r % FORM TP 2018187 rESr coDE 02116020-| MAY/JUNE 2OI8 CARIBBEAN EXAMINATIONS COUNCIL CARIBBEAN ADVANCED PROFICIENCY EXAMINATION@ ECONOMICS UNIT l -Paper02 2 hours 30 minutes READ THE F'OLLOWING INSTRUCTIONS CAREFULLY. I This paper consists ofTHREE questions, one from each module. Answer ALL questions 2 Write your answers in the spaces provided in this booklet. 3 Do NOT write in the margins. 4 You may use a silent, non-programmable calculator to answer questions. 5 If you need to rewrite any answer and there is not enough space to do so on the original page, you must use the extra lined page(s) provided at the back of this booklet. Remember to draw a line through your original answer. 6 If you use the extra page(s) you MUST write the question number clearly in the box provided at the top of the extra page(s) and, where relevant, include the question part beside the answer, DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO. Copyright @ 2017 Caribbean Examinations Council All rights reserved. f_oz, t6o2otcupE 2ol8 ffi r rilil llflilu flil ffit ]ilI ilililililfl]fl ililil 021 1602003 J r -l 4 AnswerALL questions. MODULE l: METHODOLOGY - DEMAND AND SUPPLY l. (a) Define EACH of the following terms: (i) The law of equi-marginal utility [2 marksl (ii) Producer surplus [2 marksl GO ON TO THE NEXT PAGE 02tr6020lcAPE 2018 L HH ffiil illl llll lllll lllll ffi illl llllt lllll lllll llll lil 0211602004 I t- -l 5 (b) Table I shows an individual's utility from consuming units of chocolate bars and candy bars. TABLE I: AN INDIVIDUAL'S UTILITY FROM CONSUMING UNITS OF CHOCOLATE BARS AND CANDY BARS SUBTRACT N$ -o$ Ibtal Utility Units of Marginal Utility Maryinal Utility Per Dollar Chocolate BarV Candy Bars $4 Chocolate Bar $2 Candy Bar 0 0 0 40 22 10 11 32 20 8 10 24 18 6 9 Chocolate Bar Candy Bar 0 0 0 0 I 40 22 2 72 42 3 96 60 Chocolate Consumed (i) Bar Candy Bar Complete Table I given that the price of one chocolate bar is $4 and the price of one candy bar is $2. (ii) DIVIDE MU BY $ [8 marksl Explain why the optimal bundle of the two goods would be I unit of chocolate bars and 2 units ofcandy bars. the marginal utility per dollar is higher for candy bars compared to chocolate bars. This means that the individual gets more additional satisfaction for each dollar spent on candy bars. To achieve the optimal bundle, the individual should allocate their budget in a way that equalizes the marginal utility per dollar for both goods. In this case, the individual should consume 1 unit of chocolate bars and 2 units of candy bars, achieving optimal bundle at $4 each. [3 marksl GO ON TO THE NEXT PAGE 02n6020tcAPE 2018 L ffi lliillililllt llllllffiillflflflil]]llll] 021 1602005 J t- -l -6(c) With the aid of a well-labelled diagram, assess the total welfare effect of the imposition of an indirect tax on candy bars. - Demand (D): Represents the quantity of candy bars consumers are willing to buy at different prices. - Supply (S0): Represents the quantity of candy bars producers are willing to sell at different prices. - An indirect tax shifts the supply curve upward by the amount of the tax. - The new supply curve (S1) is above the original supply curve by the tax amount. - The tax increases the price paid by consumers (P1) and decreases the price received by producers (P0 - Tax). - The quantity transacted decreases from Q0 to Q1 due to the tax. - Consumers pay a higher price (P1), and producers receive a lower price (P0 - Tax). - The difference between P1 and P0 - Tax is the tax incidence. - Total welfare is the sum of consumer surplus, producer surplus, and tax revenue. - However, there is a deadweight loss represented by the triangle between the original and new supply curves, indicating lost efficiency in the market. The imposition of an indirect tax on candy bars results in a decrease in total welfare due to reduced consumer and producer surpluses and the presence of deadweight loss. The size of the deadweight loss depends on the elasticities of demand and supply. [0 marksl Total25 marks GO ON TO THE NEXT PAGE 02rr6020lcAPE 2018 L EH ililil|fl llllilflr illl lllll l]ll llil lllll lllll llll llll 021 1602006 I r -l -7 MODULE 2: MARKET STRUCTURE, MARI(ET FAILURE AND INTERVENTION 2. (a) List FOUR measures used by the government to control market failure. [4 marksl (b) Explain the role of advenising in monopolistic competition and perfect competition. Monopol isitc competition. GO ON TO THE NEXT PAGE 02tt6020tcAPE 2018 L ffi I ll!il ffi ffit ilil ffil lilt tilll flfl ilil l]il til lu 0211602007 J r 8- -l Perfect competition [6 marksl GO ON TO THE NEXT PAGE 02tt6020lcAPE 2018 L Efi r llllil lllll llIll ffi flll lllf, lllll llil lllll l]ll llll llll 021 1602008 J r -9(c) -l With the aid of a well-labelled diagram, explain how negative externalities lead to market failure. - At the original equilibrium (E0), the market equates MPB with MPC, resulting in quantity Q0 and price P0. - The MSB curve lies above the MPB curve due to external costs. - The difference between MSC and MPC represents the negative externalities imposed on society. - The market fails to consider the external costs, leading to an equilibrium at Q0 and P0, where MPC equals MPB but not MSC. - This results in a deadweight loss, shown as the triangle between Q0 and the quantity where MSB equals MSC. - The socially optimal quantity (Q1) occurs where the MSB curve intersects the MSC curve. - The socially optimal price is P1. negative externalities cause the market to produce and consume less than the socially optimal quantity, leading to inefficiency and a deadweight loss. The gap between the private costs and the social costs represents the external costs not accounted for in the market, highlighting the need for intervention to internalize these costs and achieve a socially optimal outcome. [6 marksl GO ON TO THE NEXT PAGE 02rt6020tcAPE 2018 L H# r tilfl l]ll ffir llllr il]t ilfl til lllfi ffi I]lI ilt til 021 1602009 J r -l -10- (d) With the aid of a diagram, analyse the pricing and output decision of the monopolist The monopolist maximizes profit where marginal cost (MC) equals marginal revenue (MR). This occurs where the MC curve intersects with the MR curve. The price corresponding to Q1 is read from the demand curve (AR = P1). The monopolist charges the price P1 for each unit of output. The monopolist does not produce at the point where marginal cost equals the market price. The monopolist's price (P1) is higher than the marginal cost, leading to a markup over marginal cost. The monopolist's profit is the difference between total revenue (P1 * Q1) and total cost (AC * Q1). The monopolist can sustain positive economic profits in the long run due to barriers to entry, maintaining a monopoly position. The monopolist maximizes profit by producing at the quantity where MC equals MR. The monopolist charges a price (P1) higher than the marginal cost, resulting in a markup. The monopolist can achieve economic profits in the long run due to its monopoly position. the monopolist's pricing and output decisions are influenced by its ability to set prices above marginal cost and maintain a monopoly position. The profit-maximizing strategy involves producing at a quantity where marginal cost equals marginal revenue, resulting in a higher price and economic profits. [9 marksl Total25 marks GO ON TO THE NEXT PAGE 02tt6020lcAPE 2018 L mrr.t: Hffi ililil llill [] ffiilfll llil llill illllllil llllffiillll 021 1602010 I t- -l - ll MODULE 3: DISTRIBUTION THEORY 3. (a) Distinguish between EACH of the following pairs of concepts: (i) 'Transfer earnings' and 'economic rent' [4 marksl (ii) 'Absolute poverty' and 'relative poverty' [4 marksl GO ON TO THE NEXT PAGE 02tt6020lcAPE 2018 L ffi IrflilIil rffi [] tilt]il tffi ffirfl]ilu ll] til 0211602011 I t- -12(b) -l Identify TWO categories of persons who are mone susceptible to poverty and explain why they are more susceptible. GO ON TO THE NEXT PAGE o2n6020lcAPE 2018 L ffi r ll]ll ffi ffit il] ffi ffi llfl ffir llr] ffi fllr ffi 0211602012 I l- -l - 13 - [8 marksl (c) Analyse the effects of geographical mobility and occupational mobility on wages. GO ON TO THE NEXT PAGE 02116020/CAPE 2018 L H# llIIillllllffillllilflililffiflililillllllffillll 021 160201 3 I r -14- -l [9 marksl Total25 marks END OF TEST IF YOU FINISH BEF'ORE TIME IS CALLED, CHECK YOUR WORK ON THIS TEST. 02116020/CAPE 2018 L Hfi I lllfl llfi ffi ffit tfll lilt lffi mll l]lt ilfl lil llll 0211602014 I
