May/June 2015

Which combination of events would increase the level of scarcity in an economy?

Scarcity, choice and opportunity cost

In a market, there is a surplus of a good. Which alteration would bring the market to equilibrium?

Income elasticity of demand

The market for sugar is initially at equilibrium. A disease damages the sugar crop, and newspapers report adverse health consequences from eating sugar. Which combination of changes in demand and supply corresponds to these events?

Income elasticity of demand

The diagram illustrates a demand curve for trips on a toll road. If the toll is cut from $5 to $3, what increase in daily consumer surplus results?

Cross elasticity of demand

What economic reason explains why hospitals are frequently constructed and financed by the government?

Government intervention in markets

The diagrams illustrate the costs and benefits in four markets. Which pair of diagrams indicates the presence of a positive consumption externality and a negative production externality?

7.4

Which statement regarding costs is correct?

7.5

A government is thinking about constructing a high-speed rail link. Why might it decide not to go ahead with the project?

Scarcity, choice and opportunity cost

When a product is produced, a negative externality is created and it becomes larger as output increases. Which type of government intervention in the market is most appropriate for dealing with this externality?

Maximum and minimum prices

The government sets a maximum price P1 for an agricultural product. The diagram shows the supply and demand conditions for this product. What outcome will result in the market for this product?

Maximum and minimum prices

Country M is mainly involved in making cars, whereas country N concentrates on producing televisions. The two countries then exchange goods with one another. What is most likely to cause a fall in the extent of specialisation and trade?

6.2: Protectionism

A group of people are stranded on a tropical island and divide their time between collecting coconuts and catching fish. Every person has the same productivity when gathering coconuts or fishing. Which diagram shows the production possibility curve for this community?

Production possibility curves

In the diagram, D represents a country's demand curve for an imported good. The country's government introduces an import tariff of PWPC on the good. Which areas show the resulting fall in consumer surplus and the resulting rise in government revenue?

Protectionism

In the base year, which pair of export and import price changes will produce the greatest impact on the country’s terms of trade?

6.3

The table presents selected figures from a country’s balance of payments accounts for 2012. What was the balance on the country’s current account in 2012?

6.3

The table illustrates how the pattern of employment (%) changed in four countries from 1980 to 2012. Which country did not show the same trends as the other three countries over the period 1980 to 2012?

Monopolistic competition

Aggregate demand in an economy may fall because of a rise in

Economic growth

The table presents the CPI inflation rate (%) in the US for 2006 to 2013. What conclusion can be drawn from these figures about the period 2006 to 2013?

Balance of payments

In what way could a higher general price level cause real household expenditure to increase?

Economic growth

During 2011 to 2013, high street retailers said spending on goods made at home and goods brought in from abroad fell. Consumers were not borrowing money because the economy was in recession. What is the most likely outcome of this?

Economic growth

Which of the following does not directly raise the supply of £ sterling in the world currency market?

6.4

A country’s exchange rate depreciates. If wage costs stay the same, what is the most likely result?

6.4

Which property of money is most important if it is to act effectively as a store of value?

Oligopoly

A small island economy’s currency is permitted to move freely against the US$. The Government of the island then imposes foreign exchange controls on its citizens. What is the most likely impact on the international value of the island currency and on the US$?

6.4

A worker can produce 10 hats or 5 pairs of shoes in a day. In the market, the selling price of three hats is the same as that of two pairs of shoes. The worker should make

Scarcity, choice and opportunity cost

In the diagram, D1D1 represents an individual’s original demand curve for public transport. What might cause the demand curve to shift to D2D1?

Demand and supply curves

The table presents the price elasticity of demand for four goods and services. If the price of each item rose by 1%, which items would see total expenditure rise?

Price elasticity of demand

On the diagram, the area OP1M1Q1 is the same as the area OP2M2Q2. What is the value of the price elasticity of demand if the price falls by half from P1 to P2?

Price elasticity of demand

The market is supplied by four firms. At $20, the market supply is 50 units and at $40 it is 100 units. The table gives each firm’s market share at those two prices. Which firm has no normal upward-sloping supply curve?

Demand and supply curves

The price of a good rises to twice its original level, but firms can increase output by only 10%. This is an example of

Price elasticity of supply

In 2013, a government plan to construct a new high-speed rail connection between two cities drew a great deal of criticism. What was the most likely reason for abandoning such a project?

Scarcity, choice and opportunity cost

A firm’s product price increases by 12%. One week later, the firm is still able to make only the same quantity, but after one month it can raise output by 6%. How would the price elasticity of supply be described after one week and after one month?

Price elasticity of supply

In the past, many people smoked in restaurants. Restaurant owners have noticed that a fall in smoking, brought about by a tax on cigarettes, has lowered their meal sales. How would this be illustrated on demand and supply diagrams for cigarettes and for meals?

Maximum and minimum prices

S1 and D1 indicate the original supply and demand curves for cola. Point X marks the starting equilibrium. Where will the new equilibrium be after production costs rise and the price of lemonade falls?

Income elasticity of demand

Producer surplus is the gap between

Cross elasticity of demand

Give one example of an externality.

7.4

The table shows the projected costs and benefits for a planned new leisure complex. What is the projected value of the social benefits of the project?

7.4

Which type of production is most likely to need a government cost-benefit analysis?

Maximum and minimum prices

A national museum requires visitors to pay an entry fee before they can enter. Which pairing of rival and excludable characteristics would apply to visits to the national museum on a day when visitor numbers are very low?

1.6

The diagram illustrates the consequences of imposing a unit tax of AB on a good. Which area indicates the amount of tax borne by the producer?

Maximum and minimum prices

The table below shows the production possibilities for two countries, with each country using the same amount of resources to produce food and drink each day. What conclusion can be drawn from these figures?

Production possibility curves

As the former Soviet Union shifted away from a planned economy and towards a market economy, the share of household income saved fell. What might account for this?

Trade unions

In what ways could trade protection weaken a country’s competitiveness in export markets?

Protectionism

What does an economic union include that a customs union does not?

Protectionism

The table presents the balance in $million for four items in a country’s current account over two years. What conclusions can be drawn about the changes from Year 1 to Year 2?

6.3

In Company X, the number of workers falls from 250 to 200, and output drops from 5000 to 4800 units per day. In Company Y, the number of workers rises from 800 to 1000, and output rises from 2000 to 2200 units per day. What happens to labour productivity of the workers in the two companies?

7.7

In 2012, a survey of household expenditure chose X and Y to make up the basket of goods used for a price index. The index had a value of 100 in 2012. By 2013, its value had risen to 116. Over 2013, the prices of X and Y rose by 10% and 20%, respectively. What percentage weights were assigned to X and Y when the index was calculated?

National income statistics

With an interest rate of 4% per annum, inflation drops from 5% to 3% per annum. State one benefit of this drop.

Balance of payments

At what point is a deficit on the current account of the balance of payments likely to become worse?

6.3

What does the term real exchange rate mean?

6.4

When country X’s currency appreciates, its tourism earnings measured in foreign currency increase. What conclusion can be drawn from this regarding foreigners’ demand for holidays in country X?

6.4

Within the diagram, curves D1 and S show the demand for and supply of £ sterling in the foreign exchange market. What could cause the demand curve to move from D1 to D2?

6.4

The diagram illustrates the production possibility curve for a desert island economy in which the inhabitants depend only on two commodities: coconuts and fish. What accounts for the shape of the production possibility curve?

Production possibility curves

A government uses monetary policy to control its economy. Which sequence most accurately shows the likely result of a rise in the nation’s inflation rate?

Monetary policy

In a pottery workshop, three women each split their time equally among three products. The table gives the number of units produced of each item. Afterwards, division of labour is adopted and each woman produces only the product in which she has absolute advantage. What is the increase in total output?

Production possibility curves

The diagram illustrates a demand curve for a product. Which statement explains the nature of this demand curve?

Demand and supply curves

Suppose that Tiger Woods, the well-known golfer, says that his last golf appearance will take place at the next US Open Tournament. How could this change the demand for tickets to the tournament?

Demand and supply curves

A market investigation of good X showed that it is an inferior good and a near substitute for good Y. Which figures for the income elasticity of demand for good X and its cross elasticity of demand in relation to the price of good Y would fit this?

Price elasticity of demand

The diagram illustrates the demand curve for a product with unitary price elasticity. What happens with a curve of this type?

Price elasticity of demand

The diagram illustrates how the rice market is affected when a change in government policy shifts the supply curve from S to S1. What is represented by the area JKLM?

Cross elasticity of demand

What is the basic assumption behind the economic problem?

Scarcity, choice and opportunity cost

What is the probable nature of the price elasticity of supply for a crop such as rice?

Price elasticity of supply

In one period, 10 000 units of a normal good are sold for US$20. In a subsequent period, sales rise to 12 000 units at US$22. What might account for this change?

Income elasticity of demand

The final match of a major sports event takes place in a stadium with a fixed capacity of 40 000 people. The ticket price is PF, but when sales begin all of the tickets are bought very rapidly, and many people are left disappointed because they cannot get one. Which diagram shows this situation best?

Income elasticity of demand

Over the last few years, downloading music onto computers and other electronic devices has become more popular, replacing other methods of buying music, for example compact discs (CDs). What is likely to happen to the price and the quantity of resources allocated to each of these markets?

Income elasticity of demand

James cultivates fruit trees in his garden, and these attract butterflies and bees. Which of these is not an externality in this situation?

7.4

In 2013, Jaguar-Land Rover introduced a car that could operate on electricity as well as gas (petrol). This would lower harmful emissions by about 14% compared with the next most efficient car. However, it cost more to purchase. What can be concluded if these cars are bought instead of the existing models?

7.4

A government carries out a cost-benefit analysis of building a new high-speed railway network. The analysis gives the following details. If the railway network is built, the government insists that the net social benefit exceeds US$20 billion. What level must the external costs reach in order to meet the government's requirement?

7.4

In some state-run prisons in California, prisoners can pay for a better type of prison cell than the one they are normally assigned. What does this show?

1.6

The diagram illustrates the demand and supply curves for a good. If the government fixes a maximum price at OPM, what quantity will consumers purchase and what quantity will producers supply?

Maximum and minimum prices

A country engaged in trade is able to make two goods, X and Y. It fully specialises in producing good Y. What is the opportunity cost to the country of consuming more imports of good X?

Scarcity, choice and opportunity cost

In order to raise their economic performance, Eastern European countries have moved away from planned economies towards mixed economies. What is the most likely general result of this change?

Resource allocation in different economic systems

What will increase as a result of the removal of a tariff?

Protectionism

The table indicates the quantities of rice and wheat that two countries, X and Y, are able to produce when each nation allocates its resources evenly between rice and wheat production. Suppose each country then specialises in line with comparative advantage and exchanges goods with the other country. Which terms of trade would be advantageous to both countries?

International trade and free trade

The table shows information about the balance of trade in the US in 2011 and 2012. What conclusion can be drawn about the US in 2012?

6.3

If a country raises its labour productivity in the manufacturing industry, which outcome is least likely to occur?

Unemployment

The diagram illustrates an economy’s aggregate demand curve moving from AD1 to AD2. Which of the following could not have caused the change?

Economic growth

How will demand-pull inflation and cost-push inflation be affected by a rise in indirect taxes?

Economic growth

At the beginning of 2009, a worker was paid US$ 100 each week. Over 2009, the Retail Price Index (RPI) increased by 4% and his average pay increased by 7%. In 2010, the RPI decreased by 3% and his pay decreased by 2%. What happened to his real wage between the start of 2009 and the end of 2010?

Balance of payments

A government has low foreign currency reserves. At what point would it be most likely to regard a deficit on current account as a serious problem?

6.3

The table presents indicators of a country’s economic performance across a two-year period. What is consistent with the information above?

Market failure

The graph illustrates the movement of the £ sterling against the US$ over a three-month period in 2013. What might account for this change?

6.4

The diagram illustrates how a country’s production possibility curve changes from PQ to PR. What rises as a result of the move from PQ to PR?

Production possibility curves

In 2012, China recorded a US$155 billion current account surplus. Which combination of policies might the Chinese Government use to bring equilibrium back?

6.5

The diagram illustrates a production possibility curve for an economy. If the production possibility curve is assumed to stay the same, what is the most probable explanation for the shift from point X to point Y?

Production possibility curves

At present, buses operate at two-hour intervals between X and Y. The company running the route plans to change this to one bus every hour. What is the most likely effect on the number of passengers carried each day and the number carried on each trip?

Income elasticity of demand

The table shows Jamaica's sugar exports in 1999 and 2000. What conclusion can be drawn from the data?

6.3

The price elasticity of demand for grapes is –2.0. At a price of $15, quantity demanded is 5000 units. What quantity will be demanded if the price decreases to $12?

Price elasticity of demand

Toyota Motor Corporation produces cars to match customer orders, instead of trying to market vehicles it has already assembled. If the company experienced a sharp rise in orders for its Prius model, what would be expected to happen to its existing supply curve on a demand and supply diagram?

Income elasticity of demand

The table gives the demand and supply schedules for a good both before and after a tax was introduced. What was the tax amount?

Maximum and minimum prices

Using Fig. 1, explain the trend in US net imports of oil after 2005.

Income elasticity of demand

Explain two factors that are likely to result in the supply of a product being relatively price inelastic.

Price elasticity of supply

Explain how the contribution of each factor of production differs in an agricultural economy from that in an industrialised economy.

Factors of production

Explain what counts as money in a modern economy and what is likely to happen to the price level if the quantity of money increases significantly.

Oligopoly

Use production possibility curves to contrast Brazil’s economy in 2013 with its economy in 2003.

Production possibility curves

Explain how economists measure the extent to which demand for a good changes as income changes and, using a diagram, show why certain goods are described as ‘inferior goods’.

Price elasticity of demand

Using examples, explain the distinction between merit goods and public goods and show why profit can be earned from supplying one of these types of good but not the other.

Behavioural economics

Explain how a declining exchange rate and a high rate of inflation in an economy might influence that economy’s terms of trade.

6.4

Discuss the factors that should be taken into account by the Malawian Government when deciding whether it should develop its tourist industry and let its tobacco industry decline.

6.4

With diagrams, explain how economists use income elasticity of demand to distinguish inferior goods from necessity goods.

Price elasticity of demand

Explain what economists mean when they describe a good as a ‘demerit good’ and, using a diagram, demonstrate why such goods are overconsumed in a free market.

7.4

Define each component of aggregate demand and, using a diagram, illustrate how a fall in one of these components may lessen inflationary pressure in an economy.

Economic growth

An economy redistributes resources and moves along its production possibility frontier. It raises the output of necessity goods and lowers the output of luxury goods. The marginal utility enjoyed by the consumers of the extra necessity goods produced is higher than the marginal utility enjoyed by the consumers of the luxury goods that are no longer produced. What effect does this have on the economic efficiency of the economy?

Production possibility curves

What helps a small firm compete more easily with large firms in the same industry?

7.7

The diagram illustrates a firm’s average revenue (AR) curve. The firm is presently producing output OX. Which area(s) would represent the firm’s marginal revenue if output rose by one further unit?

7.5

The diagram illustrates the cost and revenue curves for producing a textbook. Which price would maximise the publisher’s revenue from the book?

7.5

The diagram illustrates the cost and revenue curves for a firm in monopolistic competition in long-run equilibrium. Which statements accurately describe this firm’s performance? (i) the firm is operating with excess capacity; (ii) the firm is fully exploiting available economies of scale.

7.6

In the diagram, D represents the demand curve for cigarettes, S represents the supply curve, and MSC represents the marginal social cost curve. When a specific tax is imposed on cigarettes, the supply curve moves to S1. What effects is the tax likely to have on economic efficiency and on the tax system?

Maximum and minimum prices

Which combination of policy changes is most likely to shift income from the richest households to the poorest households in an economy? (policies: excise duties; means-tested benefits; universal benefits)

Taxes and subsidies

To cut milk production, every producer is allocated a quota that restricts the quantity of milk each producer may produce. At first, these quotas are not tradable. What effect would allowing the producers to trade the quotas with one another have on the total amount of milk produced and on the combined profits of milk producers?

Maximum and minimum prices

Over one year, a country’s national income measured in money terms rose by 5%, the general level of prices rose by 4% and the total population rose by 2%. What was the approximate change in real income per person?

National income statistics

Which option shows an injection into the circular flow of income of an economy?

Aggregate demand and aggregate supply

In a closed economy without a government sector, investment rises by $100 million and real income rises by $500 million. What is the marginal propensity to consume?

Aggregate demand and aggregate supply

A household that uses all of its income to buy bananas and apples faces the following unit prices ($): bananas $2.50; apples $1.00. The household gains twice as much utility from the last banana consumed as from the last apple consumed. What action should the household take in order to maximise utility from consuming these fruits?

Utility and rational consumer behaviour

The income velocity of circulation stands at 2.0. If the money supply grows by 8% and the average price level rises by 4%, what change will there be in real output (transactions)?

Oligopoly

The diagram illustrates the demand curves and supply curves for loanable funds. The market is currently at equilibrium at point X. Which new equilibrium point would result if business confidence rose and the propensity to save fell?

Income elasticity of demand

Which factor is most likely to reduce a country's national output in the short run, while increasing its potential for long-term growth?

Supply-side policy

Which change would most clearly show that a country has undergone economic development?

Trade unions

The diagram illustrates the link between the inflation rate and the unemployment rate. What would make the curve FG move to JK?

Market failure

Which measure gives the clearest indication of the economic cost caused by a rise in unemployment?

Price stability and inflation