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Micro Multiple Choice Questions

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APT’s 540 Multiple Choice Questions for AQA A Level Economics

4.1

Individuals, Firms,
Markets and Market Failure

2
Page

© APT Initiatives Ltd, 2017. This document is for use ONLY by the purchasing individual or staff and students attending
the purchasing institution. It is not to be shared with anybody else without the prior written permission of APT Initiatives Ltd.
APT’s 540 Multiple Choice Questions for AQA A Level Economics

4.1.1

Economic Methodology and

the Economic Problem

3
Page

4.1.1 Economic Methodology and the Economic Problem

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. Value judgements influence economic decision making and policy because value
judgements

A are facts that individuals feel might be relevant to a decision.

B are evaluative processes that an individual uses solely to prioritise monetary value.

C are the foundations of positive decision making when a judgement is required.

D are evaluative processes based on an individual's standards or priorities.

2. Which one of the following is a central purpose of economic activity? The production of
goods to

A satisfy the needs of consumers.

B make a profit for firms.

C provide tax revenue for the government.

D ensure equitable access to utility.

4
Page

3. The main methodological difference between Economics and the natural sciences is that
economists

A cannot test hypotheses in laboratory conditions.

B cannot refute hypotheses.

C rely on observation to produce evidence.

D suffer the poverty of quantitative data.

4. A positive statement

A is one that can be tested.

B is one that is true.

C is one based on an opinion.

D cannot be refuted by looking at the evidence.

5. A normative statement is

A verifiable by facts.

B objective.

C based on an opinion.

D based on real world data.

6. Which one of the following is a positive statement?

A The government should reduce the standard rate of income tax.

B The government ought to cut social security benefits.

C A cut in social security benefits will increase incentives to work.

D There needs to be an increase in defence spending.

5
Page

7. ‘Rising unemployment is a price worth paying to get inflation down’. This is an example of

A a theory.

B a hypothesis.

C a positive statement.

D a value judgement.

8. The basic economic problem leads to which one of the following key economic decisions that
any economy must address?

A What the balance should be between the production of consumer and capital goods

B What, how, why, and for whom goods and services are produced

C Which goods should be made specifically for the export market and which should
be imported

D Which goods should be provided by the public sector and which by the private sector

9. Economic decision-makers are primarily concerned with

A increasing output.

B maximising their welfare.

C reducing prices.

D increasing international trade.

10. When making economic decisions, the government is least likely to take account of

A the wages in particular industries.

B how the defence budget is spent.

C possible changes in average incomes.

D the impact on exports.

Page

11. The majority of firms, when making economic decisions are least likely to take account of

A wage rates.

B advances in technology.

C the working conditions of suppliers’ employees.

D the amount of profit to be retained in the business.

12. In economic theory it is assumed that employees seek to

A maximise company profits.

B maximise their wages.

C maximise their spending.

D minimise the interest on savings.

13. The objective of economic activity is to

A achieve productive efficiency.

B minimise the use of factors of production.

C satisfy consumer wants.

D maximise output.

14. Which one of the following phrases is normally a feature of a positive statement?

A It will result in…

B The government ought to…

C The government should…

D The government must…

7
Page

15. Economic resources are those which

A maximise the output of goods in the long term.

B increase economic efficiency.

C are plentiful.

D can contribute to increased production.

16. The factor of production, land, includes

A trawlers.

B dams.

C meadows.

D roads.

17. Labour is a factor of production because

A its value to an economy can be improved.

B its productivity affects productive efficiency.

C it is a resource which can contribute to output.

D its cost can be reduced.

18. The factor of production, capital includes

A money.

B computers.

C an overdraft.

D a mortgage.
8
Page

19. The core function of the factor of production known as enterprise includes

A organising resources.

B motivating employees.

C risk taking.

D selling to customers.

20. Which one the following is least likely to be a scarce resource?

A Land

B Labour

C The environment

D Fresh air

21. The economic problem has, at its core, the issue of choice because

A our income determines what we can choose.

B resources are finite.

C as consumers we are free to choose what we want.

D the more we earn the more we can choose.

22. The basic economic problem is that

A resources have to be allocated between competing uses.

B consumers have infinite wants.

C governments cannot always deal effectively with market failure.

D every economic decision generates externalities.

9
Page

23. Economics is the study of

A how to increase economic growth.

B how society allocates scarce resources in order to maximise welfare.

C how to ensure that resources are shared equally.

D how resources should be allocated.

24. An economic good is

A one which has an opportunity cost.

B also defined as a factor of production.

C one which increases economic efficiency.

D the opposite of a public good.

A the cost of going to Australia.

B the cost of a buying a new car.

C the benefits of going to Australia.

D the benefits of having a new car.

26. The production possibility curve can be used to illustrate each of the following, with the
exception of

A consumer demand.

B economic growth.

C opportunity cost.
10

D unemployment.
Page

27. The production possibility diagram below shows various output choices P, Q, R, S and T.

Capital Goods

p T

O Consumer
Q
Goods

Which combination of capital and consumer goods could this country choose to produce?

A points TSR

B points PSQ

C points TSQ

D points SQPR

28. Referring to the production possibility diagram below, at which point is there unemployment
in the economy?

11
Page

A E

B F

C G

D H

29. All points on the production possibility curve show productive efficiency because

A output is distributed equitably.

B the economy is producing the combination of output that consumers demand.

C the economy has reached its full long-term potential.

D the economy is producing at full current capacity.

30. Which one of the following statements is false? At all points on the production
possibility curve

A there is productive efficiency.

B resources are allocated efficiently.

C resources are fully employed.

D the economy is working at its full potential.

12
Page

4.1.1 Economic Methodology and the Economic Problem - Answers

1. Value judgements influence economic decision making and policy because value
judgements
A are facts that individuals feel might be relevant to a decision.
B are evaluative processes that an individual uses solely to prioritise monetary value.
C are the foundations of positive decision making when a judgement is required.
D are evaluative processes based on an individual's standards or priorities.

Explanation: A value judgement is an assessment of something as good or bad in terms of one's

standards or priorities. These standards or priorities are processed when an individual is
required to make economic or policy decisions.

2. Which one of the following is a central purpose of economic activity? The production of
goods to
A satisfy the needs of consumers.
B make a profit for firms.
C provide tax revenue for the government.
D ensure equitable access to utility.

Explanation: The central purpose of economic activity is the production of goods and services to
satisfy our changing needs and wants.

3. The main methodological difference between Economics and the natural sciences is that
economists
A cannot test hypotheses in laboratory conditions.
B cannot refute hypotheses.
C rely on observation to produce evidence.
D suffer the poverty of quantitative data.

Explanation: Economists apply the same scientific method as used in the natural sciences but,
unlike natural scientists, it is not possible to conduct and to repeat experiments in a laboratory-
controlled environment.

4. A positive statement
A is one that can be tested.
B is one that is true.
C is one based on an opinion.
D cannot be refuted by looking at the evidence.

Explanation: A positive statement can be confirmed or disproved by testing it against evidence.

A positive statement, is therefore, not a statement of opinion.

5. A normative statement is
A verifiable by facts.
B objective.
C based on an opinion.
D based on real world data.

Explanation: A normative statement typically includes words such as ‘ought to’ or ‘should’ and is
an expression of an opinion.
13
Page

6. Which one of the following is a positive statement?

A The government should reduce the standard rate of income tax.
B The government ought to cut social security benefits.
C A cut in social security benefits will increase incentives to work.
D There needs to be an increase in defence spending.

Explanation: All other statements are opinions or value judgements and are, therefore,
normative statements. As such, they cannot be tested by reference to the facts, since they are
neither true nor false. C, on the other hand, may be controversial but, nevertheless, can be
tested to determine whether a cut in social security benefits does indeed provide an incentive to
work.

7. ‘Rising unemployment is a price worth paying to get inflation down’.

This is an example of
A a theory.
B a hypothesis.
C a positive statement.
D a value judgement.

Explanation: Rising unemployment might lead to lower inflation but this is not the point. The use
of the words ‘a price worth paying’ should convince us that this is a value judgement (or a
normative statement).

8. The basic economic problem leads to which one of the following key economic decisions that
any economy must address?
A What the balance should be between the production of consumer and capital goods
B What, how, why, and for whom goods and services are produced
C Which goods should be made specifically for the export market and which should be
imported
D Which goods should be provided by the public sector and which by the private sector

Explanation: Whilst all of these decisions will be made at some point, depending on the
prevailing economic system, scarce resources mean that decisions need to be made regarding
what, how, why, and for whom goods and services are produced.

9. Economic decision-makers are primarily concerned with

A increasing output.
B maximising their welfare.
C reducing prices.
D increasing international trade.

Explanation: Economic theory assumes that entrepreneurs, employees and consumers are self-
interested and seek to maximise profits, wages and satisfaction (utility) respectively.

10. When making economic decisions the government is least likely to take account of
A the wages in particular industries.
B how the defence budget is spent.
C possible changes in average incomes.
D the impact on exports.

Explanation: Governments will consider the impact of decisions on the economy in general, but
are very unlikely to consider the impact on a particular group of workers.
14
Page

11. The majority of firms, when making economic decisions are least likely to take account of
A wage rates.
B advances in technology.
C the working conditions of suppliers’ employees.
D the amount of profit to be retained in the business.

Explanation: If firms are self-interested and seek to maximise profits, they will not be concerned
with conditions of work for the employees of supply firms.

12. In economic theory it is assumed that employees seek to

A maximise company profits.
B maximise their wages.
C maximise their spending.
D minimise the interest on savings.

Explanation: The factor of production known as labour (human resources used in production) is
rewarded by a wage. It is reasonable to assume that employees will seek the highest wage
possible.

13. The objective of economic activity is to

A achieve productive efficiency.
B minimise the use of factors of production.
C satisfy consumer wants.
D maximise output.

Explanation: The central purpose of economic activity is the production of goods and services in
order to satisfy needs and wants. Production occurs not for its own sake, but in order to satisfy
needs and wants.

14. Which one of the following phrases is normally a feature of a positive statement?
A It will result in…
B The government ought to…
C The government should…
D The government must…

Explanation: B, C and D are clearly included in statements of opinion which cannot be tested by
reference to the facts. Response A, on the other hand, suggests a causal relationship between
two variables and, as such, can be tested and, if appropriate, disproved.

15. Economic resources are those which

A maximise the output of goods in the long term.
B increase economic efficiency.
C are plentiful.
D can contribute to increased production.

Explanation: An economic resource is scarce rather than plentiful, and contributes to production
today and not just in the future. Whether it increases economic efficiency depends on how it is
used.

16. The factor of production, land, includes

A trawlers.
15

B dams.
C meadows.
Page

D roads.

Explanation: The other three refer to capital (goods that are man-made and are used in
production). A meadow is natural and is not man-made and, therefore, is regarded as land.

17. Labour is a factor of production because

A its value to an economy can be improved.
B its productivity affects productive efficiency.
C it is a resource which can contribute to output.
D its cost can be reduced.

Explanation: The others are valid statements but do not explain why labour is a factor of
production. Labour is defined as human resources that contribute to output.

18. The factor of production, capital includes

A money.
B computers.
C an overdraft.
D a mortgage.

Explanation: Capital refers to man-made resources used in production, eg a computer. The

other three refer to financial resources which do not themselves contribute to production, but can
be used to buy or hire factors of production, including capital items such as computers.

19. The core function of the factor of production known as enterprise includes
A organising resources.
B motivating employees.
C risk taking.
D selling to customers.

Explanation: Many entrepreneurs are personally engaged in organising, motivating and selling,
but in large businesses these functions are delegated to paid managers. Risk taking, on the
other hand, is the essential characteristic of being an entrepreneur.

20. Which one the following is least likely to be a scarce resource?

A Land
B Labour
C The environment
D Fresh air

Explanation: Resources are finite at any moment in time and therefore they are scarce. The
environment is now classed as a scarce resource because we now appreciate that man has the
capacity to destroy it, thus depriving it to future generations. In most situations, fresh air is seen
as a free good available to all without an opportunity cost. Hence, it is the least likely to be seen
as a scarce good. But atmospheric pollution shows that we should not take this for granted.

21. The economic problem has, at its core, the issue of choice because
A our income determines what we can choose.
B resources are finite.
C as consumers we are free to choose what we want.
D the more we earn the more we can choose.

Explanation: The essential economic problem is that resources are scarce and finite.
16
Page

22. The basic economic problem is that

A resources have to be allocated between competing uses.
B consumers have infinite wants.
C governments cannot always deal effectively with market failure.
D every economic decision generates externalities.

Explanation: It is true that consumers have infinite wants, but this is only a problem because
resources are scarce and, therefore, have to be allocated between competing uses. For this
reason, the basic problem in Economics is the allocation of scarce resources. The other issues
are, ultimately, derived from the basic economic problem.

23. Economics is the study of

A how to increase economic growth.
B how society allocates scarce resources in order to maximise welfare.
C how to ensure that resources are shared equally.
D how resources should be allocated.

Explanation: The central issue in Economics is the allocation of scarce resources. The other
responses might refer to one aspect of Economics but not to the central issue that is at the heart
of Economics.

24. An economic good is

A one which has an opportunity cost.
B also defined as a factor of production.
C one which increases economic efficiency.
D the opposite of a public good.

Explanation: An economic good uses scarce resources and, therefore, involves an opportunity
cost. The opposite of an economic good is a ‘free good’ which can be seen as a free gift of
nature and does not involve the use of scarce resources.

25. A family inherited £15,000 from a long lost aunt. They are weighing up whether to buy a new
car or go on a trip to Australia for a month. They decide to go to Australia. The opportunity
cost of this decision is
A the cost of going to Australia.
B the cost of a buying a new car.
C the benefits of going to Australia.
D the benefits of having a new car.

Explanation: The opportunity cost of the holiday is the alternative the family sacrificed. They
forego the benefits of a new car in order to go to Australia.

26. The production possibility curve can be used to illustrate each of the following, with the
exception of
A consumer demand.
B economic growth.
C opportunity cost.
D unemployment.

Explanation: The production possibility curve illustrates productive potential. At any point inside
the curve there is unemployment of resources. An outward shift of the curve illustrates growth in
productive potential. A movement along the curve reminds us that we can sacrifice some units of
17

one product to acquire more of another (ie opportunity cost). However, the PPC tells us nothing
about demand for goods or services.
Page

27. The production possibility diagram below shows various output choices P, Q, R, S and T.

Capital Goods

P T

O Consumer
Q
Goods
Which combination of capital and consumer goods could this country choose to produce?
A points TSR
B points PSQ
C points TSQ
D points SQPR
Explanation: P, S and Q are all on the production possibility curve and are possible
combinations of goods and services that can be produced. R is also possible because it is inside
the curve. T, on the other hand, is outside the productive potential of the economy, given
existing resources and technology.

28. Referring to the production possibility diagram below, at which point is there unemployment
in the economy?

A E
B F
C G
D H
Explanation: At F and G the economy is producing at its full potential and therefore resources
are fully employed. H is beyond the curve and is not feasible with current resources and
18

technology and can only be achieved by a process of economic growth. At E, on the other hand,
the economy is not producing at full potential, therefore some resources must be
Page

underemployed.
© APT Initiatives Ltd, 2017. This document is for use ONLY by the purchasing individual or staff and students attending
the purchasing institution. It is not to be shared with anybody else without the prior written permission of APT Initiatives Ltd.
APT’s 540 Multiple Choice Questions for AQA A Level Economics

29. All points on the production possibility curve show productive efficiency because
A output is distributed equitably.
B the economy is producing the combination of output that consumers demand.
C the economy has reached its full long-term potential.
D the economy is producing at full current capacity.

Explanation: The PPC tells us nothing about the distribution of output. Response B concerns
allocative efficiency. This leaves the final responses which might be regarded as similar. The
reason why D is the correct answer is that the PPC is drawn on the assumption of a fixed
quantity of resources and no change in technology. This does not rule out an increase in
capacity (ie productive potential) in the future.

30. Which one of the following statements is false? At all points on the production possibility
curve
A there is productive efficiency.
B resources are allocated efficiently.
C resources are fully employed.
D the economy is working at its full potential.

Explanation: The production possibility curve (PPC) reflects the productive potential of the
economy and therefore at any point on the curve the resources are fully employed, output is at
its full potential (given resources and technology) and therefore there is productive efficiency.
Allocative efficiency occurs when resources are allocated to provide consumers with the
particular combination of goods and services they require at any moment of time. The PPC tells
us nothing about consumer demand.

19
Page

4.1.2

Individual Economic Decision Making

20
Page

4.1.2 Individual Economic Decision Making

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. Which one of the following options represents the statement ‘individuals compare the costs
and benefits of possible decisions and choose the one which maximises their personal net
benefit’?

A Maximising social welfare

B Maximising social cost

C Irrational decision making

D Rational decision making

2. Rational consumers are incentivised to spend their limited income by

A maximising their utility from consumption.

B minimising the amount of their income that they spend.

C maximising the quantity of goods that their income will buy.

D maximising social welfare.

21
Page

3. An individual will consume a free good up to the point at which

A the total utility derived from the good is maximised.

B the marginal utility begins to decline at an increasing rate.

C the total utility derived from the good is zero.

D the marginal utility derived from the good is equal to that derived from all other goods
consumed.

4. If a rational consumer has a limited income, they will make purchases to maximise their utility
up to the point at which

A the marginal utility derived from each good purchased is identical.

B the marginal utility derived from each good purchased adds up to zero.

C the total utility derived from each good purchased is identical.

D the marginal utility-to-price relationship of each good purchased is identical.

5. A consumer will be in a state of equilibrium with respect to the quantity of the goods
purchased where

A the average cost of production equals the marginal cost of production.

B the average cost of production is at a minimum.

C the relationship between marginal utility and price is the same for each product
bought.

D the marginal utility derived from the good is increasing at an increasing rate.

6. The hypothesis of diminishing marginal utility supports

A an upward sloping demand curve.

B a downward sloping demand curve.

C a downward sloping supply curve.

D an upward sloping supply curve.

Page

7. The hypothesis of diminishing marginal utility implies that, when the price of a goods falls, in
order to restore their equilibrium, the consumer must

A refrain from consuming the good altogether.

B consume more of the good.

C consume the same amount of the good.

D consume less of the good.

8. Which one of the following statements provides a description of marginal utility?

A The total satisfaction from a given level of consumption

B The difference between the highest and lowest levels of satisfaction across a range
of consumption levels

C The average satisfaction across a range of consumption levels

D The change in satisfaction derived from consuming one extra unit

9. The table below shows how the total utility for a particular consumer changes, as
consumption of a particular good increases.

Quantity Total
Consumed Utility
0 0
1 20
2 38
3 52
4 60
5 64

At which level of consumption is the consumer’s marginal utility equal to 4?

A 2

B 3

C 4
23

D 5
Page

10. The table below shows how the marginal utility derived by a particular consumer changes, as
consumption of a particular good increases.

Quantity Marginal
Consumed Utility
1 10
2 12
3 9
4 5
5 1

What is the value of the total utility to the consumer derived from consuming 4 units of the good?

A 5

B 9

C 36

D 37

11. An individual will make economic decisions at the margin regarding which course of action
should be taken. The table below shows two outcomes associated with each of four courses
of action that an individual could take.

Which one of the four courses of action would a rational consumer choose?

Outcome 1 Outcome 2

A Marginal benefit 100 Marginal cost 100

B Marginal benefit 200 Marginal cost 100

C Marginal benefit 100 Marginal cost 200

D Marginal benefit 0 Marginal cost 0

24
Page

12. Which one of the following is an assumption of the ‘rational decision making’ model?

A Changing preferences

B Time constraints

C Unknown options

D Perfect information

13. Which one of the following explains how asymmetric information can affect the relative power
of each party in a transaction?

A One party has superior information that leads to a reduction in their costs

B One party has superior information that leads to an increase in their efficiency

C One party has superior information that they can exploit, leading to market failure

D One party has superior information which they can use to access a new market

14. Providing more and better information to individuals will not necessarily lead to rational
decision making. Maybe this is because

A individuals are assumed to maximise their own utility.

B individuals can be overloaded with information that they are unable to process.

C individuals are assumed to always act in their own self-interest.

D individuals will not adopt irrational behaviour patterns.

A the government will bail them out with respect to any excessive losses incurred.

B the customers of the bank will be responsible for any excessive losses incurred.

C they have sufficient insurance cover in respect of any excessive losses incurred.
25
Page

D their shareholders will be responsible for any excessive losses incurred.

16. Which one of the following best describes the notion of ‘bounded rationality’ in individual
decision making?

A Abandoning intuition in decision making in favour of calculating optimal solutions

B Using intuitive rules to make decisions rather than the calculation of optimal
solutions

C Making decisions based on calculations derived from the observed behaviour of

others

D Carefully calculating the least objectionable outcome and selecting the appropriate
action to achieve this

17. Which one of the following best illustrates the notion of ‘bounded self-control’ in individual
decision making? An individual

A over reacting to a bad news story regarding an investment.

B consuming the correct amount of food to ensure optimal life expectancy.

C saving the correct amount for retirement.

D who is respectful of their environment, riding a bicycle to work rather than taking
a car.

A A reduction in Excise Duty on petrol

B The removal of nutritional information on processed meat products

C The closure of NHS medical facilities

D The introduction of a workplace pension scheme that automatically enrols workers

onto the scheme
26
Page

19. Which one of the following is an example of a ‘rule of thumb’ leading to bias in decision-
making regarding a consumer’s regular purchase of a bottle of wine?

A The fact that it is the second cheapest one in the shop

B The utility they have calculated they will derive from consuming the wine

C The recommendation of an impartial wine expert

D The fact that they have consumed and enjoyed the same wine previously

20. Which one of the following options offers the correct identification of what Daniel Kahneman
has called ‘System 1’ and ‘System 2’ thinking, in relation to rational decision making?

‘System 1’ thinking ‘System 2’ thinking

Based on the experience of

A Fast and emotional
others
Based on the experience of
B Fast and emotional
others

C Fast and emotional Deliberate and logical

D Deliberate and logical Fast and emotional

D
21. When a charitable organisation suggests an amount for an individual to donate to a cause,
for example £5, and an individual then decides to donate the £5, this is an example of

A a rule of thumb.

D
B availability bias.

C a social norm.
D
D anchoring.

22. When an individual makes a decision based on the opinion of a group of their respected
peers, the decision is influenced by

A a rule of thumb.

B availability bias.
27

C a social norm.
Page

D anchoring.

23. An individual makes a decision based on memories of such decisions or events in the recent
past. This is an example of

A a rule of thumb.

B availability bias.

C a social norm.

D anchoring.

24. Which one of the following options offers correct examples of decisions made with
‘availability bias’ and ‘anchoring’?

Availability bias Anchoring

The first price that is quoted for a

A recent flood leads to an increase
product influences an individual’s view
A in demand for household flood
about what is a reasonable price to pay
defence materials
for such a product
A belief that is held by a group of
One handful is sufficient when making a
people that influences an
B decision over how much fruit constitutes
individual’s decision over a related
one portion of the ‘five a day’
purchase
The first price that is quoted for a
A recent flood leads to an increase in
product influences an individual’s
C demand for household flood defence
view about what is a reasonable
materials
price to pay for such a product
One handful is sufficient when
A belief that is held by a group of people
making a decision over how much
D that influences an individual’s decision
fruit constitutes one portion of the
over a related purchase
‘five a day’
28
Page

25. Which one of the following options offers correct explanations of decisions made by a ‘rule of
thumb’ and with a ‘social norm’?

Rule of thumb Social norm

The first price that is quoted for a
A recent flood leads to an increase
product influences an individual’s view
A in demand for household flood
about what is a reasonable price to pay
defence materials
for such a product
A belief that is held by a group of One handful is sufficient when making a
people that influences an decision over how much fruit
B individual’s decision over a related constitutes one portion of the ‘five a
purchase day’
The first price that is quoted for a A recent flood leads to an increase in
product influences an individual’s demand for household flood defence
C view about what is a reasonable materials
price to pay for such a product
One handful is sufficient when
A belief that is held by a group of
making a decision over how much
D people that influences an individual’s
fruit constitutes one portion of the
decision over a related purchase
‘five a day’

26. Which one of the following is an explanation of altruistic behaviour?

A A decision made by an individual in order to maximise their own benefit

B A decision made by an individual in order to maximise their own income

C A decision made by an individual in order to maximise the welfare of others

D A decision made by an individual in order to maximise the costs of others

27. Which one of the following is an example of ‘framing’ to influence an individual’s choice?

A An ‘opt out’ organ donor card scheme

B An ‘opt in’ organ donor card scheme

C ‘9 out of 10 positive reviews’ highlighted on a ratings website

D A special offer item positioned close to full price complimentary items in a

supermarket
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28. Which one of the following is an example of ‘choice architecture’ being used to positively
influence an individual’s decision making?

A An ‘opt out’ organ donor card scheme

B An ‘opt in’ organ donor card scheme

C ‘9 out of 10 positive reviews’ highlighted on a ratings website

D A special offer item positioned close to full price linked items in a supermarket

29. Which one of the following is an example of ‘nudge’ being used to positively influence an
individual’s decision making?

A The banning of the sale of sugary rinks in some schools

B The prominent positioning of a salad bar in relation to fast food options to encourage
healthy eating

C The removal from sale of 100 watt light bulbs

D The maximum speed limit of 70 miles an hour on UK roads

30. Choice architecture is sometimes criticised on the grounds that it

A increases social welfare.

B effectively restricts some individual’s freedom of choice.

C promotes the interests of minority groups.

D ensures rational considerations play a part in an individual’s decision making.

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4.1.2 Individual Economic Decision Making – Answers

1. Which one of the following options represents the statement ‘individuals compare the costs
and benefits of possible decisions and choose the one which maximises their personal net
benefit’?
A Maximising social welfare
B Maximising social cost
C Irrational decision making
D Rational decision making

Explanation: The statement is a definition of rational decision making, which is based on

individuals pursuing their self-interest.

2. Rational consumers are incentivised to spend their limited income by

A maximising their utility from consumption.
B minimising the amount of their income that they spend.
C maximising the quantity of goods that their income will buy.
D maximising social welfare.

Explanation: Rational consumers are driven by self interest in order to maximise their own
satisfaction. This will occur when they select goods that maximise their own utility. This will not
necessarily occur by spending the least on an item, or consuming the most.

3. An individual will consume a free good up to the point at which

A the total utility derived from the good is maximised.
B the marginal utility begins to decline at an increasing rate.
C the total utility derived from the good is zero.
D the marginal utility derived from the good is equal to that derived from all other goods
consumed.

Explanation: When total utility is maximised, marginal utility will be zero. This is the point at
which a rational individual will consume a free good whose price is zero.

4. If a rational consumer has a limited income, they will make purchases to maximise their utility
up to the point at which
A the marginal utility derived from each good purchased is identical.
B the marginal utility derived from each good purchased adds up to zero.
C the total utility derived from each good purchased is identical.
D the marginal utility-to-price relationship of each good purchased is identical.

Explanation: A rational consumer will maximise their utility when the marginal utility of their
purchases are proportional to the price they pay for them.

5. A consumer will be in a state of equilibrium with respect to the quantity of the goods
purchased where
A the average cost of production equals the marginal cost of production.
B the average cost of production is at a minimum.
C the relationship between marginal utility and price is the same for each product
bought.
D the marginal utility derived from the good is increasing at an increasing rate.
31

Explanation: A consumer is in equilibrium when their satisfaction is maximised. Consumer

satisfaction is maximised only when marginal utility equals price. Therefore, the ‘marginal utility
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equal’s price’ is the condition of equilibrium.

6. The hypothesis of diminishing marginal utility supports

A an upward sloping demand curve.
B a downward sloping demand curve.
C a downward sloping supply curve.
D an upward sloping supply curve.

Explanation: As consumption of a good or service increases, the marginal utility from each
additional unit falls and therefore this unit will only be bought at a lower price. Hence the demand
curve is downward sloping.

7. The hypothesis of diminishing marginal utility implies that, when the price of a goods falls, in
order to restore their equilibrium, the consumer must
A refrain from consuming the good altogether.
B consume more of the good.
C consume the same amount of the good.
D consume less of the good.

Explanation: A downward sloping marginal utility curve implies that consumers will only consume
more of the good when its price falls, in order to restore their equilibrium.

8. Which one of the following statements provides a description of marginal utility?

A The total satisfaction from a given level of consumption
B The difference between the highest and lowest levels of satisfaction across a range of
consumption levels
C The average satisfaction across a range of consumption levels
D The change in satisfaction derived from consuming one extra unit

Explanation: Marginal analysis deals with the analysis of decision making at the margin, this is
where the satisfaction derived from consuming one extra or marginal unit, is taken into account
when making a purchasing decision.

9. The table below shows how the total utility for a particular consumer changes, as
consumption of a particular good increases.

Quantity Total
Consumed Utility
0 0
1 20
2 38
3 52
4 60
5 64

At which level of consumption is the consumer’s marginal utility equal to 4?

A 2
B 3
C 4
D 5

Explanation: Marginal utility is the change in satisfaction from consuming one extra unit. The
marginal utility of consuming the 5th unit is equal to 4 as total utility increases from 60 to 64.
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10. The table below shows how the marginal utility derived by a particular consumer changes, as
consumption of a particular good increases.

Quantity Marginal
Consumed Utility
1 10
2 12
3 9
4 5
5 1

What is the value of the total utility to the consumer derived from consuming 4 units of the good?
A 5
B 9
C 36
D 37

Explanation: Marginal utility is the change in total utility from consuming one extra unit of a good.
Total utility at s point can be found by summing all of the marginal utilities up to that point. In this
case: 10 + 12 + 9 + 5 = 36, up to the 4th unit.

Which one of the four courses of action would a rational consumer choose?

Outcome 1 Outcome 2
A Marginal benefit 100 Marginal cost 100
B Marginal benefit 200 Marginal cost 100
C Marginal benefit 100 Marginal cost 200
D Marginal benefit 0 Marginal cost 0

Explanation: Rational individuals will only choose a course of action if marginal benefit exceeds
marginal cost.

12. Which one of the following is an assumption of the ‘rational decision making’ model?
A Changing preferences
B Time constraints
C Unknown options
D Perfect information

Explanation: The model of rational decision making requires perfect information, constant
preferences, no time constraints and all options to be known.

13. Which one of the following explains how asymmetric information can affect the relative power
of each party in a transaction?
A One party has superior information that leads to a reduction in their costs
B One party has superior information that leads to an increase in their efficiency
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C One party has superior information that they can exploit, leading to market failure
D One party has superior information which they can use to access a new market
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Explanation: Information asymmetry in transactions occurs when one party has superior
information. This creates an imbalance of power in the transaction, which can sometimes cause
the transactions to be unfair, leading to a kind of market failure.

14. Providing more and better information to individuals will not necessarily lead to rational
decision making. Maybe this is because
A individuals are assumed to maximise their own utility.
B individuals can be overloaded with information that they are unable to process.
C individuals are assumed to always act in their own self-interest.
D individuals will not adopt irrational behaviour patterns.

Explanation: Individuals may not have the capacity to deal with the amount of information that
they are presented with. This may lead to them ignoring some of the information that is available
but which they are incapable of processing.

15. The presence of asymmetric information can lead to moral hazard. Which one of the
following best describes the moral hazard that occurred during the 2007 - 08 financial crisis
in the UK? Some banks take more risks than others, knowing that
A the government will bail them out with respect to any excessive losses incurred.
B the customers of the bank will be responsible for any excessive losses incurred.
C they have sufficient insurance cover in respect of any excessive losses incurred.
D their shareholders will be responsible for any excessive losses incurred.

Explanation: Moral hazard existed in the 2007 - 08 financial crisis in the UK because some
banks were aware of the risks they were taking, whilst others were not. These banks also knew
that, in the event of their suffering financial difficulty as a result of their risk taking, the
government would feel they had to bail out these banks to prevent a collapse in confidence in
the banking system. This led to some banks taking more excessive risks than they would
otherwise have done.

16. Which one of the following best describes the notion of ‘bounded rationality’ in individual
decision making?
A Abandoning intuition in decision making in favour of calculating optimal solutions
B Using intuitive rules to make decisions rather than the calculation of optimal solutions
C Making decisions based on calculations derived from the observed behaviour of others
D Carefully calculating the least objectionable outcome and selecting the appropriate action to
achieve this

Explanation: Bounded rationality is an observed alternative to rational decision making. It

recognises that individuals do not assess complex solutions when attempting to make a
decision. Rather they rely on intuitive ‘rules of thumb’.

17. Which one of the following best illustrates the notion of ‘bounded self-control’ in individual
decision making? An individual
A over reacting to a bad news story regarding an investment.
B consuming the correct amount of food to ensure optimal life expectancy.
C saving the correct amount for retirement.
D who is respectful of their environment, riding a bicycle to work rather than taking a car.

Explanation: Bounded self-control occurs when individuals are unable to exercise the
appropriate degree of self-control when presented with certain choices. The over reaction to the
bad news stories regarding an investment is the only example of an inappropriate choice made.
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18. Which one of the following government initiatives would be an example of an attempt to
increase social welfare, in reaction to the problems posed by bounded self-control in
individual decision making?
A A reduction in Excise Duty on petrol
B The removal of nutritional information on processed meat products
C The closure of NHS medical facilities
D The introduction of a workplace pension scheme that automatically enrols workers
onto the scheme

Explanation: In relation to social welfare, a government initiative that helps to solve the problem
posed by bounded self-control in individual decision making would be one that encouraged
behaviour leading to increased social welfare. The introduction of the automatic workplace
pension is the only option that is likely to achieve this.

19. Which one of the following is an example of a ‘rule of thumb’ leading to bias in decision-
making regarding a consumer’s regular purchase of a bottle of wine?
A The fact that it is the second cheapest one in the shop
B The utility they have calculated they will derive from consuming the wine
C The recommendation of an impartial wine expert
D The fact that they have consumed and enjoyed the same wine previously

Explanation: Biases in decision making often result from people adopting shortcuts, or rules of
thumb that avoid them gathering and processing often complex information. A strategy of
regularly selecting a bottle of wine based on the fact that it is the second cheapest in the shop is
the only strategy of those presented that exhibits the characteristics of a ‘rule of thumb’.

20. Which one of the following options offers the correct identification of what Daniel Kahneman
has called ‘System 1’ and ‘System 2’ thinking, in relation to rational decision making?

‘System 1’ thinking ‘System 2’ thinking

A Fast and emotional Based on the experience of others
B Based on the experience of others Fast and emotional
C Fast and emotional Deliberate and logical
D Deliberate and logical Fast and emotional

Explanation: According to Daniel Kahneman, ‘System 1’ decisions are made by ‘thinking fast’
and are instinctive and emotional, whereas ‘System 2’, decisions are made by ‘thinking slow’,
and are deliberate and logical.

21. When a charitable organisation suggests an amount for an individual to donate to a cause,
for example £5, and an individual then decides to donate the £5, this is an example of
A a rule of thumb.
B availability bias.
C a social norm.
D anchoring.

Explanation: Anchoring occurs because of the tendency for an individual to rely too much on a
single piece of information, frequently the first piece of information they receive, when making
decisions. This is the case when the individual simply donates the first amount suggested to
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them by the charity rather than making a processed rational decision regarding the amount they
donate.
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22. When an individual makes a decision based on the opinion of a group of their respected
peers, the decision is influenced by
A a rule of thumb.
B availability bias.
C a social norm.
D anchoring.

Explanation: A social norm is a belief that is held by a group or groups of people with whom we
associate, particularly those we respect. A decision made that relies on such a social norm could
be different to the rational decision that would otherwise have been made by an individual
decision maker.

23. An individual makes a decision based on memories of such decisions or events in the recent
past. This is an example of
A a rule of thumb.
B availability bias.
C a social norm.
D anchoring.

Explanation: Availability bias is when decisions about the probability of events occurring are
made in relation to the ease with which an individual can recall examples of such events in the
past and how they behaved then.

24. Which one of the following options offers correct examples of decisions made with
‘availability bias’ and ‘anchoring’?

Availability bias Anchoring

The first price that is quoted for a
A A recent flood leads to an increase in
product influences an individual’s view
demand for household flood defence
about what is a reasonable price to pay
materials
for such a product
A belief that is held by a group of people One handful is sufficient when making a
B that influences an individual’s decision over decision over how much fruit constitutes
a related purchase one portion of the ‘five a day’
The first price that is quoted for a product
A recent flood leads to an increase in
C influences an individual’s view about what is
demand for household flood defence
a reasonable price to pay for such a
materials
product
One handful is sufficient when making a A belief that is held by a group of people
D decision over how much fruit constitutes that influences an individual’s decision over
one portion of the ‘five a day’ a related purchase

Explanation: Only Option A offers actual examples of ‘availability bias’ and ‘anchoring’, and
under the appropriate column.
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25. Which one of the following options offers correct explanations of decisions made by a ‘rule of
thumb’ and with a ‘social norm’?

Rule of thumb Social norm

A recent flood leads to an increase in The first price that is quoted for a product
A demand for household flood defence influences an individual’s view about what is
materials a reasonable price to pay for such a product
A belief that is held by a group of people One handful is sufficient when making a
B that influences an individual’s decision over decision over how much fruit constitutes
a related purchase one portion of the ‘five a day’
The first price that is quoted for a product A recent flood leads to an increase in
C influences an individual’s view about what is demand for household flood defence
a reasonable price to pay for such a product materials
One handful is sufficient when making a A belief that is held by a group of people
D decision over how much fruit constitutes that influences an individual’s decision
one portion of the ‘five a day’ over a related purchase

Explanation: Option D is the only option that offers actual examples of a ‘rule of thumb’ and a
‘social norm’, and under the appropriate column.

26. Which one of the following is an explanation of altruistic behaviour?

A A decision made by an individual in order to maximise their own benefit
B A decision made by an individual in order to maximise their own income
C A decision made by an individual in order to maximise the welfare of others
D A decision made by an individual in order to maximise the costs of others

Explanation: Economic analysis is based on an assumption that individuals are motivated by

self-interest, but doesn’t preclude the existence of altruism. Altruism recognises that people have
a conscience and often choose to ‘do the right thing’ from a societal perspective.

27. Which one of the following is an example of ‘framing’ to influence an individual’s choice?
A An ‘opt out’ organ donor card scheme
B An ‘opt in’ organ donor card scheme
C ‘9 out of 10 positive reviews’ highlighted on a ratings website
D A special offer item positioned close to full price complimentary items in a supermarket

Explanation: Framing is the attempt to influence an individual’s decision through the context in
which it is presented. This involves accentuating the positive, particularly with respect to the
words used.

28. Which one of the following is an example of ‘choice architecture’ being used to positively
influence an individual’s decision making?
A An ‘opt out’ organ donor card scheme
B An ‘opt in’ organ donor card scheme
C ‘9 out of 10 positive reviews’ highlighted on a ratings website
D A special offer item positioned close to full price linked items in a supermarket

Explanation: Choice architecture is the attempt to influence an individual’s decision through the
way in which choices are presented to the decision-maker. An ‘opt out’ scheme is more likely to
be successful than an ‘opt in’ for recruitment to exactly the same scheme.
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29. Which one of the following is an example of ‘nudge’ being used to positively influence an
individual’s decision making?
A The banning of the sale of sugary rinks in some schools
B The prominent positioning of a salad bar in relation to fast food options to encourage
healthy eating
C The removal from sale of 100 watt light bulbs
D The maximum speed limit of 70 miles an hour on UK roads

Explanation: A nudge is used to influence an individual’s decision making without removing

options or banning behaviour. Option B is the only one that fits this criteria.

30. Choice architecture is sometimes criticised on the grounds that it

A increases social welfare.
B effectively restricts some individual’s freedom of choice.
C promotes the interests of minority groups.
D ensures rational considerations play a part in an individual’s decision making.

Explanation: Choice architecture can be viewed as manipulative and it can undermine an

individual’s freedom to choose. This is regarded, by some, as a drawback of the strategy.

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4.1.3

Price Determination in a Competitive Market

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4.1.3 Price Determination in a Competitive Market

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. A demand curve shows

A how much is sold at each price.

B how much is demanded at a price.

C how sensitive demand is to a change in price.

D how much would be demanded at different prices.

2. A demand curve for a product would shift to the left if there was

A an increase in income.

B an increase in its price.

C a decrease in the price of a substitute product.

D a decrease in the price of a complementary product.

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3. A shift in a demand curve occurs when

A there is a change in income.

B there is a change in price.

C there is an increase in a firm’s costs.

D firms become more efficient.

4. The table below refers to price per unit sold of a product and the total revenue from selling
this product.

Price Per Unit Total Revenue

£10 £600,000
£12 £600,000
£14 £600,000

From this data we can conclude that price elasticity of demand is

A -2

B -1

C 0

D +1

5. When incomes rise by 2%, demand for UK holidays rises by 4%. The income elasticity of
demand is

A +2

B +20

C +0.8

D +0.5
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6. Barclays have noticed that when HSBC recently increased their overdraft rates by 1.5% to
9%, demand for their own overdrafts increased by 200 per week from 3,300 per week. To
two decimal places, the cross elasticity of demand for Barclays overdrafts is

A +0.30

B +0.33

C +3.03

D +3.30

7. A garden centre manager has read in the trade press that the price elasticity of demand for
summer bedding plants is -2.7. If she increases this season’s price by 5.7% she should
expect quantity demanded to

A increase by 15.39%

B fall by 15.39%

C fall by 1.85%

D fall by 13.6%

8. A greengrocer has obtained some market research data which indicates that the income
elasticity of demand for potatoes is -1.56. This means that

A demand is income inelastic, and potatoes are a normal good.

B demand is price elastic, and potatoes are a necessity.

C potatoes are an inferior good, and demand is income elastic.

D potatoes are a normal good, and demand is income elastic.

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9. If cross elasticity of demand is – (minus) 2 then

A a 10% rise in the price of one good leads to a 2% reduction in the demand
for the other.

B a 5% rise in the price of one good leads to a 10% reduction in the demand
for the other.

C a 2% fall in the price of one good leads to a 4% reduction in the demand for
the other.

D a 2% rise in the price of one good leads to a 1% fall in the demand for the other.

10. A normal good is one where

A demand falls when prices rise.

B demand rises when income falls.

C demand increases when income increases.

D demand changes in proportion to changes in income.

11. A product with an income elasticity of demand of -2.2 is

A price elastic.

B income inelastic.

C a luxury product

D inferior.

12. If cross elasticity is – (minus) 5, then we can conclude that

A there is no discernible demand relationship between the goods.

B the goods are close substitutes.

C the goods are complements.

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D the goods are not close substitutes.

13. When demand for a product is price elastic, a decrease in price leads to

A an increase in revenue for the producer.

B a decrease in revenue for the producer.

C no change in revenue for the producer.

D lower demand.

14. For existing participants, the entry of a new participant into a market is likely to lead to

A a higher price elasticity of demand.

B a lower price elasticity of demand.

C a lower price elasticity of supply.

D none of the above.

15. A supply curve shows

A the effect on demand of a change in the conditions of supply.

B the quantity of a good that firms are willing to supply at different prices.

C the quantity of a good that a consumer is willing to purchase at different prices.

D the increase in consumer surplus resulting from a fall in price.

16. In the perfect competitive market model, the firm’s supply curve is also the firm’s

A average revenue curve.

B marginal revenue curve.

C average cost curve.

D marginal cost curve.

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17. Movement along a supply curve to the right arises because of

A improvements in business efficiency.

B an increase in price.

C an increase in tax.

D a reduction in price.

18. A rightward parallel shift in a supply curve would occur when business costs

A fall by £3 a unit.

B rise by 3%.

C fall by 10%.

D rise by £3 a unit.

19. The conditions of demand and supply of a luxury car brand are shown in the diagram below.

Price
S2
S1

O Quantity
The supply curve could have shifted to the left because

A there was a decrease in the price of petrol.

B the government has imposed a special tax on luxury cars.

C the price has risen.

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D the costs of manufacture have fallen.

20. A rise in price from £21 to £22 leads to a 5% rise in the quantity supplied. To two decimal
places, price elasticity of supply is

A -1.05

B -1.52

C +1.05

D +2.52

21. If price elasticity of supply is +2.2, what percentage rise (to two decimal places) is required to
bring about a 5.6% increase in the quantity supplied?

A 12.23%

B 5.25%

C 2.12%

D 2.55%

22. Supply in agriculture is typically price inelastic because

A farmers cannot alter output at short notice.

B farmers rely on the weather.

C there are few substitutes for food.

D farmers can use stocks in response to changes in price.

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23. The table below shows the demand and supply schedules for pizzas sold by a local
takeaway.

Price per Pizza Quantity demanded Quantity supplied

per week per week
£3.00 350 510
£2.75 400 480
£2.50 450 450
£2.25 500 420

Following a rise in production costs, supply falls by 80 pizzas at all prices. The new equilibrium
price would be

A £2.25

B £2.50

C £2.75

D £3.00

24. The diagram below shows the demand and supply of a product. P1 is the equilibrium price.

Price S

O
Q2 Q1 Quantity

The cause of the price decrease, from OP1 to OP2, could be

A a rise in the price of substitutes.

B a rise in the price of complementary products.

C a fall in VAT.
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D an increase in labour costs.

25. The diagram below uses demand and supply curves to illustrate that the price of a product
has fallen from OP1 to OP2, and quantity produced and sold has fallen from OQ1 to OQ2.

Price

S2
S1

O Q2 Q1 Quantity

These changes could have occurred because

A tax has fallen and the price of competitive products has fallen.

B incomes have fallen and technology has improved business efficiency.

C the business is advertising less and business costs have risen.

D business costs have risen, and the price of a complementary product has
increased.

26. A market is said to be in equilibrium when

A the price of a product equals its quantity.

B output is distributed evenly across the population.

C there are no external costs or benefits associated with either consumption

or production.

D there is neither excess demand nor excess supply.

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27. Which one of the following best describes a state of market disequilibrium? Market
disequilibrium

A occurs when the amount bought is more (or less) than the amount sold.

B always results in upward pressure on prices.

C occurs when planned demand is not the same as planned supply.

D always results in reduction in the quantity sold.

28. The model of supply and demand is based on several assumptions. Which one of the
following options provides three correct assumptions?

Assumption 1 Assumption 2 Assumption 3

Buyers and sellers
No one is a price
A Competitive markets form clearly defined
taker
separate groups
Buyers and sellers
Well defined private
B have limited Competitive markets
property rights
information
Buyers and sellers
No one is a price Well defined private
C form clearly defined
taker property rights
separate groups
Buyers and sellers
form clearly defined Well defined private
D Competitive markets
separate groups property rights

29. Demand for oil for chemicals has led to an increase in the price of petrol. This relationship is
an example of products in

A joint supply.

B joint demand.

C composite demand.

D competitive demand.
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30. The motor industry uses steel to make cars. This relationship is an example of products in

A joint supply.

B derived demand.

C substitute demand.

D competitive demand.

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4.1.3 Price Determination in a Competitive Market – Answers

1. A demand curve shows

A how much is sold at each price.
B how much is demanded at a price.
C how sensitive demand is to a change in price.
D how much would be demanded at different prices.

Explanation: A demand curve shows the relationship between price and quantity demanded over
a range of prices. Demand refers to buyers’ intentions and not to the actual amount bought and
sold.

2. A demand curve for a product would shift to the left if there was
A an increase in income.
B an increase in its price.
C a decrease in the price of a substitute product.
D a decrease in the price of a complementary product.

Explanation: We can rule out B which causes a movement along the demand curve. Response
A and D cause a rightward shift of the demand curve (an increase in demand). Only C causes
a decrease in demand for the product. This is because people switch to the less expensive
substitute.

3. A shift in a demand curve occurs when

A there is a change in income.
B there is a change in price.
C there is an increase in a firm’s costs.
D firms become more efficient.

Explanation: Option B results in a movement along the demand curve. Option C and D relate to
changes in supply. Only A causes a shift of the whole demand curve.

4. The table below refers to price per unit sold of a product and the total revenue from selling
this product.

Price Per Unit Total Revenue

£10 £600,000
£12 £600,000
£14 £600,000

From this data we can conclude that price elasticity of demand is

A -2
B -1
C 0
D +1.

Explanation: If a price change leaves total revenue unchanged then demand is of unitary
elasticity. This is because each change in price is followed by the same percentage change in
quantity demanded in the opposite direction. The reason why the correct answer is B rather than
D is that PED is normally negative (it is only positive in very exceptional circumstances). If PED
was +1 then the rise in price would lead to a rise in quantity, thus increasing revenue.
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5. When incomes rise by 2%, demand for UK holidays rises by 4%. The income elasticity of
demand is
A +2
B +20
C +0.8
D +0.5

Explanation: 4% / 2% = 2. Because quantity and income move in the same direction, the income
elasticity is positive; hence the answer is +2.

A +0.30
B +0.33
C +3.03
D +3.30

Explanation: Demand rose by 6.06% (220 / 3,300 x 100). Price charged by rival rose by 20%
(1.5 / 7.5 x 100). Cross elasticity of demand = +6.06% / +20% = +0.30. In this case, the
relationship is one of substitutes and, as a result, cross elasticity is positive.

Explanation: This involves simple manipulation of the PED formula. If -2.7 = x / 5.7, then x is 2.7
multiplied by 5.7 = (minus)15.39. In percentage terms, sales should fall by 2.7 times the
percentage rise in price.

8. A greengrocer has obtained some market research data which indicates that the income
elasticity of demand for potatoes is -1.56. This means that
A demand is income inelastic, and potatoes are a normal good.
B demand is price elastic, and potatoes are a necessity.
C potatoes are an inferior good, and demand is income elastic.
D potatoes are a normal good, and demand is income elastic.

Explanation: Negative income elasticity means that the product is an inferior good. As the
coefficient of elasticity is -1.56 it means that demand is income elastic, ie a 10% fall in income
leads to a 15.6% rise in demand.

9. If cross elasticity of demand is – (minus) 2 then

A a 10% rise in the price of one good leads to a 2% reduction in the demand for the other.
B a 5% rise in the price of one good leads to a 10% reduction in the demand for the
other.
C a 2% fall in the price of one good leads to a 4% reduction in the demand for the other.
D a 2% rise in the price of one good leads to a 1% fall in the demand for the other.
52

Explanation: -10% / + 5% equals 2. The reason why B is the correct answer rather than C (which
also gives an answer of 2) is that B gives a negative answer, whereas C gives a positive one.
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10. A normal good is one where

A demand falls when prices rise.
B demand rises when income falls.
C demand increases when income increases.
D demand changes in proportion to changes in income.
Explanation: The explanation lies in the definition of a normal good. Most goods are normal
goods. As our income rises, we buy an increased quantity of these goods.

11. A product with an income elasticity of demand of -2.2 is

A price elastic.
B income inelastic.
C a luxury product
D inferior.

Explanation: The question concerns income elasticity and, therefore, this rules out response A.
As the coefficient of income elasticity is negative, it must be an inferior good.

12. If cross elasticity is – (minus) 5, then we can conclude that

A there is no discernible demand relationship between the goods.
B the goods are close substitutes.
C the goods are complements.
D the goods are not close substitutes.
Explanation: When cross elasticity is negative then the related goods are complements, eg a fall
in the price of petrol increases the demand for cars.

13. When demand for a product is price elastic, a decrease in price leads to
A an increase in revenue for the producer.
B a decrease in revenue for the producer.
C no change in revenue for the producer.
D lower demand.
Explanation: When demand is price elastic the rise in the volume of sales following a price
reduction more than cancels out the lower amount received per unit sold. As a result, revenue
will rise.

14. For existing participants, the entry of a new participant into a market is likely to lead to
A a higher price elasticity of demand.
B a lower price elasticity of demand.
C a lower price elasticity of supply.
D none of the above.

Explanation: With more competitors demand will be more elastic. It should be remembered that
the demand for a particular brand is more elastic than the demand for the commodity itself.

15. A supply curve shows

A the effect on demand of a change in the conditions of supply.
B the quantity of a good that firms are willing to supply at different prices.
C the quantity of a good that a consumer is willing to purchase at different prices.
D the increase in consumer surplus resulting from a fall in price.
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Explanation: A supply curve shows the relationship between price and quantity supplied across
a range of prices and over a period of time.
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16. In the perfect competitive market model, the firm’s supply curve is also the firm’s
A average revenue curve.
B marginal revenue curve.
C average cost curve.
D marginal cost curve
Explanation: In the perfect competition model, a firm can produce as much as it likes, subject to
the need to maximise profits. It will therefore choose a production and sales level where
marginal cost equals marginal revenue. Since marginal revenue equals price, it will supply at a
level wherever marginal cost equals price. Hence a firm’s marginal cost curve is also its supply
curve.

17. Movement along a supply curve to the right arises because of

A improvements in business efficiency.
B an increase in price.
C an increase in tax.
D a reduction in price.
Explanation: An increase in price (brought about by a rightward shift of the demand curve) leads
to an upward movement along the supply curve as higher prices imply higher profits which
provide an incentive to expand production. A change in anything else causes a shift in the
whole curve.

18. A rightward parallel shift in a supply curve would occur when business costs
A fall by £3 a unit.
B rise by 3%.
C fall by 10%.
D rise by £3 a unit.
Explanation: A rightward shift is the result of a fall in the cost of production. The correct answer
hinges on the word ‘parallel’, which is why A is right and C is wrong.

19. The conditions of demand and supply of a luxury car brand are shown in the diagram below.

Price
S2
S1

O Quantity

The supply curve could have shifted to the left because

A there was a decrease in the price of petrol.
B the government has imposed a special tax on luxury cars.
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C the price has risen.

D the costs of manufacture have fallen.
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Explanation: Supply has decreased and this can only be explained by a rise in producer’s costs.
A tax on cars is seen in the same light as a rise in costs and to protect profits, both changes
would require a corresponding rise in price. Response A concerns the demand for cars. C is
illustrated by a movement along the supply curve. D would cause a rightward shift of the
supply curve.

20. A rise in price from £21 to £22 leads to a 5% rise in the quantity supplied. To two decimal
places, price elasticity of supply is

A -1.05
B -1.52
C +1.05
D +2.52

Explanation: The formula for PES = % change in quantity supplied / % change in price. %
change in price = 1 / 21 x 100 = 4.76%. Therefore PES is 5% / 4.76% = 1.05.

21. If price elasticity of supply is +2.2, what percentage rise (to two decimal places) is required to
bring about a 5.6% increase in the quantity supplied?
A 12.23%
B 5.25%
C 2.12%
D 2.55%

Explanation: +2.2 = +5.6% / x. Therefore x = 5.6% / 2.2 = 2.55.

22. Supply in agriculture is typically price inelastic because

A farmers cannot alter output at short notice.
B farmers rely on the weather.
C there are few substitutes for food.
D farmers can use stocks in response to changes in price.

Explanation: Supply is inelastic because agricultural output is subject to the growing cycle and
seasons of the year.

23. The table below shows the demand and supply schedules for pizzas sold by a local
takeaway.

Price per Pizza Quantity Quantity supplied

demanded per week
per week
£3.00 350 510
£2.75 400 480
£2.50 450 450
£2.25 500 420

Following a rise in production costs, supply falls by 80 pizzas at all prices. The new equilibrium
price would be
A £2.25
B £2.50
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C £2.75
D £3.00
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Explanation: Construct a new supply schedule with 80 fewer pizzas supplied at each price. At
price £2.75, 400 pizzas are demanded and 400 are supplied.

24. The diagram below shows the demand and supply of a product. P1 is the equilibrium price.

Price S

O
Q2 Q1 Quantity

The cause of the price decrease, from OP1 to OP2, could be

A a rise in the price of substitutes.
B a rise in the price of complementary products.
C a fall in VAT.
D an increase in labour costs.

Explanation: The diagram shows a decrease in demand. This could have been caused by
consumers reducing purchases because complements are more expensive. Response A would
cause an increase in demand, whereas C and D would impact on supply.

25. The diagram below uses demand and supply curves to illustrate that the price of a product
has fallen from OP1 to OP2, and quantity produced and sold has fallen from OQ1 to OQ2.

Price

S2
S1

O Q2 Q1 Quantity
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These changes could have occurred because

A tax has fallen and the price of competitive products has fallen.
B incomes have fallen and technology has improved business efficiency.
C the business is advertising less and business costs have risen.
D business costs have risen, and the price of a complementary product has increased.

Explanation: Here we have both leftward shift of the supply curve and of the demand curve. The
former could have been caused by a rise in business costs making it less attractive to supply,
whilst the latter could have been caused by a rise in the price of a complement. A more
expensive complement makes it less attractive to buy the product in question.

26. A market is said to be in equilibrium when

A the price of a product equals its quantity.
B output is distributed evenly across the population.
C there are no external costs or benefits associated with either consumption or production.
D there is neither excess demand nor excess supply.

Explanation: At the equilibrium price the quantity demanded equals the quantity supplied.

27. Which one of the following best describes a state of market disequilibrium? Market
disequilibrium
A occurs when the amount bought is more (or less) than the amount sold.
B always results in upward pressure on prices.
C occurs when planned demand is not the same as planned supply.
D always results in reduction in the quantity sold.

Explanation: The emphasis is on the words best describes. Response A is incorrect because
the amount bought always equals the amount sold. B is incorrect because disequilibrium might
also lead to downward pressure on prices. D is incorrect because it might also lead to a rise in
quantity. C focuses on the buyer and of the seller; when their plans coincide the market is in
equilibrium. In all other situations there is disequilibrium.

28. The model of supply and demand is based on several assumptions. Which one of the
following options provides three correct assumptions?

Assumption 1 Assumption 2 Assumption 3

Buyers and sellers
A No one is a price
Competitive markets form clearly defined
taker
separate groups
Buyers and sellers
B Well defined private
have limited Competitive markets
property rights
information
No one is a price Buyers and sellers
C Well defined private
taker form clearly defined
property rights
separate groups
Buyers and sellers
D form clearly defined Well defined private
Competitive markets
separate groups property rights
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Explanation: The model requires the seller’s decisions to be separated from those of the buyers.
Property rights must be clearly defined otherwise the seller may be able to ignore some of the
costs of production, which could lead to market failure. A competitive market is required ensuring
neither buyer nor seller can deliberately influence price.

29. Demand for oil for chemicals has led to an increase in the price of petrol. This relationship is
an example of products in
A joint supply.
B joint demand.
C composite demand.
D competitive demand.

Explanation: Composite demand refers to demand for a good that is wanted for more than one
purpose, so that an increase in demand for one purpose reduces the availability of supply for
other purposes.

30. The motor industry uses steel to make cars. This relationship is an example of products in
A joint supply.
B derived demand.
C substitute demand.
D competitive demand.

Explanation: As the car industry is a major user of steel we can conclude that the demand for
steel is, in part, derived from the demand for cars.

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4.1.4

Production, Costs and Revenue

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4.1.4 Production, Costs and Revenue

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. All points on the boundary of the production possibility frontier are

A productively efficient but with unemployment.

B productively efficient but not necessarily allocatively efficient.

C allocatively efficient but not necessarily productively efficient.

D allocatively efficient but with unemployment.

2. Productivity is a measure of

A output per unit of input.

B the output per unit of labour.

C the output per unit of capital.

D the output of the economy.

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3. One benefit of specialisation and division of labour is

A greater worker satisfaction.

B increased allocative efficiency.

C greater income equality.

D increased productivity.

4. Division of labour requires an efficient means of exchange because

A specialist workers are not self-sufficient.

B specialist workers achieve high productivity.

C exchange is not possible without the use of money as a medium of exchange.

D specialist workers produce a surplus.

5. The diagram below shows the average product and marginal product of a firm operating in
the short run.

At which level of employment will diminishing marginal returns to labour set in?

A OA

B OB

C OC
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D OD

6. The law of diminishing returns will only apply in situations where

A there is increasing scarcity of all factors of production.

B the price of a variable factor input is increasing.

C there is at least one fixed factor of production.

D capital is a variable factor input.

7. The table below summarises information relating to the relationships between the inputs and
output of a firm where there is a fixed supply of capital.

Labour Capital Total output

1 10 10
2 10 32
3 10 60
4 10 112
5 10 170
6 10 234
7 10 266

In this firm, the marginal product begins to fall with the addition of the

A 4th unit of labour.

B 5th unit of labour.

C 6th unit of labour.

D 7th unit of labour.

8. Which one of the following summarises the concept of returns to scale?

A The average costs of a business change over the short run

B The output of a business responds to any change in factor inputs

C The average costs of a business change over the long run

D The output of a business responds to a change in variable factor inputs when

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other factor inputs remain fixed

9. The table below summarises information relating to how the output of a business responds to
a change in variable factor inputs over the long run.

Labour Capital Total output

(units)
300 40 6 000
600 80 15 000
900 120 24 000
1200 160 32 000
1500 200 36 000

With reference to the data in the table, as output increases to 15 000 units there are

A zero returns to scale.

B constant returns to scale.

C decreasing returns to scale.

D increasing returns to scale

10. Which one of the following is a fixed cost?

A Wages paid to production workers

B Cost of energy

C Cost of materials

D Rent on property

11. Study the table below

Output Total cost

100 £10,000
200 £18,000
300 £24,000

From the table we can infer that, as output has increased, there has been

1. a rise in total costs.

2. a rise in average costs.

3. a fall in average costs.

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4. a rise in profits.

A 1 and 3 only

B 1 and 2 only

C 3 and 4 only

D 1, 3 and 4 only

12. Which one of the following statements is correct in relation to the difference between short-
run and long-run costs?

A Short-run costs increase or decrease based on fixed costs, whereas in the long run
there are no fixed costs

B There are no fixed costs in the short run but there are in the long run

C There are both fixed and variable costs in the long run

D There are no fixed costs in the long run but there are in the short run

13. The table below shows how the costs of a business change in relation to changes in variable
factor inputs.

Output Total fixed Total variable Total

(units) cost (£) cost (£) cost (£)
0 60 0 60
1 60 20 80
2 60 36 96
3 60 48 108
4 60 64 124
5 60 100 160
6 60 144 204

What is the average variable cost when 4 units of output are produced?

A £16

B £18

C £20
64

D £24
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14. As a firm increases its output, the average cost curve will

A initially decrease when output increases and then increase when output increases.

B initially increase when output increases and then decrease when output increases.

C fall consistently as output increases.

D not change gradient as output increases.

15. Which one of the following statements is true in the long run with respect to a fall in a firm’s
labour productivity?

A Total costs will fall

B Average costs will rise

C Marginal costs will fall

D Fixed costs will rise

16. Some firms benefit from research facilities at a local university. This is known as

A an external economy of scale.

B a technical economy of scale.

C a financial economy of scale.

D an internal economy of scale.

17. Diseconomies of scale result from

A the indivisibility of plant and equipment.

B bulk buying of materials.

C less effective communication.

D increased risk as firms increase their range of products.

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18. The diagram below shows the long-run average cost curve of a firm.

At which level of output will the firm experience increasing returns to scale?

A OA

B OB

C OC

D OD

19. The upward trend of the long-run average cost curve beyond a certain scale of production,
reflects the fact that beyond this point

A there is no further scope for economies of scale.

B diseconomies of scale exceed economies of scale.

C economies of scale exceed diseconomies of scale.

D diseconomies of scale start to occur.

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A Average costs fall relatively quickly to the minimum efficient scale and then
rise again over a large range of output

B Average costs increase relatively quickly to the minimum efficient scale and
then remain constant over a large range of output

C Average costs increase relatively quickly to the minimum efficient scale and
then fall again over a large range of output

D Average costs fall relatively quickly to the minimum efficient scale and then
remain constant over a large range of output

21. One implication of a relatively low minimum efficient scale in a market is that

A economies of scale will not present a significant barrier to entry.

B economies of scale will present a significant barrier to entry.

C economies of scale will present a significant barrier to exit.

D the market is likely to develop into an oligopoly or monopoly.

22. Average revenue is equal to

A total revenue minus the number of items sold.

B total revenue divided by price.

C total revenue divided by sales volume.

D price multiplied by sales volume.

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23. The table below summarises information relating to how the demand for a firm’s product
changes in relation to changes in its price.

Price Quantity
(£) demanded
24 1
18 2
14 3
10 4
6 5
2 6

What is the firm’s marginal revenue when the 3rd unit is sold?

A £12

B £6

C -£2

D -£10

24. The demand curve is derived from the

A total cost.

B total revenue.

C average revenue.

D average cost. 68
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25. The diagram below shows the revenue curves of a firm.

At which level of output is the price elasticity of demand unity?

A OA

B OB

C OC

D OD

26. The diagram below shows the marginal cost (MC), long-run average cost (LRAC), marginal
revenue (MR) and average revenue (AR) curves of a firm.

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At the output level OA, what level of profit does the firm make?

A Accounting profit

B Normal profit

C Zero profit

D Supernormal profit

27. Which one of the following statements describes one role of profit in a market economy?

A To assist in channelling savings into investment

B To reduce the negative externalities created in production

C To enable the balance of payments to balance

D To signal that profitable entry into a market may be possible

28. Which one of the following statements describes ‘innovation’?

A The creation of a product or process for the first time

B Making a product or process identical to one already in existence

C Improving on an existing product or process

D Developing the idea for a product or process that there is not yet the technology
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29. The diagram below shows two potential long-run average cost curves (LRAC) for the same
firm.

The shift from LRAC1 to LRAC2 is likely to be caused by

A a reduction in the firm’s productivity.

B the exploitation of technological advancement.

C an increase in corporation tax.

D a reduction in the firm’s productive efficiency.

30. Which one of the options is likely to reflect the outcomes of an increase in the availability of
shared technological advancement in an industry?

Statement 1 Statement 2

A Increased barriers to entry Increased competition

B Increased monopoly behaviour Increased barriers to entry

C Reduced barriers to entry Increased competition

D Increased monopoly behaviour Reduced barriers to entry

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4.1.4 Production, Costs and Revenue - Answers

1. All points on the boundary of the production possibility frontier are

A productively efficient but with unemployment.
B productively efficient but not necessarily allocatively efficient.
C allocatively efficient but not necessarily productively efficient.
D allocatively efficient but with unemployment.

Explanation: Any point on the PPF is a productively efficient point where the factors of
production are being used to their maximum potential. Hence, no unemployment. The PPF tells
us nothing about the price level or actual costs. We can, therefore, not determine whether there
will be allocative efficiency which requires the price of a good to equal the marginal cost of its
production.

2. Productivity is a measure of
A output per unit of input.
B the output per unit of labour.
C the output per unit of capital.
D the output of the economy.

Explanation: Productivity is a general term for the measurement of output per unit of input. This
can be refined to labour productivity which is the output per unit of labour, or the productivity of
capital, which is the output per unit of capital.

3. One benefit of specialisation and division of labour is

A greater worker satisfaction.
B increased allocative efficiency.
C greater income equality.
D increased productivity.

Explanation: Specialisation and division of labour occurs when workers are assigned specific
tasks within a production process. This leads to workers becoming more skilled and less
wasteful and, therefore, increases in labour productivity.

4. Division of labour requires an efficient means of exchange because

A specialist workers are not self-sufficient.
B specialist workers achieve high productivity.
C exchange is not possible without the use of money as a medium of exchange.
D specialist workers produce a surplus.

Explanation: A specialist worker does not produce the full range of goods and services that he /
she requires. Therefore, specialists must engage in exchange – goods for goods, goods for
money, labour services for money, and so on. B and D are valid statements but do not explain
why specialists need to engage in exchange. C is an incorrect statement – exchange can occur
without the use of money.
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5. The diagram below shows the average product and marginal product of a firm operating in
the short run.

At which level of employment will diminishing marginal returns to labour set in?
A OA
B OB
C OC
D OD

Explanation: Diminishing marginal returns to labour set in at a point where for the first time, each
extra unit of labour adds less to output than the previous unit, ie after the marginal product of the
firm has reached its maximum.

6. The law of diminishing returns will only apply in situations where

A there is increasing scarcity of all factors of production.
B the price of a variable factor input is increasing.
C there is at least one fixed factor of production.
D capital is a variable factor input.

Explanation: The law is applicable in the short run, as supply of at least one factor input cannot
be altered within a short span of time. Thus, that one factor input (at least) is considered fixed.

7. The table below summarises information relating to the relationships between the inputs and
output of a firm where there is a fixed supply of capital.

Labour Capital Total output

1 10 10
2 10 32
3 10 60
4 10 112
5 10 170
6 10 234
7 10 266

In this firm, the marginal product begins to fall with the addition of the
A 4th unit of labour.
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B 5th unit of labour.

C 6th unit of labour.
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D 7th unit of labour.

Explanation: The marginal product is the increase in total output each time the labour input
increases by 1 unit. The marginal product increase with each additional unit of labour until the 7th
unit is added and the marginal product falls from 64 to 32.

8. Which one of the following summarises the concept of returns to scale?

A The average costs of a business change over the short run
B The output of a business responds to any change in factor inputs
C The average costs of a business change over the long run
D The output of a business responds to a change in variable factor inputs when
other factor inputs remain fixed

Explanation: Returns to scale are a long-run concept. Long-run production assumes there are no
fixed factors, and therefore relates to the process by which the output of a business responds to
any change in factor inputs.

9. The table below summarises information relating to how the output of a business responds to
a change in variable factor inputs over the long run.

Labour Capital Total output

(units)
300 40 6 000
600 80 15 000
900 120 24 000
1200 160 32 000
1500 200 36 000

With reference to the data in the table, as output increases to 15 000 units there are
A zero returns to scale.
B constant returns to scale.
C decreasing returns to scale.
D increasing returns to scale.

Explanation: Increasing returns to scale occur when the percentage change in output is greater
than the percentage change in inputs, in the context of variable factors of production. As output
increases by 150%, both inputs increase by 100%.

10. Which one of the following is a fixed cost?

A Wages paid to production workers
B Cost of energy
C Cost of materials
D Rent on property

Explanation: Rent is treated as a fixed cost because although it can rise in the long run, or for
reasons unrelated to output, it does not rise or fall with changes in the level of production. The
others all move in the same direction as any change in the volume of output, and are therefore
treated as variable costs.
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11. Study the table below.

Output Total cost

100 £10,000
200 £18,000
300 £24,000

From the table we can infer that, as output has increased, there has been
1. a rise in total costs.
2. a rise in average costs.
3. a fall in average costs.
4. a rise in profits.

A 1 and 3 only.
B 1 and 2 only.
C 3 and 4 only.
D 1, 3 and 4 only.

Explanation: The table shows a rise in total costs and by dividing total costs by output we can
conclude that average costs fell. However, as there is no data on sales revenue we cannot draw
any conclusion about profits.

12. Which one of the following statements is correct in relation to the difference between short-
run and long-run costs?
A Short-run costs increase or decrease based on fixed costs, whereas in the long run
there are no fixed costs
B There are no fixed costs in the short run but there are in the long run
C There are both fixed and variable costs in the long run
D There are no fixed costs in the long run but there are in the short run

Explanation: Long-run costs are incurred where there are no fixed factors of production.
Changes in short-run costs are caused by changes in variable costs, associated with a variable
factor.

13. The table below shows how the costs of a business change in relation to changes in variable
factor inputs.

Output Total fixed Total variable Total

(units) cost (£) cost (£) cost (£)
0 60 0 60
1 60 20 80
2 60 36 96
3 60 48 108
4 60 64 124
5 60 100 160
6 60 144 204

What is the average variable cost when 4 units of output are produced?
A £16
B £18
C £20
D £24
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Explanation: Average variable cost = total variable cost divided by output. £64 / 4 = 16.

14. As a firm increases its output, the average cost curve will
A initially decrease when output increases and then increase when output increases.
B initially increase when output increases and then decrease when output increases.
C fall consistently as output increases.
D not change gradient as output increases.

Explanation: The average cost curve is U-shaped. Average cost initially decreases when output
increases and then increases when output increases.

15. Which one of the following statements is true in the long run with respect to a fall in a firm’s
labour productivity?
A Total costs will fall
B Average costs will rise
C Marginal costs will fall
D Fixed costs will rise

Explanation: In the long run, there are no fixed costs. When the average output produced per
worker falls, this will lead to an increase in the average cost of the output that they produce.

16. Some firms benefit from research facilities at a local university. This is known as
A an external economy of scale.
B a technical economy of scale.
C a financial economy of scale.
D an internal economy of scale.

Explanation: Where a business organisation benefits from the activities of an external

organisation we call this an external economy of scale. Technical and financial economies are
types of internal economy of scale.

17. Diseconomies of scale result from

A the indivisibility of plant and equipment.
B bulk buying of materials.
C less effective communication.
D increased risk as firms increase their range of products.

Explanation: Diseconomies of scale result mainly from problems of management in large

organisations, and typically less effective communication as a business grows.

18. The diagram below shows the long-run average cost curve of a firm.
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At which level of output will the firm experience increasing returns to scale?
A OA
B OB
C OC
D OD

Explanation: Increasing returns to scale occur when an increase in output causes a decrease in
the average cost of each unit produced. This only occurs at OA in the diagram.

19. The upward trend of the long-run average cost curve beyond a certain scale of production,
reflects the fact that beyond this point
A there is no further scope for economies of scale.
B diseconomies of scale exceed economies of scale.
C economies of scale exceed diseconomies of scale.
D diseconomies of scale start to occur.

Explanation: It is a common misunderstanding that, up to a certain point, there are only

economies of scale from increased production and beyond this point there are only
diseconomies. In fact, economies and diseconomies occur throughout the length of the LRAC
curve, but the balance between the two changes. When diseconomies from increased scale
exceed economies from the same increase in scale, the long-run average cost curve begins to
rise.

20. It is possible that a firm’s long-run average cost curve might have an L-shape, rather than the
traditional U-shape. Which one of the following statements is consistent with an L-shape
long-run average cost curve?
A Average costs fall relatively quickly to the minimum efficient scale and then
rise again over a large range of output
B Average costs increase relatively quickly to the minimum efficient scale and
then remain constant over a large range of output
C Average costs increase relatively quickly to the minimum efficient scale and
then fall again over a large range of output
D Average costs fall relatively quickly to the minimum efficient scale and then
remain constant over a large range of output

Explanation: Some firms will be able to reach their minimum efficient scale and then maintain
that low level of average costs over a large range of output. This is because the increase in cost
from some diseconomies of scale is outweighed by the ongoing decrease in cost from the
economies of scale. This gives the LRAC its L-shape.

21. One implication of a relatively low minimum efficient scale in a market is that
A economies of scale will not present a significant barrier to entry.
B economies of scale will present a significant barrier to entry.
C economies of scale will present a significant barrier to exit.
D the market is likely to develop into an oligopoly or monopoly.

Explanation: If the minimum efficient scale is low then economies of scale may not act as
a barrier to entry. This is because existing firms cannot achieve a significant cost advantages
and they cannot force prices down in the event of new businesses entering the market.

22. Average revenue is equal to

A total revenue minus the number of items sold.
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B total revenue divided by price.

C total revenue divided by sales volume.
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D price multiplied by sales volume.

Explanation: Average revenue is the average amount of money that the supplier receives from
each unit sold. Therefore, it is calculated by dividing total revenue by sales volume.

23. The table below summarises information relating to how the demand for a firm’s product
changes in relation to changes in its price.

Price Quantity
(£) demanded
24 1
18 2
14 3
10 4
6 5
2 6

What is the firm’s marginal revenue when the 3rd unit is sold?
A £12
B £6
C -£2
D -£10
Explanation: Marginal revenue is the increase in total revenue each time one extra unit is sold.
The marginal revenue of the 3rd unit is £42 - £36 = £6

24. The demand curve is derived from the

A total cost.
B total revenue.
C average revenue.
D average cost.

Explanation: The average revenue curve slopes downwards from left to right (ie to increase the
volume of sales it is necessary to reduce price). If we place a series of horizontal lines to
represent different levels of price, we can read off the average revenue curve the amount that
customers buy at each price; therefore this is the demand curve.

25. The diagram below shows the revenue curves of a firm.

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Page

At which level of output is the price elasticity of demand unity?

A OA
B OB
C OC
D OD
Explanation: When the marginal revenue is zero the average revenue is unity, therefore the
price elasticity of demand unity is unity at output level OC. (This is a feature of a straight-line
demand curve in particular).

26. The diagram below shows the marginal cost (MC), long-run average cost (LRAC), marginal
revenue (MR) and average revenue (AR) curves of a firm.

At the output level OA, what level of profit does the firm make?
A Accounting profit
B Normal profit
C Zero profit
D Supernormal profit

Explanation: Normal profit is an economic condition occurring when the difference between a
firm's total revenue and total cost, including normal profit, is equal to zero. This is where AR =
AC

27. Which one of the following statements describes one role of profit in a market economy?
A To assist in channelling savings into investment
B To reduce the negative externalities created in production
C To enable the balance of payments to balance
D To signal that profitable entry into a market may be possible

Explanation: Firms that are experiencing rising profits are sending signals to potential producers
that they too could possibly make a profit if they entered that market.

28. Which one of the following statements describes ‘innovation’?

A The creation of a product or process for the first time
B Making a product or process identical to one already in existence
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C Improving on an existing product or process

D Developing the idea for a product or process that there is not yet the technology
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to produce
© APT Initiatives Ltd, 2017. This document is for use ONLY by the purchasing individual or staff and students attending
the purchasing institution. It is not to be shared with anybody else without the prior written permission of APT Initiatives Ltd.
APT’s 540 Multiple Choice Questions for AQA A Level Economics

Explanation: Innovation is about taking an existing invention and adapting it to make it better or
more efficient; it thereby provides a level of added value for which there is significant customer
demand.

29. The diagram below shows two potential long-run average cost curves (LRAC) for the same
firm.

The shift from LRAC1 to LRAC2 is likely to be caused by

A a reduction in the firm’s productivity.
B the exploitation of technological advancement.
C an increase in corporation tax.
D a reduction in the firm’s productive efficiency.

Explanation: Technological advancement will lead to a firm’s average costs reducing at every
output level; this is reflected in the downward shift of the entire LRAC curve.

30. Which one of the options is likely to reflect the outcomes of an increase in the availability of
shared technological advancement in an industry?

Statement 1 Statement 2
A Increased barriers to entry Increased competition
B Increased monopoly behaviour Increased barriers to entry
C Reduced barriers to entry Increased competition
D Increased monopoly behaviour Reduced barriers to entry

Explanation: The sharing of a technological advancement in an industry is likely to reduce

barriers to entry as marginal firms will be able to utilise the new technology. This will lead to an
increase in the competition in the industry and potentially a change in the structure of the
industry.
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4.1.5

Perfect Competition, Imperfectly Competitive

Markets and Monopoly

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Page

4.1.5 Perfect Competition, Imperfectly Competitive Markets and

Monopoly Performance

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. Which one of the following options shows the correct spectrum of market structures, with the
most concentrated on the left and least concentrated on the right?

More concentrated structure Less concentrated structure

Perfect Monopolistic
A Oligopoly Pure monopoly
competition competition
Monopolistic Perfect
B Pure monopoly Oligopoly
competition competition
Monopolistic Perfect
C Pure monopoly Oligopoly
competition competition
Perfect Monopolistic
D Oligopoly Pure monopoly
competition competition

2. Traditional models of the theory of the firm are based on the assumption that the firm has the
objective of

A profit satisficing.

B sales revenue maximisation.

C maximising the quality of the output.

D profit maximisation.
82
Page

3. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a firm.

If the firm has the objective of profit maximisation, what will their level of output be?

A OA

B OB

C OC

D OD

4. Which one of the following summarises the ‘principal agent’ problem?

A Owners of a firm acting in their own best interest rather than the best interest
of society

B Shareholders of a firm acting in their own best interest rather than the best
interest of their customers

C Managers of a firm acting in their own best interest rather than the best
interest of the owners

D Managers of a firm acting in their own best interest rather than the best interest
of their suppliers
83
Page

5. Which one of the following is a factor used to distinguish between different market
structures?

A The degree of product differentiation

B The number of employees

C The degree of efficiency

D The sector of industry

6. Which one of the following refers to a firm’s objective of making enough profit to keep
shareholders happy whilst maintaining confidence in the management?

A Profit satisficing

B Sales revenue maximisation

C Maximising the quality of the output

D Profit maximisation

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Page

7. The diagram below shows the marginal cost (MC), long-run average cost (LRAC), marginal
revenue (MR) and average revenue (AR) curves of a perfectly competitive firm in long-run
equilibrium.

At the output level OA the firm makes normal profit. This is because

A the absence of barriers to entry means that new firms can enter the market and any
supernormal profit is competed away.

B the firm is productively inefficient and not capable of achieving supernormal profit.

C the firm has a low market share and cannot reach its minimum efficient scale of
production, which means it cannot earn above normal profit.

D the firm is profit satisficing and in long-run equilibrium this is achieved with normal
profit.

8. Firms operating in perfectly competitive markets are

A price makers.

B price takers.

C price regulators.

D price discriminators.
85
Page

9. The diagram below shows the marginal cost (MC), long-run average cost (LRAC), marginal
revenue (MR) and average revenue (AR) curves of a perfectly competitive firm in long-run
equilibrium.

The proposition that, given certain assumptions, perfect competition will result in an efficient
allocation of resources is reflected in which two conditions from the following options?

Condition 1 Condition 2
The firm is operating where The firm is operating where
A
P = MC AR = MR

The firm is operating where The firm is operating at the

B
MC = MR minimum of their LRAC curve

The firm is operating at the The firm is operating where

C
minimum of their LRAC curve AR = MR

The firm is operating where The firm is operating at the

D
P = MC minimum of their LRAC curve
86
Page

10. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopolistically competitive firm in short-run
equilibrium.

All other things being equal, at output level OA, the firm

A is making supernormal profit which will continue in the long run.

B is making supernormal profit which will not continue in the long run.

C is making a loss but should stay in the market.

D is making a loss and should exit the market.

A physical product differentiation.

B human capital differentiation.

C marketing differentiation.

D differentiation through distribution.

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Page

12. A firm operating under conditions of monopolistic competition may change the attributes of
its product in such a way as to make it more appealing to customers. This activity is termed

A price competition.

B non-price competition.

C game theory.

D loss leading.

13. The table below shows combinations of possible assumptions relating to the model of
oligopoly. Which option provides three correct assumptions relating to the model of
oligopoly?

Assumption 1 Assumption 2 Assumption 3

Significant barriers Independent

A Product branding
to entry decision making

Non-price Normal profits for the Significant barriers

B
competition dominant firms to entry

Independent Normal profits for the

C Product branding
decision making dominant firms

Significant barriers Non-price

D Product branding
to entry competition

14. There are a number of factors which affect the behaviour and performance of firms in a
variety of real world oligopolistic markets. Which option provides three factors that affect the
behaviour and performance of oligopolistic firms?

Factor 1 Factor 2 Factor 3

The nature of the Independent The degree of
A
barriers to entry decision making product differentiation

The nature of the The number of firms The degree of

B
barriers to entry in the market product differentiation

Independent The number of firms The degree of

C
decision making in the market product differentiation

The nature of the The number of firms Independent decision

D
88

barriers to entry in the market making

Page

A the strategy of the firms is unpredictable.

B there are only a few dominant firms.

C each firm only makes normal profit in the long run.

D barriers to entry are significant.

16. In a market consisting of only five firms with market shares of 30%, 25%, 20% 15% and
10%, the Herfindahl-Hirschman Index would be

A 2 025

B 2 250

C 2 600

D 2 850

17. Which one of the following is a secretive agreement between two or more oligopolistic firms,
formed with the aim of gaining illegal mutual benefits?

A Collusion

B Co-operation

C Price discrimination

D Non-price competition
89
Page

18. The diagram below shows the marginal cost (MC), marginal revenue (MR) and average
revenue (AR) curves of a firm operating under conditions of oligopoly and facing a kinked
demand curve.

The firm will be reluctant to engage in price competition that takes the price above P because
price elasticity of demand above P is

A relatively elastic, meaning the firm would see a reduction in total revenue.

B relatively inelastic, meaning the firm would see a reduction in total revenue.

C relatively elastic, meaning the firm would see an increase in total revenue.

D relatively inelastic, meaning the firm would see an increase in total revenue.

19. Collusion, in the form of a cartel or price leadership, may allow firms within an oligopoly
market structure to

A act as perfectly competitive firms and maximise their efficiency.

B act as if they operated in a monopolistically competitive market and achieve

long-run supernormal profit.

C act as a monopsony and achieve economic efficiency.

D act as a monopolist and maximise their joint profits.

Page

20. Expenditure on research, development and advertising in oligopolistic industries are

significant because firms operating in an oligopoly

A are not concerned about rising costs.

B are constantly looking for ways to reduce the price they charge for their products.

C are concerned with reducing barriers to entry.

D are keen to engage in non-price competition.

21. In an oligopolistic market, interdependence in decision making is important because it means

that firms

A will not have to consider their rivals response to any decision that they take.

B will act autonomously of rivals in the market.

C must take into account likely reactions of their rivals to any decision that they take.

D are less likely to benefit from collusion.

22. Which one of the following options is a disadvantage of an oligopoly market structure?

A Small firms find it easy to enter the market

B The contestability of the market reduces the incentive for incumbents to innovate

C There are flexible prices in the market

D Limited consumer choice between a few dominant firms in the market

23. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopoly firm.

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Page

Which one of the following options represents the area of the profit of the firm
in the long run?

A CDH

B CEG

C BDOF

D ACBD

24. Monopoly is regarded as inefficient because it results in

A a misallocation of resources.

B excess output.

C diseconomies of scale.

D innovation.

25. Which one of the following is a condition necessary for third degree price discrimination?

A Perfect competition

B Market separation

C The opportunity for buyers to resell

D All consumers must have identical price elasticity of demand

26. Which one of the following is a short-run benefit of perfect competition?

A Consumer welfare is maximised

B Incumbent firms are able to protect their market share allowing them to become
more productively efficient

C Supernormal profit allows firms to achieve dynamic efficiency

D Incumbent firms are able to protect their market share allowing them to achieve
economies of scale
Page

27. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopoly firm. It faces a contestable market
and may be vulnerable to ‘hit and run’ entry.

Which price is the monopolist likely to be charged in an attempt to avoid such hit and run
entry?

A A

B B

C C

D D

28. Which option provides correct examples of static and dynamic efficiency?

Static efficiency Dynamic efficiency

Achieving the greatest output
A Price = marginal cost
from given inputs
Technological development Producing at the minimum
B
that reduces costs efficient scale

Technological development
C Price = marginal cost
that reduces costs

Achieving the best distribution

D Price = average cost

of resources in an economy
Page

29. The diagram below shows the long-run average cost (LRAC) curve of a firm.

At which level of output is the firm achieving productive efficiency?

A A

B B

C C

D D

30. A monopoly firm that practices 3rd degree price discrimination will cause

A no change in consumer or producer surplus.

B a decrease in producer surplus.

C an increase in consumer surplus.

D a decrease in consumer surplus.

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Page

4.1.5 Perfect Competition, Imperfectly Competitive Markets and

Monopoly Performance - Answers

1. Which one of the following options shows the correct spectrum of market structures, with the
most concentrated on the left and least concentrated on the right?

More concentrated structure Less concentrated structure

Explanation: Market structures are classified in terms of the presence or absence of

competition. When competition is absent, the market is said to be concentrated. There is a
spectrum, from pure monopoly, (on the left) where the market is concentrated on one firm, to
perfect competition, where the market concentration is very low (on the right).

2. Traditional models of the theory of the firm are based on the assumption that the firm has the
objective of
A profit satisficing.
B sales revenue maximisation.
C maximising the quality of the output.
D profit maximisation.

Explanation: Whilst all of the options are potential objectives of a firm in the real world,
neoclassical models of the theory of the firm are based on the assumption that the firm has the
objective of profit maximisation.

3. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a firm.

95
Page

If the firm has the objective of profit maximisation, what will their level of output be?
A OA
B OB
C OC
D OD

Explanation: The firm will maximise profits at the level of output where MC = MR.

4. Which one of the following summarises the ‘principal agent’ problem?

A Owners of a firm acting in their own best interest rather than the best interest of society
B Shareholders of a firm acting in their own best interest rather than the best interest of their
customers
C Managers of a firm acting in their own best interest rather than the best interest of the
owners
D Managers of a firm acting in their own best interest rather than the best interest of their
suppliers

Explanation: The principal agent problem occurs when there is a divorce between the ownership
and control of a firm. This means the managers, who control the day to day activity of the firm,
may give greater priority to their own objectives rather than those of the owner.

5. Which one of the following is a factor used to distinguish between different market
structures?
A The degree of product differentiation
B The number of employees
C The degree of efficiency
D The sector of industry

Explanation: Product differentiation refers to a situation where there are generally similar
products with minor variations that are used by consumers when making a choice. In the
structure of perfect competition, for example, there is no product differentiation whereas under
monopolistic competition a distinguishing feature is the high degree of product differentiation in
the market.

6. Which one of the following refers to a firm’s objective of making enough profit to keep
shareholders happy whilst maintaining confidence in the management?
A Profit satisficing
B Sales revenue maximisation
C Maximising the quality of the output
D Profit maximisation

Explanation: Profit satisficing is an alternative objective to profit maximisation. It occurs when the
managers of a firm need to maintain the confidence of the owners (shareholders) with a
minimum acceptable profit and return, while allowing some room to pursue personal and other
business objectives at the same time.
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Page

7. The diagram below shows the marginal cost (MC), long-run average cost (LRAC), marginal
revenue (MR) and average revenue (AR) curves of a perfectly competitive firm in long-run
equilibrium.

At the output level OA the firm makes normal profit. This is because
A the absence of barriers to entry means that new firms can enter the market and any
supernormal profit is competed away.
B the firm is productively inefficient and not capable of achieving supernormal profit.
C the firm has a low market share and cannot reach its minimum efficient scale of production,
which means it cannot earn above normal profit.
D the firm is profit satisficing and in long-run equilibrium this is achieved with normal profit.

Explanation: A perfectly competitive firm in long-run equilibrium will achieve normal profit. This is
because the absence of barriers to entry will make it easy for new firms to get into the market in
order to share in any supernormal profit that may exist in the short run.

8. Firms operating in perfectly competitive markets are

A price makers.
B price takers.
C price regulators.
D price discriminators.

Explanation: With so many sellers in a perfectly competitive market no individual firm can exert
any influence on the price. All firms are therefore price takers.
97
Page

9. The diagram below shows the marginal cost (MC), long-run average cost (LRAC), marginal
revenue (MR) and average revenue (AR) curves of a perfectly competitive firm in long-run
equilibrium.

The proposition that, given certain assumptions, perfect competition will result in an efficient
allocation of resources is reflected in which two conditions from the following options?

Condition 1 Condition 2
The firm is operating where The firm is operating where
A P = MC AR = MR
The firm is operating where The firm is operating at the minimum
B MC = MR of their LRAC curve
The firm is operating at the minimum The firm is operating where
C of their LRAC curve AR = MR
The firm is operating where The firm is operating at the
D P = MC minimum of their LRAC curve

Explanation: An efficient allocation of resources occurs when there is allocative and productive
efficiency. Allocative efficiency occurs when P = MC and productive efficiency occurs at the
minimum of the LRAC, both conditions taken together.

10. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopolistically competitive firm in short-run
equilibrium. 98
Page

All other things being equal, at output level OA, the firm
A is making supernormal profit which will continue in the long run.
B is making supernormal profit which will not continue in the long run.
C is making a loss but should stay in the market.
D is making a loss and should exit the market.

Explanation: The firm’s AR is above their AC which means they are making supernormal profit.
However, because of the absence of barriers to entry in this structure it is easy for new firms to
get into the market in order to share in any supernormal profit. This means that, in the long run,
these profits will be competed away and only normal profit will remain available.

11. A central feature of monopolistic competition is that products are differentiated. When firms
try to differentiate their product by distinctive packaging and other promotional techniques,
this is known as
A physical product differentiation.
B human capital differentiation.
C marketing differentiation.
D differentiation through distribution.

Explanation: When products are packaged like breakfast cereals, they can easily be branded or
promoted and, therefore, differentiated. These are techniques of differentiation through
marketing.

12. A firm operating under conditions of monopolistic competition may change the attributes of
its product in such a way as to make it more appealing to customers. This activity is termed
A price competition.
B non-price competition.
C game theory.
D loss leading.

Explanation: Non-price competition refers to the efforts on the part of a monopolistic competitive
firm to increase its sales and profits through product variation instead of a cut in the price of its
product. In order to achieve this, it may change the attributes of its product in order to add value
and thereby make it more appealing to customers.

13. The table below shows combinations of possible assumptions relating to the model of
oligopoly. Which option provides three correct assumptions relating to the model of
oligopoly?

Assumption 1 Assumption 2 Assumption 3

A Significant barriers to Independent decision

Product branding
entry making
B Normal profits for the Significant barriers to
Non-price competition
dominant firms entry
C Independent decision Normal profits for the
Product branding
making dominant firms
D Significant barriers Non-price
Product branding
to entry competition

Explanation: Option D is the only one that contains 3 correct assumptions. Dominant oligopolistic
firms, behind significant barriers, will employ non-price techniques, such as branding to make
supernormal profit. They are also inter-dependent decision makers.
99
Page

Factor 1 Factor 2 Factor 3

A The nature of the Independent decision The degree of product
barriers to entry making differentiation
The degree of
B The nature of the The number of firms
product
barriers to entry in the market
differentiation
C Independent decision The number of firms The degree of product
making in the market differentiation
D The nature of the The number of firms Independent decision
barriers to entry in the market making

Explanation: Option B is the only one that contains 3 correct factors. Dominant firms are also
inter-dependent decision makers.

15. Market structures can be determined by the conduct and performance of participant firms.
However, in an oligopolistic market, conduct and performance cannot be relied on to
determine market outcomes. This is because
A the strategy of the firms is unpredictable.
B there are only a few dominant firms.
C each firm only makes normal profit in the long run.
D barriers to entry are significant.

Explanation: The actual performance of firms in the market affects the market structure; for
example the rising dominance of the best performing firms. However, the unpredictable strategic
behaviour of oligopolistic firms makes it difficult to predict their behaviour and therefore the
outcomes of their behaviour.

16. In a market consisting of only five firms with market shares of 30%, 25%, 20% 15% and
10%, the Herfindahl-Hirschman Index would be
A 2 025
B 2 250
C 2 600
D 2 850

Explanation: The Herfindahl-Hirschman Index is a measure of market concentration. The index

is calculated by squaring the percentage market share of each firm in the market and summing
these numbers; hence 900+625+400+225+100 = 2250.

17. Which one of the following is a secretive agreement between two or more oligopolistic firms,
formed with the aim of gaining illegal mutual benefits?
A Collusion
B Co-operation
C Price discrimination
D Non-price competition

Explanation: Collusion refers to any illegal and unfair practices that companies utilise in order to
100

achieve an unfair advantage. Co-operation is not generally classed as illegal, especially because
it does not undermine consumer sovereignty.
Page

18. The diagram below shows the marginal cost (MC), marginal revenue (MR) and average
revenue (AR) curves of a firm operating under conditions of oligopoly and facing a kinked
demand curve.

The firm will be reluctant to engage in price competition that takes the price above P because
price elasticity of demand above P is
A relatively elastic, meaning the firm would see a reduction in total revenue.
B relatively inelastic, meaning the firm would see a reduction in total revenue.
C relatively elastic, meaning the firm would see an increase in total revenue.
D relatively inelastic, meaning the firm would see an increase in total revenue.

Explanation: If the firm raises its price and others leave their prices constant, then there will be a
significant substitution effect making demand relatively price elastic. The business would then
lose market share and expect to see a fall in its total revenue.

19. Collusion, in the form of a cartel or price leadership, may allow firms within an oligopoly
market structure to
A act as perfectly competitive firms and maximise their efficiency.
B act as if they operated in a monopolistically competitive market and achieve long-run
supernormal profit.
C act as a monopsony and achieve economic efficiency.
D act as a monopolist and maximise their joint profits.

Explanation: In an oligopolistic market where a few large firms dominate, there is the potential
for the firms to seek to reduce uncertainty by engaging in some form of collusive behaviour or
price leadership. When this happens, the existing firms engage in price fixing acting as if they
were one firm and maximise their joint profits accordingly.

20. Expenditure on research, development and advertising in oligopolistic industries are

significant because firms operating in an oligopoly
A are not concerned about rising costs.
B are constantly looking for ways to reduce the price they charge for their products.
C are concerned with reducing barriers to entry.
D are keen to engage in non-price competition.
101

Explanation: Increasing sales through advertising and differentiating the product through
research are ways of engaging in non-price competition. This is the preferred battle ground of
Page

oligopolistic competition.

21. In an oligopolistic market, interdependence in decision making is important because it means

that firms
A will not have to consider their rivals response to any decision that they take.
B will act autonomously of rivals in the market .
C must take into account likely reactions of their rivals to any decision that they take.
D are less likely to benefit from collusion.

Explanation: Interdependence means that firms must take into account likely reactions of their
rivals to any change in price, output or forms of non-price competition.

22. Which one of the following options is a disadvantage of an oligopoly market structure?
A Small firms find it easy to enter the market
B The contestability of the market reduces the incentive for incumbents to innovate
C There are flexible prices in the market
D Limited consumer choice between a few dominant firms in the market

Explanation: Consumers having to choose a firm’s products in an oligopoly situation can be like
choosing the lesser evil. The consumer has very limited choices and options for the product or
services that they demand. This is seen as one of the biggest disadvantages of an oligopoly.

23. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopoly firm.

Which one of the following options represents the area of the profit of the firm in the long run?
A CDH
B CEG
C BDOF
D ACBD

Explanation: In the long run, a monopoly firm will make supernormal profits. This is represented
by the difference between AR and AC multiplied by the quantity. This is represented by the area
ACBD.

24. Monopoly is regarded as inefficient because it results in

A a misallocation of resources.
102

B excess output.
C diseconomies of scale.
D innovation.
Page

Explanation: Monopoly results in lower output and higher prices than would be the case with
perfect competition. This is seen as inefficient in not providing consumers with the goods they
require and in the quantities and price they seek. In terms of the other responses, monopolies do
not lead to excess output, they may result in diseconomies of scale but this is not inevitable, and
in terms of option D, a monopoly is likely to have the profits to invest in innovation, which can
increase efficiency.

25. Which one of the following is a condition necessary for third degree price discrimination?
A Perfect competition
B Market separation
C The opportunity for buyers to resell
D All consumers must have identical price elasticity of demand

Explanation: For price discrimination to be successful, the firm must be able to separate markets
and ensure that consumers do not have the opportunity to transfer between those markets in
order to make their purchases.

26. Which one of the following is a short-run benefit of perfect competition?

A Consumer welfare is maximised
B Incumbent firms are able to protect their market share allowing them to become more
productively efficient
C Supernormal profit allows firms to achieve dynamic efficiency
D Incumbent firms are able to protect their market share allowing them to achieve economies
of scale

Explanation: Competition encourages firms to innovate and adopt best practice techniques, this
drives the dynamic efficiency (range of choice and quality of service) across the industry. The
supernormal profit associated with perfect competition in the short run allows firms to achieve
such dynamic efficiency.

Which price is the monopolist likely to be charged in an attempt to avoid such hit and run entry?
103

A A
B B
C C
Page

D D
© APT Initiatives Ltd, 2017. This document is for use ONLY by the purchasing individual or staff and students attending
the purchasing institution. It is not to be shared with anybody else without the prior written permission of APT Initiatives Ltd.
APT’s 540 Multiple Choice Questions for AQA A Level Economics

Explanation: The monopolist would alter their price (AR) to be equal to the average cost of
production; this is at price C. This is in order to achieve just normal profit and protect their
monopoly from potential ‘hit and run’ entrants.

28. Which option provides correct examples of static and dynamic efficiency?

Static efficiency Dynamic efficiency

Price = marginal cost Achieving the greatest output
A from given inputs
Technological development Producing at the minimum
B that reduces costs efficient scale
Technological development
C Price = marginal cost
that reduces costs
Achieving the best distribution of
D Price = average cost
resources in an economy

Explanation: Static efficiency is concerned with the most efficient combination of resources at a
given point in time ie productive efficiency (producing at the minimum efficient scale) and
allocative efficiency (price = marginal cost). Dynamic efficiency is concerned with the
development of better technology and working practises which improve the efficiency of
production over time (technological development that reduces costs).

29. The diagram below shows the long-run average cost (LRAC) curve of a firm.

At which level of output is the firm achieving productive efficiency?

A A
B B
C C
D D
Explanation: Productive efficiency is achieved at the lowest point on the LRAC curve.

30. A monopoly firm that practices 3rd degree price discrimination will cause
A no change in consumer or producer surplus.
B a decrease in producer surplus.
C an increase in consumer surplus.
D a decrease in consumer surplus.
Explanation: If a firm is capable of isolating groups of consumers within their market with
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different price elasticities of demand, who are therefore willing and able to pay different prices for
the same products, then sellers can charge higher prices to those consumers with the most price
inelastic demand. This will decrease consumer surplus by turning it into producer surplus whilst
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make higher revenues and profits.

4.1.6

The Labour Market

105
Page

4.1.6 The Labour Market

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. The demand for a factor is derived from the demand for the product. This means that

A as the demand for a product increases, the demand for the labour to produce
the product will increase proportionally.

B as the demand for a product increases, the demand for the labour to produce
the product will increase.

C as the demand for a product increases the capital to labour ratio used in the
production of the product will increase.

D the demand for a product has no impact on the demand for the labour to
produce the product.

2. The marginal productivity theory of the demand for labour suggest that a firm’s demand for
labour depends on

A the marginal revenue product of a worker.

B the marginal cost of a worker.

C the marginal efficiency of capital.

D the marginal social benefit of the output produced.

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Page

3. The table below summarises employment and output data for a firm that employs a fixed
level of capital and sells all of its output for a price of £5 per unit.

Quantity of
Total output
labour
(units)
employed
0 0
1 30
2 70
3 120
4 180
5 270
6 330
7 370

Which one of the following options provides the marginal revenue product of the employment of
the 6th unit of labour?

A £200

B £250

C £300

D £450

4. The diagram below shows a shift in the demand curve for labour of a firm from D = MRP to
D1 = MRP1.

Wage
rate

D1 = MRP1

D = MRP

O
Quantity of labour
107

Which one of the following options would cause the shift in the demand curve for labour from D =
MRP to D1 = MRP1?
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A A reduction in the demand for the product that the labour produces

B A reduction in the cost of capital

C A reduction in the productivity of labour

D An increase in the productivity of labour

5. Demand for labour is more wage-elastic when

A a firm cannot substitute quickly and easily between labour and capital inputs.

B capital is in plentiful supply.

C the price elasticity of demand for the final output produced by the firm is price
inelastic.

D labour costs are a high proportion of total costs.

6. The diagram below shows the supply curve for labour in an industry.

Which one of the following options gives the correct labels for the X and Y axes?

X axis Y axis

A Quantity of labour employed Marginal revenue

B Time Marginal cost

C Quantity of labour supplied Wage rate

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D Wage rate Quantity of labour employed

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7. Which one of the following is a non-monetary consideration that is likely to increase the
supply of labour to a particular occupation?

A Working anti-social hours

B Inherent occupational risk

C A lack of job security

D An employer-provided quality training programme

8. Demand for labour is more wage-inelastic when

A a firm cannot substitute quickly and easily between labour and capital inputs

B capital is in limited supply.

C the price elasticity of demand for the final output produced by the firm is price elastic.

D labour costs are a high proportion of total costs.

9. Which one of the following is likely to cause the wage rate in a particular industry to rise?

A A decrease in the occupational mobility of labour.

B A decrease in the earnings available in substitute occupations.

C An increase in the artificial barriers to the industry's labour supply.

D A decrease in net labour migration to the UK.

10. Which one of the following is a feature of a perfectly competitive labour market?

A Many firms in the market

B Imperfect information about wages and job conditions

C Firms offer differentiated jobs

109

D Many workers with differentiated skills

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11. In a perfectly competitive labour market firms are wage takers because if they were to set a
wage below the equilibrium rate

A they would not generate enough revenue to cover their labour costs.

B there would be disequilibrium caused by too many workers wanting to work for
the firm.

C workers would not accept the wage and the firm would not attract any workers.

D trade unions would take industrial action against the firm.

12. The diagram below represents a firm in an industry where there is a perfectly competitive
labour market. In this market, labour supply (LS) equals average cost of labour (AC) and
also marginal cost of labour (MC).

If the firm employs Q1 workers it will

A maximise profit.

B maximise revenue.

C maximise productivity.
110

D maximise their wage cost.

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13. In a perfectly competitive labour market the reason why the firm’s marginal cost of labour is
constant at the industry equilibrium wage rate is because the firm

A faces a perfectly inelastic labour supply curve which means that the unit cost of
labour will be equal to the industry equilibrium wage rate.

B is a wage rate taker and therefore each additional unit of labour will cost the same
and be equal to the industry equilibrium wage rate.

C faces a unit-elastic labour supply curve which means that the unit cost of labour will
not change and be equal to the industry equilibrium wage rate.

D faces a relatively elastic labour supply curve which means that the unit cost of labour
will remain proportional to the industry equilibrium wage rate.

14. The diagram below represents a competitive labour market in an industry.

Which one of the following is likely to be the cause of the change in the wage rate from W 1 to
W2?

A Reduction in the population of working age

B The removal of minimal entry requirements to work in the industry

C The imposition of minimal entry requirements to work in the industry

111

D A reduction in the occupational mobility of labour

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15. The diagram below represents a competitive labour market in an industry.

Which one of the following is likely to be the cause of the change in the wage rate from W 1 to
W2?

A A reduction in productivity

B A reduction in the price of substitute factors of production

C The removal of a government training programme

D A decrease in employers’ national insurance contributions

16. The diagram below shows an imperfect labour market where a trade union has secured a
wage rate of WTU which is above the competitive equilibrium wage rate of W E.

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Page

In this labour market the quantity of labour that will be employed is

A O

B Q1

C QE

D Q2

17. The diagram below shows an imperfect labour market where a trade union has bargained for
a wage rate of W TU which is above the previous competitive equilibrium wage rate of W E.

In this labour market which one of the following represents the extent of the unemployment
created by the trade union?

A O – Q2

B Q 1 – Q2

C Q E – Q2
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D Q E – Q1
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18. A monopsony labour market is one where there

A is a single seller of labour.

B is a single buyer of labour.

C are many small sellers of labour.

D are many small buyers of labour.

19. The diagram below shows a monopsony labour market.

In order to maximise profits the monopsony buyer of labour will employ

A units of labour.

B Q1 units of labour.

C Q2 units of labour.

D Q3 units of labour.
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Page

20. The diagram below shows a monopsony labour market.

In order to maximise profits the monopsony buyer of labour will reduce employment by the
amount

A Q2 – O

B Q1 - O

C Q3 – Q2

D Q 1 – Q2

21. The diagram below shows a monopsony labour market.

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Page

In order to maximise profits the monopsony buyer of labour will reduce the wage rate by the
amount

A W2 – W1

B W3 – W1

C W3 - W2

D W4 – W1

22. The diagram below shows a monopsony labour market.

In order to maximise profits, the monopsony buyer of labour will pay the wage rate

A W1

B W2

C W3
116

D W4
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23. Trade unions seek to influence wages and levels of employment in labour markets. One
factor that allows them to do this is their

A desire to avoid conflict.

B right to force workers to join their union.

C collective bargaining power with employers.

D desire to promote the interests of elite groups.

24. The diagram below shows a monopsony labour market where the monopsony buyer of
labour aims to maximise profit. A trade union has imposed a minimum wage in this market.

What is the difference between the wage the monopsony buyer of labour wishes to pay and the
minimum wage the union is imposing?

A W1 – W3

B W2 – W4

C W1 – W2

D W2 – W3
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Page

25. The diagram below shows a monopsony labour market where the monopsony buyer of
labour aims to maximise profit. A trade union has imposed a minimum wage in this market.

How many workers will be employed by the monopsony buyer of labour as a result of the union
imposing this minimum wage?

A O

B Q1

C Q2

D Q3

26. The diagram below shows a labour market that was in equilibrium at E before a minimum
wage was introduced at W Min.

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Page

Which one of the following represents the reduction in employment in this labour market?

A Q 3 – Q1

B Q 1 – Q2

C Q 3 – Q2

D Q1 - O

27. Which one of the following is an advantage of a national minimum wage?

A Price inflation is likely to be easier to control

B The level of employment is likely to increase

C UK goods are likely to become more competitive in overseas markets

D Greater equity is likely in the distribution of income

28. Which one of the following is a necessary condition for wage discrimination to exist?

A Perfect information

B Equal pay legislation

C Variation in the marginal revenue product of the workforce

D Homogeneity of the workforce

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Page

29. The diagram below illustrates a labour market in initial equilibrium at E. There is subsequent
discrimination where three different groups of workers have their marginal revenue product
estimated as MRPL Dis 2, MRPL Dis 3 and MRPL Dis 4.

Which one of the following is the new wage rate of the group of workers suffering from negative
discrimination?

A W1

B W2

C W3

D W4
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Page

30. The diagram below illustrates a labour market in initial equilibrium at E. There is subsequent
discrimination where three different groups of workers have their marginal revenue product
estimated as MRPL Dis 2, MRPL Dis 3 and MRPL Dis 4.

Which one of the following represents the change in the quantity of labour employed in the group
enjoying the greatest positive discrimination?

A Q 1 – Q2

B Q 1 – Q3

C Q 1 – Q4

D Q 2 – Q4
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Page

4.1.6 The Labour Market - Answers

1. The demand for a factor is derived from the demand for the product. This means that
A as the demand for a product increases, the demand for the labour to produce the product will
increase proportionally.
B as the demand for a product increases, the demand for the labour to produce the
product will increase.
C as the demand for a product increases the capital to labour ratio used in the production of
the product will increase.
D the demand for a product has no impact on the demand for the labour to produce the
product.

Explanation: Demand for bread leads to derived demand for bakers, because bakers are
necessary for the production of bread. There is no reason why the demand for labour should be
proportional to the demand for the product.

2. The marginal productivity theory of the demand for labour suggest that a firm’s demand for
labour depends on
A the marginal revenue product of a worker.
B the marginal cost of a worker.
C the marginal efficiency of capital.
D the marginal social benefit of the output produced.

Explanation: The marginal revenue product of a worker is the extra revenue a firm gains from
employing an extra worker. It depends on a worker’s productivity and the marginal revenue of
last good sold.

3. The table below summarises employment and output data for a firm that employs a fixed
level of capital and sells all of its output for a price of £5 per unit.

Quantity of Total output

labour (units)
employed
0 0
1 30
2 70
3 120
4 180
5 270
6 330
7 370

Which one of the following options provides the marginal revenue product of the employment of
the 6th unit of labour?
A £200
B £250
C £300
D £450

Explanation: The marginal revenue product of a worker is the extra revenue a firm gains from
employing an extra worker. The 6th worker produces a marginal product of 60 units, which
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multiplied by the price of £5 gives a MRP of £300.

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4. The diagram below shows a shift in the demand curve for labour of a firm from D = MRP to
D1 = MRP1.

Wage
rate

D1 = MRP1

D = MRP

O
Quantity of labour

Which one of the following options would cause the shift in the demand curve for labour from D =
MRP to D1 = MRP1?
A A reduction in the demand for the product that the labour produces
B A reduction in the cost of capital
C A reduction in the productivity of labour
D An increase in the productivity of labour
Explanation: An increase in the productivity of labour will reduce the cost of production and lead
to a greater demand for labour, ie more workers will be demanded at each wage rate. This is
shown by the rightward shift of the D = MRP curve to D1 = MRP1.

5. Demand for labour is more wage-elastic when

A a firm cannot substitute quickly and easily between labour and capital inputs.
B capital is in plentiful supply.
C the price elasticity of demand for the final output produced by the firm is price inelastic.
D labour costs are a high proportion of total costs.
Explanation: When labour costs are a high proportion of total costs, then labour demand is more
wage-elastic because the capital and labour mix will be more sensitive to an increase in the cost
of labour.

6. The diagram below shows the supply curve for labour in an industry.
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Page

Which one of the following options gives the correct labels for the X and Y axes?

X axis Y axis
A Quantity of labour employed Marginal revenue
B Time Marginal cost
C Quantity of labour supplied Wage rate
D Wage rate Quantity of labour employed

Explanation: The supply curve for labour for an industry shows the relationship between the
wage rate and number of workers supplied, with the wage rate (price of labour) on the vertical
axis. More labour will be supplied at higher wage rates.

7. Which one of the following is a non-monetary consideration that is likely to increase the
supply of labour to a particular occupation?
A Working anti-social hours
B Inherent occupational risk
C A lack of job security
D An employer-provided quality training programme

Explanation: Non-monetary considerations can either encourage or discourage an individual in

their decision to supply labour. An employer-provided quality training programme is likely to
prompt an increase in the supply of labour to a particular occupation.

8. Demand for labour is more wage-inelastic when

A a firm cannot substitute quickly and easily between labour and capital inputs.
B capital is in limited supply.
C the price elasticity of demand for the final output produced by the firm is price elastic.
D labour costs are a high proportion of total costs.
Explanation: Labour demand will be more wage-inelastic when a firm cannot substitute quickly
and easily between labour and capital inputs. The inelasticity arises because there can only be
relatively small changes in the quantity of labour employed, even when there are relatively large
changes in the wage rate.

9. Which one of the following is likely to cause the wage rate in a particular industry to rise?
A A decrease in the occupational mobility of labour.
B A decrease in the earnings available in substitute occupations.
C An increase in the artificial barriers to the industry's labour supply.
D A decrease in net labour migration to the UK.

Explanation: A decrease in the flow of migrants seeking work in the UK will cause a reduction in
the current supply of labour and a corresponding increase in the wage rate in the UK.

10. Which one of the following is a feature of a perfectly competitive labour market?
A Many firms in the market
B Imperfect information about wages and job conditions
C Firms offer differentiated jobs
D Many workers with differentiated skills
124

Explanation: The only correct feature is that there are many firms in the market. The other
features would not result in a perfectly competitive labour market.
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11. In a perfectly competitive labour market firms are wage takers because if they were to set a
wage below the equilibrium rate
A they would not generate enough revenue to cover their labour costs.
B there would be disequilibrium caused by too many workers wanting to work for the firm.
C workers would not accept the wage and the firm would not attract any workers.
D trade unions would take industrial action against the firm.

Explanation: In a perfectly competitive labour market if a firm set a wage below the equilibrium
rate no workers would work for the firm as they could achieve a higher reward elsewhere. There
is no trade union influence in a perfectly competitive labour market.

If the firm employs Q1 workers it will

A maximise profit.
B maximise revenue.
C maximise productivity.
D maximise their wage cost.

Explanation: When the firm employs labour at the point where MRP = MC this will maximise
profit.

13. In a perfectly competitive labour market the reason why the firm’s marginal cost of labour is
constant at the industry equilibrium wage rate is because the firm
A faces a perfectly inelastic labour supply curve which means that the unit cost of labour will be
equal to the industry equilibrium wage rate.
B is a wage rate taker and therefore each additional unit of labour will cost the same and
be equal to the industry equilibrium wage rate.
C faces a unit-elastic labour supply curve which means that the unit cost of labour will not
change and be equal to the industry equilibrium wage rate.
D faces a relatively elastic labour supply curve which means that the unit cost of labour will
remain proportional to the industry equilibrium wage rate.
125

Explanation: The equilibrium wage rate in the industry is set by the meeting point of the industry
supply and industry demand curves. In a competitive market firms are wage takers because if
they set lower wages workers would not accept the wage. This means that each additional
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worker will incur the same cost and be equal to the industry equilibrium wage rate.

14. The diagram below represents a competitive labour market in an industry.

Which one of the following is likely to be the cause of the change in the wage rate from W 1 to
W2?
A Reduction in the population of working age
B The removal of minimal entry requirements to work in the industry
C The imposition of minimal entry requirements to work in the industry
D A reduction in the occupational mobility of labour

Explanation: If barriers to entry to employment in an industry are removed, then the supply of
labour to the industry will increase. Minimal entry requirements are such a barrier to entry.

15. The diagram below represents a competitive labour market in an industry.

Which one of the following is likely to be the cause of the change in the wage rate from W 1 to
W2?
A A reduction in productivity
B A reduction in the price of substitute factors of production
C The removal of a government training programme
D A decrease in employers’ national insurance contributions
126

Explanation: A decrease in employer’s national insurance contributions will lead to an increase

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in the demand for labour because the cost of employing the workers will fall.

16. The diagram below shows an imperfect labour market where a trade union has secured a
wage rate of WTU which is above the competitive equilibrium wage rate of W E.

In this labour market the quantity of labour that will be employed is

A O
B Q1
C QE
D Q2

Explanation: At the higher wage rate (WTU) secured by the trade union, the workers will wish to
supply Q2 labour, but firms will only demand Q1 employees, making Q1 the number of workers
employed.

17. The diagram below shows an imperfect labour market where a trade union has bargained for
a wage rate of W TU which is above the previous competitive equilibrium wage rate of W E.

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Page

In this labour market which one of the following represents the extent of the unemployment
created by the trade union?
A O – Q2
B Q 1 – Q2
C Q E – Q2
D QE – Q1

Explanation: At the higher wage rate (WTU) secured by the trade union, firms will only demand Q1
employees. Previously in the competitive market QE workers were employed. This makes QE –
Q1 the extent of the unemployment created.

18. A monopsony labour market is one where there

A is a single seller of labour.
B is a single buyer of labour.
C are many small sellers of labour.
D are many small buyers of labour.

Explanation: A monopsony can be defined as a market environment where there is one buyer
and many sellers. In this context, there is one employer and many workers seeking to gain
employment.

19. The diagram below shows a monopsony labour market.

In order to maximise profits, the monopsony buyer of labour will employ

A units of labour.
B Q1 units of labour.
C Q2 units of labour.
D Q3 units of labour.

Explanation: In order to maximise profit, the monopsony employer will employ Q2 units of labour
where MC = MRP.
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20. The diagram below shows a monopsony labour market.

In order to maximise profits the monopsony buyer of labour will reduce employment by the
amount
A Q2 – O
B Q1 - O
C Q3 – Q2
D Q1 – Q2
Explanation: In order to maximise profit the monopsony employer will employ Q2 units of labour
where MC = MRP. In a competitive market, Q1 units would be employed. Therefore, the
reduction in employment is Q1 – Q2.

21. The diagram below shows a monopsony labour market.

In order to maximise profits, the monopsony buyer of labour will reduce the wage rate by the
amount
A W2 – W1
B W3 – W1
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C W3 - W2
D W4 – W1
Explanation: In order to maximise profit the monopsony employer will pay the wage rate W1. This
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is less than the competitive wage rate of W2 by W2 – W1.

22. The diagram below shows a monopsony labour market.

In order to maximise profits the monopsony buyer of labour will pay the wage rate
A W1
B W2
C W3
D W4
Explanation: In order to maximise profit, the monopsony employer will employ Q2 units of labour
where MC = MRP. This will mean that a wage rate of W1 is paid.

23. Trade unions seek to influence wages and levels of employment in labour markets. One
factor that allows them to do this is their
A desire to avoid conflict.
B right to force workers to join their union.
C collective bargaining power with employers.
D desire to promote the interests of elite groups.

Explanation: A union will seek to negotiate the terms of employment between an employer and a
group of workers. The more workers there are in the collective group, the more they can exert
pressure to pursue the workers (union) case.

24. The diagram below shows a monopsony labour market where the monopsony buyer of
labour aims to maximise profit. A trade union has imposed a minimum wage in this market.
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What is the difference between the wage the monopsony buyer of labour wishes to pay and the
minimum wage the union is imposing?
A W1 – W3
B W2 – W4
C W1 – W2
D W2 – W3

Explanation: The monopsony buyer of labour will operate where MRP = MC, this is with an
employment level of Q2 and a wage rate of W1. However, the union has imposed a minimum
wage of W2 in this market which means the difference in the wage rate that the monopsony
buyer of labour must pay as a result of the union imposing the minimum wage is W 1 – W2.

25. The diagram below shows a monopsony labour market where the monopsony buyer of
labour aims to maximise profit. A trade union has imposed a minimum wage in this market.

How many workers will be employed by the monopsony buyer of labour as a result of the union
imposing this minimum wage?
A O
B Q1
C Q2
D Q3
Explanation: The monopsony buyer of labour will operate where MRP = MC. If the minimum
wage imposed by the trade union is at W4, this means that the quantity of labour is O where
MRP = MC.
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26. The diagram below shows a labour market that was in equilibrium at E before a minimum
wage was introduced at W Min.

Which one of the following represents the reduction in employment in this labour market?
A Q 3 – Q1
B Q1 – Q2
C Q 3 – Q2
D Q1 – O

Explanation: The original equilibrium is at Q1 and the new demand for labour with WMin is
Q2.Therefore, the reduction in employment in this labour market is Q1 – Q2.

27. Which one of the following is an advantage of a national minimum wage?

A Price inflation is likely to be easier to control
B The level of employment is likely to increase
C UK goods are likely to become more competitive in overseas markets
D Greater equity is likely in the distribution of income

Explanation: A national minimum wage is likely to increase the income of the lowest paid
workers whilst leaving other workers’ wages unaffected. This will represent greater equity in the
distribution of income.

28. Which one of the following is a necessary condition for wage discrimination to exist?
A Perfect information
B Equal pay legislation
C Variation in the marginal revenue product of the workforce
D Homogeneity of the workforce

Explanation: The estimated marginal revenue product of a worker is the variable that a profit
maximising employer will base the wage rate of a worker on. If the employer has a (downward)
prejudice of the MRP of different groups of workers, they are likely to find ways of reducing the
wage offered to that group of workers.
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Which one of the following is the new wage rate of the group of workers suffering from negative
discrimination?
A W1
B W2
C W3
D W4

Explanation: The group of workers who have been negatively discriminated against will have the
new MRP curve MRPL Dis 2, this corresponds to the new wage rate W2.

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Which one of the following represents the change in the quantity of labour employed in the group
enjoying the greatest positive discrimination?
A Q 1 – Q2
B Q 1 – Q3
C Q1 – Q4
D Q 2 – Q4

Explanation: The group of workers who have enjoyed the largest positive discrimination will have
the new MRP curve MRPL Dis 4. This corresponds to the new employment level of Q4 and a
change in the quantity of labour employed of Q1 – Q4.

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4.1.7

The Distribution of Income and Wealth:

Poverty and Inequality

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Page

4.1.7 The Distribution of Income and Wealth: Poverty and Inequality

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. Which one of the following provides a definition of personal income?

A The human capital accrued by an individual over time

B The stock of assets held by an individual

C The flow that an individual receives from wages, dividends, interest and rents

D The value of savings that an individual has in bank deposits

2. Which one of the following provides a definition of personal wealth?

A The flow to an individual from wages, dividends, interest and rents

B The stock of assets owned by an individual

C The flow to an individual from dividends on shares that an individual holds

D The flow to an individual from rents that an individual receives

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Page

A £4.995 trillion in net wealth.

B £499.5 billion in net wealth.

C six times the net wealth of the least wealthy 50% of households.

D £6 105 trillion in net wealth.

A 50% of households own £99.9 billion in net wealth.

B 10% of households own six times less net wealth than the wealthiest 10% of
households.

C 50% of households own £0.999 trillion in net wealth.

D 50% of households own £1.999 trillion in net wealth.

5. Total net household wealth aggregated across all households in the UK in the period July
2012 to June 2014 was £11.1 trillion. In this respect the UK can be divided into the
wealthiest, least wealthy and mid-wealthy households. 45% of the £11.1 trillion was owned
by the wealthiest 10% of households, whilst 9% of the £11.1 trillion was owned by the least
wealthy 50% of households. Therefore, the wealthiest 10% of households in the UK own

A 3 times as much net wealth as the least wealthy 50%.

B 4 times as much net wealth as the least wealthy 50%.

C 5 times as much net wealth as the least wealthy 50%.

D 6 times as much net wealth as the least wealthy 50%.

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Page

6. Total net household wealth aggregated across all households in the UK in the period July
2012 to June 2014 was £11.1 trillion. In this respect, the UK can be divided into the
wealthiest, least wealthy and mid-wealthy households. 45% of the £11.1 trillion was owned
by the wealthiest 10% of households, whilst 9% of the £11.1 trillion was owned by the least
wealthy 50% of households. Therefore, the value of the net wealth held by the mid-wealthy
households in the UK, rounded to two decimal points, is

A £5.11 billion.

B £5.94 trillion.

C £5.94 billion.

D £5.11 trillion.

7. Which one of the following factors is most likely to affect the distribution of income in an
economy?

A An increase in the marginal propensity to consume

B An improvement in the standard of education and training

C A depreciation of the exchange rate

D An increase in the rate of Value Added Tax (VAT)

8. Equality in relation to the distribution of income and wealth means a situation where income
and wealth are

A fairly distributed in an economy.

B equally distributed in an economy.

C distributed by the state.

D distributed by market forces.

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Page

9. Equity in relation to the distribution of income and wealth in an economy means a situation
where

A there is fairness in the distribution of income and wealth.

B everyone in an economy has the same income and wealth.

C income and wealth are distributed by the state.

D income and wealth are distributed by market forces.

10. The Lorenz curve is a graphical representation of

A poverty distribution in an economy.

B aid distribution in an economy.

C debt distribution in an economy.

D income distribution in an economy.

11. The diagram below shows the Lorenz curve for an economy.

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Which one of the following statements is true?

A 15% of households account for 15% of the cumulative income

B 75% of households account for 15% of the cumulative income

C 40% of households account for 95% of the cumulative income

D 95% of households account for 95% of the cumulative income

12. The diagram below shows the Lorenz curve for an economy.

Which one of the following statements is true?

A 15% of households account for 15% of the cumulative income

B 95% of households account for 95% of the cumulative income

C 15% of households account for 75% of the cumulative income

D 95% of households account for 40% of the cumulative income

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13. The diagram below shows the Lorenz curve for an economy. The area C is above the 45o
line, the area A is below the 45o line but above the Lorenz curve and area B is below the
Lorenz curve.

The Gini coefficient is equal to

A A / (A+B).

B B / (A+B).

C C / (A+B).

D A / (B+C).

14. The Gini coefficients for 4 countries (A, B, C and D) are given in the table below. Which
country has the greatest inequality in its distribution of income?

Country Gini coefficient

A 0.25

B 0.34

C 0.45
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D 0.6
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15. The Gini coefficients for 4 countries (A, B, C and D) are given in the table below. Which
country has the least inequality in its distribution of income?

Country Gini coefficient

A 0.25

B 0.34

C 0.45

D 0.6

16. A cost to an economy of inequality in the distribution of its income and wealth is

A increased consumption of healthcare.

B access to economies of scale is reduced.

C reduced allocative inefficiency.

D social cohesion is increased.

17. A benefit to an economy of inequality in the distribution of its income and wealth is

A decreased consumption of healthcare.

B increased entrepreneurial activity.

C increased consumption.

D increased ability to cope with economic shocks.

18. Notions of equity around the distribution of income and wealth are based on value
judgements. These judgements will influence economic policy prescriptions. This may be a
problem because value judgements

A fully reflect social norms.

B are objective.
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C are non-reactionary.

D are subjective.
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19. In the UK, the Office for National Statistics records someone as being in poverty if they live in
a household with disposable income below 60% of the national average, before housing
costs. This is a measure of

A relative poverty.

B absolute poverty.

C housing poverty.

D extreme poverty.

20. Absolute poverty can be defined as a condition

A in which people lack the minimum amount of income needed in order to maintain
their average standard of living in the society in which they live.

B in which citizens do not have the material goods or experience conditions that are
usually considered necessary for a pleasant life.

C characterised by severe deprivation of basic human needs, including food, safe

drinking water, sanitation facilities, health, shelter, education and information.

D where there is concern for the distribution of opportunities within a society.

21. Which one of the following is a cause of poverty?

A Lack of education

B Economic stability

C Increasing access to healthcare

D Low divorce rate

22. Which one of the following is a cause of poverty in developing countries?

A Political stability

B Increasing access to education

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C Population control

D High divorce rate

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23. Which one of the following options shows the correct cause and effect of poverty?
Country Cause of poverty Effect of poverty

A Lack of education Social conflict

B Democracy Damaging effects of civil wars

Fewer years of healthy life

C Increasing access to education
expectancy

D Population control Limited access to health care

24. Which one of the following options shows the correct cause and effect of poverty?

Country Cause of poverty Effect of poverty

A Democracy Social conflict

Low real spending power limiting

B A culture of dependency
the size of domestic markets

C Increasing access to education Low life expectancy

D Population control Limited access to health care

25. Which one of the following taxation policies will reduce income and wealth inequality in an
economy?

A Regressive taxation

B Proportional taxation

C Removal of inheritance taxation

D Progressive taxation

26. Which one of the following policies will reduce income and wealth inequality in an economy?

A Supply-side policies to increase education and training

B Supply-side policies to remove the influence of trade unions

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C Monetary policy to increase interest rates

D Demand side policies of regressive taxation

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27. Which one of the following policies will serve to alleviate poverty in an economy?

A An increase in the cost of university tuition fees

B The introduction of tax efficient saving schemes

C The introduction of means tested benefits

D The introduction of healthcare free at the point of delivery

A firms may force wages down to compensate for the higher taxes they have to pay.

B firms employ more worker in an attempt to increase their output and profit to
compensate for the higher taxes they have to pay.

C firms reduce prices in an attempt to increase their revenue to compensate for

the higher taxes they have to pay.

D firms may innovate in order to increase productivity in an attempt to increase their

output and profit to compensate for the higher taxes they have to pay.

29. A government could introduce a national minimum wage in an attempt to increase the
incomes of the low paid and alleviate poverty. One negative consequence of such a
policy might be that it

A could attract multinational corporations to establish operations in the country.

B is likely to increase the labour to capital ratio in the production process.

C may cause unemployment because firms may not be able to afford the workers.

D may encourage new entrepreneurs to establish a business.

A it would offer support to families struggling with childcare commitments.

B it could create a disincentive to work.

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C it would allow a return to study for low paid workers.

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D it is likely to support those on zero hour contracts who cannot claim benefits.

4.1.7 The Distribution of Income and Wealth: Poverty and Inequality - Answers

1. Which one of the following provides a definition of personal income?

A The human capital accrued by an individual over time
B The stock of assets held by an individual
C The flow that an individual receives from wages, dividends, interest and rents
D The value of savings that an individual has in bank deposits
Explanation: Income is a flow concept that relates primarily to receipts from wages, dividends,
interest and rents for an individual.

2. Which one of the following provides a definition of personal wealth?

A The flow to an individual from wages, dividends, interest and rents
B The stock of assets owned by an individual
C The flow to an individual from dividends on shares that an individual holds
D The flow to an individual from rents that an individual receives
Explanation: Wealth is a stock concept that relates primarily to the assets owned by an
individual.

3. Total net household wealth aggregated across all households in the UK in the period July
2012 to June 2014 was £11.1 trillion. In this respect, the UK can be divided into the
wealthiest, least wealthy and mid-wealthy households. 45% of the £11.1 trillion was owned
by the wealthiest 10% of households, whilst 9% of the £11.1 trillion was owned by the least
wealthy 50% of households. Therefore, the wealthiest 10% of households in the UK owned
A £4.995 trillion in net wealth.
B £499.5 billion in net wealth.
C six times the net wealth of the least wealthy 50% of households.
D £6 105 trillion in net wealth.
Explanation: The wealthiest 10% of households in the UK own 45% of £11.1 trillion. £11.1 x 0.45
equals £4.995 trillion.

4. Total net household wealth aggregated across all households in the UK in the period July
2012 to June 2014 was £11.1 trillion. In this respect, the UK can be divided into the
wealthiest, least wealthy and mid-wealthy households. 45% of the £11.1 trillion was owned
by the wealthiest 10% of households, whilst 9% of the £11.1 trillion was owned by the least
wealthy 50% of households. Therefore
A 50% of households own £99.9 billion in net wealth.
B 10% of households own six times less net wealth than the wealthiest 10% of households.
C 50% of households own £0.999 trillion in net wealth.
D 50% of households own £1.999 trillion in net wealth.
Explanation: The least wealthy 50% of households in the UK own 9% of £11.1 trillion. £11.1 x
0.09 equals £0.999 trillion.

B 4 times as much net wealth as the least wealthy 50%.

C 5 times as much net wealth as the least wealthy 50%.
D 6 times as much net wealth as the least wealthy 50%.
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Explanation: The least wealthy 50% of households own 9% of £11.1 trillion, the wealthiest 10%
of households own 45% of £11.1 trillion. 45 is 5 times larger than 9.

Explanation: The least wealthy 50% of households in the UK own 9% of £11.1 trillion, the
wealthiest 10% of households in the UK own 45% of £11.1 trillion. Together this is 54%, leaving
46% for the mid-wealthy. £11.1 x 0.46 equals £5.11 trillion.

7. Which one of the following factors is most likely to affect the distribution of income in an
economy?
A An increase in the marginal propensity to consume
B An improvement in the standard of education and training
C A depreciation of the exchange rate
D An increase in the rate of Value Added Tax (VAT)

Explanation: Improved education and training will improve skills and qualifications that will lead
to higher factor incomes for those previously without access to these services.

8. Equality in relation to the distribution of income and wealth means a situation where income
and wealth are
A fairly distributed in an economy.
B equally distributed in an economy.
C distributed by the state.
D distributed by market forces.

Explanation: Equality in this sense refers to an equal distribution of income and wealth. Neither
the state nor the market will necessarily achieve this.

9. Equity in relation to the distribution of income and wealth in an economy means a situation
where
A there is fairness in the distribution of income and wealth.
B everyone in an economy has the same income and wealth.
C income and wealth are distributed by the state.
D income and wealth are distributed by market forces.

Explanation: Equity in this sense refers to ‘fairness’ in the distribution of income and wealth.
Neither the state nor the market will necessarily achieve this.

10. The Lorenz curve is a graphical representation of

A poverty distribution in an economy.
B aid distribution in an economy.
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C debt distribution in an economy.

D income distribution in an economy.
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Explanation: Developed by Max Lorenz in 1905, the Lorenz curve is a graph on which the
cumulative percentage of total income is plotted against the cumulative percentage of the
corresponding population to represent the income distribution in an economy.

11. The diagram below shows the Lorenz curve for an economy.

Which one of the following statements is true?

A 15% of households account for 15% of the cumulative income
B 75% of households account for 15% of the cumulative income
C 40% of households account for 95% of the cumulative income
D 95% of households account for 95% of the cumulative income

Explanation: The Lorenz curve is a graph on which the cumulative percentage of total income is
plotted against the cumulative percentage of the corresponding population to represent the
income distribution in an economy. From the graph we can read off that 75% of the households
correspond with 15% of the cumulative income.

12. The diagram below shows the Lorenz curve for an economy.

Which one of the following statements is true?

A 15% of households account for 15% of the cumulative income
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B 95% of households account for 95% of the cumulative income

C 15% of households account for 75% of the cumulative income
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D 95% of households account for 40% of the cumulative income

Explanation: The Lorenz curve is a graph on which the cumulative percentage of total income is
plotted against the cumulative percentage of the corresponding population to represent the
income distribution in an economy. From the graph we can read off that 95% of the households
correspond with 40% of the cumulative income.

13. The diagram below shows the Lorenz curve for an economy. The area C is above the 45o
line, the area A is below the 45o line but above the Lorenz curve and area B is below the
Lorenz curve.

The Gini coefficient is equal to

A A / (A+B).
B B / (A+B).
C C / (A+B).
D A / (B+C).

Explanation: The Gini coefficient is the ratio of the area that lies between the line of equality and
the Lorenz curve (marked A in the diagram) over the total area under the line of equality
(marked A and B in the diagram); so the Gini coefficient = A / (A + B).

14. The Gini coefficients for 4 countries (A, B, C and D) are given in the table below. Which
country has the greatest inequality in its distribution of income?

Country Gini coefficient

A 0.25
B 0.34
C 0.45
D 0.6

Explanation: A Gini coefficient of 0 expresses perfect equality of income distribution, for example,
where everyone has the same income. A Gini coefficient of 1 expresses maximum inequality in the
distribution of income. The highest Gini coefficient is 0.6 in country D, and therefore it is this country
with the greatest inequality in its distribution of income.
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15. The Gini coefficients for 4 countries (A, B, C and D) are given in the table below. Which
country has the least inequality in its distribution of income?

Country Gini coefficient

A 0.25
B 0.34
C 0.45
D 0.6

Explanation: A Gini coefficient of 0 expresses perfect equality of income distribution, for example,
where everyone has the same income. A Gini coefficient of 1 expresses maximum inequality in the
distribution of income. The lowest Gini coefficient is 0.25 in country A, and therefore it is this country
with the least inequality in its distribution of income.

16. A cost to an economy of inequality in the distribution of its income and wealth is
A increased consumption of healthcare.
B access to economies of scale is reduced.
C reduced allocative inefficiency.
D social cohesion is increased.

Explanation: Capital investment and production is aimed at the needs of the more wealthy
market sectors, whilst giving lower priority to the needs of the lower income groups. This leads to
an inefficient allocation of resources in relation the economy’s needs as a whole.

17. A benefit to an economy of inequality in the distribution of its income and wealth is
A decreased consumption of healthcare.
B increased entrepreneurial activity.
C increased consumption.
D increased ability to cope with economic shocks.

Explanation: Inequality, even if viewed as unfair, may benefit growth by rewarding risk takers
and innovation. It would therefore have an economic benefit through the encouragement and
therefore increase of entrepreneurial activity, resulting in more economic growth and
development.

Explanation: Value judgements are subjective assessments of something as good or bad based
on an individual's standards or priorities. These may not reflect those of society or an electorate
and may distort the terms of the production of economic policy prescriptions.
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Explanation: Relative poverty is the condition in which people lack the minimum amount of
income needed in order to maintain the average standard of living in the society in which they
live. It is an assessment based on incomes generally.

20. Absolute poverty can be defined as a condition

A in which people lack the minimum amount of income needed in order to maintain their
average standard of living in the society in which they live.
B in which citizens do not have the material goods or experience conditions that are
usually considered necessary for a pleasant life.
C characterised by severe deprivation of basic human needs, including food, safe
drinking water, sanitation facilities, health, shelter, education and information.
D where there is concern for the distribution of opportunities within a society.

Explanation: One accepted definition of absolute poverty (United Nations) is a condition

characterised by severe deprivation of basic human needs, including food, safe drinking water,
sanitation facilities, health, shelter, education and information.

21. Which one of the following is a cause of poverty?

A Lack of education
B Economic stability
C Increasing access to healthcare
D Low divorce rate

Explanation: A lack of education can lead to poor work skills and, as a result, low incomes,
limited life-chances and therefore increased incidences of poverty.

22. Which one of the following is a cause of poverty in developing countries?

A Political stability
B Increasing access to education
C Population control
D High divorce rate

Explanation: A high divorce rate in developing countries can cause the feminization of poverty,
increasing the propensity of females to suffer poverty, particularly if they remain responsible for
child-rearing.

23. Which one of the following options shows the correct cause and effect of poverty?

Country Cause of poverty Effect of poverty

A Lack of education Social conflict
B Democracy Damaging effects of civil wars
Fewer years of healthy life
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C Increasing access to education

expectancy
D Population control Limited access to health care
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Explanation: A lack of education can lead to lower incomes, limited life chances and increased
incidences of poverty. Furthermore, social conflict can be the effect of prolonged periods of
poverty especially where inequality within a society is pronounced.

24. Which one of the following options shows the correct cause and effect of poverty?

Country Cause of poverty Effect of poverty

A Democracy Social conflict
Low real spending power
B A culture of dependency limiting the size of domestic
markets
C Increasing access to education Low life expectancy
D Population control Limited access to health care

Explanation: ‘New Right’ theorists argue that welfare payments undermine personal initiative,
thus trapping many people in poverty. As such, a culture of dependency upon the welfare state
is created, that individuals find it very difficult to escape from. One effect of poverty is to cause
domestic markets to shrink in size because domestic consumers do not have the purchasing
power to sustain production through their consumption.

25. Which one of the following taxation policies will reduce income and wealth inequality in an
economy?
A Regressive taxation
B Proportional taxation
C Removal of inheritance taxation
D Progressive taxation

Explanation: Increasing progressive taxes, such as the higher rate of income tax from 40% to
50%, will take more income from those on high income levels.

26. Which one of the following policies will reduce income and wealth inequality in an economy?
A Supply-side policies to increase education and training
B Supply-side policies to remove the influence of trade unions
C Monetary policy to increase interest rates
D Demand-side policies of regressive taxation

Explanation: Unemployment is a major cause of poverty because the unemployed have little
income, relying on state benefits. Unemployment can be reduced through a supply-side policy of
the provision of education and training in an economy, which will improve work-related skills,
increase work opportunities, and thereby increase income and wealth.

27. Which one of the following policies will serve to alleviate poverty in an economy?
A An increase in the cost of university tuition fees
B The introduction of tax efficient saving schemes
C The introduction of means tested benefits
D The introduction of healthcare free at the point of delivery

Explanation: Means tested benefits involve increasing welfare benefits only to those on lower
incomes. For example, universal tax credit or child-benefit.
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28. A government could introduce a policy to tax corporations more heavily in order to provide
revenue for them to spend on social benefits to alleviate poverty for low income earners. One
negative consequence of such a policy might be
A firms may force wages down to compensate for the higher taxes they have to pay.
B firms employ more workers in an attempt to increase their output and profit to compensate
for the higher taxes they have to pay.
C firms reduce prices in an attempt to increase their revenue to compensate for the higher
taxes they have to pay.
D firms may innovate in order to increase productivity in an attempt to increase their output and
profit to compensate for the higher taxes they have to pay.

Explanation: If firms are forced to pay higher taxes they may try to find ways to increase their
revenue or reduce their costs in order to maintain their profit level. One way to reduce costs with
a negative consequence in terms of poverty reduction might be to reduce workers’ wages.

29. A government could introduce a national minimum wage in an attempt to increase the
incomes of the low paid and alleviate poverty. One negative consequence of such a policy
might be that it
A could attract multinational corporations to establish operations in the country.
B is likely to increase the labour to capital ratio in the production process.
C may cause unemployment because firms may not be able to afford the workers.
D may encourage new entrepreneurs to establish a business.

Explanation: If firms are forced to pay a national minimum wage this may cause unemployment
and increase poverty because firms may not be able to afford the workers.

30. In an attempt to alleviate poverty a government could introduce a universal basic income or
citizen’s income. This involves giving every citizen a weekly benefit – regardless of
circumstances and income. One negative consequence of such a policy might be that
A it would offer support to families struggling with childcare commitments.
B it could create a disincentive to work.
C it would allow a return to study for low paid workers.
D it is likely to support those on zero hour contracts who cannot claim benefits.

Explanation: Some fear that if a universal income is provided, some will work less, encouraging
people to be lazy and live off benefits. In such a situation, over the longer-term, poverty could
worsen.

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4.1.8

The Market Mechanism, Market Failure and

Government Intervention in Markets

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4.1.8 The Market Mechanism, Market Failure and

Government Intervention in Markets

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. Within the price mechanism, prices are used to determine what goods and services are
produced and who gets them. One advantage of this system is that it ensures

A all consumers get a fair share of the products in the economy.

B maximum profits for firms.

C resources are allocated efficiently.

D maximum revenue for firms.

2. Within the price mechanism, prices are used to determine what goods and services are
produced and who gets them. One disadvantage of this system is that it prevents

A firms from maximising profits.

B poor consumers from gaining access to the products and services that they need.

C firms from responding quickly to the revealed preferences of consumers.

D governments from effectively operating their monetary policy.

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A only certain people can supply blood.

B human blood is only demanded by the public sector.

C the incentive to supply human blood raises ethical issues.

D it would not be possible to establish a price for a unit of human blood.

4. Market failure leads to misallocation of resources because

A small businesses struggle to survive.

B market forces may undermine economically efficient decisions.

C product cost and benefits are recognised in the price.

D businesses don’t always make a profit.

5. Complete market failure is defined as circumstances in which

A businesses can maximise excessive profits.

B resources in a market are misallocated.

C a product cannot be delivered through a market.

D consumer information is poor.

6. Inequality can lead to market failure because, if left to the market

A monopolies could more easily exploit their market position.

B richer people would have a higher standard of living.

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C the level of income and wealth would affect the level of externalities.

D some people could not afford to consume the necessities of life.

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7. In the context of a public good, non-rivalry refers to the fact that

A there are no barriers to competitors entering a market.

B there is no opportunity cost incurred in its production.

C no consumer can be excluded from its consumption.

D consumption by one does not reduce availability for others.

8. A private good is unlike a public good because

A it is consumed.

B there is an opportunity cost incurred.

C businesses can charge for it.

D its provider competes for resources.

9. Which one of the following is best described as a quasi-public good?

A National defence

B Food

C Education

D Television broadcasts

10. The free rider problem is particularly relevant in the context of

A the provision of public goods.

B the use of a pollution permit scheme.

C reducing the impact of demerit goods.

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D the production of negative externalities.

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11. The over fishing of an area to depletion by individual fishing firms, each motivated by their
own self-interest, is known as

A the tragedy of the commons.

B the law of diminishing returns.

C decreasing returns to scale.

D productive inefficiency.

12. A negative externality in production leads to market failure as a result of the absence of
clearly defined property rights. For example

A ill-health created through passive smoking.

B the litter created by individuals in a city centre on a Friday night.

C the obesity created in children through the consumption of sugary drinks.

D the depletion of rain forests through commercial logging activity.

13. The diagram below shows a market where the there is a negative externality in production.

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Which price level in equilibrium reflects the full cost of the production to society?
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A P1

B P2

C P3

D P4

14. Education is considered a merit good because

A it is provided by the government.

B it provides benefits that are unappreciated by its consumers.

C it would not be produced by private businesses.

D it generates positive externalities.

15. The diagram below shows a market where there is a misallocation of resources caused by
the, over consumption of a demerit good.
.

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The deadweight social loss from the misallocation of resources as a result of the consumption of
the demerit good is shown by the area

A ACG

B CDG

C BFD

D FGH

16. Lack of information is an example of market failure because

A consumers and producers cannot agree price.

B consumers and producers then make poorer decisions.

C it may result in negative externalities.

D governments do not address the issue of demerit goods.

17. Monopolies represent a source of market failure because these businesses

A do not have an incentive to be productively efficient.

B are able to make normal profits.

C will incur diseconomies of scale.

D are more likely to impose negative externalities on third parties.

18. Factor immobility is a source of market failure because

A social benefits are greater than private benefits.

B resources are not being most efficiently used.

C labour is inadequately educated and trained.

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D some factor markets are uncompetitive.

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19. One of the main aims of UK competition policy is to ensure

A effective price discrimination in different markets.

B technological innovation promoting dynamic efficiency in markets.

C concentration ratios are increasing in different markets.

D firms maximise the return for their shareholders in different markets.

20. One disadvantage of the operation of UK competition policy is

A regulatory capture.

B the tragedy of the commons.

C moral hazard.

D the free rider problem.

21. Which one of the following is an effective argument against the public ownership of firms and
industries?

A Diseconomies of scale are more likely to arise from the effect of overstaffing

B Price volatility is likely to be exacerbated

C Difficult-to-reach markets are less likely to receive adequate provision

D Strategic industries are more difficult to control

22. An effective argument in favour of the privatisation of state-owned enterprises is that in the
private sector

A firms are likely to take a short-term view towards planning, which will enhance
dynamic efficiency.

B the profit incentive encourages increased efficiency.

C governments interfere with industrial operations for political reasons.

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D the lack of competition can create x-inefficiency.

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23. An effective argument against the regulation of markets is that it

A can lead to government failure.

B is likely to reduce the quality of output.

C is likely to reduce the availability of merit goods.

D is likely to increase negative externalities.

24. An effective argument in favour of the deregulation of markets is that fewer and simpler
regulation will

A lead to less competition between businesses.

B lead to a raised level of competitiveness between businesses.

C increase barriers to entry to an industry.

D increase the concentration ratio in an industry.

25. The process by which regulatory agencies eventually come to be dominated by the very
industries they were charged with regulating is known as

A moral hazard.

B the tragedy of the commons.

C regulatory capture.

D the free rider problem.

26. The government wants to reduce the external costs associated with traffic congestion. Which
one of the following combinations would be most likely to achieve this objective?

A Reduce the tax on car ownership and reduce the amount of off-street parking

B Reduce the amount of off-street parking and reduce road capacity

C Increase road capacity and subsidise public transport fares

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D Increase petrol / diesel tax and subsidise the development of fuel-efficient vehicles
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27. Market failure can be corrected by establishing property rights because they

A ensure that price equals marginal cost.

B promote the use of merit goods.

C promote the use of demerit goods.

D remove the over-exploitation or misuse of scarce resources.

28. Pollution permit trading is likely to be most effective when

A there is an easily measurable pollutant.

B there is little variation in the costs of reducing pollution.

C the transaction costs of trading permits are high.

D the government sets flexible emissions targets.

29. The most significant reason why governments may fail to address market failure is because

A they have to address conflicting objectives.

B their intervention may result in a net welfare benefit.

C governments are concerned only with long-run issues.

D externalities can be accurately calculated.

30. Examples of government failure would exclude

A rent controls, which reduce the supply of low-cost housing.

B a minimum wage rate, which results in higher unemployment.

C a congestion charge, which covers the cost of the negative externality created
by the congestion.
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D a tobacco tax, which increases smuggling from overseas.

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4.1.8 The Market Mechanism, Market Failure and

Government Intervention in Markets - Answers

1. Within the price mechanism, prices are used to determine what goods and services are
produced and who gets them. One advantage of this system is that it ensures
A all consumers get a fair share of the products in the economy.
B maximum profits for firms.
C resources are allocated efficiently.
D maximum revenue for firms.

Explanation: Prices send strong signals about what buyers want and how much they are
prepared to pay. Suppliers respond to these prices by producing the appropriate output at the
lowest cost, motivated by the incentive of profit. Since resources are allocated in line with buyers
preferences, they are allocated efficiently.

2. Within the price mechanism, prices are used to determine what goods and services are
produced and who gets them. One disadvantage of this system is that it prevents
A firms from maximising profits.
B poor consumers from gaining access to the products and services that they need.
C firms from responding quickly to the revealed preferences of consumers.
D governments from effectively operating their monetary policy.

Explanation: Prices essentially ration goods on the basis of ability to pay. When people cannot
afford to buy necessities, they are denied access to some goods. This can be seen as
inequitable.

3. Introducing a market with its associated price mechanism into some sectors is generally
considered inappropriate. For example, introducing a private sector market for human blood
may be considered undesirable because
A only certain people can supply blood.
B human blood is only demanded by the public sector.
C the incentive to supply human blood raises ethical issues.
D it would not be possible to establish a price for a unit of human blood.

Explanation: Introducing a market for blood changes the nature of the transaction and the
incentives involved. There would be ethical dilemmas created regarding the appropriate nature
of some individual’s motivation to bring supply to the market.

4. Market failure leads to misallocation of resources because

A small businesses struggle to survive.
B market forces may undermine economically efficient decisions.
C product cost and benefits are recognised in the price.
D businesses don’t always make a profit.
Explanation: Market failure is concerned with the failure of market forces to produce an efficient
allocation of resources.

5. Complete market failure is defined as circumstances in which

A businesses can maximise excessive profits.
B resources in a market are misallocated.
C a product cannot be delivered through a market.
D consumer information is poor.
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Explanation: The market completely fails to deliver public goods. In all other types of market
failure the market delivers goods but in a quantity and at a price that does not maximise social
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welfare.

6. Inequality can lead to market failure because, if left to the market

A monopolies could more easily exploit their market position.
B richer people would have a higher standard of living.
C the level of income and wealth would affect the level of externalities.
D some people could not afford to consume the necessities of life.

Explanation: The harsh reality of the price mechanism is that those without the means to buy
goods and services will not get a share of the goods and services produced. The ‘for whom’
question is answered in terms of who has the money to buy – the rich will enjoy a large share,
the poor will only have a small share, and those without any income will have nothing. These
outcomes for poorer consumers are considered unacceptable and, therefore, on this basis
markets fail.

7. In the context of a public good, non-rivalry refers to the fact that

A there are no barriers to competitors entering a market.
B there is no opportunity cost incurred in its production.
C no consumer can be excluded from its consumption.
D consumption by one does not reduce availability for others.

Explanation: A chocolate bar enjoyed by one person is not available to another, whereas street
lighting is available to all. The benefits enjoyed by one person do not reduce the enjoyment of
benefits by others. This principle of non-rivalry is a key feature of a public good.

8. A private good is unlike a public good because

A it is consumed.
B there is an opportunity cost incurred.
C businesses can charge for it.
D its provider competes for resources.

Explanation: The reason that businesses can charge for private goods is that it is possible to
exclude non-payers from enjoying the benefits of the good. This is not the case with public
goods.

9. Which one of the following is best described as a quasi-public good?

A National defence
B Food
C Education
D Television broadcasts

Explanation: If we define a public good in terms of non-excludability and non-rivalry we can

regard defence as a pure public good. Food and Education are private goods as excludability
and rivalry are features of such goods. TV broadcasts, have some characteristics of public
goods (eg non-rivalry), but it is possible to exclude non payers (eg Sky, BT and Virgin services
are only available to subscribers).

10. The free rider problem is particularly relevant in the context of

A the provision of public goods.
B the use of a pollution permit scheme.
C reducing the impact of demerit goods.
D the production of negative externalities.
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Explanation: A free rider is one who enjoys the benefit of the service without contributing to it (eg
foreign visitors). As it is not possible to exclude non-payers from the benefits of public goods, it
is not possible to provide them through the market and it is necessary for the state to provide
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them.
© APT Initiatives Ltd, 2017. This document is for use ONLY by the purchasing individual or staff and students attending
the purchasing institution. It is not to be shared with anybody else without the prior written permission of APT Initiatives Ltd.
APT’s 540 Multiple Choice Questions for AQA A Level Economics

11. The over fishing of an area to depletion by individual fishing firms, each motivated by their
own self-interest, is known as
A the tragedy of the commons.
B the law of diminishing returns.
C decreasing returns to scale.
D productive inefficiency.

Explanation: The tragedy of the commons occurs when an individual (or firm) takes a course of
action motivated by their own self-interest, whereby, if others attempt to do this, the net effect
will be to deplete the resource, thereby making all economic agents worse off in the long run.

12. A negative externality in production leads to market failure as a result of the absence of
clearly defined property rights. For example
A ill-health created through passive smoking.
B the litter created by individuals in a city centre on a Friday night.
C the obesity created in children through the consumption of sugary drinks.
D the depletion of rain forests through commercial logging activity.

Explanation: Over-use of resources in production takes place because resources such as vast
rain forests are extremely difficult to establish property rights to protect them.

13. The diagram below shows a market where the there is a negative externality in production.

Which price level in equilibrium reflects the full cost of the production to society?
A P1
B P2
C P3
D P4

Explanation: In a free market, production will be at Q1 because Demand = Supply (MSB = MPC).
166

However, this is socially inefficient because the MSC is higher than the MSB. Social efficiency
would occur at Q2 with P2 where the MSC = MSB and the full cost of the production to society is
accounted for.
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14. Education is considered a merit good because

A it is provided by the government.
B it provides benefits that are unappreciated by its consumers.
C it would not be produced by private businesses.
D it generates positive externalities.

Explanation: Education does produce external benefits but B is the more precise answer. A merit
good is one which has private benefits that are not fully appreciated by consumers.

15. The diagram below shows a market where there is a misallocation of resources caused by
the over-consumption of a demerit good.

The deadweight social loss from the misallocation of resources as a result of the consumption of
the demerit good is shown by the area
A ACG
B CDG
C BFD
D FGH

Explanation: The deadweight social loss from the misallocation of resources as a result of the
consumption of the demerit good is shown by an area equal to the difference between the MPC
and the MSB multiplied by the extent of the over consumption (Q1 – Q2).

16. Lack of information is an example of market failure because

A consumers and producers cannot agree price.
B consumers and producers then make poorer decisions.
C it may result in negative externalities.
D governments do not address the issue of demerit goods.

Explanation: In the absence of perfect information we make decisions that do not result in an
efficient allocation of resources.

17. Monopolies represent a source of market failure because these businesses

A do not have an incentive to be productively efficient.
B are able to make normal profits.
C will incur diseconomies of scale.
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D are more likely to impose negative externalities on third parties.

Explanation: A monopolist controls price and does not need to produce at the lowest point of the
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average cost curve.

18. Factor immobility is a source of market failure because

A social benefits are greater than private benefits.
B resources are not being most efficiently used.
C labour is inadequately educated and trained.
D some factor markets are uncompetitive.

Explanation: Factor immobility causes unemployment and a loss of productive efficiency.

19. One of the main aims of UK competition policy is to ensure

A effective price discrimination in different markets.
B technological innovation promoting dynamic efficiency in markets.
C concentration ratios are increasing in different markets.
D firms maximise the return for their shareholders in different markets.

Explanation: The main aim of competition policy is to make markets work better and contribute
towards improved efficiency and enhanced competitiveness of UK businesses within the global
market. This is supported by technological innovation which promotes dynamic efficiency in
different markets.

20. One disadvantage of the operation of UK competition policy is

A regulatory capture.
B the tragedy of the commons.
C moral hazard.
D the free rider problem.

Explanation: This occurs when the regulated body subjects the regulators to intense pressure to
act in a particular way, often through the lobbying system. The disadvantage is that it can divert
the regulator from operating in the best interest of the public. In the UK it is claimed that banking
regulators, including the FSA and the Bank of England, have been perpetual victims of
regulatory capture by the banking industry.

21. Which one of the following is an effective argument against the public ownership of firms and
industries?
A Diseconomies of scale are more likely to arise from the effect of overstaffing
B Price volatility is likely to be exacerbated
C Difficult-to-reach markets are less likely to receive adequate provision
D Strategic industries are more difficult to control

Explanation: Publicly owned firms and industries are less likely to have the pressure from
owners driven by the desire to make a return on their investment. This means that they are less
likely to be vigilant with respect to efficiency, and that the potential for over staffing is more likely
to result in rising average total costs of production and diseconomies of scale.

22. An effective argument in favour of the privatisation of state-owned enterprises is that in the
private sector
A firms are likely to take a short-term view towards planning which will enhance dynamic
efficiency.
B the profit incentive encourages increased efficiency.
C governments interfere with industrial operations for political reasons.
D the lack of competition can create x-inefficiency.
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Explanation: When firms are privately owned, there is a greater profit incentive to increase
efficiency. In the private sector, managers are accountable to shareholders, who will want
greater efficiency to contribute to a good return on their investment.
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23. An effective argument against the regulation of markets is that it

A can lead to government failure.
B is likely to reduce the quality of output.
C is likely to reduce the availability of merit goods.
D is likely to increase negative externalities.

Explanation: Government failure is a situation where government regulation in a market in order

to correct a market failure, creates inefficiency and leads to a misallocation of scarce resources.

24. An effective argument in favour of the deregulation of markets is that fewer and simpler
regulation will
A lead to less competition between businesses.
B lead to a raised level of competitiveness between businesses.
C increase barriers to entry to an industry.
D increase the concentration ratio in an industry.

Explanation: Deregulation will lead to increased competition between firms, increases in

economic efficiency and therefore increased consumer welfare.

25. The process by which regulatory agencies eventually come to be dominated by the very
industries they were charged with regulating is known as
A moral hazard.
B the tragedy of the commons.
C regulatory capture.
D the free rider problem.

Explanation: This occurs when the regulated body subjects the regulators to intense pressure to
act in a particular way, often through the lobbying system. This can divert the regulator from
operating in the best interest of the public.

26. The government wants to reduce the external costs associated with traffic congestion. Which
one of the following combinations would be most likely to achieve this objective?
A Reduce the tax on car ownership and reduce the amount of off-street parking
B Reduce the amount of off-street parking and reduce road capacity
C Increase road capacity and subsidise public transport fares
D Increase petrol / diesel tax and subsidise the development of fuel-efficient vehicles

Explanation: We need to take note of the objective of government in this question. A switch to
fuel efficient cars will not reduce congestion. A reduction in road capacity will add to congestion,
as will a reduction in off-street parking. The combination of increased road capacity and
subsidised transport is the surest way of reducing congestion.

27. Market failure can be corrected by establishing property rights because they
A ensure that price equals marginal cost.
B promote the use of merit goods.
C promote the use of demerit goods.
D remove the over-exploitation or misuse of scarce resources.

Explanation: Resources with common property rights, such as the oceans, are free to use
because it is too expensive, or physically impossible, to establish legal boundaries. An absence
of boundaries allow free-riders uncontrolled access. Where possible, establishing the
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boundaries, or property rights, can reduce the over-exploitation or misuse of the resource.
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28. Pollution permit trading is likely to be most effective when

A there is an easily measurable pollutant.
B there is little variation in the costs of reducing pollution.
C the transaction costs of trading permits are high.
D the government sets flexible emissions targets.

Explanation: The pollutant must be easy to measure such that the achievement of pollution
targets can be clearly judged in order to establish the extent of any surplus permits that could
potentially be traded.

29. The most significant reason why governments may fail to address market failure is because
A they have to address conflicting objectives.
B their intervention may result in a net welfare benefit.
C governments are concerned only with long-run issues.
D externalities can be accurately calculated.

Explanation: Conflicting objectives is a major cause of government failure. Hence, there might
be a reluctance to act to reduce inequality if it endangers incentives in the economy.

30. Examples of government failure would exclude

A rent controls, which reduce the supply of low-cost housing.
B a minimum wage rate, which results in higher unemployment.
C a congestion charge, which covers the cost of the negative externality created by the
congestion.
D a tobacco tax, which increases smuggling from overseas.

Explanation: A, B and D are instances of government failure. The actions of a well-meaning

government have led to unfortunate consequences. C, on the other hand, is government action
that corrects a market failure without producing a government failure.

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End of Section Test

4.1: Individuals, Firms,

Markets and Market Failure

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End of Section Test - Individuals, Firms, Markets and Market Failure (4.1)

There are 30 questions. Only one answer per question is allowed.

For each answer completely fill in the lozenge alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to select
as shown.

1. Which one of the following is a positive statement?

A The price of gas is excessive

B Health care is too important to be left to the market

C Government paying for healthcare incurs an opportunity cost

D Inequality of income is undesirable

2. All economic decision-makers are forced to choose because

A resources are infinite.

B every choice has an opportunity cost.

C wants are finite.

D resources are finite.

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3. The production possibility curve is concave (bows outwards) because

A technology is fixed in the short run.

B all resources are being fully used.

C all choices involve an opportunity cost.

D some resources used in production are more specialised than others.

4. On a production possibility diagram, a proportionate increase in productive efficiency in all

sectors of the UK economy would be indicated by

A a parallel outward shift of the production possibility curve.

B a parallel inward shift of the production possibility curve.

C a new position along the production possibility curve.

D a new position beyond the production possibility curve.

5. The table below shows how the marginal utility derived by a particular consumer changes as
consumption of a particular good increases.

Quantity Total
Consumed Utility
0 0
1 80
2 155
3 225
4 285
5 325
6 345

At which level of consumption is the consumer’s marginal utility equal to 40?

A 2

B 3
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C 4
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D 5

6. Which one of the following is an example of ‘framing’ to influence an individual’s choice?

A A price reduction offered to new customers who provide their details on a firm’s
website

B A ‘buy one get one free’ scheme offered by a supermarket

C A loyalty card scheme operated by a restaurant chain

D ‘2 out of 10 positive reviews’ of a competitor’s product highlighted on a firm’s website

7. A car dealership reduces the price of a new model from £15,000 to £13,500. As a result, the
quantity demanded rises from 20 units a week to 23 units a week. The price elasticity of
demand is

A -0.67

B -1.5

C -1.3

D -0.9

8. Which one of the following would cause an increase in the quantity supplied (also known as
an extension of supply) of cars?

A A reduction in the cost of labour employed in car production

B A rise in interest rates on business loans

C A rise in the cost of electricity

D An increase in the demand for cars

9. The entry of a new competitor to an existing market will

A result in higher prices.

B force prices down.

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C increase the degree of monopoly within the market.

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D increase demand for the product.

10. If the government were to fix the support price of an agricultural product above equilibrium,
there would be

A no change in price.

B a shortage of the product.

C excess supply.

D excess demand.

11. The introduction of high definition television can be expected to result in the following, with
the exception of

A increased demand for new TV sets.

B increased supply of second hand TV sets.

C increased price of second hand TV sets.

D increased demand for satellite television services.

12. The productivity of capital is increased by each of the following, with the exception of

A technological improvement.

B an increase in the stock of capital.

C an increase in the quality of labour.

D a reduction in the time that machines are idle.

.
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13. The table below summarises the changes in the costs of capital and labour for a firm as
output increases from 100 to 150 units.

Output Fixed cost Variable cost Total cost

(units) (capital) (labour)
100 50 500 550
150 50 700 750

As the output increases the cost of labour as a percentage of total cost changes from

A 93.3% to 90.9%.

B 90.9% to 93.3%

C 66.7% to 90.9%.

D 66.7% to 93.3%.

14. The table below summarises information relating to the relationships between the inputs and
output of a firm where there is a fixed supply of capital.

Labour Capital Total output

1 10 10
2 10 32
3 10 60
4 10 112
5 10 170
6 10 234
7 10 280
8 10 304

In this firm, the average product with

A 2 units of labour employed is 38.

B 4 units of labour employed is 38.

C 6 units of labour employed is 38.

D 8 units of labour employed is 38.

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15. The table below shows how the costs of a business change in relation to changes in variable
factor inputs.

Output Total fixed Total variable Total cost

(units) cost (£) cost (£) (£)
0 60 0 60
1 60 20 80
2 60 36 96
3 60 48 108
4 60 64 124
5 60 100 160
6 60 144 204

What is the average fixed cost when 5 units of output are produced?

A £20

B £15

C £12

D £10

16. As a firm increases its output, the marginal cost curve will

A fall consistently as output increases.

B not change gradient as output increases.

C initially decrease when output increases and then increase when output increases.

D initially increase when output increases and then decrease when output increases.

17. In which one of the following market contexts does a firm have the least power to
make price?

A Concentrated market

B Perfect competition

C Imperfect competition
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D Pure monopoly
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18. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a firm.

If the firm has the objective of sales revenue maximisation, what will their level of output be?

A OA

B OB

C OC

D OD

19. In a market consisting of a single firm monopoly the Herfindahl-Hirschman Index would be

A 100

B 1 000

C 10 000

D 100 000
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20. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopoly firm.

Which one of the following options represents the area of net welfare loss in this market?

A CEG

B CDH

C BDOF

D ACBD

21. A pricing strategy designed to deter the entry of newcomers to the market is known as

A special offer pricing

B limit pricing.

C predatory pricing.

D market pricing.
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.
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22. The table below summarises employment and output data for a firm that employs a fixed
level of capital and sells all of its output for a price of £10 per unit.

Quantity of Total output

labour (units)
employed
0 0
1 90
2 210
3 360
4 540
5 810
6 990
7 1110

Which one of the following options provides the marginal revenue product of the employment of
the 5th unit of labour?

A £1200

B £1800

C £2700

D £3700

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23. The diagram below represents a competitive labour market in an industry.

Which one of the following is likely to be the cause of the change in the wage rate from W 1 to
W2?

A A reduction in net migration

B The real wage rate on offer in competing jobs decreases

C The imposition of minimal entry requirements to work in the industry

D A reduction in the geographic mobility of labour

24. Which one of the following factors is most likely to affect the distribution of income in an
economy?

A Employing a progressive tax system

B An increase in the marginal propensity to save

C An appreciation of the exchange rate

D A reduction in the rate of Value Added Tax

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25. The diagram below shows the Lorenz curve for an economy.

Which one of the following statements is true?

A 40% of households account for 40% of the cumulative income

B 95% of households account for 40% of the cumulative income

C 40% of households account for 95% of the cumulative income

D 75% of households account for 75% of the cumulative income

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26. The diagram below shows supply and demand for a product which is given a subsidy.

Price
S

P2 S (with subsidy)

P3
D

O Q Q1 Quantity

The subsidy per unit is equal to

A Price P2.

B Price P1.

C Price P2 minus price P1.

D Price P minus price P1.

27. Governments may fail to address market failure because

A the opportunity cost of any decision is high.

B their intervention will lead to a net welfare benefit.

C the accounting of social costs and benefits is challenging and lacks precision.

D market forces lead to a socially efficient allocation of resources.

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28. The diagram below shows a market where there is a negative externality in production.

The deadweight social loss as a result of the externality is shown by the area

A EFG

B ACF

C CFD

D DGH

29. One benefit of the operation of UK competition policy is

A firms are more likely to achieve economies of scale.

B dynamic efficiency is more likely to occur as a result.

C firms are more likely to maximise profits.

D consumer well-being is more likely to be enhanced.

30. An effective argument against the deregulation of local bus markets is that

A the benefits of non-price competition are likely to be reduced.

B rural and other unprofitable populations will be underserved.

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C investment in new technology is likely to be reduced.

D dynamic efficiency in the industry is likely to be reduced.

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End of Section Test - Individuals, Firms, Markets, Market Failure (4.1) - Answers

1. Which one of the following is a positive statement?

A The price of gas is excessive
B Health care is too important to be left to the market
C Government paying for healthcare incurs an opportunity cost
D Inequality of income is undesirable

Explanation: A, B and D are normative statements of opinion. The statement about government
paying for healthcare incurring an opportunity cost is a positive statement because it is objective
and based on fact.

2. All economic decision-makers are forced to choose because

A resources are infinite.
B every choice has an opportunity cost.
C wants are finite.
D resources are finite.

Explanation: It is true that every choice does have an opportunity cost but this is because
resources are finite.

3. The production possibility curve is concave (bows outwards) because

A technology is fixed in the short run.
B all resources are being fully used.
C all choices involve an opportunity cost.
D some resources used in production are more specialised than others.

Explanation: As we achieve progressively higher output of one of the classes of good, the
opportunity cost in terms of reduced output of the other increases. This is because resources are
specialist and cannot be easily transferred from one type of production to another.

4. On a production possibility diagram, a proportionate increase in productive efficiency in all

sectors of the UK economy would be indicated by
A a parallel outward shift of the production possibility curve.
B a parallel inward shift of the production possibility curve.
C a new position along the production possibility curve.
D a new position beyond the production possibility curve.

Explanation: An increase in productive efficiency in all sectors will shift the PPC outwards. If the
efficiency gains were confined to one sector, the shift would be greater on one axis rather than
the other.

5. The table below shows how the marginal utility derived by a particular consumer changes as
consumption of a particular good increases.

Quantity Total
Consumed Utility
0 0
1 80
2 155
185

3 225
4 285
5 325
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6 345

At which level of consumption is the consumer’s marginal utility equal to 40?

A 2
B 3
C 4
D 5

Explanation: Marginal utility is the change in satisfaction from consuming one extra unit. The
marginal utility of consuming the 5th unit is equal to 40 as total utility increases from 285 to 325.

6. Which one of the following is an example of ‘framing’ to influence an individual’s choice?

A A price reduction offered to new customers who provide their details on a firm’s website
B A ‘buy one get one free’ scheme offered by a supermarket
C A loyalty card scheme operated by a restaurant chain
D ‘2 out of 10 positive reviews’ of a competitor’s product highlighted on a firm’s website

Explanation: ‘Framing’ is the attempt to influence an individual’s decision through the context in
which it is presented. This involves accentuating the positive of the firm, or the negative of a
competitor, particularly with respect to the words or figures used.

7. A car dealership reduces the price of a new model from £15,000 to £13,500. As a result, the
quantity demanded rises from 20 units a week to 23 units a week. The price elasticity of
demand is
A -0.67
B -1.5
C -1.3
D -0.9

Explanation: Quantity demanded rises by 15% (3 / 20 x 100). Price is reduced by 10% (£1,500 /
£15,000 x 100). PED = +15% / -10% = -1.5.

8. Which one of the following would cause an increase in the quantity supplied (also known as
an extension of supply) of cars?
A A reduction in the cost of labour employed in car production
B A rise in interest rates on business loans
C A rise in the cost of electricity
D An increase in the demand for cars
Explanation: An increase in demand takes the form of an outward shift of the demand curve
which will generate a movement up the supply curve. The other responses refer to supply-side
factors, which would cause either an increase or a decrease in supply.

9. The entry of a new competitor to an existing market will

A result in higher prices.
B force prices down.
C increase the degree of monopoly within the market.
D increase demand for the product.

Explanation: The entry of new firms increases competitive forces in the market and will push
prices down, illustrated by a leftward shift in the demand curve for the products of established
market participants.
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10. If the government were to fix the support price of an agricultural product above equilibrium,
there would be
A no change in price.
B a shortage of the product.
C excess supply.
D excess demand.
Explanation: At any price above equilibrium, supply would exceed demand (excess supply). To
prove this, construct a sketch graph with a horizontal price line above the equilibrium.

11. The introduction of high definition television can be expected to result in the following, with
the exception of
A increased demand for new TV sets.
B increased supply of second hand TV sets.
C increased price of second hand TV sets.
D increased demand for satellite television services.
Explanation: HD will increase the demand for new sets and, at the same time, increase the
supply of second hand sets as people upgrade. The new HD television increases the
attractiveness of digital satellite services which should be seen as a complementary service. The
one thing it will not lead to is a rise in the price of used sets. If anything, it will put downward
pressure on the price of used sets.

12. The productivity of capital is increased by each of the following, with the exception of
A technological improvement.
B an increase in the stock of capital.
C an increase in the quality of labour.
D a reduction in the time that machines are idle.
Explanation: If productivity of capital is measured in terms of output per machine, then an
increase in the number of machines will not, by itself, increase the productivity of each machine.

13. The table below summarises the changes in the costs of capital and labour for a firm as
output increases from 100 to 150 units.

Output Fixed cost Variable cost Total cost

(units) (capital) (labour)
100 50 500 550
150 50 700 750

As the output increases the cost of labour as a percentage of total cost changes from

A 93.3% to 90.9%
B 90.9% to 93.3%
C 66.7% to 90.9%
D 66.7% to 93.3%

Explanation: 500 / 550 x 100 = 90.9%. 700 / 750 x 100 = 93.3%

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14. The table below summarises information relating to the relationships between the inputs and
output of a firm where there is a fixed supply of capital.

Labour Capital Total output

1 10 10
2 10 32
3 10 60
4 10 112
5 10 170
6 10 234
7 10 280
8 10 304

In this firm, the average product with

A 2 units of labour employed is 38.
B 4 units of labour employed is 38.
C 6 units of labour employed is 38.
D 8 units of labour employed is 38.

Explanation: The average product is the total output divided by the number of labour units
employed.

15. The table below shows how the costs of a business change in relation to changes in variable
factor inputs.

Output Total fixed Total variable Total cost

(units) cost (£) cost (£) (£)
0 60 0 60
1 60 20 80
2 60 36 96
3 60 48 108
4 60 64 124
5 60 100 160
6 60 144 204

What is the average fixed cost when 5 units of output are produced?
A £20
B £15
C £12
D £10

Explanation: Average fixed cost = total fixed cost divided by output: £60 / 5 = 12.

16. As a firm increases its output, the marginal cost curve will
A fall consistently as output increases.
B not change gradient as output increases.
C initially decrease when output increases and then increase when output increases.
D initially increase when output increases and then decrease when output increases.

Explanation: The marginal cost curve is U-shaped. Marginal cost initially decreases as output
increases and afterwards, rises as output increases. This is because total cost increases at a
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decreasing rate and then increases at an increasing rate, thanks to diminishing marginal returns.
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17. In which one of the following market contexts does a firm have the least power to make
price?
A Concentrated market
B Perfect competition
C Imperfect competition
D Pure monopoly

Explanation: A firm in perfect competition is a price taker and has no ability to influence price. In
other market structures, it has varying abilities to influence price.

18. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a firm.

If the firm has the objective of sales revenue maximisation, what will their level of output be?
A OA
B OB
C OC
D OD

Explanation: The firm will maximise sales revenue at the level of output where MR = 0

19. In a market consisting of a single firm monopoly the Herfindahl-Hirschman Index would be
A 100
B 1 000
C 10 000
D 100 000

Explanation: The Herfindahl-Hirschman Index is a measure of market concentration. The index

is calculated by squaring the percentage market share of each firm in the market and summing
these numbers; hence 100 x 100 = 10 000).
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20. The diagram below shows the marginal cost (MC), average cost (AC), marginal revenue
(MR) and average revenue (AR) curves of a monopoly firm.

Which one of the following options represents the area of net welfare loss in this market?
A CEG
B CDH
C BDOF
D ACBD
Explanation: Welfare loss is the loss of both consumer and producer surplus. This will occur
when a market is supplied by a monopolist and is equal to the area CEG.

21. A pricing strategy designed to deter the entry of newcomers to the market is known as
A special offer pricing
B limit pricing.
C predatory pricing.
D market pricing.

Explanation: Limit pricing is a strategy to deter entry by setting price below average cost. This
makes it unprofitable for potential rivals to enter the market.

22. The table below summarises employment and output data for a firm that employs a fixed
level of capital and sells all of its output for a price of £10 per unit.

Quantity of labour Total output

employed (units)
0 0
1 90
2 210
3 360
4 540
5 810
6 990
7 1110

Which one of the following options provides the marginal revenue product of the employment of
the 5th unit of labour?
190

A £1200
B £1800
C £2700
Page

D £3700

Explanation: The marginal revenue product of a worker is the extra revenue a firm gains from
employing an extra worker. The 5th worker produces a marginal product of 270 units, which
multiplied by the price of £10 gives a MRP of £2700.

23. The diagram below represents a competitive labour market in an industry.

Which one of the following is likely to be the cause of the change in the wage rate from W 1 to
W2?
A A reduction in net migration
B The real wage rate on offer in competing jobs decreases
C The imposition of minimal entry requirements to work in the industry
D A reduction in the geographic mobility of labour

Explanation: If the real wage rate on offer in competing jobs decreases, then the attraction of
working in the industry in question will increase. Hence, it is likely that the supply of labour to the
industry in question will increase.

24. Which one of the following factors is most likely to affect the distribution of income in an
economy?
A Employing a progressive tax system
B An increase in the marginal propensity to save
C An appreciation of the exchange rate
D A reduction in the rate of Value Added Tax

Explanation: Employing a progressive tax system which takes proportionately more tax at higher
incomes and proportionately less tax at lower incomes will lead to a more equal distribution of
income.

25. The diagram below shows the Lorenz curve for an economy
191
Page

Which one of the following statements is true?

A 40% of households account for 40% of the cumulative income
B 95% of households account for 40% of the cumulative income
C 40% of households account for 95% of the cumulative income
D 75% of households account for 75% of the cumulative income

Explanation: The Lorenz curve is a graph on which the cumulative percentage of total income is
plotted against the cumulative percentage of the corresponding population to represent the
income distribution in an economy. From the graph we can read off that 95% of the households
correspond with 40% of the cumulative income.

26. The diagram below shows supply and demand for a product which is given a subsidy.

Price
S

P2 S (with subsidy)

P3
D

O Q Q1 Quantity

The subsidy per unit is equal to

A Price P2.
B Price P1.
C Price P2 minus price P1.
D Price P minus price P1.

Explanation: The subsidy per unit is the vertical difference between the two supply curves. The
supply is displaced by this amount and suppliers are now willing to supply OQ1 rather than the
original equilibrium quantity of OQ.

27. Governments may fail to address market failure because

A the opportunity cost of any decision is high.
B their intervention will lead to a net welfare benefit.
C the accounting of social costs and benefits is challenging and lacks precision.
D market forces lead to a socially efficient allocation of resources.

Explanation: C illustrates one of the problems of pollution control, ie the problems of calculating
external costs and benefits. If governments intervene without accurate knowledge, then a market
failure will be converted into a government failure. For this reason, governments might be
reluctant to intervene.
192
Page

28. The diagram below shows a market where there is a negative externality in production.

The deadweight social loss as a result of the externality is shown by the area
A EFG
B ACF
C CFD
D DGH

Explanation: The deadweight social loss as a result of the externality is equal to the area
difference between the MSC and the MPC multiplied by the extent of the over production (Q1 –
Q2).

29. One benefit of the operation of UK competition policy is

A firms are more likely to achieve economies of scale.
B dynamic efficiency is more likely to occur as a result.
C firms are more likely to maximise profits.
D consumer well-being is more likely to be enhanced.

Explanation: Competition law enforcement enhances consumers’ well-being through detecting

and sanctioning anti-competitive practices, including cartels, the abuse of market power and
uncontrolled mergers.

30. An effective argument against the deregulation of local bus markets is that
A the benefits of non-price competition are likely to be reduced.
B rural and other unprofitable populations will be underserved.
C investment in new technology is likely to be reduced.
D dynamic efficiency in the industry is likely to be reduced.

Explanation: After deregulation in a local bus market there may not be the safeguards in place
that require the industry operators to provide rural and other unprofitable services associated
with a regulated market.
193
Page

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