Question 1

1.1 The diagram below illustrates the basic concept of demand and supply in a free market. The point
where the demand and supply curves intersect represents the equilibrium price and quantity in the
market. At this point, the quantity demanded by consumers is equal to the quantity supplied by
producers, resulting in a balance between supply and demand.

When there is a disequilibrium in the market, meaning that the quantity demanded does not equal the
quantity supplied, market forces come into play to drive the market back towards equilibrium.

For example, if the price is initially above the equilibrium price, the quantity demanded will be less than
the quantity supplied, leading to a surplus. In response to this surplus, producers will lower their prices
to sell off excess inventory, which in turn increases the quantity demanded by consumers. As prices
decrease, the quantity supplied decreases and the quantity demanded increases, eventually leading to a
new equilibrium at a lower price and higher quantity.

Conversely, if the price is initially below the equilibrium price, the quantity demanded will be greater
than the quantity supplied, leading to a shortage. In response to this shortage, producers will raise their
prices to capitalize on the high demand, which in turn decreases the quantity demanded by consumers.
As prices increase, the quantity supplied increases and the quantity demanded decreases, eventually
leading to a new equilibrium at a higher price and lower quantity.

In both cases, market forces work to bring the market back to equilibrium by adjusting prices and
quantities to match supply and demand. This demonstrates that in a free market, disequilibrium will
always be temporary as market forces work to restore equilibrium according to demand and supply
theory.
1.2

Microeconomics and macroeconomics are two branches of economics that focus on different aspects of
the economy.

Microeconomics deals with the behavior and decision-making of individual economic agents, such as
households, firms, and consumers. It examines how these agents allocate their resources to maximize
their utility or profit. Microeconomics analyzes the supply and demand for specific goods and services,
market structures, pricing decisions, consumer behavior, and factors influencing production.

For example, microeconomics can explain how a household decides to allocate its income between
consumption and savings. It can also analyze how a firm determines the optimal level of production by
considering costs, revenues, and market conditions.

On the other hand, macroeconomics studies the overall performance and behavior of an economy as a
whole. It focuses on aggregate variables such as national income, unemployment rates, inflation rates,
economic growth, and government policies. Macroeconomics aims to understand the factors that
influence these variables at a national or global level.

For instance, macroeconomics can analyze how changes in government spending or taxation policies
affect aggregate demand and economic growth. It can also examine how fluctuations in interest rates
impact investment decisions by businesses or consumer spending patterns.
Question 2

2.1.1 A: The total utility for A is 60, and the marginal utility for A is 15 (60 - 45).

2.1.2 B: The total utility for B is 90, and the marginal utility for B is 20 (90 - 70).

2.1.3 C: The total utility for C is 0, and the marginal utility for C is unknown.

2.1.4 D: The total utility for D is 75, and the marginal utility for D is 15 (75 - 60).

2.1.5 E: The total utility for E is unknown, and the marginal utility for E is also unknown.

2.2 The law of equalizing the weighted marginal utilities refers to the concept that individuals tend to
allocate their resources in a way that maximizes their overall satisfaction or utility. This principle is based
on the assumption that individuals make rational decisions and seek to maximize their well-being.

The table mentioned in the question likely represents different options or goods, along with their
respective marginal utilities and weights. Marginal utility refers to the additional satisfaction or benefit
gained from consuming one more unit of a good, while weights represent the relative importance or
preference given to each option.

To apply the law of equalizing the weighted marginal utilities, individuals would compare the marginal
utilities of different options and allocate their resources in a way that equalizes these utilities per unit of
weight. In other words, they would aim to distribute their resources in a manner where the additional
satisfaction gained from consuming one more unit of each option is proportional to its weight.

By doing so, individuals can achieve an optimal allocation of resources that maximizes their overall
utility. This principle helps guide decision-making by considering both the relative importance of
different options (weights) and the additional benefit derived from consuming more of each option
(marginal utility).
2.3

Returns to scale refer to the effect of increasing all inputs by a certain proportion on the level of output.
There are three main categories of returns to scale: constant returns to scale, increasing returns to
scale, and decreasing returns to scale.

1. Constant Returns to Scale (CRS):

Constant returns to scale occur when a firm's output increases in the same proportion as the increase
in all inputs. In other words, if all inputs (such as labor, capital, and materials) are doubled, the output
will also double. This implies that the firm's production function exhibits constant returns to scale over a
given range of output.

For example, if a firm doubles its labor, capital, and material inputs and finds that its output also
doubles, it is said to exhibit constant returns to scale. This indicates that the firm's production process is
efficient and can easily adjust to changes in input levels without a significant increase or decrease in
efficiency.

2. Increasing Returns to Scale (IRS):

Increasing returns to scale occur when a firm's output increases at a greater proportion than the
increase in all inputs. This implies that the firm becomes more efficient as it increases its scale of
production. When a firm experiences increasing returns to scale, it can lower its average cost of
production as it expands its operations.

For instance, if a firm doubles its inputs and finds that its output more than doubles, it is said to exhibit
increasing returns to scale. This signifies that the firm's production process benefits from economies of
scale, such as specialization, bulk discounts, or more efficient use of resources.

3. Decreasing Returns to Scale (DRS):

Decreasing returns to scale occur when a firm's output increases at a lesser proportion than the
increase in all inputs. In this scenario, the firm's level of efficiency decreases as it expands its scale of
production. This often leads to an increase in average cost per unit of output.

If a firm doubles its inputs but finds that its output less than doubles, it is said to exhibit decreasing
returns to scale. This suggests that the firm's production process may become less efficient as it grows,
possibly due to issues such as coordination problems, diminishing returns to inputs, or other
inefficiencies related to increased size.
Question 3

3.1 Aggregate Demand (AD) Curve

The aggregate demand curve illustrates the relationship between the price level and the quantity of real
GDP demanded by households, firms, and the government within an economy. It reflects the
relationship between the aggregate price level and the level of real GDP produced in an economy,
holding constant other factors such as the money supply, government spending, and taxes.

Inverse Relationship between Price Level and Real GDP

1. Effect on Real GDP: As the price level decreases, the real value of money increases. This encourages
consumers to spend more, given that their purchasing power has risen. Similarly, firms find it more
profitable to expand production as lower prices increase the purchasing power of consumers, leading to
an increase in the quantity of goods and services demanded.

2. Impact on Aggregate Demand: The downward slope of the AD curve illustrates this inverse
relationship. When the price level falls, consumers and firms are motivated to increase their spending
due to the increased purchasing power of money. This leads to a higher quantity of goods and services
being demanded in the economy.

3. Effects on Output and Employment: The increase in aggregate demand leads to an increase in real
GDP as firms produce more in response to the higher demand for goods and services. As production
rises, firms may need to hire more workers to meet the increased demand, leading to potential
improvements in employment levels and economic output.

4. When Prices Rise:

On the contrary, when the price level rises, the real value of money decreases, leading to a decrease in
consumer purchasing power. This, in turn, reduces the quantity of goods and services demanded in the
economy, resulting in lower real GDP.

Graphical Representation

Using the AD curve, we can see this relationship where a decrease in the price level (holding other
factors constant) leads to an increase in the quantity of real GDP demanded, and vice versa. This is
visually depicted by the downward slope of the AD curve, indicating the inverse relationship between
the price level and real GDP.
3.2

The two main tools of fiscal policy are government spending and taxation.

Decreasing government spending means that the government will spend less money on goods and
services, which will reduce the overall demand in the economy. This decrease in demand will lead to a
decrease in prices, helping to control inflation.

On the other hand, increasing taxes means that individuals and businesses will have less disposable
income, which will also reduce their demand for goods and services. This decrease in demand will also
help to control inflation.

Additionally, the government can also use targeted tax policies to reduce demand for specific goods or
services that are contributing to inflation. For example, if the price of oil is driving up inflation, the
government can implement a higher tax on gasoline to discourage consumption and reduce demand.

It is important for the government to carefully balance these measures, as too much of a decrease in
government spending or too high of an increase in taxes can lead to a decrease in economic growth and
potentially cause a recession. Therefore, the government must carefully consider the state of the
economy and make adjustments accordingly.
Question four to eight

4. True

5. False

6. False

7. False

8. False

Question nine to eight

9. i. Vertical

10. vii. Entrepreneur

11. xi. S-shaped

12. vi. A determinant of demand

13. ii. Distribution effect

14. xii. Cannot be measured

15. x. An economic system

16. viii. Short run aggregate supply

17. xiii. Normative statement

18. iii. Can be measured