Economics Revision kit Questions November 2020

QUESTION ONE

(a) Explain four methods used the government to stabilise agricultural prices. : (4 marks)

(b) Using suitable examples, differentiate between the following terms as used in economics:

(c) (i) “Basic human wants” and “secondary human wants”. – 3 (4 marks)

(ii) “Public good” and “merit good”. (4 marks)

(iii) “Stable equilibrium” and unstable equilibrium” (4 marks)

(d) With the aid of a well labelled diagram, illustrate the effect of a simultaneous increase in the income of the consumer and increase in fuel prices. (4 marks)
(Total: 20 marks)

QUESTION TWO

(a) With the help of a diagram, discuss the concept of an individual engel curve as applied in the theory of consumer behaviour. (5 marks)

(b) Citing four examples, explain the significance of mobility of factors of production. (8 marks)

(c) A firm uses two factors of production, labour and capital in the long-run. The price per unit of labour is Sh.1,200 while the price per unit of capital is Sh.900. The firm has a budget of Sh.72,000 which it uses entirely on labour and capital to produce an output level of 500,000 tons.

Required:

(i) With the help of a diagram, derive the optimal point of the firm. (4 marks)

(ii) Determine the firm’s marginal rate of technical substitution (MRTS). (3 marks)
(Total: 20 marks)

QUESTION THREE

(a) Examine three sources of monopoly power. S (6 marks)

(b) With the aid of a well labelled diagram, explain the equilibrium level of a firm operating under monopolistic market structure in the long run. (6 marks)

(c) Assume that a producer has the possibility of discriminating between the domestic and foreign markets for a product with the demand functions given as follows:

Q1 = 16-0.2 P1 (Domestic market)
Q2 =90-0.5 P2 (Foreign market)

Total Cost (TC) of production is given as:

TC =50+20Q

Required:

Determine the level of output and price to be charged for:

(i) Domestic market. (4 marks)

(ii) Foreign market. (4 marks)
(Total: 20 marks)

QUESTION FOUR

(a) A small hypothetical economy has the following information:

I = I0
G= G0
T= α0+α1Y
C = Consumers expenditure
I = Private investment
G = Government spending
T = Taxes

Required:

(i) Determine the marginal propensity to save. (2 marks)

(ii) Derive the equilibrium level of income and taxes. (6 marks)

(b) Differentiate between “seasonal unemployment” and “frictional unemployment”. (4 marks)

(c) Explain the term “economic planning”. (2 marks)

(d) Highlight six characteristics of a good economic plan. (6 marks)
(Total: 20 marks)

QUESTION FIVE

(a) Enumerate four factors that determine the velocity of money in circulation. (4 marks)

(b) (i) Explain the relationship between the multiplier and the accelerator. (4 marks)

(ii) Evaluate four benefits that might accrue to an economy as a result of accelerator chee (8 marks)

(c) Summarise four factors that might lead to an inward shift in the optimal point of a firm. (4 marks)
(Total: 20 marks)

QUESTION SIX

(a) Justify five reasons for differential interest rates in an economy. (5 marks)

(b) With the aid of a diagram, describe the concept of liquidity trap. (4 marks)

(c) Using suitable examples, provide three reasons for interest rate decontrol in an economy. (6 marks)

(d) Summarise five reasons that make it possible for commercial banks to create credit. (5 marks)
(Total: 20 marks)

QUESTION SEVEN

(a) Summiarise six corrective measures that developing countries should institute to correct the persistent deficits in their balance of payments position. (6 marks)

(b) Discuss four policy recommendations that developing countries should institute to reduce regional imbalances in their economies. (8 marks)

(c) Justify six reasons why external debt problems is a major policy issue in developing countries. (6 marks)
(Total: 20 marks)



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