Economics — March/April 2024

Question 1(a)

Explain five challenges that firms face as a result of delocalization. (10 marks)

Answer

1. Relocation costs arise from moving equipment, fitting out premises and establishing new operations.
2. Disruption of production during the move can cause lost sales and failure to meet delivery commitments.
3. Loss of experienced employees may occur when staff are unwilling or unable to relocate.
4. Distance from established customers and suppliers can increase transport costs and weaken existing relationships.
5. Unfamiliar local infrastructure, labour markets and administrative requirements can delay effective operation at the new site.

Question 1(b)

Explain five factors that may affect the circular flow of income in an economy. (10 marks)

Answer

1. Saving withdraws part of household income from current consumption; investment can return funds to expenditure on output.
2. Taxation reduces private disposable income and is a withdrawal from the simple spending flow.
3. Government spending injects demand through purchases of goods and services and payments associated with public activity.
4. Imports divert spending to foreign-produced goods, reducing demand for domestic output.
5. Exports inject foreign expenditure into the domestic economy and generate income for local producers.

Question 2(a)

Outline four features of micro-economics. (8 marks)

Answer

1. Studies individual decision-making units such as consumers, workers and firms.
2. Examines prices and quantities in particular product and factor markets.
3. Analyses allocation of scarce resources among competing uses.
4. Often studies a particular market while holding other relevant influences constant, rather than treating all economy-wide aggregates together.

Question 2(b)

The supply of commodity X has been declining in market Q in the recent past. Explain six factors that may account for such a trend. (12 marks)

Answer

1. A rise in raw-material, wage or energy costs reduces profitability at existing output prices.
2. Production failures or deterioration in technology and equipment reduce productive capacity.
3. Higher taxes on production or withdrawal of subsidies increase supplier costs.
4. Adverse weather, disease or natural disasters damage output and distribution.
5. Exit of firms reduces the number of producers in the market.
6. Higher profitability of alternative products causes producers to divert resources away from commodity X.

Question 3(a)

Explain five circumstances under which the price elasticity of demand for a product may be perfectly inelastic. (10 marks)

Answer

1. A fixed essential requirement must be met and no usable substitute exists over the relevant price range.
2. A technical production process requires a fixed quantity of an input in the immediate period, and output cannot be adjusted in that period.
3. A legally specified quantity must be acquired and the buyer cannot change that quantity in response to the price.
4. An essential fixed-dose item is required in a set quantity and neither substitution nor a reduction is feasible within the period considered.
5. In an extremely short adjustment period, a buyer may be committed to an exact quantity and unable to alter the purchase before the period ends.

Perfect inelasticity means quantity demanded stays constant as price changes: elasticity equals zero and the demand curve is vertical. These are strict, fixed-quantity assumptions. Being a necessity or lacking close substitutes alone does not establish exactly zero elasticity.

Question 3(b)

Explain five factors that determine the amount of interest charged on capital as a factor of production. (10 marks)

Answer

1. Demand for loanable funds: stronger borrowing demand can raise the interest rate when other influences are unchanged.
2. Supply of savings: more funds available for lending can reduce the rate required to attract finance.
3. Borrower risk: lenders generally require higher interest where default risk is greater.
4. Loan duration and liquidity: committing funds for longer or on less flexible terms can affect the rate charged.
5. Expected inflation: lenders may require higher nominal interest to compensate for an anticipated loss of purchasing power.

Question 4(a)

The following information relates to a perfectly competitive market structure. Compute the missing information. (10 marks)

Answer

For a price-taking firm, total revenue TR = price × output; average revenue AR = TR ÷ output; marginal revenue MR = the change in TR per extra unit. Price is Ksh. 200 throughout, so AR and MR are both Ksh. 200.

Example: from 10 to 11 units, MR = (2,200 − 2,000) ÷ (11 − 10) = 200. At 12 units, AR = 2,400 ÷ 12 = 200.

Question 4(b)

Explain five factors that determine the amount of money that an individual may hold for transaction motive. (10 marks)

Answer

1. Income level: people with higher income commonly make larger routine purchases and hold more transaction balances.
2. Price level: higher prices require more money to buy the same routine quantity of goods and services.
3. Frequency of receiving income: longer intervals between receipts require funds to cover more days of spending.
4. Pattern of expenditure: frequent or large planned payments increase the amount needed for transactions.
5. Access to payment facilities: convenient banking, electronic payments and readily accessible accounts can reduce the need to keep physical cash.

Question 5(a)

Outline five ways in which the Central Bank of Kenya contributes to the economic growth of the country. (10 marks)

Answer

1. Pursues price stability through monetary policy, supporting predictable saving, investment and business planning.
2. Promotes financial stability and banking supervision, supporting confidence in financial intermediation.
3. Supports efficient payment, clearing and settlement systems, reducing friction in economic transactions.
4. Manages foreign-exchange reserves and performs foreign-exchange policy functions, supporting external payments and resilience.
5. Acts as banker, adviser and fiscal agent to the government, supporting orderly public financial operations.

Reference: Central Bank of Kenya — functions and mission.

Question 5(b)

Explain five reasons why some countries prefer direct taxation as a source of government revenue. (10 marks)

Answer

1. Ability to pay: tax can be related to income or wealth, making progressive contributions possible.
2. Redistribution: higher rates on higher taxable incomes can reduce after-tax inequality.
3. Certainty: clear rules can identify the taxpayer, tax base, due date and amount owed.
4. Revenue responsiveness: receipts from income and profits can rise as economic activity and taxable incomes grow.
5. Demand management: changing direct taxes affects disposable income and can support fiscal stabilisation.

Question 6(a)

Describe five causes of the cost push inflation in a country. (10 marks)

Answer

1. Wage increases exceeding productivity growth raise labour cost per unit.
2. Higher energy and fuel prices increase production and transport costs.
3. Rising prices of domestic or imported raw materials make finished products more expensive to supply.
4. Currency depreciation increases the domestic cost of imported inputs.
5. Higher indirect taxes or reduced production subsidies increase firms’ costs and can lead to higher selling prices.

Question 6(b)

The population of country Z has been declining in the recent past. Highlight five negative effects of such a trend. (10 marks)

Answer

1. A smaller workforce can reduce productive capacity and cause labour shortages.
2. A shrinking domestic market can reduce demand and discourage investment.
3. An ageing population can increase the dependency burden on remaining workers.
4. A smaller tax base can make financing public services more difficult.
5. Existing infrastructure, housing or public facilities may become underused, increasing cost per user.

Question 7(a)

Explain five benefits that a developing country may derive from participating in international trade. (10 marks)

Answer

1. Larger markets allow domestic producers to sell beyond the limits of local demand.
2. Export earnings provide foreign exchange for needed imports and external payments.
3. Imports provide access to capital equipment, technology and inputs that are scarce locally.
4. Specialisation according to relative production advantages can improve efficiency and output.
5. Trade expands consumer choice and competitive pressure, encouraging improvements in quality and productivity.

Question 7(b)

Outline five measures that the governments may take to enhance implementation of development plans in a country. (10 marks)

Answer

1. Set clear, realistic objectives with measurable outputs and implementation timetables.
2. Provide adequate funding, skilled staff and other resources for planned activities.
3. Assign responsibilities and coordinate ministries, agencies and other implementing bodies.
4. Involve affected communities and stakeholders so priorities are understood and supported.
5. Monitor progress, evaluate results and correct delays, waste or other implementation problems promptly.