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Economics O Level Paper 1


Solved Topical & Yearly MCQ’s
(2003-2017)
Article No. 141

Editorial Board:
Imran Latif
Ambreen Ishfaq
Hammad Hussain
Uzair Shahed Islam

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in
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Cambridge International has not provided these questions or answers and can take no responsibility whatsoever
for their accuracy or suitability for the examinations.

Title Economics O Level P-1 ( Solved Topical & Yearly MCQ’s)


Author Imran Latif
Cell: +923004410900
Email: imranlatifmalik@gmail.com
Published by Read & Write Publications
Printed by Sadaat Printers Urdu Bazar, Lahore.
Composed by Salman, Sharjeel, Hayat, Shahab, Waqas, Awais
Title designed by Rashid Mehmood, Naveed
Edition 2018

Price Rs.630/-

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Preface

This book provides a thorough exercise of paper 1 for students taking Cambridge
International Examinations O-Level Economics. MCQs from past examinations are
sorted into relevant chapters and topics which will enable students to practice their
understanding systematically. A key to questions is added at the end of each chapter.
Further help is provided in detailed answers.
We appreciate our students and fellow teachers who helped us to improve this book.
Your suggestions and comments will be highly appreciated.

Editorial Board:
Imran Latif
Ambreen Ishfaq
Hammad Hussain
Uzair Shahed Islam
4

Review Board

1. Lahore:
Mr. Aslam Tariq, Mr. Mian Mumtaz, Mr. Saeed Afzal, Mr. Kamran Malik , Mr. Shahid
Saghir , Mr. Faisal Saeed, Mr. Muhammad Rafi, Mr. Arshad Chudhary, Mr. Ahmed Bilal,
Mr. Waqar Khan, Mr. Waqas Iqbal, Mr. Azar Anjum, Mr. Arshad Farooqi, Mr. Rizwan-ur-
Rehman, Mr. Irteza Rehman, Mr. Ahmed Javed Paracha, Mr. Ali Rana, Mr. Mazahar
Abbas, Mr. Rasheed Kahloon, Mr. Mazhar Muneer, Mr. Mumtaz Ahmad, Miss Nosheen
Jamal, Mr. Muhammad Rizwan, Mr. Azeem Qaisar, Mr. Waqas Biag and Mr. Asghar Ali
Malik.

2. Islamabad & Rawalpindi


Mr. M. Zulfiqar, Mr. Hamood Rehman, Mr. Abdul Salam, Mazhar Hameed Khan, Mr. Ali
Yasir, Mr. Asad Ali, Mr. Naveed Iqbal, Mr. Umar Khan, Mr. Sadaqat Ali, Mr. Hamood Ur
Rahman and Mian Tahir Siddique, Mr. Saeed Khan.

3. Fisalabad & Jhang


Mr. Anwar-ul-Haq, Mr. Aamir Jahangir, Mr. Ahmed Kamal , Mr. Muhammad Sakhi
Ahmad, Mr. Javed Iqbal, and Miss Kiran.

4. Sialkot and Gujranwala


Mr. Imran Aslam and Mr. Sarwar Imtiaz.

5. Karachi & Multan


M. Asif farooq, Miss Shafaq Ahmed, Mr. Siddique Ansari , Mr. Zai, Mr. Munawar Ghazi,
Mr. Abdul Kareem Lakhani, Mr. Ali Anwerzada, Miss Khalida Afsar, Miss Amna Basir,
Hanah Iqbal Mirza and Mr. Kamran Butt.
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Contents
UNIT-1 BASIC ECONOMIC IDEAS .......................................................................................................... 9
1.1 FACTORS OF PRODUCTION .................................................................................................................... 9
1.2 OPPORTUNITY COST AND SCARCITY (BASIC ECONOMIC PROBLEM) ...........................................................12
1.3 PRODUCTION POSSIBILITY CURVE .........................................................................................................18
1.4 LABOUR INTENSIVE AND CAPITAL INTENSIVE ...........................................................................................20
Key..........................................................................................................................................................21
Detailed Answers ................................................................................................................................22
UNIT-2 ECONOMIC SYSTEMS ...............................................................................................................28
2.1 BASIC ECONOMIC QUESTIONS ..............................................................................................................28
2.2 ECONOMIC SYSTEMS ...........................................................................................................................28
Key..........................................................................................................................................................33
Detailed Answers ................................................................................................................................34
UNIT-3 PRODUCTION AND COST .........................................................................................................37
3.1 TYPES OF COSTS ................................................................................................................................37
3.2 PROFIT MAXIZATION ............................................................................................................................45
3.3 DIVISION OF LABOUR ...........................................................................................................................49
3.4 ECONOMICS & DISECONOMIES OF SCALE ...............................................................................................51
3.5 SMALL FIRMS .....................................................................................................................................53
3.6 PRIMARY, SECONDARY & TERTIARY SECTORS ........................................................................................54
Key..........................................................................................................................................................57
Detailed Answers ................................................................................................................................58
UNIT-4 TYPES OF BUSINESS ORGANISATIONS .................................................................................67
4.1 TYPES OF BUSINESS ORGANIZATIONS ....................................................................................................67
4.2 MULTINATIONALS ................................................................................................................................69
Key..........................................................................................................................................................73
Detailed Answers ................................................................................................................................74
UNIT-5 GROWTH AND FINANCE OF FIRMS .........................................................................................76
5.1 SOURCES OF GROWTH OF FIRMS ..........................................................................................................76
5.2 INTEGRATION .....................................................................................................................................76
5.3 STOCK EXCHANGE ..............................................................................................................................78
Key..........................................................................................................................................................79
Detailed Answers ................................................................................................................................80
UNIT-6 DEMAND SUPPLY AND EQUILIBRIUM .....................................................................................82
6.1 DEMAND ............................................................................................................................................82
6.2 SUPPLY .............................................................................................................................................83
6.3 MARKET EQUILIBRIUM & CHANGES ........................................................................................................84
6.4 PRICE CONTROLS ...............................................................................................................................97
Key..........................................................................................................................................................98
Detailed Answers ................................................................................................................................99
UNIT-7 ELASTICITY ..............................................................................................................................105
7.1 PRICE ELASTICITY OF DEMAND (PED) .................................................................................................105
7.2 PRICE ELASTICITY OF SUPPLY (PES) .................................................................................................111
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7.3 ELASTICITY AND TAX INCIDENCE .........................................................................................................112


7.4 TOTAL REVENUE AND EQUILIBRIUM .....................................................................................................113
Key........................................................................................................................................................114
Detailed Answers ..............................................................................................................................115
UNIT-8 SOCIAL COSTS AND BENEFITS .............................................................................................121
8.1 SOCIAL COSTS & BENEFITS ................................................................................................................121
8.2 GOVT. POLICIES AND THEIR LIMITATIONS / PRIVATE VS GOVT. PRODUCTION ............................................123
8.3 CAUSES OF MARKET FAILURE .............................................................................................................125
Key........................................................................................................................................................126
Detailed Answers ..............................................................................................................................127
UNIT-9 LABOUR MARKET ...................................................................................................................130
9.1 FACTORS DETERMINING WAGE RATE ...................................................................................................130
9.2 WAGE DIFFERENTIALS .......................................................................................................................132
9.3 TRADE UNIONS .................................................................................................................................135
9.4 FACTORS AFFECTING CHOICE OF OCCUPATION .....................................................................................138
9.5 TYPES OF PAYMENTS ........................................................................................................................139
9.6 CHANGES IN EARNING IN LIFETIME .......................................................................................................139
9.7 MONEY WAGES AND REAL WAGES ......................................................................................................140
Key........................................................................................................................................................142
Detailed Answers ..............................................................................................................................143
UNIT-10 NATIONAL INCOME .................................................................................................................150
10.1 NATIONAL INCOME CONCEPTS ........................................................................................................150
10.2 CONSUMPTION AND SAVINGS AND SPENDING PATTERNS ....................................................................151
10.3 AGGREGATE DEMAND AND AGGREGATE SUPPLY ...............................................................................155
10.4 STANDARD OF LIVING .....................................................................................................................156
Key........................................................................................................................................................162
Detailed Answers ..............................................................................................................................163
UNIT-11 UNEMPLOYMENT.....................................................................................................................169
11.1 MEANING OF UNEMPLOYMENT ........................................................................................................169
11.2 TYPES AND CAUSES OF UNEMPLOYMENT ..........................................................................................169
11.3 EFFECTS OF UNEMPLOYMENT .........................................................................................................171
11.4 MOBILITY OF LABOUR ....................................................................................................................172
Key........................................................................................................................................................173
Detailed Answers ..............................................................................................................................174
UNIT-12 MACROECONOMIC POLICIES ................................................................................................176
12.1 MACROECONOMIC AIMS, CONFLICTS & POLICIES ...............................................................................176
Key........................................................................................................................................................185
Detailed Answers ..............................................................................................................................186
UNIT-13 ECONOMIC GROWTH ..............................................................................................................191
13.1 MEANING, CAUSES AND EFFECTS OF ECONOMIC GROWTH ..................................................................191
Key........................................................................................................................................................194
UNIT-14 INFLATION ................................................................................................................................197
14.1 MEANING OF INFLATION .................................................................................................................197
14.2 CAUSES OF INFLATION ...................................................................................................................197
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14.3 MEASUREMENT OF INFLATION .........................................................................................................197


14.4 EFFECTS OF INFLATION ..................................................................................................................199
14.5 ACTUAL VALUE AND PERCENTAGE VALUE .........................................................................................200
Key........................................................................................................................................................206
Detailed Answers ..............................................................................................................................207
UNIT-15 TAXES AND GOVERNMENT SPENDING ................................................................................211
15.1 TYPES OF TAX SYSTEMS.................................................................................................................211
15.2 DIRECT & INDIRECT TAXES .............................................................................................................213
15.3 REASONS FOR TAXATION ...............................................................................................................215
15.4 SOURCES OF FINANCE OF GOVERNMENT ..........................................................................................215
15.5 GOVERNMENT BUDGET ..................................................................................................................216
15.6 OTHERS .......................................................................................................................................216
Key........................................................................................................................................................219
Detailed Answers ..............................................................................................................................220
UNIT-16 MONEY AND BANKING ...........................................................................................................224
16.1 MONEY ........................................................................................................................................224
16.2 BANKING ......................................................................................................................................225
Key........................................................................................................................................................227
Detailed Answers ..............................................................................................................................228
UNIT-17 POPULATION............................................................................................................................230
17.1 FACTORS OF GROWTH IN POPULATION .............................................................................................230
17.2 LESS DEVELOPED AND DEVELOPED COUNTRIES ................................................................................234
17.3 AGING POPULATION .......................................................................................................................241
17.4 ABSOLUTE AND RELATIVE POVERTY .................................................................................................243
17.5 TYPES OF POPULATION AND EFFECTS OF GROWTH IN POPULATION ......................................................243
Key........................................................................................................................................................244
Detailed Answers ..............................................................................................................................245
UNIT-18 INTERNATIONAL TRADE ........................................................................................................252
18.1 ABSOLUTE AND COMPARATIVE ADVANTAGE ......................................................................................252
18.2 METHODS OF PROTECTIONISM OR POLICIES .....................................................................................253
18.3 EFFECTS OF FREE TRADE AND PROTECTIONISM ................................................................................254
Key........................................................................................................................................................259
Detailed Answers ..............................................................................................................................260
UNIT-19 EXCHANGE RATE ....................................................................................................................264
19.1 MEANING OF EXCHANGE RATE ........................................................................................................264
19.2 EFFECTS OF EXCHANGE RATE DEPRECIATION AND APPRECIATION .......................................................264
19.3 CAUSES OF EXCHANGE RATE DEPRECIATION AND APPRECIATION ........................................................266
Key........................................................................................................................................................267
Detailed Answer ................................................................................................................................268
UNIT-20 BALANCE OF PAYMENT .........................................................................................................270
20.1 BALANCE OF PAYMENTS ACCOUNTS ................................................................................................270
20.2 CAUSES OF BALANCE OF PAYMENTS DEFICIT OR SURPLUS .................................................................273
20.3 MIXED QUESTIONS ........................................................................................................................275
Key........................................................................................................................................................276
Detailed Answers ..............................................................................................................................277
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UNIT-21 ADVERTISING, MONOPOLY AND COMPETITION .................................................................280


21.1 CHARACTERISTICS OF PERFECT COMPETITION AND MONOPOLY ..........................................................280
21.2 PRICING AND OUTPUT OF PERFECT COMPETITION AND MONOPOLY ......................................................281
21.3 ADVANTAGES AND DISADVANTAGES OF MONOPOLY ...........................................................................282
21.4 ADVERTISING................................................................................................................................282
Key........................................................................................................................................................283
Detailed Answers ..............................................................................................................................284
UNIT-22 OTHERS ....................................................................................................................................286
22.1 OTHERS .......................................................................................................................................286
Key........................................................................................................................................................294
Detailed Answers ..............................................................................................................................295
UNIT-23 NOVEMBER 2015 TO NOVEMBER 2017………………………………….…………….……….. 298
KEY ALL YEARS..................................................................................................................LAST PAGE
Unit 1 9 Basic economic problem

Unit-1 BASIC ECONOMIC IDEAS


1.1 Factors of production
1 In a market economy, what does the entrepreneur decide?

A the combination of resources used


B the demand for the product
C the equilibrium price of the product
D the level of profits
J05/P1/Q1

2 A boat owner employs a crew to catch fish to sell on the market.


Which factors of production are involved in this activity?

A labour, capital and enterprise only B land, labour and capital only
C land, labour and enterprise only D land, labour, capital and enterprise
J06/P1/Q3

3 What is an example of the factor of production enterprise?

A a shop assistant B a shop’s profits


C a shop owner D a shopping centre
N06/P1/Q4

4 $2 bn is invested in developing a country’s natural resources and infrastructure.


Which two factors of production does this refer to directly?

A capital and labour B capital and land


C enterprise and land D labour and land
J07/P1/Q1

5 Which of the following is a factor of production?

A the payment of interest on a bank loan


B the profit declared by a company in its annual report
C the skill of the managers of a business
D the taxes paid to the government
J08/P1/Q2

6 Hong Kong lacks natural resources. Its best asset is its people.
What can be concluded about Hong Kong’s factors of production?

Well supplied Poorly supplied


A Capital Enterprise
B Enterprise Labour
C Labour Land
D Land Capital
J08/P1/Q4
Unit 1 10 Basic economic problem

7 What is not a factor of production?

A company shares B machinery


C raw materials D unskilled workers
N08/P1/Q1

8 A major airline needs a range of people and equipment. These can be divided into factors of
production.

Which is allocated to its correct factor of production?

people or equipment factor of production


A aircraft capital
B computer network land
C pilots enterprise
D shareholders laboratory
J09/P1/Q2

9 Nolwazi lived in a rural area in Botswana and made baskets to sell to the tourists. The local
government gave her a loan to buy a car to take the baskets to the city market.

Which factor of production increased?

A capital B enterprise
C labour D land
N09/P12/Q1

10 Which statement about the factors of production is correct?

A A river from which a company draws water is called land.


B Raising finance for a company is called capital.
C Supervisors employed in a company are called enterprise.
D The owner of a company is called labour.
J10/P12/Q1

11 A farmer pays a landowner for the use of a field.

What is the income to the landowner called?

A interest B profit
C rent D wages
N10/P12/Q1
12 What is a factor of production?

A an advantage of producing on a large scale


B a resource used to produce goods and services
C a sub-section of a manufacturing process
D a unit of output
N10/P12/Q4
Unit 1 11 Basic economic problem

13 Each of the factors of production earns an income.


What are the incomes for land and capital?

land capital
A rent interest
B rent profit
C wages interest
D wages profit
J11/P12/Q1
14 Which statement about the factors of production is correct?
A Capital includes factories and machinery but not roads and ports.
B Enterprise is more often found in the public sector rather than the private sector.
C Labour is the factor that takes risks and can become unemployed.
D Land is the natural factor that can be improved by human action.
J12/P12/Q2
15 Two telecommunications companies are to merge to finance investments in new technology, which
will be more efficient and require smaller buildings. Three hundred workers will lose their jobs.
What will happen to the factors of production used?

land labour capital enterprise


A fall fall rise fall
B fall fall uncertain rise
C rise rise rise rise
D uncertain rise fall fall
N12/P12/Q3
16 Reena makes a living by selling paintings of the town in which she lives. She sells them in an open
air market once a week.
In order to be able to sell more pictures in a week she decides to buy a studio, pay someone to
help in the studio and try to increase demand by advertising in the local paper.
Which factors of production were changed?
A capital and enterprise B enterprise and labour
C labour and capital D labour only
J13/P12/Q3
17 In which case is it possible to set the level of reward before production takes place for the first
factor of production but not for the second?

first factor second factor


A capital land
B enterprise labour
C labour capital
D land enterprise
N13/P12/Q3
Unit 1 12 Basic economic problem

18 What is a factor of production?


A a semi-skilled, young worker
B direct taxes received by a government
C shares in a manufacturing company
D stocks of money held a bank
J14/P12/Q3

19 Which statement about the factors of production is correct?


A Capital includes man-made machines that do not keep their original value.
B Enterprise is a natural factor of production that cannot be taught.
C Labour is an immobile factor that does not change its skill level.
D Land is only agricultural fields that cannot be improved by human effort.
N14/P12/Q2

20 New oil reserves are discovered.


What has increased in supply?

A capital B enterprise C labour D land


J15/P12/Q2

1.2 Opportunity cost and scarcity (Basic economic problem)


21 An unemployed worker accepts a job.
Which of the following is the opportunity cost of this decision?
A the cost of travel to work B the income from the new job
C the leisure time lost D the training in the new job
J03/P1/Q1

22 A hospital cannot treat all the people that need treatment. This is an example of
A excess supply. B limited wants.
C scarcity. D unlimited resources.
J03/P1/Q2, J09/P1/Q5

23 The table shows the various combinations of food and clothing which a village can produce using
all its resources.
food units clothing units
0 500
100 400
200 250
300 50
400 0

What is the opportunity cost to the village of increasing the production of food from 200 to 300
units?
A 50 units of clothing B 100 units of clothing
C 200 units of clothing D 250 units of clothing
N03/P1/Q2
Unit 1 13 Basic economic problem

24 Which statement best explains why drought is an economic problem?


A Drought cannot be controlled.
B Rainfall is unreliable.
C The effects of drought involve the government.
D Water is a scarce good.
J04/P1/Q2
25 In 2002 the government of Zimbabwe diverted US$18 million, originally intended to support private
business, to help feed millions of people threatened by famine. Some of the money was used to
import up to 1.8 million tonnes of corn.
What was the opportunity cost to Zimbabwe of this decision?

A the cost of the extra food B the cost of the 1.8 million tonnes of corn
C the effect on private business D the US$18 million
J04/P1/Q3
26 A woman playing a quiz game starts with no money, but correctly answers the question that is
worth $4000. The next question is worth $10 000 but if she answers incorrectly she will leave the
game with no money.
What is her opportunity cost of choosing to answer the $10 000 question if her answer is
incorrect?

A nothing B $4000 C $6000 D $10 000


N04/P1/Q2, N08/P1/Q5
27 A factory working at full capacity is producing tennis racquets and golf clubs. The
management decides to produce fewer racquets and more clubs because of an increase in
demand for golf clubs.
What is the opportunity cost of producing more golf clubs?

A the cost of retraining some workers to make golf clubs


B the cost of transporting and selling the extra golf clubs produced
C the materials bought to make extra golf clubs
D the tennis racquets that will not now be produced
J05/P1/Q3
28 What is the basic economic problem facing all economies?
A inequality of income B insufficient resources
C low economic growth D shortages of skilled labour
N05/P1/Q1
1

29 A government spends $100 m on employing extra teachers instead of extra nurses.


What will be the opportunity cost of this?
A $100 m B the cost of training extra teachers
C the extra nurses D the reduction in unemployment among teachers
N05/P1/Q3
30 Construction companies are building new houses on land previously used for farming.
What is the opportunity cost to society of this activity?
A improved living conditions B less congestion in city centres
C more homes for new homeowners D some farm output
J06/P1/Q1
Unit 1 14 Basic economic problem

31 A government decides to spend more on defence and, therefore, cannot spend as much on
improving the country’s infrastructure.

What economic idea is illustrated by this decision?

A budget surplus B monetary policy


C opportunity cost D specialization
N06/P1/Q1

32 The table shows the various combinations of food and clothing which a village can produce using
all its resources.

food units clothing units


0 500
100 400
200 250
300 50
400 0

What is the opportunity cost to the village of increasing the production of food from 200 to 300
units?

A 50 units of clothing B 100 units of clothing


C 200 units of clothing D 250 units of clothing
J08/P1/Q5

33 What is the basic economic problem facing all societies?

A how to achieve price stability


B how to keep employment levels high
C the extent to which incomes should be redistributed
D what will be produced, how and for whom?
J09/P1/Q1

34 Commercial companies are cutting down tropical rainforests for hardwood timber.

What is the opportunity cost to society of this activity?

A tax revenue from the sale of the timber


B the environment that is destroyed
C the products made from the timber
D the profits of the companies
J09/P1/Q3

35 What, according to the definition of opportunity cost, is sacrificed when a decision is taken?

A an identical alternative B any possible alternative


C the least valuable alternative D the next best alternative
N09/P12/Q2
Unit 1 15 Basic economic problem

36 Which terms summarise the nature of the economic problem?

A finite resources and limited wants


B finite resources and unlimited wants
C infinite resources and limited wants
D infinite resources and unlimited wants
J10/P12/Q2, J15/P12/Q1

37 The government of a country with a rapidly increasing population decides to switch resources from
investment to increased subsidies to farmers.
What is the opportunity cost of this decision?

A the profit earned by farmers B the rent of the land on which food is grown
C the reduction in investment D the wages of the farm workers
J10/P12/Q4

38 Which economic change would increase the problem of scarcity?

A a decrease in fish stocks B a discovery of a new oil field


C an increase in labour productivity D a reduction in waste
J10/P12/Q5

39 What makes choice an important element in the basic economic problem?

A Increased demand leads to higher market prices.


B Limited resources have many alternative uses.
C Reaching a market equilibrium may take a long time.
D Scarce economic resources are distributed equally.
N10/P12/Q3

40 A government is faced with the choice of spending on either education or healthcare. Of what is
this an example?
A conservation of resources B monetary policy
C opportunity cost D substitution of factors
N10/P12/Q5

41 A firm decides to stop manufacturing ovens and to produce washing machines instead.
What is the opportunity cost to the firm?

A the additional washing machines produced


B the cost of producing ovens
C the cost of producing washing machines
D the loss of the production of ovens
J11/P12/Q2

42 What is meant by the economic problem?

A how to achieve efficiency with the existence of fixed resources and limited wants
B how to allocate resources between public and private sectors
C how to balance unlimited wants against finite resources
D how to decide which methods to use to exploit all resources
J11/P12/Q5
Unit 1 16 Basic economic problem

43 Every business organisation faces the problem of satisfying wants.


What is the reason why wants are not fully satisfied?

A An economy can only produce a limited amount of goods and services.


B Governments cannot print enough money to pay for goods and services.
C There is an over-production of goods and services by business organisations.
D Workers are too skilled for the requirements of the jobs available.
N11/P12/Q3

44 A university rejects 2000 qualified applicants who wish to study there.


What factor of production could have caused the university to make this decision?

A infinite quantity of capital B scarcity of labour


C surplus of land D unlimited supply of enterprise
N11/P12/Q4

45 Economics is primarily concerned with

A allocating scarce resources for unlimited wants.


B controlling unemployment and inflation.
C determining the level of government expenditure.
D studying how new wants and economic resources can be produced.
J12/P12/Q1

46 A student leaves school and decides to spend the next two years at a college to improve her
qualifications.
What is the opportunity cost to the student of taking this decision?

A the cost of the course fees at the college


B the increase in job opportunities she will have as a result of her extra qualifications
C the lost production due to her not being in work
D the money she would have earned if she had been in work for the two years
J12/P12/Q3

47 In China the government is concerned about the level of poverty and the need for more resources
in the poorer regions of the country. As a result, it is increasing its expenditure there and reducing it
in the wealthier regions.
Which economic concept does this government policy illustrate best?

A diseconomies of scale B market forces


C opportunity cost D specialisation
N12/P12/Q1

48 A country with a low income per head discovers large quantities of oil, which eventually makes
everybody better off.
Why is the basic economic problem of scarcity not solved by this discovery?

A People may not get jobs in the oil industry.


B People’s wants are always changing and increasing.
C Prices of oil can fluctuate on the world market.
D Production of oil can damage the environment.
N12/P12/Q2
Unit 1 17 Basic economic problem

49 Why will the economic problem never be solved?

A People will always want more products than can be produced.


B People will never agree on what is the best economic system.
C There will always be an uneven distribution of income.
D There will always be some people unemployed.
J13/P12/Q1

50 Sam wrote a list of how he would prefer to spend his Saturday afternoon.

first choice go to a cricket match


second choice watch the annual town parade
third choice go to the cinema
fourth choice visit relatives

Unfortunately a thunderstorm caused the cricket match and the town parade to be cancelled. Sam
went to the cinema.
What was the opportunity cost of going to the cinema?

A going to the cricket match


B watching the town parade
C visiting his relatives
D losing his Saturday free time
N13/P12/Q1
51 What is the cause of economic scarcity?

A limited wants with limited resources


B limited wants with unlimited resources
C unlimited wants with limited resources
D unlimited wants with unlimited resources
J14/P12/Q1

52 Economics textbooks often start by identifying the existence of the basic economic problem.
What is it that makes this problem ‘basic’?

A It affects all economies and individuals.


B It is the most urgent target of government economic policy.
C It only affects low-income developing economies.
D It relates to the production of raw materials in the primary sector.
N14/P12/Q1

53 A person makes sandwiches at home for five hours each day. She makes 20 sandwiches per hour,
and she sells each sandwich for $2 each.
What is the opportunity cost if she takes a holiday on a working day?

A $2
B $40
C 20 sandwiches
D 100 sandwiches
J15/P12/Q4
Unit 1 18 Basic economic problem

1.3 Production possibility curve


54 An economy is producing at X.

X
200
food
150 Y

0 75 100
machines
What is the opportunity cost of choosing to produce at Y instead of X?

A 25 machines
B 50 units of food
C 75 machines
D 150 units of food
J07/P1/Q4
55 The diagram shows the choices for an individual between leisure and earnings.

24

20

16
hours of leisure X
12
per day
Y
8

0
0 20 40 60 80 100 120
earnings $

What is the opportunity cost to the individual of the extra earnings when moving from position X to
position Y?

A $20 B $80
C 4 hours of leisure per day D 8 hours of leisure per day
N07/P1/Q2, N11/P12/Q1
Unit 1 19 Basic economic problem

56 A country is producing at point X on its production possibility curve which shows how it can allocate
its production between capital goods and consumer goods.
A period of recession then causes some of its factories to close.
Which point could represent the country’s new position?

A B

X
capital
goods C D

O consumer goods
J13/P12/Q2

57 How does a production possibility curve show that scarcity exists?

A It shows that a rise in demand for one of the products increases its price.
B It shows that as more resources are used to produce a product, its price rises.
C It shows that at any point outside the production possibility curve an economy is wasting
resources.
D It shows that there is a limit to the quantity of products that can be produced with existing
resources and technology.
N13/P12/Q2
58 How is an immediate effect of an increase in unemployment illustrated on a production possibility
curve diagram?

A a movement of the production point closer to the curve


B a movement of the production point further inside the curve
C a shift of the production possibility curve inwards
D a shift of the production possibility curve outwards
J14/P12/Q2

59 The diagram shows two production possibility curves for an economy.

What could have caused the change in the


economy’s production possibility curve from
XX to YY?

A a decrease in the price level


B a large number of industrial disputes
C a major earthquake
D an increase in unemployment

N14/P12/Q3
Unit 1 20 Basic economic problem

60 The diagram shows production possibility curves (PPC) for a country that can produce agricultural
products or manufactured products.
Its current PPC passes through points Q and S but the country is currently experiencing
unemployment.

Q R

agricultural
products
P S

O
manufactured products
If there is now full employment at the same time as new agricultural techniques enable an increase
in productivity, what would be the movement on the PPC diagram?

A P to R B P to S C Q to R D S to Q
J15/P12/Q3

1.4 Labour intensive and capital intensive


61 An entrepreneur can use either capital or labour in the production process. The actual
combination changes as the prices of the factors alter.

When is capital most likely to replace labour?

Price of Capital Price of Labour


A Constant Falling
B Falling Rising
C Rising Constant
D Falling Falling
N03/P1/Q23, J06/P1/Q20, N08/P1/Q3

62 What makes an industry capital-intensive?

A It employs many unskilled workers.


B It manufactures expensive products.
C It occupies sites on cheap land.
D It uses a large amount of equipment and a small labour force
N06/P1/Q3

63 A British firm, Dyson, moved production of its vacuum cleaners from the UK to Malaysia.
Why might it have made this change?

A average costs would fall B average revenue would rise


C market share would fall D transport costs would rise
J07/P1/Q20
Unit 1 21 Basic economic problem

Key
Q Ans. Q Ans. Q Ans. Q Ans.
1 A 17 D 33 D 49 A
2 D 18 A 34 B 50 C
3 C 19 A 35 D 51 C
4 B 20 D 36 B 52 A
5 C 21 C 37 C 53 D
6 C 22 C 38 A 54 B
7 A 23 C 39 B 55 C
8 A 24 D 40 C 56 C
9 A 25 C 41 D 57 D
10 A 26 B 42 C 58 B
11 C 27 D 43 A 59 C
12 B 28 B 44 B 60 A
13 A 29 C 45 A 61 B
14 D 30 D 46 D 62 D
15 B 31 C 47 C 63 A
16 C 32 C 48 B
Unit 1 22 Basic economic problem

Detailed Answers

1.1
1-A In a market economy there is freedom to enterprise and the entrepreneur combines all factors
together in a proportion that minimizes the cost. Therefore entrepreneur decides the allocation of
resources in terms of combination of resources used.

2-D All four factors of production are involved in this activity. Land (all natural resources) will be the sea
from which fishes are caught, labour (human efforts) will be the crew employed, capital (manmade
resources) will be the boat and entrepreneur (the boat owner who is combining all these factors of
production together and is taking the risk of loss).

3-C Enterprise (or entrepreneur) is the person who combines all the factors of productions and takes
the risk of loss. In this case, shop owner is the person who will fit into the definition of enterprise

4-B Capital refers to all manmade resources and hence infrastructure will come under the category of
capital whereas land refers to all the natural resources. The question directly refers to capital and
land.

5-C Factors of production are the scarce resources used in a production process. There are four types
of factors of production: land (natural resources), labour (human efforts), capital (manmade
resources) and entrepreneur (risk taker). Skills of a manager will be the human efforts and hence
will come under the category of labour as factor of production.

6-C Natural resources include land whereas human efforts include labour. Hence, Hong Kong is well
supplied in labour and poorly supplied in land.

7-A Factors of production include land (natural resources), labour (human efforts), capital (manmade
resources) and entrepreneur (risk taker). Company shares are the investment undertaken by the
shareholders in a business and investments don’t form a part of any of the above types of factors of
production.

8-A Aircraft comes under the category of capital which includes all the manmade resources.

9-A Capital includes all the manmade resources and hence car comes under the category of capital.

10-A Land includes all the natural resources and hence the river used by a company to draw water will
come under the category of land.

11-C The reward/income for parting away from land (in this case a field) is rent.

12-B Factors of production are all those resources which are used in production of goods and services,
e.g., land, labour, capital, etc.

13-A Rent is an income for land. It is when a person owning land parts away from his or her land he or
she earns rent as a compensation/reward or income. Same goes for capital. When a person
owning capital parts away from the capital by giving it to someone else, he or she earns interest as
a reward/income.
Unit 1 23 Basic economic problem

14-D Land refers to all natural resources. Hence, Land is that natural resource that is utilized in order to
make further goods and resources.

15-B The merger will require smaller buildings so the use of land will fall. It has also been mentioned that
300 people will lose their jobs so use of labor will also fall. Investment into technology will increase
so use of capital will rise. Enterprise, which is the skill required to combine the factors of
production, will also fall since there are fewer firms. Therefore the answer is option A.

16-C Firstly, since Reena has bought a studio, this means she has employed capital into the production
process. Capital is a man-made resource that aids in producing goods, and in the question it has
been clearly stated that the studio will help her sell more pictures, so capital has changed. Also,
Reena hired someone to help her sell pictures, which means labour is being used. So, the correct
answer is option C.

17-D It is possible to set the level of reward for land because rent is predetermined based on external
factors and can easily be calculated before production starts. However, it is not possible to
accurately forecast the level of reward expected from enterprise because it is difficult to know
whether the business will earn a profit or loss and what amount exactly. The level of reward from
the other two factors of production can also be determined to a certain extent. Option D is correct.

18-A Factors of production are inputs that could help in the production of goods & services. The four
main factors of production are labor, capital, land and enterprise. Labor as factor of production is
human effort mental or physical that helps in producing goods. A young semi-skilled worker can
provide labor services to a firm to help it produce a good and therefore option A is correct.

19-A One of the factors of production—the inputs necessary to produce commodities—is capital.
'Capital,' in the context of factors of production, refers to all those man-made machines that aid in
the production process; thus, option A is correct. The phrase regarding capital not keeping its
'original value' merely refers to the imputed cost of depreciation (or capital consumption), which, in
economics, is calculated in terms of opportunity costs, and arises because the asset wears out or
becomes obsolete. The factor of production of enterprise refers to entrepreneurs, who take risks
and combine the other factors of production in order ensure that the firm produces and operates
well; it is not a natural factor of production. Subjects on management are taught in schools and
universities, so option B is wrong. 'Labor' refers to workers, and this is, in most cases, a mobile
factor of production, and its skill level can be changed through education and vocational programs
(among other things), so option C is incorrect. The term 'land' covers all natural resources—
whether it be crude oil or coal or agriculture, etc.—and not just agricultural fields. Also, there have
been improvements in crops through scientific research; option D is, therefore, wrong.

20-D Factors of production are all those resources without which production cannot take place. Land
refers to all natural resources. Since oil is a natural resource, it is classified as land. Therefore,
option D is the answer. Capital refers to all man-made commodities that aid in the production
process or improve factor productivity. Enterprise refers to the people who help bring all the other
factors of production together in order to initiate and manage a firm. Labour refers to all human
effort that is invested into the production process.

1.2
21-C The worker has to choose between a job and the time he can spend in leisure while not at work. By
choosing the job he will forgo the leisure time which will be his opportunity cost

22-C The hospital has limited resources to cater for all the people who come for treatment and
therefore it is an example of scarcity (which arises from limited resources and unlimited wants).
Unit 1 24 Basic economic problem

23-C When the village increases their production of food from 200 to 300 units, production of clothing
falls from 250 to 50 units. Therefore they have to forgo 200 units of clothing (250- 50) which is their
opportunity cost of increasing the production of food.

24-D The economic problem arises from limited resources and unlimited wants, i.e., scarcity. Drought
is an economic problem because water is a resource that is scarce in nature.

25-C The money previously intended for supporting private businesses was now used to feed those
who were threatened by famine. The opportunity cost (the benefit of next best alternative forgone)
of this decision would be the effect on private businesses (in terms of their growth, expansion, etc).

26-B Initially, the woman has won $4000. In case she answers the $10000 question incorrectly she
would have to forgo those $4000 won which will be her opportunity cost (benefit of next best
alternative forgone).

27-D Opportunity cost is the benefit of the next best alternative forgone. The tennis racquets that would
not now be produced because of an increase in the production of golf clubs will be the opportunity
cost.

28-B Basic economic problem arises from limited resources to satisfy all the wants. Hence insufficient
resources is the basic economic problem faced by all economies.

29-C Opportunity cost (the benefit of next best alternative forgone) will be the extra nurses forgone
because of the employment of extra teachers.

30-D Farm-land would be used for the construction of new houses which would lead to a loss of some
farm output. This would be the opportunity cost (benefit of next best alternative forgone) of building
new houses on land previously used for farming.

31-C The country has to forgo the improvement in country’s infrastructure because of an
increased expenditure on defence. This will be the opportunity cost (benefit of next best
alternative forgone) of this decision

32-C When the village increases their production of food from 200 to 300 units they have to forgo 200
units of clothing (250-50 units of clothing) which is their opportunity cost of increasing the
production of food.

33-D The basic economic problem faced by all societies is what to produce, how to produce and for
whom to produce.

34-B The opportunity cost will be the environment that is destroyed because of cutting down tropical
rainforests for hardwood timber.

35-D Opportunity cost is the benefit of next best alternative forgone.

36-B Basic economic problem arises from limited resources and unlimited wants.

37-C Opportunity cost is the benefit of next best alternative forgone. A reduction in investment will be the
opportunity cost of increased subsidies to farmers.

38-A A decrease in fish stocks means a reduction in natural resources which will aggravate the problem
of scarcity.
Unit 1 25 Basic economic problem

39-B Basic economic problem, i.e., limited resources and unlimited wants lead to the making of choice
from alternative uses.

40-C Opportunity cost is the cost of next best alternative forgone. Making a choice between
education or healthcare would lead to opportunity cost.

41-D Opportunity cost is the benefit of next best alternative forgone. If a firm starts producing washing
machines instead of ovens its next best alternative forgone will be the loss of ovens it could have
produced.

42-C The basic economic problem arises because of the fact that there are limited resources to cater for
unlimited wants. The whole scope of economics rests on this economic problem which tries to
tackle how to balance limited resources and unlimited wants.

43-A Wants are not fully satisfied by a business organization because an economy has limited resources
to satisfy unlimited wants of its people and therefore only limited amount of goods can be produced.

44-B A university has not accepted all the students because it is faced with the problem of scarcity of
labour, i.e., it doesn’t have instructors to cater for all the students that have applied and therefore
has to reject some of the students.

45-A Economics is a social science that is concerned with how humans make the best use out of the
scarce resources in order to satisfy their unlimited wants. Hence, option A is correct.
46-D Opportunity cost is the benefit of next best alternative forgone. If a student enrolls in a college
instead of working, the next best alternative forgone (opportunity cost) will be the money that
student could have received by working. Hence, option D is correct.
47-C Opportunity cost is the benefit of the next best alternative given up. In this question, the
government is reallocating resources towards poorer regions by reducing its expenditure on
wealthier regions. This action is best explained by the concept of opportunity cost. Option A applies
only to higher costs when scale of production is increased. Since this question is only concerned
with the government, option B cannot be the answer. Option D applies when production process is
divided so that individuals can become specialized in specific tasks, and so cannot be the correct
answer.
48-B The basic economic problem asserts that scarcity exists in all economies; that is there is finite
amount of resources but unlimited wants. Since people’s wants are changing, the society at one
time will never be able to fulfill all of people’s wants. The discovery of oil reserves may make some
better off but nevertheless will be unable to satisfy all people. Option B is therefore the right
answer. Option A is incorrect because people can still get jobs in other industries. Option C is
incorrect because fluctuations in oil prices will have no impact on oil reserves and can only
marginally change people employed in the oil industry. Option D is irrelevant since environmental
damage has nothing to do with the basic economic problem.

49-A By definition the basic economic problem is that scarcity will always exist in society. That is, people
will demand more than can be produced using finite resources. Option A correctly describes the
problem of scarcity. Other options are economic problems, but they all stem from the existence of
the basic economic problem.

50-C Opportunity cost is the benefit of the next best alternative forgone. Since the thunderstorm
cancelled the cricket match and the parade, the opportunity cost of going to the cinema is the
benefit he would have received from visiting his relatives. Therefore option C is correct.
Unit 1 26 Basic economic problem

51-C Economic scarcity exists because there are finite resources in the world whereas people’s demand
are unlimited. So option C is the answer.

52-A The basic economic problem is that of 'scarcity'—the fact that there are finite resources and
unlimited wants. This problem is considered 'basic' because 'it affects all economies and
individuals,' and is thus a universal problem; this makes option A the correct answer. It is not the
most urgent target of government economic policy (as option B states), and it is also a problem
found in free market economies where governments are not present. It affects all economies, and
not only low-income developing ones, so option C is incorrect as well. Option D is incorrect
because the basic economic problem relates to the lack of resources to produce commodities, not
the production of raw materials in the primary sector.

53-D Opportunity cost refers to the benefit from the next best alternative forgone as the result of an
economic decision which involved a choice. She makes 20 sandwiches per hour, and works 5
hours each day; so, in a normal working day, she can produce 20×5=100 sandwiches. However, if
she takes a holiday, then she will forego all those sandwiches. Those 100 sandwiches will become
the opportunity cost of her decision to take a holiday. This is option D.

1.3
54-B When the country chooses instead of X, it has an increase of machines from 75 to 100 units but a
reduction of food from 200 to 150 units. Hence 50 units of food is the opportunity cost of 25 more
units of machines.

55-C Initial leisure hour on point X is 12. Leisure hour on point Y is 8. When he moves from point X to
point Y he forgoes 4 hours (12 – 8) of leisure per day.

56-C The production possibility curve shows all possible production bundles that an economy can
produce given that it is utilizing all resources efficiently. All points on the PPC are efficient. During a
recession, an economy begins to contract and certain resources become unemployed. If an
economy is not using all of its resources it will produce under the PPC, which is shown by point C.

57-D Production possibility curve shows all the possible combinations of two commodities that can be
produced using existing resources. The concept of scarcity is shown through a PPC as a society
can only produce a limited quantity of the goods with existing resources. Option D is correct.

58-B Unemployment means the society is not utilizing all of its resources and therefore is producing less
than its potential. Since it will be producing less than its potential its production point will be shifted
inside the curve. So option B is correct.

59-C The production possibility curve (PPC) shows the maximum possible combinations of two
commodities which a country can produce using all of its available resources with economic
efficiency—within the constraints of a given state of technology. A major earthquake is a natural
disaster which would significantly reduce the potential productive capacity of an economy, thus
causing the PPC to shift inwards from XX to YY; option C is, therefore, correct. Option A is
incorrect because the price level is irrelevant to the PPC. Option B is incorrect because a large
number of industrial disputes might hamper production, causing an economy to produce inside the
PPC, but not shifting the PPC inwards. An increase in unemployment would mean that labor is not
being fully employed, so option D is incorrect for the same reason: The economy is producing
inside the PPC, but there is no inward shift of the PPC itself.
Unit 1 27 Basic economic problem

60-A The production possibility curve (PPC) shows the maximum possible combinations of two
commodities which a country can produce using all of its available resources with economic
efficiency, within the constraints of a given state of technology. When the economy is experiencing
unemployment, then that means that it is not utilizing all of its resources efficiently; thus, it will
produce inside the PPC. So, the initial point that the country is producing at is P. An increase in
factor productivity can cause varying shifts in the entire PPC. An introduction of agricultural
techniques that enhance productivity will increase the amount of agricultural products that the
economy can produce without forgoing any manufactured products. Since the economy is now also
at full employment, then that means that it will be producing on its PPC. Therefore, the new
possible point at which the economy is producing is R. Thus, the economy moves from P to R,
which is option A.

1.4
61-B Capital will be replaced by labour when it will be more economical for the producer to use capital. It
will be economical in a situation when the price of capital falls and price of labour rises.

62-D Capital intensive industry is one that uses more machines and equipment in proportion to labour.
On the other hand labour–intensive is an industry in which greater proportion of inputs is labour.

63-A Dyson might have moved production of its vacuum cleaners from the UK to Malaysia because of
lower labor wage rates in Malaysia, which would cause its average costs of production to fall. Thus,
the answer is option A.