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1

Tom has set up his own business, which is based in premises owned by Fanda. All machinery is hired from an equipment company. Both Tom and Fanda are employed in the business. What describes the earnings of Tom and Fanda?

8. Government microeconomic intervention (A Level)  →  8.3. Labour market forces and government intervention

7. The price system and the microeconomy (A Level)  →  7.5. Types of cost, revenue and profit, short-run and long-run production

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2

The diagram illustrates the production possibility curves for an economy in Year 1 (X1 Y1) and Year 2 (X2 Y2). O X1 X2 Y2 Y1 good Y good X What can be concluded from the diagram?

1. Basic economic ideas and resource allocation (AS Level)  →  1.5. Production possibility curves

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3

What does the concept of ceteris paribus allow economists to do?

1. Basic economic ideas and resource allocation (AS Level)  →  1.2. Economic methodology

2. The price system and the microeconomy (AS Level)  →  2.5. Consumer and producer surplus

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4

The diagram shows a person’s marginal costs and marginal benefits of making trips to the cinema. number of trips costs, benefits ($) marginal cost marginal benefit How many trips will the person make?

7. The price system and the microeconomy (A Level)  →  7.1. Utility

7. The price system and the microeconomy (A Level)  →  7.4. Private costs and benefits, externalities and social costs and benefits

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5

A change in market conditions causes a reduction in supply. This results in a higher price for the product, which has a downward-sloping demand curve. What must be the outcome of this higher price?

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

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6

A government wishes to impose a tax on a good so that the consumer and not the producer pays most of the tax increase. Which type of elasticity would best achieve this aim?

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

2. The price system and the microeconomy (AS Level)  →  2.3. Price elasticity of supply

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7

The table shows the price elasticity of demand for four goods and services. price elasticity motor cycles 1.6 telephone calls 1.0 football tickets 0.3 light bulbs 0.0 If the price of each item increased by 1 %, for which items would the total expenditure increase?

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

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8

Two goods, X and Y, are complementary goods. Column 1 of the table below shows the original market situation at time period 1 and column 2 shows the situation following an increase in the price of good Y. price of good X quantity demanded price of good Y quantity demanded The value of cross elasticity of demand for good X with respect to the price of good Y lies between A –1.7 and –2.6. B –0.8 and –1.3. C –0.3 and –0.8. D +0.3 and +0.6.

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

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9

A specific tax is placed upon each bottle of perfume sold. In the diagram, SS is the supply curve before tax, StSt the supply curve after tax. O P Y Z T U D Q price quantity R W St St S S X Which area represents the revenue received by the government from the tax?

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

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10

The table shows the maximum price a consumer would be willing to pay for successive cans of fruit juice. cans first second third fourth fifth price ($) The price of a can of fruit juice is $4 and, having bought three cans, the consumer decides to buy a fourth. How does buying the fourth can affect his consumer surplus?

2. The price system and the microeconomy (AS Level)  →  2.5. Consumer and producer surplus

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11

What is generally considered to be one of the advantages of using the price mechanism as a rationing device?

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

3. Government microeconomic intervention (AS Level)  →  3.1. Reasons for government intervention in markets

7. The price system and the microeconomy (A Level)  →  7.8. Differing objectives and policies of firms

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12

The demand curve in the diagram shows the relationship between the number of car journeys and the cost of a car journey. D O number of car journeys cost of a car journey What would cause the demand curve to shift to the left?

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

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13

What would cause a failure of the market mechanism’s rationing function?

7. The price system and the microeconomy (A Level)  →  7.3. Efficiency and market failure

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

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14

The government is considering building flood defences along a river. It has calculated the costs and benefits as follows. costs $m benefits $m private external According to cost-benefit analysis, which decision and reasoning about flood defences is correct?

7. The price system and the microeconomy (A Level)  →  7.4. Private costs and benefits, externalities and social costs and benefits

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15

Despite much opposition, the local government in a popular tourist resort built a leisure centre and swimming pool which is open to everyone. Many tourists visit the centre. Local residents are charged a reduced entry fee. How would economists classify this service?

1. Basic economic ideas and resource allocation (AS Level)  →  1.6. Classification of goods and services

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16

What can be provided only as a public good?

3. Government microeconomic intervention (AS Level)  →  3.1. Reasons for government intervention in markets

1. Basic economic ideas and resource allocation (AS Level)  →  1.6. Classification of goods and services

3. Government microeconomic intervention (AS Level)  →  3.2. Methods and effects of government intervention in markets

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17

The diagram shows the market for wheat. D S X Y Z P1 P2 O quantity price What quantity of wheat must the government buy if it wishes to raise the market price from P1 to P2?

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

5. Government macroeconomic intervention (AS Level)  →  5.4. Supply-side policy

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

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18

The government places a maximum price P1 on an agricultural product. The supply and demand conditions for this product are shown...

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

5. Government macroeconomic intervention (AS Level)  →  5.4. Supply-side policy

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19

A country has the correct climate for growing tea, which is produced very cheaply and exported. Fruit is also grown, but this costs more as the climate is not as suitable. Fruit can be sold at a higher price than tea so some of the land used for tea is switched to fruit. What will definitely happen as a result?

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

5. Government macroeconomic intervention (AS Level)  →  5.4. Supply-side policy

1. Basic economic ideas and resource allocation (AS Level)  →  1.1. Scarcity, choice and opportunity cost

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20

A government has been protecting its domestic car industry with a quota on imported cars. It then removes the quota and replaces it with a subsidy to domestic car producers. How will this change affect the price of cars and the level of consumer choice?

5. Government macroeconomic intervention (AS Level)  →  5.4. Supply-side policy

5. Government macroeconomic intervention (AS Level)  →  5.2. Fiscal policy

2. The price system and the microeconomy (AS Level)  →  2.5. Consumer and producer surplus

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21

What will cause an improvement in a country’s terms of trade?

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

6. International economic issues (AS Level)  →  6.4. Exchange rates

11. International economic issues (A Level)  →  11.2. Exchange rates

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22

The table shows the balances for four items in a country’s current account on the balance of payments for two years. visible invisible income current transfers year 1 –72 –24 year 2 –87 –3 –4 What can be concluded about the changes between year 1 and year 2?

6. International economic issues (AS Level)  →  6.3. Current account of the balance of payments

6. International economic issues (AS Level)  →  6.5. Policies to correct imbalances in the current account of the balance of payments

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23

What could lead to an increase in the size of a country’s labour force?

8. Government microeconomic intervention (A Level)  →  8.3. Labour market forces and government intervention

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24

The graphs show consumer prices and employment for Ireland. consumer prices % increase on a year earlier 7.0 6.0 5.0 4.0 unemployment as % of labour force What can be concluded from the graphs?

4. The Macroeconomy (AS Level)  →  4.1. National income statistics

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

5. Government macroeconomic intervention (AS Level)  →  5.3. Monetary policy

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25

What may cause cost-push inflation?

4. The Macroeconomy (AS Level)  →  4.6. Price stability

8. Government microeconomic intervention (A Level)  →  8.3. Labour market forces and government intervention

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26

The table gives details of some parts of a country’s balance of payments. In which year did the country have its largest visible trade deficit?

6. International economic issues (AS Level)  →  6.3. Current account of the balance of payments

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27

The table shows indicators of a country’s economic performance over a two-year period. year exchange rate index volume of exports index volume of imports index balance of trade in goods and services ($) zero +500 million What is consistent with the above information?

6. International economic issues (AS Level)  →  6.4. Exchange rates

11. International economic issues (A Level)  →  11.3. Economic development

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

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28

The diagram shows the market for Japanese Yen. O price of Yen in terms of other currencies quantity of Yen D S2 S1 What could have caused the change in the supply of Yen from S1 to S2?

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

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29

Country X trades with only two countries, the USA and Japan. 90 % of the country’s trade is with the USA and 10 % is with Japan. The original value of the trade-weighted exchange rate index is 100. The value of country X’s currency against the US$ rises by 10%. The value of country X’s currency against the Japanese yen rises by 50 %. What will be the value of country X’s new trade-weighted exchange rate index?

6. International economic issues (AS Level)  →  6.4. Exchange rates

11. International economic issues (A Level)  →  11.2. Exchange rates

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30

Copyright Acknowledgements: Question 24 © For How Much Longer Can the Emerald Isle Gleam; p 96; The Economist; 18 March 2006 30 A government with a floating exchange rate wishes to encourage a rise in the international value of its currency. What should it do?

6. International economic issues (AS Level)  →  6.4. Exchange rates

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