CPA FOUNDATION LEVEL – ECONOMICS REVISION KIT

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Complete copy of ECONOMICS REVISION KIT is available in SOFT ( Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.co.ke

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SAMPLE WORK

Complete copy of ECONOMICS REVISION KIT is available in SOFT ( Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.co.ke

MAY 2021

SUGGESTED ANSWERS AND SOLUTIONS

 

QUESTION ONE

Ways in which the government could influence allocation of resources in a country. (May 2016 1B and 1C)       

  • Indirect taxes: indirect taxes can be used to raise the price of de-merit goods and products with negative externalities designed to increase the opportunity cost of consumption and therereduce consumer demand towards a socially optimal level.
  • Subsidies: subsidies to consumers will lower the price of merit goods. They are designed to boost consumption and output of products with positive externalities – remember that a subsidy causes an increase in market supply and leads to a lower equilibrium price.
  • Provision of goods and services: Because of privatization, the state owned sector of the economy is much smaller than it was years ago. State funding can also be used to provide merit goods and services and public goods directly to the public.
  • Tax relief: the government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax designed to promote new capital investment and extra employment.
  • Legislation and regulation. employment laws may offer some legal protection for workers setting maximum working hours or providing a price-floor in the labor market through the setting of a minimum wage regulation may be used to introduce fresh competition into a market- for example breaking up the existing monopoly power of service provider.                                                                   

 

Difference between “arc elasticity” and “point elasticity” of demand.

  • Arc elasticity – refers to the average elasticity between two given points on the curve.

  • Point elasticity – this measures elasticity at a particular point and is only valid or based on small movements.

                                           

                             

(i) Term “Consumer Sovereignty” as used in economics. (Nov 2018 1B)       

This is an economic belief that societal welfare is maximized when consumers are at liberty to choose goods to satisfy their needs .Simply, the consumer is the best judge of their product choices.

 

           (ii) Limitations of consumer sovereignty in an economy.  

  • Government policy through taxes and subsidies can influence choices made consumer.
  • Nature of economic system e.g. in a command economy, government dictates what a consumer should do.
  • Irrationality of consumer
  • Advertising also restricts the consumer’s choice.
  • Type of market e.g. in monopolies consumers have limited choice.
  • Income of consumer products are only made for rich guy and the choices of the poor are never considered
  • In availability of goods means consumers has to use what is available.
  • Technical factors may impinge on freedom of consumer. For example the existing technology may not allow producers to make goods desired consumers.
  • Habit individual consumers have different and are reluctant to charge

 

QUESTION TWO

  • Effects of removing interest rate capping in an economy / Impact of interest rate decontrol in an economy 
  • It leads to appreciation of local currency
  • It leads to an improvement in the country’s balance of payment position.
  • It leads to an increase in foreign investments
  • Increases investment and promotes employment creation
  • The government earns revenue through taxes from increase in investment and employment.
  • Encourages investment in the banking industry.
  • High interest rate discourages borrowing leading to a reduction in money supply which helps to control inflation.

 

Reasons why governments intervene with the operations of price mechanism.

  • Government regulation can protect the environment, workers and consumers.
  • Limit monopoly power
  • Protect long term interest of the environment
  • Reduce in equality and poverty through tax and benefit system
  • Provide merit goods like education and health which are under provided in free markets.
  • Provide public goods e.g. law and order not supplied in the market
  • Disaster relief – only government can solve major health crisis such as pandemics
  • Macroeconomics intervention – intervention to overcome prolonged recession and reduce unemployment.

                                                                                            

Factors that influence the elasticity of supply of a commodity.

  • Number of producers – more producers mean that the output can be increased more easily. The supply is more elastic.
  • Stock of finished goods – in industries where there are high inventories / stocks of finished goods, the suppliers can easily supply more as the price rises. Thus, the price elasticity supply for theses goods will be elastic.
  • Time period of training – where a company invests in capital the supply is more elastic in its response to price increases.
  • Reaction of costs – if costs increase slowly it will stimulate an increase in quantity supplied. If cost rises rapidly the stimulus to production will be choked off quickly.
  • Length of production period – quick production response to a price increases easily
  • The availability of spare capacity – if fixed factors of production are being used to the fullest extent, however great the increase in price, the supply will be inelastic. If however, a firm is operating below capacity and there are unemployed resources the supply will be elastic.
  • Improvement in technology – in industries where there is rapid improvement in technology, the price elasticity of supply of such goods will be more elastic as compared to industries where there is not much in improvement of technology.
  • Adjustment time – in the short run supply will be less elastic and in the long run supply will be elastic.

 

QUESTION THREE

  • How an individual’s equilibrium point is attained. (September 2015 Q5A)

IC1, IC2 and IC3 are the three indifference curves and AB is the budget line. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y.

All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus indicate a lower level of satisfaction. As budget line can be tangent to one and only one indifference curve, consumer maximizes his satisfaction at point E, when both the conditions of consumer’s equilibrium are satisfied:

                                                                                       

Substitution effect and income effect of an inferior good (September 2015 Question 5B (ii). )

             Inferior good Y

The above figure represents the substitution and income effects of an inferior good. The movement from Y1 to Y2 is the positive substitution effect. However the movement from Y2 to Y3 is the negative income effect.

  • Kenya

Required:

Factors that might hinder Kenya from realising the objective.

  • Project mismanagement – most of cash borrowed ends up in pockets of a few due to corruption .Consequently, this leads to incomplete projects with high over run and time delays. If such projects were well done, then they could have generated revenues which could have helped in financing debt payments.
  • Decline inflow of concessional assistance and a result greater reliance costly borrowing.
  • Persistent inflationary pressures
  • Aggravation of balance of payment deficit oil crisis.
  • Limited productive use of resources
  • Low export earnings
  • Lack of political will – lack of commitment and political will politicians since they have higher level of decision making.
  • Limited range and effectiveness of policy instruments.
  • Unanticipated economic disturbances e.g. covid 19
  • Over ambitious plan that do not take into account the realities on ground. E.g. tax revenue collection.
  • Foreign dominion
  • Inflation
  • Natural calamities
  • Insecurities
  • Poor planning in its self
  • Non coordination of various policy making organs
  • Lack of public participation and ownership the public.

 

SAMPLE WORK

Complete copy of ECONOMICS REVISION KIT is available in SOFT ( Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.co.ke

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