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Economics: Market failure Unit 1

Question 1 of 21

1

Choice is an important element in the basic economic problem because

Select one of the following:

  • limited resources have alternative uses.

  • wants increase with income.

  • Incomes are distributed unequally

  • High demand leads to high prices

Explanation

Question 2 of 21

1

A misallocation of resources is most likely to occur in monopoly if

Select one of the following:

  • 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

Explanation

Question 3 of 21

1

An economy is always productively efficient if it

Select one of the following:

  • A continually increases its average standard of living.


  • B maximises investment in capital goods.

  • C is operating with full employment of labour.

  • D can only produce more of one good by producing less of another.

Explanation

Question 4 of 21

1

Which one of the following would shift the supply curve for a good to the left?
A decrease in

Select one of the following:

  • A demand for the good

  • B subsidies granted to producers

  • C the rate of growth of labour productivity

  • D the elasticity of supply of the good

Explanation

Question 5 of 21

1

Negative externalities exist in a market for a good giving rise to a misallocation of resources.
This misallocation is most likely to have resulted from

Select one of the following:

  • A the product being over-priced.

  • B over-production of the product.

  • C too little consumption of the product.

  • D too few resources devoted to producing the product

Explanation

Question 6 of 21

1

In a buffer-stock scheme

Select one of the following:

  • A an organisation might buy in the open market to maintain a minimum price in the
    market for a product.

  • B governments restrict supplies of a product coming onto an open market in order to lower
    prices of the product.

  • C buffer stocks are kept to sell if the price of a product starts to fall.

  • D buffer stocks are sold when there are surpluses in the market.

Explanation

Question 7 of 21

1

Which one of the following situations would lead to an increase in equilibrium price?

Select one of the following:

  • A Demand is perfectly inelastic and a firm’s labour costs fall.

  • B Demand is perfectly elastic and a firm’s labour costs rise.

  • C Supply is perfectly elastic and the price of a substitute good falls.

  • D Demand is perfectly inelastic and a firm’s labour costs rise.

Explanation

Question 8 of 21

1

Which one of the following is true?

Select one of the following:

  • A A positive statement is one which can be tested against the facts.

  • B A positive statement is one which never contains words such as ‘could’ or ‘should’.

  • C A normative statement is one which can be scientifically proven to be true or false.

  • D A normative statement is one which never contains words such as ‘is’ or ‘will’ or
    ‘always’.

Explanation

Question 9 of 21

1

The price mechanism helps to allocate resources efficiently because

Select one of the following:

  • A it results in lower rewards being paid to factors of production when demand for the
    output they produce increases.

  • B it will lead to a distribution of output amongst individuals on the basis of greatest need.

  • C the prices of non-renewable resources will tend to rise as the stock of such resources
    nears depletion.

  • D it will always ensure that competition between firms prevents high profits being earned.

Explanation

Question 10 of 21

1

The cross elasticity of demand between two complementary products is always

Select one of the following:

  • A negative.

  • B positive.

  • C zero.

  • D greater than 1.

Explanation

Question 11 of 21

1

Which one of the following is an appropriate form of government intervention for the problem
identified?

Select one of the following:

  • A The introduction of pollution permits to limit positive externalities

  • B The use of a buffer-stock scheme to stabilise the price of a public good

  • C The imposition of a maximum price for a merit good


  • D The provision of a subsidy for a product which generates negative externalities

Explanation

Question 12 of 21

1

Which one of the following is associated with a missing market?

Select one of the following:

  • A A monopoly restricting output

  • B The production of a negative externality

  • C A firm deciding to produce a private good


  • D A government subsidising agricultural production

Explanation

Question 13 of 21

1

At current levels of output, the marginal social benefit of a good is greater than its marginal
private benefit. As a result, there are likely to be

Select one of the following:

  • A positive externalities in consumption.

  • B positive externalities in production.

  • C negative externalities in consumption.

  • D negative externalities in production

Explanation

Question 14 of 21

1

An airline announces that it is ‘slashing fares on all of its flights’. Given a fare reduction of
35%, what would be the expected percentage rise in demand for those flights if the company
has estimated their price elasticity of demand is -2.0?

Select one of the following:

  • A 17.5

  • B 175.0

  • C 7.0

  • D 70.0

Explanation

Question 15 of 21

1

‘Electricity suppliers are required to buy a growing amount of electricity from renewable
energy generators. By 2010, this must amount to at least 10 per cent of total electricity bought
from all 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

Select one of the following:

  • A the government is subsidising the production 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 production of
    ‘green energy’.

  • D electricity suppliers are paying higher average prices for their electricity because some
    of the electricity is generated from ‘green sources’.

Explanation

Question 16 of 21

1

One reason why specialisation raises labour productivity is because

Select one of the following:

  • A specialisation shifts the production possibility boundary to the left.

  • B labour replaces capital to produce goods and services.

  • C specialisation requires an economy to produce on its production possibility boundary.

  • D the division of labour makes it cost-effective to provide workers with specialist
    equipment.

Explanation

Question 17 of 21

1

Two products are in joint supply when

Select one of the following:

  • A a fall in the output of one product is accompanied by a decrease in the output of the
    other product.

  • B an increase in the demand for one product reduces the supply of the other product.

  • C a rise in the quantity supplied of one product reduces the supply of the other product.

  • D a fall in the price of one product reduces the cost of supplying the other product.

Explanation

Question 18 of 21

1

Government failure always occurs when

Select one of the following:

  • A government intervention leads to a net welfare loss compared to the free market
    solution.

  • B social costs in a market are greater than social benefits.

  • C the government fails to intervene in the market.

  • D externalities exist in a market.

Explanation

Question 19 of 21

1

The marketing department of a company manufacturing and selling washing machines has
found that its product has a price elasticity of demand equal to ñ0.75. This suggests that if the
company raises the price of washing machines

Select one of the following:

  • A the quantity demanded will fall by 75%.

  • B the amount consumers spend on the product will increase.

  • C the quantity demanded will increase by 75%.

  • D the amount consumers spend on the product will fall.

Explanation

Question 20 of 21

1

A market is defined as being in equilibrium when

Select one of the following:

  • A there is maximum output at minimum cost.

  • B prices are at their lowest possible level.

  • C there is no tendency for the market price to change.

  • D consumer satisfaction is maximised

Explanation

Question 21 of 21

1

ëAccording to the Environment Secretary, the country has to ìface up to the need to make
some difficult choicesî on reducing its growing mountain of waste. Household waste is
growing at about 3% a year, creating a need for a doubling of waste disposal capacity by
2020. But landfill and incineration are unpopular, while the introduction of recycling and
composting has been hampered by a lack of demand for recycled materials.í
It can be inferred from the data that

Select one of the following:

  • A the opportunity cost of landfill is incineration.

  • B greater composting of waste would reduce the annual rate of growth of waste.

  • C the private cost of waste disposal is greater than the social cost.

  • D prices for recycled materials are low.

Explanation

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