Which one of the following is a positive economic statement?
Resources are best allocated via the market mechanism
Government spending on health care should be increased.
An increase in interest rates will reduce house prices.
Pollution is the most serious of all economic problems.
two products are in joint supply when
a fall in the output of one product is accompanied by a decrease in the output of the other products.
an increase in the demand for one product reduces the supply of the other products.
a rise in the quantity supplied of one product reduces the supply of the other product.
a fall in the price of one product reduces the cost of supplying the other product.
Government failure always occurs when
government intervention leads to a net welfare loss compared to the free market solution.
social costs in a market are greater than social benefits.
the government fails to intervene in the market.
externalities exist in a market.
the marketing department of a company manufacturing and selling washing machines has found that its product has a price elasticity of demand equal to -0.75. This suggests that if the company raises the price of washing machines
the quantity demanded will fall by 75%.
the amount consumers spend on the product will increase.
the quantity demanded will increase by 75%.
the amount consumers spend on the product will fall.
A market is defined as being in equilibrium when
there is maximum output at minimum cost.
prices are at their lowest possible level.
there is no tendency for the market price to change.
consumer satisfaction is maximised.
The abolition of betting tax led to an estimated 37% increase in sales during the last quarter at Stanley's, a chain of betting shops. Betting tax was an indirect tax on each bet placed by customers. The abolition pf betting tax can be shown by the
supply curve of bets shifting to the left.
supply curve of bets shifting to the right.
demand curve for bets shifting to the left.
demand curve for bets shifting to the right.
a government grants producers a subsidy for a product. Which one of the following is likely to result in the largest increase in its sales?
supply is price elastic
supply is price inelastic
demand is price inelastic
demand is price elastic
For monopoly to persist over time in a market, it is most likely that
the good produced is a necessity
the firm is charging high prices
there are barriers to entry
the firm is productively efficient
An economic good is one which
has an opportunity cost in production
does not use up resources
is supplied competitively
makes a profit
When money is used as a medium of exchange
barter or swapping of goods is likely to become more common
trade is likely to increase
the relative prices of goods never change
specialization and the division of labour are made more difficult
Which one of the following is most likely to lead to greater labour productivity in an industry?
an increase in market demand
a fall in wages
an increase in the number of firms in the industry
an increase in capital investment
Assuming the price elasticity of demand for a product is zero, any tax placed on the product will
leave the position of the supply curve unchanged
be paid entirely by the producer
shift the demand curve to the left
raise the price of the product by the full amount of the tax
Market failure arises when
prices rise in response to excess demand.
positive externalities exist in consumption
firms make zero profits
costs increases as firms expand production.
Cross elasticity of demand is defined as the
responsiveness of the price of one good to a change in demand for another.
responsiveness of demand for one good to a change in demand for another
responsiveness of demand for one good to a change in the price of another
responsiveness of the price of one good to a change in the price of another
Merit goods are likely to be under-provided in a free market economy because their
private benefits exceeds their social benefits
social benefits exceed their social costs.
private costs exceed their private benefits.
social benefits exceed their private benefits.
The central purpose of economic activity is
to create maximum profit.
the satisfaction of needs and wants.
to achieve economic efficiency.
to save scarce resources.
To calculate the percentage change in the quantity supplied of a good following a change in its price, the price elasticity of supply should be
divided by the percentage change in price.
divided by the percentage change in quantity.
multiplied by the percentage change in price.
multiplied by the percentage change in quantity.
An economy in which average incomes have fallen by 5% has also seen the demand for holidays overseas fall by 20%. It can be concluded from this that the income elasticity of demand for holidays overseas is
A monopoly market will be less economically efficient than a competitive market if, under monopoly,
the market demand curve is inelastic.
the main objective of the firm is maximum profit.
there are both economies of scale and diseconomies of scale.
prices are higher and output is lower.
An economy is always productively efficient if it
continually increases its average standard of living.
maximises investment in capital goods.
is operating with full employment of labour.
can produce more of one good only by producing less of another.
The equilibrium price in a market
is the market-clearing price.
changes when demand equals supply.
always increases when demand rises.
is the balance of excess demand and excess supply.
Which one of the following would be classified by an economist under the factor of production known as land?
Fish in the ocean
Government failure may result directly from
the high cost of administering government policy.
underconsumption of merit goods by the public.
a failure of market prices to reflect social costs.
goods being provided through the market mechanism.
Which one of the following is an example of composite demand?
The demand for labour increases as the demand for the good which that labour produces
The demand for petrol increases because car travel increases in popularity.
The demand for strawberries increases following a series of price reductions.
The demand for bricks increases for use in both house building and factory building.
Positive externalities exist when
production creates private benefits.
private benefits are less than social benefits.
private benefits are greater than private costs.
social costs exceed private costs.
Market failure arises whenever firms
make a loss.
replace machines with workers.
reduce expenditure on research and development.
All other things being equal, supply curves slope upwards from left to right because
higher prices lead to higher costs.
lower prices lead to higher output.
lower prices lead to higher demand.
higher prices lead to higher profits.
One reason why UK governments provide education is because
the private benefit from education is less than the social benefit.
education cannot be provided by the free market.
all education is both a merit good and a public good.
this ensures that the provision of education is maximised.
An increase in the price of petrol will often result in consumers economising in their use of fuel by reducing the number of journeys they make in their cars. This
is because petrol and car journeys are in joint supply.
shows that there is a positive cross elasticity of demand between the price of petrol and
the demand for car journeys.
illustrates the operation of the rationing function of the price mechanism.
is because the price elasticity of demand for petrol is positive.
A firm will always reduce its unit cost of production as it expands its output if it
benefits from specialisation.
reduces its price.
moves down the economy’s production possibility frontier.
expands its use of capital and labour.
Market failure results in a misallocation of resources. In some cases, this can be corrected by the government
restricting the manufacture of goods that generate positive externalities.
providing public goods.
subsidising all loss-making firms.
placing a tax on merit goods.
Which one of the following is classified as an economic resource?
‘OPEC is expected to cut output of crude oil by more than 1 million barrels per day when it
meets in Vienna this week. The cut is intended to maintain the high world price for oil.’
Source: news reports, 2008
All other things being equal, if output of crude oil was cut in a such a way, which one of the following would happen in the world market for crude oil? There would be a
movement along the supply curve
shift to the right of the supply curve
movement along the demand curve.
shift to the left of the demand curve.
Price elasticity of supply measures the responsiveness of the quantity supplied to a change in
costs of production
the size of firms
Complete market failure always exists when
there are negative externalities in production.
the free market fails to provide sufficient merit goods
the free market underprices demerit goods
there is a missing market in the provision of public goods
Specialisation requires the existence of
economies of scale.
a system of exchange
In an economy, some industries are dominated by a few large firms. Which one of the following is most likely to explain this situation?
In the economy
small producers are likely to suffer from diseconomies of scale
as industries increase their output, firms are likely to be able to charge a higher price for
as firms increase their size, the employment of specialist managers may result in a fall in
the average cost of running a business
small firms find it hard to compete because, as firms increase their output, the rise in
employment is likely to reduce labour productivity.
Which one of the following situations would lead to an increase in equilibrium price?
Demand is perfectly inelastic and labour costs rise
Demand is perfectly elastic and labour costs rise
Supply is perfectly elastic and the price of a substitute good falls
Demand is perfectly inelastic and labour costs fall
Which one of the following measures of elasticity indicates that two goods are substitutes?
A negative income elasticity of demand
A positive price elasticity of demand
A positive cross elasticity of demand
A negative price elasticity of demand
The income elasticity of demand for a good is −3. Which one of the following statements is correct?
A 20% increase in income leads to a 60% fall in quantity demanded.
A 10% increase in price leads to a 30% fall in quantity demanded.
The good is a normal good
Demand for the good is income inelastic
‘Electricity suppliers are required to buy a growing amount of electricity from renewable energy generators. Green energy generators are paid more for their electricity because there is a scarcity of supply of electricity generated from renewable resources.’
It can be deduced from the data above that
the government pays a subsidy to generators of renewable energy.
the social cost of electricity generated from renewable resources is greater than the
the government is subsidising the negative externalities arising from the generation of
electricity suppliers are paying higher average prices for their electricity because some of
the electricity is generated from ‘green sources'.
Government intervention to correct market failure may make the situation worse because
the information needed to make sound economic decisions is widely dispersed amongst
individuals and firms.
the government is unable to provide private goods since they are both rival and
positive externalities resulting from the consumption of merit goods means that they will
be underprovided by the state
competition amongst firms in the private sector will inevitably result in an optimum
allocation of resources
A positive statement in economics is always
capable of being tested
based upon an opinion.
based upon numerical data
Government provision of a merit good can be justified because
without government intervention there would be a missing market.
merit goods are non-rival and non-excludable
without government intervention partial market failure would result
the provision of merit goods has an opportunity cost
At all points on a country’s production possibility frontier
all firms are benefiting from economies of scale
productive efficiency is achieved
each point is equally socially desirable because output is at its maximum
there is an equal distribution of income in the economy
A good is excludable if
it is possible to prevent someone from enjoying its benefits.
it is supplied by the government rather than through the free market.
one person’s use has no effect on the quantity available for someone else.
it is supplied at a zero price.
In a typical demand schedule, quantity demanded
varies directly with price.
varies proportionately with price.
is determined by the elasticity of demand.
varies inversely with price.
Which one of the following is a normative statement?
Economic theory assumes that firms will maximise profits
Labour is the human contribution to production
Producers and consumers may have to consider opportunity cost when making
Governments must intervene in markets
The essential feature of an inferior good is that its
price elasticity of demand is positive.
income elasticity of demand is positive
price elasticity of demand is negative.
income elasticity of demand is negative
The use of money as a medium of exchange enables an economy to
operate outside its production possibility boundary.
increase production of public goods.
prevent market failure.
benefit from specialisation and the division of labour.
An industry’s supply curve is more likely to be price elastic in the short term if
the industry uses scarce factor inputs.
its firms are operating below their full capacity.
its firms hold relatively low levels of stock.
there are many substitutes for its output.
Left to the free market, Good X would not be produced at all. Yet the production and consumption of at least some of Good X increases the welfare of society. The government therefore has an incentive to intervene to ensure its provision. Good X is most likely to be a
An indirect tax on the production of a good will have no effect on price if demand is
inversely related to price.
of unitary elasticity
If increased economies of scale are experienced by firms in an industry, this is likely to result in
a competitive market replacing a monopoly.
rising unit costs of production.
the demand curve for the good shifting to the right.
the supply curve of the good shifting to the right.
The government was recently advised that a 40% increase in the price of beer would reduce beer consumption by the rich by 6% and beer consumption by the poor by 20%. It can be concluded from this that
demand for beer is price inelastic for both rich and poor.
for the rich, beer is an inferior good.
the rich consume less beer than the poor.
the demand of the poor for beer is price elastic while that of the rich is price inelastic
Features of the fundamental economic problem include
both unlimited resources and many wants.
both trade-offs and conflicting objectives.
the provision of goods with no opportunity cost.
both scarce resources and limited wants.
Which one of the following is a reason for government intervention to correct a market failure?
The existence of
diseconomies of scale
externalities in consumption and production
goods in composite demand
Which one of the following statements referring to a market economy is correct?
Monopolists take no account of consumer preferences.
Prices do not always reflect social costs
Efficiency is always indicated by high profits
Large firms are more efficient than small firms.
A small firm is able to buy any amount of a raw material on world markets at the same price. This means that it faces a perfectly
elastic demand curve for the raw material.
inelastic demand curve for the raw material.
elastic supply curve for the raw material.
inelastic supply curve for the raw material.
The fundamental economic problem facing all societies is
what, how and for whom goods and services should be produced.
the existence of unemployed resources.
a significant divergence between social and private costs of production and consumption.
inequalities in the distribution of income and wealth.
Which one of the following is an example of an economy of scale?
A firm using its existing capacity more efficiently
A company using its factory to produce more than one product
A car firm increasing its range of models
A firm employing specialist managers as its size increases
Which one of the following statements about a merit good is true?
It may be provided by the free market but not in sufficient quantities
Once the good has been supplied to one consumer, there is no extra cost in supplying it
It is always provided free to consumers.
It tends to be provided by the government because it is non-excludable.
The demand for capital goods such as plant and machinery is said to be an example of derived demand because it depends on
the productivity of capital goods.
the quantity of consumer goods purchased.
the price of capital goods.
the amount of labour employed by a firm.
A free good has which one of the following characteristics?
It has no opportunity cost in supply.
It is generally supplied by the government because its consumption is considered to be
It has no externalities associated with its consumption or production.
It is in perfectly inelastic supply.
Which one of the following statements involves a value judgement?
The supply of beef is likely to be inelastic in the short run.
Economies of scale can lead to lower prices
Inferior goods have a negative income elasticity of demand.
The government was wrong to increase spending on roads.
In August 2000, the World Health Organisation said that a 10 % increase in cigarette prices worldwide would reduce consumption of cigarettes by 4 % in high-income countries and by 8 % in low-income countries.
The above statement suggests that
smokers in high-income countries are twice as addicted to cigarettes as those in
demand for cigarettes is price elastic in both low-income and high-income countries.
income elasticity of demand for cigarettes is higher in low-income countries than in
price elasticity of demand for cigarettes is negative in both high-income and low-income
At current levels of output, the marginal social cost of making a good is greater than its marginal private cost. Also, the marginal social benefit of the good is greater than its marginal private benefit. As a result, there will probably be
a misallocation of resources.
positive externalities in production.
negative externalities in consumption.
A tradeable pollution permit
is needed to equalise positive and negative externalities in production.
will be bought by a firm if its price is less than the social cost of the pollution it creates
is designed to reduce the negative externalities arising from pollution
can be used only by the firm to which it is issued.
In July 2007, smoking in enclosed public places in England became illegal.
Such a policy would inevitably lead to government failure if
the government’s tax revenue from cigarette sales fell.
the economic benefits arising from the ban were outweighed by its costs.
some people continued to smoke cigarettes in their own homes.
jobs were lost in the tobacco industry.
Specialisation and the division of labour require
a means of exchanging goods and services.
that the economy is operating on its production possibility frontier.
an absence of negative externalities.
One reason why the free market fails to achieve an optimal allocation of scarce resources is
public goods are provided free of charge to users.
positive externalities lead to overproduction of a good.
there is underproduction of goods with positive externalities.
individuals’ incomes and wealth are not identical
Labour productivity in an economy is likely to improve if there is
a reduction in the number of firms in an industry
an improvement in allocative efficiency.
an increase in the quantity of capital per worker.
a reduction in negative externalities in production.
A pure public good (or service) is always
provided by the government for all consumers.
provided free of charge for all consumers.
available for consumption by others when consumed by an additional person.
heavily subsidised by the government