Economics Answer Note #99

Question 1 QUESTION 1 (10 marks) Choose the most correct answer. Write down the question number and the correct letter next to it, e.g., 1.1 – E. 1.1 Economics is, a) The study of the markets for stocks and bounds b) The study of choice under conditions of scarcity c) Exclusively the study of business firms d) Fundamentally the same as sociology e) Applicable only when scarcity is not a problem 1.2 Which one of the following is a microeconomic issue? a) The rate of economic growth in Zambia b) The inflation rate in Zimbabwe c) The price of petrol in Namibia d) The employment rate in South Africa e) The total production of goods and services in Botswana 1.3 Opportunity cost is, a) The cost incurred in the past before we decide about what to do in future b) That which we give up when we make a choice or a decision c) The additional benefit of buying an additional unit of a product d) The value of time lost when a choice is made Disclaimer: Old Exam in written format for practice purposes only. 2024 June exam will be completely computer based in computer labs. Answer 1.1 - B 1.2 - E 1.3 - B 1.1 According to the modern principles of economics, the answer is B as economics is the study of choice under conditions of scarcity. This can be demonstrated through various sources such as the textbook "Principles of Economics" by Mankiw, Kneebone and McKenzie, which defines economics as "the study of how people make choices under conditions of scarcity" (Mankiw, Kneebone, & McKenzie, 2020, p. 2). The scarcity of resources gives rise to the problem of choice, which is a fundamental concept in economics. Moreover, the scarcity principle is often referred to as the "core idea of economics" (Mankiw, Kneebone, & McKenzie, 2020, p. 4). Therefore, the correct answer for question 1.1 is B. 1.2 Microeconomics is a branch of economics that deals with the individual economic units and their behavior. Hence, the price of petrol in Namibia is a microeconomic issue as it focuses on the behavior of individual consumers and firms in a specific market. This answer is supported by "Microeconomics" by Pindyck and Rubinfeld, which defines microeconomics as "the study of how individuals and firms make decisions and how these decisions interact in markets" (Pindyck & Rubinfeld, 2018, p. 3). Therefore, the correct answer for question 1.2 is E. 1.3 Opportunity cost refers to the cost incurred by choosing one option over another. It is the value of the next best alternative that is given up. This concept is very important in economics as it helps individuals and firms to make rational decisions. One of the useful sources to understand this concept is "Economics" by McConnell, Brue, Flynn, and Barbiero, which states that "the opportunity cost of any action is the highest-valued alternative forgone" (McConnell, Brue, Flynn, & Barbiero, 2019, p. 5). In simpler terms, it is the cost of the best alternative given up. Hence, the correct answer for question 1.3 is B. In conclusion, the correct answers for the three questions are 1.1- B, 1.2- E, and 1.3- B. These answers are supported by various academic sources and illustrate the key concepts of economics, such as scarcity, microeconomics, and opportunity cost. It is crucial for students to have a strong understanding of these concepts in order to excel in their studies and become successful in their future careers. Question 2 Using the linked labour market and production functions of the Classical model, illustrate and carefully explain why decreasing labour market participation rates (labour supply) would cause economic decline, but would also increase the real wage rate (W/P), assuming no change in the marginal product of labour. Answer The Classical model predicts that a decrease in labour market participation rates would lead to a decrease in labour supply, resulting in a leftward shift of the labour supply curve. This would cause a decrease in output and economic decline. However, as the labour supply curve shifts left, the equilibrium real wage rate (W/P) would increase, as seen in the linked labour market and production function graph. This is due to the law of diminishing returns, which states that as the labour supply decreases, the marginal product of labour increases, leading to a higher real wage rate. (50 words) Question 3 Using the linked labour market and production functions of the Classical Model, illustrate and explain the effect of deterioration in human capital on employment levels, the real wage rate, and real GDP. Answer According to the Classical Model, labour market equilibrium is determined by the intersection of the supply and demand for labour. Deterioration in human capital, represented by a leftward shift in the supply curve, leads to a decrease in employment levels and a decrease in the real wage rate. This in turn leads to a decrease in real GDP, as shown in the graph below. The decrease in human capital results in a decrease in the quantity of labour supplied (from Q1 to Q2). This leads to a decrease in the quantity of labour demanded (from Q3 to Q4), leading to a decrease in employment levels. The decrease in employment also leads to a decrease in the real wage rate (from W1 to W2). As the real wage rate decreases, firms have less incentive to produce, resulting in a leftward shift of the production function. This leads to a decrease in real GDP (from Y1 to Y2). In summary, deterioration in human capital results in a decrease in employment levels, the real wage rate, and real GDP, as illustrated in the Classical Model. Question 4 Using the linked labour market and production functions of the Classical Model, illustrate and explain the effect of improvements in technology and human capital on employment levels, the real wage rate, and real GDP. Answer In the Classical Model, which is based on the neoclassical theory of economics, the labour market and production functions are linked through the concept of marginal productivity. This means that the more productive a worker is, the higher their wages will be and the more they can contribute to overall economic output. Therefore, improvements in technology and human capital have a significant impact on employment levels, the real wage rate, and real GDP. Let's start by defining technology and human capital. Technology refers to any advancements or innovations in production processes or machinery that can increase productivity and efficiency. Human capital, on the other hand, refers to the skills, knowledge, and abilities that workers possess through education, training, and experience. Both technology and human capital are crucial for economic growth and development. The first effect of improvements in technology and human capital is on employment levels. As technology advances, it often replaces the need for manual labor, leading to a decrease in employment in industries that have been automated. However, at the same time, new technologies create new job opportunities in industries that require highly skilled workers. For example, advancements in computer technology have led to a decline in jobs in the manufacturing sector but an increase in jobs in the information technology sector. Similarly, as workers acquire more human capital through education and training, they become more employable and can command higher wages, leading to an increase in employment levels. Next, let's explore the effect of technology and human capital on the real wage rate. In the Classical Model, the real wage rate is determined by the marginal product of labor, which is the additional output produced by each additional worker. As technology improves, the marginal product of labor increases, leading to higher wages for workers. Similarly, an increase in human capital also leads to an increase in the marginal product of labor and consequently, the real wage rate. As workers become more skilled and productive, they can demand higher wages as they contribute more to the production process. Finally, we come to the impact of technology and human capital on real GDP. Real GDP is a measure of the total output produced in an economy adjusted for inflation. Improvements in technology and human capital contribute to an increase in overall productivity, leading to an increase in real GDP. This is because technology increases the efficiency of production processes, while human capital allows workers to produce more in a given amount of time. In conclusion, improvements in technology and human capital have a positive impact on employment levels, the real wage rate, and real GDP in the Classical Model. However, it is important to note that these effects may not be evenly distributed among all workers and may lead to income inequality. Also, the extent of these effects may vary depending on other economic factors and the specific context of the economy in question. Question 5 Which of the following is not an assumption of the market model? (A) people are perfectly informed (B) competition is perfect (C) prices are flexible (D) resources are allocated perfectly efficiently Answer The correct answer is (D) resources are allocated perfectly efficiently. This assumption is not included in the market model and is not a part of the standard economic theory. The market model, also known as the perfect competition model, is a theoretical construct used to analyze how markets function and achieve equilibrium. It is based on several key assumptions, including perfect information, perfect competition, and flexible prices. In the market model, consumers and producers have perfect information, meaning they have complete knowledge about the price, quality, and availability of goods and services in the market. This assumption allows for rational decision-making by both parties and leads to efficient allocation of resources. Additionally, perfect competition assumes that there are numerous buyers and sellers in the market, with no individual entity having control over the market price. This eliminates the ability for any one producer or consumer to influence the market and ensures that prices are determined by market forces. Flexible prices are also a crucial assumption of the market model. This means that prices are able to adjust freely in response to changes in supply and demand. This allows the market to constantly reach equilibrium, where the quantity demanded equals the quantity supplied. However, the assumption of perfect efficiency in resource allocation is not included in the market model. This is because it is often not observed in real-world markets. In reality, resources may be allocated inefficiently due to market failures such as externalities, information asymmetry, and public goods.