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Form 4 Economics Practice Paper: Basic Concepts, Demand and Supply, Firms and National Income (12 Questions, 100 Marks, 75 Minutes)
Form 4 Economics – 12 questions – 100 marks – 75 minutes
Form 4 Economics paper: 12 questions, 100 marks, 75 minutes on opportunity cost, elasticity, marginal product, cost curves, GDP, unemployment, deposits and inflation.
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Paper details Form 4 Economics practice paper with 12 structured questions on opportunity cost, equilibrium price, price elasticity of demand, marginal product, cost curves, monopoly, national income, unemployment, deposit creation, progressive tax, comparative advantage and inflation, with full worked answers.
Section A: Basic Concepts, Demand and Supply (Q1-Q4, 34 marks)
Answer all questions; show the formula, substitution and unit for every calculation.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | 1. Mr Chan can choose among three jobs with monthly salaries of 18 000, 20 000 and 22 000 dollars; he could also study full time, which pays nothing. (a) Find his opportunity cost if he takes the highest-paid job. (2 marks) (b) Find his opportunity cost if he takes the 20 000 dollar job. (3 marks) (c) Explain why opportunity cost counts only the highest-valued option forgone rather than the sum of all forgone options. (4 marks) | Answer: (a) Taking the best-paid job means giving up the next best salary of 20,000 dollars, so the opportunity cost is 20,000 dollars. (b) Choosing the 20,000 dollar job means the highest-valued option forgone is 22,000 dollars, so the opportunity cost is 22,000 dollars; full-time study pays nothing and does not affect this choice. (c) A resource can serve only one purpose at a time; among the options given up only the most valuable one is a real cost, since its value already covers the others and adding them would double count. |
| 2 | 2. In a market the demand function is Qd = 120 – 4P and the supply function is Qs = 2P – 30, with price in dollars and quantity in thousand units. (a) Find the equilibrium price and quantity. (3 marks) (b) If the government sets a price ceiling of 20 dollars, find the size of the shortage. (3 marks) (c) Explain what non-price competition tends to appear when the ceiling is kept for a long time. (2 marks) | Answer: (a) Setting Qd = Qs gives 120 – 4P = 2P – 30, so 6P = 150 and P = 25 dollars, hence Q = 20 thousand units. (b) At a ceiling of 20 dollars, Qd = 120 – 80 = 40 thousand units and Qs = 40 – 30 = 10 thousand units, so the shortage is 30 thousand units. (c) Price cannot rise, so sellers ration the limited supply by queuing, rationing, tie-in sales or lower quality, and buyers bear extra time costs. |
| 3 | 3. The price of a product falls from 50 dollars to 40 dollars and quantity demanded rises from 200 to 260 units. (a) Use the arc formula to find the price elasticity of demand, taking the absolute value and giving two decimal places. (3 marks) (b) State whether demand is elastic, inelastic or unit elastic. (2 marks) (c) Find total revenue before and after the price cut and explain the link with your answer in (b). (3 marks) | Answer: (a) Percentage change in quantity = (260 – 200) / 230 = 26.09% and percentage change in price = (40 – 50) / 45 = -22.22%, so the absolute elasticity is 1.17. (b) The value is greater than one, so demand is elastic. (c) Total revenue was 50 x 200 = 10,000 dollars and becomes 40 x 260 = 10,400 dollars, a rise of 400 dollars; with elastic demand the percentage rise in quantity exceeds the percentage fall in price, so revenue rises. |
| 4 | 4. A firm uses one variable factor, labour, with a fixed factor. As labour rises from 1 to 5 workers, total product is 10, 26, 39, 48 and 52 units. (a) Find the marginal product of the 2nd to the 5th worker. (3 marks) (b) From which worker does diminishing marginal returns begin? (2 marks) (c) Find the average product of the 4th worker and explain how marginal product and average product are related. (3 marks) | Answer: (a) Marginal product is 16, 13, 9 and 4 units for the 2nd to the 5th worker. (b) Marginal product falls from 16 to 13 units at the 3rd worker, so diminishing marginal returns begin there. (c) The average product of the 4th worker is 48 / 4 = 12 units; average product rises while marginal product is above it and falls while it is below, and the two meet at the maximum average product. |
Section B: Firms, Market Structure and National Income (Q5-Q8, 33 marks)
Data: amounts are in dollars and units are given in each question; percentages must be given to the stated number of decimal places.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | 5. A firm has a total cost function TC = 200 + 6Q + 0.5Q2, where Q is output in units and cost is in dollars. (a) Find total cost when Q = 20. (2 marks) (b) Find average cost when Q = 20. (2 marks) (c) Find marginal cost when Q = 20. (2 marks) (d) Explain why average cost is at its minimum when Q = 20. (2 marks) | Answer: (a) TC = 200 + 6 x 20 + 0.5 x 400 = 200 + 120 + 200 = 520 dollars. (b) Average cost = 520 / 20 = 26 dollars. (c) Marginal cost = 6 + Q = 6 + 20 = 26 dollars. (d) Average cost stops falling and turns up when marginal cost equals average cost; at Q = 20, MC = AC = 26 dollars, so average cost is at its minimum there. |
| 6 | 6. A monopoly faces the demand curve P = 60 – 2Q, has a constant marginal cost of 20 dollars and no fixed cost. (a) Find the marginal revenue function. (2 marks) (b) Find the profit-maximising output and price. (3 marks) (c) Find total revenue, total cost and profit at that output. (3 marks) | Answer: (a) TR = 60Q – 2Q2, so MR = 60 – 4Q. (b) Profit is maximised where MR = MC: 60 – 4Q = 20 gives Q = 10 units and P = 60 – 20 = 40 dollars. (c) TR = 40 x 10 = 400 dollars, TC = 20 x 10 = 200 dollars and profit = 400 – 200 = 200 dollars. |
| 7 | 7. For an economy in a year, in billion dollars: private consumption 1 200, investment 340, government spending 280, exports 900 and imports 860; net factor income from abroad is -40 billion and population is 5.0 million. (a) Find gross domestic product. (3 marks) (b) Find gross national product. (3 marks) (c) Find gross domestic product per capita in dollars. (3 marks) | Answer: (a) GDP = 1,200 + 340 + 280 + (900 – 860) = 1,860 billion dollars. (b) GNP = GDP + net factor income from abroad = 1,860 + (-40) = 1,820 billion dollars. (c) GDP per capita = 1,860 billion / 5.0 million = 37200 dollars. |
| 8 | 8. In an economy the population aged 15 and over is 6.0 million, the labour force is 3.6 million and employment is 3.42 million. (a) Find the number of unemployed people. (2 marks) (b) Find the unemployment rate to one decimal place. (3 marks) (c) Find the labour force participation rate and explain why population aged 15 and over is not the same as the labour force. (3 marks) | Answer: (a) Unemployed = 3.6 million – 3.42 million = 0.18 million people (180,000). (b) Unemployment rate = 0.18 / 3.6 x 100% = 5%. (c) Participation rate = 3.6 / 6.0 x 100% = 60%; full-time students, retirees and homemakers neither work nor seek work, so they are outside the labour force. |
Section C: Money, Public Finance and Trade (Q9-Q12, 33 marks)
Write explanations in full sentences and support each point with calculated values or economic concepts.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | 9. Banks keep a required reserve ratio of 20% and the public holds no cash. A customer deposits 100 million dollars of new money. (a) Find the deposit multiplier. (2 marks) (b) Find the total deposits the banking system can finally create. (3 marks) (c) Find total new loans and explain how the result changes if the public holds cash. (3 marks) | Answer: (a) Deposit multiplier = 1 / 0.2 = 5. (b) Total deposits = 100 x 5 = 500 million dollars. (c) New loans = 500 – 100 = 400 million dollars; if the public holds cash, part of the money never returns to the banks, so the multiplier is smaller and total deposits fall short of 500 million dollars. |
| 10 | 10. A progressive tax charges 2% on the first 50 000 dollars of taxable income, 6% on the next 50 000, 10% on the next 50 000, 14% on the next 50 000 and 17% on the remainder. A person has taxable income of 480 000 dollars. (a) Find the tax payable. (4 marks) (b) Find the average tax rate to two decimal places. (2 marks) (c) Explain why the marginal tax rate is above the average tax rate. (2 marks) | Answer: (a) Tax = 50 000 x 2% + 50 000 x 6% + 50 000 x 10% + 50 000 x 14% + 280 000 x 17% = 1 000 + 3 000 + 5 000 + 7 000 + 47 600 = 63,600 dollars. (b) Average tax rate = 63,600 / 480,000 x 100% = 13.25%. (c) The top slice of income is taxed at 17% while the rest is taxed at lower rates, so the overall rate is pulled down to 13.25%, below the marginal rate of 17%. |
| 11 | 11. With the same resources and one hour of work, country A can produce 10 metres of cloth or 5 gallons of wine, and country B can produce 6 metres of cloth or 6 gallons of wine. (a) Find the opportunity cost of one metre of cloth and of one gallon of wine in each country. (3 marks) (b) State the comparative advantage of each country and say who has an absolute advantage in cloth. (3 marks) (c) State the range of the terms of trade for one metre of cloth. (3 marks) | Answer: (a) In A, 1 metre of cloth costs 5 / 10 = 0.5 gallons of wine and 1 gallon of wine costs 2 metres of cloth; in B, 1 metre of cloth costs 1 gallon of wine and 1 gallon of wine costs 1 metre of cloth. (b) A gives up less wine per metre of cloth (0.5 gallon against 1 gallon), so A has a comparative advantage in cloth and B in wine; A makes 10 metres in an hour against 6 in B, so A has an absolute advantage in cloth. (c) The terms of trade should lie between 0.5 and 1 gallon of wine per metre of cloth so that both gain. |
| 12 | 12. A consumer price index rises from 120 to 126 while nominal wages rise by 8% over the same period. (a) Find the inflation rate. (3 marks) (b) Find the percentage change in real wages to two decimal places. (3 marks) (c) Explain how purchasing power changes when inflation is above the growth of nominal wages. (2 marks) | Answer: (a) Inflation rate = (126 – 120) / 120 x 100% = 5%. (b) Change in real wages = (1.08 / 1.05 – 1) x 100% = 2.86%. (c) If nominal wages grow more slowly than prices, real wages fall, so the same wage buys fewer goods and services and purchasing power drops. |
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