ANSWER NUMBER 1

(i)

Using the elasticity of supply formula

Es=%ΔQs / %ΔP
where:

• Es = 1 (given)
• %ΔP=P2−P1 / P1×100
• %ΔQs=Qs2−Qs1 / Qs1×100

Computing the percentage change in price

%ΔP=50−40 / 40×100 = 10 / 40×100=25%

Solving for %ΔQs

Since Es = 1,

1=%ΔQs / %ΔP
%ΔQs=25%

Solving for X (Quantity Supplied at 50$)

X−80 / 80×100=25
X−80=25 / 100×80
X - 80 = 20
X = 100

So, the quantity supplied at $50 is 100 tonnes.

(ii)

Using the price elasticity of demand formula

Ed = %ΔQd / %ΔP

where:

• Ed=0.5E_d = 0.5 (given)

• %ΔQd=Qd2−Qd1 / Qd1×100
• %ΔP=P2−P1 / P1×100
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Computing the percentage change in quantity demanded

%ΔQd = 85,000 − 95,000 / 95,000×100

= −10,000 / 95,000×100
= -10.53%

Solve for %ΔP

0.5= −10.53 / %ΔP0.5 =

%ΔP=−10.53 / 0.5 = -21.06%

Solve for Z

Since the price at quantity 95,000 is $80$,

Z−80 / 80×100=−21.06
Z−80 = −21.06 / 100×80
Z - 80 = -16.85
Z = 63.15

So, the price of good Z is $63.15

(iii) graph indicating the equilibrium price and quantity

To determine the equilibrium price and quantity:

• The equilibrium is where Quantity Demanded = Quantity Supplied.

• From the table, at $60, the Quantity Demanded = 110 tonnes and the Quantity Supplied =
110 tonnes.
• Thus, the equilibrium price = $60 and equilibrium quantity = 110 tonnes.

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Here's the graph showing the demand and supply curves for good X. The equilibrium price and
quantity are marked at (110 tonnes, $60), where the demand and supply curves intersect. Let
me know if you need any modifications or explanations!

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ANSWER NUMBER 2

Given Data:

• Initial cost per unit = $50

• Initial import tariff = 20%

• Initial selling price per unit = $100

• Total sales revenue = $85,000

• New import tariff = 30%

• Elasticity of demand = 3

Initial Units Sold

Revenue is given by:

Revenue = Price per unit × Quantity sold

85,000 = 100×Q

Q=85,000 / 100=850 units

So, the company initially sold 850 units.

The New Selling Price

The price increase due to the tariff is calculated as follows:

• Initial import tariff per unit = 50 × 0.2 = 10

• New import tariff per unit = 50 × 0.3 = 15

• Increase in tariff per unit = 15 – 10 = 5

• New price per unit = 100 + 5 = 105

So, the new price per unit is $105.

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The Change in Quantity Demanded

Using the price elasticity of demand formula:

Ed = %ΔQ / %ΔP

We calculate the percentage change in price:

%ΔP=105−100 / 100×100=5%

Using Ed = 3:

3= %ΔQ / 5

%ΔQ=3×5=15%

Since demand decreases when price increases:

New Quantity=850−(0.15×850)

850 - 127.5 = 722.5

Rounding down, the company will sell 722 units.

New Revenue

New Revenue=New Price×New Quantity

=105×722

= 75,810

Revenue Before and After

• Initial Revenue = $85,000

• New Revenue = $75,810

Since the new revenue is lower than the initial revenue, the company's revenue decreases due
to the tariff increase.

(i) The company will sell 722 units after the price increase.
(ii) The company's revenue will decrease from $85,000 to $75,810 due to the increase in the
import tariff.

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ANSWER NUMBER 3

(a) Demand and Supply Schedules

To obtain the demand and supply schedules, choose different prices (PxP_x) and compute the
corresponding quantities demanded (QDQ_D) and supplied (QSQ_S) using the given functions:

QD =480 − 20Px
QS = 60Px

For example, if we choose Px = 0, 5, 10, 15, 20, 25, we can calculate QD and QS.

(b) Graphing the Curves

Plot the values from part (a) on a graph with Px on the x-axis and quantity on the y-axis. The
demand curve will slope downward, and the supply curve will slope upward.

(c) Market Equilibrium

Find the equilibrium by setting QD=QS:

480 − 20Px = 60Px

Solve for Px, then substitute back into either equation to find Q.

Here is the demand and supply schedule:

Price (Px) Quantity Demanded (QD) Quantity Supplied (QS)

0 480 0
5 380 300
10 280 600
15 180 900
20 80 1200
25 -20 1500

The market equilibrium price and quantity are:

• Equilibrium Price (Px) = 6

• Equilibrium Quantity (Q) = 360

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graph of the demand and supply curves

• The blue line represents the demand curve (QD=480−20PxQ_D = 480 - 20P_xQD
=480−20Px), which slopes downward.

• The red line represents the supply curve (QS=60PxQ_S = 60P_xQS=60Px), which slopes
upward.

• The green point represents the equilibrium at (Px=6,Q=360)(P_x = 6, Q = 360)(Px

=6,Q=360).

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ANSWER NUMBER 4

The increase in VAT results in a higher price, leading to a decrease in quantity demanded
(movement along the demand curve) rather than a shift in the demand curve itself.

ANSWER NUMBER 5

i. Fixed Costs and Variable Costs

• Fixed Costs: These are costs that do not change regardless of the level of production or
business activity. They are incurred even if no production occurs. Examples include:

o Rent for factory space: Even if the factory is not in operation, the rent remains
constant.

o Salaries of permanent staff: Employees on fixed salaries are paid regardless of

how much the business produces.

• Variable Costs: These costs change in direct proportion to the level of production or
business activity. The more products are made, the higher these costs will be. Examples
include:

o Raw materials: The cost of raw materials increases as more products are
produced.

o Labor wages for hourly workers: If more workers are needed as production
increases, labor costs increase accordingly.

ii. Explicit Costs and Implicit Costs

• Explicit Costs: These are direct, out-of-pocket costs incurred by a business in the course
of producing goods or services. These costs are easily identifiable and measurable.
Examples include:

o Rent paid for office space

o Salaries paid to employees

o Cost of raw materials and supplies

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 • Implicit Costs: These are the opportunity costs of using resources owned by the
business. They are not direct out-of-pocket expenses but represent the value of what
could have been earned if resources were employed in an alternative use. Examples
include:

o Owner's time: If an entrepreneur spends time running their business instead of

working elsewhere, the opportunity cost is the potential salary they could have
earned.

o Using a building owned by the business instead of renting it out: The foregone
rental income is an implicit cost.

b) Factors of Production

The factors of production are the resources used to produce goods and services. They are
typically classified into four main categories:

1. Land: This refers to all natural resources used in production. These can include land
itself, as well as resources like minerals, water, and forests. Example:

o Agricultural land: Used for farming crops.

o Oil reserves: Extracted for use in energy production.

2. Labor: This is the human effort used in production, including both physical and mental
work. It refers to the workers who contribute their skills and time to produce goods and
services. Example:

o Factory workers: They operate machinery and assemble products.

o Software developers: They write code to develop applications or systems.

3. Capital: This refers to man-made resources used in production. It includes machinery,

tools, buildings, and technology that help in the creation of goods and services.
Example:

o Machinery and equipment: Used in manufacturing processes.

o Office buildings: Used by businesses for operations and employee activities.

Each of these factors plays a critical role in the production process and determines the output
and efficiency of an economy.

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ANSWER NUMBER 6

(a) Total Production Curve and Marginal Product of Labour

The production function is given as:

Q = 2800L - 100L^2

1. Total Production Curve

The given equation Q = 2800L - 100L^2 already represents the total production curve,
where Q is the total output and L is the amount of labor.
2. Marginal Product of Labour (MP_L)
The marginal product of labor is found by differentiating the production function with
respect to LL:

MPL=dQ / dL=2800−200L

This shows that the marginal product of labor decreases as more labor is used.

(b) Marginal and Average Costs of Production & Optimal Production Size

The total cost function is given as:

TC = 2000 + 900L

1. Marginal Cost (MC):

Marginal cost is found by differentiating the total cost function:

MC = dTC / dQ = d(2000+900L)dL×dL

Since dTC / dL=900, we use the marginal product of labor:

MC=900 / MPL = 900 / 2800−200L

2. Average Cost (AC):

The average cost is given by:

AC = TC / Q = 2000+900L / 2800L - 100L^2

3. Optimal Production Size:

The optimal production size occurs when marginal cost (MC) equals marginal revenue
(MR). If the firm is in a perfectly competitive market, MR equals the price of the product.

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 Given no price information, we can find the labor input where MP_L is maximized by
setting:

dMPL / dL = -200 = 0

Since this derivative is always negative, MP_L decreases as L increases. The optimal
production level depends on where MC = MR, which requires more information about
pricing.

Would you like a graph of the production and cost curves?

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ANSWER NUMBER 7

Monopoly Case in Malawi

In Malawi, a notable example of a business monopoly is the Electricity Generation Company

(EGENCO) and Electricity Supply Corporation of Malawi (ESCOM), that holds a monopoly on
electricity generation supply respectively in Malawi.

It would it be better to have more suppliers since having more suppliers in a market generally
leads to increased competition, lower prices, better quality, and more innovation. In contrast,
monopolies can lead to inefficiency, higher prices, and lower consumer choice. However, in
some industries (such as utilities), monopolies might be more efficient due to economies of
scale.

(a) Definition of Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total monetary value of all goods and services produced
within a country's borders in a given period (usually a year). It is a key indicator of a country's
economic performance.

(b) The Four Components of GDP

GDP is typically measured using the expenditure approach, which includes four main
components:

1. Consumption (C)

o This includes all spending by households on goods and services (e.g., food,
clothing, rent, healthcare).

2. Investment (I)

o This refers to business expenditures on capital goods, construction, and

inventories. It includes investments in machinery, buildings, and new technology.

3. Government Spending (G)

o This includes government expenditures on goods and services such as

infrastructure, defense, healthcare, and education.

4. Net Exports (Exports - Imports) (X - M)

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 o Exports represent goods and services sold to foreign markets, while imports are
those purchased from other countries. GDP is positively affected by net exports
when exports exceed imports.

Thus, the formula for GDP is:

GDP = C + I + G + (X - M)

(c) Definition and Impact of the Shadow Economy

Shadow Economy refers to economic activities that take place outside the official economy and
are not recorded in a country’s GDP. This includes unregistered businesses, informal labor, black
markets, and tax evasion.

How does the Shadow Economy influence GDP?

• It underestimates GDP because these activities are not officially recorded.

• It reduces tax revenues, leading to lower government spending on public services.

• It creates unfair competition with formal businesses that pay taxes.

• In some cases, it provides employment and income opportunities where formal jobs are
scarce.

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ANSWER NUMBER 8

(a) Explanation of Aggregate Demand and Aggregate Supply

1. Aggregate Demand (AD)

Aggregate Demand represents the total demand for all goods and services in an
economy at a given price level over a specific period. It is calculated using the formula:

AD = C + I + G + (X - M)

where C is consumption, I is investment, G is government spending, and (X - M) is net exports.

o Example: If consumer confidence increases, households may spend more,

leading to a rise in AD.

2. Aggregate Supply (AS)

Aggregate Supply refers to the total quantity of goods and services that producers in an
economy are willing and able to supply at different price levels.

o Example: If technological advancements improve productivity, firms can produce

more, increasing AS.

(b) Two Factors That Might Cause Economic Growth

1. Investment in Infrastructure

o When a country invests in infrastructure (e.g., roads, electricity, internet),

businesses operate more efficiently, leading to economic growth.

o Example: Building high-speed rail networks in China improved trade and business
operations, boosting GDP.

2. Technological Advancements

o New technology increases productivity, allowing firms to produce more goods

with the same number of resources.

o Example: The rise of automation in manufacturing has led to increased

production with lower costs.

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(c) How a Reduction in Interest Rates Shifts the Aggregate Demand Curve

A decrease in interest rates affects Aggregate Demand (AD) in the following ways:

1. Encourages Consumption (C)

o Lower interest rates reduce borrowing costs, encouraging consumers to take

loans for houses, cars, and other goods.

2. Boosts Investment (I)

o Businesses find it cheaper to borrow money for expansion, leading to increased

production and employment.

3. Increases Net Exports (X - M)

o A reduction in interest rates may lead to currency depreciation, making exports

cheaper and boosting foreign demand.

Illustration of AD Shift Due to Lower Interest Rates

• The AD curve shifts rightward (AD → AD1) due to increased spending and investment.

Would you like a graph to illustrate this?

ANSWER TO NUMBER 9

Given:

• Pete's initial income = $2,000 USD

• Pete's new income = $2,000 + $300 = $2,300 USD
• Percentage of income spent on chocolate = 10%

(a) Change in Total Spending on Chocolate

Initial spending on chocolate:

Initial Spending = 10% × 2000 = 200 USD

New spending on chocolate:

New Spending = 10% × 2300=230 USD

Change in spending on chocolate:

Δ Spending = 230 – 200 = 30 USD

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So, Pete's total spending on chocolate increases by $30 USD.

(b) Income Elasticity of Demand for Chocolate

Income elasticity of demand (EY) is given by the formula:

EY = % change in quantity demanded / % change in income

Since Pete always spends a fixed percentage (10%) of his income on chocolate, the quantity
demanded for chocolate does not change with income—it increases proportionally.
Thus, chocolate is a normal good with unitary income elasticity (EY = 1).

Calculations:

% change in spending = 30 / 200×100=15%

%change in income = 300 / 2000×100=15%
EY=15% / 15% = 1

Interpretation: Since EY = 1, chocolate is a unitary income elastic good, meaning Pete's spending
on chocolate increases at the same rate as his income.

ANSWER NUMBER 10

Limitations of Using GDP as a Measure of Economic Performance

While Gross Domestic Product (GDP) is widely used to measure economic performance, it has
several limitations:

1. Does Not Measure Income Distribution

o GDP may grow, but the benefits might be concentrated among the wealthy,
increasing inequality.
o Example: A country with a growing GDP but rising poverty levels does not
necessarily indicate better well-being for all citizens.
2. Ignores Non-Market Activities
o Informal labor (e.g., unpaid household work or volunteer services) is not included
in GDP calculations.
o Example: A mother caring for her children full-time is not counted in GDP,
despite providing significant economic value.
3. Does Not Consider Environmental Degradation
o GDP includes economic activities that harm the environment, such as
deforestation and pollution, without considering their negative effects.
o Example: A factory increasing production may boost GDP but also cause air and
water pollution, reducing long-term economic sustainability.
4. Focuses on Quantity, Not Quality of Growth
o GDP does not measure happiness, education quality, or healthcare improvements.

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 oExample: Two countries may have the same GDP, but one may have better public
services and higher life satisfaction.
5. Does Not Account for the Shadow Economy
o Many developing nations have large informal sectors that contribute to economic
activity but are not recorded in GDP.
o Example: Street vendors and unregistered businesses in countries like India or
Nigeria contribute significantly to economic output but are not reflected in GDP
figures.

(a) The Effect of Environmental Concerns Such as Pollution on Economic Growth

1. Negative Impact on Public Health and Productivity

o Air and water pollution lead to increased healthcare costs and reduced workforce
productivity.
o Example: High air pollution in cities like Beijing results in respiratory diseases,
increasing medical expenses and reducing worker efficiency.
2. Cost of Environmental Damage
o Economic growth from industries such as mining and manufacturing can lead to
deforestation, climate change, and loss of biodiversity, requiring costly cleanup
efforts.
o Example: The oil spill in the Gulf of Mexico led to billions of dollars in cleanup
costs and economic damage to the fishing and tourism industries.
3. Regulatory Costs and Green Economy Transition
o Governments impose regulations and taxes on polluting industries, increasing
costs but encouraging cleaner technology.
o Example: Carbon taxes on coal-based power plants force businesses to invest in
renewable energy.

(b) The Economic Business Cycle and Its Relation to GDP

The business cycle refers to the natural rise and fall of economic activity over time, characterized
by four phases:

1. Expansion (Boom Phase)

o GDP increases, unemployment falls, and consumer spending rises.
o Example: The U.S. tech boom in the late 1990s led to rapid economic growth.
2. Peak
o The economy reaches its highest point of growth before slowing down.
o Example: The real estate bubble in 2007 marked a peak before the financial crisis.
3. Contraction (Recession)
o GDP declines, unemployment rises, and business investment slows.
o Example: The 2008 financial crisis led to a global recession, with declining
production and high job losses.
4. Trough (Recovery Begins)

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o The economy stabilizes and begins to grow again as businesses regain confidence.
o Example: The post-pandemic economic recovery in 2021 saw increasing GDP
and job creation.

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