Unit 1 Part 1 Objective Test Markets and Market Failure

Transcription

1 Surname entre Number Other Names andidate Number andidate Signature General ertificate of Education June 2001 dvanced Subsidiary Examination EONOMIS EN1/1 Unit 1 Part 1 Objective Test Markets and Market Failure Tuesday 5 June 2001 fternoon Session In addition to this paper you will require: an objective test answer sheet; a blue or black ball-point pen; the question paper for Part 2 (EN1/2). You may use a calculator. Recommended time allowed: 30 minutes for EN1/1 Instructions Use a blue or black ball-point pen. o not use pencil. Fill in the boxes at the top of this page. nswer all questions. For each question there are four alternative responses. When you have selected the response which you think is the best answer to a question, mark this response on your objective test answer sheet. If you wish to change your answer to a question, follow the instructions on your objective test answer sheet. o all rough work in this book, not on your answer sheet. Information The maximum mark for this paper is 25 marks. Each question carries one mark. No deductions will be made for wrong answers. dvice o not spend too long on any question. If you have time at the end, go back and answer any question you missed out. Make sure that you hand in both your answer sheet and this question book at the end of the examination. M/S01/EN1/1

2 2 OJETIVE TEST QUESTIONS You are advised not to spend more than 30 minutes on these questions. Each item consists of a question or an incomplete statement followed by four suggested answers or completions. You are to select the most appropriate answer in each case. 1 The opportunity cost to society of constructing a new motorway would be the financial cost of the road. other goods and services which the labour employed constructing the road could produce. the other goods and services that would be produced if the motorway were not built. the loss of farmland used in order to build the road. 2 Economics is concerned with the study of determining how governments should allocate resources. how to make more effective use of resources through reducing wants. allocating scarce resources to satisfy unlimited wants. how new wants and resources are produced. 3 Which one of the following is a normative economic statement? Free health care should be provided to all citizens at the point of consumption. reduction in government spending on the Health Service will result in some redundancies. dditional funding for the Health Service could be provided by switching expenditure from other government programmes. reduction in free health care facilities will have most impact on lower income groups. M/S01/EN1/1

3 3 4 If the supply curve of a commodity is positively sloped, a rise in the price of the commodity results in an increase in the quantity supplied. a rightward shift in the supply curve. a decrease in the quantity supplied. a leftward shift in the supply curve. 5 In a typical demand schedule, quantity demanded varies directly with price. varies proportionately with price. is determined by the quantity offered for sale. varies inversely with price. 6 Given a rise in real income, the demand curve for a normal good will, other things being equal, shift to the right, hence raising price. shift to the right, only if price rises by less than real income. shift to the left, hence lowering price. shift to the right, causing an outward shift in the supply curve. 7 The demand curve for lamb is downward sloping. If the demand for lamb is price inelastic a reduction in its price must result in excess supply of lamb. an increase in quantity demanded for lamb. an increase in total expenditure on lamb. increased sales of beef. Turn over M/S01/EN1/1

4 4 8 Price of Good Y 1 O Quantity demanded of Good X The relationship in the diagram above illustrates that the two goods X and Y are inferior goods. complementary goods. normal goods. substitute goods. 9 In a market economy, an increase in the price of a good will always lead to more resources being devoted to the production of the good. always be accompanied by a fall in the output of the good. provide information which will influence the production and consumption decisions of economic agents. make it less likely that new firms will enter the industry. 10 Which one of the following statements referring to the price mechanism is correct? High prices ration scarce goods. Firms are unable to influence demand for their goods. High prices are always associated with high profits. Producers and consumers take account of externalities. M/S01/EN1/1

5 5 11 The table shows the price and quantity for two goods X and Y. Price of X Quantity of X demanded Quantity of Y demanded The cross elasticity of demand for X and Y when the price of X falls from 10 to 9 is Price S 1 S 2 P 1 P 2 1 O Q 1 Q 2 Quantity The rightward shift of the supply curve from S 1 to S 2 in the above diagram could be caused by an increase in the demand for the good. the creation of a monopoly by the firms in the industry supplying the good. a reduction in the rate of VT applied to the good. an increase in the cost of the raw materials used in the production of the good. Turn over M/S01/EN1/1

6 6 13 n industry s short run supply curve is more likely to be elastic if the industry uses scarce factor inputs. its firms are operating below their full capacity. its firms hold low levels of stock. there are many substitutes for its output. 14 monopoly firm may achieve low unit costs as a consequence of restricting its level of output. economies of scale. lack of competition. increasing its elasticity of supply. 15 n economy has achieved productive efficiency if it is self-sufficient in all products. it has eliminated all negative externalities. cost equals price in all its industries. it is unable to produce more of one good without producing less of another. 16 State health care is classed as a merit good because if provision were left to market forces it would be underconsumed. its supply would be at too low a price. it would be impossible to avoid having free riders. demand would exceed supply at the market price. 17 Specialisation and trade can improve economic welfare because the supply of goods and services should increase. inefficient firms are forced to leave the market. fewer goods and services will be exchanged. firms are able to charge higher prices for goods and services. M/S01/EN1/1

7 7 18 In the diagram, P is a maximum price imposed by a government. Price S P O Quantity In the circumstances shown in the diagram, the maximum price will have no effect on price or quantity. cause excess supply. cause excess demand. increase both price and quantity. 19 pure public good (or service) is one which is provided by the State for all consumers. is provided free of charge for all consumers. if consumed by one person is still available for consumption by other people. is heavily subsidised by the State. 20 Government warnings on cigarette packets are an attempt to discourage the consumption of merit goods. inferior goods. public goods. demerit goods. Turn over M/S01/EN1/1

8 8 21 The government is considering four possible capital investment projects. It only has the resources to implement one of these projects. The table shows the estimated value of the private and external costs and benefits that each project is expected to yield. New New New New hospitals roads schools airport Private benefits Private costs Positive externalities Negative externalities Which one of the projects should the government adopt if it wishes to maximise the economic welfare of the whole community? New hospitals. New roads. New schools. New airport. 22 policy of increasing subsidies for inner-city public transport is most likely to cause a fall in negative externalities. government borrowing. the demand for bus and train drivers. the level of local taxation. 23 Market failure results in a misallocation of resources. This may be corrected by the government providing public goods. restricting the manufacture of goods that produce positive externalities. subsidising all loss-making firms. placing a tax on merit goods. M/S01/EN1/1

9 9 24 Government intervention in the market to improve economic welfare may fail because the opportunity cost of government intervention is zero. the administrative costs of government action are excessive. the government seeks to maximise profit. subsidies have to be paid for out of taxation. 25 The supply and demand diagram relates to the market for a merit good. Price ( ) S 1 P 2 H E P 1 G F 2 1 O Q 1 Q 2 Q 3 Quantity The demand curve for the merit good shifts from 1 to 2 raising the market price from P 1 to P 2. To reduce the price back to P 1, the government could introduce a minimum price of OP 1 per unit. subsidy of P 1 P 2 per unit. subsidy of EF per unit. subsidy of GH per unit. QUESTION 25 WS THE LST QUESTION IN THE PPER ON YOUR NSWER SHEET IGNORE ROWS 26 TO 60 EN OF TEST M/S01/EN1/1