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ECONOMICS

Question Paper

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Question 1

1. A decrease in earnings leads to a decrease in demand for a product. Explain [10]

this relationship between the demand for the product and consumer earnings.

2. Evaluate the consequences of increasing earnings on service sector producers [15]

(such as resorts) and primary sector producers (such as wheat farmers).

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Question 2
Pakistan's Economic Recovery Challenges

Pakistan continues to navigate complex economic challenges as a developing

nation with a rapidly growing, youthful population. The country's financial
situation remains precarious, with a substantial budget deficit driven by two main
factors: significant defense expenditure and escalating debt servicing costs, with
interest payments now consuming approximately 40% of the deficit. This fiscal
strain is further complicated by persistent current account deficits and an ongoing
dependence on external financial support.

In addressing these challenges, Pakistan has actively engaged with international

financial institutions, particularly the IMF. The latest IMF program outlines a
comprehensive set of structural reforms that the country must implement. These
include the privatization of state-owned enterprises, substantial reform of the
energy sector's subsidy structure, enhancement of tax collection mechanisms,
tightening of monetary policy, and the maintenance of a market-determined
exchange rate policy.

Pakistani government officials consistently emphasize the crucial nature of

international financial support for the country's economic recovery. They argue
that such support serves multiple purposes: it helps rebuild market confidence,
attracts foreign direct investment (FDI), assists in breaking the cycle of economic
instability, and facilitates access to additional multilateral funding from institutions
like the Asian Development Bank and World Bank.

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The historical context provides important insights into Pakistan's relationship with
international financial institutions. Since the 1980s, the country has participated in
more than twenty IMF programs, though their success has been mixed. A
recurring pattern has emerged: temporary improvements in external accounts
followed by reversals, leading to debates between the IMF's emphasis on
compliance issues and Pakistani perspectives on program design and
implementation capacity.

Development economists increasingly emphasize the critical importance of

enhancing human capital, particularly given Pakistan's demographic dividend. This
focus encompasses several key areas: comprehensive educational system reform,
expansion of technical skills development programs, promotion of gender
equality in workforce participation, and creation of youth employment initiatives.
These elements are considered fundamental to transforming Pakistan's economic
trajectory.

While multilateral development banks actively support various social and

infrastructure projects in Pakistan, including educational initiatives, green energy
development, and digital infrastructure expansion, critics argue that these
interventions require better integration with broader economic reforms and
stronger environmental safeguards. This highlights the ongoing challenge of
balancing development objectives with environmental protection.

A fundamental tension exists in Pakistan's policy landscape between immediate

macroeconomic stabilization goals and longer-term development objectives.
Current policy approaches tend to prioritize fiscal and monetary stabilization
measures over social development programs, raising questions about the optimal
balance between short-term stability and sustainable long-term growth. This
dilemma continues to shape Pakistan's economic policy decisions and its
relationship with international financial institutions.

1. State two functions of the International Monetary Fund (IMF). [2]

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2. Define the term human capital. [2]

3. Using a poverty cycle diagram, describe how Pakistan's government could [4]

intervene to break the country out of the poverty cycle.

4. Using an externalities diagram, explain how improving educational access for [4]

girls in Pakistan could contribute to a reduction in market failure.

5. Using information from the text/data and your knowledge of economics, [8]

evaluate the potential impact of the IMF and the World Bank on economic
development in Pakistan.

Question 3

1. Explain the concepts of consumer surplus and producer surplus. [10]

2. Examine the view that the best allocation of resources, from society’s point of [15]
view, occurs where the marginal private benefit equals the marginal private
cost.

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Question 4

1. Explain the view that an increase in price will lead to an increase in the quantity [10]
supplied whilst an increase in supply will lead to a decrease in price.

2. To what extent are subsidies the most effective way of encouraging the [15]

consumption of merit goods?

Question 5

1. Explain three factors that could lead to an increase in demand for soft drinks. [10]

2. Discuss three policies a government might use to reduce the consumption of a [15]
demerit good such as soft drinks.

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Question 6
The following diagram illustrates the market for bananas in Country A. D and S
represent the domestic demand and supply for bananas, while bananas can be
imported at the current world price of $3 per kg.

The government of Country A decides to impose a quota on banana imports of

150 000kg per month.

The demand and supply functions for the currency of Country A (the dollar ($)) are
given by:

Qd = 1900 - 18P

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Qs = 580 + 12P

where Qd is the quantity of dollars demanded per month, Qs is the quantity of

dollars supplied per month and P is the price of the dollar, measured in yen (¥).

The following table provides selected items of the balance of payments for
Country A in 2015.

Table 1

1. Assuming that there are no restrictions on the importing of bananas into [1]
Country A:

State the quantity of bananas which will be purchased each month in Country

2. Assuming that there are no restrictions on the importing of bananas into [1]
Country A:

Calculate the monthly expenditure on bananas imported into Country

3. Assuming that there are no restrictions on the importing of bananas into [1]
Country A:
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Calculate the domestic producer surplus.

4. Identify the price which would be paid by consumers in Country A per kg of [1]
bananas following the imposition of the quota.

5. Identify the quantity of bananas which would be purchased in Country A per [1]
month following the imposition of the quota.

6. Calculate the change in revenue earned by domestic producers of bananas in [3]

Country A as a result of the quota.

7. With reference to the diagram, explain why the welfare loss from the imposition [4]
of the quota is likely to be greater than the welfare loss resulting from a tariff of
$2 per kg.

8. Outline the reason why a fall in the price of the dollar should lead to an increase [2]
in the quantity of dollars demanded.

9. Assume that the dollar/yen exchange rate is in equilibrium. Using the functions, [3]
calculate the cost, in dollars, of a motorbike which costs ¥552 640.

10. Using examples from Table 1, outline the difference between debit items and [2]

credit items in the balance of payments.

11. Calculate the current account balance from the data given in Table 1. [2]

12. Explain two implications of a rising current account surplus. [4]

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Question 7
Indonesia's Path to Economic Reform

In Indonesia, citizens are optimistic that their new president will drive much-
needed reforms to spur economic progress. The nation’s priorities include
expanding infrastructure, cutting through bureaucratic red tape, and tackling
corruption. There’s also an ambition to enhance Indonesia’s position in the global
market, generate new employment opportunities, and upskill its youthful
workforce.

The government has already begun implementing certain measures, such as a

major power plant development initiative, as well as tax breaks to support young
industries. Sectors like transportation, telecommunications, metal production, and
agricultural processing are among those benefiting from these incentives. To
further support infrastructure spending, which is projected to reach USD 22
billion, fuel subsidies have been reduced, despite their role in making energy
affordable for low-income populations.

Nevertheless, Indonesia continues to face economic hurdles. Growth rates remain

modest, and consumer sentiment has dropped. Global prices for Indonesia’s
primary exports—coal, gold, and palm oil—have decreased, contributing to
economic strain. Inflation has reached 7.26%, surpassing the central bank’s target
of 3–5%, while weak global economic growth has exacerbated domestic
challenges.

Experts have noted the importance of enhancing export competitiveness through

increased investment in education and vocational training to strengthen the
workforce.

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The cost of doing business in Indonesia is high due to extensive regulatory

procedures. To counter this, the government is adopting policies aimed at
improving clarity for international investors and bolstering the role of small
businesses. Additionally, initiatives like expanding micro-credit access and easing
loan availability are intended to facilitate financing for entrepreneurs and small
enterprises.

Lastly, trade protection measures are on the rise as the government seeks to
manage imports, support local markets, and strengthen domestic industries in
response to these economic pressures.

Figure 1 – Indonesian development statistics

2007 2008 2009 2010 2011 2012 2013 2014

Relative poverty 16.6 15.4 14.2 13.3 12.5 11.7 11.5 11.0

(% of population)

Absolute poverty 37 35 33 31 30 29 29 28

(in millions)

Gini coefficient 0.35 0.35 0.37 0.38 0.40 0.41 0.41 -*

Human Development -* 0.654 -* 0.671 0.678 0.681 0.684 -*

1. Define micro-credit. [2]

2. Define infrastructure. [2]

3. Using a production possibilities curve (PPC) diagram, explain how the [4]
government’s large infrastructural investment in will affect Indonesia’s
production possibilities.

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4. Using a demand and supply diagram, discuss the impact on the market for fuel [4]
of the government’s decision to reduce fuel subsidies.

5. Using the text/data and your knowledge of economics, discuss the possible [8]
impacts of market-oriented and interventionist policies on Indonesia’s
economic development.

Question 8

1. Evaluate the effectiveness of state regulations in achieving a reduction in the [10]

consumption of demerit goods.

2. Explain why authorities impose price floors in the market for farm products. [15]

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Question 9

1. Explain why the consumption of merit goods, such as nutritious food, can lead [10]
to positive externalities of consumption.

2. Discuss whether advertising by the government is the most appropriate way of [15]
increasing consumption of a merit good.

Question 10

1. Assess the perspective that monopoly is an unfavorable market structure as it [10]

fails to achieve productive and allocative efficiency.

2. Explain the connection between the principle of diminishing returns and a [15]
company's short-term cost curves.

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Question 11
Nigeria and Ghana

Nigeria and Ghana are neighboring countries in West Africa.

Nigeria

Nigeria's economy is dominated by its oil sector. It is Africa's largest oil producer.
Oil production and related activities contribute about 65% of gross domestic
product (GDP), approximately 75% of government revenue and over 90% of the
country's exports. Natural gas contributes an additional 7% to exports.
Subsistence agriculture remains crucial for most Nigerians' livelihoods, yet the
country imports significant quantities of its food.

Since 2007, the Nigerian government has secured substantial loans from China,
the World Bank, African Development Bank, and various international partners to
develop its infrastructure. The global oil price crash of 2014-2015 severely
impacted economic growth. Particularly, declining oil prices during this period
reduced GDP growth to 2.7% in 2015, causing numerous infrastructure projects to
be suspended.

The recent volatility in oil prices and sluggish growth in non-oil sectors have
dampened growth prospects. Nigeria has responded with various policy
measures, including reducing fuel subsidies and implementing import restrictions.
Fuel subsidies have been significantly reduced, though not eliminated. Corruption,
particularly in the oil sector, remains a persistent challenge.

Ghana

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Ghana's economy relies heavily on mining and mineral processing for export
revenue. The mining sector accounts for 14% of GDP but generates over 45% of
foreign exchange earnings. Ghana is Africa's largest gold producer. Additionally,
Ghana has significant reserves of bauxite, manganese, and recently discovered
offshore oil deposits. Despite its mineral wealth, the mining sector employs only
about 1.5% of the population. Ghana typically imports about 45% of its food
requirements.

A relatively high per capita GDP for the region masks significant income
inequality. The Ghanaian economy maintains strong ties with regional partners
through the Economic Community of West African States (ECOWAS).

Ghana's economy remains susceptible to global commodity price fluctuations and

climate-related challenges. Rising costs in the mining sector, particularly in deep-
level gold mining, have squeezed profit margins. Ghanaian authorities
acknowledge these challenges and emphasize the need for economic
diversification.

1. Define the term infrastructure. [2]

2. Define the term customs union. [2]

3. Nigeria and Ghana have different Gini coefficient values. Using a Lorenz curve [4]
diagram, describe what this signifies.

4. Using a demand and supply diagram, outline the impact on the price and [4]
quantity of fuel consumed in Ghana, caused by eliminating fuel subsidization.

5. Using information from the text/data and your knowledge of economics, [8]
compare and contrast factors that are likely to lead to economic development in
Nigeria and Ghana.

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Question 12

1. To what extent is marketing the most effective way of increasing the [10]
consumption of beneficial goods?

2. Explain how the pricing mechanism reallocates resources when there is an [15]
increase in demand for a product or service.

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Question 13
Declining Trade Terms and Economic Impact in Australia

In the second quarter of 2015, Australia’s terms of trade saw a significant drop,
declining by around 5.8% from the previous quarter. This marked the steepest
decline since the 2008 financial crisis, according to the Australian Bureau of
Statistics (ABS), raising concerns about the impact on Australia’s current account
deficit.

The current terms of trade index is now far below its peak in 2011, largely driven
by the ongoing fall in prices for major exports such as iron ore, coal, and energy.
This shift is particularly crucial as Australia’s economic reliance on liquefied natural
gas exports continues to grow.

A Commonwealth Bank economist remarked that the era of income growth driven
by high commodity prices has come to an end. The economist explained that “the
continued drop in the terms of trade reflects a significant reduction in purchasing
power for Australian households and businesses, a trend that has become more
evident over recent years.” Specifically, the decline in iron ore and coal prices has
weighed heavily on export revenues and has slowed real gross national income
growth.

Falling export prices are projected to have a negative impact on the government’s
revenue expectations, potentially dimming hopes for a swift economic recovery.

While the volume of exports, particularly iron ore, is reaching new highs, the
income generated by top exporters has been declining. Some economists worry
that this trend could eventually push Australia into a recession, breaking its 24-
year streak of economic growth.

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The Australian dollar’s slight drop in value—down 0.4%—has done little to

counterbalance this trend. The Reserve Bank of Australia has hinted at possible
measures to further adjust the currency, which currently stands at around AUD 1 =
USD 0.73.

The ongoing decline in terms of trade has intensified calls for both government
and business leaders to focus on productivity improvements. The Reserve Bank of
Australia’s manager noted that productivity had been lagging for over a decade
but had been overshadowed by rising terms of trade up until 2013. As
commodity prices fall, the underlying weaknesses in Australia’s productivity
growth are becoming increasingly evident.

Figure 1 – Australian Export and Import Indices

Year Index of export prices Index of import prices

2011 100 100

2015 77 108

1. Define the term current account deficit. [2]

2. Define the term gross national income. [2]

3. Using a definition of the terms of trade, explain the terms of trade change in [4]

Australia from 2011 to 2015.

4. Using a definition of price elasticity of demand, explain why “the revenues [4]
received by the nation’s biggest exporters continue to fall” (paragraph 5).

5. Referencing the text/data and your knowledge of economics, discuss the [8]
possible effects of the fall in Australia’s terms of trade on the Australian
economy.
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Question 14

1. Discuss the view that price controls imposed by governments on the market [10]

for leased accommodation should never be used.

2. Explain one supply factor and one demand factor that might lead to a rise in [15]

the price of leased accommodation.

Question 15

1. Explain why an increase in incomes over time may lead to an increase in [10]
demand for some products but a decrease in demand for other products.

2. The income elasticity of demand for basic commodities tends to be relatively [15]
low, while the income elasticity of demand for manufactured products and
services tends to be higher. Examine the likely effects of this for individual
producers and for the economy as a whole.

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Question 16

1. Discuss the consequences for different stakeholders when the government [10]

imposes a maximum price on a market.

2. Explain the impact of a minimum price on market outcomes. [15]

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Question 17
South African opposition towards corn tariff

South Africa, once a major corn exporter, is facing a critical juncture due to severe
drought. Local farmers, represented by Grain SA, are seeking government
intervention to protect their livelihoods. They have petitioned the International
Trade Administration Commission (ITAC) to impose tariffs on imported corn, a
move aimed at shielding domestic producers from lower global prices.

However, this proposal has sparked a heated debate. South African corn millers
oppose the tariff, arguing that it would increase consumer prices and harm the
livestock industry, which relies heavily on corn as a feedstock. They contend that
South Africa's self-sufficiency in corn production renders protectionist measures
unnecessary.

The global market dynamics are further complicating the situation. The United
States, a major corn producer, is currently experiencing a surplus, leading to
significantly lower international prices. This price disparity has put South African
farmers at a disadvantage, as their domestic production costs are significantly
higher due to the drought. For instance, the price of US corn has halved to USD
145 per ton, while South African corn prices have doubled to USD 348 per ton.

The potential economic implications of this policy decision are far-reaching. A

tariff on imported corn could lead to higher food prices, inflation, and reduced
consumer purchasing power. Additionally, it could trigger retaliatory measures
from other countries, impacting South Africa's export market.

On the other hand, failing to protect domestic farmers could lead to job losses,
reduced agricultural output, and increased reliance on food imports. The
government faces a delicate balancing act between protecting domestic
producers and safeguarding consumer interests.

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South Africa is projected to import approximately 970,000 tons of corn this year
and an additional 3.8 million tons in the following 12 months. The depreciation of
the rand further exacerbates the situation, as it increases the cost of imports and
negatively impacts the country's current account balance.

The South African government must carefully consider the potential consequences
of imposing a tariff on imported corn. A well-informed decision is crucial to
ensure the long-term sustainability of the country's agricultural sector and overall
economic well-being.

1. Define the term current account [2]

2. Define the term depreciation [2]

3. Using an exchange rate diagram, explain how “the need to import corn” will [4]
affect the value of the South African rand

4. Using a demand and supply diagram, explain the effect of government [4]
subsidies on the US corn market.

5. Using information from the text/data and your knowledge of economics, [8]
evaluate the economic impacts of trade protection in the South African corn
market.

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Question 18

1. Discuss the significance of price elasticity of demand (PED) for a government [10]
imposing an indirect tax on a product.

2. Explain two reasons why the demand for basic raw materials might be price [15]
inelastic.

Question 19

1. Discuss the consequences of providing a subsidy for goods such as farm [15]
products.

2. Explain why administrations provide subsidies for some goods and services. [10]

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Question 20

1. A government decides to impose an indirect tax on sugary beverages. Discuss [10]

the consequences for the stakeholders in these markets.

2. With reference to the concept of surplus demand, explain how a decrease in [15]
supply of a product would lead to a new market equilibrium.

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Question 21
Note that widgets are an imaginary product.

In Country X, the supply and demand for widgets are given by the functions

Qs = − 45 + 4.5_P_
Qd = 180 − 3_P_

where P is the price per widget in dollars ($), Qs is the quantity of widgets
supplied (thousands per year) and Qd is the quantity of widgets demanded
(thousands per year).

The supply (S) and demand (D) functions are represented in Figure 1.

An increase in costs of production has resulted in a new supply function:

Qs_1 = − 60 + 3_P

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Figure 2 shows the demand for and supply of widgets in Country Y.

Figure 2

The government of Country Y decides to impose an indirect tax of $10 per

widget.

A music concert is to take place in Country Z. 40 000 tickets are available for the
concert. Figure 3 shows the demand (D) for tickets at this concert.

Figure 3

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The fixed costs for the concert have been calculated as $3 million, while it is
expected that there will be no variable costs.

1. Identify the slope of the supply curve. [1]

2. Outline the reason why the quantity supplied increases as the price rises. [2]

3. Draw and label the new supply curve on Figure 1. [1]

4. Using your answer to part (c), outline the reason why an increase in costs of [2]
production has resulted in a new supply function.

5. Calculate the change in producer surplus resulting from the increase in costs of [2]
production.
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6. Define the term price elasticity of supply. [2]

7. The time taken to produce goods is an important determinant of the price [4]
elasticity of supply.

Apart from time, explain two factors which influence the price elasticity of
supply.

8. With reference to Figure 2, explain how the incidence of taxation on consumers [4]
and/or producers will be influenced by the price elasticity of supply.

9. Draw and label the marginal revenue (MR) curve for the concert on Figure 3. [1]

10. Calculate the maximum revenue that could be earned from selling tickets for [2]
the concert.

11. Calculate the average fixed cost per ticket if all tickets are sold. [1]

12. Assuming the event organizers aim to maximize profit, calculate the profit that [3]
will be made from the concert.

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Question 22

1. Using a diagram, explain why companies in monopolistic competition are [10]

neither allocatively nor productively efficient.

2. Examine the view that the market for groceries is more beneficial to consumers [15]
if dominated by a monopoly retailer (supermarket) rather than by a large
number of small stores operating under monopolistic competition.

Question 23

1. Explain the impact on buyers, manufacturers and the administration of a price [10]
floor being introduced in a farming market.

2. Evaluate the view that a price ceiling is an ineffective policy to protect low- [15]

income buyers.

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Question 24

1. Explain this connection between the demand for the product and consumer [10]
earnings.

2. Evaluate the effects of increasing earnings on service industry producers (such [15]
as resorts) and primary industry producers (such as wheat farmers).

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Question 25
Note that widgets and pidgets are imaginary products.

In the country of Burbia, the demand and supply of widgets are given by the
functions

Qd = 249 − 4P
Qs = 150 + 14P

where Qd is the quantity demanded per month, Qs is the quantity supplied per
month and P is the price per widget in dollars ($).

The final of the 2018 Football World Cup is expected to be held in the Luzhniki
stadium, Moscow.
The capacity of the stadium is 80 000. The expected cost of holding the final is
US$12 million, which is not dependent on the number of people attending the
match. All tickets will be sold for the same price.

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1. Calculate the equilibrium price and quantity per month. [2]

2. Calculate the excess demand/excess supply (state which of these) at a price of [2]
$8.50.

3. Calculate the price at which excess demand of 18 widgets would result. [2]

4. A demand curve is drawn under the assumption of ceteris paribus. [2]

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Using an example, outline why the assumption of ceteris paribus is necessary

when analysing the effect of a change in price on the quantity demanded of a
product.

5. Widgets and Pidgets have negative cross price elasticity of demand (XED). [2]
Explain how the demand function for Widgets, Qd = 249 − 4P, is likely to
change as a result of an increase in the price of Pidgets.

6. The demand for widgets is considered to be unit elastic at the current price. [2]

Outline the meaning of the term unit elastic demand.

7. Explain two determinants of the price elasticity of demand (PED). [4]

8. Two products are in competitive supply. Using an example, outline how the [2]
supply for one of them is likely to be affected by an increase in the price of the
other.

9. State the value of the price elasticity of supply (PES) for tickets to the 2018 [1]
Football World Cup final.

10. On the diagram draw and label the supply curve for tickets at the 2018 [1]
Football World Cup final.

11. Draw and label the marginal revenue (MR) curve for the 2018 Football World [1]
Cup final.

12. Using the diagram and your answers to parts (j) and (k), explain how the [4]
organizers could achieve their goal of profit maximisation.

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Question 26

1. Explain why an increase in earnings over time may lead to an increase in [10]
demand for some products but a decrease in demand for other products.

2. The income elasticity of demand for basic commodities tends to be relatively [15]
low, while the income elasticity of demand for manufactured products and
services tends to be higher. Examine the likely effects of this for individual
producers and for the economy as a whole.

Question 27

1. Evaluate the policies a government might use to increase the consumption of [10]
college education.

2. Analyse the private and external benefits associated with the consumption of [15]

college education.

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Question 28

1. Explain how an increase in the price of train travel might affect the demand for [10]
its complements and its substitutes.

2. Evaluate the view that the use of legislation is the most effective way to reduce [15]
negative externalities.

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