WB Econs A2 1

Chapter 1 1
Basic Economic Ideas and Resource Allocation
Chapter 1
MULTIPLE CHOICE QUESTIONS

ECONOMIC EFFICIENCY
1 Q30 Oct 2009
An economy is operating at a point on its production possibility curve.

What is true about the way the economy’s resources are being used at this point?
allocatively efficient productively efficient socially desirable

A possibly yes yes
B yes possibly possibly
C possibly yes possibly
D yes possibly yes
2 Q30 MJ 2010
Which is a correct statement about efficiency?

A Allocative efficiency occurs when marginal revenue equals marginal cost.
B An economy is productively efficient when it is producing at a point on its production
possibility curve.
C An economy will improve its allocative efficiency when its production possibility curve
A-LEVEL Workbook series - www.bac.edu.my

moves outward.
D Productive efficiency occurs when the prices of goods equal their marginal cost of
production.
2
3 Q30 MJ 2011
Chapter 1
In the diagram, LM is an economy’s production possibility curve.
L E
G
good X
O good Y M
Which statement is correct?

A E only is attainable.
B F is economically efficient.
C G may be economically efficient but is not productively efficient.
D H is productively efficient but may not be economically efficient.
4 Q2 ON 2011
The diagram shows a firm’s long-run cost and revenue curves.

At which level of output is the firm both allocatively and productively efficient?
A OA
B OB
C OC
D OD
3
5 Q1 MJ 2012
Chapter 1
When is economic efficiency achieved in an economy?
A when nobody can become better off without somebody else becoming worse off
B when the economy is operating at its natural rate of unemployment
C when the level of social costs is minimised

D when the rate of economic growth is maximized
6 Q1 ON 2013
What is the purpose of trying to achieve economic efficiency?

A to ensure that economic decisions are made equitably
B to ensure that firms are internationally competitive
C to ensure that firms maximise their profit levels
D to ensure that the economy does not waste scarce resources
7 The diagram shows the production possibility curve for a successful transition economy that
moves from point X to point Y over time.

During the transition process the population of the country expressed a strong preference
for increased privatisation.
What happens to economic efficiency as a result of the transition from point X to point Y?
PRODUCTIVE EFFICIENCY
Chapter 1
8 Q1 MJ 2014
In the diagram, LM is an economy’s production possibility curve.

Which statement must be correct?

A F is productively inefficient.
B G and H are productively efficient but economically inefficient.
C Only E is economically efficient.
D Only G is productively efficient.
9 Q1 ON 2014
Which condition defines productive efficiency?

A All factors of production are fully employed.
B All firms are producing at their profit-maximising levels of output.

C There are no further opportunities for substituting capital for labour.
D The output of all goods is produced at the lowest possible cost.
5
ALLOCATIVE EFFICIENCY
Chapter 1
10 Q14 ON 2009
What could prevent a market economy achieving allocative efficiency?

A disagreement among consumers over resource allocation
B inequalities in the distribution of income and wealth

C an inability to produce free goods
D an inability to produce public goods
11 Q15 MJ 2012
A good gives rise to external benefits and is produced under conditions of imperfect
competition.
Which statement must be true?
A Benefits to consumers exceed the benefits to society.
B Firms producing the good will make a loss.
C Output of the good is below the socially optimum level.
D Social costs of production exceed private costs.
12 Q16 MJ 2012
The diagram shows the long-run cost and revenue curves of a monopolist.
AR

revenue,
costs
LRAC
LRMC
W X Y Z
MR
output
Which level of output satisfies the condition for an efficient allocation of resources?
A OW
B OX
C OY
D OZ
6
13 Q1 ON 2012
Chapter 1
What will happen if a firm is subsidised by an amount equal to the external benefits that it
confers on the rest of society?
A There will be no effect upon production.
B The firm will produce less.
C There will be a misallocation of resources.
D Resource allocation will be improved.
14 Q14 ON 2012 (repeated in Q1 Forecast Paper 2016)
All firms in an economy produce at levels of output where price and marginal private cost are
equal.
Why might this not be sufficient to ensure that allocative efficiency is achieved?
A a small number of buyers and sellers
B differences in consumers’ preferences
C product differentiation
D the presence of externalities
15 What need not pose a potential threat to allocative efficiency in a market economy?
A externalities
B differentiated products
C monopolistic elements
D perfect knowledge
PARETO OPTIMALITY
16 Q1 ON 2010
In an economy no one can be made better off without making others worse off.
What can be concluded from this?
A All markets are perfectly competitive.
B There are no externalities.
C The economy is operating on its production possibility curve.
D The distribution of income reflects what each individual deserves.
7
Dynamic Efficiency
Market Failures
Chapter 1
EXTERNALITIES
17 Q13 MJ 2010 (AS)
James grows fruit trees in his garden. They attract butterflies and bees.

What is not an externality of this?
A Neighbours may be stung by the bees that pollinate the trees.
B Neighbours may buy fruit more cheaply from James than the local supermarket.
C Neighbours may enjoy better air quality as the trees naturally improve the atmosphere.
D Neighbours may like to watch the activity of the wildlife at no cost.
18 Q14 MJ 2010 (AS)
The table shows some of the costs when a firm produces a good.
What is the additional cost to a firm of producing the 24th unit?

A $2
B $4

C $6
D $8
19 Q15 ON 2010 (AS)
How would net external benefit be calculated?

A external benefit minus external cost
B external benefit plus private benefit
C private benefit plus social benefit
D social benefit minus private cost
8
20 Q13 MJ 2011 (AS)

Chapter 1
The table shows some of the costs and benefits at a given level of production of a good.
What is correct at this level of production?

A External benefits exceed external costs.
B Private benefits exceed external costs.
C Private costs exceed social benefits.
D Social costs exceed social benefits.
21 Q14 MJ 2011 (AS)
The consumption of a good generates external benefits. Its market equilibrium is E.

Which diagram shows the change in the equilibrium (E to E1) necessary to reflect the correct
value of the good to society?
22 Q14 ON 2011 (AS)

A congestion charge of £10 per day has been imposed on motorists taking their cars into
Central London.
What is it about driving into Central London that provides the economic justification for this
charge?
A The external benefits are greater than the external costs.
B The private costs are greater than the external costs.
C The social benefits are greater than the private benefits.
D The social costs are greater than the private costs.
9
23 Q15 ON 2011 (AS) (repeated in Q16 ON 2015 (AS))
Chapter 1
A cost-benefit analysis of a proposed underground railway produced the following statistics.

What can be concluded from the statistics?
A If undertaken by the private sector there would be a loss of $13m.
B If undertaken by the private sector there would be a profit of $3m.
C If undertaken by the public sector there would be a net social benefit of $15m.
D If undertaken by the public sector there would be a net social cost of $1m.
24 Q14 MJ 2012 (AS)
Which statement is correct?

A External cost equals social cost minus private cost.
B Private cost equals external cost minus social cost.
C Social cost equals external cost minus private cost.
D Social cost equals private cost minus external cost.

25 Q14 ON 2012 (AS)
Which policy adopted by an airline is the result of an externality?

A price cutting against rival airlines
B the prohibition of smoking on aircraft
C the provision of different classes of seating accommodation
D the use of internet booking facilities
10
26 Q15 ON 2012 (AS)

Chapter 1
What will be the result, from society’s view, if the market price for a product does not reflect
the negative externalities in its production?
A too little consumption and too little production
B too little consumption and too much production
C too much consumption and too little production
D too much consumption and too much production
27 Q14 MJ 2013 (AS)
Which is not an example of an externality?

A The establishment of a new firm in an area increases the general level of wage rates in
the area.
B The flowers planted by a householder in his garden give pleasure to his neighbours.
C The immunisation of children against smallpox reduces the danger of the risk of
infection to others.
D The installation of security cameras in a city centre results in an increase in thefts
elsewhere.
28 Q15 MJ 2013 (AS)
A government decided to approve a private airport-building scheme because it was socially

beneficial. In making its decision it calculated private costs at $700 m, private benefits at
$800m and external costs at $200m.
What must have been true about the external benefits of the scheme?
A External benefits equalled private benefits.
B External benefits exceeded external costs.

C External benefits exceeded $100 m.
D There were no external benefits.
29 Q15 ON 2013 (AS)
What will be the result, from society’s view, if the market price for a product does not reflect
the positive externalities in its production?
A too little consumption and too little production
B too little consumption and too much production
C too much consumption and too little production
D too much consumption and too much production
11
30 Q14 MJ 2014 (AS)
Chapter 1
The existence of a positive externality is possible when
A consumers are not the best judges of the future benefits from consuming a product.
B groups of consumers act together to negotiate a discount on the sale of a product.
C producers use a government scheme to clear waste from their offices at no cost to
themselves.

D social costs of production exceed private costs of production.
31 Q15 MJ 2014 (AS)
A firm opens a new factory on derelict ground on the outskirts of a town.

What will be included among the externalities arising from the opening of the new factory?

an increase in air an increase in the the change in the
pollution rents of neighbouring appearance of the
factory sites neighbourhood
A no no yes
B no yes no
C yes no yes
D yes yes no
32 Q16 MJ 2014 (AS)
A firm owns a bridge and charges all vehicle users who cross it.
How might the charge be classified?
A a private benefit and a private cost

B a private benefit and an external cost
C an external benefit and a private cost
D an external benefit and an external cost
33 Q14 ON 2014 (AS)
A firm wishes to build a factory extension.

Permission is required from the government because the extension may increase
A comparative costs.
B external costs.
C opportunity costs.
D private costs.
12
34 Q15 ON 2014 (AS)

Chapter 1
The diagram shows the private and social costs and benefits that arise from the consumption
and production of a good.
If there is no government intervention, what is the value of the marginal external benefit?
A $2
B $3
C $4
D $6
35 Q2 Forecast Paper 2016
Which problem might an extension of defined property rights help to resolve?

A a divergence between private and social costs
B imperfect information on the part of consumers
C inequalities of income and wealth
D the exploitation of consumers by a monopoly supplier
36 Q14 MJ 2015 (AS)
What is an example of an externality?
A Production of good X directly affects the cost of producing good Y.

B The entry of a new firm reduces the profits of existing firms producing good X.
C The introduction of bus-only lanes reduces the travel times of bus passengers.
D The opening of a new underground railway reduces the revenue of bus operators.
13
37 Q15 MJ 2015 (AS)
Chapter 1
The table gives the estimated costs and benefits of a proposed new leisure complex.

What is the estimated value of the social benefits of the project?
A $40 000
B $60 000
C $80 000
D $200 000
38 Q17 MJ 2015 (AS)
A national museum charges an entry fee for admission.
Which combination of rival and excludable qualities would apply to visits to the national
museum on a day when there are very few visitors?

14
39 Q14 ON 2015 (AS)

Chapter 1
In 2011, the Health Ministry in a country encouraged parents to have their children vaccinated
against measles. The parents did not have to use the vaccine and did not have to pay for it.
The government cancelled other projects to fund the programme from taxation because
research concluded that the vaccine benefited the community by preventing the spread of a
serious illness.
Which concepts are implied in the above statement?
A external benefit, public sector, opportunity cost

B market mechanism, fiscal policy, public good
C merit good, normative statement, regulatory control
D private cost, social benefit, monetary policy
40 Q15 ON 2015 (AS)
A gardener plants bamboo to create an attractive environment along the roadside. The
bamboo grows into the garden of his neighbour, who removes the bamboo with a chemical
spray.
What cannot be concluded about the outcome of the planting?
A It increases external cost and external benefit.

B It increases private cost and private benefit.
C It increases social cost and social benefit.
D It increases social cost more than social benefit.
41 Q17 ON 2015 (AS)
What is the best example of what was once a public good becoming a private good?
A education
B medical care
C postal services
D television broadcasts
15
COST-BENEFIT ANALYSIS
Chapter 1
42 Q13 ON 2009 (AS)
The government is considering building flood defences along a river. It has calculated the
costs and benefits as follows.

costs benefit
$m $m
private 450 260
external 60 190
According to cost-benefit analysis, which decision and reasoning about flood defences is
correct?

decision reasoning
A Build External benefits are greater than external costs.
B Build Spcial benefits are greater than private benefits.
C Do not build Private costs are greater than the external benefits
D Do not build Social cost are greater than the social benefits.
43 Q15 MJ 2010 (AS)
What makes it particularly difficult to take decisions using cost-benefit analysis?

A External costs are difficult to estimate accurately.
B Governments have no method of valuing time savings.

C Market forces have no influence on the outcome.
D Private costs can vary from one day to the next.
44 Q16 ON 2010 (AS)
The table shows the expected costs and benefits from four government projects. The
government can afford only one project.
Which project should the government choose?

16
45 Q15 MJ 2011 (AS)

Chapter 1
What is an advantage, rather than a disadvantage, of cost-benefit analysis in deciding on a

government investment project?
A Economic agents place different values on external costs and external benefits.
B Estimates of external costs and external benefits are included.
C Forecasts of future costs and benefits vary over time.
D Miscalculations of the costs are financed by the taxpayer.
46 Q16 ON 2011 (AS)
A government admits that building a new bridge would produce a positive net benefit to
society.
Owing to a lack of public funds, the bridge would have to be built and operated by a private
company, that would charge the public to use the bridge.
Private companies insist that building the bridge would not be profitable.
What could explain the companies’ unwillingness to build the bridge?
A A private company will be unable to obtain the consumer surplus of the users.
B Building the bridge will give rise to negative externalities.
C The demand for bridge crossings is price-inelastic.
D The potential benefits are non-excludable.
47 Q15 MJ 2012 (AS)
In deciding whether to invest in a new project, what would be taken into account in
government cost-benefit analysis but not by a private company?
A consultancy fees
B consumer surplus
C interest charges
D tax payments
17
48 Q16 ON 2012 (AS)
Chapter 1
The table shows some of the costs and benefits, in $ millions, associated with a road building
project. Both a government department and a profit-maximising private firm are considering
building the road.

Who would be willing to build the road?
A Both would be willing to build it.
B Neither would be willing to build it.
C Only the government department would be willing to build it.
D Only the private firm would be willing to build it.
49 Q14 ON 2013 (AS)
The table shows the expected costs and benefits from four government projects. The
government can afford only one project.
Which project should the government choose?

50 Q17 MJ 2014 (AS)
The table shows the results of a cost-benefit analysis into the building of a new runway at an
airport.
Which statement about the new runway is correct?

A The net external benefit is US$5 million.
B The net private benefit is US$25 million.
C The net social benefit is US$105 million.
D The net social benefit is US$145 million.
18

Chapter 1
In a social cost-benefit study what would be included when calculating the net social benefit
of raising the maximum speed limit on motorways from 70 mph to 80 mph?
52 Q16 MJ 2015 (AS)
The production of what is most likely to require a government cost-benefit analysis?
A houses
B medicines
C roads
D schools
Chapter 1 Basic Economic Ideas and Resource Allocation A-LEVEL Workbook series - www.bac.edu.my
19
20
ESSAY
Chapter 1
Economic Efficiency (Questions are largely combined with Market Failure)
1 Q2a ON 2010
In 2009 there were huge fires in Australia which destroyed much property and countryside.
The government promised to allocate a large amount of money and resources to help with
the restoration of the area.
(a) With the help of diagrams explain what is meant by efficiency in the use of resources.
[12]
2 Q7b ON 2010
Economic analysis states that the aims of the government include economic growth and
economic efficiency.
Is economic efficiency better achieved by the market mechanism rather than by government
microeconomic policy? [13]
3 Q2 MJ 2011
The use of cars causes market failure. To achieve an efficient use of resources it would be
better if governments intervened to affect both the production and the use of cars.
Explain the meaning of the terms ‘market failure’ and ‘the efficient use of resources’ and
analyse whether economic theory can be used to support this argument. [25]
4 Q2b ON 2011
Analyse what is meant by economic efficiency and assess whether efficiency is always
achieved in a market. [13]
5 Q7 MJ 2012
It is important to achieve economic efficiency in the use of resources. This can only be done
if the private sector is increased in size. Government intervention in the economy should,
therefore, be minimised.
To what extent do you support this argument? [25]
6 Q7 MJ 2013
The market system is not able to allocate resources efficiently.

Discuss this opinion. [25]
21
7 Q3 MJ 2014
Chapter 1
‘The profitability of firms is a measure of their efficiency. The higher the profit, the greater the
efficiency. High profits should, therefore, be encouraged.’
Do you support this argument? [25]

‘The market system is not able to allocate resources efficiently. Governments are always able
to achieve a better resource allocation than the market.’
To what extent do you agree with this opinion? [25]
MARKET FAILURES
9 Q2a MJ 2010
In 2007 the UK Competition Commission indicated that failure in the market mechanism
would result in both winners and losers.
(a) Explain why producers are usually the winners and consumers are usually the losers
when the market fails. [12]
10 Q4 ON 2013
In the economic recession of 2011 many private sector firms were still able to announce that
they were successful and had made substantial profits. Large bonuses were paid to directors
and shareholders received large dividends.
Discuss whether it is better for an economy if the allocation of resources is left entirely to the
private sector operating through the market system. [25]
EXTERNALITIES

11 Q3b ON 2009 (AS)
Discuss whether it is likely that the private costs and the social costs of production would be
identical. [12]
12 Q4a MJ 2010 (AS)
With the help of a diagram, explain why some goods are produced in quantities greater than
is socially desirable. [8]
13 Q7b ON 2014
Discuss whether economic growth would necessarily lead to a more efficient use of resources
in developing countries. [13]
22
14 Q7 MJ 2015
Chapter 1
‘The free market is not the way to achieve a sustainable, efficient use of economic resources.
Even the famous economist Adam Smith recognised that there was a need for some
government involvement.’
Discuss whether government involvement in the economy might overcome the weaknesses
of the free market system. [25]
15 Q3a MJ 2015
Using examples, explain the difference between merit goods and public goods and show
why it is possible for profit to be made in the supply of one of these types of good but not
the other. [8]
Cost-Benefit Analysis

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Chapter 1 1

Basic Economic Ideas and Resource Allocation

Basic Economic Ideas and Resource Allocation

1 Q30 Oct 2009

An economy is operating at a point on its production possibility curve.

allocatively efficient productively efficient socially desirable

Which is a correct statement about efficiency?

A-LEVEL Workbook series - www.bac.edu.my

In the diagram, LM is an economy’s production possibility curve.

Which statement is correct?

The diagram shows a firm’s long-run cost and revenue curves.

Basic Economic Ideas and Resource Allocation

What is the purpose of trying to achieve economic efficiency?

A-LEVEL Workbook series - www.bac.edu.my

In the diagram, LM is an economy’s production possibility curve.

Which statement must be correct?

Which condition defines productive efficiency?

B All firms are producing at their profit-maximising levels of output.

What could prevent a market economy achieving allocative efficiency?

Basic Economic Ideas and Resource Allocation

A-LEVEL Workbook series - www.bac.edu.my

D Resource allocation will be improved.

14 Q14 ON 2012 (repeated in Q1 Forecast Paper 2016)

17 Q13 MJ 2010 (AS)

Basic Economic Ideas and Resource Allocation

18 Q14 MJ 2010 (AS)

What is the additional cost to a firm of producing the 24th unit?

A-LEVEL Workbook series - www.bac.edu.my

19 Q15 ON 2010 (AS)

How would net external benefit be calculated?

20 Q13 MJ 2011 (AS)

What is correct at this level of production?

21 Q14 MJ 2011 (AS)

The consumption of a good generates external benefits. Its market equilibrium is E.

22 Q14 ON 2011 (AS)

23 Q15 ON 2011 (AS) (repeated in Q16 ON 2015 (AS))

Basic Economic Ideas and Resource Allocation

24 Q14 MJ 2012 (AS)

Which statement is correct?

A-LEVEL Workbook series - www.bac.edu.my

Which policy adopted by an airline is the result of an externality?

26 Q15 ON 2012 (AS)

D too much consumption and too much production

27 Q14 MJ 2013 (AS)

Which is not an example of an externality?

28 Q15 MJ 2013 (AS)

A government decided to approve a private airport-building scheme because it was socially

B External benefits exceeded external costs.

29 Q15 ON 2013 (AS)

30 Q14 MJ 2014 (AS)

Basic Economic Ideas and Resource Allocation

31 Q15 MJ 2014 (AS)

A firm opens a new factory on derelict ground on the outskirts of a town.

32 Q16 MJ 2014 (AS)

A-LEVEL Workbook series - www.bac.edu.my

33 Q14 ON 2014 (AS)

A firm wishes to build a factory extension.

34 Q15 ON 2014 (AS)

35 Q2 Forecast Paper 2016

Which problem might an extension of defined property rights help to resolve?

D the exploitation of consumers by a monopoly supplier

36 Q14 MJ 2015 (AS)

achieved in a market. [13]