Q.1. A free good
Answer: B- has zero opportunity cost in its supply
Q.2. The equilibrium market price can be defined as the price at which
Answer: A- the market for the product clears.
Q.3. The diagram below illustrates the industry supply curve for mobile phones.
All other things being equal, the upward slope of the supply curve is due to
Answer: B- higher prices providing a profit incentive for firms to expand production.
Q.4. The free market equilibrium price for a merit good is £50 per unit. At present, the government does not intervene in the market for this good. The government is most likely to correct the market failure associated with this merit good if it
Answer: D- subsidizes the free market price.
Q.5. The four diagrams below relate to the provision of medical services at a local hospital. The services are currently provided free. It has been suggested that patients could pay £20 each time they receive treatment at the hospital to reduce pressure on its fixed capacity and to reduce waiting times for treatment.
Which one of the diagrams, A, B, C or D, best illustrates the effects of such a policy?
The supply of medical services is provided for free now (S), thus the demand for them is high (D1). The hospital now has decided to reduce the pressure on the fixed capacity its staff and also the waiting time for treatment, thus, they suggested that patients could pay £20 each time they receive treatment at the hospital. Due to this decision, now the cost of receiving medical services will go up, thus the demand will come down to D2, supply being constant.
Q.6. The table below shows the private and external costs for four products. Which product, A, B, C or D, has a market price which takes least account of negative externalities?
|Product||private cost per unit of output
|External cost per unit of output
Answer: D: product D has market price which takes least account of negative externalities because the external cost per unit of output is highest in case of product D i.e. £8 per unit of output. Also, the share of external cost per unit of output from the total market price is highest.
Q.7. Which one of the following provides a reason why governments should intervene in a market economy?
Answer: D- Private firms are unable to produce merit goods in a free market.
Q.8. The diagram below illustrates the market demand (D) and market supply (S) curves for a good. The production of the good creates a negative externality.
To reduce production and consumption of the good to OQ2, the government could impose a
Answer: B- tax of P2P3.
Q.9. The table below shows possible sources of market failure in current UK markets.
Which combination of example and policy, A, B, C or D, is consistent with the possible source of market failure identified?
|Source of market failure||Example of market failure||Policy to correct market failure|
|A||Public good||Healthcare||State provision|
|B||Positive consumption externalities||Education||Minimum price|
|C||Merit good||Petrol||Indirect taxation|
|D||Negative production externalities||Electricity generation||Pollution permits|
Answer: D- Negative production externalities arise from electricity generation like pollution etc. which leads to market failure. Thus, policy provision like pollution permits would help in correcting the market failure.
Q.10. All other things being equal, when the equilibrium price of car tyres in a market rises from £60 to £90, the quantity demanded falls from 2 million units to 1.5 million units. Therefore, the value of the price elasticity of demand is
Answer: C: -0.5
Price elasticity of demand is percentage change in quantity demanded by percentage change in price.
% change in quantity demanded= -0.5million/ 2 million= -0.25 × 100 = - 25%
% change in price = 30/60 = 0.5 × 100= 50%
Thus price elasticity of demand = -25%/ 50% = -0.5
Q.11. The existence of scarcity in an economy implies that
Answer: A- there is no free goods
Q.12. The diagram below shows the production possibility boundaries for Countries X and Y respectively.
The opportunity cost of cars in terms of bicycles
Answer: B- is greater for Country Y than for Country X.
Q.13. The table below indicates the average price of furniture as a price index.
Which one of the following can be deduced from the data above?
Answer: B- Compared with 2015, the price of furniture was 20% cheaper in 2011.
% change in price compared with 2015: (125-100)/ 125 = 25/125 ×100 = 20%
Q.14.Which one of the following is the most likely disadvantage that may arise from the growth in the size of a firm?
Answer: D- Problems in coordinating different parts of the business
Q.15. The diagram below shows the marginal private and social benefit (MPB and MSB) curves and the marginal private and social cost (MPC and MSC) curves for a good which generates negative externalities in production.
In the absence of government intervention, a misallocation of resources is likely to occur because
Answer: D- there is overproduction of JH.
Q.16. A firm is productively efficient when
Answer: A- it is operating at the lowest point on its average cost curve.
Q.17. The use of money as a medium of exchange enables an economy to
Answer: C- prevents market failure.
Q.18. The two diagrams below show the markets for Goods X and Y.
The markets are initially in equilibrium at P1 and Q1. If the supply of Good X increases and both markets move to a new equilibrium at P2 and Q2, it may be concluded that Goods X and Y are in
Answer: A- Competitive demand.
Competitive demand is the demand for products that are competing for sales i.e. people can substitute one good for another. Here, demand for Good X increases thus, the demand for its substitute/competitor Good Y decreases.
Q.19. Which one of the following combinations, A, B, C or D, is most likely to increase a firm’s monopoly power?
|Barriers to entry||Product differentiation|
Answer: A- Barriers to entry increase and product differentiation decrease.
Q.20. An indirect tax on the production of a good will have no effect on its market price if demand is
Answer: D- perfectly inelastic
Q.21.Complete market failure exists when
Answer: D- there is a missing market in the provision of public goods.
Q.22. The cross price elasticity of demand for two products which are close substitutes for each other will be
Answer: A- high and positive.
Cross-price elasticity value is positive when the two goods are substitutes i.e. as the price of one good increase, the demand for the other good increases. Also, in case of close substitutes, the coefficient of cross price elasticity is high.
Q.23. The size of a firm increases. As a result, its long run average costs fall because the firm utilizes its factory more efficiently and the advertising cost per item decreases. Therefore, the firm experiences
Answer: A- technical and marketing economies of scale.
Q.24. If the consumption of a product results in a negative externality, it follows that
Answer: C- an optimum allocation of resources can be achieved by placing a tax on the product
Q.25. Which one of the following is most likely to be a reason for government failure?
Answer: C- Missing markets for public goods and merit goods