Question

Question 1

(A) Critically analyze / explain whether the following statement(s) is/are normative or

positive.

Childcare is expensive and licensed center-based care is unaffordable for families of

poor. There is broad public support for more government spending on childcare as long

as that spending does not result in another unfunded entitlement that worsens the deficit.

Some argue that (1)government should not help the poor. Some argue that (2)more

spending on childcare will pay back the taxpayer in the long run based on better child

development or increased workplace productivity. Politicians claim that (3)there will

be an offset in the government budget because charitable contributions will be lower

with more spending on childcare.

(B) Explain and contrast how resources are allocated to different uses in market and

command economic systems.

(C) Analyze the difference between a straight line and a curved production possibility

frontier.

(Total 20 marks)

Question 2

(A) Explain why scarcity of resources creates an opportunity cost.

(B) What is the opportunity cost of a country deciding whether to build a new dam to

provide hydroelectric power and water supply?

2020-21

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(C) Susan wants to have curry beef with rice or spaghetti carbonara which costs $45

for her lunch. Explain the effect on Susan’s opportunity cost of buying curry beef

with rice if a cockroach is found inside the curry. Explain.

(Total 15 marks)

Question 3

(A) Consider the market demand and supply schedules for chocolate bars.

Price

(dollars)

Quantity Demanded

(per month)

Quantity Supplied

(pen month)

50

100,000

420,000

40

150,000

300,000

30

200,000

200,000

20

260,000

120,000

10

330,000

60,000

0

400,000

40,000

(i) What is the market price and the quantity of chocolates bars traded in the market?

(ii) What would happen if the market is not in equilibrium?

(B) What is the difference between change in quantity supplied and change in supply?

(C) Use well-labelled diagram(s) to analyze the effect of the following cases on the

market for apples.

(i)

A fall in the price of pears.

(ii)

Farmers use a new fertilizer that makes apple trees more productive.

(D)Consider the following events: Consumers are convinced by arguments about the

benefits of coffee as scientists reveal that consumption of coffee decreases the risk

of heart diseases, and at the same time, there is severe frost in Brazil that affects the

coffee crop. Illustrate and explain what effect these changes on equilibrium price

and quantity of coffee with the aid of well-labeled diagram(s).

(Total 40 marks)2020-21

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Question 4

(A) Explain the factors that affect the price elasticity of demand for a product.

(B) At a price of $50 a bookshop can sell 200 copies of a textbook each month. If it

reduces the price to $45 it can increase its sales to 212, what is the price elasticity

of demand?

(C) How would the incidence of an indirect tax between producers(sellers) and

consumers(buyers) if

(i) Demand for the good is elastic and supply of the good is inelastic.

(ii) The elasticity of demand for and elasticity of supply of the good are the same.

Use well-labelled diagram(s) to support your views.

Answer 1

Normative statements are those statements which define what should be or what ought to be for economic development. These statements cannot be verified.

Positive statements are those statements which can be tested and verified.These statements define objectives. These are fact based statements.

(A) (1)" Government should not help the poor" is a normative statement because it is only an opinion .

(2) " More spending on the childcare will pay back the taxpayer in long run " it is a positive statement because this statement can be tested . This statement is fact based .

(3) "There will be an offset in government budget because charitable contribution will be lower with more spending on childcare " is a positive statement because this is a fact statement . It's reason is also given hence it is verified too.

(B) Command economy is an economy in which all the decision are taken by government. Government hire all the workers and fix their wages. Decisions of production and price remains with government. Public benefits are concerned.

Market economy is an economy in which decisions of production and price are made based on market demand and supply. There is no government interference.

Contrast on​​​​​ the basis of resource allocation between market economy and command economy are given below:

# Resource allocation decision making in market economy is taken by individuals or firms without any government interference while in command economy resource allocation is done centrally by government.

# In market economy what to produce is answered by consumers ,how to produce is answered by producers and for whom to produce depends on consumer's purchasing power.

# Profit maximization is the main motive in market economy while public welfare is main motive in command economy.

# In market economy consumers protect themselves from fraud and abuse while in command economy there is government to protect consumers from fraud and abuse.

(3) Production Possibility Frontier is a curve which show different possible combinations of two goods which can be produced within given resources and technology.

Shape of the PPF is determined by the opportunity cost .

Opportunity cost is the cost of producing more unit of one product by sacrificing unit of another product with in given resources and technology.

PPF will be a straight line when opportunity cost is constant but PPF will be curved shape when opportunity cost will differ at different units of production.

Above PPF is the straight line .In this production of good A is represented on y-axis and production of goodB is represented on x-axis .PQ is the straight PPF because opportunity cost is same , that is 5

In the above figure PPF is curved .In this production of Good A is represented on y-axis and production of good B is represented on x-axis .P1Q1 is curved PPF because opportunity cost is different at different combinations of production.

Main difference between staight line PPF and curved PPF which are defined above are :

Opportunity cost are same in staight line PPF while opportunity cost is different in curved PPF .

Straight line PPF are staight curve while curved PPF is curved curve.