Oct/Nov 2013

What might promote a greater degree of division of labour?

7.7

A good’s supply function may be expressed as Q = 2P + 10, in which Q denotes the quantity supplied in kilos and P denotes the price per kilo in dollars. The price increases from $10 to $15 per kilo. The value of price elasticity of supply for this price increase falls within a range from

Price elasticity of supply

The diagram illustrates a market for a good that is met partly by domestic production and partly by imports. Sh represents domestic supply and Sw represents world supply. Domestic supply then moves to Sh1. After this change in supply, what will the consumption level and the related quantity of imports be?

Income elasticity of demand

The table indicates the price Rashid is prepared to pay for each additional can of cola. If the price is $0.50 and Rashid purchases four cans, what is the money value of Rashid’s consumer surplus?

Cross elasticity of demand

The diagram illustrates the supply curve for the number of spaces in a car park, while the demand curves represent demand for spaces on four separate days (D1, D2, D3 and D4). The owner wants to impose a parking fee on each of these days so that the spaces are allocated by the market mechanism. Which pricing policy should the owner adopt?

Income elasticity of demand

Which circumstance would show that an externality is present?

7.4

In public sector cost-benefit analysis, the term ‘cost’ is defined as

7.4

A merit good is often defined as one that is underconsumed because of poor decision-making. Who would normally be responsible for this poor decision-making?

Government intervention in markets

A local council imposes a fee for using tennis courts, yet it does not charge for street lights. How would an economist explain this?

1.6

The government is thinking about constructing flood defences beside a river. It has worked out the costs and benefits like this. Using cost-benefit analysis, which decision and explanation about the flood defences is correct?

Law of diminishing returns

In the diagram, MN is the production possibility curve for a country with a comparative advantage in producing good Y. What could allow the country to consume the quantities of X and Y shown at point R?

Production possibility curves

The diagram illustrates a country’s production possibility curve. What might enable the economy to shift from M to N in the long run?

Production possibility curves

A country is prepared to engage in free trade with its neighbouring countries and to permit the unrestricted movement of factors of production between them. However, it does not want to adopt a common currency or a common external tariff. In what type of economic relationship is it likely to have with its neighbours?

International trade and free trade

Which combination of price changes has to lead to an improvement in the country’s terms of trade?

International trade and free trade

Which item connected to a Japanese-owned car assembly plant in the US would not be entered in the current account of the US balance of payments?

6.3

The table sets out the number of employees in four firms in the same industry, the average hours worked per day, and the total daily output of each firm. Which firm’s workers have the highest productivity?

Factors of production

The diagram illustrates aggregate demand (AD) and short-run aggregate supply (SRAS) for an economy at a price level OP. Which set of events would certainly lead to an increase in the general price level?

Economic growth

It is expected that a country’s inflation rate will keep increasing. Which is most likely to rise as a consequence?

Balance of payments

If a country’s currency is devalued, in what circumstances is this most likely to lead to inflation in the country?

6.4

Why might a government want to cut a surplus on the current account of the balance of payments?

6.3

In the diagram, D1D1 and S1S1 represent the starting demand and supply curves for the pound sterling (£) in the foreign exchange market. Which event would shift demand to D2D2 and supply to S2S2?

6.4

In a country, the Marshall-Lerner condition for an improvement in the trade balance is met in the long run, yet import and export quantities take a long time to react to price changes. The government devalues its currency in order to cut its trade deficit. Which curve shows the likely movement of the trade balance?

6.3

Which of the following statements about factors of production is correct?

Factors of production

A country has experienced a persistent current account deficit in the balance of payments. Its government had been following an expenditure switching policy, but now plans to move to an expenditure reducing policy. What might the former policy have been, and what would the new policy be?

Labour market

A website compares the prices of groceries. Which function of money does this show?

Oligopoly

The price of gold rings is expected to rise in the future. Which diagram shows the effect that this expectation is likely to have on the demand for gold rings now?

Demand and supply curves

Which pairing of changes could result in the demand curve for a normal good X staying in the same position?

Demand and supply curves

A product has a normal demand curve and a normal supply curve. What could account for an increase in the product's price and a decrease in the quantity traded of the product?

Income elasticity of demand

The diagram illustrates how the quantity demanded for four goods varies as income changes. Which good has an income elasticity of demand that is always +1?

Price elasticity of demand

The cross elasticity of demand between bus travel and rail travel is +2. If bus fares increase, the demand for rail travel rises by 10%. What change in bus fares has caused this?

Price elasticity of demand

‘Since the age of twelve, I earned my living by purchasing towels, needles, shampoo and soap, then reselling them as a vendor on the street. At present, I manage three hotels in Hanoi’ - Duong Than Binh. Which factors of production are likely to be involved in the events described above?

Factors of production

The diagram illustrates a country's domestic supply and demand for a commodity that it both uses and exports. The world price moves from WP1 to WP2. What changes occur in domestic consumption and exports as a result?

6.3

The diagram illustrates the sugar market, where it is initially in equilibrium at price OP. The government then sets a maximum price of OP1. What will happen as a result?

Maximum and minimum prices

A consumer wanted to buy a new camera and a new armchair. She was willing to pay $500 for either item. She found that the camera was priced at $450 and the armchair at $500. She chose the camera. What were her opportunity cost and her consumer surplus?

Cross elasticity of demand

In which circumstances will prices have no influence on deciding how resources are distributed among alternative uses, yet could still act as a rationing device?

Resource allocation in different economic systems

The table sets out the anticipated costs and benefits for four government projects. The government can afford just one project. Which project should the government select?

Scarcity, choice and opportunity cost

What outcome, from society’s perspective, occurs if the market price of a product fails to take account of the positive externalities created in producing it?

7.4

A good is made, and consumers cannot stop themselves from consuming it. What type of good is this?

1.6

A government introduces a subsidy to reduce the price of heating oil, sets maximum rents for apartments and establishes a national minimum wage rate. For each of these, who is intended to benefit?

Maximum and minimum prices

On the diagram, D shows the demand curve for a commodity. S1 and S2 show the supply curves before and after a government intervention. What action did the government take?

Maximum and minimum prices

The table compares the ability of two countries, P and Q, to make two goods, Y and Z (per person). Which statement is correct?

International trade and free trade

Which sequence places these economic concepts in the correct order? (The options present different arrangements of inevitability of choices, opportunity costs, and scarce resources.)

Scarcity, choice and opportunity cost

Which outcome is the least likely for countries taking part in a shift towards freer trade?

International trade and free trade

A country becomes part of a trade organisation whose only conditions are that members apply the same tariff rates to non-members and have no trade barriers with other members. Which possible change in the country’s status would fit this condition?

Protectionism

In Australia in 2005, one shipload of exported iron ore could buy 2200 imported flatscreen TVs. By 2010, an equally large shipload could buy 22 000 imported flatscreen TVs. Which pair of price movements must have occurred to bring about this change in Australia's terms of trade?

6.3

A nation has a population of 500 million. There are 15 million unemployed people, and the unemployment rate in the nation is 6%. What is the labour force size?

Price stability and inflation

The diagram shows how aggregate demand (AD) and aggregate supply (AS) change in an economy over one year. What accounts for the increase in the general price level?

Economic growth

What factor would raise both demand-pull inflation and cost-push inflation?

Economic growth

A UK resident purchases shares in a Spanish company. What are the immediate and later effects on the UK balance of payments?

6.3

The table presents information about several components of a country’s balance of payments. In which year was the country’s trade deficit greatest? (options A-D list export, import and net income/transfer values)

6.3

Country X carries on trade with just two countries: the USA (90% of trade) and Japan (10%). If the original trade-weighted exchange rate index is 100, and Country X’s currency appreciates by 10% against the US$ and by 50% against the yen, what will the new trade-weighted exchange rate index be?

6.4

Which factor is most likely to lead to an increase in a country’s exchange rate?

6.4

A farmer is able to produce both beef and lamb. The opportunity cost of producing 1 kilo of beef is 3 kilos of lamb. A kilo of beef sells for twice the price of a kilo of lamb. What should he do if his aim is to maximise his revenue?

Scarcity, choice and opportunity cost

An economy is experiencing a high unemployment rate and a large deficit on the current account of the balance of payments. What policy would be appropriate for the government to adopt?

Labour market

What benefit do banknotes (paper money) offer compared with coins (metallic money)?

Oligopoly

The diagram illustrates an individual demand curve. What is measured by XY?

Demand and supply curves

The diagram shows the market for diamonds. What might have caused the price to move from P1 to P2?

Income elasticity of demand

How is the market supply of a product determined in a competitive market?

Demand and supply curves

The diagram illustrates the demand for a product that has only three purchasers, Freeman, Hardy and Willis. The table gives the demand from two of the three purchasers. Which statement about the product demand from Willis is correct?

Demand and supply curves

The diagram illustrates the demand and supply curves for tractors. The current equilibrium is at X. What could the new equilibrium be if the government introduced a tax on the country’s tractor manufacturers?

Maximum and minimum prices

Which one is not a factor of production?

Factors of production

The table gives the demand and supply schedules for a good both before and after a tax is introduced. What was the amount of tax revenue collected by the government?

Maximum and minimum prices

Oranges and apples are substitutes. The diagram presents the equilibrium position in the oranges market at X. Weather conditions lower the quantity of oranges produced but raise the quantity of apples produced. Which point is most likely to show the new equilibrium for oranges?

Income elasticity of demand

A consumer had saved $700 and chose to use the money on a new television instead of a new washing machine. On visiting the shop, she found that the television cost $500 and the washing machine cost $400. She purchased the television. What were the consumer surplus and the opportunity cost?

Scarcity, choice and opportunity cost

Which is usually regarded as one advantage of using the price mechanism as a rationing device?

Resource allocation in different economic systems

A government is intending to step into a free market and set output at the level that is currently economically desirable. To meet this objective, what should the government put in place?

Maximum and minimum prices

What does a government compare when it carries out a cost-benefit analysis of a project?

7.4

What key feature defines a private good?

1.6

Which two government measures are designed to give suppliers a direct benefit?

Maximum and minimum prices

The diagram illustrates a maximum price (OM) being set for a product. An organisation purchases the entire supply at the maximum price and then sells it again illegally in order to obtain the highest possible revenue. What is the organisation’s revenue?

Maximum and minimum prices

Which two groups inside a country are likely to gain from the introduction of tariffs?

Protectionism

If George and Zaheer each devote a full working day to producing just one product, they can make the amounts shown below. They first set aside the 6 units of food they require to stay alive. After that, they specialise in the product for which each of them has a comparative advantage. What is the combined output of clothing and shoes, as well as the 12 units of food, produced in one working day?

Scarcity, choice and opportunity cost

What would bring about a deterioration in a country’s terms of trade?

6.3

The graphs illustrate the production possibilities for commodities X and Y in two countries, M and N. What effect will an agreement between M and N to trade the commodities at an exchange rate of 1Y for 3X have?

International trade and free trade

Which of the following is not included in a country’s current account of its balance of payments?

6.3

In the diagram, AD1 shows an economy’s original aggregate demand curve. What might lead to the curve moving to AD2?

Economic growth

A nation has a population of 100 million. 5 million people are unemployed, and the unemployment rate in the country is 10%. What is the size of the labour force?

Price stability and inflation

The graph illustrates the yearly percentage variation in the prices of services and the prices of goods from 2007 to 2012. What can be deduced from the graph?

Balance of payments

Which combination is most likely to lead to a surplus in a country’s trade in goods and services?

6.3

At an exchange rate of 30 Thai baht per $US1, a US-made export is priced in Thailand at 150 baht. What alteration in the baht exchange rate would make the export cost 165 baht?

6.4

The diagram illustrates the demand and supply curves for £ sterling against the US dollar. What is most likely to lead to the demand curve moving from D1 to D2?

6.4

Under the Purchasing Power Parity theory, what factor sets the exchange rate between two countries?

6.4

In a centrally planned economy, free market forces are given a major role in deciding how economic resources are distributed. What is most likely to happen in the short run?

Resource allocation in different economic systems

What would be the most likely way to reduce the deficit on a country’s current account in its balance of payments straight away?

Labour market

In recent years, Zimbabwe experienced a very high rate of inflation. During this period of hyperinflation, which two functions of money could the Zimbabwe dollar still have carried out?

Oligopoly

The diagram illustrates the demand for telephone calls in four countries in 2004 and 2009. Which statement about the demand for telephone calls is correct?

Demand and supply curves

A market is served by three firms (X, Y and Z). Their supply levels at four different prices are shown in the table. Which price adjustment would make market supply twice as large?

Demand and supply curves

A product has a price elasticity of demand that stays constant at unity. Which curve in the diagram illustrates how total expenditure on the product changes with its price?

Price elasticity of demand

The price of good X goes up by 20%. Consequently, the demand for substitute good Y increases by 10%. What is the cross-elasticity of demand for good Y in relation to good X?

Price elasticity of demand

A car rental company hires out the cars in its fleet on weekdays to business users and at weekends to tourists. What is likely to happen if demand from tourists for car rentals increases?

Income elasticity of demand

With reference to the data identify two characteristics of a command economy in Vietnam.

Maximum and minimum prices

Explain, using a diagram, how the social cost of consuming some goods can be higher than the private cost of consuming them.

7.4

A firm producing yoghurt is provided with the following price elasticity of demand information for several flavours: strawberry (–0.8), vanilla (–1.0), pineapple (–2.5).

Price elasticity of demand

Use a diagram to show how a fall in the rate of interest in a country may bring about a change in its foreign exchange rate.

6.4

(i) What does hyperinflation mean?

Balance of payments

Using diagram(s), contrast the effect of a maximum price set below the equilibrium market price with one set above it.

Maximum and minimum prices

Use diagrams to show the distinction between merit goods and demerit goods.

7.4

Explain, with the help of a diagram, how an expenditure dampening policy in an economy would change aggregate demand, prices and output in that economy.

Labour market

Answer the questions below.

Protectionism

Explain the role that the enterprise factor of production plays in a free market economy, then compare it with the roles of the other factors in the production process.

Factors of production

Explain the link between the quantity of money in an economy and the value of money in that economy.

Oligopoly

Explain how exchange rates are set in a free market and how some governments intervene to manage their exchange rate.

6.4

The diagram illustrates the production possibility curve of an economy. What could allow consumers in this economy to consume the mix of goods X and Y shown by point L?

Production possibility curves

The diagram illustrates a firm’s cost and revenue curves. The firm switches its objective from sales revenue maximisation to profit maximisation. In the short run, what effect will this have on the net economic welfare of the following groups? customers and workers

7.8

A market structure where a limited number of firms compete while new firms may enter the market. What is this describing?

7.6

At its present output level, a monopolist operates on the price-inelastic segment of its demand curve. What effect will a rise in the price charged by the firm have on its output and its profits?

7.6

A country operates a negative tax income regime. In the diagram, the curve NT represents the country’s original tax schedule. When the tax rate is altered, the schedule moves to NT1. What effect will this have on work incentives and the after-tax distribution of income?

Long-run costs and economies of scale

The diagram illustrates the market for new cars. At present, the government fixes the quantity supplied at S1. If the market were deregulated, the supply curve would shift to S2. Which area represents the net welfare gain from removing the restriction on the quantity supplied?

Cross elasticity of demand

What economic-efficiency losses are likely to arise from a policy that redistributes income from the rich to the poor?

Short-run costs

A government controls the price set by a monopolist. Under which situation will this intervention increase economic efficiency?

Maximum and minimum prices

By what method are the weights allocated to the various indicators used to build the United Nations’ Human Development Index decided?

Trade unions

Which assets are counted in broad money but excluded from narrow money?

Oligopoly

If national income is $30 000 million and government expenditure is $15 000 million, the economy is at equilibrium but still below full employment. For each extra $100 added to national income, $10 goes to taxes, $25 is used on imports and $15 is saved. In order to increase national income to the full employment level of $50 000 million, to what level must the government increase its own spending?

Fiscal policy

The table lists the marginal utility gained by a consumer who spends his entire weekly income of $42 on two goods X and Y. Good X costs $3 per unit and Good Y costs $6 per unit. To maximise his utility, what quantities of X and Y should the consumer buy?

Utility and rational consumer behaviour

Within a banking system, every bank holds 20% of deposits in cash. A single bank then takes in a fresh cash deposit of $200. If the net cash withdrawals from the banking system after that are zero, what increase will result in bank loans, and what will be the total rise in bank deposits?

Oligopoly

A government funds a rise in expenditure by issuing government securities to overseas residents. What is the immediate impact on the money supply and on the foreign exchange reserves?

Oligopoly

What would lead to a decrease in the quantity of money demanded?

Oligopoly

The table shows the growth rate of nominal GDP, the population growth rate and the rate of inflation in one year for four countries. Which country experienced the greatest rise in average living standards?

Unemployment

Under what circumstances could a rise in the government budget deficit be seen as the most suitable policy choice?

Fiscal policy

The diagram illustrates the link between the rate at which wages rise and the unemployment rate. What would be likely to make the curve in the diagram move downwards and to the left?

Supply-side policy