QuestionBank AS ECONOMICS. tutor2u. Author: Geoff Riley (Eton College)

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1 AS ECONOMICS QuestionBank 2005 Multiple choice and true-false questions to test your knowledge and understanding of key topics in AS Economics Author: Geoff Riley (Eton College) tutor2u 2004 All Rights Reserved

2 CONTENTS 1 REVISION TESTS Macroeconomics Revision Test (1) Macroeconomics Revision Test (2) Microeconomics Revision Test (1) Microeconomics Revision Test (2) MICROECONOMICS Introductory Economic Concepts Production Possibility Frontier (PPF) The Theory of Demand The Theory of Supply Price Elasticity of Demand Cross Price and Income Elasticity of Demand Price Elasticity of Supply Market Equilibrium and Changes in Equilibrium Prices Maximum and Minimum Prices Consumer and Producer Surplus Government Intervention: Taxation and Subsidies Markets in Action Production and Costs Economies and Diseconomies of Scale Market Failure and Government Failure Monopoly and Competition Public and Merit Goods External Costs and Benefits Market Failure and Government Intervention MACROECONOMICS Introduction to Macroeconomics Interpreting Macroeconomic Data Growth and the Economic Cycle Aggregate Demand Aggregate Supply Equilibrium National Income Monetary Policy and the Exchange Rate Fiscal Policy Supply-side Policies Inflation Unemployment and the Labour Market The Balance of payments International Trade...198

3 Introduction About QuestionBank 2005 There are over 650 multiple-choice and true-false questions in this edition of the AS Economics QuestionBank. They are designed to cover the key aspects of the AS Economics specifications of all the major examination boards. The questions are organised into sub-sections so that you can test your knowledge and understanding of key concepts and topics as you work through your course. All the questions are individually and sequentially numbered. On the following page there is a blank worksheet for you to use to record your answers to each quiz. Your teacher may ask you to try certain questions or to work through a complete section. Print out and use this worksheet to note down the questions you have attempted, your answer and the correct answer. You will find the answers to each section directly after the questions (but on a separate page!). Good luck with your studies. Best wishes Geoff Riley Head of Economics Eton College tutor2u Page 3

4 Answer sheet Name Question No Your answer Correct answer or? Total score tutor2u Page 4

5 1 Revision Tests tutor2u Page 5

6 1.1 Macroeconomics Revision Test (1) 1. Which one of the following is NOT an example of the use of government fiscal policy? A change in a) Government spending on the National Health Service b) Interest rates c) The size of the budget deficit d) A tax imposed on imports of goods and services 2. Which one of the following would cause an outward shift of the long run aggregate supply curve? An increase in a) The demand for credit b) The rate of consumer price inflation c) The volume of exports produced d) The productivity of labour and capital inputs 3. The chart below shows real consumer spending in the UK for each year from 1987 to From the chart it can be seen that a) The real level of consumer spending fell in 1995 b) Consumer spending grew more strongly in the second half of the 1990s than the first half of the same decade c) The UK economy was in recession in 1991 and 1992 d) The level of consumer spending was at its highest in 1988 tutor2u Page 6

7 General Price Level LRAS P2 P1 SRAS1 AD1 AD2 Y1 Y2 Yfc Real National Income 4. The change in aggregate demand shown in the diagram above could have been caused by all of the factors below except a) An increase in the level of household disposable income b) An increase in the level of government borrowing c) A fall in the value of the sterling exchange rate d) An increase in the level of direct taxation for consumers and businesses 5. Which of the following is likely to decrease short run aggregate supply in an economy? a) A rise in the price of raw materials and components b) Improvements in production technology c) Increased geographical mobility of labour d) A rise in business confidence 6. Supply-side economic policies are most likely to be concerned with influencing a) The value of the UK exchange rate against the Euro b) The long run trend rate of economic growth c) Short run fluctuations in the general price level d) Short run fluctuations in the volume of UK exports sold overseas tutor2u Page 7

8 7. The chart above provides information on house prices in the UK from data published by the Halifax and the Nationwide, two of Britain's leading mortgage providers. From the data it can be seen that a) UK House prices were at their lowest in January 2001 b) The Nationwide has sold fewer houses than the Halifax during the period c) The UK housing market experienced a recession during 2003 d) On average, house prices have risen by more than ten per cent per annum since Other things being equal, a rise in interest rates in the UK is most likely to a) Decrease the external value of the pound against other currencies b) Decrease the demand for new homes c) Decrease the propensity to save among consumers d) Decrease the level of government spending on public and merit goods 9. Which one of the following is a supply-side policy to reduce the level of unemployment? a) A cut in interest rates b) An increase in the real value of unemployment benefits c) A reduction in the basic rate of income tax from 22% to 20% d) A cut in spending on the Government s New Deal programme 10. If the short run aggregate supply curve is drawn as perfectly inelastic, an increase in aggregate demand will lead to an increase in a) Inflation b) Real national output c) Both inflation and real national output d) Real national output and employment tutor2u Page 8

9 11. In the short run an increase in the government s budget deficit is most likely to reduce a) The demand for imported goods and services b) Unemployment c) Interest rates d) Inflation 12. A decision by the Bank of England to cut UK interest rates at a time when the value of the UK exchange rate is falling is most likely to lead to an increase in a) Long run aggregate supply b) Unemployment c) The trade surplus in goods and services d) Aggregate demand 13. The chart above shows the household savings ratio for the UK for each year from 1990 to From the data shown in the chart above we can say that a) Consumers were spending less in 2001 than they were in 2000 b) Interest rates were higher in 1992 than there were in 2001 c) The average propensity to save has fallen since 1994 d) The number of households in debt has increased since Other factors remaining the dame, a 10 per cent fall in the UK exchange rate is most likely to lead to a) A fall in the UK price of imported food and drink b) A rise in the foreign price of UK exports of cars c) Higher demand for imported televisions into the UK d) Higher demand for exports of digital cameras out of the UK tutor2u Page 9

10 15. Economic growth occurs when there is an increase in a) Aggregate demand b) The rate of inflation c) Wage rates d) Productive capacity 16. Which one of the following would not be regarded as a macro-economic government objective? a) Achieving a steady rate of economic growth b) Increasing capital investment and productivity in the steel industry c) Keeping the rate of consumer price inflation within target d) Reducing the rate of claimant count unemployment 17. The level of structural unemployment is most likely to be reduced by a) Reducing interest rates b) Reducing tariff barriers on imports of new technology c) Increasing funding for training schemes for the unemployed d) Decreasing capital investment grants for small businesses 18. The diagram above shows the annual rate of growth of real GDP for the Euro Zone countries and the UK. From the data it can be seen that a) The UK has grown faster than the Euro Zone throughout the period shown b) Unemployment has fallen in both the Euro Zone and the UK since 1997 c) Both the Euro Zone and the UK economy experienced a recession in 2001 d) The UK economy experienced an upturn in economic growth in 2003 tutor2u Page 10

11 19. Which one of the following is most likely to lead to an increase in the rate of consumer price inflation? a) An appreciation of the exchange rate b) A fall in the balance of payments surplus c) A rise in the budget surplus d) A rise in world commodity prices 20. A government wishes to increase the rate of economic growth and reduce a deficit on the balance of payments. Which of the following mix of policies would be most likely to achieve these objectives? a) Expansionary fiscal policy together with a rise in interest rates b) Expansionary monetary policy together with a rise in taxes c) Policies aimed at increasing investment and education and training d) Increased investment in infrastructure together with policies aimed at raising the exchange rate tutor2u Page 11

12 Macroeconomics Revision Test (1) - Answers 1. (b) 2. (d) 3. (b) 4. (d) 5. (a) 6. (b) 7. (d) 8. (b) 9. (c) 10. (a) 11. (b) 12. (d) 13. (c) 14. (d) 15. (d) 16. (b) 17. (c) 18. (d) 19. (d) 20. (c) tutor2u Page 12

13 1.2 Macroeconomics Revision Test (2) 21. Unemployment is most likely to rise when a) GDP grows more quickly than the trend rate of growth b) The world economy experiences an acceleration in growth c) GDP grows more slowly than the underlying trend rate of growth d) Aggregate demand is higher than aggregate supply 22. The Consumer Price Index is a measure of changes in the a) Level of consumer spending on goods and services b) Average standard of living c) Effective demand for consumer goods d) Average cost of living 23. In 2000, the money national income of a country was $500 billion. In 2001 the money value of national income had grown to $550 billion but the price level had risen to 102. The approximate value of real national income in 2001 is a) $550 billion b) $539 billion c) $525 billion d) $510 billion 24. One of the advantages of an appreciation in the UK exchange rate against other currencies is that a) Manufacturing exports to overseas countries will increase b) Raw materials will cost more for the UK to import c) The government will run a larger budget surplus d) The purchasing power of UK tourists overseas will rise 25. The Monetary Policy Committee of the Bank of England decides to reduce interest rates over a period of time from 6% to 4%. Other things being equal, this is likely to lead to a) A rise in the average level of house prices b) A fall in business sector investment c) An increase in the value of the exchange rate d) A reduction in consumer confidence 26. Macroeconomic disequilibrium exists when a) Aggregate output is not equal to aggregate real income b) Aggregate demand is not equal to aggregate supply c) Aggregate exports are not equal to aggregate imports d) Government expenditure is not equal to government tax revenue tutor2u Page 13

14 General Price Level LRAS P2 P1 SRAS2 SRAS1 AD Y2 Y1 Yfc Real National Income 27. The most likely cause of the shift in the short run aggregate supply curve shown in the diagram above would be a) A rise in the exchange rate b) A rise in unit labour costs c) A rise in government spending on public goods d) A rise in business confidence 28. The chart above shows the UK (sterling)exchange rate and the annual trade balance in goods for the UK for each year since The rise in the exchange rate during the years is likely to have caused a larger trade deficit because tutor2u Page 14

15 a) UK exports will have become more expensive in international markets b) UK imports will have become more expensive c) UK consumers will have seen a fall in their real incomes d) UK consumers will have decided to save a greater proportion of income 29. An increase in the rate of valued added tax would other things remaining equal lead to a) A fall in the average cost of living b) A fall in people's disposable income c) A fall in the real level of consumer spending d) An increase in government borrowing 30. Supply-side policies are understood to be policies which a) Reduce the rate of inflation by controlling consumer spending b) Reduce the price of imported goods and services c) Encourage a rise in business sector investment and productivity d) Restrict the supply of labour from other European Union countries 31. Which one of the following types of unemployment would be associated with a decline in employment in the pharmaceuticals industry due to a global economic slowdown? a) Structural unemployment b) Cyclical unemployment c) Frictional unemployment d) Seasonal unemployment 32. A country experiences a persistent deficit in its balance of payments and falling unemployment. Which one of the following policies would suggest that the Government's main objective is to reduce the balance of payments deficit? a) A reduction in the standard rate of income tax b) An increase in government spending on the National Health Service c) An increase in tax allowances for business investment d) An increase in the standard rate of income tax 33. A tax is defined as regressive if a) A lower income earner pays less in tax than a higher income earner b) A lower income earner pays a lower percentage of their income in tax than a higher income earner c) A lower income earner pays a higher percentage of their income in tax than a higher income earner d) A higher income earner pays a higher percentage of their income in tax than a higher income earner 34. Real national income may be defined as a) Money national income with direct taxes deducted b) Money national income adjusted for changes in the level of prices c) The sum of all output from manufacturing and construction industries d) Money national income minus the effects of international trade tutor2u Page 15

16 35. The chart above shows the index of the level of output in Manufacturing and Service industries. From the data contained in the table it can be seen that a) Manufacturing has grown more quickly than services over the period b) Manufacturing industry was in recession in 1989 c) Manufacturing industry has grown more slowly than the service sector d) UK manufacturing has become less competitive against other countries 36. A government wishing to reduce the level of unemployment through the use of fiscal policy would be most likely to a) Lower interest rates to stimulate private sector investment b) Remove all controls on consumer credit and bank lending c) Increase the size of the budget deficit d) Encourage a depreciation of the exchange rate 37. Investment may be defined as a) Spending on goods and services by consumers b) Any addition to the capital stock of the economy c) All types of spending by the government d) That part of household spending which is financed by borrowing from banks rather than from saving 38. A cut in interest rates will give a boost to aggregate demand if it leads to an increase in a) Saving b) The value of the pound c) Consumer borrowing and spending d) Imports tutor2u Page 16

17 39. A multiplier effect occurs when an initial change in government spending leads to a larger change in the level of a) Investment b) National income c) Prices d) Saving 40. Real income may be obtained from data on money income by allowing for a) Changes in wage rates b) Changes in interest rates c) Changes in the general level of prices d) Changes in government taxation tutor2u Page 17

18 Macroeconomics Revision Test (2) - Answers 21. (c) 22. (d) 23. (b) 24. (d) 25. (a) 26. (b) 27. (b) 28. (a) 29. (c) 30. (c) 31. (b) 32. (d) 33. (c) 34. (b) 35. (c) 36. (c) 37. (b) 38. (c) 39. (b) 40. (c) tutor2u Page 18

19 1.3 Microeconomics Revision Test (1) 41. A indirect tax on the suppliers of a good usually a) Raises its price b) Increases the profits of producers supplying the good c) Causes an inward shift of demand d) Offsets the effect of a government subsidy on the good 42. The price mechanism helps to allocate scarce resources efficiently because a) It will always ensure that competition between firms prevents excessive profits being earned b) When the supply of non-renewable resources such as coal nears depletion, the market price will increase, putting downward pressure on demand c) It will lead to a distribution of output amongst consumers on the basis of greatest need rather than ability to pay d) It results in lower wages being paid to workers when the demand for the good or service they produces increases 43. The fundamental economic problem facing all countries is a) Too much money chasing too few goods b) The depletion of the earth's scarce resources c) Noise and air pollution from road congestion d) Unlimited needs and wants constrained by limited factor resources 44. A manufacturer of kitchen equipment reduces the prices of their standard models by 8% and, as a result, the volume of sales of new kitchens rises by 6%. The price elasticity of demand for the good is a) b) c) d) An advertising campaign aimed at differentiating a product from its only substitute was successful. What is likely to have happened to the price elasticity of demand for the product and the cross price elasticity of demand of the substitute? a) Price elasticity increases and cross elasticity increases b) Price elasticity increases and cross elasticity decreases c) Price elasticity decreases and cross elasticity increases d) Price elasticity decreases and cross elasticity decreases tutor2u Page 19

20 46. When the price of a new pre-recorded DVD is 15 per DVD, 20,000 DVDs are demanded. If the price elasticity of demand is (-) 2.5, how many DVDs would be demanded if its price fell to 12 per DVD? a) 30,000 b) 28,000 c) 27,500 d) 25, The price elasticity of demand for digital cameras will be influenced by a) The degree of necessity or luxury that is perceived by consumers of digital cameras b) The time taken to produce digital cameras c) The availability of resources used to produce digital cameras d) The ease with which producers of digital cameras are able to respond to market changes by changing their output Price S2 F S1 A B C E D J I D1 G H Quantity 48. The diagram above shows the demand and supply curves for a product following the introduction of an ad valorem tax. As a result of the shift in the supply curve from S1 to S2, the level of consumer surplus falls by a) ACF b) ABEC c) CED d) ABDC tutor2u Page 20

21 49. If the supply curve of a commodity is positively sloped, a fall in the price of the commodity caused by an inward shift of demand results in a) A contraction in quantity supplied b) A decrease (inward shift) in supply c) An expansion of quantity supplied d) An increase (rightward shift) in supply 50. In a typical demand schedule, quantity demanded a) Varies directly in price b) Varies proportionately with price c) Varies inversely with price d) Varies according to the amount available for sale 51. Given a rise in real income, the demand curve for an inferior good will, other things being equal a) Shift to the left causing a fall in market price b) Shift to the right causing an increase in market price c) Shift to the left causing a rise in market price d) Shift to the right causing an inward shift of the market supply curve Price S2 F S1 A B C E D J I D1 G H Quantity 52. The diagram above shows the effect of a tax on producers introduced by the Government. As a result of the tax, the total tax revenue going to the government equals area a) ACEB b) CID c) ACIJ d) FAC tutor2u Page 21

22 53. The demand curve for lobster is downward sloping. If the demand for lobster is price inelastic a reduction in its price (other things remaining equal) must result in a) Excess supply of lobsters b) An increase in the quantity demanded of lobster c) An increase in total spending on lobster by consumers d) Increased sales of crab (a substitute for lobster) 54. In a free-market economy, an increase in the price of a good will a) Always lead to more resources being devoted to production of the good b) Always be accompanied by a fall in the output of the good c) Provide information which will influence the production and consumption decisions of economic agents d) Make it less likely that new suppliers will enter the industry 55. Which one of the following statements referring to the price mechanism is correct? a) Low prices act as an incentive for firms to supply more products b) Firms are unable to influence market demand for their products c) High prices will always lead to higher profits d) Consumers will see a rise in their real incomes (other things being equal) if the general price level falls Price of Good S Demand Quantity demanded of Good T 56. The relationship in the diagram above illustrates that the two goods S and T are a) Complementary goods b) Inferior goods c) Normal goods d) Substitute goods tutor2u Page 22

23 Price Demand Supply (post tax) Supply (pre tax) P2 P1 Q1 Quantity 57. The diagram above shows the effect of a tax on petrol to reduce road congestion and pollution from road use. It can be deduced from the diagram that a) Suppliers pay all the tax b) Consumers pay all the tax c) Consumers will refuse to pay the tax d) The demand for petrol falls as a result of the tax 58. A product has a price elasticity of supply of If its price rises from 6.00 to 8.50 then its supply will a) Rise by 25% b) Rise by 50% c) Fall by 50% d) Fall by 20% 59. Which one of the following measures is designed to deal with divergences between private and social costs? a) Minimum wage legislation b) Equal pay legislation c) The introduction of "bus only lanes" in city centres d) The introduction of toll charges on road bridges 60. When the economy is operating on its production possibility frontier, an increase in the production of public goods will a) Increase the opportunity cost of private goods b) Mean a reduction in the production of private goods c) Have no effect on the supply of private goods d) Increase total output because public goods are non rival tutor2u Page 23

24 Microeconomics Revision Test (1) - Answers 41. (a) 42. (b) 43. (d) 44. (c) 45. (d) 46. (a) 47. (a) 48. (d) 49. (a) 50. (c) 51. (a) 52. (c) 53. (b) 54. (c) 55. (d) 56. (d) 57. (b) 58. (b) 59. (c) 60. (b) tutor2u Page 24

25 1.4 Microeconomics Revision Test (2) 61. The opportunity cost to the government of a decision to construct five new by-passes for a selection of towns would be a) The financial cost of building the roads b) The other goods and services that the capital equipment constructing the roads could have produced c) The other goods and services that would be produced if the by-passes had not been built d) The loss of natural habitat given up in order to build the roads 62. Which one of the following is a positive statement? a) The exchange rate is affected by the level of interest rates b) The British fishing industry should be given a subsidy to cover their financial losses due to the loss of fish stocks in the North Sea c) Fire fighters deserve higher pay than nurses d) The government should increase the rate of excise duty on cigarettes 63. If an economy is operating at full capacity, the most likely effect of an increase in the output of capital goods is that the output of consumer goods will a) Increase in the short run but fall in the long run b) Decrease in the short run but fall in the long run c) Increase in the short run but rise in the long run d) Decrease in the short run but rise in the long run All Other Operations C A B Heart Operations tutor2u Page 25

26 64. The diagram above shows an economy with a production possibility boundary producing heart operations and other health treatments. The economy is able to expand output from the combination shown by point A to the combination shown by point C if a) There is an increase in the productivity of all resources available to provide health treatments b) Wage costs increase in the National Health Service c) Technological improvements in providing heart operations only reduce the cost of such procedures d) There is a reduction in the number of people employed in the NHS Price Domestic Supply Pw + T Pw M World Price + Tariff World Price Domestic Demand Qs Qs2 Qd2 Qd Output (Q) 65. The diagram above shows the domestic demand and supply for a commodity and also the world supply both before and after the introduction of an import tariff. The shaded area in the diagram labelled by the letter M represents a) The volume of imports before the introduction of the tariff b) The value of imports before the introduction of the tariff c) The volume of imports after the introduction of the tariff d) The value of government tax revenue after the introduction of the tariff tutor2u Page 26

27 Price S1 S2 P1 P2 D1 Q1 Q2 Quantity 66. The change in the supply curve shown in the diagram might have been caused by a) An increase in consumers' real incomes b) A successful advertising campaign for the product c) A fall in the costs of raw materials and components d) The exit of some suppliers from the market 67. If, when income changes, the quantity demanded of a commodity remains the same, its income elasticity of demand is equal to a) Infinity b) Zero c) +1 d) -1 tutor2u Page 27

28 Price S1 S2 P1 P2 Demand Q2 Q3 Quantity 68. The diagram above shows the effect of an increase in market supply for a commodity. The shaded area in the diagram represents a) The increase in producer surplus following a fall in market price b) The increase in total costs following a fall in market price c) The increase in consumer surplus following a fall in market price d) The increase in government tax revenue following a fall in market price 69. If, when the price of product S rises by 20%, the demand for product W falls by 4% and the demand for product T rises by 5%, then we can say that a) W is a substitute for S and T is a complement to S b) W is a substitute for S and T is a substitute to S c) W is a complement for S and T is an inferior good d) W is a complement for S and T is a substitute to S tutor2u Page 28

29 Price Supply Pe P max Maximum Price Demand A B C D Quantity 70. The diagram above shows a market where the government has introduced a statutory maximum price of P max. As a result of the maximum price, the output that will be supplied onto the market will be a) A b) B c) C d) D Price Supply P1 A B C D Demand Q1 Quantity tutor2u Page 29

30 71. The diagram above shows a market in equilibrium at price P1 and output Q1. Which area, A, B, C or D shows the level of producer surplus in the market at this price and output? a) A b) B c) C d) D 72. The effect of a government imposing a minimum price for cereals above the free market equilibrium price will result in a) No change in equilibrium price b) A fall in the quantity of cereals produced c) An increase in the demand for cereals d) Over-production of wheat because of the incentive of higher prices 73. If the supply curve of a commodity is positively sloped, a fall in the price of the commodity brought about by an inward shift of demand results in a) A contraction in quantity supplied b) A decrease in supply at all price levels c) A rise in producer surplus d) An increase in consumer surplus Price of Lamb Supply of Lamb P2 P1 D1 D2 Q1 Q2 Quantity of Lamb 74. The change in the market demand for lamb shown in the diagram above might have been caused by a) A fall in consumers' incomes (assuming lamb is a normal good) b) A rise in the price of beef (a substitute for lamb) c) A successful advertising campaign for chicken (a substitute for lamb) d) An increase in the number of farmers supplying lamb to the market tutor2u Page 30

31 Price G Supply pre subsidy Supply + Subsidy D A E C F B Demand Q1 Q2 Quantity 75. The diagram above shows the effect of a government subsidy to producers of cereals. Following the subsidy, the total amount that the government will pay to producers as part of the subsidy arrangement is equal to area. a) GDA b) GFB c) DABF d) ECBF 76. A producer estimates that the price elasticity of supply for his product is As a result of an increase in market price from 30 to 45 following an outward shift of the producer's demand curve, we could expect the producer to expand supply by a) 50% b) 70% c) 75% d) 100% 77. The government wishes to increase economic welfare by introducing policies that create external benefits as well as internal ones. It should a) Raise the price of unleaded fuel b) Increase the highest rates of income tax c) Increase the school - leaving age d) Invest more in funding training for the long-term unemployed tutor2u Page 31

32 78. A government believes that consumers derive greater benefit from a good than consumers themselves perceive. To which category does the good belong? a) Merit good b) Collective good c) Superior good d) Public good 79. Which one of the following statements referring to a market economy is correct? a) Monopolists never take account of consumer preferences they just charge the maximum price a consumer is willing to pay b) Prices in markets do not always reflect externalities c) Efficiency is always indicated by high producer profits d) Large firms are always more efficient than smaller firms 80. Which one of the following would be included in the economist s definition of physical capital? a) A concert musician b) Timber from forests c) Fish stocks in the North Sea d) Computer aided design technology used in car manufacturing tutor2u Page 32

33 Microeconomics Revision Test (2) - Answers 61. (c) 62. (a) 63. (d) 64. (a) 65. (d) 66. (c) 67. (b) 68. (c) 69. (d) 70. (a) 71. (b) 72. (d) 73. (a) 74. (b) 75. (c) 76. (c) 77. (d) 78. (a) 79. (b) 80. (d) tutor2u Page 33

34 2 Microeconomics tutor2u Page 34

35 2.1 Introductory Economic Concepts 81. True or False: According to the basic model of competition in a market, firms seek to maximise profits 82. True or False: Economics cannot claim to be a science since the subject cannot make use of controlled laboratory experiments to test a theory 83. True or False: The following statement is an example of a normative statement: the cost of fruit and vegetables should be subsidised by the government to encourage healthy eating 84. Individuals and businesses must make choices because a) They must act rationally b) Of resource scarcity c) Of the law of diminishing returns d) None of the above 85. If a consumer is acting rationally, we mean that a) They save a proportion of their monthly income rather than spend it all b) They won t take a job that pays low wages c) They weigh up the costs and benefits of each choice they make d) They will always buy the products in the market that are cheapest 86. Allocating scarce products such as cup final tickets by using ballot or a lottery is an example of a) The profit motive b) Rationing c) Only selling to the highest bidder d) None of the above 87. In a market-based economy the scarcity of factors of production means that a) Consumers must inevitably consider the opportunity cost of their choices b) A country cannot achieve economic growth every year c) Inflation is inevitable d) The economy cannot produce on its production possibility frontier tutor2u Page 35

36 88. Which of the following is not a factor of production as the term is used by economists? a) Farmland b) Cash in a bank account c) Buildings and machinery d) Labour 89. Which one of the following is best described as a normative statement? a) A reduction in spending on the NHS will result in some job losses b) Free health care should be provided to everyone c) A reduction in health care spending will have most impact on lower income households d) Extra funding for the NHS may involve some switching of spending from other services such as education or transport 90. Economics is primarily concerned with the study of a) Determining how the government should allocate resources b) How to make more effective use of resources through reducing wants c) Allocating scarce resources to satisfy competing and unlimited wants d) How new wants and economic resources are produced by businesses 91. Which one of the following is a positive statement? a) Income inequality in the UK has increased over the last 30 years b) The rate of unemployment is too high c) The national minimum wage rate should be increased to 5 per hour d) Nurses working in the National Health Service should have a maximum working week of 50 hours per week 92. Choice is important in the basic economic problem because a) Wants increase with income b) Scarce economic resources are distributed equally c) Limited economic resources have many alternative uses d) High demand leads to higher market prices 93. Which one of the following is a 'normative statement'? a) Increased spending on new cars will lead to a rise in traffic congestion b) Prices in a competitive market are likely to be lower than a monopoly c) Most firms seek to maximise their market share d) The government should raise taxes on products which harm the environment 94. In economics it is generally assumed that the main objective of firms is to a) Reduce their prices and satisfy as many consumers as possible b) Maximise the company share price on the stock market c) Employ more workers in order to reduce unemployment d) Maximise total profits tutor2u Page 36

37 95. Profit is most likely to be an objective of a) State-owned industries b) Consumers c) Governments d) Entrepreneurs 96. A possible advantage of a planned economy is that: a) Resources are allocated via the price mechanism b) There is greater consumer choice of products c) Identification with the state may be a better work incentive than the profit motive d) The state can better provide a range of goods for collective consumption 97. Which of the following is a measure of productivity? a) The total amount of output produced by a business each year b) Total output divided by total employment of labour c) The quantity of capital used by a business d) The percentage increase in employment 98. Which of the following is a positive statement? a) Direct taxes should be increased to distribute income more fairly b) The government ought to cut the taxes paid by motorists c) The distribution of income and wealth is unequal d) All taxes are bad, but some public services are good 99. Which one of the following is a normative statement? a) The government should spend more on the health service b) Building a new hospital involves an opportunity cost c) The government regards health care as a merit good d) Some medicinal drugs are ineffective and expensive to supply to patients 100. Opportunity cost is best defined as a) The cost of a choice measured by the cost of products bought b) The cost of a choice measured by the next best alternative forgone c) The cost of a choice measured by the time taken to consume d) The cost of buying an additional unit of a good or service 101. What are the four main types of factor of production? a) Land, labour and money b) Money, entrepreneurship, and factories c) Labour, cash, capital, and entrepreneurship d) Land, labour, capital and entrepreneurship tutor2u Page 37

38 102. A student works for a book shop during the holidays. She is offered the alternative of being paid 100 per week in cash of choosing 150 worth of books from the shelves. What is the opportunity cost to the student of choosing the books? a) 50 b) 150 c) 100 d) The alternative use to which her time could have been put 103. If scarce resources are allocated efficiently then a) Equal amounts of land, labour and capital have been used in producing a good or service b) Firms are maximising their sales and profits c) All consumers have equal amounts of goods and services d) It is impossible to increase the output of one good without reducing the output of another good 104. The existence of scarcity implies that a) There are no free goods b) Only rich households can save c) Supplies of factors of production cannot be increased d) Households, firms and governments must make choices 105. The workers in a factory currently earn 240 for a 40 hour week. The management offers them a choice between either a straight 10 per cent wage increase or an increase in the weekly wage to 260 along with a reduction in hours from 40 to 39 hours. Disregarding the value of leisure time, what is the opportunity cost to each worker of opting for the 39 hour week? a) 4 b) 6 c) 20 d) 24 tutor2u Page 38

39 Introductory Economic Concepts - Answers 81. (a) 82. (b) 83. (a) 84. (b) 85. (c) 86. (b) 87. (a) 88. (b) 89. (b) 90. (c) 91. (a) 92. (c) 93. (d) 94. (d) 95. (d) 96. (d) 97. (b) 98. (c) 99. (a) 100. (b) 101. (d) 102. (c) 103. (d) 104. (d) 105. (a) tutor2u Page 39

40 2.2 Production Possibility Frontier (PPF) 106. True or False: Combinations of goods and services that lie within the production possibility curve show an inefficient allocation of scarce resources 107. True or False: A fall in the size of the available labour supply, other factors remaining constant, will cause an outward shift of a production possibility curve 108. True or False: A movement along the frontier of a production possibility curve can only be achieved if the economy successfully reduced unemployment 109. The production possibility schedule for vans and lorries is as follows Vans Lorries The opportunity cost of the second lorry in terms of vans is a) 1 b) 2 c) 7 d) 14 tutor2u Page 40

41 Output of consumer goods and services Output of capital goods 110. Which economic concept is illustrated by the shape of the production possibility frontier shown in the diagram above? a) The law of diminishing returns b) Economies of scale c) Economic growth d) Diseconomies of scale 111. The production possibility curve a) Shows the amount of two or more goods that a society can produce b) Is normally drawn as a concave curve rather than a straight line c) Shows allocations of two or more goods that are allocative efficient d) All of the above 112. When an economy operates on its production possibility frontier it is a) Satisfying all the economic wants of consumers b) Productively efficient c) Maximising the profits of producers d) Not producing demerit goods such as cigarettes and other harmful drugs tutor2u Page 41

42 113. The production possibility frontier for a country producing two goods is shown in the diagram above. The opportunity cost of increasing the output of MP3 players from 80 to 100 (a movement from A to B) on the PPF is a) 80 DVD players given up b) 50 DVD players given up c) 30 DVD players given up d) 20 DVD players given up 114. Which of the combinations of output of DVD players and MP3 players are feasible given the PPF that a country faces a PPF shown in the diagram above? a) A, B and C b) A, B, C and D c) E only d) A, B, C, D and E tutor2u Page 42

43 115. In the diagram above, what is happening to the marginal opportunity cost of producing extra MP3 players as a country reallocates resources from combination A to B and then to C? a) The marginal opportunity cost remains the same b) The marginal opportunity cost is increasing c) The marginal opportunity cost is falling d) The marginal opportunity cost cannot be calculated Output of Capital Goods C2 B C1 A X2 X1 Output of Consumer Goods 116. A reallocation of resources within an economy from A to B shown in the PPF diagram above is likely to lead to a) A short term rise in production of consumer goods and a fall in demand for investment goods b) A short term fall in production of consumer goods but a long term rise in an economy's productive potential c) A decrease in demand for workers employed in producing capital goods d) An increase in the demand for consumption goods tutor2u Page 43

44 117. Periods of high unemployment in an economy correspond to a) Points that lie within the production possibility curve b) Points that lie on the production possibility curve c) Points that lie outside the production possibility curve d) None of the above 118. If the United Kingdom has a comparative advantage in the production of a good, then a) The UK will usually be a net importer of the good b) The UK will be required to pay tariffs on imports of the good c) Fewer resources are required to produce the good in the United Kingdom d) The relative cost of producing the good is lower in other countries 119. Important sources of comparative advantage in the production of a good or service include a) Natural endowments of factors of production b) The quality of human capital c) Lower unit labour costs d) All of the above All Other Operations C A B PPF1 PPF1 Heart Operations 120. The diagram above shows a production possibility frontier for health services. The outward shift of the PPF might have been caused by a) An increase in the efficiency of labour and capital providing heart operations only b) A fall in new capital investment in the health service c) An increase in the number of heart surgeons employed by the NHS d) Improvements in medical technology available to provide a full range of health services tutor2u Page 44

45 121. Which combination of output shown in the PPF above would represent a preference within this economy to increase consumption of goods and services in future time periods? a) A b) B c) C d) D All Other Goods and Services C F A E B D PPF2 PPF1 G Motor Cars 122. The diagram above shows the effects of a shift in a production possibility frontier. Which points shown in the diagram above indicate an efficient use of scarce resources after an economy has grown? a) A and B b) D and E c) C and G d) C, G and F tutor2u Page 45

46 Production Possibility Frontier (PPF) - Answers 106. (a) 107. (b) 108. (b) 109. (a) 110. (a) 111. (d) 112. (b) 113. (c) 114. (b) 115. (b) 116. (b) 117. (a) 118. (c) 119. (d) 120. (d) 121. (c) 122. (c) tutor2u Page 46

47 2.3 The Theory of Demand 123. True or False: In a market economy, prices provide incentives to help the economy use scarce resources efficiently 124. True or False: As price falls, quantity demanded for a normal good will fall 125. True or False: A change in consumers' income will normally cause a shift in the demand curve 126. True or False: A decrease in the price of a complement will shift the demand for the good in question to the left 127. True or False: A fall in the price of a substitute good will cause an inward shift in the demand for a product 128. Individual consumers normally try to maximise a) Utility or satisfaction from consumption b) Profits c) The satisfaction of other consumers d) Their intelligence 129. In a free market economy, market prices a) Reflect the relative scarcity of the product b) Communicate information to producers about how much to supply c) Provide incentives for consumers about how much to purchase d) All of the above tutor2u Page 47

48 130. As the market price rises, the quantity demanded decreases along the market demand curve because a) Some consumers enter the market b) Some producers leave the market c) Some consumers switch to relatively cheaper substitute products d) Some producers enter the market Price per unit D1 D2 Quantity demanded 131. The shift of the demand curve from D1 to D2 in the diagram above could have been caused by a) An increase in the price of the good itself b) A decrease in the price of the good itself c) A fall in interest rates d) A fall in real incomes of consumers if the good is a normal good 132. The phrase 'ceteris paribus' means a) A change in one factor affects another b) Both factors moving in the same direction c) No change in any economic factor d) All other factors are held constant tutor2u Page 48

49 133. As consumers have become more concerned about the amount of saturated fat in their diet, the demand for chicken has increased whilst the demand for beef has fallen. The result of this is likely to be a) An increase in the quantity supplied of beef b) A rise in the market price of beef c) A decrease in the quantity supplied of chicken d) A rise in the market price of chicken 134. Which one of the following is NOT a cause of a shift in the market demand for a product? a) A change in the product's own price b) A change in consumer incomes c) A change in the price of a complement d) A change in consumer tastes and preferences 135. The market demand curve for overseas holiday cruises will NOT shift when there is a a) Rise in consumers real incomes b) Successful advertising campaign c) Fall in the price of a cruise in the brochures d) Increase in the price of land-based holidays (a substitute for cruises) 136. All other factors held constant a decrease in market demand for new cars will lead to a) Decreased price and decreased quantity b) Increased price and decreased quantity c) Increased price and increased quantity d) Decreased price and no change in quantity 137. Suppose that a 20% increase in the price of good Y results in an increase in the consumption of good X of 8%. This is an example of a) A shift in supply b) The substitution effect c) The real income effect d) A higher demand for all goods and services in general 138. If the price of a digital camera falls from 500 to 300 during a period when the general price level rose by 10 per cent, then the relative price of the camera has fallen by a) 40 per cent b) 50 per cent c) 60 per cent d) 100 per cent tutor2u Page 49

50 139. When the price of one of the products that you buy increases, your purchasing power decreases. Thus you are likely to buy less of all normal goods. This is known as: a) The substitution effect b) The real income effect c) The law of diminishing marginal returns d) The rip-off effect 140. If consumers expect that the price of cocoa will increase in the future, what will happen to equilibrium price and quantity of cocoa now? a) Price will increase; quantity will increase b) Price will increase; quantity will decrease c) Price will decrease; quantity will increase d) Both price and quantity will remain the same 141. Which one of the following would be expected to cause an inward shift in the market demand for UK produced cheese? a) An increase in the price of cheese b) An increase in the price of a complement to cheese c) A rise in income - assuming that cheese is a normal good d) A rise in the price of a substitute for cheese 142. Tom graduates from university with a degree in Economics and his income increases by 10,000 a year. Other things remaining the same, he decreases the quantity of donuts he buys. For Tom, donuts. a) And toast have become substitutes b) And tea has become complements c) Are an inferior good d) Are a normal good 143. Chicken and fish are assumed to be substitutes for each other. If the price of chicken increases, demand for fish will a) Not change but there will be a movement along the demand curve for fish b) Decrease and the demand curve for fish will shift to the left c) Increase and the demand curve for fish will shift to the right d) Increase or decrease, but there will be no change in demand for chicken 144. Other factors remaining the same, a large rise in the price of using bus transport will lead to a) A fall in the demand for new cars b) A fall in the demand for taxi services c) An expansion of supply of new and second-hand cars d) An expansion of new bus routes available for customers tutor2u Page 50

51 145. Demand for a good or service is said to be effective only when it is associated with a) The satisfaction of a want b) Willingness and ability to pay for the good c) The existence of an adequate supply of the good d) Knowledge of the characteristics of the good tutor2u Page 51

52 The Theory of Demand - Answers 123. (a) 124. (b) 125. (a) 126. (b) 127. (a) 128. (a) 129. (d) 130. (c) 131. (c) 132. (d) 133. (d) 134. (a) 135. (c) 136. (a) 137. (b) 138. (b) 139. (b) 140. (a) 141. (b) 142. (c) 143. (c) 144. (c) 145. (b) tutor2u Page 52

53 2.4 The Theory of Supply 146. True or False: A change in the price of a good will cause a shift in its supply curve 147. True or False: A poor cocoa crop will result in higher prices for chocolates, other things being equal 148. True or False: The introduction of a 17.5% value added tax on aviation fuel must lead to a 17.5% rise in the average cost of a flight for air travellers Price per unit Supply P2 P1 Q1 Q2 Quantity supplied 149. The diagram above illustrates the market supply curve for fitted kitchens. The upward slope of the market supply curve can be explained by the argument that at higher prices a) Manufacturers stand to make higher profits if they produce more b) Higher prices give kitchen manufacturers more monopoly power c) Consumers will regard higher prices as a sign of product quality d) The Government will offer a subsidy for more kitchens to be produced tutor2u Page 53