1. Describe the concept of diminishing marginal utility with an example.

The law ofdiminishing marginal utility simply means that consuming more of oneproduct while holding others constant reduces the marginal utility ofthe consumer. For example, eating more servings of food lead to lessutility compared to the earlier plate.

  1. Using the idea of the diamond and water paradox create and explain one of your own as an example of valuation.

The diamond andwater paradox can be best understood through the concepts of marginalutility and scarcity. For example, given a choice between buying acar or a house where the house is more of a basic need while the caris a luxury.

  1. Describe the concepts of fixed and variable costs with an example for each.

Fixed costs arecosts that are not dependent on the level of output thus remaining atthe same level over a given relevant range. For example, rent paidover the year for a premise. Variable costs on the other hand varywith the level of output. For example, cost incurred on raw materialsused in production.

  1. Describe economies of scale, and provide a well explained example.

Economies of scaleare the advantages of befits accrued by a business organization as aresult of carrying out its activities on a large scale. That is, thehigher the quantity produced the lower the cost per unit ofproduction. For example, producing 50 units for $500 and 250 unitsfor $1000 costs $10 and $4 per unit respectively.

  1. Name, explain and give an example for each of the two determinants of the interest rate.

The firstdeterminant of interest rates is internal factors in the financialmarkets such as savings and investment that fluctuateproportionately. The second determinant is external factors such aseconomic conditions which have an effect on spending habits and thusinterest.

  1. Describe purchasing power with an example of decreased purchasing power.

Purchasingpower can be described as the total number of goods or even theamount of services that can be successfully bought using a givencurrency. Decreasing purchasing power can be demonstrated by 3 unitspurchased using $1 at period 1 and $1 purchasing 1 unit at period 2.

  1. Explain the concept of the substitution effect with an example.

Substitution effectis the tendency of consumers replacing goods or consumption trendswith either higher or lower alternatives depending on factors such asincome level. Moving from a middle-income to a high-incomeneighborhood after gaining promotion at work can be a properillustration.

  1. Detail the theory of budget constraint with an example.

A budget constraintrepresents the optimum combination of goods and services that aperson can be able to purchase with reference to their income. Forexample, a person earning $100 can only buy goods worth that much.Say, a combination of $20, $25, $50 and $5.

  1. Explain the concept of elasticity of demand with an example.

Elasticity of demandrepresents the level of sensitivity of a good’s demand tofluctuations in its price. For example, an increase in demand foreggs by 10% as a result of decrease in price levels by 5%.

  1. Explain the concept of inelastic demand with an example.

Inelastic demand canbe described as a situation where demand for a good or service doesnot fluctuate regardless of changes in its price. For example, aconstant demand of 100 units per week with prices gradually shiftingby 25%.

  1. Describe the partnership, sole proprietorship and corporation with two advantages and two disadvantages for each.

A partnership is aform of ownership where shares of a firm are held by two or morepeople.


  • Limited external regulation

  • Increased ability of contributing higher capital to the firm


  • High risk of disagreements hence dissolution

  • Share of the partnership’s liabilities

A sole proprietorship business is a business owned and run by oneindividual.


  • Complete control

  • Low start-up costs


  • Full liability and obligations for the business

  • Difficult to get investor support

A corporation is anentity that has been given a legal personality to act as a person orindividual in its operations.


  • Easy access to investors

  • Shareholders not responsible for liabilities


  • High start-up costs

  • Double-taxation

  1. Describe economies and diseconomies of scale while explaining possible reasons for both situations to occur.

Economies of scale can be described as the total benefits enjoyedafter a business firm reforms it operation to a large scale whilediseconomies of scale are the disadvantages accrued. For bothsituations to occur, comparison should be made based on the change incost per unit produced.


Hubbard, G., &amp O`Brien, A. (2008). Economics. Upper Saddle River, N.J.: Pearson Prentice Hall.