Chapter 1: Basic Economic Ideas and Resource Allocation

Syllabus

1
Exercises
1. 9708/11 – May/June 2011 – MQ1
The diagram shows the production possibility curves of two economies, X
and Y.

Which statement about the two economies is correct?

A. Both economies always have the identical opportunity costs.
B. Both economies have the same future growth prospects.
C. The opportunity costs are constant in both economies.
D. The two economies can never produce the same combination of products.
2. 9708/11 – May/June 2011 – MQ2
What distinguishes capital from other factors of production?
A. Capital exists only in capitalist market economies.
B. Capital results from the operation of the other factors.
C. The rewards earned by the owners of capital are uncertain.
D. Unlike labour or land, capital must be owned rather than hired or rented.
3. 9708/11 – May/June 2011 – MQ3
What is likely to be greater in a planned economy than a market economy?
A. efficiency
B. flexibility
C. innovation
D. stability
4. 9708/11 – May/June 2011 – MQ4
Which is a normative statement?
A. An increase in the rate of inflation will lead inevitably to an increase in
unemployment.
B. A reduction in unemployment below a certain level will lead to higher
inflation.
C. Inflation can be reduced only by increasing the level of unemployment.
D. Unemployment is more harmful than inflation.
5. 9708/11 – October/November 2011 – MQ1
The diagram shows a production possibility curve for an economy.

2
 Assuming that the production possibility curve remains unchanged, what is
the most likely reason for the movement from point X to point Y?
A. a civil war causing a widespread loss of resources
B. a permanent fall in productivity in both capital and consumer goods
C. a rise in unemployment due to a recession
D. the exhaustion of a natural resource
6. 9708/11 – October/November 2011 – MQ2
What is an example of the factor of production capital?
A. a bank account held by a small firm to be used for future purchases
B. a forest of hardwood trees ideal for furniture making
C. the market value of a company’s shares
D. word processing software used by a writer to complete her new book
7. 9708/11 – October/November 2011 – MQ3
What is the opportunity cost to an unemployed worker who becomes
employed?
A. the leisure they would otherwise have had
B. the value of the goods and services they produce
C. the wages they are paid
D. zero
8. 9708/11 – October/November 2011 – MQ4
Which statement is normative?
A. As a general rule, people are happier in more equal societies.
B. Despite a large increase in income per head, people are no happier today than
they were 50 years ago.
C. Happiness depends not on the absolute level of a person’s income but on his
relative income.
D. The promotion of happiness is a more important goal than the maximisation of
production.

9. 9708/12 – October/November 2011 – MQ1

An individual has an appointment with his bank manager. He has a choice
between travelling to the appointment by car, or leaving the car at home and
travelling by bus and then by train. The costs of the journey are given below.

3
 Given this information, what is the opportunity cost to the individual of
travelling by car rather than by bus and train?
A. $2
B. $4
C. $7
D. $12
10. 9708/12 – October/November 2011 – MQ2
The curve PP in the diagram is the production possibility curve for a country
producing goods X and Y. The production of X is more labour intensive than
the production of Y.

The working hours of the labour force are reduced by law. Which curve
could be the country’s new production possibility curve?
A. TT
B. SS
C. QQ
D. RR

11. 9708/12 – October/November 2011 – MQ3

In Economics, decisions are usually taken ‘at the margin’. What does this
mean?
A. They are concerned with actions that occur in free market not planned
economies.
B. They are concerned with issues on the boundary between macroeconomics
and microeconomics.
C. They are concerned with the choice between normative and positive actions.

4
 D. They are concerned with the effect of adding a further action to the current
level of activity.
12. 9708/12 – October/November 2011 – MQ4
Which factor of production and example are correctly linked?

13. 9708/11 – May/June 2012 – MQ1

The term ‘transition economy’ is used to describe a country that is
A. adopting capital-intensive methods in place of labour-intensive methods.
B. moving from central planning towards the market system.
C. replacing a trade deficit with a trade surplus.
D. substituting manufacturing output for agricultural output.
14. 9708/11 – May/June 2012 – MQ2
In the diagram, JK is an economy’s production possibility curve.

What could cause the curve to shift to GH?

A. a decrease in innovation
B. an increase in the retirement age
C. an increase in the price of energy
D. an increase in the unemployment rate
15. 9708/11 – May/June 2012 – MQ3
What is the opportunity cost to a fully employed economy of increasing
capital investment?
A. a fall in consumption
B. a fall in income
C. a rise in saving
D. a rise in the rate of interest
16. 9708/11 – May/June 2012 –
MQ4
Skilled actors deserve to receive a high income because they bring pleasure to
people who attend the theatre. What can be concluded about this statement?
A. It is a normative statement because both services and goods are economic
outputs.
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B. It is a normative statement because it expresses an opinion.

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 C. It is a positive statement because actors do bring pleasure to people.
D. It is a positive statement because greater skill results in higher
pay. 17. 9708/12 – May/June 2012 – MQ1
What is a characteristic of a planned economy?
A. All property is owned privately.
B. All resources are allocated centrally.
C. Supply and demand always determine prices.
D. There is competition in most markets.
18. 9708/12 – May/June 2012 – MQ3
The growing domestic, agricultural and industrial demand for water is
leading to a world shortage of water. Which change would reduce this
problem of water scarcity?
A. an increase in demand for food
B. an increase in population growth
C. climate change which leads to lower rainfall
D. D more efficient water management
19. 9708/11 – October/November 2012 – MQ1
Which type of firm is able to exploit division of labour to the greatest extent?
A. a bakery employing two workers making a range of bread and cakes
B. a motorcycle assembler employing two hundred workers making a
standardised model
C. a tailor employing ten workers making men’s suits to order
D. a well established furniture maker employing three hundred workers making
high quality individual items

20. 9708/11 – October/November 2012 – MQ2

The diagram shows the production possibility frontier of a desert island
economy where the inhabitants live off just two commodities, coconuts and
fish.

What explains the shape of the production possibility frontier?

A. Coconuts and fish are perfect complements.
B. Coconuts and fish are perfect substitutes.
C. Fishing and coconut growing are equally efficient.
D. The opportunity cost of fish increases as more time is devoted to fishing.
21. 9708/11 – October/November 2012 – MQ3
India is failing to reach its full economic potential because of poor rail, road
and electricity infrastructure. Its problem is not lack of government spending

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 but a lack of skilled civil engineers. Which factors of production need to be
increased?
A. capital and land
B. enterprise and labour
C. labour and capital
D. land and enterprise
22. 9708/11 – October/November 2012 – MQ4
There is a worldwide shortage of oil. The diagram shows the consumption
and production of oil (billion tonnes) in 2007 for selected countries.

What can be concluded from the diagram?

A. In Britain, oil has zero opportunity cost.
B. In Japan, there is self sufficiency in oil.
C. In Russia, the problem of oil shortage has been solved.
D. In the United States, rationing will be the only solution to oil shortage.
23. 9708/12 – October/November 2012 – MQ1
What is the defining characteristic of a mixed economy?
A. one in which the allocation of resources is determined partly by the state and
partly by individual producers and consumers
B. one in which there are both monopolies and purely competitive industries
C. one in which there are features of both more economically developed and less
economically developed economies
D. one which produces a mixture of agriculture and industrial products
24. 9708/12 – October/November 2012 – MQ2
In the diagram the original production possibility curve is LM.

What might cause the curve to shift to NP?

A. a higher retirement age

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 B. a reallocation of resources
C. the depletion of natural resources
D. the underemployment of resources
25. 9708/12 – October/November 2012 – MQ3
The diagram shows a production possibility curve for an economy that
produces only two goods, X and Y.

The economy produces 1200 of good X and produces on its production

possibility curve. Which quantity of good Y is given up?
A. 400
B. 600
C. 800
D. 1000
26. 9708/13 – October/November 2012 – MQ1
Why can division of labour benefit an economy?
A. Costs of trading are reduced.
B. Individual workers learn a wider range of skills.
C. Less money is required as a medium of exchange.
D. The total supply of goods and services rises.
27. 9708/13 – October/November 2012 – MQ2
The production possibility curve for an economy producing capital goods and
consumer goods is represented by the line PQ.

What is the opportunity cost of producing OS of consumer goods?

A. OR of capital goods
B. PR of capital goods
C. SQ of consumer goods

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 D. SQ of consumer goods + PR of capital goods
28. 9708/13 – October/November 2012 – MQ3
How is labour allocated in a market economy and in a planned economy?

29. 9708/11 – May/June 2013 – MQ1

The diagram shows the production possibility curve (PPC) of an economy
that produces goods and services.

What might cause the shift of the PPC from XY1 to XY2?
A. a decrease in the demand for services
B. a decrease in the efficiency in the production of services
C. a decrease in the opportunity cost of producing services
D. a decrease in the resources employed in services
30. 9708/11 – May/June 2013 – MQ2
An economy has changed from a command economy to a market economy.
What might increase after this change?
A. the amount of centralised decision making
B. the extent of externalities
C. the level of government economic intervention
D. the production of merit goods
31. 9708/11 – May/June 2013 –
MQ3
What is most likely to be a result from the division of labour?
A. a decrease in job satisfaction
B. a decrease in productivity
C. an increase in the cost of living
D. an increase in unit labour costs
32. 9708/12 – May/June 2013 – MQ1
10
 A government minister states that the main economic benefit of locating a
new factory in a coastal region is the 500 jobs it will create. What does this
statement imply about the coastal region?
A. Alternative employment opportunities are scarce.
B. Job seekers have a wide range of choices open to them.
C. Labour is a scarce resource.
D. Unemployment is at a low level.
33. 9708/12 – May/June 2013 – MQ2
The diagram shows two production possibility curves (EF and GH), before
and after technological progress has taken place.

After technological progress has taken place, what is the opportunity cost in
capital goods of producing OX consumer goods?
A. MH
B. OH
C. OM
D. YF
34. 9708/12 – May/June 2013 – MQ3
The table shows indicators for four countries undergoing a transition to a
market economy. Which country has achieved the most indicators of a
successful transition?

35. 9708/12 – May/June 2013 – MQ4

A kitchen manufacturer wanted to become more efficient. It decided to move
to an industrial estate and to increase the division of labour in the
manufacture of its products. Which statement about the division of labour is
correct?
A. It occurs only in manufacturing industry.
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 B. It occurs only in market economies.
C. It occurs only when similar firms are located in the same area.
D. It occurs only when workers become more specialised.
36. 9708/13 – May/June 2013 – MQ1
What is likely to occur when an economy moves from state planning to a
market system?
A. Consumer choice is reduced.
B. Enterprise is discouraged.
C. The amount of innovation declines.
D. The output of merit goods is reduced.
37. 9708/13 – May/June 2013 – MQ2
The diagram shows a production possibility curve for an economy that produces
only two goods, X and Y.

The economy produces 400 of good Y and produces on its production possibility
curve. Which quantity of good X is given up?
A. 600
B. 800
C. 1200
D. 1600
38. 9708/13 – May/June 2013 – MQ3
In the recession of 2011 some governments decided to reduce expenditure
and decrease the numbers working in the public sector. Trades unions
organised a mass demonstration in protest. Which question relating to the
government decision is a normative question rather than a positive question?
A. How should public sector industries be run?
B. What goods and services are produced by the public sector?
C. When the government reduced its expenditure what happened to the level of
unemployment?
D. Why was there a trade union protest?
39. 9708/11 – October/November 2013 – MQ1
What will encourage a higher degree of division of labour?
A. firms wishing for a greater level of self-sufficiency
B. firms wishing to increase their flexibility in production
C. firms wishing to raise their level of productivity
D. firms wishing to reduce their level of risk
40. 9708/11 – October/November 2013 – MQ2
The diagram shows a country’s production possibility curve.
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 What could allow the economy to move from M to N in the long run?
A. an increase in consumer spending
B. an increase in demand for exports
C. an increase in government spending on pensions
D. an increase in investment
41. 9708/11 – October/November 2013 – MQ3
Which statement about factors of production is correct?
A. All factors of production can earn income for their owner.
B. The factor capital includes human capital, money capital and physical capital.
C. The factor labour involves only physical effort.
D. The natural resources classed as land are in unlimited supply.
42. 9708/12– October/November 2013 – MQ1
‘From the age of twelve I made a living by buying towels, needles, shampoo
and soap and e-selling them as a street vendor. Now, I run three hotels in
Hanoi’ - Duong Than Binh. Which factors of production are likely to be
involved in the above events?
A. land only
B. land and labour only
C. land, labour and capital only
D. land, labour, capital, enterprise
43. 9708/12– October/November 2013 – MQ2
What is the correct order of these economic concepts?

44. 9708/13– October/November 2013 – MQ1

What is not a factor of production?
A. fish stocks
B. money
C. oil reserves
D. roads
45. 9708/13– October/November 2013 – MQ2
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 Two workers, George and Zaheer, can produce the following amounts in one
working day if they concentrate on producing only one of the products.

First they decide to produce for themselves the 6 units of food they need to
survive. Then they specialise in the product at which they are relatively
efficient. What will be the total output of clothing and shoes, in addition to
the 12 units of food, that is produced in one working day?

46. 9708/11– S2011 – MQ14

47. 9708/11– S2011 – MQ17

48. 9708/11– W2011 – MQ16

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49. 9708/11– W2011 – MQ17

50. 9708/13 – W2012 – MQ17

51. 9708/12 – W2013 – MQ16

52.9708/11– S2015 – MQ1

Which combination of events must increase the level of scarcity in an economy?
A discovery of new oil reserves and higher saving ratios
B improved application of technology and new invention
C less certain weather patterns and a fashion for greater consumption
D more efficient power generation and a reduced birth rate

53.9708/11– S2015 – MQ2

Some people are shipwrecked on a tropical island and allocate their time
between gathering coconuts and fishing. Each individual is equally productive in
collecting coconuts or catching fish.
Which diagram represents the production possibility curve of this community?
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54.9708/11– S2015 – MQ3
Which characteristic of money is most essential if it is to serve effectively as a
store of value?
A divisibility
B liquidity
C portability
D scarcity

55.9708/11– S2015 – MQ4

A worker can make 10 hats or 5 pairs of shoes in a day. In the market, three
hats can be sold at the same price as two pairs of shoes.
The worker should make
A hats only.
B shoes only.
C 4 hats and 3 pairs of shoes daily.
D 6 hats and 2 pairs of shoes daily.

56.9708/11 – S2015 – MQ19

Country M specialises in the production of cars while country N specialises in the

production of televisions. They then trade with each other. What is most likely to
reduce the level of specialisation and trade?

A There is rising productivity in the production of cars in M and televisions in N.

B There is a change from fixed to floating exchange rates between M and N.
C There is a decrease in the costs of transporting cars and televisions between M and
N.
D There is an increase in the mobility of factors of production within M and within
N.

57.9708/12 – S2015 – MQ2

The transition of the former Soviet Union from a planned economy towards a
market economy was accompanied by a reduction in the proportion of
incomes that households saved.
What could explain this?
A an increase in income inequality
B an increase in job insecurity
C increased availability of consumer goods

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D the introduction of charges for hospital treatment

58.9708/12 – S2015 – MQ3

59.9708/13 – S2015 – MQ1

What is the fundamental assumption of the economic problem?
A Factors of production are finite.
B Individuals are the best judges of their own wellbeing.
C Individuals can be relied upon to behave rationally.
D The principal aim of private firms is profit maximisation.

60.9708/13 – S2015 – MQ2

To improve their economic performance, Eastern European countries have
switched from planned economies to mixed economies.
What is likely to be the most common outcome of such a change?
A short-term and long-term success in improving economic performance
B short-term and long-term failure in improving economic performance
C short-term failure and long-term success in improving economic performance
D short-term success and long-term failure in improving economic performance

61.9708/13 – S2015 – MQ3

1
What increases as a result of the change from PQ to PR?
A the price of private goods
B the price of public goods
C the opportunity cost of private goods
D the opportunity cost of public goods

62.9708/13 – S2015 – MQ4

63.9708/13 – S2015 – MQ19

A trading country can produce two goods, X and Y. It specialises completely in
the production of good Y.
What will be the opportunity cost to the country of consuming additional
imports of good X?
A the additional imports of good X
B the increase in the resources required to produce good X
C the reduction in the domestic consumption of good Y
D the reduction in the resources available to produce good Y

64.9708/12 – W2015 – MQ1

Which question does not directly refer to the basic economic problem?
A What goods and services should a firm produce?
B What price should a firm charge?
C What production methods should a firm use?
D Who should receive the goods and services that a firm produces?

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65.9708/12 – W2015 – MQ2

66.9708/12 – W2015 – MQ3

What can be concluded from the diagrams?

A Future growth prospects have been harmed.
B The level of unemployment has fallen.
C The opportunity cost of consumer goods has risen.
D The proportionate growth in production is greater in consumer goods.

67.9708/12 – W2015 – MQ4

What term is used by economists for the income received by the factor
of production enterprise?
A capital
B interest

1
C profit
D revenue

68.9708/12 – Feb/Mar 2016 – MQ1

69.9708/12 – Feb/Mar 2016 – MQ2

What confirms that scarcity exists?
A A product has an opportunity
cost.
B The demand for a product has risen.
C The government has set a minimum price for a product.
D The supply of a product has fallen.

70.9708/12 – Feb/Mar 2016 – MQ3

1
What explains the shape of the production possibility frontier?

2
A Coconuts and fish are perfect complements.
B Coconuts and fish are perfect substitutes.
C The inhabitants consume more fish than coconuts.
D The opportunity cost of fish is constant as more time is devoted to fishing.

71.9708/11 – S2016 – MQ1

72.9708/11 – S2016 – MQ2

The transition of centrally planned economies to market economies was accompanied
by a significant change in the composition of output.
What was an immediate consequence of this transition?
A a build-up of unsold stocks of goods
B an increase in exports of goods
C an increase in structural unemployment
D decreasing prices of goods and services

73.9708/11 – S2016 – MQ3

2
Which statement about the two economies is correct?
A Both economies always have identical opportunity costs.
B Both economies have the same future growth prospects.
C The opportunity costs are constant in each economy.
D The terms of trade for both countries will be one capital good for one consumer
good.

74.9708/11 – S2016 – MQ4

A production possibility curve shows labour-intensive farming output and capital-
intensive manufacturing output.
What would not cause a shift in this curve?
A a reduction in sales tax on manufactured products
B better training of workers in the manufacturing sector of the economy
C improvements in the productivity of agricultural machinery
D the reclamation of land to be used for both agriculture and manufacturing

75.9708/12 – S2016 – MQ1

What can be concluded from the diagram?

A In Britain, oil had zero opportunity cost.
B In Japan, there was self-sufficiency in oil.
C In Russia, there was no shortage of oil.
D In the United States, rationing was the only solution to oil shortage.

76.9708/12 – S2016 – MQ2

What is necessary for effective specialisation?
A a barter system
B a medium of exchange
2
C a production possibility curve

2
D a system of trade protection

77.9708/12 – S2016 – MQ3

What could have caused this shift?

A an increase in employment among the existing labour force
B an increase in the rate of interest
C the closing of an inefficient factory
D the discovery of a new resource

78.9708/12 – S2016 – MQ4

Recently, thousands of ancient Roman coins were discovered buried in a field in the
UK. Funds were raised by a museum to buy them.
What function of money did the coins retain?
A a medium of exchange
B a standard for deferred payments
C a store of value
D a unit of account

79.9708/13 – S2016 – MQ1

2
They wish to increase production of cakes from 15 units to 25 units. What is the
opportunity cost?
A 10 units of cake
B 15 units of cake
C 20 units of bread
D 50 units of bread

80.9708/13 – S2016 – MQ2

Which statement is the most valid reason for government intervention in a free market
economy?
A Consumers are well informed, making it difficult for producers to make
profits. B Health and education are not available in sufficient quantities.
C Producers are motivated by profit maximisation.
D There are many competitive firms and not enough sole suppliers.

81.9708/13 – S2016 – MQ3

82.9708/11– S2014 – MQ1

What is likely to occur as a result of a permanent rise in unemployment resulting in
loss of skills?
A a reduction in the economy’s long-run production possibility

2
B a reduction in the scarcity of resources
C an increase in the cost of allocating resources
D an increase in the number of adults experiencing the economic problem

83.9708/11– S2014 – MQ2

What is likely to be the short-run consequence of replacing central planning with a
market-based system?
A a decrease in the rate of inflation
B a lower rate of return on capital investment
C a more equal distribution of income and wealth
D an increase in the level of unemployment

84.9708/11– S2014 – MQ3

85.9708/11– S2014 – MQ4

An American bought an English football team in 2013. The money to purchase
the club came from loans, which meant future interest payments of more than US
$95 million. Which function of money is best illustrated by this transaction?
A double coincidence of wants
B general acceptability

2
C standard of deferred payments
D store of value

86.9708/12– S2014 – MQ1

By 2030, as the human population grows, the world will need at least 50% more food,
45% more energy and 30% more water from the same resources. What does this
statement directly indicate?
A comparative advantage
B merit goods
C negative externalities
D the economic problem

87.9708/12– S2014 – MQ2

88.9708/12– S2014 – MQ3

Which is a normative statement?
A A reduction in unemployment below a certain level will lead to higher inflation.
B An increase in the rate of inflation will lead inevitably to an increase in
unemployment.
C Inflation can be reduced only by increasing the level of unemployment.
D Unemployment is more harmful to economic welfare than inflation.

89.9708/12– S2014 – MQ4

2
90.9708/13– S2014 – MQ1
One of the central themes of economics is that resources are scarce.
What is certain from this?
A Difficult choices are unavoidable for economic agents.
B Food shortages will become more severe over time.
C Resource allocation cannot be left solely to the price mechanism.
D There will be a continuing upward trend in commodity prices.

91.9708/13– S2014 – MQ2

92.9708/13– S2014 – MQ3

A country is producing electrical goods and medicines at full capacity. An innovation
is developed that enables the country to produce a new medicine which becomes in
great demand.
How would this be represented by its production possibility curves?

2
A as a movement from W to X
B as a movement from X to Y
C as a movement from X to Z
D as a movement from Y to X

93.9708/13– S2014 – MQ4

What would encourage the growth of the international division of labour?
A an improvement in transport systems
B instability in international exchange rates
C restrictions on the movement of resources
D the widespread introduction of tariffs

94.9708/01– 2016 – MQ1

What is most likely to be a result from the division of labour?
A a decrease in job satisfaction
B a decrease in productivity
C an increase in the cost of living
D an increase in unit labour costs

95.9708/01– 2016 – MQ2

96.9708/01– 2016 – MQ4

2
97.9708/11– W2016 – MQ1

98.9708/11– W2016 – MQ2

99.9708/11– W2016 – MQ3

2
What could cause the curve to shift to XZ?
A a fall in productivity in manufacturing
B a fall in the price of manufactured goods
C a higher demand for manufactured goods
D an improvement in manufacturing technology

Answers

1 2 3 4 5
C B D D C

6 7 8 9 10
D A D A B

11 12 13 14 15
D D B C A

16 17 18 19 20
B B D B C

21 22 23 24 25
C C A C B

26 27 28 29 30
D B B B B

31 32 33 34 35
A A A C D

36 37 38 39 40
D B A C D

41 42 43 44 45
A D D B C

2
46 47 48 49 50
D D B D A

51 52 53 54 55
D C A D A

56 57 58 59 60
B C C A C

61 62 63 64 65
D D C B C

66 67 68 69 70
C C A A D

71 72 73 74 75
B C A A C

76 77 78 79 80
B D C C B

81 82 83 84 85
B A D B C

86 87 88 89 90
D B D C A

91 92 93 94 95
A C A A C

96 97 98 99
D C B D