Oct/Nov 2014

What does the allocation of resources in a market economy involve?

Resource allocation in different economic systems

If demand for a good rises, the equilibrium price does not change. What is the good’s elasticity of supply?

Price elasticity of supply

A manufacturer has estimated that the price elasticity of supply of ice cream is +1.5. If demand for ice cream increases and price goes up by 10%, by how much will the manufacturer increase supply to the market?

Price elasticity of supply

Consumer X is the biggest of five consumers and accounts for 50% of sales. The table gives the quantity of the good demanded by consumer X and the market supply of the good. What is the market equilibrium price?

Income elasticity of demand

The gap between the price consumers pay for a product and the maximum amount they are willing to pay is called

Cross elasticity of demand

What kinds of externalities are generated by 1 a firm increasing the supply of trained labour and, 2 the loud noise produced when a householder mows his lawn?

7.4

The table sets out the total amount that consumers are prepared to pay for various quantities of good X, along with the total external benefits created by the consumption of X. What is the marginal social benefit when 5000 units are consumed?

7.4

A company made an application to construct a supermarket on the outskirts of a town beside a river. Gaining permission for this required an expensive planning procedure with the local government. To secure approval, the company also agreed to build a bridge over the river close to the supermarket. Which factor would be counted in a social cost-benefit study of this proposal that would not be included in a private calculation?

7.4

A good is best provided by the market when it is

1.6

As the economy shifted towards a market economy, government price controls were abolished. In the diagram below, the government had originally imposed an effective maximum price. What happened to price and quantity when the government removed the maximum price?

Income elasticity of demand

The diagrams illustrate the production possibility curves for two countries, X and Y, each able to produce food and clothes. Which statement about production in these two countries is correct?

Production possibility curves

In the diagram, the curve JK shows an economy’s production possibility curve. What might make the economy move from point M to point N?

Production possibility curves

The diagram illustrates what happens when a tariff on sugar imports into a country is removed. Which area shows the fall in producer surplus for the country’s domestic sugar producers?

Protectionism

What effect will a rise in a country’s export prices compared with its import prices have on that country?

6.3

A country brings in components that it then uses to produce electrical goods for sale in the domestic market. Incomes in the country are rising. What is likely to be the effect on the price of electrical goods and on the country’s balance of trade?

Income elasticity of demand

The table shows data for household spending in the UK economy from 2008 to 2010. What conclusion can be drawn from the data?

National income statistics

In the diagram, AS1 represents an economy’s long-run aggregate supply curve. What would make the aggregate supply curve move from AS1 to AS2?

Unemployment

The table presents an index of consumer prices (2005 = 100) for several countries in 2009, 2010 and 2011. Which country had the smallest rate of decline in the real value of money between 2009 and 2011?

Balance of payments

National inflation rates differ greatly, but they have fallen in most countries over recent years. Which combination could best account for this fall in inflation rates?

Monetary policy

Why can a balance of payments deficit be a possible issue for an economy that uses a fixed exchange rate?

Wage determination

Which factor is most likely to lead to a depreciation of Australia’s exchange rate?

6.4

If the exchange rate is 4 Egyptian pounds (EGP) = 1 US$, an American product is priced in Egypt at EGP120. Provided the dollar price does not change, what price will the product have in Egypt when the Egyptian pound depreciates to EGP5 = 1 US$?

6.4

During the twentieth century, a typical car assembly plant altered in character. There were fewer firms in the industry, they worked from bigger sites and they used more automated machinery. How is this change most likely to have influenced the relative use of factors of production in the industry?

Factors of production

The US Central Bank reduces its interest rate in order to increase aggregate demand. This affects the exchange rate of the US$. The diagram illustrates the resulting shifts in the demand for and supply of US$ in the foreign exchange market. Assume that a change is represented by a movement from curve numbered 1 to curve numbered 2. What should W, X, Y and Z be labelled to show the effect of the interest rate rise on the exchange rate?

6.4

What does the term ‘the value of money’ mean?

Oligopoly

What could cause an individual’s demand curve for petrol to shift to the right?

Demand and supply curves

The diagram illustrates a consumer’s short-run and long-run demand curves for coconuts. At first, the consumer buys quantity Q at price P. When the price of coconuts rises from P, the consumer’s short-run reaction is larger than the long-run reaction. When the price falls from P, his short-run reaction is smaller than his long-run reaction. What is the consumer’s short-run demand curve?

Demand and supply curves

The diagram illustrates the demand curve for a product. If rectangle OLMN has the same area as rectangle OPQR, which statement is correct?

Price elasticity of demand

Which elasticity values show that cars are normal goods and that petrol is a complement to using cars?

Price elasticity of demand

A tax of a fixed amount is imposed on every bottle of perfume sold. In the diagram, SS shows the supply curve before the tax, while StSt shows the supply curve after the tax. Which area indicates the revenue gained by the government from the tax?

Maximum and minimum prices

Which statement correctly describes the problem of scarcity?

Scarcity, choice and opportunity cost

In the diagram, OS1 and OS2 represent a pair of straight-line supply curves. As price rises, the elasticity of supply

Price elasticity of supply

Under which situation will a specified increase in the supply of a good lead to the largest drop in the good’s price?

Price elasticity of demand

The table sets out the highest price a consumer is prepared to pay for each successive can of fruit juice. A can costs $4, and after buying three cans, the consumer chooses to purchase a fourth. What effect does buying the fourth can have on his consumer surplus?

Cross elasticity of demand

Which combination of changes would allow the price mechanism to allocate resources more efficiently in a monopoly market?

7.6

A company wants to construct a factory extension. Government approval is necessary because the extension may increase

7.4

The diagram illustrates the private and social costs and benefits generated by the consumption and production of a good. If there is no government intervention, what is the value of the marginal external benefit?

7.4

Which kind of item can be supplied only as a public good?

1.6

The diagram illustrates the demand for, and supply of, a foreign-made mobile (cell) phone. The starting position in the domestic market is X. Importers raised the supply of the phone, and demand for the phone also rose. The government then considered protecting domestic manufacturers by introducing a limit on imports that would keep supply at the original quantity. How would the price differ between the new equilibrium without an import limit and the equilibrium with an import limit?

Protectionism

The government sets a maximum price of P2 for a product. What will the position be after this action?

Maximum and minimum prices

What impact does free trade have on a country?

International trade and free trade

A firm is deciding whether to purchase a piece of capital equipment costing $2000. It expects that this equipment will be usable for two years. As an alternative, the money could be lent to a finance company at a compound rate of interest of 5%. What minimum rise in revenue must the firm expect for buying the equipment to be worthwhile?

7.5

What does dumping mean in international trade?

Protectionism

Because of a trade agreement, toys made in Africa may be sold in European markets. These toys cost far less than comparable toys made in Europe, although their quality is lower. What will happen in Europe to expenditure on toys, employment in European toy companies and imports from Africa?

International trade and free trade

In which part of the balance of payments account would the following international transaction be entered, if it is matched correctly?

6.3

The diagram presents the annual average labour productivity growth for three groups of countries across two periods. Which activity, and in which country group, recorded the largest increase in its labour productivity growth rate from 1975-1990 to 1990-2005?

Unemployment

The diagram, which illustrates part of the process causing the aggregate demand curve to slope downwards to the right, is incomplete. Which words correctly fill gaps 1, 2 and 3?

Economic growth

The graph illustrates the rate of inflation in a country over a 5 year period. What conclusion can be drawn from the graph?

Balance of payments

What factors could account for a rise in the amount of a country’s imports?

Unemployment

Which consequence is most likely if a country’s balance of payments deficit rises?

6.3

Which economic change could lead to both cost-push inflation and demand-pull inflation?

Economic growth

The diagram illustrates the market for Japanese Yen. What might have led to the supply of Yen shifting from S1 to S2?

6.4

The diagram illustrates the production possibility curve XX for an economy producing both consumer goods and capital goods. If the economy shifts from point M to point N, which diagram is the most likely future location of the production possibility curve YY?

Production possibility curves

To cut a deficit in the current account of the balance of payments, a government sets a cap on the foreign exchange that its households and firms are allowed to buy. Why might this cause the country’s inflation rate to rise?

Labour market

Arfan and his brother Ben jointly own and manage a fishing business. They have one boat, and on the days when they go fishing they hire Cephas and Dipak. They sell the fish to the proprietor of a nearby shop. Which row correctly identifies the factors of production involved?

Factors of production

The market price of a product increased from $8 to $10 and, because of this, market demand dropped from 20 000 to 8000 per week. Consumer X’s demand decreased from 30 to 24 and consumer Y’s demand fell from 100 to 60 per week. What conclusion can be drawn from this information?

Price elasticity of demand

A government wants to levy a tax on a product in such a way that most of the tax burden falls on the producer rather than the consumer. What level of price elasticity of demand should the product have if this objective is to be achieved?

Price elasticity of demand

The demand for a commodity has unitary price elasticity. Which diagram illustrates how total expenditure on the commodity is related to its price?

Price elasticity of demand

The price of good X increases by 10%. As a consequence, demand for the substitute good Y increases by 20%. Calculate the cross-elasticity of demand for good Y with respect to the price of good X?

Price elasticity of demand

The diagram illustrates the supply curve of coffee in an economy. The market equilibrium begins at point X, but a change causes it to shift to point Y. What could account for this?

Income elasticity of demand

In ordinary circumstances, breathing fresh air carries no opportunity cost. This indicates that fresh air is

1.6

The diagram depicts three supply curves.

Demand and supply curves

As demand for shoes rises, their price is pushed up. Firm Y raises its supply faster than firm Z does. What factor could account for this difference in the speed of their responses?

Price elasticity of supply

In a free market that is not in equilibrium, which price and quantity combination will cause price to decrease and output to contract until equilibrium is reached?

Income elasticity of demand

Under which set of circumstances will prices be unable to carry out their role as an allocative mechanism, yet may still act as a rationing device?

Behavioural economics

The table sets out, for two different quantities of good X, the total price consumers are prepared to pay and the total external benefits created. What extra social benefit arises if 4 units, rather than 3 units, are produced?

7.4

Which statement regarding the supply of goods is correct?

1.6

A country exports olives. The government plays a part in their production because it wants private olive producers to feel secure enough to plan investment even when the olive harvest varies. Which economic term is used to describe this situation?

Government intervention in markets

The table presents demand and supply schedules for a product. The government then provides a subsidy for the product because it generates external benefits. By how much does the subsidy raise consumption of the product?

Maximum and minimum prices

The diagram shows a wheat market. The government fixes a maximum price at OP. What might make this maximum price affect the market?

Maximum and minimum prices

Country X sends agricultural commodities to country Y, whereas country Y sends industrial goods to country X. If the trade pattern between X and Y is explained by the theory of comparative advantage, what conclusion can be drawn from this?

International trade and free trade

The diagrams illustrate an economy’s production possibility curve both before and after a change occurs.

Production possibility curves

Which is not normally a reason for a country to introduce protection in international trade?

Protectionism

A government chooses to raise the quota for an imported product. What is likely to occur?

Protectionism

A Japanese car manufacturer establishes a factory in Malaysia to make car parts. What effect is this likely to have on Malaysia’s trade balance and its income balance within the current account of the balance of payments?

6.3

The proportion used for food in building the United Kingdom’s Retail Price Index dropped from 16.7% in 1987 to 11.8% in 2011. What might account for this?

Balance of payments

People within an economy become more optimistic about the future. This leads to a rise in consumer expenditure, causing the aggregate demand curve to shift to the right, as shown. What could make the economy’s output return to Y?

Economic growth

Which statement concerning inflation is correct?

Balance of payments

A country had an annual inflation rate of 4% for three consecutive years. Which statement is correct for the 3-year period?

Balance of payments

Why may a rise in a current account surplus cause inflation?

6.3

In the short term, demand for imports is frequently price inelastic. As time passes, demand usually becomes more price elastic. What does this help to explain?

6.3

The table indicates how many Jamaican dollars were exchanged for 1 unit of each other currency in time period 1 and time period 2. What conclusion could be drawn from the table?

6.4

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

Factors of production

An economy is experiencing a high inflation rate and a balance of payments deficit. Which policy change would help reduce the balance of payments deficit without worsening inflation?

6.5

A farmer is able to grow both wheat and barley at constant production costs. The opportunity cost of 1 kilo of wheat is 1.5 kilos of barley. A kilo of wheat sells for twice the price of a kilo of barley. What should the farmer choose in order to maximise revenue?

Scarcity, choice and opportunity cost

The table sets out the price and quantity demanded of a successful film DVD during the first four weeks after its release.

Demand and supply curves

The price of good X increases by 20%. Consequently, the demand for substitute good Y changes by 10%. What is the cross elasticity of demand for good Y with respect to the price of good X?

Price elasticity of demand

For a product with inelastic price elasticity of demand, what impact will a decrease in supply have on producer revenue and consumer surplus?

Price elasticity of demand

Goods X and Y are complementary goods. In the table below, column 1 presents the original market position at time period 1, while column 2 shows the position after the price of good Y rises. The value of cross elasticity of demand for good X with respect to the price of good Y is between

Price elasticity of demand

A business produces and sells magazines. The diagram illustrates the movement of the firm’s supply curve from S1 to S2. What might have brought about this change in the firm’s supply curve?

Demand and supply curves

Describe the general movement in coffee prices from 2007 to 2012 and identify one year when supply was likely to have been greater than demand in the coffee market.

Demand and supply curves

Using a supply and demand diagram, explain how the introduction of a subsidy for a good would change the surplus gained by the producers of that good.

Maximum and minimum prices

Explain the influences that determine whether the price elasticity of demand for a product is high or low.

Price elasticity of demand

Explain how tariffs and an undervalued exchange rate can be used to protect a domestic market from foreign competition.

Protectionism

Compare the inflation rate in China for 2007–2008 with that for 2010–2011.

6.4

Using a diagram, explain how prices are used to allocate scarce resources in a market economy.

Resource allocation in different economic systems

Explain why the value of income elasticity of demand for a good may be positive, negative or zero, whereas the value of its price elasticity of demand is most likely to be negative.

Price elasticity of demand

Explain how a rise in the rate of interest might bring about a shift in an economy’s aggregate demand curve.

Economic growth

If the minimum price per unit were set at 50 pence rather than 45 pence, explain, with the aid of a diagram, how the higher price would affect consumer surplus in this market.

Maximum and minimum prices

Show how the economic problem may be illustrated using a production possibility curve.

Scarcity, choice and opportunity cost

Explain why an increase in the money supply and rising world energy prices are treated as different causes of inflation in an economy.

Balance of payments

Explain how comparative advantage indicates that specialisation and international trade can raise the welfare of consumers in an economy.

International trade and free trade

Which statement about efficiency is right?

Behavioural economics

Which of the following is a financial economy of scale?

7.7

The diagram illustrates a firm’s average revenue curve. What can be inferred from the average revenue curve about the firm’s total revenue as output rises?

7.5

What assumption lies behind the kinked demand curve in oligopoly?

7.6

At its present output level, a monopolist is operating on the price-inelastic section of its demand curve. What would happen to price and output if it maximised profit?

Price elasticity of demand

In a number of countries, there are laws that stop firms from imitating innovations brought in by other firms. What economic reason lies behind these laws?

Behavioural economics

Which policy change will benefit some individuals without making anyone else worse off?

Behavioural economics

When a good creates external benefits and is produced in monopolistic competition, which statement must be correct?

7.4

A woman enters the labour force and receives a salary of $25 000 per annum. Her partner, who is already in employment, earns $18 000 per annum. The couple pay a childminder $8000 per annum to care for their baby. What will be the increase in GDP?

National income statistics

As part of quantitative easing, a central bank buys government securities. What effect is this likely to have on interest rates and the money supply?

Monetary policy

An economy is operating at its natural rate of unemployment. Under monetarist theory, what effect will an unexpected rise in the money supply have on unemployment in the short run and in the long run?

Monetary policy

The schedule indicates the total utility gained by a consumer of good X at various levels of consumption. The consumer gets two units of utility from the final $ spent on each good that she buys. What is the largest number of units of X that she will consume if the price of X is $5?

Utility and rational consumer behaviour

In an economy with full employment, the marginal propensity to consume of pensioners exceeds that of taxpayers. Government expenditure on pensions falls by $20 billion. In order to keep full employment, taxation must be

Fiscal policy

The table presents some figures for an economy. What is the equilibrium national income level?

Economic growth

If the income velocity of circulation of money stays constant, and inflation is 10% while the money supply grows by 7%, what is the approximate change in the volume of national output?

Economic growth

The diagram illustrates two liquidity preference demand curves for money (LP). The money supply is M and the original equilibrium rate of interest is r1. What might have led to the decrease in the rate of interest from r1 to r2?

Oligopoly

What is most likely to raise a country’s long-run trend rate of growth?

Unemployment

The chart presents the rates of economic growth and unemployment in a country over the period 2007 to 2010. What does the chart indicate?

Unemployment