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Multiple Choice Questions

for

AQA AS ECONOMICS

Unit 1:

MARKETS & MARKET FAILURE

300 Multiple Choice Questions [12 Tests of 25 Questions]

Tests on each Specification Topic & End of Unit Tests

Answers with Supporting Explanations
General Advice on How to Tackle the Questions

Minimising Workloads, Maximising Performance

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure i

APT Initiatives Ltd, 2010

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure ii

CONTENTS
Page No

A INFORMATION SHEET FOR STUDENTS: TACKLING THE MULTIPLE

CHOICE QUESTIONS – UNIT 1 1

B INDIVIDUAL TESTS AND ANSWERS WITH EXPLANATIONS 2

1 THE ECONOMIC PROBLEM 2

Test 1 Questions 3
Test 1 Answers 8
Test 2 Questions 13
Test 2 Answers 18

2 THE ALLOCATION OF RESOURCES IN COMPETITIVE MARKETS 23

Test 1 Questions 24
Test 1 Answers 29
Test 2 Questions 34
Test 2 Answers 39

3 PRODUCTION & EFFICIENCY 44

Test 1 Questions 45
Test 1 Answers 50
Test 2 Questions 55
Test 2 Answers 60

4 MARKET FAILURE 65

Test 1 Questions 66
Test 1 Answers 71
Test 2 Questions 76
Test 2 Answers 81

5 GOVERNMENT INTERVENTION IN THE MARKET 87

Test 1 Questions 88
Test 1 Answers 93
Test 2 Questions 99
Test 2 Answers 104

6 ENTIRE UNIT 110

Test 1 Questions 111

Test 1 Answers 118
Test 2 Questions 125
Test 2 Answers 131

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 1

STUDENT INFORMATION SHEET

TACKLING THE MULTIPLE CHOICE QUESTIONS – UNIT 1

A multiple choice paper provides you with a good opportunity to achieve a high mark,
but only if you know the subject matter and think logically. In addition to revising
thoroughly to learn the subject matter, the following points should be taken into
account when tackling the multiple choice questions for AQA AS Economics Unit 1.

1. Pace yourself. You are advised to spend 25 minutes on the 25 multiple choice
questions. On some questions you should identify the correct response very quickly,
others will take a little longer but you have an average of one minute per question.
Don’t rush your answer, but do make sure that after 25 minutes you are in a position
to move on to section B of the examination.

2. Read the question very carefully. Work on the assumption that every word is of
significance.

3. There is only one correct answer. Do not “hedge your bets” by suggesting two
answers. If you give two answers then you will not get a mark (even if one is
correct).

4. You should (a) identify the correct answer and (b) understand why the others
are incorrect. Sometimes you can identify the correct answer by eliminating the
wrong ones. Ideally, you should approach the question from both angles.

5. There are no half marks. Even though one of the 3 distracters (incorrect answers)
might be more valid than the other 2, you do not get half marks for spotting the “half
right answer”. The fact is that if it is “only half right”, then it is wrong.

6. It is very tempting to guess the answer when you are unsure. But, remember, there
is only a one in four chance of guessing correctly and a three in four chance of
guessing it wrong. Therefore, always try to work out the answer using your
knowledge and logical thinking. Only guess the answer if you genuinely have no
idea of what the correct answer is.

7. Be extra careful when answering the negative questions ie “Which if the

following is not....”

8. Use the question paper to do rough working. This applies particularly to

quantitative questions such as elasticity calculations.

9. Use the question paper to jot down or to manipulate a sketch graph. This
advice is especially relevant in questions which refer to demand or supply curves
shifting to the left or to the right. It is easier to see a leftward / rightward shift on
paper than trying to visualise it in your mind.

10. Graphs showing a shift in the supply or demand curve are labelled D1, D2, S1 and S2
etc with the curve labelled 1 as the original. To make it clearer to see this on the
question paper, draw an arrow to show the direction of the shift.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 2

The Economic Problem

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 3

1.1: The Economic Problem ‐ Test 1

1. Economics is the study of

A how to increase economic growth.
B how society allocates scarce resources in order to maximise welfare.
C how to ensure that resources are shared equally.
D how resources should be allocated.

2. Economic activity does not include

A buying illegal drugs.
B building a house.
C unpaid coaching of a school boy football team.
D regenerating derelict land.

3. Microeconomics includes the study of

A how the price of oil is determined.
B how to deal with increasing inflation.
C the impact on economic growth of increasing the education budget.
D measures designed to reduce unemployment.

4. The primary sector of an economy excludes

A forestry.
B oil drilling.
C farming.
D education.

5. An economic good is
A one which has an opportunity cost.
B also defined as a factor of production.
C one which increases economic efficiency.
D the opposite of a public good.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 4

6. The factor of production, land, includes

A trawlers.
B dams.
C meadows.
D roads.

7. Labour is a factor of production because

A its value to an economy can be improved.
B its productivity affects productive efficiency.
C it is a resource which can contribute to output.
D its cost can be reduced.

8. The factor of production, capital includes

A money.
B computers.
C an overdraft.
D a mortgage.

9. A consumer, in making a purchasing decision, is least likely to take account of

A the impact on his / her status.
B the price of competitive products.
C the standard of living of workers who made the product.
D the components chosen to make the product.

10. Firms, when making economic decisions are least likely to take account of
A wage rates in local businesses.
B advances in technology.
C the working conditions of suppliers’ employees.
D the amount of profit to be retained in the business.

11. A government, in making an economic decision is least likely to take account of

A the attitudes of other EU governments.
B the interests of civil servants.
C the impact on economic growth.
D the results of opinion polls.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 5

12. The basic economic problem is that

A resources have to be allocated between competing uses.
B consumers have infinite wants.
C governments cannot always deal effectively with market failure.
D every economic decision generates externalities.

13. Examples of economic resources include

A distilled water.
B wind.
C sea water.
D sunlight.

14. The reward for risk taking is known as

A wages.
B profit.
C interest.
D rent.

15. A production possibility curve diagram cannot be used to illustrate

A the range of goods and services an economy can produce.
B the concept of opportunity cost.
C the changing trade off incurred in varying the production of 2 products.
D output options which cannot be achieved.

16. The production possibility curve is concave to the origin because

A technology is fixed in the short run.
B all resources are being fully used.
C all choices involve an opportunity cost.
D some resources are more specialised than others.

17. A production possibility curve, illustrating the output options for Capital and Consumer goods, shifts
to the right because there is
A an increase in inflation.
B an improvement in technology.
C reduced unemployment.
D an increase in exports.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 6

18. Refer to the diagram below.

Capital
Goods
Y

0
Consumer
Goods
A movement along this production possibility curve from X to Y means that
A this economy is operating more efficiently.
B this economy is using more resources.
C businesses in this economy are fully exploiting economies of scale.
D an opportunity cost has been incurred.

19. Any point inside a nation’s production possibility curve reflects a product combination which is
A currently impossible to achieve.
B productively inefficient.
C based on full employment of resources.
D productively efficient.

20. Using a production possibility diagram, increased productive efficiency in all sectors of the UK
economy would be indicated by
A a new position along the production possibility curve.
B a parallel inward shift of the production possibility curve.
C a parallel outward shift of the production possibility curve.
D a new position beyond the production possibility curve.

21. The concept of opportunity cost helps an economist

A understand how resources are allocated in an economy.
B determine the causes of inflation.
C determine consumers’ purchasing power.
D understand the causes of a trade deficit.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 7

22. A family have inherited £15,000 from a long lost aunt. They are weighing up whether to buy a new
car or go on a trip to Australia for a month. They decide to go to Australia. The opportunity cost of
this decision is

A the cost of going to Australia.

B the cost of a buying a new car.
C the benefits of going to Australia.
D the benefits of having a new car.

23. A normative statement is

A verifiable by facts.
B objective.
C based on an opinion.
D based on real world data.

24. Economists avoid making normative statements such as

A wages are usually higher for those whose productivity is high.
B the environment can be considered as a scarce resource.
C we live in a world of infinite wants but limited resources.
D wage rates ought to be higher for the lowest paid.

25. Which of the following statements is not a positive economic statement?

A Consumers prefer to use a credit card to buy expensive items.
B Governments are likely to take account of the state of the economy when deciding on taxes.
C Firms consider improved efficiency an important source of increased profits.
D Businesses should be forced to take account of the externalities they create.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 8

1.1: The Economic Problem ‐ Test 1 ‐ Answers

1. Economics is the study of

A how to increase economic growth.
B how society allocates scarce resources in order to maximise welfare.
C how to ensure that resources are shared equally.
D how resources should be allocated.

Explanation: The central issue in economics is the allocation of scarce resources. The other responses
might refer to one aspect of economics but not to the central issue that is at the heart of our subject.

2. Economic activity does not include

A buying illegal drugs.
B building a house.
C unpaid coaching of a school boy football team.
D regenerating derelict land.

Explanation: If the coach is unpaid and undertakes the role in his/her spare time then it is not an
economic activity. It does not divert resources away from the production of other goods and services. The
other activities involve spending and, therefore, resources are attracted to them.

3. Microeconomics includes the study of

A how the price of oil is determined.
B how to deal with increasing inflation.
C the impact on economic growth of increasing the education budget.
D measures designed to reduce unemployment.

Explanation: Microeconomics includes the study of the determination of the price of a single commodity
like oil. The other issues relate to the economy as a whole.

4. The primary sector of an economy excludes

A forestry.
B oil drilling.
C farming.
D education.

Explanation: Education is a tertiary or service sector activity, whereas the other three are primary sector
activities and involve extracting products from nature.

5. An economic good is
A one which has an opportunity cost.
B also defined as a factor of production.
C one which increases economic efficiency.
D the opposite of a public good.

Explanation: An economic good uses scarce resources and, therefore, involves an opportunity cost. The
opposite of an economic good is a free good which can be seen as a free gift of nature and does not
involve the use of scarce resources.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 9

6. The factor of production, land, includes

A trawlers.
B dams.
C meadows.
D roads.

Explanation: The other three refer to capital (goods that are manmade and are used in production). A
meadow is natural and is not manmade and, therefore, is regarded as land.

7. Labour is a factor of production because

A its value to an economy can be improved.
B its productivity affects productive efficiency.
C it is a resource which can contribute to output.
D its cost can be reduced.

Explanation: The others are valid statements but do not explain why labour is a factor of production.
Labour is defined as human resources that contribute to production.

8. The factor of production, capital includes

A money.
B computers.
C an overdraft.
D a mortgage.

Explanation: Capital refers to manmade resources used in production, eg a computer. The other three
refer to financial resources which do not themselves contribute to production, but can be used to buy or
hire factors of production, including capital items such as computers.

9. A consumer, in making a purchasing decision, is least likely to take account of

A the impact on his / her status.
B the price of competitive products.
C the standard of living of workers who made the product.
D the components chosen to make the product.

Explanation: If we assume that economic agents, such as consumers, are self interested, then they would
not take into account the standard of living of workers who make the product.

10. Firms, when making economic decisions are least likely to take account of
A wage rates in local businesses.
B advances in technology.
C the working conditions of suppliers’ employees.
D the amount of profit to be retained in the business.

Explanation: If firms are self‐interested and seek to maximise profits, they will not be concerned with
conditions of work for the employees of supply firms.

11. A government, in making an economic decision is least likely to take account of

A the attitudes of other EU governments.
B the interests of civil servants.
C the impact on economic growth.
D the results of opinion polls.

Explanation: In a democracy, governments serve the interests of the community and not public sector
employees.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 10

12. The basic economic problem is that

A resources have to be allocated between competing uses.
B consumers have infinite wants.
C governments cannot always deal effectively with market failure.
D every economic decision generates externalities.

Explanation: It is true that consumers have infinite wants, but this is only a problem because resources
are scarce and, therefore, have to be allocated between competing uses. For this reason the basic
problem in Economics is the allocation of scarce resources. The other issues are ultimately derived from
the basic economic problem.

13. Examples of economic resources include

A distilled water.
B wind.
C sea water.
D sunlight.

Explanation: Only distilled water is scarce and, therefore, has an opportunity cost and price. The others
are free goods and do not use economic resources in production.

14. The reward for risk taking is known as

A wages.
B profit.
C interest.
D rent.

Explanation: Entrepreneurs are risk takers. The incentive for them to take risk is the profits they expect to
enjoy from their enterprise.

15. A production possibility curve diagram cannot be used to illustrate

A the range of goods and services an economy can produce.
B the concept of opportunity cost.
C the changing trade off incurred in varying the production of 2 products.
D output options which cannot be achieved.

Explanation: A production possibility curve diagram is a two dimensional diagram with all goods and
services aggregated in two classes, eg consumer goods and capital goods. Therefore, it cannot show the
full range of goods and services that can be produced. However, it can be used to illustrate each of the
other three.

16. The production possibility curve is concave to the origin because

A technology is fixed in the short run.
B all resources are being fully used.
C all choices involve an opportunity cost.
D some resources are more specialised than others.

Explanation: As we achieve progressively higher output of one of the classes of good, the opportunity cost
in terms of reduced output of the other increases. This is because resources are specialist and cannot be
easily transferred from one type of production to another.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 11

17. A production possibility curve, illustrating the output options for Capital and Consumer goods, shifts
to the right because there is
A an increase in inflation.
B an improvement in technology.
C reduced unemployment.
D an increase in exports.

Explanation: An improvement in technology increases the productive potential of the economy and
causes the PPC to shift outwards. Reduced unemployment simply moves the economy to a point inside
the PPC towards the PPC itself. Thus, it increases production, but not productive possibility.

18. Refer to the diagram below.

Capital
Goods
Y

0
Consumer
Goods
A movement along this production possibility curve from X to Y means that
A this economy is operating more efficiently.
B this economy is using more resources.
C businesses in this economy are fully exploiting economies of scale.
D an opportunity cost has been incurred.
Explanation: A movement along the PPC from X to Y means that the opportunity cost of increased
production of capital goods is reduced production of consumer goods.

19. Any point inside a nation’s production possibility curve reflects a product combination which is
A currently impossible to achieve.
B productively inefficient.
C based on full employment of resources.
D productively efficient.

Explanation: At any point on the PPC all existing resources are being used efficiently. Therefore, any point
inside the PPC is productively inefficient, ie more could be produced of both product categories with the
same resources.

20. Using a production possibility diagram, increased productive efficiency in all sectors of the UK
economy would be indicated by
A a new position along the production possibility curve.
B a parallel inward shift of the production possibility curve.
C a parallel outward shift of the production possibility curve.
D a new position beyond the production possibility curve.

Explanation: An increase in productive efficiency in all sectors will shift the PPC outwards. If the efficiency
gains were confined to one sector the shift would be greater on one axis rather than the other.
© APT Initiatives Ltd, 2010
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 12

21. The concept of opportunity cost helps an economist

A understand how resources are allocated in an economy.
B determine the causes of inflation.
C determine consumers’ purchasing power.
D understand the causes of a trade deficit.

Explanation: Opportunity cost and resource allocation are central to Economics.

22. A family have inherited £15,000 from a long lost aunt. They are weighing up whether to buy a new
car or go on a trip to Australia for a month. They decide to go to Australia. The opportunity cost of
this decision is
A the cost of going to Australia.
B the cost of a buying a new car.
C the benefits of going to Australia.
D the benefits of having a new car.

Explanation: The opportunity cost of the holiday is the alternative they sacrificed. They forego the
benefits of a new car in order to go to Australia.

23. A normative statement is

A verifiable by facts.
B objective.
C based on an opinion.
D based on real world data.

Explanation: A normative statement typically includes words such as” ought to” or “should” and is an
expression of an opinion.

24. Economists avoid making normative statements such as

A wages are usually higher for those whose productivity is high.
B the environment can be considered as a scarce resource.
C we live in a world of infinite wants but limited resources.
D wage rates ought to be higher for the lowest paid.

Explanation: D is the only one that is an opinion and cannot be tested with reference to the facts. As a
general rule we can say that when words such as “ought” or “should” are used the statement will be a
normative statement.

25. Which of the following statements is not a positive economic statement?

A Consumers prefer to use a credit card to buy expensive items.
B Governments are likely to take account of the state of the economy when deciding on taxes.
C Firms consider improved efficiency an important source of increased profits.
D Businesses should be forced to take account of the externalities they create.

Explanation: D is the only one of the four that cannot be tested by reference to the facts. Instead, it is an
opinion and, therefore, a normative rather than a positive statement.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 13

1.1: The Economic Problem ‐ Test 2

1. Housework is an economic activity because

A it is undertaken free of charge.
B it requires the use of scarce resources.
C there is no opportunity cost incurred.
D it increases consumer well‐being.

2. Macroeconomics includes the study of

A the causes of changes in demand for many consumer products.
B the measures government can take to encourage businesses to invest.
C how well different markets operate in the interests of consumers.
D how bankers’ pay levels are determined.

3. Which of the following issues would not be the subject of microeconomic analysis?
A The significance of economies of scale in bank mergers over recent years
B The impact of civil war in central Africa on worldwide copper prices
C The impact of a fall in the £ exchange rate on investment levels in the UK
D The features of a tradable permit scheme designed to reduce pollution levels

4. Economic resources are those which

A maximise the output of goods in the long term.
B increase economic efficiency.
C are plentiful.
D can contribute to increased production.

5. The factor of production, labour does not include

A teachers.
B vicars.
C premiership footballers.
D students.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 14

6. A tractor can be categorised as capital in the context of factors of production because

A the buyer needs capital to buy it.
B it is a resource that has been manufactured.
C it helps a farmer make a profit.
D it is an economic resource and therefore has an opportunity cost.

7. The function of the factor of production known as enterprise includes

A organising resources.
B motivating employees.
C risk taking.
D selling to customers.

8. A firm, in making a business decision, is least likely to take account of

A the impact on unemployment.
B its effect on efficiency.
C the reaction of competitors.
D customer reaction.

9. Government, when making economic decisions, is least likely to take account of

A the impact on exports.
B how the defence budget is spent.
C possible changes in average incomes.
D the wages in particular industries.

10. In economic theory it is assumed that employees seek to

A maximise company profits.
B maximise their wages.
C maximise their spending.
D minimise the interest on savings.

11. The numerical difference between revenue and cost is known as

A profit.
B interest.
C bonus.
D rent.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 15

12. The economic problem has, at its core, the issue of choice because
A our income determines what we can choose.
B resources are finite.
C as consumers we are free to choose what we want.
D the more we earn the more we can choose.

13. In the context of economics, free goods are those which

A generate no external costs.
B can also be called merit goods.
C are not scarce.
D are offered at no charge at the point of purchase.

14. As increasing numbers of the world’s population are attracted to towns and cities, there is increasing
concern that the natural environments in their vicinity are being degraded. This suggests that

A using the natural environment has an opportunity cost.

B urbanisation imposes a private cost on society.
C the natural environment is a free good.
D the natural environment imposes external costs.

15. High wage rises in expanding industries are needed to ensure

A banks lend to business.
B workers move to areas of labour shortage.
C consumers buy British goods.
D firms achieve high profits.

16. Economic growth refers to

A an increase in productive efficiency.
B an improvement in technology.
C an increase in the output of goods and services.
D a reduction in negative externalities.

17. A point on a production possibility curve indicates

A the latest technology has not been employed.
B an output choice which uses available resources most efficiently.
C an output combination of two products which cannot be achieved.
D indicates that there is an opportunity cost.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 16

18. A straight‐line production possibility frontier, for an economy, indicates that

A an improvement in technology would be of equal benefit to the two product options.
B resources are allocated equally between the two product options.
C changing to a different product combination would not incur an opportunity cost.
D its resources are equally suited to the production of all products.

19. The diagram below, a production possibility curve, shows various output choices A, B, C, D and E.

Capital Goods

A E

O B Consumer
Goods
Which combination of capital and consumer goods could this country choose to produce?
A EDC
B ADB
C EDB
D DBAC

20. In the context of a country’s production possibility curve, increased factor specialisation means that
A some output choices are excluded.
B factors are more likely to be employed.
C any movement along the curve incurs an increasing opportunity cost.
D any shift outwards from new technology is likely to be small.

21. Opportunity cost is an important concept in Economics because

A it explains the nature of economic decision‐making.
B consumers have infinite wants.
C cost is a reflection of the value of resources used to make an economic good.
D cost has implications not just for a business but for society as a whole.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 17

22. A student has earned £200 from a temporary job. He is weighing up whether to spend it on some
new clothes or on a holiday with friends. He decides to spend it on clothes. The opportunity cost of
this decision is

A the cost of the new clothes.

B the benefits of the new clothes.
C the cost of the holiday.
D the benefits of the holiday.

23. Which of the following statements is correct?

A A normative statement is one which is useful in the context of economic analysis
B A positive statement is one which expresses an opinion
C A positive statement is one which is based on the evidence available
D A normative statement is one which can be proven true or false

24. Which of the following statements is not a normative statement?

A Interest rates are effective at controlling inflation
B Unemployment should be reduced if we are to increase economic growth
C We ought to focus on increasing national income rather than how to share it
D Fair trade is better than free trade

25. Which of the following is a positive statement?

1. Smoking causes disease and premature death
2. Smoking should be banned
3. Tobacco should be heavily taxed
4. The tax on tobacco has done little to reduce smoking

A 1 and 4 only
B 1 only
C 2 and 3 only
D 1, 2 and 4 only

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 18

1.1: The Economic Problem ‐ Test 2 ‐ Answers

1. Housework is an economic activity because

A it is undertaken free of charge.
B it requires the use of scarce resources.
C there is no opportunity cost incurred.
D it increases consumer well‐being.

Explanation: Housework, even if undertaken by the householder, involves the use of time and resources
and, therefore, incurs an opportunity cost. When the householder undertakes household work resources
are being diverted from the production of other goods and services.

2. Macroeconomics includes the study of

A the causes of changes in demand for many consumer products.
B the measures government can take to encourage businesses to invest.
C how well different markets operate in the interests of consumers.
D how bankers’ pay levels are determined.

Explanation: Macroeconomics (which is the subject matter of unit two) concerns the economy as a whole.
Microeconomics, on the other hand, focuses on behaviour in a single market, a single firm, or a single
product.

3. Which of the following issues would not be the subject of microeconomic analysis?
A The significance of economies of scale in bank mergers over recent years
B The impact of civil war in central Africa on worldwide copper prices
C The impact of a fall in the £ exchange rate on investment levels in the UK
D The features of a tradable permit scheme designed to reduce pollution levels

Explanation: The impact of exchange rate movements is the only one of the four responses which does
not concern a specific product, market or firm.

4. Economic resources are those which

A maximise the output of goods in the long term.
B increase economic efficiency.
C are plentiful.
D can contribute to increased production.

Explanation: An economic resource is scarce rather than plentiful and contributes to production today
and not just the future. Whether it increases economic efficiency depends on how it is used.

5. The factor of production, labour does not include

A teachers.
B vicars.
C premiership footballers.
D students.

Explanation: Many students offer their labour part‐time but whilst engaged in the activity of studying,
they are consuming education and / or investing in their human capital. Therefore, they are not
contributing to today’s production.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 19

6. A tractor can be categorised as capital in the context of factors of production because

A the buyer needs capital to buy it.
B it is a resource that has been manufactured.
C it helps a farmer make a profit.
D it is an economic resource and therefore has an opportunity cost.

Explanation: Each of the statements by themselves are accurate but only B correctly follows on from the
stem. Capital refers to manmade resources used in production. It should be remembered that whilst in
everyday language we use the word capital to mean money to set up a business, in Economics we reserve
the word capital to mean real resources.

7. The function of the factor of production known as enterprise includes

A organising resources.
B motivating employees.
C risk taking.
D selling to customers.

Explanation: Many entrepreneurs are personally engaged in organising, motivating and selling, but in
large businesses these functions are delegated to paid managers. Risk taking, on the other hand, is the
essential characteristic of being an entrepreneur.

8. A firm, in making a business decision, is least likely to take account of

A the impact on unemployment.
B its effect on efficiency.
C the reaction of competitors.
D customer reaction.

Explanation: A profit maximising entrepreneur will not be concerned about the impact on jobs generally,
but will be concerned with efficiency and the reactions of competitors and customers.

9. Government, when making economic decisions, is least likely to take account of

A the impact on exports.
B how the defence budget is spent.
C possible changes in average incomes.
D the wages in particular industries.

Explanation: Governments will consider the impact of decisions on the economy in general, but are very
unlikely to consider the impact on a particular group of workers.

10. In economic theory it is assumed that employees seek to

A maximise company profits.
B maximise their wages.
C maximise their spending.
D minimise the interest on savings.

Explanation: The factor of production known as labour (human resources used in production) is rewarded
by a wage. It is reasonable to assume that employees will seek the highest wage possible.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 20

11. The numerical difference between revenue and cost is known as

A profit.
B interest.
C bonus.
D rent.

Explanation: Profit, the reward paid to the entrepreneur, is sales revenue minus costs.

12. The economic problem has, at its core, the issue of choice because
A our income determines what we can choose.
B resources are finite.
C as consumers we are free to choose what we want.
D the more we earn the more we can choose.

Explanation: The essential economic problem is that resources are scarce and finite.

13. In the context of economics, free goods are those which

A generate no external costs.
B can also be called merit goods.
C are not scarce.
D are offered at no charge at the point of purchase.

Explanation: Free goods should be seen as gifts of nature and, as free goods are not scarce, there is no
opportunity cost involved in their consumption, eg fresh air.

14. As increasing numbers of the world’s population are attracted to towns and cities, there is increasing
concern that the natural environments in their vicinity are being degraded. This suggests that
A using the natural environment has an opportunity cost.
B urbanisation imposes a private cost on society.
C the natural environment is a free good.
D the natural environment imposes external costs.

Explanation: The natural environment is a scarce resource and its use involves an opportunity cost.

15. High wage rises in expanding industries are needed to ensure

A banks lend to business.
B workers move to areas of labour shortage.
C consumers buy British goods.
D firms achieve high profits.

Explanation: The reward to labour is known as a wage and firms seeking to expand will offer pay rises to
secure new recruits of labour.

16. Economic growth refers to

A an increase in productive efficiency.
B an improvement in technology.
C an increase in the output of goods and services.
D a reduction in negative externalities.

Explanation: Economic growth is an increase in the productive potential of an economy and is illustrated
by an outward shift of the production possibility curve.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 21

17. A point on a production possibility curve indicates

A the latest technology has not been employed.
B an output choice which uses available resources most efficiently.
C an output combination of two products which cannot be achieved.
D indicates that there is an opportunity cost.
Explanation: Any point on the production possibility curve illustrates the productive potential of the
economy when all resources are most efficiently employed.

18. A straight‐line production possibility frontier, for an economy, indicates that

A an improvement in technology would be of equal benefit to the two product options.
B resources are allocated equally between the two product options.
C changing to a different product combination would not incur an opportunity cost.
D its resources are equally suited to the production of all products.
Explanation: As the resources are equally suited to the production of all products, then increasing output
of one product is not at the expense of a progressively greater decrease in the output of the other.
Hence, in this case, the PPF is a straight line rather than concave.

19. The diagram below, a production possibility curve, shows various output choices A, B, C, D and E.
Capital Goods

A E

O B Consumer
Goods
Which combination of capital and consumer goods could this country choose to produce?
A EDC
B ADB
C EDB
D DBAC
Explanation: A, D and B are all on the PPC and are possible combinations of goods and services that can
be produced. C is also possible because it is inside the curve. E, on the other hand, is outside the
productive potential of the economy – given existing resources and technology.

20. In the context of a country’s production possibility curve, increased factor specialisation means that
A some output choices are excluded.
B factors are more likely to be employed.
C any movement along the curve incurs an increasing opportunity cost.
D any shift outwards from new technology is likely to be small.
Explanation: Progressive increases in the output of one product has an increasing opportunity cost in
terms of reduced output of the other product. It is for this reason that the typical PPC is shown as
concave to the origin.
© APT Initiatives Ltd, 2010
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 22

21. Opportunity cost is an important concept in Economics because

A it explains the nature of economic decision‐making.
B consumers have infinite wants.
C cost is a reflection of the value of resources used to make an economic good.
D cost has implications not just for a business but for society as a whole.

Explanation: B, C and D are accurate statements but do not follow on from the stem. Opportunity cost is
a concept that is central to economics – whenever we make a decision we sacrifice an alternative.

22. A student has earned £200 from a temporary job. He is weighing up whether to spend it on some
new clothes or on a holiday with friends. He decides to spend it on clothes. The opportunity cost of
this decision is
A the cost of the new clothes.
B the benefits of the new clothes.
C the cost of the holiday.
D the benefits of the holiday.

Explanation: The opportunity cost of the decision he makes is the alternative he sacrifices. He forgoes the
benefits of going on holiday with friends in order to get the new clothes.

23. Which of the following statements is correct?

A A normative statement is one which is useful in the context of economic analysis
B A positive statement is one which expresses an opinion
C A positive statement is one which is based on the evidence available
D A normative statement is one which can be proven true or false

Explanation: Positive statements can be tested against the evidence available and, therefore, by
reference to the facts. They are either correct or incorrect. Normative statements are opinions which are
neither correct nor incorrect.

24. Which of the following statements is not a normative statement?

A Interest rates are effective at controlling inflation
B Unemployment should be reduced if we are to increase economic growth
C We ought to focus on increasing national income rather than how to share it
D Fair trade is better than free trade

Explanation: A is a positive statement which can be tested by reference to the facts. All the other
alternatives are opinions.

25. Which of the following is a positive statement?

5. Smoking causes disease and premature death
6. Smoking should be banned
7. Tobacco should be heavily taxed
8. The tax on tobacco has done little to reduce smoking

A 1 and 4 only
B 1 only
C 2 and 3 only
D 1, 2 and 4 only

Explanation: A is an indisputable fact. D is disputable but can be tested against real world data.
Therefore, both are positive statements, whereas B and C are based on opinions.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 23

The Allocation of Resources

in Competitive Markets

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 24

1.2: The Allocation of Resources in Competitive Markets ‐ Test 1

1. When the price of a product increases

A demand will shift to the left.
B more will be demanded at each price.
C quantity demanded will fall.
D quantity demanded will rise.

2. A shift in a demand curve occurs when

A there is a change in price.
B there is an increase in business costs.
C businesses become more efficient.
D there is a change in income.

3. Which of the following statements is incorrect? A rightward shift of the demand curve can be
caused by

A a reduction in the price of the product.

B a rise in population.
C a rise in income.
D a rise in the price of a substitute product.

4. A pen manufacturer reduces the price of its latest model by 6% and, as a result, sales volume
increases by 4%. Therefore, the price elasticity of demand, to two decimal places must be

A +1.57.
B ‐0.67.
C ‐1.52.
D ‐2.54.

5. The price elasticity of demand for a firm’s products will change when a business
A is faced with a new competitor.
B manages to reduce its costs.
C benefits from a general increase in incomes.
D experiences a rise in production costs.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 25

6. When incomes rise by 2%, demand for UK holidays rise by 4%. The income elasticity of demand is
A +2.
B +20.
C +0.8.
D +0.5.

7. A greengrocer has obtained some market research data which indicates that the income elasticity of
demand for potatoes is ‐1.56. This means that

A demand is income inelastic, and the potatoes are a normal good.

B demand is price elastic, and potatoes are a necessity.
C potatoes are a normal good, and demand is income elastic.
D potatoes are an inferior good, and demand is income elastic.

8. Petrol retailers have noticed that when cars increase in price by 5%, demand for petrol falls by 2%.
The cross elasticity of demand for petrol is

A ‐2.5.
B ‐1.0.
C ‐0.5.
D ‐0.4.

9. Movement up a supply curve arises because of

A improvements in business efficiency.
B an increase in price.
C an increase in tax.
D a reduction in price.

10. A supply curve for a product would shift to the right if there was
A an increase in tax.
B a decrease in price.
C an improvement in production technology.
D an increase in business costs.

11. A rightward parallel shift in a supply curve would occur when business costs
A rise by 3%.
B fall by 10%.
C rise by £3 a unit.
D fall by £3 a unit.
© APT Initiatives Ltd, 2010
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 26

12. A decrease in price elasticity of supply can arise when

A business costs rise.
B business costs fall.
C government intervenes with more market regulation.
D a business produces various goods for different markets.

13. A rise in price from £21 to £22 leads to a 5% rise in the quantity supplied. To two decimal places
price elasticity of supply is

A +1.05.
B ‐1.52.
C ‐1.05.
D +2.52.

14. Movement up a demand curve to a new equilibrium position could have been caused by
A an increase in price of a substitute product.
B a tax imposed on a good.
C a shift to the right in the supply curve.
D an increase in the price elasticity of demand.

15. The conditions of demand and supply of a luxury car brand are shown in the diagram below.
Price
S2
S1

D1

O
Quantity

The supply curve could have shifted to the left because

A there was a decrease in the price of petrol.
B the government has imposed a special tax on luxury cars.
C the price has risen.
D the costs of manufacture have fallen.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 27

16. The table below shows the demand and supply schedules for pizzas sold by a local takeaway.

Price per Pizza Quantity demanded Quantity supplied

per week per week
£3.00 350 510
£2.75 400 480
£2.50 450 450
£2.25 500 420

Following a rise in production costs, supply falls by 80 pizzas at all prices. The new equilibrium price
would be

A £2.25.
B £2.50.
C £2.75.
D £3.00.

17. Supply in agriculture is typically price inelastic because

A farmers cannot alter output at short notice.
B farmers rely on the weather.
C there are few substitutes for food.
D farmers can use stocks in response to changes in price.

18. The price elasticity of supply of houses is estimated to be less than 1. This means that
A supply is price elastic.
B builders cannot easily build more houses in a booming economy.
C producer revenue will remain unchanged.
D builders benefit from increased revenue when prices rise.

19. Which one of the following products or services is not complementary to owner occupied houses?
A Mortgages
B Home improvements
C Rented accommodation
D Furniture

20. The introduction of high definition television can be expected to result in the following with the
exception of

A increased demand for new TV sets.

B increased supply of second hand TV sets.
C increased price of second hand TV sets.
D increased demand for satellite television services.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 28

21. Coffee and tea are substitute products. A rise in the price of coffee will lead to
A an increase in demand for tea.
B an increase in the quantity demanded of tea.
C a contraction in the demand for tea.
D no change in the demand for tea.

22. The motor industry uses steel to make cars. This relationship is an example of products in
A joint supply.
B derived demand.
C substitute demand.
D competitive demand.

23. Which of the following is not a feature of price?

A It rations available resources
B It signals market conditions
C It incentivises buyers and sellers
D It allocates resources fairly

24. When resources are allocated through the price mechanism

A prices must fall.
B prices are typically determined by central government.
C production costs will determine prices.
D business costs are more likely to be competitive.

25. Which of the following statements is true about a market economy?

A Economic decision makers act in ways which will maximise social welfare
B The government has a crucial role to play in ensuring that economic outcomes are fair
C Prices help buyers make rational judgements about the value of what they buy
D Producers determine what is produced, and for whom it is produced

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 29

1.2: The Allocation of Resources in Competitive Markets ‐ Test 1 ‐ Answers

1. When the price of a product increases

A demand will shift to the left.
B more will be demanded at each price.
C quantity demanded will fall.
D quantity demanded will rise.

Explanation: A rise in price brings about a fall in the quantity demanded, otherwise known as a
contraction of demand. A contraction of demand (illustrated by an upward movement along the demand
curve) should be distinguished from a decrease in demand (an inward shift of the demand curve).

2. A shift in a demand curve occurs when

A there is a change in price.
B there is an increase in business costs.
C businesses become more efficient.
D there is a change in income.

Explanation: The first response results in a movement along the demand curve. The middle two responses
relate to changes in supply. Only D causes a shift of the whole demand curve.

3. Which of the following statements is incorrect? A rightward shift of the demand curve can be
caused by
A a reduction in the price of the product.
B a rise in population.
C a rise in income.
D a rise in the price of a substitute product.

Explanation: A reduction in price will lead to downward movement along the demand curve, rather than
a shift of the demand curve.

4. A pen manufacturer reduces the price of its latest model by 6% and, as a result, sales volume
increases by 4%. Therefore, the price elasticity of demand, to two decimal places must be
A +1.57.
B ‐0.67.
C ‐1.52.
D ‐2.54.

Explanation: 4% / ‐6% = ‐0.67.

5. The price elasticity of demand for a firm’s products will change when a business
A is faced with a new competitor.
B manages to reduce its costs.
C benefits from a general increase in incomes.
D experiences a rise in production costs.

Explanation: The entry of new competitors will increase the price elasticity of demand for the products of
existing firms, because buyers will have more products to choose from and will, therefore, respond more
readily to price changes.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 30

6. When incomes rise by 2%, demand for UK holidays rise by 4%. The income elasticity of demand is
A +2.
B +20.
C +0.8.
D +0.5.
Explanation: 4% / 2% = 2. Because quantity and income move in the same direction, the income elasticity
is positive; hence the answer is +2.

7. A greengrocer has obtained some market research data which indicates that the income elasticity of
demand for potatoes is ‐1.56. This means that
A demand is income inelastic, and the potatoes are a normal good.
B demand is price elastic, and potatoes are a necessity.
C potatoes are a normal good, and demand is income elastic.
D potatoes are an inferior good, and demand is income elastic.
Explanation: Negative income elasticity means that the product is an inferior good. As the coefficient of
elasticity is ‐1.56 it means that demand is income elastic, ie a 10% fall in income leads to a 15.6% rise in
demand.

8. Petrol retailers have noticed that when cars increase in price by 5%, demand for petrol falls by 2%.
The cross elasticity of demand for petrol is
A ‐2.5.
B ‐1.0.
C ‐0.5.
D ‐0.4.
Explanation: ‐2% / +5% = ‐0.4. The fact that the figure is negative proves that the relationship is one of
complements.

9. Movement up a supply curve arises because of

A improvements in business efficiency.
B an increase in price.
C an increase in tax.
D a reduction in price.
Explanation: A change in price (brought about by a rightward shift of the demand curve) leads to an
upward movement along the supply curve. A change in anything else causes a shift in the whole curve.

10. A supply curve for a product would shift to the right if there was
A an increase in tax.
B a decrease in price.
C an improvement in production technology.
D an increase in business costs.
Explanation: A shift to the right means more is supplied at each price (an increase in supply). This could
be the result of an improvement in technology which will lead to lower business costs.

11. A rightward parallel shift in a supply curve would occur when business costs
A rise by 3%.
B fall by 10%.
C rise by £3 a unit.
D fall by £3 a unit.
Explanation: A rightward shift is the result of a fall in the cost of production. The correct answer hinges
on the word ‘parallel’ which is why D is right and B is wrong.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 31

12. A decrease in price elasticity of supply can arise when

A business costs rise.
B business costs fall.
C government intervenes with more market regulation.
D a business produces various goods for different markets.

Explanation: Government regulation acts as a constraint, thus reducing the possibilities for expansion of
output and the entry of new firms into the market.

13. A rise in price from £21 to £22 leads to a 5% rise in the quantity supplied. To two decimal places
price elasticity of supply is
A +1.05.
B ‐1.52.
C ‐1.05.
D +2.52.

Explanation: Even without any calculation we can rule out the first two responses. PES is usually positive
and it certainly is in this case. PES = +5% / +4.7610 = +1.05

14. Movement up a demand curve to a new equilibrium position could have been caused by
A an increase in price of a substitute product.
B a tax imposed on a good.
C a shift to the right in the supply curve.
D an increase in the price elasticity of demand.

Explanation: What happens here is that the tax shifts the supply curve to the left and, as a result, there is
a movement along the demand curve to a higher price. A would cause a shift of the demand curve,
whereas C is a shift in the supply, which causes a slide down the demand curve. D is concerned with
slope of the demand curve, rather than a shift of the demand curve.

15. The conditions of demand and supply of a luxury car brand are shown in the diagram below.
Price
S2
S1

D1

O
Quantity
The supply curve could have shifted to the left because
A there was a decrease in the price of petrol.
B the government has imposed a special tax on luxury cars.
C the price has risen.
D the costs of manufacture have fallen.

Explanation: Supply has decreased and this can only be explained by a rise in producer’s costs. A tax on
cars is seen in the same light as a rise in costs; to protect profits, both changes would require a
corresponding rise in price. Hence, B is the correct answer. A concerns the demand for cars. C is
illustrated by a movement along the supply curve. D would cause a rightward shift of the supply curve.
© APT Initiatives Ltd, 2010
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 32

16. The table below shows the demand and supply schedules for pizzas sold by a local takeaway.

Price per Pizza Quantity demanded Quantity supplied

per week per week
£3.00 350 510
£2.75 400 480
£2.50 450 450
£2.25 500 420

Following a rise in production costs, supply falls by 80 pizzas at all prices. The new equilibrium price
would be
A £2.25.
B £2.50.
C £2.75.
D £3.00.
Explanation: Construct a new supply schedule with 80 fewer pizzas supplied at each price. At price £2.75,
400 pizzas are demanded and 400 are supplied.

17. Supply in agriculture is typically price inelastic because

A farmers cannot alter output at short notice.
B farmers rely on the weather.
C there are few substitutes for food.
D farmers can use stocks in response to changes in price.
Explanation: Supply is inelastic because agricultural output is subject to the growing cycle and seasons of
the year.

18. The price elasticity of supply of houses is estimated to be less than 1. This means that
A supply is price elastic.
B builders cannot easily build more houses in a booming economy.
C producer revenue will remain unchanged.
D builders benefit from increased revenue when prices rise.
Explanation: By definition inelasticity of supply means that it is difficult to respond to changes in the
market.

19. Which one of the following products or services is not complementary to owner occupied houses?
A Mortgages
B Home improvements
C Rented accommodation
D Furniture
Explanation: Rented accommodation is a substitute for owner occupation.

20. The introduction of high definition television can be expected to result in the following with the
exception of
A increased demand for new TV sets.
B increased supply of second hand TV sets.
C increased price of second hand TV sets.
D increased demand for satellite television services.
Explanation: HD will increase the demand for new sets and, at the same time, increase the supply of
second hand sets as people upgrade. The new HD television increases the attractiveness of digital
satellite services which should be seen as a complementary service. The one thing it will not lead to is a
rise in the price of used sets. If anything, it will put downward pressure on the price of used sets.
© APT Initiatives Ltd, 2010
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 33

21. Coffee and tea are substitute products. A rise in the price of coffee will lead to
A an increase in demand for tea.
B an increase in the quantity demanded of tea.
C a contraction in the demand for tea.
D no change in the demand for tea.

Explanation: As the two products are substitutes for each other it is to be expected that a rise in the price
of coffee will mean people switch to tea. The only issue in dispute is whether it is an increase in demand,
or an increase in the quantity demanded. By custom, we use the term “an increase in quantity
demanded” (alternatively an extension of demand) to mean a change brought about by a reduction in the
price of the product. The phrase “increase in demand” is reserved for an increase brought about by
something other than a change in the price of the product.

22. The motor industry uses steel to make cars. This relationship is an example of products in
A joint supply.
B derived demand.
C substitute demand.
D competitive demand.

Explanation: As the car industry is a major user of steel we can conclude that the demand for steel is, in
part, derived from the demand for cars.

23. Which of the following is not a feature of price?

A It rations available resources
B It signals market conditions
C It incentivises buyers and sellers
D It allocates resources fairly

Explanation: The price mechanism allocates resources, but not necessarily fairly. However, it does
definitely ration, signal and incentivise. Therefore, D is the correct answer to the question.

24. When resources are allocated through the price mechanism

A prices must fall.
B prices are typically determined by central government.
C production costs will determine prices.
D business costs are more likely to be competitive.

Explanation: Competition will force firms to keep down costs and, therefore, D is correct.

25. Which of the following statements is true about a market economy?

A Economic decision makers act in ways which will maximise social welfare
B The government has a crucial role to play in ensuring that economic outcomes are fair
C Prices help buyers make rational judgements about the value of what they buy
D Producers determine what is produced, and for whom it is produced

Explanation: Economic theory is based on the assumption that consumers and others make rational
decisions. A is certainly not true since economic agents act in their own self interest. B is not true since
governments play a minimal role in a market economy. D is not true since producers respond to
consumer demand.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 34

1.2: The Allocation of Resources in Competitive Markets ‐ Test 2

1. Movement down a demand curve arises because of

A an increase in income.
B a reduction in price.
C an increase in price.
D a decrease in income.

2. A demand curve for a product would shift to the left if there was
A an increase in income.
B an increase in its price.
C a decrease in the price of a substitute product.
D a decrease in the price of a complementary product.

3. A demand curve for a DVD is drawn on the assumption that all factors are constant except
A the price of the DVD.
B the price of substitute products.
C consumer incomes.
D the price of DVD players.

4. A garage reduces the price of a new model from £15,000 to £13,500. As a result, the quantity
demanded rises from 20 units a week to 23 units a week. The price elasticity of demand is

A ‐0.67.
B ‐0.9.
C ‐1.3.
D ‐1.5.

5. If demand for a product has unitary price elasticity, it means that

A changing price will leave a business’s revenue unchanged.
B a percentage change in demand leads to the same percentage change in price.
C the product is a necessity.
D the price elasticity of demand is zero.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 35

6. A car manufacturer has been studying market research data, shown in the table below, regarding
income elasticity of demand for four of its models.

Model Income elasticity of demand

Paris +0.7
Viaggio +1.0
Belmont +1.25
Tucson +2.2

Following a 5% fall in real incomes this business can expect

A a fall in demand for the Paris of 3.5%.
B an increase in demand for the Viaggio of 5%.
C an increase in demand for the Belmont of 4%.
D no change in demand for the Tucson.

7. A normal good is one where

A demand increases when income increases.
B demand rises when income falls.
C demand falls when prices rise.
D demand changes in proportion to changes in income.

8. When the price of tea recently rose from £140 per kg to £160 per kg, demand for milk fell from
1.62m litres to 1.57m litres. To two decimal places, the cross elasticity of demand was

A ‐1.79.
B ‐3.44.
C ‐0.22.
D ‐4.61.

9. Movement down a supply curve reflects

A a shift in demand arising from higher incomes.
B a shift in demand arising from a decrease in the demand for a complementary product.
C a shift in supply arising from an increase in supplier costs.
D an increase in equilibrium price.

10. A shift to the left in a supply curve would arise if

A a unit tax on the product was reduced.
B there was an increase in consumer incomes.
C there was an improvement in technology.
D none of the above.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 36

11. A supply curve would shift to the right when

A there was a decrease in the price elasticity of supply.
B producers increased output in response to an increase in market price.
C output per employee falls.
D raw material costs fall.

12. The elasticity of supply for a product is more likely to change if

A output increases significantly.
B the business responds to an increase in market price.
C the business has found some spare capacity.
D there is a change in the price elasticity of demand.

13. If price elasticity of supply is +2.2, what percentage rise (to two decimal places) is required to bring
about a 5.6% increase in the quantity supplied?

A 12.23%.
B 5.25%.
C 2.55%.
D 2.12%.

14. Refer to the diagram below.

Price S

C B
D

Quantity

The producers’ revenue is represented by the triangles

A A + D.
B A + C.
C B + C.
D A + B + C.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 37

15. A shift to the right in a demand curve, where supply is perfectly inelastic will result in
A an increase in price and quantity sold.
B an increase in producer revenue, proportional to the increase in price.
C an increase in producer revenue, and quantity supplied.
D a fall in quantity sold and in producer revenue.

16. An equilibrium price for a product is certain to rise when

A business costs rise and the price of a substitute falls.
B demand is perfectly inelastic and technology improves production efficiency.
C supply and demand are both perfectly inelastic.
D incomes rise and supply is perfectly inelastic.

17. Markets for agricultural products can often function poorly because
A price elasticity of supply is low.
B demand for these products is volatile.
C there is a shortage of agricultural land.
D the products are too expensive.

18. Supply of health care services is price inelastic because

A improving technology improves decision‐making and treatment outcomes.
B it is labour‐intensive, much of which requires prolonged and intensive training.
C people are living longer and demand a quicker response to their health concerns.
D the private sector is becoming more significant, as it relieves pressure on the NHS.

19. If rented accommodation is seen as an inferior good compared with owner occupation then
A demand for rented accommodation rises as incomes fall.
B demand for owner occupation falls as income rises.
C the income elasticity of demand for rented accommodation is positive.
D cross elasticity between rented accommodation and owner occupied accommodation is negative.

20. The entry of a new competitor to an existing market will

A result in higher prices.
B force prices down.
C increase the degree of monopoly within the market.
D increase demand for the product.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 38

21. Demand for oil for chemicals has led to an increase in the price of petrol. This relationship is an
example of products in

A joint supply.
B joint demand.
C composite demand.
D competitive demand.

22. The relationship between the demand for computers and the demand for computer technicians is an
example of

A derived demand.
B joint demand.
C composite demand.
D complementary demand.

23. Resources are often allocated most efficiently through the price mechanism because
A those factors of production which produce the most get paid the least.
B the competition which arises results in high profits.
C prices of resources rise as demand for their product rises.
D the resulting output is distributed fairly among individuals.

24. Which of the following statements is not true?

A The price mechanism ensures that the quantity demanded equals the quantity supplied
B Rationing coupons is unnecessary in a free market
C A black market only exists when price is fixed below the equilibrium level
D The price mechanism ensures that everyone who wants to buy the product is able to do so

25. Resources are allocated in a market economy in response to

A the resources which are available to producers.
B government’s objective of increasing the population’s standard of living.
C the need for everyone to have the necessities which they need.
D the products consumers wish to buy.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 39

1.2: The Allocation of Resources in Competitive Markets ‐ Test 2 ‐ Answers

1. Movement down a demand curve arises because of

A an increase in income.
B a reduction in price.
C an increase in price.
D a decrease in income.

Explanation: Changes in income cause a shift of the demand curve, whereas changes in price (prompted
by a rightward shift in the supply curve) cause a downward movement along the demand curve. A
movement down a demand curve means a reduction in price which causes an extension of demand.

2. A demand curve for a product would shift to the left if there was
A an increase in income.
B an increase in its price.
C a decrease in the price of a substitute product.
D a decrease in the price of a complementary product.

Explanation: We can rule out B which causes a movement along the demand curve. A and D cause a
rightward shift of the demand curve (an increase in demand). Only D causes a decrease in demand for
the product. This is because people switch to the less expensive substitute.

3. A demand curve for a DVD is drawn on the assumption that all factors are constant except
A the price of the DVD.
B the price of substitute products.
C consumer incomes.
D the price of DVD players.

Explanation: This is the ceteris paribus (other things remain equal) principle. We assume that all factors
remain unchanged except the variable that we are focusing on.

4. A garage reduces the price of a new model from £15,000 to £13,500. As a result, the quantity
demanded rises from 20 units a week to 23 units a week. The price elasticity of demand is
A ‐0.67.
B ‐0.9.
C ‐1.3.
D ‐1.5.

Explanation: Quantity demand rises by 15%. Price is reduced by 10%. PED = +15% / ‐10% = ‐1.5.

5. If demand for a product has unitary price elasticity, it means that

A changing price will leave a business’s revenue unchanged.
B a percentage change in demand leads to the same percentage change in price.
C the product is a necessity.
D the price elasticity of demand is zero.

Explanation: A is correct because one feature of unitary demand is that price changes are cancelled out
by quantity changes to leave revenue unchanged. B might be a tempting answer but the line of causation
is the wrong way round.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 40

6. A car manufacturer has been studying market research data, shown in the table below, regarding
income elasticity of demand for four of its models.

Model Income elasticity of

demand
Paris +0.7
Viaggio +1.0
Belmont +1.25
Tucson +2.2

Following a 5% fall in real incomes this business can expect

A a fall in demand for the Paris of 3.5%.
B an increase in demand for the Viaggio of 5%.
C an increase in demand for the Belmont of 4%.
D no change in demand for the Tucson.

Explanation: As income elasticity of demand is positive then it is certain that a fall in income leads to a
fall in demand. Therefore, logic demands that only A can be correct. This is confirmed by the data ‐3.5 / ‐
5 = +0.7.

7. A normal good is one where

A demand increases when income increases.
B demand rises when income falls.
C demand falls when prices rise.
D demand changes in proportion to changes in income.

Explanation: The explanation lies in the definition of a normal good. Most goods are normal goods. As
our income rises, we buy an increased quantity of these goods.

8. When the price of tea recently rose from £140 per kg to £160 per kg, demand for milk fell from
1.62m litres to 1.57m litres. To two decimal places, the cross elasticity of demand was
A ‐1.79.
B ‐3.44.
C ‐0.22.
D ‐4.61.

Explanation: Demand fell by 3.09. Price rose by 14.29%. Cross elasticity of demand is ‐3.09% / +14.29 = ‐
0.22.

9. Movement down a supply curve reflects

A a shift in demand arising from higher incomes.
B a shift in demand arising from a decrease in the demand for a complementary product.
C a shift in supply arising from an increase in supplier costs.
D an increase in equilibrium price.

Explanation: A shift of a demand curve causes a movement along the supply curve. As demand for a
complementary product has declined so has the demand for the product with which we are concerned.
The demand for this product shifts inwards and there is a sliding down on the supply curve. To fully
understand this, construct a sketch graph.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 41

10. A shift to the left in a supply curve would arise if

A a unit tax on the product was reduced.
B there was an increase in consumer incomes.
C there was an improvement in technology.
D none of the above.
Explanation: A shift to the left means a decrease in supply. A and C would cause an increase in supply.
Notice that A is not the imposition of a tax, but a reduction in a tax. B would impact upon demand rather
than supply. Hence, none of the above is the correct answer.

11. A supply curve would shift to the right when

A there was a decrease in the price elasticity of supply.
B producers increased output in response to an increase in market price.
C output per employee falls.
D raw material costs fall.
Explanation: A shift of the supply curve to the right (more is supplied at each price) is the result of a
reduction in the cost of production. Of the four responses, only D relates to a fall in the cost of
production.

12. The elasticity of supply for a product is more likely to change if

A output increases significantly.
B the business responds to an increase in market price.
C the business has found some spare capacity.
D there is a change in the price elasticity of demand.
Explanation: Existence of spare capacity facilitates a rise in output, thus it makes supply more elastic.

13. If price elasticity of supply is +2.2, what percentage rise (to two decimal places) is required to bring
about a 5.6% increase in the quantity supplied?
A 12.23%.
B 5.25%.
C 2.55%.
D 2.12%.
Explanation: +2.2 = +5.6% / x. Therefore x = 5.6% / 2.2 = 2.55.

14. Refer to the diagram below.

Price S

D
A
C B
D

Quantity
The producers’ revenue is represented by the triangles
A A + D.
B A + C.
C B + C.
D A + B + C.
Explanation: Triangles A and C combined = price multiplied by quantity = sales revenue.
© APT Initiatives Ltd, 2010
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 42

15. A shift to the right in a demand curve, where supply is perfectly inelastic will result in
A an increase in price and quantity sold.
B an increase in producer revenue, proportional to the increase in price.
C an increase in producer revenue, and quantity supplied.
D a fall in quantity sold and in producer revenue.
Explanation: The rise in demand pushes up price and if supply is perfectly inelastic then quantity sold will
remain unchanged. Logically, if price rises by 10% so will revenue in these circumstances.

16. An equilibrium price for a product is certain to rise when

A business costs rise and the price of a substitute falls.
B demand is perfectly inelastic and technology improves production efficiency.
C supply and demand are both perfectly inelastic.
D incomes rise and supply is perfectly inelastic.
Explanation: D is the only combination of events which is certain to lead to a rise in price.

17. Markets for agricultural products can often function poorly because
A price elasticity of supply is low.
B demand for these products is volatile.
C there is a shortage of agricultural land.
D the products are too expensive.
Explanation: Price elasticity is low because the production cycle is long, eg a planned increase in the grain
production must await the next harvest which, in the case of the UK, will be next year. In the meantime
farmers will be unable to respond to changes in demand and, as a result, the whole of the adjustment will
be in the form of price rises.

18. Supply of health care services is price inelastic because

A improving technology improves decision‐making and treatment outcomes.
B it is labour‐intensive, much of which requires prolonged and intensive training.
C people are living longer and demand a quicker response to their health concerns.
D the private sector is becoming more significant, as it relieves pressure on the NHS.
Explanation: As it takes many years to train medical professionals, supply cannot respond quickly to
changing demand. The other three statements might be accurate in themselves, but do not explain why
supply is inelastic.

19. If rented accommodation is seen as an inferior good compared with owner occupation then
A demand for rented accommodation rises as incomes fall.
B demand for owner occupation falls as income rises.
C the income elasticity of demand for rented accommodation is positive.
D cross elasticity between rented accommodation and owner occupied accommodation is negative.
Explanation: An inferior good is defined as one in which demand rises as income falls. In the case of an
inferior good income elasticity is negative. Cross elasticity between substitutes is positive not negative.

20. The entry of a new competitor to an existing market will

A result in higher prices.
B force prices down.
C increase the degree of monopoly within the market.
D increase demand for the product.
Explanation: The entry of new firms increases competitive forces in the market and will push prices down,
illustrated by a leftward shift in the demand curve for the products of established market participants.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 43

21. Demand for oil for chemicals has led to an increase in the price of petrol. This relationship is an
example of products in
A joint supply.
B joint demand.
C composite demand.
D competitive demand.

Explanation: Composite demand refers to demand for a good that is wanted for more than one purpose,
so that an increase in demand for one purpose reduces the availability of supply for other purposes.

22. The relationship between the demand for computers and the demand for computer technicians is an
example of
A derived demand.
B joint demand.
C composite demand.
D complementary demand.

Explanation: The demand for computer technicians is derived from (comes from) the demand for
computers.

23. Resources are often allocated most efficiently through the price mechanism because
A those factors of production which produce the most get paid the least.
B the competition which arises results in high profits.
C prices of resources rise as demand for their product rises.
D the resulting output is distributed fairly among individuals.

Explanation: Changes in consumer demand are reflected in changes in the relative prices of the products,
and also of the factors of production needed to make the products. This ensures that resources are
shifted into the production of goods required by consumers.

24. Which of the following statements is not true?

A The price mechanism ensures that the quantity demanded equals the quantity supplied
B Rationing coupons is unnecessary in a free market
C A black market only exists when price is fixed below the equilibrium level
D The price mechanism ensures that everyone who wants to buy the product is able to do so

Explanation: The weakness in response D (and why it is not true) is that there is no reference to price or
willingness to pay. We might all like to acquire certain goods, but without the means and willingness to
pay our demand is not effective. For Economists, demand is only meaningful if desire is backed up by
ability and willingness to pay.

25. Resources are allocated in a market economy in response to

A the resources which are available to producers.
B government’s objective of increasing the population’s standard of living.
C the need for everyone to have the necessities which they need.
D the products consumers wish to buy.

Explanation: In the free market the consumer is sovereign. In a competitive market the profit motive
ensures that supply responds to demand.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 44

Production and Efficiency

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 45

1.3: Production Efficiency ‐ Test 1

1. Specialisation results in each of the following with the exception of

A self sufficiency.
B increased output.
C higher incomes.
D higher living standards.

2. The benefits of specialisation depend on

A more competitive businesses that have focused on producing better products.
B the use of money as a means of exchange.
C managing inflation successfully.
D increased use of technology, which reduces average costs.

3. Which one of the following statements is not a reason why money is a more efficient medium of
exchange than barter?

A Money provides a common measuring rod of value

B The value of money is stable
C Money overcomes the problem of the double coincidence of wants
D Money is portable and divisible

4. Division of labour requires an efficient means of exchange because

A specialist workers are not self sufficient.
B specialist workers achieve high productivity.
C exchange is not possible without the use of money as a medium of exchange.
D specialist workers produce a surplus.

5. The extent of division of labour is determined by

A the size of the market.
B the productive efficiency of the economy.
C the profits of the enterprise.
D the productivity of labour.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 46

6. Which of the following statements is incorrect?

A Production refers to the total output of goods in the economy
B Production refers to the total output of goods and services in an economy
C Production is the process whereby inputs are converted into outputs
D Production is the means by which consumer wants are satisfied

7. A 5% rise in the workforce in a factory led to a 4% increase in the output of goods. From this we can
conclude that

A both output and productivity increased.

B productivity increased but output fell.
C production increased but productivity fell.
D both production and productivity fell.

8. Labour productivity is defined as

A how many items a workforce produces.
B the value of the output a business produces.
C the output per person per period of time.
D the average cost of employing someone.

9. A production manager has noted higher labour productivity in the factory and, therefore, can
confidently look forward to

A reduced cost per unit made.

B increased sales.
C more hours being worked.
D lower total costs.

10. Which one of the following will cause a fall in the productivity of labour?
A A reduction in the size of the workforce
B An improvement in the quality of recruits
C A deterioration in the quality of capital equipment
D Investment in training

11. Investment in new technologically‐advanced capital equipment will result in

A increased output.
B a rise in the productivity of labour.
C a rise in the productivity of capital.
D all the above.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 47

12. Productive efficiency is defined as

A producing the best quality products.
B the lowest cost per unit of output.
C the lowest average cost per person employed.
D maximum output per square foot.

13. A productively efficient economy is one which

A spends heavily on capital goods, in order to ensure that standards of living rise in the future.
B benefits from full employment.
C can ensure that consumers’ welfare is maximised.
D can only increase output in one product at the expense of output in another.

14. In a fully employed and productively efficient economy an increase in the productivity of factors of
production will result in
A a movement along the production possibility frontier.
B a movement from a point inside the production possibility frontier to a point on the frontier.
C a leftward shift of the production possibility frontier.
D a rightward shift of the production possibility frontier.

15. On the production possibility diagram below there are four points identified.

Consumer goods
A
D
B

0
Capital goods

Which of the following statements is not valid?

A A movement to D can be achieved with additional resources
B A movement to D can be achieved with improved technology
C A and B are points of equal productive efficiency
D At point C resources are fully employed

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 48

16. For an individual firm the productively efficient level of output occurs when
A total costs are at their lowest.
B average costs are at their lowest.
C profits are maximised.
D output is maximised.

17. Economies of scale refer to lower average costs arising from, for example
A increasing output.
B employing more specialised factors.
C buying resources from a cheaper supplier.
D producing in a larger factory.

18. Larger businesses benefit from financial economies of scale, for example by
A producing more efficiently.
B paying lower interest rates on loans.
C employing low‐wage staff.
D buying cheaper materials or components.

19. Some shipping businesses can benefit from economies of increased dimensions because
A they can buy fuel in bulk and, therefore, at a lower cost.
B they use more technically advanced ships.
C they can employ more specialised staff.
D bigger ships can carry a more than proportionate amount of cargo.

20. A large firm benefits by spreading its advertising budget over a larger volume of output. This is an
example of

A an external economy of scale.

B a managerial economy of scale.
C a financial economy of scale.
D a marketing economy of scale.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 49

21. Workshop employees increase output by 5% per hour and are awarded a pay rise of 3% per hour.
Other things remaining equal (ceteris paribus), the labour cost of producing each unit of production
will

A fall by 1.90%.
B rise by 1.90%.
C rise by 1.85%.
D none of the above.

22. Which of the following statements illustrates the concept of economies of scale? A business
experiences management difficulties which

A reduces output per hour.

B can be overcome by moving to a larger factory.
C rationalises its two factories into one to save money.
D adjusts the output level in its factory so that efficiency is improved.

23. The benefits of external economies of scale can arise when

A investing in training to enable employees to be more productive.
B employing specialist managers from outside to improve business efficiency.
C a growing business prompts infrastructure improvements in its vicinity.
D buying more cheaply from overseas suppliers as a means of reducing costs.

24. Diseconomies of scale can arise when

A the average cost of a business increases.
B total costs increase as scale of a business increases.
C efficiency suffers because of communication problems among employees.
D factor costs increase.

25. Which one of the following statements is incorrect?

A Increased scale of production leads to economies of scale
B Increased scale of production can lead to diseconomies of scale
C Economies of scale result in a reduction in total costs
D Diseconomies of scale result in a rise in average costs

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 50

1.3: Production Efficiency ‐ Test 1 ‐ Answers

1. Specialisation results in each of the following with the exception of

A self sufficiency.
B increased output.
C higher incomes.
D higher living standards.

Explanation: The last three are the consequences and advantages of specialisation. Self sufficiency, on
the other hand, is not possible for specialist workers who depend on exchanging the products of their
specialism with that of other specialist producers.

2. The benefits of specialisation depend on

A more competitive businesses that have focused on producing better products.
B the use of money as a means of exchange.
C managing inflation successfully.
D increased use of technology, which reduces average costs.

Explanation: Specialisation requires us to engage in exchange, and money is a more efficient medium of
exchange than relying upon barter (the direct exchange of goods/services without the medium of money).

3. Which one of the following statements is not a reason why money is a more efficient medium of
exchange than barter?
A Money provides a common measuring rod of value
B The value of money is stable
C Money overcomes the problem of the double coincidence of wants
D Money is portable and divisible

Explanation: A general rise in prices (a process known as inflation) means that the value of money is
definitely not stable. What we could say is that price stability is desirable in terms of permitting money to
function as an efficient means of exchange, but even with some inflation, money is still a more efficient
medium of exchange than barter.

4. Division of labour requires an efficient means of exchange because

A specialist workers are not self sufficient.
B specialist workers achieve high productivity.
C exchange is not possible without the use of money as a medium of exchange.
D specialist workers produce a surplus.

Explanation: A specialist worker does not produce the full range of goods and services that he / she
requires. Therefore, specialists must engage in exchange – goods for goods, goods for money, labour
services for money, and so on. B and D are valid statements but do not explain why specialists need to
engage in exchange. C is an incorrect statement – exchange can occur without the use of money.

5. The extent of division of labour is determined by

A the size of the market.
B the productive efficiency of the economy.
C the profits of the enterprise.
D the productivity of labour.

Explanation: The larger the market the greater the opportunities for division of labour.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 51

6. Which of the following statements is incorrect?

A Production refers to the total output of goods in the economy
B Production refers to the total output of goods and services in an economy
C Production is the process whereby inputs are converted into outputs
D Production is the means by which consumer wants are satisfied
Explanation: The term production covers both goods and services.

7. A 5% rise in the workforce in a factory led to a 4% increase in the output of goods. From this we can
conclude that
A both output and productivity increased.
B productivity increased but output fell.
C production increased but productivity fell.
D both production and productivity fell.
Explanation: We are told that output or production rose, which rules out B and D. As output rose by less
than the workforce then productivity must have fallen.

8. Labour productivity is defined as

A how many items a workforce produces.
B the value of the output a business produces.
C the output per person per period of time.
D the average cost of employing someone.
Explanation: Productivity is output per unit of input and so labour productivity is output per worker per
time period (day, shift, week, or year).

9. A production manager has noted higher labour productivity in the factory and, therefore, can
confidently look forward to
A reduced cost per unit made.
B increased sales.
C more hours being worked.
D lower total costs.
Explanation: If employees produce more per hour then wage costs are spread more thinly over a given
wage. This will lead to a fall in average costs.

10. Which one of the following will cause a fall in the productivity of labour?
A A reduction in the size of the workforce
B An improvement in the quality of recruits
C A deterioration in the quality of capital equipment
D Investment in training
Explanation: With lower quality capital equipment, labour will be less productive. A causes a reduction in
production but not in output per head. B and D will lead to a rise in productivity.

11. Investment in new technologically‐advanced capital equipment will result in

A increased output.
B a rise in the productivity of labour.
C a rise in the productivity of capital.
D all the above.
Explanation: Investment in capital equipment will raise output and will raise the productivity of the
workforce. The greater the capital per worker, the greater the output per head. The fact that this
investment improves the quality of capital leads to a rise in the productivity of capital.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 52

12. Productive efficiency is defined as

A producing the best quality products.
B the lowest cost per unit of output.
C the lowest average cost per person employed.
D maximum output per square foot.
Explanation: Efficiency is a measure of output in relation to input. A is incorrect, whereas C and D only
deal with partial efficiency. B, on the other hand, deals with total efficiency. If output is produced at the
lowest cost per unit then production has reached the point of maximum efficiency.

13. A productively efficient economy is one which

A spends heavily on capital goods, in order to ensure that standards of living rise in the future.
B benefits from full employment.
C can ensure that consumers’ welfare is maximised.
D can only increase output in one product at the expense of output in another.
Explanation: If the economy is productively efficient it is producing on the PPF curve and this means that
the output of one good cannot be increased without a reduction in the production of other goods.

14. In a fully employed and productively efficient economy an increase in the productivity of factors of
production will result in
A a movement along the production possibility frontier.
B a movement from a point inside the production possibility frontier to a point on the frontier.
C a leftward shift of the production possibility frontier.
D a rightward shift of the production possibility frontier.
Explanation: From the description of the economy it is clear that it is operating on the PPF. A rise in
productivity suggests that more can be produced with available resources and this means that the PPF
shifts outwards and to the right.

15. On the production possibility diagram below there are four points identified.

Consumer goods
A
D
B

0
Capital goods

Which of the following statements is not valid?

A A movement to D can be achieved with additional resources
B A movement to D can be achieved with improved technology
C A and B are points of equal productive efficiency
D At point C resources are fully employed
Explanation: If resources were fully employed then the combination of output would be significantly
greater than shown at C. Productive efficiency with full employment of resources could take the
economy to either of the two points on the production possibility frontier ie A or B.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 53

16. For an individual firm the productively efficient level of output occurs when
A total costs are at their lowest.
B average costs are at their lowest.
C profits are maximised.
D output is maximised.

Explanation: Productive efficiency for a firm means making best use of its resources thereby producing at
the lowest unit cost. This is not necessarily the point where profits are maximised.

17. Economies of scale refer to lower average costs arising from, for example
A increasing output.
B employing more specialised factors.
C buying resources from a cheaper supplier.
D producing in a larger factory.

Explanation: Economies of scale refer to the advantages of increasing the scale of production, eg by
moving to larger premises. Increased output could be achieved by increasing the use of existing plant and
for this reason D rather than A is correct. B and C are incorrect because they do not relate to an increase
in the scale of production.

18. Larger businesses benefit from financial economies of scale, for example by
A producing more efficiently.
B paying lower interest rates on loans.
C employing low‐wage staff.
D buying cheaper materials or components.

Explanation: One of the benefits of being a large organisation is that increased scale provides access to
more and cheaper forms of finance. This is a category of internal economy of scale known as a financial
economy.

19. Some shipping businesses can benefit from economies of increased dimensions because
A they can buy fuel in bulk and, therefore, at a lower cost.
B they use more technically advanced ships.
C they can employ more specialised staff.
D bigger ships can carry a more than proportionate amount of cargo.

Explanation: The first three responses are all economies of scale but are not technical economies of
increased dimension. Only the final response can be classified as an economy resulting from increased
dimension. In essence, it means that a doubling of the size of a ship results in a more than doubling of
capacity.

20. A large firm benefits by spreading its advertising budget over a larger volume of output. This is an
example of
A an external economy of scale.
B a managerial economy of scale.
C a financial economy of scale.
D a marketing economy of scale.

Explanation: A marketing economy (also known as a commercial economy) refers to any advantage in
terms of buying and selling that a business derives from an increase in the scale of its operations.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 54

21. Workshop employees increase output by 5% per hour and are awarded a pay rise of 3% per hour.
Other things remaining equal (ceteris paribus), the labour cost of producing each unit of production
will
A fall by 1.90%.
B rise by 1.90%.
C rise by 1.85%.
D none of the above.

Explanation: As output per hour rises by more than labour costs per hour, then it is clear that unit costs
will fall. Hence, only A or D could be correct. A is, in fact, correct because the average labour cost falls by
1.9% (1.03 / 1.05 = 0.98095, representing a fall of 1.90%).

22. Which of the following statements illustrates the concept of economies of scale? A business
experiences management difficulties which
A reduces output per hour.
B can be overcome by moving to a larger factory.
C rationalises its two factories into one to save money.
D adjusts the output level in its factory so that efficiency is improved.

Explanation: Economies of scale are a long term rather than a short term concept. Only B is concerned
with a rise in the scale of production.

23. The benefits of external economies of scale can arise when

A investing in training to enable employees to be more productive.
B employing specialist managers from outside to improve business efficiency.
C a growing business prompts infrastructure improvements in its vicinity.
D buying more cheaply from overseas suppliers as a means of reducing costs.

Explanation: External economies are the benefits that the individual firm gains from an increase in the
size of the industry in which it operates. In this case, the infrastructure improvements benefit other
(including rival) firms, in the vicinity.

24. Diseconomies of scale can arise when

A the average cost of a business increases.
B total costs increase as scale of a business increases.
C efficiency suffers because of communication problems among employees.
D factor costs increase.

Explanation: This is the best known example of diseconomies of scale. As the scale of production rises so
do the management problems associated with the business. The other three responses might relate to
the consequences of diseconomies but not to the reasons why they arise.

25. Which one of the following statements is incorrect?

A Increased scale of production leads to economies of scale
B Increased scale of production can lead to diseconomies of scale
C Economies of scale result in a reduction in total costs
D Diseconomies of scale result in a rise in average costs

Explanation: Economies of scale do not reduce the total cost of production – instead they reduce the
average cost per unit of production.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 55

1.3: Production Efficiency ‐ Test 2

1. Specialisation leads to each of the following with the exception of

A increased output.
B a lower standard of living.
C the process of exchange.
D greater efficiency.

2. Which one of the following statements is incorrect?

A Specialisation requires people to engage in exchange
B Exchange cannot occur without the use of money as a medium of exchange
C The extent of specialisation is limited by the size of the market
D Specialisation leads to increased output

3. Barter is the direct exchange of goods and services without the use of money as a medium of
exchange. Which one of the following statements is not valid?

A Barter is an efficient method of exchange

B One problem associated with barter is that of valuing goods and services
C The major defect of barter is the problem of the double coincidence of wants
D Barter limits the degree of specialisation within the economy

4. In the Wealth of Nations (1776) Adam Smith used the example of the allocation of work tasks in a pin
making factory to illustrate

A the benefits of division of labour.

B economies of scale.
C the production possibility curve.
D opportunity cost.

5. Which one of the following is not an advantage of division of labour?

A Employees are assigned tasks for which they are best suited
B Greater experience improves efficiency
C Increased vulnerability to periods of unemployment
D More cost effective use of capital equipment

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 56

6. Factors of production are seen as the essential ingredients of production. The active factor that
initiates the productive process and combines and organises the other factors is

A capital.
B labour.
C management.
D enterprise.

7. In which of the following situations is there not a rise in productivity?

A Producing more goods with the same quantity of labour
B Producing the same volume of output with a smaller quantity of labour
C A 5% fall in output with a 7% cut in the workforce
D A 7% fall in output with a 5% cut in the workforce

8. A rise in the productivity of labour is best defined as

A a rise in output.
B a rise in output per person.
C a rise in output per unit of labour.
D producing more by employing more people.

9. Which of the following will result in an increase in productivity of labour?

1. An increase in the quality of capital
2. An increase in the quantity of capital
3. An improvement in training and skills
4. An increase in number of employees

A 3 and 4 only
B 1, 2, and 3 only
C 4 only
D 3 only

10. The productivity of capital is increased by each of the following with the exception of
A technological improvement.
B an increase in the stock of capital.
C an increase in the quality of labour.
D a reduction in the time that machines are idle.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 57

11. The yield or productivity of land is measured by

A output per tractor.
B output per acre.
C output per farm worker.
D profit from the land.

12. An economy is productively efficient when it

A chooses a product combination which is on its production possibility curve.
B satisfies perfectly the wants of consumers.
C produces no external costs.
D does not have to rely on international trade.

13. Any point on a production possibility frontier is productively efficient because

A it reflects most accurately what consumers want.
B technology has reduced average costs.
C no more output can be secured from existing resources.
D the opportunity cost is zero.

14. A business would be productively efficient in the short run if it

A is a monopolist.
B produces at the lowest point on its average cost curve.
C exploits all economies of scale fully.
D earns high profit.

15. Refer to the diagram below.

Average
Cost

O
A Output

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 58

The diagram shows that at output level A

A the production scale chosen is being managed efficiently.
B all economies of scale have been fully exploited.
C diseconomies of scale are more significant than any economies of scale generated.
D the production level chosen is productively inefficient.

16. A business is benefiting from a sustained increase in sales and decides to produce more by employing
larger machines. This is an example of

A a commercial economy of scale.

B a diseconomy of scale.
C an external economy of scale.
D an internal economy of scale.

17. Larger businesses can benefit from managerial economies of scale because
A specialised managers are more efficient.
B managers can delegate tasks to subordinates.
C employees are better motivated.
D communication systems can reduce average costs.

18. Buying in bulk is an example of a

A technical economy of scale.
B managerial economy of scale.
C commercial economy of scale.
D financial economy of scale.

19. Large firms with a large range of products and a number of different premises can reduce the
average cost of insurance. This is an example of

A a technical economy of scale.

B a risk‐bearing economy of scale.
C a managerial economy of scale.
D a financial economy of scale.

20. The law of increased dimension is a particular example of

A a marketing economy.
B a managerial economy.
C a technical economy.
D a financial economy.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 59

21. When two farms merge and benefit from internal economies of scale
A average costs for the whole farm will fall.
B profits across agriculture will increase.
C the merged farm will benefit from falling returns to scale.
D profits across both farms must increase.

22. Some firms benefit from research facilities at a local university. This is known as
A an external economy of scale.
B a technical economy of scale.
C a financial economy of scale.
D an internal economy of scale.

23. Car production using an assembly line illustrates

A the benefits of division of labour.
B diseconomies of scale.
C economies of scale.
D all the above.

24. Which one of the following statements is correct?

A Economies of scale only exist in the short run
B All diseconomies of scale are linked to technology
C Diseconomies of scale can be avoided
D Economies of scale result in a reduction in total costs

25. Diseconomies of scale are caused by

A problems of co‐ordination.
B problems of supervision.
C problems of alienation.
D all the above.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 60

1.3: Production Efficiency ‐ Test 2 ‐ Answers

1. Specialisation leads to each of the following with the exception of

A increased output.
B a lower standard of living.
C the process of exchange.
D greater efficiency.

Explanation: Specialisation or division of labour leads to increased output and, ultimately, average living
standards depend upon the level of output in the economy.

2. Which one of the following statements is incorrect?

A Specialisation requires people to engage in exchange
B Exchange cannot occur without the use of money as a medium of exchange
C The extent of specialisation is limited by the size of the market
D Specialisation leads to increased output

Explanation: Specialisation and exchange does occur in the absence of money as a means of exchange.
Barter might be an inefficient method of exchange, but from prehistoric times to the present day people
have engaged in exchange by means of barter (the direct exchange of goods and services).

3. Barter is the direct exchange of goods and services without the use of money as a medium of
exchange. Which one of the following statements is not valid?
A Barter is an efficient method of exchange
B One problem associated with barter is that of valuing goods and services
C The major defect of barter is the problem of the double coincidence of wants
D Barter limits the degree of specialisation within the economy

Explanation: Barter is a method of exchange but it is not efficient because of the problems of valuing
goods / services and finding someone who wants what you have and has what you want. These are
major problems associated with barter and, as such, limit the degree of specialisation within a barter
economy. B, C and D are valid statements but A is not.

4. In the Wealth of Nations (1776) Adam Smith used the example of the allocation of work tasks in a pin
making factory to illustrate
A the benefits of division of labour.
B economies of scale.
C the production possibility curve.
D opportunity cost.

Explanation: This is a famous example used to illustrate division of labour and, even in the absence of
knowledge of this important book, logic should suggest that allocation of work tasks is concerned with
division of labour.

5. Which one of the following is not an advantage of division of labour?

A Employees are assigned tasks for which they are best suited
B Greater experience improves efficiency
C Increased vulnerability to periods of unemployment
D More cost effective use of capital equipment

Explanation: Division of labour makes the specialist worker more vulnerable to periods of unemployment.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 61

6. Factors of production are seen as the essential ingredients of production. The active factor that
initiates the productive process and combines and organises the other factors is
A capital.
B labour.
C management.
D enterprise.
Explanation: Of the factors of production land, labour and capital are seen as passive and have to be
activated by the factor of production known as enterprise. This must be seen as the risk‐taking factor.
Management is not a factor of production but is a specialist form of labour undertaken by salaried
employees (in a large firm) or owner‐ managers (in a small firm).

7. In which of the following situations is there not a rise in productivity?

A Producing more goods with the same quantity of labour
B Producing the same volume of output with a smaller quantity of labour
C A 5% fall in output with a 7% cut in the workforce
D A 7% fall in output with a 5% cut in the workforce
Explanation: If output falls by more than the workforce then there has been a reduction in productivity –
that is, a decrease in output per worker. In all the other situations there has been a rise in output per
worker, even though in B and C there was no rise in production (output). Productivity is concerned with
output per unit of input.

8. A rise in the productivity of labour is best defined as

A a rise in output.
B a rise in output per person.
C a rise in output per unit of labour.
D producing more by employing more people.
Explanation: Productivity is output per unit of input. A and D do not represent rises in productivity. C is a
better definition than B. This is because unit of labour incorporates units of time. Labour productivity can
be seen as output per person per unit of time.

9. Which of the following will result in an increase in productivity of labour?

5. An increase in the quality of capital
6. An increase in the quantity of capital
7. An improvement in training and skills
8. An increase in number of employees
A 3 and 4 only
B 1, 2, and 3 only
C 4 only
D 3 only
Explanation: The productivity of labour is increased by an improvement in the quality of labour and an
increase in the quality and quantity of complementary factors (1 and 2). However, an increase in the
quantity of labour will not increase output per head.

10. The productivity of capital is increased by each of the following with the exception of
A technological improvement.
B an increase in the stock of capital.
C an increase in the quality of labour.
D a reduction in the time that machines are idle.
Explanation: If productivity of capital is measured in terms of output per machine, then an increase in the
number of machines will not by itself increase the productivity of each machine.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 62

11. The yield or productivity of land is measured by

A output per tractor.
B output per acre.
C output per farm worker.
D profit from the land.
Explanation: The productivity of any factor of production is expressed in terms of output per unit of the
factor. In the case of land, productivity is measured in terms of output per unit of land.

12. An economy is productively efficient when it

A chooses a product combination which is on its production possibility curve.
B satisfies perfectly the wants of consumers.
C produces no external costs.
D does not have to rely on international trade.
Explanation: Productive efficiency is concerned with producing at the maximum potential level of output
given existing resources and technology. Any point on the production possibility curve is a point of
maximum productive efficiency.

13. Any point on a production possibility frontier is productively efficient because

A it reflects most accurately what consumers want.
B technology has reduced average costs.
C no more output can be secured from existing resources.
D the opportunity cost is zero.
Explanation: At any point on the PPF the economy is producing as much as possible from existing
resources and technology. Therefore, it is not possible to produce more of one category of goods without
producing less of another.

14. A business would be productively efficient in the short run if it

A is a monopolist.
B produces at the lowest point on its average cost curve.
C exploits all economies of scale fully.
D earns high profit.
Explanation: Efficiency is achieved by reducing unit costs to the lowest level possible in the short run
(which is defined as period when at least one factor of production is fixed). Monopoly is likely to reduce
efficiency. Productive efficiency does not guarantee high profits, and economies of scale are only fully
exploitable in the long run.

15. Refer to the diagram below.

Average
Cost

O
A Output

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 63

The diagram shows that at output level A

A the production scale chosen is being managed efficiently.
B all economies of scale have been fully exploited.
C diseconomies of scale are more significant than any economies of scale generated.
D the production level chosen is productively inefficient.
Explanation: The logic of the curve suggests that output could be increased beyond A and this would
reduce unit costs. Therefore, output level A is not productively efficient.

16. A business is benefiting from a sustained increase in sales and decides to produce more by employing
larger machines. This is an example of
A a commercial economy of scale.
B a diseconomy of scale.
C an external economy of scale.
D an internal economy of scale.
Explanation: As this concerns growth in the firm itself, it is clearly an internal economy rather than an
external economy. However, it is not a commercial economy (one form of internal economy of scale).
Logically, if it was a commercial economy then both A and D would be correct. As it is a technical
economy then we can conclude D alone is the correct answer to the question.

17. Larger businesses can benefit from managerial economies of scale because
A specialised managers are more efficient.
B managers can delegate tasks to subordinates.
C employees are better motivated.
D communication systems can reduce average costs.
Explanation: Specialists tend to be more efficient than “jacks / Jill’s of all trades”, but only the largest of
firms can employ the most specialist forms of manager.

18. Buying in bulk is an example of a

A technical economy of scale.
B managerial economy of scale.
C commercial economy of scale.
D financial economy of scale.
Explanation: Bulk buying results in a fall in the unit cost of inputs. It is classed as a commercial economy
since it relates to buying rather than to management, production or finance.

19. Large firms with a large range of products and a number of different premises can reduce the
average cost of insurance. This is an example of
A a technical economy of scale.
B a risk‐bearing economy of scale.
C a managerial economy of scale.
D a financial economy of scale.
Explanation: Large firms benefit from spreading risks over a large range of products, in other words,
placing their eggs in a number of baskets. The cost of insurance does not increase proportionally with the
number of products and/or premises.

20. The law of increased dimension is a particular example of

A a marketing economy.
B a managerial economy.
C a technical economy.
D a financial economy.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 64

Explanation: Because it relates to machinery, storage and transport, this is classed as a technical
economy. In essence, the law of increased dimensions means that costs of, say, a storage unit do not rise
at the same rate as the volume of the storage unit. Therefore average storage costs fall.

21. When two farms merge and benefit from internal economies of scale
A average costs for the whole farm will fall.
B profits across agriculture will increase.
C the merged farm will benefit from falling returns to scale.
D profits across both farms must increase.

Explanation: The benefits of economies of scale are seen in a fall in average costs.

22. Some firms benefit from research facilities at a local university. This is known as
A an external economy of scale.
B a technical economy of scale.
C a financial economy of scale.
D an internal economy of scale.

Explanation: Where a business organisation benefits from the activities of an external organisation then
we call this an external economy. Technical and financial economies are types of internal economy of
scale.

23. Car production using an assembly line illustrates

A the benefits of division of labour.
B diseconomies of scale.
C economies of scale.
D all the above.

Explanation: The three points illustrate the strengths and weakness of mass production of cars. On the
positive side division of labour and economies of scale result in a high level of output, but on the negative
side alienation of the workforce is seen as a diseconomy of scale.

24. Which one of the following statements is correct?

A Economies of scale only exist in the short run
B All diseconomies of scale are linked to technology
C Diseconomies of scale can be avoided
D Economies of scale result in a reduction in total costs

Explanation: Diseconomies of scale tend to be associated with management and human relations in the
workplace, and in particular, with communication problems. With appropriate human resource
management policies and procedures, it is possible to avoid diseconomies. In other words, they are not
inevitable. In addition, A is an incorrect statement since economies of scale are a long term phenomenon.
B is incorrect because diseconomies are linked to management and human resources. D is incorrect
because even though economies of scale reduce average costs they do not reduce total cost.

25. Diseconomies of scale are caused by

A problems of co‐ordination.
B problems of supervision.
C problems of alienation.
D all the above.

Explanation: As a firm grows in size there are problems in supervising the workforce and co‐ordinating
activities. In addition, the workforce feels a sense of alienation in a large firm.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 65

Market Failure

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 66

1.4: Market Failure ‐ Test 1

1. Market failure is defined as circumstances in which

A some markets are uncompetitive.
B consumers lose sovereignty because they do not get what they want.
C prices are higher than they ought to be.
D the choices made by consumers and producers lead to a misallocation of resources.

2. Complete market failure is defined as circumstances in which

A businesses can maximise excessive profits.
B resources in a market are misallocated.
C a product cannot be delivered through a market.
D consumer information is poor.

3. Demerit goods represent a source of market failure because

A their production results in external costs.
B their consumption results in external benefits.
C they are over‐consumed.
D they are not provided by the market.

4. Public goods have a number of characteristics, for example:

A They are not produced by central or local government.
B They have a value beyond what is appreciated by the buyer.
C No person can be excluded from benefiting from them.
D They do not generate externalities.

5. Which one of the following is an example of a pure public good?

A Street lighting
B MMR vaccination
C Health care
D Public libraries

6. A quasi public good is one which

A has the characteristics of excludability and rivalry.
B is produced by the private and public sector.
C has only some of the characteristics of a public good.
D is bought by the state.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 67

7. A private good is unlike a public good because

A it is consumed.
B there is an opportunity cost incurred.
C businesses can charge for it.
D its provider competes for resources.

8. Externalities are of interest to economists when

A their impact on welfare is not recognised in the price.
B firms behave in a monopolistic fashion.
C they are negative and reduce economic welfare.
D the drawbacks of consumption are not fully appreciated.

9. Economic activity which creates a positive externality

A is over‐priced.
B is over‐produced.
C is over‐consumed.
D results in greater‐than recognised‐benefits.

10. A negative externality exists when

A the private benefit of consumption is less than the social benefit.
B the consumption of the product reduces the welfare of third parties.
C the production of a product incurs costs.
D third party costs incurred are not recognised by consumers and producers.

11. Some people put Christmas lights on the outside of a house. This resulting externality is an example
of a

A negative consumption externality.

B positive consumption externality.
C negative production externality.
D positive production externality.

12. A social cost is defined as all costs

A incurred as a by‐product of economic activity.
B incurred by a business.
C arising from economic activity.
D that affect a business’s profitability.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 68

13. Refer to the diagram below.

Costs & Marginal Social Cost

Benefits
Marginal Private Cost

P1
P

Marginal Benefit

Q1 Q Quantity

The diagram shows that

A a higher price at P1 would reflect the external costs generated.
B lower sales, Q to Q1 will be secured for a product whose production has incurred extra private costs.
C quantity produced and sold, Q to Q1, will change as a result of a positive externality.
D changes in price, P to P1, will reflect lower business costs.

14. The diagram below illustrates the impact of an externality arising from the extra congestion in the
vicinity around a new car factory, as many more vehicles use local streets.

Costs & Benefits MSC

A F

MPC
G

C H

J MSB = MPB

O
D E Quantity

As a result there is a welfare

A gain represented by the triangle FGH.
B loss represented by the triangle GHJ.
C gain represented by the triangle GHJ.
D loss represented by the triangle FGH.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 69

15. A merit good is defined as a good which

A generates benefits to individuals greater than appreciated.
B is free at the point of consumption.
C can only be provided by government.
D improves the competitiveness of the UK economy by reducing business costs.

16. Education is considered a merit good because

A it is provided by the government.
B it provides benefits which are unappreciated by its consumers.
C it would not be produced by private businesses.
D it generates positive externalities.

17. Which of the following is an example of a demerit good?

A Pollution
B Cigarettes
C Litter
D The prison service

18. A misallocation of resources is likely to occur when

A consumers are not given information on which to make their decisions.
B merit goods are provided by the market forces.
C demerit goods are provided by market forces.
D all the above.

19. Markets allocate resources more successfully when

A businesses are large.
B governments provide services.
C there are many businesses in a market.
D there is no opportunity cost.

20. A monopoly uniquely can cause economic inefficiency because such a business
A generates externalities.
B dominates the market.
C makes a profit.
D has less incentive to cut costs and prices.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 70

21. Competitive markets are more likely to deliver economic welfare because the businesses in these
markets

A can produce in large quantities and thereby exploit economies of scale.

B can only survive by accurately responding to what their customers want.
C have a greater incentive to make a profit.
D have to invest in advertising to attract customers.

22. Barriers to entry are a source of market failure because

A social costs are often greater than private costs.
B they lead to a reduction in business’s profitability.
C they ensure that businesses have an incentive to cut costs and prices.
D they typically result in higher prices.

23. Consumers can benefit from a monopolistic market because

A the profits the businesses earn can be invested in innovation.
B the barriers to entry will be high.
C the businesses can charge higher prices.
D of the diseconomies of scale it can exploit.

24. Factor immobility is a source of market failure because

A social benefits are greater than private benefits.
B resources are not being most productively used.
C labour is inadequately educated and trained.
D some factor markets are uncompetitive.

25. Inequality can lead to market failure because, if left to the market
A some people could not afford to consume the necessities of life.
B richer people would have a higher standard of living.
C the level of income and wealth would affect the level of externalities.
D monopolies could more easily exploit their market position.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 71

1.4: Market Failure ‐ Test 1 ‐ Answers

1. Market failure is defined as circumstances in which

A some markets are uncompetitive.
B consumers lose sovereignty because they do not get what they want.
C prices are higher than they ought to be.
D the choices made by consumers and producers lead to a misallocation of resources.
Explanation: Each of the responses A to C describes some aspect of market failure, but only D ‐ with its
emphasis on misallocation of resources ‐ defines market failure.

2. Complete market failure is defined as circumstances in which

A businesses can maximise excessive profits.
B resources in a market are misallocated.
C a product cannot be delivered through a market.
D consumer information is poor.
Explanation: The market completely fails to deliver public goods. In all other types of market failure the
market delivers goods but in a quantity and at a price which does not maximise social welfare.

3. Demerit goods represent a source of market failure because

A their production results in external costs.
B their consumption results in external benefits.
C they are over‐consumed.
D they are not provided by the market.
Explanation: Demerit goods harm the consumer who through his / her own foolishness chooses to
consume them. For this reason economists see this as an example of over‐consumption.

4. Public goods have a number of characteristics, for example:

A They are not produced by central or local government.
B They have a value beyond what is appreciated by the buyer.
C No person can be excluded from benefiting from them.
D They do not generate externalities.
Explanation: C is one characteristic of a public good and, therefore, is the answer to the question.
However, it should be pointed out that C does not represent a full definition of a public good since the
other feature of public goods is non‐rivalry.

5. Which one of the following is an example of a pure public good?

A Street lighting
B MMR vaccination
C Health care
D Public libraries
Explanation: It is not possible to exclude some people from the benefit of street lighting and consumption
by one person does not reduce the benefit to others. Therefore, it passes the tests for being a public
good.

6. A quasi public good is one which

A has the characteristics of excludability and rivalry.
B is produced by the private and public sector.
C has only some of the characteristics of a public good.
D is bought by the state.
Explanation: Quasi means almost or semi. This suggests that it has some but not all the characteristics of
a public good.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 72

7. A private good is unlike a public good because

A it is consumed.
B there is an opportunity cost incurred.
C businesses can charge for it.
D its provider competes for resources.

Explanation: The reason that businesses can charge for private goods is that it is possible to exclude non
payers from enjoying the benefits of the good. This is not the case with public goods.

8. Externalities are of interest to economists when

A their impact on welfare is not recognised in the price.
B firms behave in a monopolistic fashion.
C they are negative and reduce economic welfare.
D the drawbacks of consumption are not fully appreciated.

Explanation: Externalities (positive and negative) are enjoyed by / inflicted on third parties. By definition
they are not recognised by the price system since economic agents are selfish. Where they impact on
welfare they become an issue for economic analysis.

9. Economic activity which creates a positive externality

A is over‐priced.
B is over‐produced.
C is over‐consumed.
D results in greater‐than recognised‐benefits.

Explanation: A positive externality is a benefit enjoyed by people not party to the transaction. The market
ignores the benefits enjoyed by third parties and, instead, focuses on private benefit.

10. A negative externality exists when

A the private benefit of consumption is less than the social benefit.
B the consumption of the product reduces the welfare of third parties.
C the production of a product incurs costs.
D third party costs incurred are not recognised by consumers and producers.

Explanation: A negative externality is an external cost imposed on third parties. Therefore, it reduces the
welfare of third parties.

11. Some people put Christmas lights on the outside of a house. This resulting externality is an example
of a
A negative consumption externality.
B positive consumption externality.
C negative production externality.
D positive production externality.

Explanation: It is clearly an externality because it is enjoyed or endured by other people. Also, because it
results from the behaviour of a householder or consumer it is clearly a consumption externality. Although
some people might find Christmas lights not to their taste, most people would see it as adding to
Christmas cheer. Therefore, we can regard Christmas lights on houses as a positive rather than negative
consumption externality.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 73

12. A social cost is defined as all costs

A incurred as a by‐product of economic activity.
B incurred by a business.
C arising from economic activity.
D that affect a business’s profitability.
Explanation: Social costs combine the private costs to the producer with the external costs inflicted on the
rest of the community. For this reason C is the correct response. A refers just to external costs, and C and
D relate to private costs.

13. Refer to the diagram below.

Costs & Marginal Social Cost

Benefits
Marginal Private Cost

P1

Marginal Benefit

Q1 Q Quantity

The diagram shows that

A a higher price at P1 would reflect the external costs generated.
B lower sales, Q to Q1 will be secured for a product whose production has incurred extra private costs.
C quantity produced and sold, Q to Q1, will change as a result of a positive externality.
D changes in price, P to P1, will reflect lower business costs.
Explanation: P is the price in the free market in which no account is taken of externalities. If external
costs were taken into account then the supply would shift to the left, thus pushing up equilibrium price.

14. The diagram below illustrates the impact of an externality arising from the extra congestion in the
vicinity around a new car factory, as many more vehicles use local streets.

Costs & Benefits MSC

A F

MPC
G

C H

J MSB = MPB

O
D E Quantity

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 74

As a result there is a welfare

A gain represented by the triangle FGH.
B loss represented by the triangle GHJ.
C gain represented by the triangle GHJ.
D loss represented by the triangle FGH.
Explanation: The social (external plus private) cost of the car plant exceeds the private cost. If this
business and therefore its customers were forced to take account of the negative externalities associated
with the congestion, (at price OB), demand would fall to OD. Therefore FGH represents the loss of welfare
arising from only charging OC.

15. A merit good is defined as a good which

A generates benefits to individuals greater than appreciated.
B is free at the point of consumption.
C can only be provided by government.
D improves the competitiveness of the UK economy by reducing business costs.
Explanation: A merit good is under‐appreciated by consumers and would be under‐consumed. In simple
terms, a merit good is something which is “good for you” even if you do not fully appreciate it.

16. Education is considered a merit good because

A it is provided by the government.
B it provides benefits which are unappreciated by its consumers.
C it would not be produced by private businesses.
D it generates positive externalities.
Explanation: Education does produce external benefits but b is the more correct answer. A merit good is
one which has private benefits which are not fully appreciated by consumers.

17. Which of the following is an example of a demerit good?

A Pollution
B Cigarettes
C Litter
D The prison service
Explanation: Demerit products are demanded by consumers even though they are harmful. Tobacco
clearly fits this description. Pollution and litter are economic bads, whereas the prison service is a publicly
provided service designed to deal with law breakers.

18. A misallocation of resources is likely to occur when

A consumers are not given information on which to make their decisions.
B merit goods are provided by the market forces.
C demerit goods are provided by market forces.
D all the above.
Explanation: Merit and demerit goods are characterised by information failure which is also the
substance of A. In all three cases consumers are not able or willing to make rational decisions and, as a
result, there is a misallocation of resources.

19. Markets allocate resources more successfully when

A businesses are large.
B governments provide services.
C there are many businesses in a market.
D there is no opportunity cost.
Explanation: Competition forces firms to be efficient and respond better to consumer demands; this leads
to a more efficient allocation of resources.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 75

20. A monopoly uniquely can cause economic inefficiency because such a business
A generates externalities.
B dominates the market.
C makes a profit.
D has less incentive to cut costs and prices.
Explanation: Under monopoly, price exceeds marginal costs in the long run, and the absence of
competition removes the imperative to reduce costs.

21. Competitive markets are more likely to deliver economic welfare because the businesses in these
markets
A can produce in large quantities and thereby exploit economies of scale.
B can only survive by accurately responding to what their customers want.
C have a greater incentive to make a profit.
D have to invest in advertising to attract customers.
Explanation: Economic welfare will be greater where consumers can secure exactly what they want at the
lowest prices. This is more likely to occur where businesses have to compete for customer sales.

22. Barriers to entry are a source of market failure because

A social costs are often greater than private costs.
B they lead to a reduction in business’s profitability.
C they ensure that businesses have an incentive to cut costs and prices.
D they typically result in higher prices.
Explanation: Barriers to entry protect monopoly forces from competition and, as a result, enable firms
with market power to force up prices.

23. Consumers can benefit from a monopolistic market because

A the profits the businesses earn can be invested in innovation.
B the barriers to entry will be high.
C the businesses can charge higher prices.
D of the diseconomies of scale it can exploit.
Explanation: B, C and D are all negative consequences of monopoly, whereas A is a possible benefit of
monopoly. With their high profits they have the financial resources to invest in new products which
benefit consumers, and at the same time, protect or enhance their monopoly position.

24. Factor immobility is a source of market failure because

A social benefits are greater than private benefits.
B resources are not being most productively used.
C labour is inadequately educated and trained.
D some factor markets are uncompetitive.
Explanation: Factor immobility reduces the ability of firms to respond to changing consumer demand.

25. Inequality can lead to market failure because, if left to the market
A some people could not afford to consume the necessities of life.
B richer people would have a higher standard of living.
C the level of income and wealth would affect the level of externalities.
D monopolies could more easily exploit their market position.
Explanation: The harsh reality of the price mechanism is that those without the means to buy goods and
services will not get a share of the goods and services produced. The ‘for whom’ question is answered in
terms of who has the money to buy – the rich will enjoy a large share, the poor will have only a small
share and those without any income will have nothing. These outcomes for poorer consumers are
considered unacceptable, and therefore on this basis, markets fail.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 76

1.4: Market Failure ‐ Test 2

1. Market failure leads to misallocation of resources because

A small businesses struggle to survive.
B market forces may undermine economically efficient decisions.
C product cost and benefits are recognised in the price.
D businesses don’t always make a profit.

2. Education is an example of partial market failure because

A there are both government‐funded and private suppliers of this service.
B the product is a public good which has to be partly funded by government.
C it can be provided by the market but at unacceptable prices and, therefore, quantity.
D it generates both external benefits and external costs.

3. Sources of market failure do not include

A factor immobility.
B inequality.
C government intervention.
D lack of competition.

4. Market failure may be the result of information failure. In which of the following markets is this not
an issue?
A Newspaper.
B Health insurance.
C Legal service.
D Second hand car.

5. Which one of the following is an example of a public good?

A Lighthouse
B Sea water
C Education
D Roads

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 77

6. Mass MMR vaccination is not a pure public good because

A it has a low level of non‐rivalry.
B there is no free rider problem.
C vaccines are manufactured by private businesses.
D it has a high level of non‐excludability.

7. In the context of a public good, non‐rivalry refers to the fact that

A there are no barriers to competitors entering a market.
B there is no opportunity cost incurred in its production.
C no consumer can be excluded from its consumption.
D consumption by one does not reduce availability for others.

8. A characteristic feature of a private good is that it is one

A which is available to consumers.
B whose consumption prevents other consumers benefiting.
C which is produced by a private sector business.
D whose production generates an opportunity cost.

9. A misallocation of resources can arise from an external benefit. This misallocation will have occurred
because

A too much of the product is being consumed.

B not enough of the product is being produced.
C no tax has been imposed on the product.
D only limited resources are available to produce the product.

10. Positive externalities are created when

A social costs are greater than social benefits.
B private benefits exceed social benefits.
C social costs are greater than private costs.
D social benefits are greater than private benefits.

11. The existence of a negative externality means that

A pollution is lower than it would otherwise be.
B resources could be better allocated to maximise welfare.
C taxes have to rise in response.
D the product should not be produced.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 78

12. A nuclear power station, in the course of generating electricity, allows radio‐active water to be
dispersed across a nearby beach, popular with dog walkers. This externality is an example of a

A negative consumption externality.

B positive production externality.
C negative production externality.
D positive consumption externality.

13. The difference between social benefits and private benefits is that
A private benefits include external benefits.
B social benefits take account of external benefits.
C only social benefits exclude private benefits.
D private benefits exclude external benefits.

14. The diagram below illustrates a firm’s marginal cost and benefit curves.

Costs &
MPC = MSC
Benefits

MSB
MPB

O
A Output

The firm chooses to produce an output level of OA. Therefore

A resources are being allocated efficiently.
B there is positive externality.
C there is negative externality.
D external costs exceed private costs.

15. Which of the following is an example of a merit good?

A Education
B Hospital car parks
C Roads
D Beer

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 79

16. A demerit good is defined as a good which

A is taxed.
B undermines the competitiveness of the UK economy.
C is considered to be socially undesirable.
D is more expensive than it should be.

17. Smoking is considered a demerit good because

A it is highly regulated and taxed.
B its consumption is largely a reflection of information failure.
C it incorporates degrees of non‐rivalry or non‐excludability.
D its consumers take insufficient account of its drawbacks.

18. The diagram below shows the marginal cost and benefit curves associated with the demand and
supply of private education.

Costs &
MSC = MPC
Benefits

B
C
MSB

MPB

O
E F Output

Unless government intervenes in this market there will be a misallocation of resources because
A private schools would not make profits from education.
B the free market price of OB would be too high.
C excess demand would lead to output OF.
D education would be under priced by BC.

19. A market is more likely to allocate resources efficiently where

A no one business can influence price.
B businesses advertise to attract consumers.
C some of the businesses are larger than others.
D some of the businesses make abnormal profits.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 80

20. Monopolies represent a source of market failure because these businesses

A do not have an incentive to be productively efficient.
B are able to make normal profits.
C will incur diseconomies of scale.
D are more likely to impose negative externalities on third parties.

21. Many markets are less competitive than they could be because of barriers to entry. These barriers
include

A new product development.

B lower prices.
C a patent on a product design.
D a lack of advertising.

22. Product differentiation represents an effective strategy for a business to

A operate more efficiently.
B increase output more profitably.
C reduce competitive pressure.
D charge lower prices.

23. Monopolies are keen to invest in innovation because

A it reduces market failure.
B it establishes a new barrier to entry.
C they are keen to cut costs and stay competitive.
D they want to make an average level of profit.

24. As a result of factor immobility, the market mechanism will

A not provide certain goods.
B over provide some goods.
C result in over‐consumption.
D misallocate resources.

25. The UK is predominantly a market economy. Therefore

A externalities will always be recognised in market prices.
B the government dominates economic decision‐making.
C firms have little incentive to advertise.
D the rewards for factor employment will vary considerably.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 81

1.4: Market Failure ‐ Test 2 ‐ Answers

1. Market failure leads to misallocation of resources because

A small businesses struggle to survive.
B market forces may undermine economically efficient decisions.
C product cost and benefits are recognised in the price.
D businesses don’t always make a profit.

Explanation: Market failure is concerned with the failure of market forces to produce an efficient
allocation of resources.

2. Education is an example of partial market failure because

A there are both government‐funded and private suppliers of this service.
B the product is a public good which has to be partly funded by government.
C it can be provided by the market but at unacceptable prices and, therefore, quantity.
D it generates both external benefits and external costs.

Explanation: A and D are correct statements in themselves but do not explain why education is seen as an
example of partial market failure. The market could be left to provide education but the outcome would
be seen as unacceptable since large numbers of people would be deprived of education.

3. Sources of market failure do not include

A factor immobility.
B inequality.
C government intervention.
D lack of competition.

Explanation: Government intervention is designed to correct market failure, although it might lead to the
quite separate problem of government failure.

4. Market failure may be the result of information failure. In which of the following markets is this not
an issue?
A Newspaper.
B Health insurance.
C Legal service.
D Second hand car.

Explanation: We base our choice of newspapers on our knowledge and experience but we all face
problems in relation to the other three. We have to trust the advice of lawyers, we are unable to fully
assess a car before purchase, and we purchase life insurance without being certain whether we will need
to call on it. Therefore, it is difficult to make rational decisions.

5. Which one of the following is an example of a public good?

A Lighthouse
B Sea water
C Education
D Roads

Explanation: A lighthouse is a classic public good since it is not possible to exclude any ship from
benefiting from the light. Also the benefit gained by one ship does not reduce the benefits to others.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 82

6. Mass MMR vaccination is not a pure public good because

A it has a low level of non‐rivalry.
B there is no free rider problem.
C vaccines are manufactured by private businesses.
D it has a high level of non‐excludability.

Explanation: With a limited stock of vaccine there is obviously rivalry between consumers – a vaccine
given to one person is not available to another. As a result, a vaccine is not a public good. It should also
be pointed out that if a vaccine was also sold on the market it would be possible to exclude non payers
from the benefits of the vaccine.

7. In the context of a public good, non‐rivalry refers to the fact that

A there are no barriers to competitors entering a market.
B there is no opportunity cost incurred in its production.
C no consumer can be excluded from its consumption.
D consumption by one does not reduce availability for others.

Explanation: A chocolate bar enjoyed by one person is not available to another, whereas street lighting is
available to all. The benefits enjoyed by one person do not reduce the enjoyment of benefits by others.
This principle of non‐rivalry is a key feature of a public good.

8. A characteristic feature of a private good is that it is one

A which is available to consumers.
B whose consumption prevents other consumers benefiting.
C which is produced by a private sector business.
D whose production generates an opportunity cost.

Explanation: This is the principle of rivalry – It applies to private goods but not to public goods. It should,
however, be appreciated that B is not a complete definition of a private good but it is one characteristic
feature.

9. A misallocation of resources can arise from an external benefit. This misallocation will have occurred
because
A too much of the product is being consumed.
B not enough of the product is being produced.
C no tax has been imposed on the product.
D only limited resources are available to produce the product.

Explanation: The price mechanism takes into account private costs and price benefit but ignores external
benefits to others. As a result, goods with substantial external benefits are under‐produced and under‐
consumed in a market, and therefore welfare is lost.

10. Positive externalities are created when

A social costs are greater than social benefits.
B private benefits exceed social benefits.
C social costs are greater than private costs.
D social benefits are greater than private benefits.

Explanation: Positive externalities or external benefits = social benefit to all minus private benefit to the
economic agent concerned.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 83

11. The existence of a negative externality means that

A pollution is lower than it would otherwise be.
B resources could be better allocated to maximise welfare.
C taxes have to rise in response.
D the product should not be produced.

Explanation: A negative externality will mean that the product concerned will be over produced –
therefore, if resources were shifted to the production of other goods welfare would be increased.

12. A nuclear power station, in the course of generating electricity, allows radio‐active water to be
dispersed across a nearby beach, popular with dog walkers. This externality is an example of a
A negative consumption externality.
B positive production externality.
C negative production externality.
D positive consumption externality.

Explanation: This is clearly a negative externality because it is harmful and is inflicted on ”innocent
bystanders” who happen to walk on the beach. It is a production externality because it results from the
action of a producer.

13. The difference between social benefits and private benefits is that
A private benefits include external benefits.
B social benefits take account of external benefits.
C only social benefits exclude private benefits.
D private benefits exclude external benefits.

Explanation: Private benefit = social benefit minus external benefit. B is an accurate statement but does
not answer the question. A and D not only do not answer the question but they are incorrect statements.

14. The diagram below illustrates a firm’s marginal cost and benefit curves.

Costs &
MPC = MSC
Benefits

MSB
MPB

O
A Output

The firm chooses to produce an output level of OA. Therefore

A resources are being allocated efficiently.
B there is positive externality.
C there is negative externality.
D external costs exceed private costs.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 84

Explanation: Private and social costs are equal and, therefore, there are no external costs. The vertical
distance between social and private benefits illustrates the existence of positive externalities. In a free
market the firm would produce OA which is a point of equilibrium, and efficiency in terms of the
allocation of resources.

15. Which of the following is an example of a merit good?

A Education
B Hospital car parks
C Roads
D Beer

Explanation: Education is under‐appreciated by consumers and is classed as a merit good. It could be

provided by the market but, through ignorance and foolishness, some people might choose not to
consume it.

16. A demerit good is defined as a good which

A is taxed.
B undermines the competitiveness of the UK economy.
C is considered to be socially undesirable.
D is more expensive than it should be.

Explanation: A demerit good is one that is demanded by consumers even though it is harmful. These
goods are deemed by society and the state to be so harmful that demand for them should be constrained.

17. Smoking is considered a demerit good because

A it is highly regulated and taxed.
B its consumption is largely a reflection of information failure.
C it incorporates degrees of non‐rivalry or non‐excludability.
D its consumers take insufficient account of its drawbacks.

Explanation: A demerit good is one which is demanded even though it is harmful. A is a consequence of it
being seen as a demerit good. B might have been valid in the period before we knew the full harm that
comes from smoking. C is a definition of a public good.

18. The diagram below shows the marginal cost and benefit curves associated with the demand and
supply of private education.

Costs &
MSC = MPC
Benefits

B
C
MSB

MPB

O
E F Output

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 85

Unless government intervenes in this market there will be a misallocation of resources because
A private schools would not make profits from education.
B the free market price of OB would be too high.
C excess demand would lead to output OF.
D education would be under priced by BC.

Explanation: Private education, like publicly‐funded education generates external benefits, and these are
not recognised in the price that parents pay, namely OC. Governments could intervene by subsidising
private education to the value of AC per child to ensure that the socially optimal quantity is produced,
namely OF. BC is the difference between the market price, and the new equilibrium price which reflects
the external benefits and delivers a quantity of OF.

19. A market is more likely to allocate resources efficiently where

A no one business can influence price.
B businesses advertise to attract consumers.
C some of the businesses are larger than others.
D some of the businesses make abnormal profits.

Explanation: One feature of competition is that no firm or buyer is able to dictate price. These firms have
to accept the prevailing market price which is going to be lower, ensuring greater welfare for consumers,
and thereby a better allocation of resources. Monopoly leads to inefficiency in resource allocation
whereas competition produces productive efficiency.

20. Monopolies represent a source of market failure because these businesses

A do not have an incentive to be productively efficient.
B are able to make normal profits.
C will incur diseconomies of scale.
D are more likely to impose negative externalities on third parties.

Explanation: A monopolist controls price and does not need to produce at the lowest point of the average
cost curve.

21. Many markets are less competitive than they could be because of barriers to entry. These barriers
include
A new product development.
B lower prices.
C a patent on a product design.
D a lack of advertising.

Explanation: A patent can give inventers a monopoly on the use of an invention for a specific period of
time and, therefore, bars the entry of new firms into the market.

22. Product differentiation represents an effective strategy for a business to

A operate more efficiently.
B increase output more profitably.
C reduce competitive pressure.
D charge lower prices.

Explanation: By differentiating the firm’s product from that of rivals, they hope to reduce price elasticity
of demand, so that even if price is raised, some people will continue to buy because they consider the
firm’s product is sufficiently different and superior to that of rivals to justify a higher price.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 86

23. Monopolies are keen to invest in innovation because

A it reduces market failure.
B it establishes a new barrier to entry.
C they are keen to cut costs and stay competitive.
D they want to make an average level of profit.

Explanation: The question concerns why monopolists innovate and for this reason B is the correct answer
rather than C. A monopolist does not face the pressure of competition but would see innovation as a way
to exclude potential rivals.

24. As a result of factor immobility, the market mechanism will

A not provide certain goods.
B over provide some goods.
C result in over‐consumption.
D misallocate resources.

Explanation: The price mechanism is unable to perform its function of shifting resources in line with
changing demand.

25. The UK is predominantly a market economy. Therefore

A externalities will always be recognised in market prices.
B the government dominates economic decision‐making.
C firms have little incentive to advertise.
D the rewards for factor employment will vary considerably.

Explanation: Rewards reflect the contribution made to production. As abilities vary, so will the rewards
enjoyed by different people in the economic system. Not only is A correct but the other three are clearly
wrong.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 87

Government Intervention
in the Market

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 88

1.5: Government Intervention in the Market ‐ Test 1

1. In order to correct market failure, a government may intervene if

A businesses have more information about its products than its consumers.
B the consumption of merit goods reduces economic welfare.
C negative externalities are being addressed by the businesses generating them.
D public goods are being financed through taxation.

2. Indirect tax is sometimes used by governments to address market failure because

A it enables governments to pay for public services.
B it forces consumers and businesses to take account of negative externalities.
C it reduces external benefits arising from economic activity.
D it has little impact on the macroeconomic environment.

3. As a means of addressing market failure, a government may use subsidies in order to

A reduce the price of a product which generates external benefits.
B fund the provision of more or better merit goods.
C reduce the price of a product which is over‐produced.
D impose a minimum price.

4. The diagram below illustrates the impact of negative externalities which the production of a product
can impose on costs, benefits and output.
Costs & S1 = MSC
Benefits
S = MPC

G
J
F
E

MPB = MSB

O
Q2 Q1 Output

Left to the market, equilibrium would be at J, with output at Q1. To secure a more economically efficient
outcome, the government could

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 89

A provide a subsidy of OG‐OF for each unit bought.

B set a minimum price of OE.
C impose a tax per unit manufactured of OG‐OE.
D regulate the quantity available on the market through rationing.

5. The government wants to reduce the external costs associated with congestion. Which one of the
following combinations would be most likely to achieve this objective?

A Reduce the amount of off‐street parking and reduce road capacity

B Increase the road capacity and subsidise public transport fares
C Reduce the tax on car ownership and reduce the amount of off‐street parking
D Increase petrol / diesel tax and subsidise the development of fuel‐efficient vehicles

6. Price controls may be used by government where

A they wish to encourage production.
B the operation of factor markets lead to increasing income inequalities.
C they may lead to more economically efficient outcomes.
D negative externalities are too high.

7. The UK government is concerned about income inequality, and responds by increasing the minimum
wage significantly. Which of the following is not a potential consequence of this decision?

A A fall in unemployment slowing down

B Businesses employ more capital goods
C Business costs rise
D UK businesses are more competitive

8. An advantage of a buffer stock scheme, as a means of addressing market failure, is that

A it raises the price of commodities.
B it stabilises price.
C it encourages producers to reduce output.
D it reduces negative externalities.

9. Tradable Pollution permits are designed to address market failure by

A encouraging producers to reduce the pollution they are responsible for.
B eliminating pollution among businesses with permits.
C allowing businesses to increase pollution.
D imposing regulation on pollution created by manufacturing businesses.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 90

10. Governments manage the provision of public services and, thereby, directly address market failure
by

A taxing negative externalities.

B subsidising positive externalities.
C delegating control over their business decisions to providers.
D ensuring that some services remain free at the point of consumption.

11. Governments may use regulations to address some market failures because
A businesses are keen to address their wider social responsibilities.
B they make use of market forces to improve resource allocation.
C it may be the most efficient means of ensuring a better allocation of resources.
D they encourage businesses to reduce the price of products which generate negative externalities.

12. Government failure occurs when

A government reduces spending on public services.
B consumer decisions lead to a misallocation of resources.
C government makes decisions which lead to a misallocation of resources.
D public sector businesses make a loss.

13. The most significant reason why governments may fail to address market failure is because
A they have to address conflicting objectives.
B the measures needed may clash with EU commitments.
C governments are concerned only with long run issues.
D externalities can be accurately calculated.

14. A “black market” may exist where

A goods and services are sold at prices above controlled prices.
B goods are sold at market price.
C transactions take place that are not recorded in national income accounting.
D buyers and sellers are not paying taxes associated with their transaction.

15. Examples of government failure would exclude

A rent controls which reduce the supply of low cost housing.
B a minimum wage rate which results in higher unemployment.
C a congestion charge which internalises the negative externality.
D a tobacco tax which increases smuggling from overseas.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 91

16. Which one of the following best illustrates the Law of Unintended Consequences?
A A “Pay as you throw” scheme for refuse leads to increased recycling
B A “Pay as you throw” scheme for refuse leads to flytipping
C A rise in the tax on tobacco reduces smoking
D A rise in the tax on petrol leads to increased sale of fuel efficient cars.

17. Which one of the following represents a case of government failure?

A A national minimum wage raises income levels for low income families
B The CAP Single Farm Payment improves the living standards of poorer farmers
C Control of monopoly reduces the monopoly power
D A state buffer stock scheme leads to surplus production

18. Which one of the following pairs of government objectives would not be said to be conflicting?
A To reduce inequality and to provide incentives to work
B To raise revenue yield from tobacco and eliminate tobacco consumption
C To provide affordable housing in rural areas and to protect the green belt
D To improve educational standards and improve the quality of the future labour supply

19. The diagram below shows supply and demand for a product which is given a subsidy.

S
Price

P2 S (with subsidy)

P1

P3
D

O Q Q1 Quantity

The subsidy is equal to

A Price P2.
B Price P1.
C Price P2 minus price P1.
D Price P minus price P1.

© APT Initiatives Ltd, 2010

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 92

20. Which of the following government actions will not reduce inequality?
A A rise in VAT
B An increase in Job Seekers’ Allowance
C A rise in the higher rate of income tax
D A rise in the income tax threshold to £10,000 per year

21. Rent controls reduced the amount of rented accommodation in the UK. This was because
A they reduced the demand for rented accommodation.
B they reduced the return on owning houses to rent.
C they encouraged the development of council or social housing.
D they taxed landlords.

22. Tax on tobacco will reduce smoking in each of the following situations except
A when the demand for tobacco is relatively price inelastic.
B when the demand for tobacco is perfectly price inelastic.
C when the demand for tobacco is perfectly price elastic.
D when the demand for tobacco has a price elasticity of unitary.

23. The Common Agricultural Policy is an example of government failure because

A it applies across all members of the EU.
B farmers are encouraged to amalgamate their farms.
C farmers produce as efficiently as they can.
D as a result, the food we eat is more expensive than it could be.

24. Subsidies to train operating companies are least likely to

A reduce rail fares.
B improve rail services.
C reduce congestion on the roads.
D reduce externalities from rail travel.

25. The government is beginning to give serious consideration to charging motorists for the congestion
they cause by their decision to drive. This intervention could best be described as
A using a charge to reduce the loss of welfare arising from a negative externality.
B a subsidy which will encourage motorists to use public transport instead of their cars.
C a price control in response to the loss of welfare arising from unstable prices.
D a regulation which will force the motorist to internalise the positive externality associated with
driving.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 93

1.5: Government Intervention in the Market ‐ Test 1 ‐ Answers

1. In order to correct market failure, a government may intervene if

A businesses have more information about its products than its consumers.
B the consumption of merit goods reduces economic welfare.
C negative externalities are being addressed by the businesses generating them.
D public goods are being financed through taxation.

Explanation: This is market failure through information failure. Because of lack of information consumers
are unable to make rational decisions. The rationale for government intervention is to correct market
failure.

2. Indirect tax is sometimes used by governments to address market failure because

A it enables governments to pay for public services.
B it forces consumers and businesses to take account of negative externalities.
C it reduces external benefits arising from economic activity.
D it has little impact on the macroeconomic environment.

Explanation: Indirect taxes on negative externalities (eg pollution taxes) are designed to force economic
agents to take external costs into account. In other words they are designed to internalise the
externality.

3. As a means of addressing market failure, a government may use subsidies in order to

A reduce the price of a product which generates external benefits.
B fund the provision of more or better merit goods.
C reduce the price of a product which is over‐produced.
D impose a minimum price.

Explanation: A subsidy will encourage consumers to buy more of the product which then generates an
external benefit for third parties.

4. The diagram below illustrates the impact of negative externalities which the production of a product
can impose on costs, benefits and output.

Costs & S1 = MSC

Benefits
S = MPC

G
J
F
E

MPB = MSB

O
Q2 Q1 Output

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 94

Left to the market, equilibrium would be at J, with output at Q1. To secure a more economically efficient
outcome, the government could
A provide a subsidy of OG‐OF for each unit bought.
B set a minimum price of OE.
C impose a tax per unit manufactured of OG‐OE.
D regulate the quantity available on the market through rationing.

Explanation: The tax is shown as the vertical difference between the two supply curves. By imposing this
tax, a new equilibrium is established at a price of OG and therefore a quantity of OQ2.

5. The government wants to reduce the external costs associated with congestion. Which one of the
following combinations would be most likely to achieve this objective?
A Reduce the amount of off‐street parking and reduce road capacity
B Increase the road capacity and subsidise public transport fares
C Reduce the tax on car ownership and reduce the amount of off‐street parking
D Increase petrol / diesel tax and subsidise the development of fuel‐efficient vehicles

Explanation: We need to take note of the objective of government in this question. A switch to fuel
efficient cars will not reduce congestion. A reduction in road capacity will add to congestion, as will a
reduction in off street parking. The combination of increased road capacity and subsidised transport is
the surest way of reducing congestion.

6. Price controls may be used by government where

A they wish to encourage production.
B the operation of factor markets lead to increasing income inequalities.
C they may lead to more economically efficient outcomes.
D negative externalities are too high.

Explanation: The purpose of any government microeconomic measure is to improve economic efficiency.
We can also conclude that C is the correct answer by eliminating the other responses ‐ price controls do
not encourage production, do not tackle the problem of externalities and are imposed in the market for
goods rather than factors of production.

7. The UK government is concerned about income inequality, and responds by increasing the minimum
wage significantly. Which of the following is not a potential consequence of this decision?
A A fall in unemployment slowing down
B Businesses employ more capital goods
C Business costs rise
D UK businesses are more competitive

Explanation: One argument against the national minimum wage is that it adds to business costs and
makes UK businesses less competitive.

8. An advantage of a buffer stock scheme, as a means of addressing market failure, is that

A it raises the price of commodities.
B it stabilises price.
C it encourages producers to reduce output.
D it reduces negative externalities.

Explanation: The main purpose of a buffer stock scheme is to stabilise producer incomes. At times it will
raise price and at times there will be incentives for producers to reduce output, but these are not the
purpose of a buffer stock scheme.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 95

9. Tradable Pollution permits are designed to address market failure by

A encouraging producers to reduce the pollution they are responsible for.
B eliminating pollution among businesses with permits.
C allowing businesses to increase pollution.
D imposing regulation on pollution created by manufacturing businesses.

Explanation: A pollution permit allows a business to pollute up to a set amount, but it can sell any unused
permit quantities to other businesses who cannot manage on the quantities their own permits allow. This
provides an incentive to reduce pollution. It does not eliminate it altogether and neither would it increase
pollution. It is seen as a market based measure since the permit can be bought and sold.

10. Governments manage the provision of public services and, thereby, directly address market failure
by
A taxing negative externalities.
B subsidising positive externalities.
C delegating control over their business decisions to providers.
D ensuring that some services remain free at the point of consumption.

Explanation: The direct provision of services by government (e.g. education and health care) is designed
to ensure that these services remain free at the point of consumption.

11. Governments may use regulations to address some market failures because
A businesses are keen to address their wider social responsibilities.
B they make use of market forces to improve resource allocation.
C it may be the most efficient means of ensuring a better allocation of resources.
D they encourage businesses to reduce the price of products which generate negative externalities.

Explanation: Market based measures (taxes, subsidies, pollution permits) are the preferred methods of
dealing with market failure. However, there are some circumstances where it is felt that a market
solution is inadequate and some form of regulation is needed, eg regulation of alcohol sales via licensing
and the prohibition of trade in certain drugs.

12. Government failure occurs when

A government reduces spending on public services.
B consumer decisions lead to a misallocation of resources.
C government makes decisions which lead to a misallocation of resources.
D public sector businesses make a loss.

Explanation: In simple terms, the government acts to reduce market failure but an unintended by‐product
effect may result in a misallocation of resources i.e. government failure.

13. The most significant reason why governments may fail to address market failure is because
A they have to address conflicting objectives.
B the measures needed may clash with EU commitments.
C governments are concerned only with long run issues.
D externalities can be accurately calculated.

Explanation: Conflicting objectives is a major cause of government failure. Hence, there might be a
reluctance to act to reduce inequality if it endangers incentives in the economy.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 96

14. A “black market” may exist where

A goods and services are sold at prices above controlled prices.
B goods are sold at market price.
C transactions take place that are not recorded in national income accounting.
D buyers and sellers are not paying taxes associated with their transaction.

Explanation: C and D refer to what many people call the black economy and which is more accurately
called the “hidden economy”. A black market, on the other hand, is the illegal selling of goods at other
than a controlled price. A black economy only exists when prices are regulated and are not permitted to
find their equilibrium level in the market. In a freed and unregulated market there can be no black
market.

15. Examples of government failure would exclude

A rent controls which reduce the supply of low cost housing.
B a minimum wage rate which results in higher unemployment.
C a congestion charge which internalises the negative externality.
D a tobacco tax which increases smuggling from overseas.

Explanation: A, B and D are instances of government failure. The actions of a well‐meaning government
have led to unfortunate consequences. C, on the other hand, is government action that corrects a market
failure without producing a government failure.

16. Which one of the following best illustrates the Law of Unintended Consequences?
A A “Pay as you throw” scheme for refuse leads to increased recycling
B A “Pay as you throw” scheme for refuse leads to flytipping
C A rise in the tax on tobacco reduces smoking
D A rise in the tax on petrol leads to increased sale of fuel efficient cars.

Explanation: The law of unintended consequences is one aspect of government failure. A well intentioned
measure has perverse consequences and this is clearly the case with a measure designed to reduce waste
going to landfill, but which leads to an unsocial act.

17. Which one of the following represents a case of government failure?

A A national minimum wage raises income levels for low income families
B The CAP Single Farm Payment improves the living standards of poorer farmers
C Control of monopoly reduces the monopoly power
D A state buffer stock scheme leads to surplus production

Explanation: A buffer stock scheme is usually designed to stabilise prices (or incomes). Surplus production
is an undesirable outcome of the scheme and, as such, constitutes government failure. Even without
knowing the objectives of the measures in the other responses, it is clear that the outcomes specified are
desirable.

18. Which one of the following pairs of government objectives would not be said to be conflicting?
A To reduce inequality and to provide incentives to work
B To raise revenue yield from tobacco and eliminate tobacco consumption
C To provide affordable housing in rural areas and to protect the green belt
D To improve educational standards and improve the quality of the future labour supply

Explanation: Improvement in educational standards will improve the quality of new entrants to the
labour force.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 97

19. The diagram below shows supply and demand for a product which is given a subsidy.

Price
S

P2 S (with subsidy)

P1

P3
D

O Q Q1 Quantity

The subsidy per unit is equal to

A Price P2.
B Price P1.
C Price P2 minus price P1.
D Price P minus price P1.

Explanation: The subsidy per unit is the vertical difference between the two supply curves. The supply is
displaced by this amount and suppliers are now willing to supply OQ1 rather than the original equilibrium
quantity of OQ.

20. Which of the following government actions will not reduce inequality?
A A rise in VAT
B An increase in Job Seekers’ Allowance
C A rise in the higher rate of income tax
D A rise in the income tax threshold to £10,000 per year

Explanation: VAT is a regressive tax which means that it disproportionately affects the less well off;
therefore, this measure will increase inequality. Conversely, a rise in JSA assists those who are
unemployed, and therefore among the poorest. A rise in the higher rate of tax will mean the better off
will pay more tax. A rise in the tax threshold will remove low income earners from the tax net.

21. Rent controls reduced the amount of rented accommodation in the UK. This was because
A they reduced the demand for rented accommodation.
B they reduced the return on owning houses to rent.
C they encouraged the development of council or social housing.
D they taxed landlords.

Explanation: Rent controls are a form of price control. By limiting rents they reduced the return on
owning property to let and, as a result, reduced the supply of rented accommodation. This is an example
of government failure.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 98

22. Tax on tobacco will reduce smoking in each of the following situations except
A when the demand for tobacco is relatively price inelastic.
B when the demand for tobacco is perfectly price inelastic.
C when the demand for tobacco is perfectly price elastic.
D when the demand for tobacco has a price elasticity of unitary.

Explanation: It should be remembered that in all situations except perfect inelasticity a rise in price will
lead to a contraction of demand. The degree of elasticity simply concerns the extent of the contraction.

23. The Common Agricultural Policy is an example of government failure because

A it applies across all members of the EU.
B farmers are encouraged to amalgamate their farms.
C farmers produce as efficiently as they can.
D as a result, the food we eat is more expensive than it could be.

Explanation: The CAP is designed to protect farmers and maintain their incomes at a higher level than
would otherwise be the case. This means that consumers are forced to pay more for their food and, as
such, this interference in the market system can be regarded as government failure.

24. Subsidies to train operating companies are least likely to

A reduce rail fares.
B improve rail services.
C reduce congestion on the roads.
D reduce externalities from rail travel.

Explanation: Subsidies to train operators encourage more services to be offered and at lower prices,
assuming there is spare capacity. If people switch from road to rail, it will reduce the negative externality
of road congestion. However, an increase in rail transport will not reduce the positive externalities
associated with rail transport.

25. The government is beginning to give serious consideration to charging motorists for the congestion
they cause by their decision to drive. This intervention could best be described as
A using a charge to reduce the loss of welfare arising from a negative externality.
B a subsidy which will encourage motorists to use public transport instead of their cars.
C a price control in response to the loss of welfare arising from unstable prices.
D a regulation which will force the motorist to internalise the positive externality associated with
driving.

Explanation: It is a charge and is designed to force drivers to shoulder the cost of the negative externality
inflicted on the community. It is clearly not a subsidy, nor a price control. It is not a regulation since it
uses rather than overrides the price mechanism.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 99

1.5: Government Intervention in the Market ‐ Test 2

1. Governments are keen to address market failure and, therefore, are more likely to tax
A merit goods.
B pollution.
C positive externalities.
D employment.

2. Indirect taxation includes

A income tax.
B Value Added Tax.
C corporation tax.
D capital gains tax.

3. Governments may intervene in the market to

A set a minimum wage to increase business competitiveness.
B impose a tax on petrol and diesel to reduce driving speeds.
C impose a congestion charge to eliminate pollution.
D subsidise eye tests to ensure wider access.

4. A government subsidy is defined as

A a reduction in price which businesses use to increase sales.
B a way by which governments can force consumers to accept a higher price.
C a tax rebate awarded when an individual or business has paid too much tax.
D a grant given by government to encourage production or consumption.

5. The product, whose demand and supply curves are shown below, creates a positive externality.

Price S

P2

P1

P3

O Quantity
Q1 Q2

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 100

If the government wanted to increase consumption of this product to OQ2, it could

A provide a subsidy per unit sold of OP2‐OP1 per unit.
B tax the product at OP1‐OP3 per unit.
C impose a minimum price of OP3.
D provide a subsidy per unit sold of OP2‐OP3.

6. Which of the following is the most appropriate way for government to address the type of market
failure featured?

A A subsidy to encourage the generation of negative externalities

B The use of price controls to limit positive externalities
C The imposition of a minimum price for a demerit good
D The use of a buffer‐stock scheme to stabilise the price of a merit good

7. A buffer stock scheme is designed to stabilise producers’ income. This is achieved by

A selling stocks when prices are falling.
B government purchases to stop prices falling.
C government buying from the market when they have excess stock.
D offering incentives to maximise output.

8. A government’s use of pollution permits to correct market failure will

A impact upon each manufacturer’s costs in different ways.
B increase negative externalities.
C reduce manufacturers’ profits.
D be the most successful way of reducing pollution.

9. Privatisation, a form of government intervention, can lead to a better allocation of resources

because the business/es involved
A are more likely to exploit increased returns to scale.
B are less likely to impose negative externalities on society.
C can secure greater profits.
D must take more accurate account of consumer wants.

10. Government can intervene in a number of ways to address market failure, for example by
A reducing bankers’ bonuses.
B enforcing minimum wages.
C taxing public goods.
D regulating supermarket prices.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 101

11. Which one of the following is an example of how Government has attempted to address market
failure?
A They have increased regulation of pollution by manufacturers
B They have indicated that tobacco businesses should reduce the prices of demerit goods
C They have told food manufacturers to change information on their product labels
D They have encouraged businesses to invest in advertising

12. Governments may fail to address market failure because

A the opportunity cost of any decision is high.
B their intervention will lead to a net welfare benefit.
C the accounting of social costs and benefits is challenging and lacks precision.
D market forces lead to a socially efficient allocation of resources.

13. The weaknesses of government intervention in the context of market failure, include
A borrowing too heavily to pay for public services.
B spending heavily on health and education.
C creating new unintended market distortions.
D creating too many laws and regulations.

14. In 2009/10 the NHS purchased a large stock of swine flu vaccine which was not used. This is an
example of government failure through
A regulatory capture.
B the law of unintended consequences.
C policy myopia or short sightedness.
D a policy decision based on imperfect information.

15. Which one of the following is not a cause of government myopia or short sightedness?
A Income inequality
B Regulatory capture
C Policy myopia in the form of short termism
D Imperfect information

16. Which one of the following would not be said to be a case of government failure?
A A rise in national insurance employer’s contributions leads to a reduction in job creation
B Rent control leads to a reduction in the supply of rented accommodation
C A rise in income tax reduces the incentive to work
D A rise in the tax on tobacco leads to such a significant decline in smoking that the yield from tobacco
tax declines
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 102

17. Which one of the following is most likely to result in government failure?
A Tradable Pollution permits
B Pollution regulations
C Pollution taxes
D Subsidies for the use of less polluting methods

18. Which one of the following statements is correct?

A A maximum price below equilibrium price leads to excess demand
B A minimum price below equilibrium price leads to excess supply
C A minimum price above equilibrium price leads to excess demand
D A maximum price above equilibrium price leads to excess supply

19. Which one of the following tax and benefit measures is most likely to provide a disincentive to work?
A A rise in income tax allowances
B A rise in VAT
C A reduction in the income tax allowances
D A reduction in benefits for job seekers

20. Which of the following statements are correct? The ban on smoking in enclosed public spaces
1 reduces the positive externalities associated with smoking.
2 reduces the negative externalities associated with smoking.
3 reduces inequality.
4 regulates the consumption of a demerit good.

A 2 and 4 only
B 1 and 3 only
C 4 only
D 2 only

21. Which of the following statements relating to the purpose of a landfill tax is not correct?
A It increases the amount of recycling
B It penalises waste
C It encourages flytipping
D It imposes a cost on businesses and householders

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 103

22. The EU system of farm support based on buffer stock intervention in the market led to
A higher food prices
B food surpluses
C subsidised export of food
D all the above

23. In place of production subsidies, the EU provides farmers with financial incentives to adopt
environmentally‐friendly methods. This is because
A subsidising food production generates fewer external benefits than subsidising environmental care.
B traditional intensive farming leads to external benefits, which are absent from environmentally‐
friendly methods.
C spending less on farming will lead to lower food prices and more external benefits.
D the social costs of food subsidies are less than the social benefits.

24. The diagram below illustrates the consequences of a local authority awarding a subsidy to a bus
company to provide bus services for isolated communities.

Price S1
A
E
H S2
B

C F

D G

O J K Quantity
The amount spent by the local authority on this subsidy is represented by the area
A AEFC.
B OAEK.
C OCFK.
D DBHG.

25. A tax on pollution is least likely to

A reduce pollution.
B reduce prices.
C reduce production.
D reduce economic welfare.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 104

1.5: Government Intervention in the Market ‐ Test 2 ‐ Answers

1. Governments are keen to address market failure and, therefore, are more likely to tax
A merit goods.
B pollution.
C positive externalities.
D employment.

Explanation: As pollution is seen as a market failure then a pollution tax is designed to make the polluter
pay and, thus, provide an incentive to reduce pollution.

2. Indirect taxation includes

A income tax.
B Value Added Tax.
C corporation tax.
D capital gains tax.

Explanation: VAT is an expenditure tax and is classed as indirect ie we pay indirectly through our
purchases. The other three are direct taxes paid directly to HM Customs and Revenue.

3. Governments may intervene in the market to

A set a minimum wage to increase business competitiveness.
B impose a tax on petrol and diesel to reduce driving speeds.
C impose a congestion charge to eliminate pollution.
D subsidise eye tests to ensure wider access.

Explanation: An eye test can be seen as a merit good – something which is beneficial but which some
individuals might neglect. A subsidy is designed to increase the take up of eye tests.

4. A government subsidy is defined as

A a reduction in price which businesses use to increase sales.
B a way by which governments can force consumers to accept a higher price.
C a tax rebate awarded when an individual or business has paid too much tax.
D a grant given by government to encourage production or consumption.

Explanation: Government offer a subsidy to encourage firms to reduce prices and, as result, to increase
production and consumption.

5. The product, whose demand and supply curves are shown below, creates a positive externality.

Price S

P2

P1

P3

O Quantity
Q1 Q2

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 105

If the government wanted to increase consumption of this product to OQ2, it could

A provide a subsidy per unit sold of OP2‐OP1 per unit.
B tax the product at OP1‐OP3 per unit.
C impose a minimum price of OP3.
D provide a subsidy per unit sold of OP2‐OP3.

Explanation: To increase consumption to OQ2 it is necessary to reduce price to OP3. This can only be
achieved by a subsidy which covers the vertical difference between supply and demand at quantity OQ2.

6. Which of the following is the most appropriate way for government to address the type of market
failure featured?
A A subsidy to encourage the generation of negative externalities
B The use of price controls to limit positive externalities
C The imposition of a minimum price for a demerit good
D The use of a buffer‐stock scheme to stabilise the price of a merit good

Explanation: This is a matching question. We have to match a method of intervention with a rationale.
The purposes suggested in both A and B are the very opposite of what we would expect of a government.
Buffer stocks are not used in connection with merit goods. The only response that links a method with an
appropriate rationale is C, and the obvious example for this is the proposed minimum price of alcohol.

7. A buffer stock scheme is designed to stabilise producers’ income. This is achieved by

A selling stocks when prices are falling.
B government purchases to stop prices falling.
C government buying from the market when they have excess stock.
D offering incentives to maximise output.

Explanation: The buffer stock buys when there is a surplus in order to maintain prices. It sells when there
is a shortage in order to hold down prices. Therefore, B is the only correct answer.

8. A government’s use of pollution permits to correct market failure will

A impact upon each manufacturer’s costs in different ways.
B increase negative externalities.
C reduce manufacturers’ profits.
D be the most successful way of reducing pollution.

Explanation: Some businesses would incur higher costs having to buy a permit and, possibly, one or, even,
more from others who may not need them. These other businesses can sell their permits, thereby
benefiting from a “negative” cost.

9. Privatisation, a form of government intervention, can lead to a better allocation of resources

because the business/es involved
A are more likely to exploit increased returns to scale.
B are less likely to impose negative externalities on society.
C can secure greater profits.
D must take more accurate account of consumer wants.

Explanation: Privatisation involves selling state owned businesses and returning them to the market
sector. This will force the enterprises concerned to take better account of consumer wants. One criticism
of state owned enterprise is that they took insufficient account of consumer wants.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 106

10. Government can intervene in a number of ways to address market failure, for example by
A reducing bankers’ bonuses.
B enforcing minimum wages.
C taxing public goods.
D regulating supermarket prices.

Explanation: Of the four B is the only measure taken by UK governments. We do have a national
minimum wage but public goods are not taxed, supermarket prices are not regulated by government, and
the government has not reduced bonuses paid by private sector banks.

11. Which one of the following is an example of how Government has attempted to address market
failure?
A They have increased regulation of pollution by manufacturers
B They have indicated that tobacco businesses should reduce the prices of demerit goods
C They have told food manufacturers to change information on their product labels
D They have encouraged businesses to invest in advertising

Explanation: UK governments have not and would not seek lower prices for demerit goods or encourage
businesses to advertise. They do seek to reduce pollution, but this tends to be in the form of market‐
based solutions. This leaves us with C and we can see on food packaging that governments have sought
to close the information gap by regulating the information on food.

12. Governments may fail to address market failure because

A the opportunity cost of any decision is high.
B their intervention will lead to a net welfare benefit.
C the accounting of social costs and benefits is challenging and lacks precision.
D market forces lead to a socially efficient allocation of resources.

Explanation: C illustrates one of the problems of pollution control, ie the problems of calculating external
costs and benefits. If governments intervene without accurate knowledge, then a market failure will be
converted into a government failure. For this reason governments might be reluctant to intervene.

13. The weaknesses of government intervention in the context of market failure, include
A borrowing too heavily to pay for public services.
B spending heavily on health and education.
C creating new unintended market distortions.
D creating too many laws and regulations.

Explanation: C refers to government failure – the unintended consequence of government action which
can convert a market failure into a misallocation of resources through government failure.

14. In 2009/10 the NHS purchased a large stock of swine flu vaccine which was not used. This is an
example of government failure through
A regulatory capture.
B the law of unintended consequences.
C policy myopia or short sightedness.
D a policy decision based on imperfect information.

Explanation: The government had imperfect information about the extent and severity of swine flu and
adopted an over cautious approach which resulted in excessive purchase of vaccine that was not in the
end needed.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 107

15. Which one of the following is not a cause of government myopia or short sightedness?
A Income inequality
B Regulatory capture
C Policy myopia in the form of short termism
D Imperfect information

Explanation: Some income inequality arises from market failure. The other three are all causes of
government failure.

16. Which one of the following would not be said to be a case of government failure?
A A rise in national insurance employer’s contributions leads to a reduction in job creation
B Rent control leads to a reduction in the supply of rented accommodation
C A rise in income tax reduces the incentive to work
D A rise in the tax on tobacco leads to such a significant decline in smoking that the yield from
tobacco tax declines

Explanation: If the tax on tobacco is designed to discourage smoking then the outcome outlined in
response D is a desirable one. Each of the other responses describes undesirable and unintended
consequences of government action.

17. Which one of the following is most likely to result in government failure?
A Tradable Pollution permits
B Pollution regulations
C Pollution taxes
D Subsidies for the use of less polluting methods

Explanation: What makes B the odd one out is that, unlike the others, it overrides market forces rather
harnessing them. It is possible but very unlikely that regulation will result in economic efficiency.
Therefore, it is the measure most likely to cause government failure.

18. Which one of the following statements is correct?

A A maximum price below equilibrium price leads to excess demand
B A minimum price below equilibrium price leads to excess supply
C A minimum price above equilibrium price leads to excess demand
D A maximum price above equilibrium price leads to excess supply

Explanation: You should draw sketch graphs to understand these points. In A price cannot rise and, as a
result, excess demand exists and persists. In B and D the equilibrium price is attainable and in these
circumstances the price control is non‐constraining. In the case of C there will be excess supply – not
excess demand.

19. Which one of the following tax and benefit measures is most likely to provide a disincentive to work?
A A rise in income tax allowances
B A rise in VAT
C A reduction in the income tax allowances
D A reduction in benefits for job seekers

Explanation: A reduction in income tax allowances would lower the threshold for paying income tax. This
would reduce the benefit from working and narrow the gap between take home pay and job seekers
allowance.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 108

20. Which of the following statements are correct? The ban on smoking in enclosed public spaces
1 reduces the positive externalities associated with smoking.
2 reduces the negative externalities associated with smoking.
3 reduces inequality.
4 regulates the consumption of a demerit good.

A 2 and 4 only
B 1 and 3 only
C 4 only
D 2 only

Explanation: The ban on smoking in enclosed public spaces was designed to reduce the negative
externality known as passive smoking. It does not ban smoking itself but is clearly a regulation of tobacco
consumption.

21. Which of the following statements relating to the purpose of a landfill tax is not correct?
A It increases the amount of recycling
B It penalises waste
C It encourages flytipping
D It imposes a cost on businesses and householders

Explanation: As waste that goes into landfill imposes a cost on business and local authorities there is a
clear incentive to recycle. However, less socially minded members of the community seek to avoid the tax
by flytipping. Unfortunately, it does encourage flytipping although this was not the purpose of the tax.

22. The EU system of farm support based on buffer stock intervention in the market led to
A higher food prices
B food surpluses
C subsidised export of food
D all the above

Explanation: Buffer stock schemes which contain a price guarantee always lead to over production but
because of controls prices were not permitted to fall to adjust to the market. To eliminate growing
surpluses the EU resorted to various measures including subsidised exports.

23. In place of production subsidies, the EU provides farmers with financial incentives to adopt
environmentally‐friendly methods. This is because
A subsidising food production generates fewer external benefits than subsidising environmental
care.
B traditional intensive farming leads to external benefits, which are absent from environmentally‐
friendly methods.
C spending less on farming will lead to lower food prices and more external benefits.
D the social costs of food subsidies are less than the social benefits.

Explanation: Only A explains the reason why the EU has switched its support from production, to the
promotion of environmentally‐friendly methods. The other statements are to varying degrees invalid.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 109

24. The diagram below illustrates the consequences of a local authority awarding a subsidy to a bus
company to provide bus services for isolated communities.

Price
S1
A
E
H S2
B

C F

D G

O J K Quantity

The amount spent by the local authority on this subsidy is represented by the area
A AEFC.
B OAEK.
C OCFK.
D DBHG.

Explanation: To extend demand to OK a subsidy of EF per unit is offered, with the customer paying only FK
(or OC). This brings about an increase in supply to OK (or CF). AEFC is quantity subsidised multiplied by
the subsidy per unit.

25. A tax on pollution is least likely to

A reduce pollution.
B reduce prices.
C reduce production.
D reduce economic welfare.

Explanation: A pollution tax represents another business cost which will be passed on to buyers in the
form of higher prices. This will reduce sales, production and pollution, but will increase economic welfare
by forcing buyers to internalise the external cost of pollution which their decision to buy generates.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 110

End of Unit Tests

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 111

End of Unit Test 1

1. Economic decision‐makers are primarily concerned with

A increasing output.
B maximising their welfare.
C reducing prices.
D increasing international trade.

2. Which of the following is not a factor of production?

A Labour
B Management
C Capital
D Enterprise

3. In economic theory it is assumed that business organisations seek to maximise

A sales revenue.
B output.
C profit.
D employee’s wages.

4. All economic decision‐makers are forced to choose because

A resources are infinite.
B every choice has an opportunity cost.
C wants are finite.
D resources are finite.

5. A parallel shift outwards of a production possibility curve could reflect the fact that
A the opportunity cost of changing to a new product combination has fallen.
B a nation’s workforce is better educated and trained.
C there have been technological improvements in agriculture.
D the economy is producing at an unsustainable level.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 112

6. Economists avoid making normative statements such as

A wage rates ought to be higher for the lowest paid.
B wages are usually higher for those whose productivity is high.
C the environment can be considered as a scarce resource.
D we live in a world of infinite wants but limited resources.

7. The income elasticity of demand for a sports car is +3.4. Incomes fall by 4%. Retailers should expect
demand to

A decrease by 10.6%.
B increase by 10.6%.
C decrease by 13.6%.
D decrease by 5.3%.

8. A private health provider has decided to build a new hospital in London which exceeds the capacity
of two smaller hospitals which it replaces. Which of the following statements is likely to be true?

A The new hospital will increase the demand for private health care
B The supply curve for private health care will shift to the right
C There will be a movement along the supply curve of private health care
D Demand for health care will become more price elastic

9. The diagram below shows the demand for oranges across a range of prices.

Price

P1

P2

O
Quantity of oranges

If P1 had been the equilibrium price a fall in price to P2 could have arisen because of
A an increase in the price of a substitute fruit.
B an increase in income.
C a fall in the wages of orange packers.
D a decrease in demand.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 113

10. The prices of agricultural products are subject to large fluctuations because
A both supply and demand are price elastic.
B demand is price elastic but supply is price inelastic.
C supply is price elastic but demand is price inelastic.
D both supply and demand are price inelastic.

11. An increase in demand for beef, leads to a fall in the price of leather. This relationship is an example
of products in

A joint supply.
B joint demand.
C composite demand.
D competitive demand.

12. Which of the following is not a benefit of specialisation?

A It can save time
B It makes better use of capital equipment
C It makes greater use of experts
D It reduces repetition

13. Study the table below.

Output Total cost

100 £10,000
200 £18,000
300 £24,000

From the table we can infer that as output has increased there has been a
1. a rise in total costs.
2. a rise in average costs.
3. a fall in average costs.
4. a rise in profits.

A 1 and 3 only
B 1 and 2 only
C 3 and 4 only
D 1, 3 and 4 only

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 114

14. A computer chip manufacturer has discovered that as it increases output from OK to OL by producing
the extra quantity from a fourth factory, average costs rise.

Average AC
Cost

O Output of Chips
K L

From this we can conclude that as output rises from OK to OL the business
A will begin to experience diseconomies of scale.
B becomes more productively efficient.
C loses the benefits of economies of scale.
D experiences increasing returns to scale.

15. Economic activity which generates externalities

A does not contribute to consumer welfare.
B will result in prices which are lower than market equilibrium.
C results in a misallocation of resources.
D is recognised in the price system.

16. Which of the following products could not be produced in a market economy?
A Education
B National defence
C Health care
D Motorways

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 115

17. The diagram below illustrates the impact of an externality arising from a householder producing a
very attractive front garden.

Cost & Benefits MPC = MSC

A F

B G

C J
MSB
H

MPB

O
D E Quantity

As a result there is a welfare

A gain represented by the triangle FGJ.
B loss represented by the triangle GJH.
C loss represented by the triangle FGJ.
D gain represented by the triangle GJH.

18. The assessment of goods as merit or demerit

A is a matter of opinion.
B depends on the extent of harm that they impose.
C includes all products provided by government.
D depends on the amount of external costs and benefits they generate.

19. A monopoly market is more likely to lead to a misallocation of resources because the business
A can increase output and reduce average costs.
B can successfully charge a higher price.
C can exploit economies of scale.
D cannot exploit barriers to entry.

20. Immobility of labour results in

A unemployment when there are job vacancies.
B persistent pay differences.
C labour shortage in times of unemployment.
D all the above.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 116

21. Which one of the following statements is correct?

A Income comes only from offering labour services
B The wealth of a person is confined to ownership of property
C Unlike income wealth can be inherited
D Income is seen as a stock whereas wealth is seen as a flow

22. Taxes are sometimes used by government to correct market failure, for example, the use of
A alcohol duty as a means of discouraging the consumption of a demerit good.
B VAT as a means of regulating products which impose external costs.
C corporation tax as a means of imposing price controls.
D income tax as a means of making employment more worthwhile.

23. The diagram below illustrates the effect of a local authority intervening by subsidising land it owns, in
order to attract new businesses.

£ S
S1
A

O
D E Quantity
From this diagram we can identify
A the subsidy per acre bought of AB.
B the quantity of subsidised land which new businesses buy OD.
C the equilibrium price of OC, before the subsidy.
D the total cost of the subsidy to the local authority of AC x OE.

24. An increase in tax which may result in a misallocation of resources is a reflection of

A productive inefficiency.
B market failure.
C social inefficiency.
D government failure.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 117

25. The diagram below shows supply and demand curves for a product which is subject to an indirect tax.

Price S (with tax)

P3 S
Tax per
P2 unit

P1
D

O Q1 Q Quantity

The equilibrium price after the tax is

A P
B P1
C P2
D P3

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 118

End of Unit Test 1 ‐ Answers

1. Economic decision‐makers are primarily concerned with

A increasing output.
B maximising their welfare.
C reducing prices.
D increasing international trade.

Explanation: Economic theory assumes that entrepreneurs, employees and consumers are self‐interested
and seek to maximise profits, wages and satisfaction (utility) respectively.

2. Which of the following is not a factor of production?

A Labour
B Management
C Capital
D Enterprise

Explanation: The factors of production are the essential ingredients in all production – land, labour,
capital and enterprise. Obviously, production has to be managed but this is normally undertaken by
entrepreneurs (an owner‐manager business), or by specialists who are, in a sense, offering their labour
(salaried managers). Therefore, management is a process, and therefore not treated as a distinct factor
of production.

3. In economic theory it is assumed that business organisations seek to maximise

A sales revenue.
B output.
C profit.
D employee’s wages.

Explanation: As entrepreneurs are self‐interested it is reasonable to assume that they seek to maximise
the reward paid to them.

4. All economic decision‐makers are forced to choose because

A resources are infinite.
B every choice has an opportunity cost.
C wants are finite.
D resources are finite.

Explanation: It is true that every choice does have an opportunity cost but this is because resources are
finite.

5. A parallel shift outwards of a production possibility curve could reflect the fact that
A the opportunity cost of changing to a new product combination has fallen.
B a nation’s workforce is better educated and trained.
C there have been technological improvements in agriculture.
D the economy is producing at an unsustainable level.

Explanation: An outward shift in the production possibility curve illustrates an increase in the productive
potential of the economy. Although this could be achieved with C (a technological improvement in
agriculture) it would not take the form of a parallel shift of the curve. B, on the other hand, will result in
the potential for an increase in the output of all sectors.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 119

6. Economists avoid making normative statements such as

A wage rates ought to be higher for the lowest paid.
B wages are usually higher for those whose productivity is high.
C the environment can be considered as a scarce resource.
D we live in a world of infinite wants but limited resources.

Explanation: A is the only one that is an opinion and cannot be tested with reference to the facts. As a
general rule we can say that when words such “ought” or “should” are used the statement will be a
normative statement.

7. The income elasticity of demand for a sports car is +3.4. Incomes fall by 4%. Retailers should expect
demand to
A decrease by 10.6%.
B increase by 10.6%.
C decrease by 13.6%.
D decrease by 5.3%.

Explanation: +3.4 = x / ‐4%. Therefore x = +3.4 multiplied by ‐4% = ‐13.6%. Demand falls as a result of
the fall in income.

8. A private health provider has decided to build a new hospital in London which exceeds the capacity
of two smaller hospitals which it replaces. Which of the following statements is likely to be true?
A The new hospital will increase the demand for private health care
B The supply curve for private health care will shift to the right
C There will be a movement along the supply curve of private health care
D Demand for health care will become more price elastic

Explanation: The supply curve will shift to the right as the capacity of the new large hospital exceeds that
of the two smaller hospitals combined.

9. The diagram below shows the demand for oranges across a range of prices.
Price

P1

P2

O
Quantity of oranges

If P1 had been the equilibrium price a fall in price to P2 could have arisen because of
A an increase in the price of a substitute fruit.
B an increase in income.
C a fall in the wages of orange packers.
D a decrease in demand.

Explanation: A fall in wages of orange pickers increases supply and reduces price. As a result of the lower
price, demand extends.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 120

10. The prices of agricultural products are subject to large fluctuations because
A both supply and demand are price elastic.
B demand is price elastic but supply is price inelastic.
C supply is price elastic but demand is price inelastic.
D both supply and demand are price inelastic.

Explanation: Demand is price inelastic because most of these products are necessities. Supply is price
inelastic (especially in the short run) because any change in output is constrained by the growing cycle.
Therefore, even a small shift in demand or supply will have a significant impact on equilibrium price.

11. An increase in demand for beef, leads to a fall in the price of leather. This relationship is an example
of products in
A joint supply.
B joint demand.
C composite demand.
D competitive demand.

Explanation: Joint supply occurs when the production of one good leads to the production of another
good, eg a by‐product. Leather is a by‐product of the beef cattle industry.

12. Which of the following is not a benefit of specialisation?

A It can save time
B It makes better use of capital equipment
C It makes greater use of experts
D It reduces repetition

Explanation: Specialisation involves repeating the same or similar tasks over and over again. This is often
seen as the disadvantage of specialisation.

13. Study the table below.

Output Total cost

100 £10,000
200 £18,000
300 £24,000

From the table we can infer that as output has increased there has been a
5. a rise in total costs.
6. a rise in average costs.
7. a fall in average costs.
8. a rise in profits.

A 1 and 3 only
B 1 and 2 only
C 3 and 4 only
D 1, 3 and 4 only

Explanation: The table shows a rise in total costs and by dividing total costs by output we can conclude
that average costs fell. However, as there is no data on sales revenue we cannot draw any conclusion
about profits.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 121

14. A computer chip manufacturer has discovered that as it increases output from OK to OL by producing
the extra quantity from a fourth factory, average costs rise.

Average AC
Cost

O Output of Chips
K L

From this we can conclude that as output rises from OK to OL the business
A will begin to experience diseconomies of scale.
B becomes more productively efficient.
C loses the benefits of economies of scale.
D experiences increasing returns to scale.

Explanation: As average costs are rising the business suffers from diseconomies of scale. The extra
economies of scale from increasing output beyond OK are more than cancelled out by diseconomies.

15. Economic activity which generates externalities

A does not contribute to consumer welfare.
B will result in prices which are lower than market equilibrium.
C results in a misallocation of resources.
D is recognised in the price system.

Explanation: The misallocation of resources takes the form of the overproduction of certain goods (those
with negative externalities) and the underproduction of others (those with positive externalities).

16. Which of the following products could not be produced in a market economy?
A Education
B National defence
C Health care
D Motorways

Explanation: It is possible (though not desirable) to exclude non payers from education, health care and
motorways. However, national defence is a public good which is available to all or to none. It is not
possible to exclude non payers from the benefits of national defence.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 122

17. The diagram below illustrates the impact of an externality arising from a householder producing a
very attractive front garden.

Cost & Benefits MPC = MSC

A F

B G

C J
MSB
H

MPB

O
D E Quantity

As a result there is a welfare

A gain represented by the triangle FGJ.
B loss represented by the triangle GJH.
C loss represented by the triangle FGJ.
D gain represented by the triangle GJH.

Explanation: As the garden is attractive there is clearly a welfare gain. If externalities were taken into
account then third parties also would benefit from additional quantity from OD to OE. The welfare gain is
therefore FGJ.

18. The assessment of goods as merit or demerit

A is a matter of opinion.
B depends on the extent of harm that they impose.
C includes all products provided by government.
D depends on the amount of external costs and benefits they generate.

Explanation: Although there is no doubt that some demerit goods cause harm to the consumer, the
extent of the harm caused by some is a matter of opinion. Some people might argue that even though
some products are harmful, people should have the right to choose whether or not to consume them.

19. A monopoly market is more likely to lead to a misallocation of resources because the business
A can increase output and reduce average costs.
B can successfully charge a higher price.
C can exploit economies of scale.
D cannot exploit barriers to entry.

Explanation: Monopoly markets are defined as those with little or no competition. Therefore there is no
pressure to reduce prices to secure sales and profit. Therefore prices will tend to be, and remain higher
than they would otherwise be.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 123

20. Immobility of labour results in

A unemployment when there are job vacancies.
B persistent pay differences.
C labour shortage in times of unemployment.
D all the above.

Explanation: Because labour is not perfectly mobile it is possible for people to remain unemployed when
firms are desperate to recruit new workers. In addition, shortage of labour in some areas and surplus in
others can result in wage differences which persist into the long run.

21. Which one of the following statements is correct?

A Income comes only from offering labour services
B The wealth of a person is confined to ownership of property
C Unlike income wealth can be inherited
D Income is seen as a stock whereas wealth is seen as a flow

Explanation: Wealth is a stock of assets owned by an individual. Not only does this make D incorrect but
it also means that wealth in the form of land, property and financial assets can be inherited. A is
incorrect because income comes from employing any of the factor services. B is incorrect because wealth
takes forms other than just ownership of property.

22. Taxes are sometimes used by government to correct market failure, for example, the use of
A alcohol duty as a means of discouraging the consumption of a demerit good.
B VAT as a means of regulating products which impose external costs.
C corporation tax as a means of imposing price controls.
D income tax as a means of making employment more worthwhile.

Explanation: Each of the taxes are employed by UK governments but only A links a tax with a correct
reason for imposing the tax.

23. The diagram below illustrates the effect of a local authority intervening by subsidising land it owns, in
order to attract new businesses.

£ S
S1
A

O
D E Quantity
From this diagram we can identify
A the subsidy per acre bought of AB.
B the quantity of subsidised land which new businesses buy OD.
C the equilibrium price of OC, before the subsidy.
D the total cost of the subsidy to the local authority of AC x OE.

Explanation: The subsidy is shown as the vertical distance between the supply curves. The subsidy is
given on all acres purchased and, therefore, amounts to AC x OE.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 124

24. An increase in tax which may result in a misallocation of resources is a reflection of

A productive inefficiency.
B market failure.
C social inefficiency.
D government failure.

Explanation: Any government measures with unintended results leading to a misallocation of resources
can be seen as government failure.

25. The diagram below shows supply and demand curves for a product which is subject to an indirect tax.

Price S (with tax)

P3 S
Tax per
P2 unit

P1
D

O Q1 Q Quantity

The equilibrium price after the tax is

A P
B P1
C P2
D P3

Explanation: An indirect tax results in a leftward shift of the supply curve. The new equilibrium price will
be at the intersection of the demand curve and the supply‐with‐tax curve – ie at price P2.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 125

End of Unit Test 2

1. The objective of economic activity is to

A achieve productive efficiency.
B minimise the use of factors of production.
C satisfy consumer wants.
D maximise output.

2. Which of the following would be included in an economist’s definition of human capital?

A The skills and techniques developed by a tennis champion
B Education
C A builder’s cement mixer
D A surgeon

3. Which one of the following would not be seen as rational economic behaviour?
A Expanding output to increase profits
B Working overtime to increase wages
C Placing savings in a low interest bank account
D Investing in the most profitable company

4. Which one of the following is not considered to be one of the three central questions in economics?
A What to produce?
B When to produce?
C How to produce?
D For whom to produce?

5. Shown below is a country’s production possibility curve AA, and a second curve BB for the same
country 10 years later.

Consumer
Goods
B
A

A B Capital
Goods
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 126

It is clear from this diagram that, 10 years later

A the opportunity costs have remained unchanged.
B more consumer goods are being made, at the expense of capital goods.
C there have been more productivity improvements in making capital goods.
D more capital goods are being made.

6. Which of the following are positive statements?

1. The UK ought to leave the EU
2. Governments should place a greater priority on reducing inequality
3. A rise in interest rates will reduce borrowing
4. A rise in the price of petrol will reduce demand for cars

A 1 and 2 only
B 3 and 4 only
C 1 and 3 only
D 2 and 4 only

7. The demand curve of a product will shift to the left if

A there is an increase in price of a substitute product.
B there is a fall in the population.
C the price of the product decreases.
D there is a fall in the costs associated with the product.

8. In the short run the price elasticity of supply for a particular product is +0.2. If price rises by 20%
then quantity supplied will rise by

A 10%.
B 5%.
C 4%.
D 2%.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 127

9. The diagram below shows the demand and supply of a product. P1 is the equilibrium price.

Price S

P1

P2

D1

D2

O
Q2 Q1 Quantity

The cause of the price decrease, from OP1 to OP2, could be

A a rise in the price of substitutes.
B a rise in the price of complementary products.
C a fall in VAT.
D an increase in labour costs.

10. Coffee prices tend to be unstable because

A demand is price elastic.
B coffee is a luxury good.
C tea is an excellent substitute.
D demand and supply are price inelastic.

11. In a free market, which of the following groups does not interact with the others to maximise its
return?

A Producers
B Government
C Consumers
D Factory owners

12. Exchange is only possible if

A money exists as a medium of exchange.
B money maintains its value.
C specialist workers produce a surplus beyond their individual needs.
D there is a framework of law and order.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 128

13. The managing director of a garden nursery producing bedding plants plots the following graph:

Average
SRAC
Cost

Output of Plants

At the lowest point of the Short Run Average Cost curve, indicated at X, this firm
A must be exploiting some of the available economies of scale.
B can have the most influence in its market.
C is making high profits.
D is maximising the productivity of the resources it is using.

14. Which one of the following statements is not valid?

A The pursuit of economies of scale encourages the growth of firms
B Full economies of scale might only be available to a monopolistic firm
C Economies of scale are often used as a defence for monopoly
D Monopoly is always in the interests of consumers

15. Lack of information is an example of market failure because

A consumers and producers cannot agree price.
B consumers and producers then make poorer decisions.
C it may result in negative externalities.
D governments do not address the issue of demerit goods.

16. The free rider problem is particularly relevant in the context of

A the provision of public goods.
B the use of a pollution permit scheme.
C reducing the impact of demerit goods.
D the production of negative externalities.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 129

17. The diagram below illustrates the impact of an externality arising from the unwanted noise created
by someone playing loud music in their garden.

Costs &
Benefits MPC = MSC
A F

B G

C J
MPB
H

MSB

O
D E Quantity

As a result there is welfare

A loss represented by the triangle FGJ.
B gain represented by the triangle GJH.
C loss represented by the triangle GJH.
D gain represented by the triangle FGJ.

18. Consumption of demerit goods may lead to

A negative externalities because it may also reduce the welfare of non‐consumers.
B market failure because governments must increase tax on these products.
C a free rider problem because consumption may also generate positive externalities.
D a misallocation of resources because external benefits are greater than social benefits.

19. Compared to monopolistic markets, businesses in a competitive market are more likely to
A have some control over their price.
B benefit from barriers of entry.
C impose negative externalities on society.
D earn lower profits.

20. Geographical immobility of labour is caused by

A lack of qualifications
B problems in the housing market
C lack of skills
D lack of experience

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 130

21. The functions of income differences are to

1. ensure a flow of factors into expanding areas of the economy.
2. provide incentives for economic agents.
3. ration the supply of goods and services in the economy.
4. prevent market failure.

A 1 and 2
B 1 and 4 only
C 2 and 4 only
D 1,2, 3 and 4

22. Local government authorities are often keen to subsidise public bus transport in more remote areas
because this will
A reduce local taxes.
B increase external costs associated with pollution.
C reduce pollution as a majority of car drivers switch to public transport.
D address market failure by reducing inequalities.

23. Which of the following might governments use to address market failure?
A Taxation to reduce consumption of demerit goods
B Subsidies to discourage over‐production
C Regulation to force businesses to internalise the positive externalities they create
D Information to encourage consumption of public goods

24. Government intervention may result in government failure. Which one of the following cases would
constitute government failure?
A Public goods have been financed out of taxation.
B Merit goods are subsidised to encourage consumption.
C Negative externalities have been taxed to reduce consumption.
D High taxes on demerit goods lead to their under‐production.

25. The government has decided to manage sugar beet prices through a buffer stock scheme, using the
data in the table below.

Price £/kg Quantity demanded (000 kg) Quantity Supplied (000 kg)
16 2 6
12 4 4
8 7 3

If the government decided to introduce a minimum price of £16 per kg, then it would
A buy 4,000 kg for the buffer stock.
B be imposing a tax of £4 per kg.
C be trying to recognise the negative externalities associated with sugar beet production.
D sell 4,000 kg into the market.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 131

End of Unit Test 2 ‐ Answers

1. The objective of economic activity is to

A achieve productive efficiency.
B minimise the use of factors of production.
C satisfy consumer wants.
D maximise output.

Explanation: The central purpose of economic activity is the production of goods and services in order to
satisfy needs and wants. Production occurs not for its own sake but in order to satisfy needs and wants.

2. Which of the following would be included in an economist’s definition of human capital?

A The skills and techniques developed by a tennis champion
B Education
C A builder’s cement mixer
D A surgeon

Explanation: Human capital is defined as the knowledge and skills acquired by individuals through
education, training and experience. Education itself is not human capital although it enables people to
acquire knowledge and skills. A surgeon is not human capital although s/he has acquired human capital.
A cement mixer is an example of real (non‐human) capital.

3. Which one of the following would not be seen as rational economic behaviour?
A Expanding output to increase profits
B Working overtime to increase wages
C Placing savings in a low interest bank account
D Investing in the most profitable company

Explanation: Traditional economic theory assumes that economic agents are rational and self‐interested,
and therefore, maximise their reward. C is not behaviour designed to maximise this return.

4. Which one of the following is not considered to be one of the three central questions in economics?
A What to produce?
B When to produce?
C How to produce?
D For whom to produce?

Explanation: As a result of scarcity and choice, an economic system has to answer the “what, how and for
whom” questions. The subsidiary question “when” is not one of the central or basic economic questions
facing an economy.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 132

5. Shown below is a country’s production possibility curve AA, and a second curve BB for the same
country 10 years later.

Consumer
Goods
B
A

A B Capital
Goods

It is clear from this diagram that, 10 years later

A the opportunity costs have remained unchanged.
B more consumer goods are being made, at the expense of capital goods.
C there have been more productivity improvements in making capital goods.
D more capital goods are being made.

Explanation: Because the PPC illustrates the potential rather than actual production, the correct answer
cannot be either B or D. It cannot be A since there has been a change in opportunity cost. The reason
why C is the correct answer is that the curve shows gains in the productive possibility of capital goods in
excess of gains in the potential of consumer goods.

6. Which of the following are positive statements?

5. The UK ought to leave the EU
6. Governments should place a greater priority on reducing inequality
7. A rise in interest rates will reduce borrowing
8. A rise in the price of petrol will reduce demand for cars

A 1 and 2 only
B 3 and 4 only
C 1 and 3 only
D 2 and 4 only

Explanation: C and D can be tested as either true or false by reference to the facts. The other two are
opinions which are neither right nor wrong, and cannot be tested against the facts.

7. The demand curve of a product will shift to the left if

A there is an increase in price of a substitute product.
B there is a fall in the population.
C the price of the product decreases.
D there is a fall in the costs associated with the product.

Explanation: A causes a rightward shift of the demand curve, C causes a movement downwards along the
demand curve and D relates to supply rather than demand. A fall in population causes demand to
decline, at all prices.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 133

8. In the short run the price elasticity of supply for a particular product is +0.2. If price rises by 20%
then quantity supplied will rise by
A 10%.
B 5%.
C 4%.
D 2%.

Explanation: 0.2 = x / 20. Therefore x is 0.2 x 20% = 4%.

9. The diagram below shows the demand and supply of a product. P1 is the equilibrium price.

Price S

P1

P2

D1

D2

O
Q2 Q1 Quantity

The cause of the price decrease, from OP1 to OP2, could be

A a rise in the price of substitutes.
B a rise in the price of complementary products.
C a fall in VAT.
D an increase in labour costs.

Explanation: The graph shows a decrease in demand. This could have been caused by consumers
reducing purchases because complements are more expensive. A would cause an increase in demand,
whereas C and D would impact on supply.

10. Coffee prices tend to be unstable because

A demand is price elastic.
B coffee is a luxury good.
C tea is an excellent substitute.
D demand and supply are price inelastic.

Explanation: Because both supply and demand tend to be price inelastic, changes in volumes supplied
have a dramatic impact on prices. Shortages of coffee, resulting from poor harvests, lead to a significant
rise in prices, as supply cannot respond. Also, because demand is price inelastic customers will continue
to buy in large quantities despite the price rises.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 134

11. In a free market, which of the following groups does not interact with the others to maximise its
return?
A Producers
B Government
C Consumers
D Factory owners

Explanation: In a totally free market there is no role for the government.

12. Exchange is only possible if

A money exists as a medium of exchange.
B money maintains its value.
C specialist workers produce a surplus beyond their individual needs.
D there is a framework of law and order.

Explanation: Exchange predates the existence of money and governments. Primitive tribes have engaged
in exchange thousands of years ago. However, exchange only occurs where specialists produce a surplus
which they swap with others, who are typically specialist as well.

13. The managing director of a garden nursery producing bedding plants plots the following graph:

Average
SRAC
Cost

Output of Plants

At the lowest point of the Short Run Average Cost curve, indicated at X, this firm
A must be exploiting some of the available economies of scale.
B can have the most influence in its market.
C is making high profits.
D is maximising the productivity of the resources it is using.

Explanation: The reason why D is correct and A is not correct is that the AC curve shown is a short run
curve and economies of scale are a long run phenomenon. At the lowest point on the SRAC curve the firm
is productively efficient.

14. Which one of the following statements is not valid?

A The pursuit of economies of scale encourages the growth of firms
B Full economies of scale might only be available to a monopolistic firm
C Economies of scale are often used as a defence for monopoly
D Monopoly is always in the interests of consumers

Explanation: Although it is true that consumers might benefit from the existence of monopoly firms
through lower costs, there is no guarantee that monopolies will pass on the benefits of economies of
scale in the form of lower prices.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 135

15. Lack of information is an example of market failure because

A consumers and producers cannot agree price.
B consumers and producers then make poorer decisions.
C it may result in negative externalities.
D governments do not address the issue of demerit goods.
Explanation: In the absence of perfect information we make decisions that do not result in an efficient
allocation of resources.

16. The free rider problem is particularly relevant in the context of

A the provision of public goods.
B the use of a pollution permit scheme.
C reducing the impact of demerit goods.
D the production of negative externalities.
Explanation: A free rider is one who enjoys the benefit of the service without contributing to it (eg foreign
visitors). As it is not possible to exclude non payers from the benefits of public goods it is not possible to
provide them through the market, and it is necessary for the state to provide them.

17. The diagram below illustrates the impact of an externality arising from the unwanted noise created
by someone playing loud music in their garden.

Costs &
Benefits MPC = MSC
A F

B G

C J
MPB
H

MSB

O
D E Quantity
As a result there is welfare
A loss represented by the triangle FGJ.
B gain represented by the triangle GJH.
C loss represented by the triangle GJH.
D gain represented by the triangle FGJ.
Explanation: As the noise is unwanted we can be certain that this is a welfare loss rather than a gain. This
loss is represented by the triangle GJH. If the perpetrators of the noise were made to pay, (ie internalise
the externality) he / she would be made to pay more and the quantity would be reduced.

18. Consumption of demerit goods may lead to

A negative externalities because it may also reduce the welfare of non‐consumers.
B market failure because governments must increase tax on these products.
C a free rider problem because consumption may also generate positive externalities.
D a misallocation of resources because external benefits are greater than social benefits.
Explanation: The consumption of many products might lead to negative externalities, and this is certainly
the case with demerit goods. For instance, alcohol harms the excessive drinker but the behaviour of
heavy drinkers impacts on the rest of society. Smoking can kill the smoker but it can also inflict passive
smoking on people in the vicinity.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 136

19. Compared to monopolistic markets, businesses in a competitive market are more likely to
A have some control over their price.
B benefit from barriers of entry.
C impose negative externalities on society.
D earn lower profits.

Explanation: Monopolists control prices and are able to force prices up in the interests of higher profits.
Such power is not available to a firm in a competitive market.

20. Geographical immobility of labour is caused by

A lack of qualifications
B problems in the housing market
C lack of skills
D lack of experience

Explanation: Problems in the housing market make it difficult for people to move from one part of the
country to another in search of a job. The other three factors cause occupational immobility.

21. The functions of income differences are to

1. ensure a flow of factors into expanding areas of the economy.
2. provide incentives for economic agents.
3. ration the supply of goods and services in the economy.
4. prevent market failure.

A 1 and 2
B 1 and 4 only
C 2 and 4 only
D 1,2, 3 and 4

Explanation: Income differences can reflect market failure and, therefore, 4 is incorrect. Income
differences do influence the distribution of goods and services, but rationing is not a function of income
differences – price rations supply. However, income differences do provide an incentive and do help to
shift resources to areas of resource shortage.

22. Local government authorities are often keen to subsidise public bus transport in more remote areas
because this will
A reduce local taxes.
B increase external costs associated with pollution.
C reduce pollution as a majority of car drivers switch to public transport.
D address market failure by reducing inequalities.

Explanation: Subsidised public bus transport will benefit the less well off who tend to use buses in remote
areas. Therefore, it reduces inequalities. Subsidised public transport might lead to some switching from
cars to buses, but the majority of car drivers will not switch and, therefore, C is an incorrect response.

23. Which of the following might governments use to address market failure?
A Taxation to reduce consumption of demerit goods
B Subsidies to discourage over‐production
C Regulation to force businesses to internalise the positive externalities they create
D Information to encourage consumption of public goods

Explanation: Governments use each of the four methods of intervention but only A links a method with a
correct explanation of the purpose for which the intervention is used.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 1: Markets and Market Failure 137

24. Government intervention may result in government failure. Which one of the following cases would
constitute government failure?
A Public goods have been financed out of taxation.
B Merit goods are subsidised to encourage consumption.
C Negative externalities have been taxed to reduce consumption.
D High taxes on demerit goods lead to their under‐production.

Explanation: The implication is that government intervention has gone too far and led to an under‐
production of the demerit good. In other words, the market over‐produces but government intervention
leads to an under‐production.

25. The government has decided to manage sugar beet prices through a buffer stock scheme, using the
data in the table below.

Price Quantity demanded Quantity Supplied

£/kg (000 kg) (000 kg)
16 2 6
12 4 4
8 7 3

If the government decided to introduce a minimum price of £16 per kg, then it would
A buy 4,000 kg for the buffer stock.
B be imposing a tax of £4 per kg.
C be trying to recognise the negative externalities associated with sugar beet production.
D sell 4,000 kg into the market.

Explanation: The government would buy up the quantity supplied minus the quantity demanded. At the
target price of £16 this means buying up 4,000kg.

© APT Initiatives Ltd, 2010