AQA As Level Economics Econ 1 January 2009

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AQA As Level Economics Econ 1 January 2009 - Quiz

Questions and Answers
  • 1. 

    Choice is an important element in the basic economic problem because

    • A.

      Wants increase with income.

    • B.

      Incomes are distributed unequally.

    • C.

      High demand leads to high prices.

    • D.

      Limited resources have alternative uses.

    Correct Answer
    D. Limited resources have alternative uses.
    Explanation
    The correct answer is limited resources have alternative uses. This is because the basic economic problem arises from the scarcity of resources relative to unlimited wants and needs. Resources such as land, labor, and capital are limited, but they can be used in different ways to produce different goods and services. Therefore, choices must be made about how to allocate these limited resources among competing alternative uses, which is the essence of the basic economic problem.

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  • 2. 

    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.

    Correct Answer
    B. Higher prices are charged than under competitive conditions.
    Explanation
    In a monopoly, there is no competition, allowing the monopolistic firm to have control over the market and set higher prices. This is because there are no other firms to offer alternative products at lower prices. As a result, consumers have limited options and are forced to pay the higher prices set by the monopoly. This leads to a misallocation of resources as the monopolistic firm may not be producing the optimal quantity of goods or services that would benefit society as a whole.

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  • 3. 

    An economy is always productively efficient if it

    • 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.

    Correct Answer
    D. Can only produce more of one good by producing less of another.
    Explanation
    This answer is correct because it refers to the concept of trade-offs in economics. When an economy can only produce more of one good by producing less of another, it demonstrates that resources are limited and choices must be made. This concept is known as the production possibility frontier, where a country must allocate its resources efficiently to maximize its production of goods and services. Therefore, this answer indicates that the economy is productively efficient.

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  • 4. 

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

    • 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

    Correct Answer
    B. Subsidies granted to producers
    Explanation
    Subsidies granted to producers would shift the supply curve for a good to the left. When subsidies are given to producers, it reduces their production costs, making it more profitable for them to supply the good. As a result, they are willing and able to supply more of the good at each price level, causing the supply curve to shift to the right. Therefore, a decrease in subsidies granted to producers would have the opposite effect, reducing their willingness and ability to supply the good, and shifting the supply curve to the left.

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  • 5. 

    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

    • 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.

    Correct Answer
    B. Over-production of the product.
    Explanation
    Negative externalities occur when the production or consumption of a good imposes costs on third parties who are not involved in the transaction. In this case, the existence of negative externalities in the market for the good indicates that the production of the product is causing harm to others. Over-production of the product means that more of it is being produced than what is socially optimal, leading to an excessive amount of negative externalities. Therefore, the misallocation of resources is most likely a result of over-production of the product.

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  • 6. 

    In a buffer-stock scheme

    • 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.

    Correct Answer
    A. An organisation might buy in the open market to maintain a minimum price in the market for a product.
    Explanation
    In a buffer-stock scheme, an organization might buy in the open market to maintain a minimum price in the market for a product. This means that the organization purchases the product from the open market in order to prevent the price from falling below a certain level. By doing so, they create a buffer stock that can be used to stabilize the market and ensure that the price remains at a desired minimum level. This helps to protect the interests of producers and maintain a stable market for the product.

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  • 7. 

    • A.

      The wages of apple pickers.

    • B.

      Real incomes in the economy.

    • C.

      The price of substitutes.

    • D.

      The popularity of apples.

    Correct Answer
    A. The wages of apple pickers.
  • 8. 

    • A.

      A fall in demand for holidays in China.

    • B.

      No change in demand for holidays in Peru.

    • C.

      A 14% increase in demand for holidays in Italy.

    • D.

      A 2% increase in demand for holidays in Spain.

    Correct Answer
    C. A 14% increase in demand for holidays in Italy.
  • 9. 

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

    • 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.

    Correct Answer
    D. Demand is perfectly inelastic and a firm’s labour costs rise.
    Explanation
    When demand is perfectly inelastic, it means that the quantity demanded does not change regardless of the price. If a firm's labor costs rise, it will need to increase the price of its product in order to maintain profitability. Since the demand is inelastic, consumers will continue to purchase the product even at the higher price, leading to an increase in equilibrium price.

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  • 10. 

    Which one of the following is true?

    • 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’.

    Correct Answer
    A. A positive statement is one which can be tested against the facts.
    Explanation
    A positive statement is a statement that can be tested against the facts, meaning it can be empirically verified or falsified. This means that it can be proven to be true or false based on evidence and observations. Positive statements are based on objective data and do not involve subjective opinions or values.

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  • 11. 

    • A.

      A

    • B.

      B

    • C.

      C

    • D.

      D

    Correct Answer
    C. C
  • 12. 

    The price mechanism helps to allocate resources efficiently because

    • 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.

    Correct Answer
    C. The prices of non-renewable resources will tend to rise as the stock of such resources nears depletion.
    Explanation
    The correct answer suggests that the price mechanism helps allocate resources efficiently because as the stock of non-renewable resources nears depletion, their prices tend to rise. This increase in price signals scarcity and encourages consumers and producers to use these resources more efficiently or find alternative resources. As a result, the price mechanism helps in the allocation of resources by incentivizing conservation and the search for substitutes, ensuring their optimal use.

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  • 13. 

    The cross elasticity of demand between two complementary products is always

    • A.

      Negative.

    • B.

      Positive.

    • C.

      Zero.

    • D.

      Greater than 1.

    Correct Answer
    A. Negative.
    Explanation
    The cross elasticity of demand measures the responsiveness of the quantity demanded of one product to a change in the price of another product. Complementary products are those that are used together, such as bread and butter. When the price of one complementary product increases, the demand for the other complementary product decreases. Therefore, the cross elasticity of demand between two complementary products is negative, indicating an inverse relationship between the two products.

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  • 14. 

    • A.

      OHJR.

    • B.

      FHJL.

    • C.

      OFLR.

    • D.

      EGKM.

    Correct Answer
    B. FHJL.
  • 15. 

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

    • 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

    Correct Answer
    C. The imposition of a maximum price for a merit good
    Explanation
    The imposition of a maximum price for a merit good is an appropriate form of government intervention for the problem identified. A merit good is a good that is considered to be beneficial for society, but may be under-consumed by individuals. By imposing a maximum price, the government can ensure that the merit good is affordable and accessible to all, thereby increasing its consumption and maximizing the social benefits it provides. This intervention helps to correct market failures and promote the overall welfare of society.

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  • 16. 

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

    • 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

    Correct Answer
    B. The production of a negative externality
    Explanation
    A missing market refers to a situation where there is no market mechanism to allocate resources efficiently. The production of a negative externality is associated with a missing market because the cost of the negative externality is not accounted for in the market price. This leads to an inefficient allocation of resources as the negative effects of the externality are not taken into consideration by producers and consumers. Therefore, the production of a negative externality is a characteristic of a missing market.

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  • 17. 

    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

    • A.

      Positive externalities in consumption.

    • B.

      Positive externalities in production.

    • C.

      Negative externalities in consumption.

    • D.

      Negative externalities in production.

    Correct Answer
    A. Positive externalities in consumption.
    Explanation
    At current levels of output, when the marginal social benefit of a good is greater than its marginal private benefit, it suggests that the consumption of the good generates positive externalities. This means that the benefits of consuming the good extend beyond the individual consumer and positively impact others in society. Therefore, there are likely to be positive externalities in consumption.

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  • 18. 

    • A.

      Equilibrium price and quantity would remain at OP1 and OQ1.

    • B.

      It would encourage suppliers to increase production from OQ1 to OQ2.

    • C.

      The amount sold would increase from OQ1 to OQ2.

    • D.

      The market price would fall from OP1 to OPmin.

    Correct Answer
    A. Equilibrium price and quantity would remain at OP1 and OQ1.
  • 19. 

    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?

    • A.

      17.5

    • B.

      175.0

    • C.

      7.0

    • D.

      70.0

    Correct Answer
    D. 70.0
    Explanation
    The expected percentage rise in demand can be calculated using the formula:

    % Rise in Demand = % Reduction in Price * Price Elasticity of Demand

    In this case, the % Reduction in Price is 35% and the Price Elasticity of Demand is -2.0.

    So, % Rise in Demand = 35% * -2.0 = -70%

    However, since the question asks for the expected percentage rise in demand, the negative sign is ignored.

    Therefore, the expected percentage rise in demand is 70.0%.

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  • 20. 

    ‘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

    • 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’.

    Correct Answer
    D. Electricity suppliers are paying higher average prices for their electricity because some of the electricity is generated from ‘green sources’.
    Explanation
    The correct answer is that electricity suppliers are paying higher average prices for their electricity because some of the electricity is generated from 'green sources'. This can be inferred from the statement that "Green energy generators are paid more for their electricity because there is a scarcity of supply of electricity generated from renewable resources." This indicates that the higher prices are a result of the limited availability of renewable energy sources.

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  • 21. 

    • A.

      The free market price will be too high.

    • B.

      There will be over-production of the good of HJ.

    • C.

      The free market output will be too high.

    • D.

      There will be under-consumption of the good of HJ.

    Correct Answer
    D. There will be under-consumption of the good of HJ.
  • 22. 

    • A.

      The benefits of monopoly power.

    • B.

      The benefits of increased specialisation.

    • C.

      Diseconomies of scale.

    • D.

      Increased productive efficiency.

    Correct Answer
    C. Diseconomies of scale.
  • 23. 

    • A.

      The production of potatoes be subsidised.

    • B.

      A tax be imposed on consumers of potatoes.

    • C.

      Potatoes be released from the buffer stock.

    • D.

      Potatoes be purchased for the buffer stock.

    Correct Answer
    D. Potatoes be purchased for the buffer stock.
  • 24. 

    • A.

      Only W and Y

    • B.

      Only V, W and X

    • C.

      Only V, W, X and Y

    • D.

      V, W, X, Y and Z

    Correct Answer
    C. Only V, W, X and Y
    Explanation
    The correct answer is "Only V, W, X and Y." This means that the answer includes V, W, X, and Y, but does not include Z.

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  • 25. 

    One reason why specialisation raises labour productivity is because

    • 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.

    Correct Answer
    D. The division of labour makes it cost-effective to provide workers with specialist equipment.
    Explanation
    The division of labor makes it cost-effective to provide workers with specialist equipment. This is because when workers specialize in specific tasks, they become more skilled and efficient in performing those tasks. As a result, they can produce more output in less time. By providing them with specialist equipment that is specifically designed for their tasks, they can further enhance their productivity. This equipment is tailored to their needs and allows them to perform their tasks more effectively, ultimately leading to increased labor productivity.

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