1) Stating that taxes should be raised to help the poor is an example of:
a) A positive economic statement
Incorrect – positive means testable or verifiable, but this statement cannot be tested
b) A normative economic statement
Correct – stating that anything ‘should’ happen is a value judgement, and is not testable, but is
an opinion
c) A testable fact
Incorrect – this statement cannot be tested in any way
d) An objective economic statement
Incorrect – objective is the opposite of ‘subjective’, which means based on a value judgement
2) A PPF can indicate all of the following, except:
a) The effect of an increase in the use of new technology
Incorrect – an increase in the use of new technology will shift a PPF outwards
b) The opportunity cost of increasing production of one good
Incorrect – opportunity cost can be illustrated at a single point on a PPF, or via a movement around a
PPF
c) Consumer preferences
Correct – PPFs only show what is possible to produce, it has nothing to do with consumption
d) Economic growth
Incorrect – potential growth can be shown by a shift outward in a PPF
3) A demand curve can shift to the right by all of the following, except:
a) A fall in price of the good
Correct – a fall in price causes a movement along the demand curve, not a shift
b) A fall in the price of a complement
Incorrect – when a complementary product falls in price the demand curve shifts to the right
c) A rise in the price of a substitute
Incorrect – when a substitute product rises in price the demand curve shifts to the right
d) An increased preference for the good
Incorrect – when consumers increase their preference the whole demand curve shifts to the right
4) A supply curve can shift to the left due to all of the following, except:
a) An increase in VAT
Incorrect – an increase in VAT shifts up the supply curve to the left (supply is reduced)
b) A reduced subsidy
Incorrect – a reduced subsidy shifts up the supply curve to the left (supply is reduced)
c) An increase in wages
Incorrect – an increase in wages shifts up the supply curve to the left (supply is reduced)
d) An increase in the use of new technology
Correct – using new technology enables more to be produced, so supply shifts to the right
5) The price of tomatoes is currently 50p per kilo, and a shop currently sells 1000 kilos per
week. It then reduces price to 40p and finds that it now sells 1400 kilos per week. Its PED
is:
a) - 0.5
Incorrect – Use the correct formula: PED is calculated by % change in Qd / % change in P
b) + 0.5
Incorrect – Use the correct formula: PED is calculated by % change in Qd / % change in P
c) - 2.0
Correct – PED is calculated by % change in Qd / % change in P, which is +40/-20 = -2.0
d) + 2.0
Incorrect – Use the correct formula: PED is calculated by % change in Qd / % change in P
6) The price of tomatoes falls from 50p to 40p, and tomato growers supply the same
amount to shops. The PES is:
a) Zero
Correct – PES is calculated by % change in Qs / % change in P, which is 0/-20 = 0
b) Infinite
Incorrect – Use the correct formula: PES is calculated by % change in Qs / % change in P
c) Equal to one
Incorrect – Use the correct formula: PES is calculated by % change in Qs / % change in P
d) Impossible to calculate
Incorrect – Use the correct formula: PES is calculated by % change in Qs / % change in P
7) When the price of good X rises the demand for good Y also rises. X and Y are:
a) Inferior goods
Incorrect – Inferior goods relate to income changes and not price changes
b) Complements
Incorrect – If the price of complementary good rises and the demand for a good that is its complement
will fall rather than rise – a rise in cinema ticket prices will reduce the demand for popcorn!
c) Substitutes
Correct – If the price of any good rises and the demand for another good rises as a result, the
goods must be substitutes – e.g. tea and coffee
d) Normal goods
Incorrect – Inferior goods relate to income changes and not price changes
8) When the price of good A rises the demand for good B falls, A and B are:
a) Inferior goods
Incorrect – Inferior goods relate to income changes and not to cross price changes
b) Complements
Correct – If the price of any good rises and the demand for another good falls as a result, the
goods must be complements – e.g. milk and breakfast cereal
c) Substitutes
Incorrect – If the price of any good rises and the demand for another good falls as a result, the goods
cannot be substitutes – if the price of tea rises, the demand for coffee would rise, not fall!
d) Normal goods
Incorrect – Normal goods relate to income changes and not to cross price changes
9) YED for an inferior good is always:
a) Negative
Correct – Inferior goods relate to income changes and when income rises, demand falls and
when income falls demand rises, hence the relationship is mathematically ‘negative’
b) Positive
Incorrect – A positive relationship is the sign of a ‘normal’ good not an ‘inferior good’
c) > 1
Incorrect – Greater than one is ‘interesting’, indicating the degree of response but not whether the
good is normal or inferior
d) < 1
Incorrect – Less than one is ‘interesting’, indicating the degree of response but not whether the good
is normal or inferior
10) The effect of a fall in the price of a normal good is to:
a) Increase producer surplus
Incorrect – producer surplus, which occurs when the price a producer is prepared to sell at is less
than the actual market price, will fall – not rise!
b) Increase consumer surplus
Correct – consumer surplus, which occurs when the price a consumer is prepared to pay is
more than the actual market price, will increase following a price fall
c) Decrease consumer surplus
Incorrect – consumer surplus, which occurs when the price a consumer is prepared to pay is more
than the actual market price, will decrease when price rises!
d) Reduce demand for a complementary good
Incorrect – If the price of any good (including a normal good) falls and the demand for another good
which is a complement rises – e.g. if breakfast cereal prices fall, more will cereal will be consumed,
and more milk will also be bought!
11) If new firms enter a market, but demand stays the same, it can be predicted that:
a) Consumer surplus will fall
Incorrect – consumer surplus, which occurs when the price a consumer is prepared to pay is more
than the actual market price, will increase following a price fall (resulting from the increased supply)
b) Prices are likely to fall
Correct – an increase in the number of firms increases supply and, ceteris paribus, price will
fall
c) There will be reduced economic welfare
Incorrect – economic welfare can be measured by adding consumer surplus and producer surplus.
When new firms enter a market, supply shifts to the right, and price falls and the area of economic
welfare increases – drawing a diagram will greatly help with this.
d) Prices are likely to rise
Incorrect – prices will only rise if supply shifts to the left, or demand shifts to the right
12) If an indirect tax is imposed on a good which has a very elastic PED, the burden, or
incidence, of the tax is:
a) Mainly on the consumer
Incorrect – the incidence of a tax (i.e. who suffers from the tax) depends upon PED. If the incidence is
mainly on the consumer, it means that PED is inelastic, not elastic.
b) Mainly on the producer
Correct – If PED is elastic the firm cannot afford to pass on all of the tax to the consumer, as they will
reduce their demand by more than any price rise. In fact they will have to bear most of the cost
themselves – a diagram will help with this.
c) Equally shared
Incorrect – the incidence of a tax (i.e. who suffers from the tax) depends upon PED. Only if PED is
equal to 1 will the incidence be equally shared.
d) All on the producer
Incorrect – the incidence of a tax (i.e. who suffers from the tax) depends upon PED. If the incidence is
all on the producer, it must mean that PED is perfectly elastic, so the firm would have to bear all the
tax!
13) The effect of a subsidy is to:
a) Shift the supply curve downwards and to the right
Correct – a subsidy is a grant given to firms by the government to reduce costs and encourage
consumption. The effect is to shift the supply curve down and to the right.
b) Shift the supply curve upwards and to the left
Incorrect – a subsidy is a grant given to firms by the government to reduce costs and encourage
consumption. A supply curve shift up and to the left implies a cost rise or a tax. Not a subsidy.
c) Reduce demand
Incorrect – a subsidy would only increase demand via an expansion (movement along the demand
curve) following the supply shift
d) Reduce consumer surplus
Incorrect – consumer surplus would only be reduced following a price rise, caused, say by a tax
14) If the government imposes a minimum price below the existing market price it will:
a) Cause supply to shift to the left
Incorrect – a minimum price does not cause any curve to shift because it is a price ‘effect’, not a
change in an underlying determinant
b) Cause demand to contract
Incorrect – a minimum price below the market price would have no effect on demand or supply
because the market price would prevail
c) Cause supply to contract
Incorrect – a minimum price below the market price would have no effect on demand or supply
because the market price would prevail
d) Have no effect
Correct – a minimum price below the market price would have no effect on demand or supply
because the market price would prevail
15) If the government imposes a maximum price below the existing market price it will:
a) Cause supply to expand
Incorrect – supply will contract not expand
b) Cause demand to contract
Incorrect – demand will expand, not contract
c) Create a shortage
Correct – supply will fall (contraction) and demand will rise (expansion) leading to an excess
of demand over supply
d) Create a surplus
Incorrect – a surplus would be created if a minimum price is set above market equilibrium!
16) A market can fail in all of the following cases, except:
a) Under-supply of public goods
Incorrect – markets do fail to supply enough public goods
b) Under-supply of merit goods
Incorrect – markets do fail to supply enough merit goods
c) Not labelling foods which contain unhealthy ingredients
Incorrect – markets do fail to ensure that labelling is accurate
d) Creating incentives through the price mechanism
Correct – markets do not fail to provide incentives through the price mechanism – this is one o
the strengths of markets
17) The price mechanism works main through:
a) Incentives and signalling
Correct – markets provide incentives through the price mechanism, and prices signal to
producers and consumers to buy more or less or to sell more of less, helping to establish
market equilibrium
b) Taxes and subsidies
Incorrect – taxes and subsidies are methods of state intervention to correct market failures
c) Minimum and maximum prices
Incorrect – minimum and maximum prices are types of state intervention and are not a feature of the
price mechanism
d) Government spending and welfare benefits
Incorrect – government spending and welfare benefits are types of state intervention and are not a
feature of the price mechanism
18) Public goods will be under-supplied in a market economy because public goods exhibit:
a) Reject-ability
Incorrect – public goods like defence and street lighting cannot be rejected – one supplied they are
available to all with no ability to reject it
b) Diminish-ability
Incorrect – the supply of public goods like defence and street lighting does not alter (diminish) when
more is consumed
c) Non-excludability
Correct – when public goods like defence and street lighting are supplied they are available to
all and no one can be excluded from consumption, hence a potential ‘free-rider’ problem
d) Zero opportunity cost
Incorrect – the creation of public goods like defence and street lighting uses scarce resources, and
hence an opportunity cost is created
19) Road congestion can be reduced by all of the following, except:
a) Subsidising car production
Correct – this would encourage car purchases, and driving
b) Taxing car ownership
Incorrect – this would reduce road congestion as the cost of car ownership would rise
c) Pricing road-space
Incorrect – this would reduce road congestion as the cost of driving would rise
d) Improving public transport
Incorrect – this would reduce road congestion as the attraction of the alternative would rise
20) Carbon trading helps reduce carbon emissions mainly because:
a) Low polluters buy excess permits to pollute
Incorrect – low polluters could sell, not buy, unwanted permits or credits
b) High polluters are fined by the carbon regulator
Incorrect – carbon trading is an attempt to allow the price mechanism to resolve or ease the carbon
problem. Currently, there is no ‘carbon regulator’.
c) Information failure is increased
Incorrect – Information failure would be reduced as producers become more aware of the impact of
their own pollution
d) External costs are internalised by the polluter
Correct – the cost of buying permits or credits will become a private cost to those producers
who pollute, hence the cost becomes a private cost
21) All of the following could reduce waste, except:
a) Introducing a landfill tax
Incorrect – a landfill tax, which is a tax on waste disposed of in landfill sites, should discourage the
creation and disposal of waste as it adds an extra cost to production which creates waste
b) Providing less information
Correct – providing less information would encourage more waste
c) Taxing rubbish bags/bins
Incorrect – taxing rubbish bags or bins, by size or weight, should discourage the creation and disposal
of waste as it adds an extra cost to production which creates waste
d) Reducing packaging on products
Incorrect – reducing packaging will almost certainly reduce waste
22) It is reasonable to expect students or their families to contribute to their tuition fees
at university because:
a) It will provide the universities with more revenue
Incorrect – it may provide more revenue, but this is not the issue.
b) The State should not contribute to their fees
Incorrect – the State should contribute if there is a measurable external benefit available to society.
c) The cost of education continuously rises
Incorrect – the cost of education usually does rise, but this is not the issue.
d) The average university student derives private benefit
Correct – the average student gains a private benefit, in terms of higher salary or increased
employability, and being charge for this is reasonable.
23) Government intervention to correct a market failure will be inefficient if:
a) The cost of implementation is greater than the benefit
Correct – it is inefficient for the government to allocate scarce resources to resolve a
market failure if the cost of implementing the policy is greater than the benefit arising
b) It causes unemployment
Incorrect – it may be efficient to create temporary unemployment, such as lost jobs in the cigarette
producing industry, and have workers retrain as primary school teachers, for example
c) Businesses have to close
Incorrect – it may be efficient for a business to close, such as a high polluting business.
d) Anyone loses from their actions
Incorrect – government intervention to resolve a market failure may well result in a short term loss to
an individual – putting a tax on cigarettes adds a burden to smokers, but this would not be a sufficient
reason not to intervene!
24) Highly unstable agricultural prices are often caused by:
a) Governments buying up stock
Incorrect – buying and selling stock, through a buffer stock scheme, is one method of helping to
regulate price
b) The price mechanism working effectively
Incorrect – if the price mechanism worked effectively agricultural prices would go up and down, and
the market would not become ‘highly unstable’. The problem in agricultural markets is that the price
signalling system, and incentives, create extreme conditions, which eventually might force farmers
and growers to leave the land
c) Supply shocks like diseases
Correct – supply shocks during the planting and growing season cause short run output to
rise or fall, triggering the so-called ‘exploding cobweb effect’
d) Highly elastic demand and supply
Incorrect – draw a demand and supply diagram with ‘flat’ (elastic) gradients, and then shift D or S.
You will notice that the range of price movement is small, not large.
25) Buffer stocks can be criticised for all of the following, except:
a) They need a good harvest to start
Incorrect – this is a criticism of buffer stocks
b) Not all goods can be stored
Incorrect – this is a criticism of buffer stocks
c) They cost money to manage
Incorrect – this is a criticism of buffer stocks
d) They can help stabilise prices
Correct – this is not a criticism; it is an advantage of buffer stocks. By taking output off the market
when harvests are especially good, the price is kept higher than it would otherwise be, and by
releasing from stock at times of poor harvests the price is kept from falling too low. Buffer stocks
often operate with price floors and ceilings.