Questions
ECN 001: PRINCIPLES OF ECONOMICS I
1. (a) With the aid of appropriate diagrams, discuss how Perfect competitive market will maximise profit in the short run [7 marks]
(b) What are the main causes of monopoly? [8 marks]
2. (a) Explain the concept of
(i) Price elasticity of demand; [2 marks]
(ii) Cross elasticity of demand; [2 marks]
(iii) Income elasticity of demand. [2 marks]
(b) Given the demand function of a firm as P = 100 − 2X and total cost function as TC = 50 + 40X; where P= price, TC= cost and X= output.
(i) Find the MC and MR; [4 marks]
(ii) Find the output level that maximizes the firm's profits; [2 marks]
(iii) What is the profit of the firm? [3 marks]
ECN 002: PRINCIPLES OF ECONOMICS II
3. (a) Explain any three principles of taxation [6 marks]
(b) Outline three (3) reasons for saving. [3 marks]
(c) Discuss THREE problems that can hinder effective measurement of national income [6 marks]
4. (a) Discuss the motives for liquidity preference according to Keynes. [6 marks]
(b) Explain any three functions of money in an economy [9 marks]
ECN 003: APPLIED ECONOMICS I
5. Analyse how fluctuations in the following can affect Balance of Payments.
(a) Exchange rate [5 marks]
(b) Interest rate [5 marks]
(c) Inflation rate [5 marks]
6. (a) Explain the term 'Economic Development' using appropriate examples. (5 marks)
(b) Science and technology have been noted for their roles in contributing to development process. Discuss. (10 marks)
Solutions
ECN 001: PRINCIPLES OF ECONOMICS I
1(a) Perfect competition profit maximization in the short run:
A perfectly competitive firm maximizes profit where Marginal Cost (MC) = Marginal Revenue (MR). Since the firm is a price-taker, MR = Price (AR), so the demand curve is horizontal (perfectly elastic) at the market price. The firm produces at the output where the MC curve cuts the MR/AR line from below. In the short run, if price exceeds Average Total Cost (ATC) at this output, the firm earns supernormal (abnormal) profit — shown as the area between AR and ATC above the equilibrium output. If price is below ATC but above Average Variable Cost (AVC), the firm makes a loss but continues producing in the short run (covering variable costs). (Diagram: horizontal AR=MR=Price line intersecting upward-sloping MC at equilibrium output Q, with profit shown as a rectangle between AR and ATC curves.)
(b) Main causes of monopoly:
- Legal barriers – patents, copyrights, licenses granted by government
- Control of essential/scarce raw materials by a single firm
- Economies of scale – large firms produce at lower average cost, discouraging new entrants
- Government franchise/state monopoly – exclusive right granted (e.g., public utilities)
- High capital requirements – large start-up costs discourage competitors
- Mergers and takeovers – firms combine to eliminate competition
- Exclusive control of technology/know-how
2(a) Concepts:
- (i) Price elasticity of demand: Measures the responsiveness (percentage change) of quantity demanded of a good to a percentage change in its own price.
- (ii) Cross elasticity of demand: Measures the responsiveness of quantity demanded of one good to a percentage change in the price of another (related) good.
- (iii) Income elasticity of demand: Measures the responsiveness of quantity demanded of a good to a percentage change in consumer income.
(b) Given: P = 100 − 2X, TC = 50 + 40X
Total Revenue: TR = P × X = (100 − 2X)X = 100X − 2X²
(i) MC and MR:
- MR = d(TR)/dX = 100 − 4X
- MC = d(TC)/dX = 40
(ii) Profit-maximizing output: Set MR = MC
100 − 4X = 40
4X = 60
X = 15
(iii) Profit at X = 15:
- TR = 100(15) − 2(15)² = 1500 − 450 = 1050
- TC = 50 + 40(15) = 50 + 600 = 650
- Profit = TR − TC = 1050 − 650 = ₦400
ECN 002: PRINCIPLES OF ECONOMICS II
3(a) Three principles of taxation:
- Equity/Ability to pay: Tax should be based on the taxpayer's ability to pay (those with higher income pay more)
- Certainty: The amount, time, and manner of tax payment should be clear and not arbitrary
- Convenience: Tax should be collected in a manner and at a time convenient for the taxpayer
- (Also: Economy — cost of collection should be low relative to revenue raised)
(b) Three reasons for saving:
- Precautionary motive (to meet unforeseen emergencies)
- To finance future investment or major purchases
- For retirement/old age provision
(c) Problems hindering measurement of national income:
- Double counting – risk of counting the value of goods more than once
- Non-monetized/informal sector activities – subsistence production and unrecorded transactions are excluded, understating true income
- Inadequate/unreliable statistical data – poor record-keeping makes accurate computation difficult
4(a) Keynes' motives for liquidity preference:
- Transactionary motive: Holding money to meet day-to-day expenses
- Precautionary motive: Holding money to cater for unforeseen contingencies/emergencies
- Speculative motive: Holding money to take advantage of future investment opportunities (e.g., anticipated changes in interest rates/bond prices)
(b) Three functions of money:
- Medium of exchange: Facilitates buying and selling, eliminating the need for barter
- Store of value: Money can be saved and used for future purchases without losing (much) value
- Unit of account/Measure of value: Provides a common standard for measuring and comparing the value of goods and services
ECN 003: APPLIED ECONOMICS I
5. Effects of fluctuations on Balance of Payments:
(a) Exchange rate: A depreciation of the domestic currency makes exports cheaper and imports more expensive, which can improve the balance of payments (increase net exports); an appreciation has the opposite effect, making exports costlier and imports cheaper, worsening the balance.
(b) Interest rate: A rise in domestic interest rates attracts foreign capital inflows (as investors seek higher returns), improving the capital account of the balance of payments; a fall in interest rates can cause capital outflows, worsening it.
(c) Inflation rate: Higher domestic inflation (relative to trading partners) makes exports less competitive and imports relatively cheaper, worsening the balance of trade/payments; lower inflation improves export competitiveness and helps the balance of payments.
6(a) Economic Development:
Economic Development refers to the process of improving the overall well-being, living standards, and quality of life of a country's citizens, involving not just growth in output/income (GDP) but also improvements in employment, education, health, infrastructure, and reduction in poverty and inequality. Example: A country may experience economic growth (rising GDP) without development if poverty and unemployment persist; true development means citizens' living standards genuinely improve (e.g., better healthcare access, literacy rates rising).
(b) Role of science and technology in economic development:
- Increased productivity: Technological innovation improves efficiency in agriculture, industry, and services, raising output
- Job creation: New technology-based industries create employment opportunities
- Improved healthcare: Medical technology reduces mortality and improves quality of life, boosting human capital
- Better infrastructure: Technology aids in developing transportation, communication, and energy systems
- Global competitiveness: Technological advancement enables countries to compete effectively in international trade
- Education advancement: Science and technology improve access to and quality of education, building skilled human capital for future development
(Overall: science and technology drive innovation, efficiency, and structural transformation, which are central engines of sustainable economic development.)