TUTORIAL SHEET

Course: ECONOMICS SCIENCE

Level: HND
Specialty: All specialties

1. The supply and demand for concert tickets are given in the table below

Price (FCFA) 0 40 80 120 160 200 240 280 320 360 400
Quantity Demanded 15 14 13 12 11 10 9 8 7 6 5

Quantity Supplied 0 0 0 0 0 1 3 5 7 9 11

Required:

(a) Plot the supply and demand curves to scale and establish the equilibrium price and quantity. (05 marks)

(b) What is the excess supply or demand when price is 240 FCFA and 360 FCFA? (02 marks)

(c) Describe the market adjustments in price induced by these two prices. (02 marks)

(d) Does an excess or surplus imply market failure? (01 marks)

SOLUTION

(a) The diagram shows the supply and demand curves from the data in the table. These curves intersect at the
equilibrium price 320 FCFA and the equilibrium quantity 7 units.

(b) Excess demand is 6 and excess supply is 3.

(c) With excess demand the price is bid up, with excess supply the price is pushed down (explain further).

(d)Not necessary. The market forces of demand and supply can restore equilibrium in the market.

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2. Suppose you are given the following data on incomes and expenditures for EMAS republic, in current prices
for factors of production and outputs.
Consumption expenditures 2,500
Employment compensation 2,800
Government expenditure 800
Net indirect taxes 150
Exports 1,200
Gross corporate surplus and mixed income 1,050
Investment expenditure 600
Imports 1,100

(a) What is the value of nominal GDP measured by expenditures?

(b) What is net domestic income?

(c) What is the value of nominal GDP measured by the income approach?

SOLUTION

(a) Nominal GDP by expenditures= C + I + G + X −IM = 4,000.

(b) Net domestic income=Employ income + Business income + invest income= 3,650.

(c) Nominal GDP by income=Net domestic income + capital consumption allowance + net indirect taxes=
4,000.

3. Suppose GDP is 2,000M FCFA, consumption expenditure is 1,700M FCFA, government expenditure is
50M FCFA, and net exports are 40M FCFA.

(a) What is business investment expenditure?

(b) If exports are 350M FCFA, what are imports?

(c) In this example, net exports are positive. Could they be negative?

SOLUTION

(a) Investment expenditure is Y −(C +G +NX) = 2,000M FCFA −(1,700 + 50 + $40) M FCFA = 210M FCFA.

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(b) If exports are 350 M FCFA and net exports are 40M FCFA imports are 310M FCFA.

(c) Yes. Net exports would be negative if imports exceed exports.

4. Consider the following for a hypothetical economy

Year Nominal GDP GDP Deflator Population

(billions) (2000 = 100) (millions)
2012 750 104 25

2013 825 112 30

(a) Calculate the growth (percentage change) in nominal GDP from 2012 to 2013.

(b) What was real GDP in 2012 and 2013? How much did real GDP grow?

(c) If changes in the standard of living can be measured by changes in real per capita GDP, did growth in
nominal and real GDP raise the standard of living in this economy from 2012 to 2013?

(d) Explain the reasons for the change in standard of living that you have found.

SOLUTION

(a) Growth in nominal GDP from 2012 to 2013 is 10%.

(b) Real GDP in 2012 was $721.15. Real GDP in 2013 was $736.60. Real GDP grew by 2.14%.

(c) Per capita real GDP was $28.8 thousand in 2012 and $24.5 thousand in 2013.

(d) The standard of living declined because population grew faster than real GDP.

5. Given the aggregate expenditure or demand as; Aggregate expenditure: AE = 100 + 0.5Y

a) Calculate the equilibrium national income

b) Suppose autonomous expenditure increases by 25. Calculate the new equilibrium income

c) Calculate the value of the income multiplier for this economy

SOLUTION

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a) Initial conditions in a basic model: Aggregate expenditure: AE = 100 + 0.5Y

Equilibrium condition: Y = AE or Y = AD

Then equilibrium national income is:

Y = 100 + 0.5Y

0.5Y = 100

Y = 200

b) Suppose autonomous expenditure increases by 25 to A1 = 100 + 25 = 125:

Aggregate expenditure: AE1 = 125 + 0.5Y

Equilibrium condition: Y = AE1

Then the new equilibrium national income is:

Y = 125 + 0.5Y

0.5Y = 125

Y1 = 250

The change in autonomous expenditure by 25 increased equilibrium national income by 50.

c) The Multiplier is defined as the change in national income (∆Y) divided by the change in autonomous
expenditure (∆A) that caused it. In this example the multiplier is:

∆Y/∆A = 50/25 = 2.

Notice the multiplier is also equal to 1/(1−slope of AE). In this example the slope of AE is

the marginal propensity to spend on domestic output (c−m) = 0.5. The multiplier is:

∆Y/∆A = 1/(1−slope of AE) = 1/(1−0.5) = 1/0.5 = 2.

6. Suppose that in an economy with no government the aggregate expenditure/demand function is:

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AD or AE = 50 +0.75Y.

(a) Draw a diagram showing the aggregate expenditure function, and indicate the level of planned expenditure
when income is 150.

(b) In this same diagram, show what would happen to aggregate expenditure if income increased to 200.

(c) What are the levels of autonomous expenditure and induced expenditure at income levels of 150 and 200.

(d) In this same diagram show what would happen if autonomous expenditure increased by 20.

SOLUTION

(a) See the diagram below.

(b) If Y were to increase from 150 to 200 AE would increase by (0.75 × 50) = 37.5 to 200 as shown in the
diagram.

(c) Autonomous expenditure is constant at 50 in both (a) and (b) but induced expenditure increase from 112.5
when Y = 150 to 150 when Y = 200.

(d) If autonomous expenditure increased by 20 the AE line in the diagram would shift up as shown, with AE
higher by 20 at every Y. The new AE equation would be AE = 70 + 0.75Y.

7. A closed economy in equilibrium has total consumption of 600 million FCFA and investment of 300 million
FCFA. Consumption is a constant proportion of disposable income.

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(a) Calculate the equilibrium level of national income. (3 marks)

(b) Consider that the government sector is incorporated and that one fifth of all income is taxed while public
spending on goods and services amounts to 260 million FCFA.

(i) Determine the new equilibrium level of national income. (3 marks)

(ii) Determine the budgetary situation. (2 marks)

(c) The economy is exposed to the rest of the world with total exports of 250 million FCFA and imports equal
to one sixth of total consumption spending.

(i) Determine the new equilibrium level of national income. (3 marks)

(ii) Calculate the value of the multiplier. (4 marks)

SOLUTION

(a) Calculation of equilibrium level of income:

At equilibrium, Y = C + I
Y = 600MFCFA + 300MFCFA
Y = 900MFCFA (3 marks, working = 2 marks, answer = 1 mark)
600𝑚 2 1
(b) From (a) above, C = 900𝑚 𝑌 𝑑 = 3 𝑌 𝑑 → 𝑆 = 3 𝑌 𝑑
(i) At equilibrium,
Y=C+I+G
Y = 2/3(Y-1/5Y) + 300MFCFA + 260MFCFA
Y = 8/15Y + 560MFCFA
Y – 8/15Y = 560MFCFA
7/15Y = 560MFCFA
Y = 1200MFCFA
Alternative 1 :
At equilibrium, ∑ 𝑊 = ∑ 𝐽
S+T=I+G
But S = 1/3Yd = 1/3 (Y-1/5Y) = 4/15Y
4/15Y +1/5Y = 300MFCFA + 260MFCFA
7/15Y = 560MFCFA
Y = 1200MFCFA
NB: if decimals are used, accept any answer between 1206MFCFA (with or without decimals) up to
1217 MFCFA (with or without decimals).
Alternative 2:
Candidates may use the multiplier approach:
At equilibrium, Y = k (C+I+G)
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 1 1 1 1
Where k = 1−𝑀𝑃𝐶 = 8 𝑜𝑟 = 7 = 2.14285714
1− 𝑀𝑃𝑆
15 15
∴ Y = 2.14285714 (560MFCFA) = 1200MFCFA (working = 2 marks, answer = 1 mark)
NB: Accept answers from 1176MFCFA up to 1200MFCFA if the value of the multiplier is
approximated to 2.1 or up to 8 decimal places.
(ii) Budgetary situation :
T = 1/5Y = 1/5×1200MFCCFA = 240MFCFA
G = 260MFCFA
T – G = 240MFCFA – 260MFCFA = -20 MFCFA
Conclusion: budget deficit of 20 MFCFA
(Working = 1 marks, conclusion = 1 mark. NB: conclusion should barely mention that it is a deficit
without necessarily stating amount)
Alternatively,
Budgetary situation = G – T = 260m – 240m = 20MFCFA
Conclusion → budget deficit of 20 MFCFA
(Working = 1 marks, conclusion = 1 mark. NB: conclusion must state that it is a deficit with amount
stated)
(c) (i) At equilibrium,
Y=C+I+ G+X–M
Y = 8/15Y + 300MFCFA + 260MFCFA + 250MFCFA – 4/45Y
Since M = 1/6C = 1/6(8/15) Y = 4/45Y
Y = 8/15Y – 4/45Y + 810MFCA
Y – 20/45Y = 810MFCFA
5/9Y = 810MFCFA
Y = 1,458MFCA
NB: if decimals are used accept answers between 1,372MFCFA (with or without decimals) up to
1,472MFCFA (with or without decimals).
Alternative 1:
At equilibrium, ∑ 𝑊 = ∑ 𝐽
S+T+M=I+G+X
4/15Y + 1/5Y + 4/45Y = 300M + 260M + 250M
25/45Y = 5/9Y = 810MFCFA
Y = 1,458MFCFA
Alternative 2:
The multiplier approach:
At equilibrium, Y = k (I + G + X)
Where k = 1.8
Y = 1.8 (810MFCFA)
Y = 1,458MFCFA (working = 2 marks, answer = 1 mark)
(ii) Calculation of value of the multiplier:
1 1 1 1
k = 𝑀𝑅𝐿 𝑜𝑟 𝑀𝑃𝑊 = 𝑀𝑃𝑆+𝑀𝑃𝑇+𝑀𝑃𝑀 = 4 1 4 = 25 = 1.8
+ +
15 5 45 45
alternative:
1
k = 1−𝑀𝑃𝐶𝑑 where MPCd = MPC – MPM

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 MPC = 8/15 – 4/45 = 4/9
1 1
k= 4 = 5 = 1.8 (working = 3 marks, answer = 1 mark)
1−
9 9
NB: if decimals are used, answers will lie between 1.6 and 1.8

8. Due to the high level of domestic inflation, a government decides to protect the lower-income groups by
setting maximum retail prices for certain essential foodstuffs. The existing equilibrium price of such foodstuff
is 1,500 FCFA per unit.

(a) With the use of a diagram, illustrate and state the effect on the market for this commodity if the
maximum price is set at:
(i) 1,500 FCFA.
(ii) 1,300 FCFA.
(b) What other name is given to the maximum price? (2 marks)
(c) List four consequences of a maximum price legislation. (4 marks)
(d) State one strategy the government can use to make the implementation of this policy effective. (2
marks)
(e) Define the term black market price. Illustrate it on the diagram in (a) above. (4 marks)
(f) Identify two areas of economic activity where government can apply this price control legislation. (2
marks)

SOLUTION

(a) Diagrammatical illustration:

(1 mark)
Price
D
(FCFA) S
PB

N/B: Do not 4 marks

consider PB here
(1 mark)1500
Correct indication of prices = 2 marks

(1 mark) 1300 Proper labelling/drawing = 2 marks

S D
0 Quantity (1 mark)
Q1 Qe Q2

(i) No effect or Quantity demanded = Quantity supplied (1 mark)

(ii) Excess demand of Q2 - Q1 or Shortage in quantity supplied. (1 mark)
(b) Another name given to the maximum price:

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 Ceiling Price or Price Ceiling. (2 marks)
(c) 04 consequences of maximum price legislation:
1. Excess demand or shortage in quantity supplied.
2. It leads to a black market price.
3. Hoarding of the commodity by sellers (creation of artificial shortage).
4. It leads to rationing (use of coupons, etc.)
5. Long queues in front of shops.
6. Under-the-counter sales or parallel markets (or discriminatory sale practices).
7. Establishment of waiting lists.
8. Distortion of the functioning of the price system.
9. Conditional sales.
10. Increase in consumer surplus.
11. Rise in consumers’ living standards.
12. Fall in producer surplus.
13. Possible BOP deficit from fall in exports. (4 marks for any first 4 points)
(d) 01 strategy government can use to make the implementation of this policy effective:
1. Provide or increase subsidies to producers.
2. Reduce indirect taxes on inputs.
3. Relax restrictions on importation of similar goods (reduce tariffs, quotas, etc.)
4. Direct production by government to increase supply in the market (through nationalisation,
creation of public enterprises, etc.)
5. Heavy sanctions on defaulters.
6. Education for sellers.
7. Rationing.
8. Government should organise buffer stock (though buffer stock goes with minimum price).
9. Encourage Non-Governmental Organisations that will comply with government policy.
10. Release buffer stock or constitute buffer stock. (02 marks for any one point, if more than one point,
all must be correct)
(e) Definition and illustration of Black market price:
Definition:
❖ Black market price refers to any other price illegally charged different from that set by the
government.
❖ Price that violates the legislated (government) price. (2 marks)
Illustration:

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 See PB in diagram in (a) above. (2 marks)
(f) 02 areas of economic activity where government can apply maximum price control:
1. Rents payment.
2. Interest rate.
3. Healthcare.
4. Education.
5. Transport.
6. Public utilities (telephone, light, water, etc.) NB: consider if these points are given separately e.g.
candidate instead of writing public utilities, says telephone or water …. Mark correct.
7. Basic necessities (cooking gas, palm oil, meat, etc.) NB: equally consider and mark if points are
given separately. (2 marks)

9. a) Fill in blanks in the table for AR, MR, MC and Profit

Output TR AR MR TC MC Profit

0 0 10

1 140 70

2 214 120

3 276 170

4 326 220

5 330 253

6 300 298

b) Find profit-maximizing output and price by calculating TR and TC.

c) What is the value of the Price, Total fixed cost and the Total variable cost for the profit maximizing output

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SOLUTION

a) The following table has been completed as follows:

Q(Output) TR AR MR TC MC Profit

0 0 0 - 10 - -10

1 140 140 140 70 60 70

2 214 107 74 120 50 94

3 276 92 62 170 50 106

4 326 81.5 50 220 50 106

5 330 66 4 253 33 77

6 300 50 -30 298 45 2

b) The profit maximizing condition for a monopolist is where MR = MC

For the 4th level of output the condition is being satisfied, MR = MC = 50

c) TR = P *Q

At the profit-maximizing level of output,

TR = 326, Q = 4

P = 326/4

P = 81.5

The profit-maximizing P is 81.5 and the corresponding level of Q is 4

Fixed cost = TC at output zero = 10

Variable cost at Q4 is TC – TFC = 220 – 10

TVC = 210

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10. Consider the following PPC
Capital Goods Consumer Goods
6 0
5 3
4 5
3 6
2 7
0 8

a) Plot the PPC curve from the above information

b) What does the shape imply?

c) What does the output combination of 2 capital goods and 3 consumer goods imply?

d) Can the combination 5 capital goods and 7 consumer goods be produced.

e) Can the combination in d) above never be produced

f) What is the opportunity cost of changing from the combination 4 capital goods, 5 consumer goods to the
combination 3 capital goods, 6 consumer goods?

g) Following the move in f) above what is the implication on the current and the future living standards?

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