Discussion Questions

1. a. Explain the relationship between scarcity, the problem of choice, and opportunity cost. Use a
suitable example to illustrate your answer.
(05 Marks)
b Briefly define the term “Factors of Production” and identify four factors of production with
suitable examples. (05 Marks)
c. State whether each of the following statements is ‘True’ or ‘False’. Justify your answer.
Marks will not be given to answers without justification.
i. Normative economics is an analysis based on value judgments.

ii What to produce, what quantities to produce and how to produce are the three basic
economic questions faced by any economy.
iii Capitalist economy is characterized by private ownership of resources and profit
motive. (15 Marks)
(Total 25 Marks)
.
2. a. Discuss the “Law of Demand” with an example of your choice. (05 Marks)
b. Evaluate how each of the following events will affect the equilibrium price and the quantity
in the market for Solar Panels. In each case, also state how the event will affect the supply
and/or demand curves. Draw diagrams to illustrate your answer.
i Electricity board has announced there will be more power disruptions in the next few
months.
ii Government offers tariff reductions on Solar Panel importation. (08 Marks)
c. Figure 1 shows the market for commodity X where it is at the equilibrium when the price is
Rs. 6 and the quantity is 30,000 units. Suppose that the government decide to impose a sales
tax of $4 per unit sold of commodity X.
Figure 1

P (Rs.) S2
S1
12

10

8
6

4
2
D
0 0 0 0
0 ,00 0,00 0,00 Q
2
Calculate the following. 3 4
i. Consumer Surplus after the tax
ii. Government Revenue after the tax
iii. Dead Weight Loss (12 Marks)
(Total 25 Marks)

3.
a. Elasticity measures the responsiveness of one variable to a change in the other variable.
Define “Price elasticity of demand” and discuss 5 types of price elasticity of demand.

(10 Marks)
b. The following table 1 shows the income elasticity of demand for two goods: Ramen Noodles
and organic vegetables that Sam consumes.

Table 1: Income Elasticity for Ramen and Organic vegetables

Good Income Elasticity of
Demand
Ramen Noodles -3.0
Organic Vegetables +4.0

i. Suppose Sam’s income has increased by 5%. Graphically illustrate how this will impact the
demand of each of these goods.
(06 Marks)
ii. Calculate the percentage change in the quantity demanded for these goods if Sam’s income
has increased by 5%. ((Note that 5% can also be written as 0.05)

(04 Marks)

c. Cross price elasticity between butter and margarine is +3.5. Comment on the type of these two
goods.
(05 Marks)
(Total 25 Marks)