rESr coDE 02116020

FORM TP 2015173 %. MAY/JUNE 2OI5

CARIBBEAN EXAMINATIONS COUNCIL

CARIBBEAN ADVAXCii,n PROFICIENCY EXAMINATION@
ECONOMICS

UNIT 1-PaPer02
2 hours 30 minutes

21 MAY 2015 (a.m.)

READ THE FOLLOWING INSTRUCTIONS CAREFULLY.

l. This paper consists of THREE sections: l, ll and IIl.

2. There are TWO questions in each section. Candidates MUST answer

THREE questions, ONE from EACH section.

3. Answers for ALL questions must be written in the answer booklet

provided.

4. Begin EACH question on a separate page.

5. You may useasilent, non-programmablecalculatortoanswerquestions'

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DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.
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Copyright @ 2Ol4 Caribbean Examinations Council

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All rights reserved.
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SECTION I
MODULE 1: METHODOLOGY - DEMAND AND SUPPLY
Answer ONE question.

Draw ALL diagrams neatly and carefully, and clearly label ALL axes and curves.

1. Table I shows the quantity of chocolate bars that Romain consumes in a given period of time, the
total utility and marginal utility associated with the consumption of the chocolate bars.

TABLE 1

Chocolate Bars Total Utility Marginal Utility

0 0

I 20

2 35

J 47

4 0

5 45

(a) (i) Copy Table I into your answer booklet and complete it to show the total utility
and the marginal utility derived from the consumption of I to 5 chocolate bars.
[5 marks]
(ii) Define EACH of the following terms:

a) Totalutility [2 marksl

b) Marginal utility [2 marksl

c) Law of diminishing marginal utility [2 marks]

(iii) State the point at which Romain

a) begins to lose satisfaction from his consumption of each additional chocolate 1

bar I mark] ;

b) maximizes his satisfaction from consuming chocolate bars-

[1 markl

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(b) Assume that the maximum amount that Romain is willing to pay for a chocolate bar is
$5.00 and the current market price is $2'50. At this price Romain is willing and able to
t

purchase 6 chocolate bars.

(i) Define the term 'consumer surplus'. [2 marks]

(ii) Draw Romain's demand curve. [4 marksl

(iii) On the demand curve in (b) (ii) above, shade and label the TOTAL consumer
surplus. [2 marksl

(c) With reference to marginal utility theory, justify the shape of Romain's demand curve for
chocolate bars. [4 marksl

Total25 marks

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2. The following equations are for the demand and supply curves in the market for pens.

Demand: Qo:20 -2P

Supply: Q,:5+3P,
quantity demanded, Q, is the quantity supplied, and P is the price per pen' in dollars'
where Qo is the
fll

(a) (i) Define the term 'market equilibrium'' [2 marks] in

(ii) copy Table 2 into your answer booklet and complete it to show the quantity of
pens demanded and the quantity supplied'

TABLE 2

Price per Unit Quantity Demanded Quantity Supplied

4
[5 marks]

that shows
(iii) Use the information from the completed Table2 to draw a diagram

a) the demand curve and supply curve for pens [3 marksl

b) the equilibrium price and quantity' [2 marks]

(iv) a) If the government sets a price of $2 per pen, state the name of this tYPe of
intervention. [1 markl

b) Explain, giving details, the market outcome at this price' [3 marksl

apply a specific tax of

(b) In an effort to balance the budget, the government has decided to
$l per pen levied on the Producer.
[5 marks]
I
(i) Illustrate this change on the diagram in (a) (iii) above'
.t
surplus, government
(ii) Analyse the total welfare effect (consumer surplus, producer
in (b) (i) above to
revenue and deadweight loss) of the tax. Refer to the diagram
support your analysis. [4 marksl

Total25 marks

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SECTION II
MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION

Answer ONE question.

I 3. (a) (i) a) Define the term 'price discrimination'. [2 marksl

li
b) outline oNE form of price discrimination that may be used by a firm.
[2 marksl

(ii) Outline TWO conditions that are necessary for price discrimination. [4 marks]

(iii) Explain ONE reason why a firm would opt to apply price discrimination.
[3 marks]

(b) List TWO types of market structures that exist in CARICOM and give one example of
EACH. [4 marksl

(c) (i) Illustrate, using a diagram, the profit maximizing output and price for a monopolistic
firm. [6 marksl

(ii) Analyse why a perfectly competitive firm is more efficient than a monopolistic
firm. [4 marksl

Total25 marks

4. (a) Define EACH of the following terms:

(i) Market failure [2 marksl

(ii) Pareto efficiency [2 marksl

(iii) Productive efficiency [2 marksl

(b) (i) State THREE reasons why the competition or regulatory authorities may prevent
a merger of TWO major companies in an industry. [3 marksl

(ii) Explain how EACH of the following types of goods contributes to market failure,
stating an examPle of EACH.

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a) Public [4 marks]
J
b) Merit [4 marks]

(c) Discuss TWO measures used by governments to correct market failure. [8 marksl

Total25 marks

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SECTION III
MODULE 3: DISTRIBUTION THEORY

Answer ONE question.

5. (a) (i) Define the term 'wage differentials'. [2 marksl

v
(ii) Identify TWO factors that may cause imperfections in the labour market on the
a) demand side [2 marksl

b) supply side. [2 marksl

(b) (i) Distinguish between 'geographical mobility'and 'occupational mobility'.

[4 marksl

(ii) Discuss TWO effects of labour mobility on wages across different CARICOM
territories. [8 marksl

(c) Using awell-labelled diagram, analyse the effect of a monopoly trade union in determining
*ug"i and the level of employment under perfect competition. 17 marksl

Total25 marks

6. (a) (i) Explain the concept of income inequality'' [3 marksl

(ii) Identify THREE measures used to reduce income inequality. [3 marksl

(b) (i) List TWO ways of measuring poverty. [2 marksl

(ii) Explain THREE economic costs of poverty' [9 marks]

(c) The main aim of the Mitlennium Development Goals is to alleviate poverty. In support
of
this aim most governments in CARICOM have expended millions of dollars in resources
to attemPt to alleviate Poverty.

Assess TWO economic benefits of this expenditure by CARICOM

governments.
[8 marksl

Total25 marks

END OF TEST

TEST'
IF YOU FINISH BEFORE TIME IS CALLED, CHECK YOUR WORK ON THIS

021r6020/cAPE 2015