2

1 What is necessary to achieve Pareto efficiency?

A Both consumers and producers must be made better off.

B Everybody must be made equally better off.
C One person must benefit without anyone else being worse off.
D The welfare gains must exceed the welfare losses.

2 A local council is considering building a passenger terminal at a port so that it can benefit the
large cruise ships that dock there. It undertakes a cost–benefit analysis.

What would be included as an external cost in the local council’s cost–benefit analysis?

A the cost of a ticket for a passenger to travel on a cruise ship

B the cost of fuel to operate the cruise ships
C the costs paid by cruise ships when they dock at the port
D the cost to a fishing fleet of relocating to another port

3 The expected marginal private benefits (MPB), marginal social benefits (MSB), marginal private
costs (MPC) and marginal social costs (MSC) for the building of a new road are shown in the
diagram. The government intervenes so that the socially desirable output is achieved.

MSC

price MPC

MSB

MPB

O Q1 Q2 Q3 Q4
quantity

Which combination shows the equilibrium output without government intervention and with
government intervention?

without government with government

intervention intervention

A Q4 Q1
B Q3 Q2
C Q3 Q4
D Q4 Q1

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4 A rational consumer chooses what quantities of two products Y and Z to purchase with a given
income.

MUY and MUZ are the additions to total utility that would result if the consumer were to purchase
an additional unit of each product.

PY and PZ are the current prices of the two products.

Which outcome would represent consumer equilibrium?

A when MUY = MUZ

B when MUY  PY = MUZ  PZ

C when MUY  PZ = MUZ  PY

D it is not possible to tell from the information available

5 The diagrams show a consumer’s indifference curves (IC) and budget lines (BL) for an
inferior good and a normal good.

Which diagram shows the effect of a cut in income tax on the consumer’s choice?

A B

normal BL2 normal BL2

good good
BL1 BL1
IC2

IC2
IC1 IC1
O O
inferior good inferior good

C D

normal BL2 normal BL2

good good
BL1
IC2 BL1 IC2
IC1
IC1

O O
inferior good inferior good

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6 What is marginal cost?

A the difference between the total cost of producing n units and n – 1 units of output
B the difference between the average variable cost of producing n units and n – 1 units of
output
C the difference between the average total cost of producing n units and n – 1 units of output
D the average fixed cost of producing one more unit of output

7 The table shows the production and total cost of a firm.

production (tonnes) total cost ($)

0 20
1 30
2 35
3 40
4 45
5 50

What is the average variable cost of producing 5 tonnes of output?

A $4 B $5 C $6 D $10

8 The diagram shows the long-run total cost (LRTC) curve of a firm.

LRTC

costs

O W X Y Z
output

At which output is the long-run average total cost at its minimum?

A OW B OX C OY D OZ

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9 Which combination of statements about small firms and large firms is correct?

small firms large firms

A are more common in face high barriers to exit

manufacturing than in services
B are more numerous do not experience
than large ones diseconomies of scale
C can do well when each item may arise from internal
produced must be different growth or mergers
D cannot have any monopoly power cannot earn supernormal profits

10 Why might the long-run equilibrium of a profit-maximising firm in a monopolistically competitive

market differ from its short-run equilibrium?

A Advertising expenditure is possible.

B There are low barriers to entry.
C Firms experience diminishing returns.
D Innovation reduces the monopoly power of firms.

11 The diagram shows the cost and revenue curves of a monopolist.

price
MC

AC
P1

AR

O Q1
quantity
MR

What would be the aim of the firm if it chose to produce at Q1P1?

A revenue maximisation
B profit maximisation
C sales maximisation
D growth maximisation

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1 What is an example of a negative externality?

A Lower profit due to increased competition from new firms entering the market.
B Reduced government funding for a museum.
C The increase in noise levels from aircraft due to the expansion of a large city airport.
D The increase in production costs due to an increase in the cost of importing raw materials.

2 The diagram shows a firm operating in monopolistic competition.

At which point is the firm allocatively efficient?

revenue MC AC
/ costs

A
B

MR AR
O D output

3 The amount of training undertaken in a mixed economy is not socially optimal.

What could explain this?

A Experienced educators are a scarce resource.

B In a mixed economy training is a public good.
C The individual’s benefit from training is less than the benefit to society.
D Training is a large variable cost for firms.

4 Four bus companies control more than two-thirds of the market in a country.

Critics claim that these companies fix prices on some routes to maximise revenue whilst lowering
prices on other routes to stop smaller competitors entering the market.

Which anti-competitive practices are these companies accused of?

A collusion and limit pricing

B collusion and price leadership
C limit pricing and price discrimination
D price leadership and x-inefficiency

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5 On a diagram the slope of a consumer’s budget line becomes steeper.

What can definitely be concluded from this?

A The consumer’s income has fallen.

B The consumer’s income has risen.
C The price has decreased for the product on the horizontal axis.
D The price has increased for the product on the horizontal axis.

6 The diagram shows two indifference curves and two budget lines for goods X and Y.

good Y
Y

H
F
G
IC2

IC1
O X1 X2
good X

The consumer’s initial position is at point F. The consumer’s preferred final position becomes
point H.

What does the movement from F to G represent?

A the income effect of a price fall for X

B the price effect of a price change for X
C the substitution effect of a price fall for X
D the substitution effect of a price rise for X

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7 The table shows the total costs at different levels of output for a firm producing chairs.

output total cost

(chairs) ($)

0 50
1 60
2 64
3 77
4 94
5 114

What is the average variable cost when output is 4 chairs?

A $11 B $17 C $44 D $23.50

8 At which level of output will a firm achieve the aim of sales maximisation?

A where AC = AR
B where AC = MC
C where MC = AR
D where MR = zero

9 In market economies firms can operate under monopolistic competition.

Which feature is not typical of this type of market?

A non-price competition through advertising

B price leadership with few large firms
C promotion of differentiated products
D unrestricted entry results in long-run normal profit

10 When will the ‘principal-agent’ problem occur?

A when managers are not allowed to become shareholders

B when members of a cartel collude to gain higher profit
C when one firm dominates the market
D when owners have different objectives to managers

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11 Which feature of oligopoly is being assumed when the demand curve for an individual firm is as
shown?

price D

O quantity

A price discrimination
B price leadership by the dominant firm
C interdependence between firms
D collusion between firms

12 The table provides data on the number and value of mergers in Europe and North America
between 2014 and 2017.

Europe North America

year
number value (euro) number value (US dollar)

2014 17 000 980 billion 14 000 2289 billion

2015 15 500 1161 billion 14 500 2533 billion
2016 18 100 1003 billion 15 100 1858 billion
2017 18 000 980 billion 18 500 1822 billion

What can be deduced from the table?

A The average value of a merger in Europe was higher in 2017 than 2014.
B The difference in the number of mergers in Europe and North America was the same in 2014
and 2016.
C The value of mergers each year in US dollars was always lower in Europe.
D The number of mergers each year was always higher in Europe.

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1 Some multinational oil companies extracting oil in developing countries are now required to repair
the damage they do to the environment.

Which best describes the total costs incurred by the oil companies in such circumstances?

A external costs
B private costs plus external costs
C social costs plus external costs
D social costs plus private costs

2 In an economy, no one can be made better off without making someone else worse off.

What does not necessarily follow from this?

A The conditions for allocative efficiency have been met.

B The conditions for productive efficiency have been met.
C The distribution of income is socially acceptable.
D The economy is operating at a point on its production possibility curve.

3 A government decided to approve a road building scheme because it was socially beneficial. In
making its decision it calculated private costs at $800m, private benefits at $800m and external
costs at $150m.

What must have been true about the external benefits of the scheme?

A External benefits equalled private benefits.

B External benefits exceeded external costs.
C External benefits exceeded $200m.
D There were no external benefits.

4 What is it called when a consumer’s marginal utility is greater than the price paid for the good?

A a Giffen good
B an inferior good
C consumer surplus
D producer surplus

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9 In which type of market structure are commercial banks usually found?

A perfect competition, because they all link their interest rates to that of the central bank
B perfect competition, because they offer identical products and services
C monopolistic competition, because a competitive market prevents them making excess
profits
D oligopoly, because they are affected by the actions of other banks

10 What is a condition for operating a successful cartel?

A a large number of firms in the industry

B each firm has a differentiated product
C low barriers of entry to the industry
D strictly enforced production quotas

11 Which assumption is essential for a market to be contestable?

A The market is supplied by a large number of firms.

B Firms are free to enter and leave the market.
C Firms cannot earn abnormal profits in the short run.
D Firms produce differentiated goods.

12 What is generally associated with the principal-agent problem?

A Directors prefer company growth to greater shareholder dividends.

B Managers ignore workers’ concerns about safety in the workplace.
C Shareholders determine the price of products.
D Workers go on strike against managers’ reorganisation plans.

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