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65 Cards in this Set
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The main economic objective of firms in a market economy is most likely to be the A) achievement of economies of scale. B) maximisation of consumer satisfaction. C) achievement of an efficient allocation of resources. D) maximisation of profits. |
D) maximisation of profits. |
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The price elasticity of supply for most goods is A) zero. B) between zero and –1. C) between –1 and minus infinity. D) positive. |
D) positive. |
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Which one of the following is most likely to lead to greater labour productivity in an industry? A) An increase in market demand. B) A fall in wages in the industry. C) An increase in the number of firms in the industry. D) An increase in capital investment in the industry. |
D) An increase in capital investment in the industry. |
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The existence of scarcity in an economy implies that A) there are no free goods. B) there are no public goods. C) individuals must make choices. D) there has been a misallocation of resources. |
C) individuals must make choices. |
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An increase in UK incomes leads to an increase in demand for holidays abroad and a decrease in demand for holidays in the UK. It can therefore be concluded that A) holidays in the UK are an inferior good while holidays abroad are a normal good. B) the demand for holidays abroad is income elastic while the demand for holidays in the UK is income inelastic. C) there is a negative cross price elasticity of demand between holidays abroad and holidays in the UK. D) holidays abroad have a high price elasticity of demand while holidays in the UK have a low price elasticity of demand. |
A) holidays in the UK are an inferior good while holidays abroad are a normal good. |
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The UK Government currently subsidises the building of social housing. Social housing is provided to low income households at rents which are lower than the free market rent.Which one of the following would provide an economic justification for these subsidies? A) The unequal distribution of income and wealth caused by the free market results in an unsatisfactory allocation of resources. B) Subsidising low cost housing reduces inequalities in the distribution of wealth. C) Social housing is a public good because it is both non-rival and non-excludable. D) There is market failure in the housing market because of the existence of missing markets. |
A) The unequal distribution of income and wealth caused by the free market results in an unsatisfactory allocation of resources. |
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Which one of the following best describes the relationship between the demand for air travel and the demand for airline pilots? A) Composite demand. B) Derived demand. C) Joint demand. D) Complementary demand. |
B) Derived demand. |
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When money is used as a medium of exchange, A) barter or swapping of goods is likely to become more common. B) trade is likely to increase. C) the relative prices of goods never change. D) specialisation and the division of labour are made more difficult. |
B) trade is likely to increase. |
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A firm increases the size of its business. As a result, its average costs fall because of better utilisation of its factory and the lower cost of buying advertising space. The firm therefore experiences greater A) technical and marketing economies of scale. B) purchasing and marketing economies of scale. C) financial and purchasing economies of scale. D) financial and technical economies of scale. |
A) technical and marketing economies of scale. |
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Which one of the following statements about market failure is correct? A) Small firms are less efficient than large firms due to diseconomies of scale. B) The existence of free riders will result in the over-production of public goods. C) The social benefits of some private goods exceed the private benefits. D) Markets do not supply merit goods. |
C) The social benefits of some private goods exceed the private benefits.
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A misallocation of resources is most likely to occur in monopoly if A) other firms enter the industry. B) higher prices are charged than under competitive conditions. C) market output increases. D) there are economies of scale. |
B) higher prices are charged than under competitive conditions. |
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A product has a price elasticity of demand of –0.5. If the price of this product increases by 10%, then total revenue will A) rise by more than 10%. B) rise by less than 10%. C) fall by more than 10%. D) fall by less than 10%. |
B) rise by less than 10%. |
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An inferior good always has A) positive price elasticity of demand. B)many substitutes. C) negative cross elasticity of demand. D) negative income elasticity of demand. |
D) negative income elasticity of demand. |
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Which one of the following is most likely to be an example of the immobility of a factor of production? Workers’ unwillingness to A) change jobs. B) accept lower wages. C) improve productivity. D) attend training courses. |
A) change jobs. |
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Market failure arises when A) prices rise in response to excess demand. B) no account is taken of positive externalities in consumption. C) firms are unprofitable and go out of business. D) costs increase as firms expand their production. |
B) no account is taken of positive externalities in consumption. |
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A government wishing to reduce firms’ carbon emissions through the use of pollution permits may fail to achieve such a reduction because A) firms would need permits if their production processes pollute the environment. B) firms which do not use all of their permits can sell some of them to other firms. C) permits issued to firms do not impose strict enough limits on their carbon emissions. D) firms improve their technology to reduce the number of permits they require. |
C) permits issued to firms do not impose strict enough limits on their carbon emissions. |
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Which one of the following is a factor of production? A) The profits made by firms. B) Land owned or rented by firms. C) A bank loan. D)The productivity of labour. |
B) Land owned or rented by firms. |
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Which one of the following is most likely to discourage the growth of a firm? The existence of A) diseconomies of scale at low levels of output. B) marketing economies of scale at high levels of output. C) large economies of scale at low levels of output. D) competing firms in the same industry. |
A) diseconomies of scale at low levels of output. |
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The income elasticity of demand for bus travel is − 1.5. This means that A) a 10% increase in fares will lead to a 15% decrease in passengers. B) bus travel is an inferior good. C) bus travel has a negative cross elasticity of demand. D) as unemployment falls, more people will use buses. |
B) bus travel is an inferior good. |
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Which one of the following is an example of government failure? A) The government overproducing a merit good. B) Government provision of national defence. C) All subsidies given to private sector firms. D) The government allowing free market forces to raise the price of oil. |
A) The government overproducing a merit good. |
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The free market equilibrium price of a merit good is £50 per unit. At present, the government does not intervene in the market for this good. The government is most likely to correct the market failure associated with this good if it A) imposes a maximum price of above £50 per unit. B) sets a minimum price of £50 per unit. C) taxes the free market price. D) subsidises the free market price. |
D) subsidises the free market price. |
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A firm is productively efficient when A) it is operating at the lowest point on its average cost curve. B) it cannot increase current production even if demand for its product increases. C) output per worker cannot increase. D) an increase in production will decrease average costs. |
A) it is operating at the lowest point on its average cost curve. |
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Which one of the following is most likely to be a source of monopoly power? A) The employment of additional workers by a firm as it increases its size. B) The existence of diseconomies of scale at high levels of output. C) The granting of a patent to a pharmaceutical company for a newly developed drug. D) The merger of two small firms in a large industry. |
C) The granting of a patent to a pharmaceutical company for a newly developed drug. |
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If there is a negative value for the cross elasticity of demand between two goods, this means that the two goods are A) complementary to each other. B) both inferior goods. C) unrelated to each other. D) substitutes for each other. |
A) complementary to each other. |
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A shift to the right of the supply curve for a product can be caused by A) a rise in popularity of the product. B) a rise in costs of production. C) a tax on the product. D) the entry of new firms into the industry. |
D) the entry of new firms into the industry. |
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In a free market, the rationing function of the price mechanism means that A) an increase in demand, leading to a rise in price, will encourage new firms to enter the market. B) when there is a shortage of a product, the price will rise and deter some consumers from buying the product. C) changes in price provide information to both producers and consumers about changes in market conditions. D) if a product is scarce, a rise in price is likely to make the shortage worse. |
B) when there is a shortage of a product, the price will rise and deter some consumers from buying the product. |
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Merit goods are likely to be underprovided in a free market economy because their A) private benefits exceed their social benefits. B) social benefits exceed their social costs. C) private costs exceed their private benefits. D) social benefits exceed their private benefits. |
D) social benefits exceed their private benefits. |
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At current levels of output, the marginal social cost of making a good is greater than its marginal private cost. Also, the marginal social benefit of the good is greater than its marginal private benefit. As a result, there will probably be A) a misallocation of resources. B) positive externalities in production. C) negative externalities in consumption. D) diseconomies of scale in production. |
A) a misallocation of resources. |
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Which one of the following is an appropriate form of government intervention for the problem identified? A) The introduction of pollution permits to limit negative externalities. B) The use of a buffer stock to stabilise the price of a public good. C) The imposition of a maximum price for a merit good above its free market price. D) The provision of a subsidy for a product which generates negative externalities. |
A) The introduction of pollution permits to limit negative externalities. |
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A manufacturer of rubber tyres for motor vehicles invents and sells a new tyre. The new tyres cut petrol consumption by 25% on cars fitted with them. Which one of the following is most likely to be correct? The A) supply of petrol will fall because petrol is in joint supply with tyres. B) demand for crude oil to produce petrol will fall because the demand for oil is derived from the demand for petrol. C) demand for car tyres will rise because tyres and petrol are in composite demand. D) demand for existing types of tyre will fall because they are in joint demand with the new tyres. |
B) demand for crude oil to produce petrol will fall because the demand for oil is derived from the demand for petrol. |
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The price elasticity of supply of wheat is A) less elastic in the long run than in the short run. B) determined by the availability of substitutes. C) affected by the stocks of wheat available. D) more elastic when there are restrictions on the amount of wheat that can be imported. |
C) affected by the stocks of wheat available. |
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A free good A) is paid for by the government. B) has zero opportunity cost. C) is non-excludable and non-rival. D) has a perfectly inelastic supply. |
B) has zero opportunity cost.
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Where there is partial market failure, A) a market exists but there is a misallocation of resources. B) the product is both non-excludable and non-rival in consumption. C) the market can only be competitive with government support. D) there is excess demand in the market at the current market price. |
A) a market exists but there is a misallocation of resources. |
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The central purpose of economic activity is A) to create maximum profit. B) the satisfaction of needs and wants. C) to achieve economic efficiency. D) to save scarce resources. |
B) the satisfaction of needs and wants. |
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To calculate the percentage change in the quantity supplied of a good following a change in its price, the price elasticity of supply should be A) divided by the percentage change in price. B) divided by the percentage change in quantity. C) multiplied by the percentage change in price. D) multiplied by the percentage change in quantity. |
C) multiplied by the percentage change in price. |
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An economy in which average incomes have fallen by 5% has also seen the demand for holidays overseas fall by 20%. It can be concluded from this that the income elasticity of demand for holidays overseas is A) + 4.0 B) – 4.0 C) + 0.25 D) – 0.25 |
A) + 4.0
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A monopoly market will be less economically efficient than a competitive market if, under monopoly,A the market demand curve is inelastic.B the main objective of the firm is maximum profit.C there are both economies of scale and diseconomies of scale.D prices are higher and output is lower. |
D) prices are higher and output is lower.
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An economy is always productively efficient if itA continually increases its average standard of living.B maximises investment in capital goods.C is operating with full employment of labour.D can produce more of one good only by producing less of another. |
D) can produce more of one good only by producing less of another.
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The equilibrium price in a market A) is the market-clearing price. B) changes when demand equals supply. C) always increases when demand rises. D) is the balance of excess demand and excess supply. |
A) is the market-clearing price. |
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Which one of the following would be classified by an economist under the factor of production known as land? A) A tractor. B) Chemical fertiliser. C) Fish in the ocean. D) A farmer. |
C) Fish in the ocean.
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Government failure may result directly from A) the high cost of administering government policy. B) underconsumption of merit goods by the public. C) a failure of market prices to reflect social costs. D) goods being provided through the market mechanism. |
A) the high cost of administering government policy. |
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Which one of the following is an example of composite demand? A) The demand for labour increases as the demand for the good which that labour produces increases. B) The demand for petrol increases because car travel increases in popularity. C) The demand for strawberries increases following a series of price reductions. D) The demand for bricks increases for use in both house building and factory building. |
D) The demand for bricks increases for use in both house building and factory building. |
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Positive externalities exist when A) production creates private benefits. B) private benefits are less than social benefits. C) private benefits are greater than private costs. D) social costs exceed private costs. |
B) private benefits are less than social benefits.
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Market failure arises whenever firms A) make a loss. B) replace machines with workers. C) create externalities. D) reduce expenditure on research and development. |
C) create externalities. |
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All other things being equal, supply curves slope upwards from left to right because A) higher prices lead to higher costs. B) lower prices lead to higher output. C) lower prices lead to higher demand. D) higher prices lead to higher profits. |
D) higher prices lead to higher profits.
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One reason why UK governments provide education is because A) the private benefit from education is less than the social benefit. B) education cannot be provided by the free market. C) all education is both a merit good and a public good. D) this ensures that the provision of education is maximised. |
A) the private benefit from education is less than the social benefit. |
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An increase in the price of petrol will often result in consumers economising in their use of fuel by reducing the number of journeys they make in their cars. This A) is because petrol and car journeys are in joint supply. B)shows that there is a positive cross elasticity of demand between the price of petrol and the demand for car journeys. C) illustrates the operation of the rationing function of the price mechanism. D) is because the price elasticity of demand for petrol is positive. |
C) illustrates the operation of the rationing function of the price mechanism.
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A firm will always reduce its unit cost of production as it expands its output if it A) benefits from specialisation. B) reduces its price. C) moves down the economy’s production possibility frontier. D) expands its use of capital and labour. |
A) benefits from specialisation
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Market failure results in a misallocation of resources. In some cases, this can be corrected by the government A) restricting the manufacture of goods that generate positive externalities. B) providing public goods. C) subsidising all loss-making firms. D) placing a tax on merit goods. |
B) providing public goods. |
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Which one of the following is classified as an economic resource? A) Consumption . B) Productivity. C) Production . D) Enterprise. |
D) Enterprise. |
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‘OPEC is expected to cut output of crude oil by more than 1 million barrels per day when it meets in Vienna this week. The cut is intended to maintain the high world price for oil.’Source: news reports, 2008 All other things being equal, if output of crude oil was cut in a such a way, which one of the following would happen in the world market for crude oil? There would be a A) movement along the supply curve. B) shift to the right of the supply curve. C) movement along the demand curve. D) shift to the left of the demand curve. |
C) movement along the demand curve. |
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Price elasticity of supply measures the responsiveness of the quantity supplied to a change in A) demand. B) price. C) costs of production. D) the size of firms. |
B) price. |
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Complete market failure always exists when A) there are negative externalities in production. B) the free market fails to provide sufficient merit goods. C) the free market underprices demerit goods. D) there is a missing market in the provision of public goods. |
D) there is a missing market in the provision of public goods.
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Specialisation requires the existence of A) economies of scale. B) economic efficiency. C) a system of exchange. D) rising productivity. |
C) a system of exchange.
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In an economy, some industries are dominated by a few large firms. Which one of the following is most likely to explain this situation? In the economy A) small producers are likely to suffer from diseconomies of scale. B) as industries increase their output, firms are likely to be able to charge a higher price for their products. C) as firms increase their size, the employment of specialist managers may result in a fall in the average cost of running a business. D) small firms find it hard to compete because, as firms increase their output, the rise in employment is likely to reduce labour productivity. |
C) as firms increase their size, the employment of specialist managers may result in a fall in the average cost of running a business.
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Which one of the following situations would lead to an increase in equilibrium price?
A) Demand is perfectly inelastic and labour costs rise. B) Demand is perfectly elastic and labour costs rise. C) Supply is perfectly elastic and the price of a substitute good falls. D) Demand is perfectly inelastic and labour costs fall |
A) Demand is perfectly inelastic and labour costs rise. |
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Which one of the following measures of elasticity indicates that two goods are substitutes? A) A negative income elasticity of demand. B) A positive price elasticity of demand . C) A positive cross elasticity of demand. D A negative price elasticity of demand. |
C) A positive cross elasticity of demand.
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The income elasticity of demand for a good is −3. Which one of the following statements is correct?
A) A 20% increase in income leads to a 60% fall in quantity demanded. B) A 10% increase in price leads to a 30% fall in quantity demanded. C) The good is a normal good. D) Demand for the good is income inelastic. |
A) A 20% increase in income leads to a 60% fall in quantity demanded.
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‘Electricity suppliers are required to buy a growing amount of electricity from renewable energy generators. Green energy generators are paid more for their electricity because there is a scarcity of supply of electricity generated from renewable resources.’ It can be deduced from the data above that A) the government pays a subsidy to generators of renewable energy. B) the social cost of electricity generated from renewable resources is greater than the private cost. C) the government is subsidising the negative externalities arising from the generation of ‘green energy’. D) electricity suppliers are paying higher average prices for their electricity because some of the electricity is generated from ‘green sources’. |
D) electricity suppliers are paying higher average prices for their electricity because some of the electricity is generated from ‘green sources’.
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Government intervention to correct market failure may make the situation worse because A) the information needed to make sound economic decisions is widely dispersed amongst individuals and firms. B) the government is unable to provide private goods since they are both rival and excludable. C) positive externalities resulting from the consumption of merit goods means that they will be underprovided by the state. D) competition amongst firms in the private sector will inevitably result in an optimum allocation of resources. |
A) the information needed to make sound economic decisions is widely dispersed amongst individuals and firms. |
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A positive statement in economics is always A) capable of being tested. B) based upon an opinion. C) based upon numerical data. D) correct. |
A) capable of being tested. |
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Government provision of a merit good can be justified because A) without government intervention there would be a missing market. B) merit goods are non-rival and non-excludable. C) without government intervention partial market failure would result. D) the provision of merit goods has an opportunity cost. |
C) without government intervention partial market failure would result.
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At all points on a country’s production possibility frontier A) all firms are benefiting from economies of scale. B) productive efficiency is achieved. C) each point is equally socially desirable because output is at its maximum. D) there is an equal distribution of income in the economy. |
B) productive efficiency is achieved.
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A good is excludable if A) it is possible to prevent someone from enjoying its benefits. B) it is supplied by the government rather than through the free market. C) one person’s use has no effect on the quantity available for someone else. D) it is supplied at a zero price. |
A) it is possible to prevent someone from enjoying its benefits.
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In a typical demand schedule, quantity demanded A) varies directly with price. B) varies proportionately with price. C) is determined by the elasticity of demand. D) varies inversely with price. |
D) varies inversely with price.
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