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Economics CPA paper 1 mock exams with answers


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By Omosa


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NUMBER ONE (a) In a certain economy the marginal propensity to save is 0.2 and the autonomous consumption equals 400. i. Formulate the consumption function. (3 marks) ii. If the Government‟s expenditures were to increase by 50% what would be the resultant change in National income. (3 marks) (b) The demand and supply schedules for carrots in a certain market are given below: Price per ton (Sh „000‟) Quantity demanded per month (Thousands of tons) Quantity supplied per month (Thousands of tons) 2 110.0 5.0 4 90.0 46.0 8 67.5 100.0 10 62.5 115.0 12 60.0 122.5 Determine the equilibrium quantity and price by graphical method. (8 marks) (c ) Explain how the concept of elasticity guides decisions in the following situations: (i) Government‟s tax policy on household consumption. (2 marks) (ii) Devaluation policy to encourage exports and discourage imports. (2 marks) (iii) Price discrimination by a monopolist. (2 marks) (Total: 20 marks) NUMBER TWO (a) (i) Based on the circular flow of income analysis, explain why marginal propensity to consumer plus marginal propensity to save equals one. (4 marks) What is the relationship between the simple multiplier and marginal propensity to consume? (3 marks) (b) Given a hypothetical consumption function of the form: C = a + bYd Where Yd = Y – T And Y = Income T = Taxes and that: Government spending and investment are exogenously determined at G and I respectively: Determine Government Spending Multiplier. (5 marks) (c ) Briefly explain the hindrances encountered in estimating national income values of a developing country. (8 marks) (Total: 20 marks) NUMBER THREE You have been hired as a consultant by a firm producing bread to advise on a pricing strategy that would enable the firm to maximize profits. This firm is a monopolist which sells in two distinct markets, one of which is completely sealed off from the other. As part of the analysis, you establish that the total demand for the firm‟s output is given by the following equation: Q = 50 – 0.5P and the demand for the firm‟s output in the two markets is given by the following equations: Q1 = 32 – 0.4P1 and Q2 = 18 – 0.1 P2 Where: Q = total output P = Price Q1 = Output sold in Market 1 Q2 = Output sold in Market 2 P1 = Price charged in Market 1 P2 = Price charged in Market 2 The cost of production is given by C = 50 + 40Q Where C = total cost of producing bread. Required: (a) The total output that the firm must produce in order to maximize profits. (4 marks) (b) What price must be charged in each market in order to maximize profits? (2 marks) (c) How much profit would the firm earn if it sold the output at a single price, and if it discriminates? (5 marks) (d) (i) The price elasticity of demand for the two markets at the equilibrium price and quantity. (4 marks) (ii) Comment on how the price elasticity of demand may be used in making economic decisions. (3 marks) (e) Under what conditions is price discrimination possible? (2 marks) (Total: 20 marks) NUMBER FOUR (a) Distinguish between a tariff and a quota as applied in International Trade. (8 marks) (b) Argue for and against international trade restrictions. (12 marks) (Total: 20 marks) NUMBER FIVE (a) State the Law of diminishing returns as applied to production functions. (3 marks) (b) Illustrate and explain the three stages associated with the law of variable proportions. (9 marks) (c) The table below represents a production function for a commodity X where capital is fixed and labour is variable. Quantity of Labour Total Physical product (Tons of X) 0 0 1 15 2 34 3 48 4 60 5 62 Using the data in the table, plot the marginal product for labour. (8 marks) (Total: 20 marks) NUMBER SIX (a) (i) A monopolistic firm with a linear demand curve finds that it can sell two units at Sh.12 or twelve units at Sh.2. Its fixed cost is Sh. 20 and its marginal cost is constant at Sh. 3 per unit Derive and plot the following: Marginal cost, average total cost, marginal revenue and demand curves for this firm. (8 marks) (ii) At what output level will this firm produce? (4 marks) (b) Bring out the salient features of a monopsony market model. (8 marks) (Total: 20 marks) NUMBER SEVEN (a) Discuss the major causes of supply curve shifts. (7 marks) (b) By use of diagrams, illustrate and explain the resultant changes on the equilibrium price and quantity from a simultaneous fall in price of a substitute and an increase in the cost of raw materials for a specific commodity. (7 marks) (c) What are the determinants of demand for labour? (6 marks) (Total: 20 marks) NUMBER EIGHT (a) (i) Define the term hyperinflation. (2 marks) (ii) what is the effect of high and rising inflationary rate on the rate of interest? (4 marks) (iii) Suggest economic measures to curb inflation. (8 marks) (b) Given the following data in millions of shillings pertaining to an economy, determine Net National and Gross National Product Values. (6 marks) National income 3,387 Indirect business taxes (less subsidies) 366 Depreciation 455 (Total: 20 marks)
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