TANZANIA ECONOMICS TEACHER’S ASSOCIATION (TETA)

ECONOMICS JOINT EXAMINATIONS SET 3

151/1 ECONOMICS 1
Marking scheme
Time 3: 00 Hours
31st

October, 2023

SECTION A (20 Marks)

1. For each of the following statement, explain whether the statement is normative or positive.

i. When price rises, demand for the commodity may also rise, assuming other factors may
vary.
This is positive statement; it just explains the economic situation as it occurs. It
shows that price may rise and quantity demanded rise if other factors are not
constant.

ii. Tanzania should not take foreign aids.

This is normative statement, it suggests that Tanzania should not take foreign aids,

iii. When disposable income increases consumption expenditure also increases but less than
the increase in income.
This is positive statement, it just explains the economic situation as income increases,
consumption expenditure also increases.

iv. Agricultural labours in Tanzania should be given minimum wages of Tshs. 500,000/=

This normative statement because it suggests what ought to be. It Suggest the amount
of wages that should be given to agricultural labours in Tanzania.

v. Tanzania should set a balanced budget each year.

This is normative statement as it suggests the country to set a balanced budget.

(5 points @ 2 marks = 10)

2. “Atomistic Competition” is the term used by some economists to describe the competitive
nature of perfect competition market which is free from monopoly elements. Use five points
to justify that this kind of market is myth.

The perfect competitive market is myth (is not real in the world) due to the following reasons.

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 o Real word does not have large number of buyers and sellers that no one can influence
the market or price.
o There is no such a thing as “homogeneous products” in the real world. Products may
differ in quality.
o In the real world, firms do not enjoy the complete freedom of entry and exit. There are
barriers of entry in industries.
o Buyers and sellers cannot have the perfect information about the market. It difficult to
know the costs, price and other information perfectly.
o Perfect mobility of factors of production is impossible. Example there are barriers of
movement of labour from one place to another like costs or changing occupation needs
skills which acts like barrier.
o Transport costs are constant in transporting goods and services from one place to
another.
(any 5 points @ 2 = 10 marks)

SECTION B (40 Marks)

3. (a) Demand for a factor of production can be derived or joint demand. briefly
describe five factors that are generally affecting the demand for a factor of
production.

In general, the demand for factors of production depends on the following factors:

i. Demand for the produced goods. If the demand for the product is greater, then the
demand of a factor will also be high and when the demand for the product is lower the
demand for a factor will also be low.
ii. Price of the factor. The higher the price the lower the demand, the lower the price the
higher the demand of a factor.
iii. Price of other related factors. Example high price of labours can lead to high demand
of machinery if the machine can perform that work.
iv. Productivity of a factor. With the increase in productivity of the factor, its demand also
rises while the lower the productivity of the factor the lower the demand for that factor.
v. Technical conditions. If a firm applies labor-intensive technic the demand for labour
will be higher than capital and if the firm applies capital intensive technic the demand
for capital will be higher than labour.
(any 5 points @ 1.5 = 7.5 marks)

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 (b) You are given that the average product function of AI-Company operating
in short run is given as AP=10−L , additionary the amount of machinery used
was fixed at 10 units throughout the production period. Required:

i. Prepare a table for TP, AP and MP if variable factor labour ranges from 0 to 9
man-hours.

Solution

Given:
AP=10−L
TP
Since AP=
L;
TP= AP L ………………………………………………………………………………………..(0.5 mark)
TP=(10−L) L
2
TP=10 L−L

To fill the table for TP, substitute values of L to total product function.
e.g

when L=0
2
TP=10 (0)−0
TP=0Units

When L=1
2
TP=10 (1)−1
TP=9Units

Also,
∆ TP
MP= ………………………………………………………………………………………..(0.5 mark)
∆L
TP 2−TP1
MP=
L2− L1
e.g when L =1
9−0
MP=
1−0

MP=9 Units
Capital Labours Total Average Marginal
(machinery (L) Product product (AP) Product
) (TP) (MP)
10 0 0 - -
10 1 9 9 9
10 2 16 8 7
10 3 21 7 5

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 10 4 24 6 3
10 5 25 5 1
10 6 24 4 1
10 7 21 3 3
10 8 16 2 5
10 9 9 1 7

(30 items @ 0.2 = 6 marks)

ii. Use the information in 3 (b) i. above to draw the graph for TP, AP and MP.

iii. How many labours at which the company starts to experience the law of
diminishing return?

At 1man-hour where MP is at maximum, the company starts to experience

the law of diminishing return.
(1 mark)
iv. Propose the number of labours the firm would employ so as to produce at
minimum average costs.

To produce at minimum average cost, the company should employ 5 man-

hours because at this point, the TP is at maximum so the AC is minimum.
(1 mark)
v. What determine the variation in units of output while the units of machinery are
fixed?

The variation of output is determined by the variable factor only (labours) in

this production function since fixed factor (machinery) if constant.
(1 mark)

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4. (a) Study the table below and answer the questions that follow:

Price per unit of Quantity ΔQ ΔP Elasticity Total

output bought Qo PO of demand outlay
5 40 1 - 5 -
4 80 0.5 - 2 -
3 120 0.33 - 1 -
2 160 0.25 - 0.5 -
1 200 0.1 - 0.2 -

(i) Complete the table by filling in the blank spaces.

Since TR = P.Q……………………………………………………. (1.5 mark)
% ∆ QD
Also by percentage method , e =
%∆P
QN −QO QN −QO ∆Q
X 100
QO QO QO
= =
PN−PO PN−PO ∆ P
X 100
PO PO PO
∆Q
Qo ∆ P ∆Q
e= hence = e … … … … … … (1.5 mark)
∆P Po Qo
Po

Price per unit Quantity ΔQ ΔP Elasticity of Total

of output bought Q0 P0 demand Revenue
5 40 1 0.2 5 200
4 80 0.5 0.25 2 320
3 120 0.33 0.66 0.5 360
2 200 0.25 0.5 0.5 400
(8 items @ 0.5 = 4 marks)
(ii) What is the relationship if any, between price,elasticity and total revenue?

Price is directly proportional to elasticity of demand and inversely related to total

revenue. (1.5 mark)

(iii) Basing on your answer in (a) ii above, how would your advice the seller of the
product?

The seller is advised to charge low price to increase revenue, (1.5 mark)

(b) When does a consumer buy more of a commodity at a given price? Provide five points.

The following are the reasons as to why a consumer may buy more of a commodity at a given
price (reasons for exceptional demand curve)
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 i. Ignorance of consumers on price of goods on other markets
ii. Habits in use of a commodity
iii. Luxury goods
iv. Fear of serious shortage in future
v. Giffen goods
vi. Expected future price change
(5 points @ 2 = 10 marks)

5. (a) A firm which operates under perfect competitive market (PCM) has a long run
equilibrium fixed cost of 120/= when firm sales 5 units of output its total revenue is
275/=. Other information is given below:

Output Average cost

1 145

2 75

3 55

4 50

5 54

i. Prepare a table for ac, TC, TFC, AVC, P and TR

Data given:
TFC = 120
TR = 275 at 5 units

Workings
Normal profit is achieved when P = AC or TR = TC
and
TR = P  Q
P = TR/Q
AC = TC/Q
TC = TVC  TFC OR AC Q ( 2 mark)
Consider the table below:

Output Average Total Total Average Pric Total

(Q) Cost Cost Fixed Variable Cost e Revenue
(AC) (TC) Cost (AVC) (P) (TR)

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 (TFC)

1 145 145 120 25 55 55

2 75 150 120 15 55 110
3 55 165 120 15 55 165
4 50 200 120 20 55 220
5 54 270 120 30 55 275
(25 Items @0.2 =5 Marks)

ii. At what level of output will variable cost per unit of output be 30?

At 5units of output, average variable cost is 30………. (1 marks)

iii. At what output will a firm earn normal revenue?

At 3 units, a firm earns a normal profit since at normal profit, P = AC…

OR TR = TC 65 (1 Marks)

iv. At what price and output will a firm maximize profit?

At 4 units, a firm maximizes profit because the difference between TR and TC Is

maximum. ℿ = TR – TC, 220 – 200 = 20…………………. (1 marks)
(b) Use diagram to explain three laws of return to scale.
Answer
Return to scale means changes in output and proportionate change in all factors of
production. It explains the changes in output in long run when all factors changes in the
same proportional where output can increase more than inputs, increases same as inputs
or decreases. Consider illustration below. ( 2 mark)

( 2 mark)

Increasing returns to scale:it occurs when an increase in output is more than proportionate
increase in inputs. Exampleif the inputs in a production process are increased by 100% and it
leads to an increase in production by more than 100% then the production function is said to be
one of having an increasing return to scale. ( 2 mark)
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Decreasing return to scale: it occurs when an increase in output is less than proportionate
increase in inputs. Example If increasing the inputs by 100% leads to increase in production by
less than 100% then the production function is said to be having a decreasing return to scale.
( 2 mark)
Constant returns to scale: it occurs when an increase in output is same asa proportionate
increase in inputs. Example, If the inputs of the production process are increased by 100% and
output increase exactly by 100% then the production function of the firm is said to be having
constant returns to scale ( 2 mark)

SECTION C (40 Marks)

Answer any two (2) questions from this section.

NB:
ESSAY QUESTIONS.
INTRO. = 1 MARK
MAIN BODY: 6 POINTS @ 3 = 18 MARKS
CONCL. 1 MARK
TOTAL 20 MARKS.

6. Exchange of goods and services to satisfy human wants in an economy has no any drawbacks
if the whole society has mutually agreed to do so” With six points, argue in hostile to this
statement.

The question requires drawbacks of barter system. These are

 Lack of double coincidence of wants.

 Lack of a common measure of value.
 Indivisibility of certain goods.
 Difficulty in making deferred payments.
 Difficulty in storing value.
 Immovable nature of some goods. Eg. Buildings.

7. Describe six factors which induce employment in an economy.

The question requires the factors which creates employment opportunities. these are:

o Fluctuation in economic activities. Example boom creates employment opportunities

o Political factors. Eg. Policies on self-employment
o Government policy on production / investment. Eg. Industrialization policy creates
employment opportunities.
o Technological advancement. It creates job s for machine operators etc.
o Peace and security
o Economic factors. etc

8. Use six (6) points to evaluate the Malthusian theory of population.

The question needs to assess the Malthusian theory of population on its applicability and
failure. The following can be the arguments.
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The Malthus population theory is a theory of exponential population growth and arithmetic food
production established in 1798 on Malthus essay of principles of population. He suggested that
population is growing faster than food production hence starvation may occur if population is not
checked. The theory has pertinence and weaknesses as follows:

 In developing countriesit’s true that population growth is higher than food production
 It’s true that improvement in social services increases population
 To some extent, the international trade failed to solve food problem in LCDs
 It is true that land is fixed in supply
 It’s true that natural calamities have been checkers of high population as suggested by
Malthus
 Malthus did the research in Europe only and concluded for the whole world, this cannot
be true to all nations
 Malthus ignored distribution of resources. Some counties have lower population with
unequal income distribution
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