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Economics multiple choice questions

A level

Efficient Resource Allocation

Multiple Choice Questions and Answers

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 [N09/P3/Q14]

➡Answer D

Market forces fail to allocate resources for public goods due to the free rider problem. Option A is irrelevant and option B is not related to the issue of efficiency. Option C is clearly incorrect

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 moves outward. D
Productive efficiency occurs when the prices of goods equal their marginal cost of production. [J10/P3/Q30]

➡Answer B

All points on a PPC are necessarily productively efficient. Allocative efficiency is where P = MC hence A & D are incorrect. Option C is incorrect because improvement in allocative efficiency does not always follow an outward shift in PPC

Which is not a policy designed to correct market failure?
A competition policy
B free inoculation against infectious diseases
C minimum wage policy
D regulations to limit river pollution [N10/P3/Q14]

➡Answer C

Competitor, policy is formed to reduce concentration of market power; a market failure. Free inoculation and regulations to limit river pollution would increase consumption of a merit good and reduce negative externality again examples of market failure.

What would economists agree should be the aim of any health care system?
A to meet all the health care demands of the population
B to provide every patient with the latest and best available treatment
C to provide free medical treatment
D to secure the maximum health gain from the resources available * [N11/P3/Q13]

➡Answer D

Economists aim at efficient use of scarce resources i.e. maximum gain from the available resources.

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. [JI2/P3/Q15]

➡Answer C

Market system of demand & supply fails to take account of external benefits; therefore the resulting output is less than the socially optimum level. Options A & D refer to external costs while B is irrelevant.

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. [N12/P3/QI]

➡Answer D

Good with external benefits is under produced by market forces. A subsidy will increase its output, therefore improves allocation of resources.

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 [N12/P3/Q14]

➡Answer D
The condition P = MC indicates allocative efficiency only in the absence of externalities

Which government policy would not be classified as regulation?
A bans on heroin and cocaine consumption
B compulsory wearing of seat belts in cars and coaches
C licences for the extraction of water from lakes and rivers
D taxation of cigarettes and tobacco products [J15/P3/Q17]

➡Answer D

Imposing a tax is not a form of regulation.

Which government microeconomic policy is not usually aimed at correcting allocative inefficiency in an economy?
A anti-monopoly legislation
B congestion charges for the use of roads in cities
C pollution taxes imposed on various firms
D subsidies for agricultural producers [N15/P3/QI6]

➡Answer D

The objective of subsidy in this case is to reduce the prices of agricultural products and not necessanly to improve allocation of resources. All other options represent market failure.

What is the purpose of trying to achieve economic efficiency?
A to achieve full employment
B to achieve the cheapest possible price for products
C to ensure resources are not wasted
D to use as many resources as possible [N16/P3/Q1]

➡Answer C Scarcity of resources implies that they must be used most efficiently.

When will an economic activity create a net social benefit?
A when (private benefit + external benefit) - (private cost + external cost) is negative
B when (private benefit + external benefit) - (private cost + external cost) is positive
C when (private benefit + private cost) - (external benefit + external cost) is negative
D when (private benefit + private cost) - (external benefit + external cost) is positive [J17/P3/QI]

➡Answer B

PB + EB = SB, PC+EC = SC. A positive outcome of SB minus SC indicates net social benefit

Which policy is not designed to correct a market failure?
A government provision of health care
B removing import quotas
C price controls on large firms
D regulations to limit smoke pollution [NI7/P37Q14]

➡Answer B Options A, C & D aim at correcting market failure white B aims at correcting BOP

How is social cost calculated?

A external cost minus external benefit
B external cost minus private cost
C external cost plus private cost
D social cost minus social benefit IJ18/P3/Q1]

➡Answer C

Social cost = private cost + external cost. Option A measures net external benefits and 0 suggests net social benefits while B is irrelevant.

A cost-benefit analysis is carried out on the construction of a hydroelectric power station. Which combination of circumstances would be most likely to lead to the scheme being approved?
A Private benefits are greater than private costs.
B Social benefits arc greater than social costs.
C Social benefits arc greater than total costs.
D Total costs arc greater than total revenue. [N18/P3/Q2]

➡Answer B
A project is approved when it generates net social benefits (SB > SC). Thus C & D are cancelled. Option A is more likely to be applied by private firms

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