to describe this situation. Since output would be zeroin the market, these goods would be under produced and allocative inefficiency wouldexist.4b) ii) When externalities exist, there are additional benefits and costs apart from thebenefits received by consumers (PMB) and the cost faced by producers (PMC). These arethe external benefits and costs faced by the third parties. The market, however does nottake into consideration these spillover cost and benefits received by third parties.This means when there are external benefits, the market would under produce the good orservice and this results in a loss in welfare. When negative externalities exist, the good orservice is over produced also leading to a welfare loss. The existence of welfare lossesmeans that allocative efficiency is not achieved by the market in the presence ofexternalities.4 b iii) Moral hazard causes market failure because the hidden actions by one party causeother parties to face unwarranted costs. E.g. Irresponsible behaviour of those insuredcauses insurance companies to face excessive claims.4 c ) If left to the market, no private producer would be willing to supply goods andservices which are non-excludability, as they would be unable to charge consumers forsuch. As such the output of such goods would be below the allocatively efficient outputlevel. The state would therefore produces the allocatively efficient level of output anddistributes it freely to the public. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  8. 8. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS5 a i a) MPP = ΔTPP/ΔQL5 a i b) APP = TPP/QL5 a i c) VMPP = P × MPP5 a ii) Marginal Average Value of Units of Units of Physical Physical Marginal Wage Rate Labour (L) Output (Q) Product of Product of Product (W) Labour (MPP) Labour (APP) (VMP) 0 0 $200 1 8 8 8.00 $800 $200 2 21 13 11.50 $1300 $200 3 27 6 9.00 $600 $200 4 31 4 7.75 $400 $200 5 33 2 6.60 $200 $200 6 34 1 5.66 $100 $2005 b i)5 b ii) The firm would employ 5 workers as this is the level of employment at whichMVP or MRP is equal to the wage rate. If the firm employs less than 5 units of labourthen profits can be increase by employing more workers. If the firm employs more than 5units of labour then it would incur a loss on all workers in excess of the 5 th employee. Thefirm therefore maximizes profits when the quantity of labour is 5.5 b iii) 4 workers EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS
  9. 9. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS6a) Poverty refers to a state of deprivation by individuals. This usually occurs when anindividual has little or no means to support to his or her family. As a result livingstandards are significantly depressed. E.g. Beggars and vagrants face a life of extremepoverty and experience very poor living standards.6 a ii )Absolute poverty - this measures the actual number of people or headcount within qneconomy who are unable to afford certain basic goods and services such as food andshelter.Relative Poverty - this measures the extent to which a households financial resourcesfalls below the average income level of the economy.6 b i) The basic needs approach combines certain aspects of absolute and relativemeasures. This is because it considers firstly the amount of income needed for long-termphysical well-being such as food, clothing and shelter, which essentially defines absolutepoverty. In addition, it also considers the amount of income needed to afford other goodsand services which the average member of society consumes such as furniture,transportation, communication, entertainment and health care and home insurance. Thisis similar to looking at the average level of income earned under the relative povertyapproach. Anyone with income below this combined income level, would face povertyaccording to the basic need approach. There may however be some difficulties using thisapproach for cross country comparisons as clearly the goods and services consumed bythe average member of society in different countries would definitely vary.6 b ii) The poverty line is the minimum level of income deemed necessary to achieve anadequate standard of living. Determining the poverty line is usually done by finding theamount of money that is required to afford the basic goods and services needed by eachhousehold. According to the United Nations Development Program (UNDP), the povertyline is US$1 per day based on 1985 prices. All individuals with an income below thisthreshold are absolutely poor. This approach also suffers from the difficulty that thepoverty line in country may not be the same for others.6 b iii) The United Nations Development Program computes such a measure which isknown as the human development index (HDI). This is a socio-economic measure whichfocuses on three of the factors which affects poverty. These factors are:• GDP per capita – average income per person;• Longevity – Life expectancy;• Knowledge – Access to education and literacy rates.This method may be more appropriate since it incorporate more variables apart from justincome alone. EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS

×