Principles of Economics August 2026 ATD Level III Answers

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ACCOUNTING TECHNICIANS DIPLOMA (ATD) LEVEL III
PRINCIPLES OF ECONOMICS
WEDNESDAY: 19 August 2026. Morning Paper. Time Allowed: 2 hours.

This paper consists of fifty (50) Multiple Choice Questions. Answer ALL questions by indicating the letter (A, B, C or D) that represents the correct answer. Each question is allocated two (2) marks.

1. A county government intends to convert 200 hectares of fertile agricultural land into an industrial park. The expected increase in manufacturing output is estimated at Sh.900 million annually, while the agricultural output forgone is valued at Sh.650 million annually. The economic concept illustrated by the value of agricultural production forgone is .
A. marginal benefit
B. opportunity cost
C. consumer deficit
D. marginal cost (2 marks)

2. A logistics company has 20 delivery trucks but receives customer requests requiring the equivalent of 35 trucks each day. Which economic problem is illustrated?
A. Inflation
B. Monopoly
C. Scarcity
D. Poverty (2 marks)

3. An economy experiences rapid technological advancement, enabling it to produce more capital goods and consumer goods using the same quantity of resources. This situation would be represented by .
A. an outward shift of the production possibility frontier
B. an inward shift of the production possibility frontier
C. movement inside the production possibility frontier
D. a movement along the production possibility frontier (2 marks)
4. Which one of the following statements is MOST likely to weaken consumer sovereignty in a free-market economy?
A. Increased consumer income
B. Perfect information
C. Increased competition by firms in same industry
D. Extensive advertising by dominant firms (2 marks)
5. Which one of the following statements distinguishes positive economics from normative economics?
A. Positive economics recommends government policies
B. Positive economics is based on value judgements
C. Positive economics explains economic relationships using objective analysis
D. Positive economics only studies macroeconomic issues (2 marks)
6. The demand for electric bicycles increased after commercial banks introduced affordable green-energy loans to households. This increase in demand was MOST likely caused by .
A. a decrease in production costs
B. an increase in consumer purchasing power
C. a reduction in the number of suppliers for bicycles
D. an increase in indirect taxation (2 marks)

7. A bakery increases the selling price of bread from Sh.60 to Sh.72 per loaf, resulting in quantity supplied increasing from 12,000 loaves to 15,600 loaves weekly. The supply of bread is BEST described as .
A. elastic
B. perfectly elastic
C. inelastic
D. unit elastic (2 marks)
8. A government imposes a legally binding minimum price for milk that is above the market equilibrium price. The MOST likely immediate consequence is .
A. excess demand
B. reduced production
C. market equilibrium
D. excess supply (2 marks)
9. Following a severe drought, the supply curve for maize shifts left while demand remains unchanged. Which one of the following outcomes is MOST likely?
A. Lower equilibrium price and higher equilibrium quantity
B. Lower equilibrium price and lower equilibrium quantity
C. Higher equilibrium price and lower equilibrium quantity
D. Higher equilibrium price and higher equilibrium quantity (2 marks)

10. A firm estimates the demand function for one of its products as Qd = 800#8211; 20P and the supply function as Qs = 100
+ 15P. The equilibrium price is .
A. Sh.18
B. Sh.20
C. Sh.24
D. Sh.30 (2 marks)
11. A transport company observes that demand for executive buses rises significantly whenever passenger incomes increase. Executive bus services are therefore classified as .
A. inferior goods
B. giffen goods
C. normal goods
D. complementary goods (2 marks)
12. Which one of the following factors might cause a movement along the demand curve rather than a shift?
A. Change in the commodity’s own price
B. Increase in advertising expenditure
C. Change in consumer tastes
D. Change in population (2 marks)
13. A smartphone manufacturer reduces its selling price by 10%, causing quantity demanded to increase by 25%. Demand is therefore
A. unit elastic
B. perfectly inelastic
C. inelastic
D. elastic (2 marks)

14. Which one of the following policies is appropriate for correcting persistent shortages created by an effective price ceiling?
A. Increase indirect taxes
B. Remove or relax the price ceiling
C. Introduce import quotas
D. Increase export duties (2 marks)

15. Under the ordinal approach to consumer behaviour, satisfaction is assumed to be .
A. rankable according to preference
B. measurable in monetary units
C. measurable in utility units
D. equal for all consumers (2 marks)

16. A consumer purchases an additional bottle of mineral water and experiences a smaller increase in satisfaction than from previous bottles. This illustrates .
A. equilibrium satisfaction of the consumer
B. substitutional effect
C. law of diminishing marginal utility
D. consumer surplus (2 marks)

17. Which one of the following assumptions underlies indifference curve analysis?
A. Utility is measurable in cardinal numbers
B. Prices are fixed permanently under cardinal approach
C. Income is unlimited
D. Consumer preferences are complete and transitive (2 marks)

18. A consumer switches from coffee to tea following an increase in coffee prices while maintaining the same level of satisfaction. This behaviour BEST illustrates .
A. income effect only
B. substitution effect
C. consumer surplus
D. producer surplus (2 marks)
19. Which one of the following would cause the budget line to shift outward in a parallel manner?
A. Increase in consumer income
B. Increase in price of one commodity only
C. Decrease in price of one commodity only
D. Change in consumer preferences (2 marks)
20. Consumer equilibrium under indifference curve analysis occurs where .
A. total utility is maximised without considering income of the consumer
B. marginal utility is equal to price for one commodity only
C. the highest attainable indifference curve is tangent to the budget line
D. average utility remains constant (2 marks)
21. A furniture manufacturer employs additional carpenters while keeping machinery and factory space unchanged. Initially, output increases at an increasing rate before eventually rising at a decreasing rate. The initial increase in marginal product is mainly attributed to .
A. economies of scale due to expanded production
B. better specialisation of labour
C. technological progress
D. constant returns to scale (2 marks)

22. Which one of the following combinations correctly identifies the four factors of production?
A. Labour, money, machinery and capital
B. Labour, technology, land and finance
C. Land, management, labour and government
D. Land, labour, capital and entrepreneurship (2 marks)

23. A manufacturing firm replaces manual packaging with automated machines, resulting in some workers losing their jobs. This unemployment is described as .
A. structural unemployment
B. seasonal unemployment
C. frictional unemployment
D. cyclical unemployment (2 marks)

24. A firm’s marginal product begins to decline while total product continues increasing. The firm is operating in
.
A. stage I of production
B. stage III of production
C. stage II of production
D. the shutdown stage (2 marks)

25. An isoquant shows .
A. different combinations of two products yielding equal revenue
B. different combinations of two inputs producing the same output
C. alternative levels of total cost
D. different combinations of output and profit (2 marks)

26. Producer equilibrium is achieved when .
A. average cost equals average revenue
B. total cost equals total revenue
C. marginal product equals total product
D. marginal rate of technical substitution equals the ratio of input prices (2 marks)

27. Which one of the following statements explains internal economies of scale?
A. Lower average costs arising from expansion within the firm
B. Reduced transport costs resulting from improved national infrastructure
C. Government tax incentives to all firms
D. Increased competition among firms (2 marks)

28. A firm’s total cost function is TC = 360 + 12Q. The marginal cost of producing one additional unit is .
A. Sh.360
B. Sh.(360 + 12Q)
C. Sh.12
D. Sh.372 (2 marks)

29. A company produces 250 units at a total cost of Sh.75,000. Average cost equals .
A. Sh.250
B. Sh.300
C. Sh.325
D. Sh.375 (2 marks)
30. A firm’s fixed cost is Sh.420,000. Selling price per unit is Sh.350 and variable cost per unit is Sh.230. Break-even output is .
A. 3,500 units
B. 2,625 units
C. 5,250 units
D. 6,000 units (2 marks)

31. Which one of the following costs remains unchanged regardless of output in the short run?
A. Marginal cost
B. Variable cost
C. Fixed cost
D. Average variable cost (2 marks)
32. External diseconomies of scale are likely to result from .
A. improved supervision
B. industry congestion
C. bulk purchasing
D. increased labour specialisation (2 marks)
33. A manufacturing firm’s average cost falls continuously as output expands because of increased specialisation and better utilisation of machinery. This demonstrates .
A. diseconomies of scale
B. constant returns to scale
C. law of diminishing returns
D. internal economies of scale (2 marks)
34. Under perfect competition, a profit-maximising firm should continue increasing output until .
A. marginal revenue equals marginal cost
B. average revenue equals average cost
C. total revenue equals fixed cost
D. average cost equals marginal cost (2 marks)

35. Which one of the following statements is the strongest barrier to entry under monopoly?
A. Product differentiation
B. Lack of appropriate technology
C. Legal patent protection
D. Large number of sellers (2 marks)
36. A monopolistically competitive firm is likely to compete through .
A. product differentiation
B. government regulation
C. price leadership
D. uniform pricing agreements (2 marks)
37. The kinked demand curve theory attempts to explain .
A. profit maximisation in monopoly
B. consumer equilibrium
C. labour demand
D. price rigidity in oligopoly (2 marks)
38. A monopolist practising price discrimination must be able to .
A. eliminate fixed costs and variable costs
B. prevent resale between market segments
C. eliminate substitutes products
D. increase marginal cost (2 marks)
39. In the long run, firms operating under perfect competition normally earn .
A. supernormal profits
B. monopoly profits
C. normal profits
D. negative profits (2 marks)
40. A firm operating under oligopoly is characterised by .
A. strategic interdependence among firms
B. independent pricing decisions
C. complete absence of competition from other firms
D. unlimited market entry (2 marks)
41. The Central Bank increases the cash reserve ratio from 4% to 6% to curb excessive growth in private sector credit. The immediate effect of this policy is MOST likely to be .
A. increased commercial bank lending
B. higher government expenditure
C. increased aggregate demand from increased purchasing power
D. reduced lending capacity of commercial banks (2 marks)
42. The national income of Country Z at market prices is Sh.1.8 trillion while depreciation is Sh.120 billion. The Net Domestic Product (NDP) at market prices is .
A. Sh.1.80 trillion
B. Sh.1.68 trillion
C. Sh.1.92 trillion
D. Sh.1.56 trillion (2 marks)
43. In a simple closed economy, autonomous investment increases by Sh.40 million. If the marginal propensity to consume is 0.75, the total increase in national income will be .
A. Sh.40 million
B. Sh.75 million
C. Sh.160 million
D. Sh.120 million (2 marks)
44. Which one of the following represents a leakage from the circular flow of income?
A. Government expenditure
B. Investment
C. Exports
D. Imports
(2 marks)

45. A government plans to reduce unemployment during an economic recession. Which fiscal policy measure is appropriate? .
A. Increase income tax rates
B. Increase development expenditure on infrastructure
C. Reduce government expenditure
D. Increase excise duties 2 marks)

46. A country experiences persistent demand-pull inflation. Which monetary policy action would reduce inflationary pressure?
A. Increase the Central Bank policy rate
B. Reduce the policy interest rate
C. Purchase government securities from commercial banks
D. Reduce the cash reserve ratio (2 marks)
47. The domestic currency appreciates significantly against major foreign currencies. Which one of the following is the MOST likely consequence?
A. Exports become cheaper to foreign buyers
B. Export volumes increase automatically
C. Imported goods become cheaper
D. Domestic inflation increases immediately (2 marks)
48. Which one of the following international trade policies is primarily intended to protect newly established domestic manufacturing firms until they become competitive?
A. Free trade
B. Import liberalisation
C. Export substitution
D. Protection of infant industries (2 marks)
49. Which one of the following is the BEST indicator of long-term economic development rather than short-term economic growth?
A. Increase in quarterly GDP
B. Increase in export earnings during one year
C. Increase in collected government tax revenue
D. Improvement in literacy, health and productivity (2 marks)

50. A country records the following data for one financial year: consumption Sh.850 billion, investment Sh.240 billion, government expenditure Sh.310 billion, exports Sh.180 billion and imports Sh.150 billion. Using the expenditure approach, the Gross Domestic Product is .
A. Sh.1.400 trillion
B. Sh.1.430 trillion
C. Sh.1.580 trillion
D. Sh.1.730 trillion (2 marks)
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