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QCAA Economics study materials
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QCAA Economics practice questions

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Question 1Unit 3

In economics, what does the term 'scarcity' refer to?

  1. The point at which a market price has stopped changing
  2. A temporary shortage of a product on a shop shelf
  3. The situation where a government rations goods during wartime
  4. The condition where unlimited wants exceed the limited resources available to satisfy them Correct answer.

Explanation

Scarcity is the fundamental economic problem: human wants are effectively unlimited while the resources used to produce goods and services are finite. Because of scarcity, individuals, firms and governments must make choices about what to produce and consume.

Question 2Unit 3

A student gives up a part-time job paying $200 per week in order to attend university full time. In economics, the $200 of forgone wages is best described as:

  1. A sunk cost of the university decision
  2. A transfer payment received by the student
  3. An opportunity cost of attending university Correct answer.
  4. A positive externality of education

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. By choosing study, the student loses the income from the job, so that forgone wage is the opportunity cost of the decision.

Question 3Unit 3

What does a production possibility frontier illustrate?

  1. The distribution of income between households in an economy
  2. The maximum combinations of two goods an economy can produce given its resources and technology Correct answer.
  3. The revenue a firm earns at each level of output
  4. The quantities of a good consumers are willing to buy at each price

Explanation

The production possibility frontier shows the outer boundary of output combinations achievable when all resources are fully and efficiently employed, holding technology constant. Points inside the curve indicate inefficiency, while points beyond it are currently unattainable.

Question 4Unit 3

The law of demand states that, all else being equal, as the price of a good rises:

  1. The supply curve shifts left
  2. The quantity demanded rises
  3. The demand curve shifts right
  4. The quantity demanded falls Correct answer.

Explanation

The law of demand describes an inverse relationship between price and quantity demanded, holding other influences constant. A higher price reduces the quantity buyers are willing and able to purchase, which is shown as a movement up along the demand curve.

Question 5Unit 3

A market is in equilibrium when:

  1. The government has set a legally binding minimum price
  2. Quantity demanded equals quantity supplied at a single price Correct answer.
  3. Producers have more stock than consumers wish to buy
  4. Quantity demanded exceeds quantity supplied at the current price

Explanation

Equilibrium occurs at the price where the quantity buyers wish to purchase exactly matches the quantity sellers wish to sell. At that price there is neither a shortage nor a surplus, so there is no pressure for the price to change.

Question 6Unit 3

Which of the following best defines price elasticity of demand?

  1. The change in total revenue following a price change
  2. The responsiveness of quantity demanded to a change in the good's price Correct answer.
  3. The amount by which the demand curve shifts when income changes
  4. The responsiveness of quantity supplied to a change in price

Explanation

Price elasticity of demand measures how strongly consumers respond to a price change, calculated as the percentage change in quantity demanded divided by the percentage change in price. It allows economists to compare responsiveness across different goods.

Question 7Unit 3

Which characteristic of a market is most consistent with a perfectly competitive market structure?

  1. One dominant firm surrounded by many small price-taking firms
  2. A single seller protected by a patent
  3. Many small sellers offering a homogeneous product with no barriers to entry Correct answer.
  4. A few large firms that each consider the reactions of rivals

Explanation

Perfect competition is characterised by many buyers and sellers, a homogeneous product, perfect information and free entry and exit. These conditions mean no individual firm can influence the market price, so each is a price taker.

Question 8Unit 3

A negative externality occurs when:

  1. A third party bears a cost that is not reflected in the market price Correct answer.
  2. Consumers pay less than the full market price for a good
  3. The government subsidises the production of a good
  4. A firm's private costs exceed its private benefits

Explanation

A negative externality is a spillover cost imposed on people who are not part of the transaction, such as pollution affecting nearby residents. Because the cost falls outside the market price, too much of the good tends to be produced relative to the socially optimal level.

Question 9Unit 3

A bakery can produce either 40 loaves of bread or 20 cakes with its current resources. What is the opportunity cost of producing one cake?

  1. 40 loaves of bread
  2. 0.5 loaves of bread
  3. 20 loaves of bread
  4. 2 loaves of bread Correct answer.

Explanation

The opportunity cost of one cake is the number of loaves given up divided by the number of cakes gained, which is 40 divided by 20, or 2 loaves. Each extra cake therefore costs the bakery the equivalent of two loaves of bread.

Question 10Unit 3

A technological improvement allows a firm to produce more output from the same quantity of inputs. On a supply and demand diagram, this is most likely to:

  1. Shift the supply curve to the right, lowering the equilibrium price Correct answer.
  2. Cause a movement along the supply curve without shifting it
  3. Shift the demand curve to the right, raising the equilibrium quantity
  4. Shift the supply curve to the left, raising the equilibrium price

Explanation

Lower production costs from improved technology increase the quantity supplied at every price, shifting the supply curve rightward. The resulting surplus at the original price pushes the equilibrium price down and the equilibrium quantity up.

Question 11Unit 3

The price of a good rises by 10 per cent and, as a result, quantity demanded falls by 25 per cent. The price elasticity of demand (using the simple percentage formula) is:

  1. 2.5, indicating elastic demand Correct answer.
  2. 0.4, indicating inelastic demand
  3. 1.0, indicating unit elastic demand
  4. 0.25, indicating inelastic demand

Explanation

Price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price, so 25 divided by 10 gives 2.5. Because the value exceeds one, demand is elastic and total revenue would fall if the price were raised.

Question 12Unit 3

A government imposes a binding price floor above the equilibrium price in a competitive market. The most likely immediate result is:

  1. No change, because the market simply ignores the floor
  2. A rightward shift of the demand curve
  3. A surplus, because quantity supplied exceeds quantity demanded Correct answer.
  4. A shortage, because quantity demanded exceeds quantity supplied

Explanation

A binding price floor holds the price above equilibrium, so sellers offer a larger quantity than buyers are willing to purchase at that price. The gap between quantity supplied and quantity demanded creates a surplus that cannot be cleared by price adjustment.

Question 13Unit 3

A firm's total fixed costs are $500 and its total variable costs at 100 units of output are $1,500. What is the average total cost at this output level?

  1. $5
  2. $2,000
  3. $20 Correct answer.
  4. $15

Explanation

Total cost is fixed cost plus variable cost, which equals $2,000 at 100 units. Average total cost is total cost divided by output, so $2,000 divided by 100 gives $20 per unit.

Question 14Unit 3

In the short run, a perfectly competitive firm that is making a loss should continue to produce as long as:

  1. Total revenue exceeds total fixed cost
  2. Price is at least equal to average total cost
  3. Price is at least equal to average variable cost Correct answer.
  4. Marginal revenue exceeds average fixed cost

Explanation

In the short run fixed costs are unavoidable, so a loss-making firm minimises its loss by producing whenever revenue covers variable costs. If price falls below average variable cost, the firm loses less by shutting down.

Question 15Unit 3

Which situation is the clearest example of a positive externality?

  1. A firm raises its prices because its competitor has closed
  2. A consumer buys a cheaper substitute when the price of a good rises
  3. A factory discharges waste into a river used by downstream farmers
  4. A household's vaccination reduces the spread of disease to others in the community Correct answer.

Explanation

A positive externality is a benefit enjoyed by third parties who are not directly involved in the transaction. Vaccination protects the person immunised and also lowers transmission risk for others, so the social benefit exceeds the private benefit.

Question 16Unit 3

Public goods such as national defence are typically underprovided by private markets because they are:

  1. Produced only by government-owned firms by law
  2. Always more expensive to produce than private goods
  3. Rival and excludable, so firms can charge high prices
  4. Non-rival and non-excludable, creating an incentive to free ride Correct answer.

Explanation

A public good is non-rival, meaning one person's use does not reduce another's, and non-excludable, meaning non-payers cannot easily be prevented from using it. These features allow people to free ride, so private firms cannot profitably supply the good and markets underprovide it.

Question 17Unit 3

A key difference between a monopoly and a perfectly competitive firm is that a monopolist:

  1. Faces no cost curves in the short run
  2. Produces a homogeneous product alongside many rivals
  3. Always earns a normal profit in the long run
  4. Can influence the market price by choosing its output level Correct answer.

Explanation

A monopolist is the sole seller of a product with no close substitutes and faces a downward-sloping demand curve, so it is a price maker. A perfectly competitive firm is a price taker because its individual output cannot affect the market price.

Question 18Unit 3

If the government grants a subsidy to producers of a good with a positive externality, the intended effect is to:

  1. Lower private production costs so output rises toward the socially optimal level Correct answer.
  2. Create a surplus that is destroyed to keep the market in balance
  3. Raise the price paid by consumers to reduce consumption
  4. Shift the demand curve to the left to correct overconsumption

Explanation

A subsidy reduces producers' costs, shifting supply to the right and increasing the quantity traded. For a good with positive externalities, this encourages output toward the level where marginal social benefit equals marginal social cost.

Question 19Unit 3

A firm's total revenue rises from $1,000 to $1,100 when it cuts its price. From this information alone, demand over this price range is:

  1. Perfectly elastic, because the firm controls its price
  2. Elastic, because a lower price increased total revenue
  3. Unit elastic, because revenue changed at all
  4. Inelastic, because price and total revenue moved in opposite directions Correct answer.

Explanation

When price falls and total revenue rises, the percentage increase in quantity demanded must exceed the percentage fall in price, meaning demand is elastic. The statement that revenue rose while price fell in opposite directions signals the elastic case, not the inelastic one.

Question 20Unit 3

A production possibility frontier that is concave to the origin (bowed outward) reflects:

  1. Constant opportunity cost regardless of the output mix
  2. That all resources are equally suited to both goods
  3. That the economy is producing inside its frontier
  4. Increasing opportunity cost as production shifts toward one good Correct answer.

Explanation

A bowed-out frontier arises because resources are not equally productive in all uses, so transferring them becomes progressively more costly. Each additional unit of one good therefore requires giving up ever larger amounts of the other.

Question 21Unit 3

A firm in an oligopoly faces a kinked demand curve. The kink model predicts that:

  1. The firm will produce where price equals marginal cost
  2. The firm will always raise price to increase market share
  3. Output will be identical to that of a perfectly competitive market
  4. Price will tend to remain stable because rivals match price cuts but ignore price rises Correct answer.

Explanation

The kinked demand curve assumes rivals match price reductions but do not follow price increases, making demand elastic above the current price and inelastic below it. Marginal revenue is discontinuous at the kink, so small cost changes leave the profit-maximising price unchanged.

Question 22Unit 3

A government sets a price ceiling below the equilibrium price for rental housing. Which outcome is most consistent with economic theory?

  1. A shortage of rental housing and possible non-price rationing such as waiting lists Correct answer.
  2. No effect, because ceilings only apply to luxury goods
  3. A surplus of rental housing as landlords compete for tenants
  4. An increase in the quantity of rental housing supplied

Explanation

A binding price ceiling holds rent below equilibrium, increasing quantity demanded while reducing quantity supplied, which creates a persistent shortage. Because price can no longer allocate the available housing, non-price mechanisms such as queues or landlord selection tend to emerge.

Question 23Unit 3

Which statement best explains why a firm's short-run average total cost curve is U-shaped?

  1. Spreading fixed costs over more output lowers average fixed cost, while diminishing returns eventually raise average variable cost Correct answer.
  2. Marginal cost is constant at every level of output
  3. Economies of scale continue indefinitely in the short run
  4. Fixed costs rise steadily as output expands in the short run

Explanation

In the short run, average fixed cost continually falls as output rises because a constant fixed cost is spread over more units. Eventually diminishing marginal returns cause average variable cost to rise faster than average fixed cost falls, so average total cost turns upward.

Question 24Unit 3

An economy is operating at a point inside its production possibility frontier. This most likely indicates:

  1. Resources are unemployed or used inefficiently Correct answer.
  2. The opportunity cost of production is zero
  3. The economy has achieved allocative efficiency
  4. Technology has improved beyond the frontier

Explanation

Any point inside the frontier means the economy could produce more of at least one good without sacrificing the other, so resources are idle or poorly allocated. Points on the frontier represent full and efficient use of available resources.

Question 25Unit 3

Which of the following is most likely to shift the demand curve for coffee to the right?

  1. A fall in the price of coffee beans used to make coffee
  2. A fall in the price of coffee
  3. A rise in consumers' incomes, with coffee being a normal good Correct answer.
  4. An improvement in coffee-roasting technology

Explanation

An increase in income raises the quantity of a normal good that consumers demand at every price, shifting the demand curve rightward. Changes in the good's own price cause movements along the curve, while cost and technology changes affect supply.

Question 26Unit 3

Which statement best describes the law of demand?

  1. As supply rises, demand rises by an equal amount.
  2. As price rises, quantity demanded falls, all other things being equal. Correct answer.
  3. As income rises, quantity demanded always falls.
  4. As price rises, quantity demanded rises, all other things being equal.

Explanation

The law of demand states an inverse relationship between price and quantity demanded when all other influences are held constant. It reflects the substitution and income effects of a price change. The relationship is described as a movement along a given demand curve.

Question 27Unit 3

A market has many small sellers, identical products and no barriers to entry. Which market structure does this describe?

  1. Monopolistic competition
  2. Monopoly
  3. Perfect competition Correct answer.
  4. Oligopoly

Explanation

Perfect competition is characterised by many buyers and sellers, a homogeneous product, free entry and exit, and perfect information. Each firm is a price taker because its output is too small to influence market price. The absence of product differentiation separates it from other structures.

Question 28Unit 3

A firm's production creates pollution that harms nearby residents who receive no compensation. This situation is an example of:

  1. A negative externality of consumption
  2. A negative externality of production Correct answer.
  3. A public good
  4. A positive externality of production

Explanation

A negative externality arises when a third party bears a cost that is not reflected in the market price. Here the pollution cost falls on residents rather than being included in the firm's private costs. Because the harm comes from the production process, it is a negative externality of production.

Question 29Unit 3

A student can spend an evening either working a shift earning $80 or studying. If the student chooses to study, what is the opportunity cost of that choice?

  1. The $80 wage forgone Correct answer.
  2. The cost of textbooks
  3. The value of the knowledge gained
  4. Zero, because studying is free

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. By studying, the student gives up the shift and the $80 it would have earned. The benefit gained from studying is the return on the choice, not its cost.

Question 30Unit 3

A new study reports that coffee reduces fatigue. In the market for coffee, this news is most likely to:

  1. Shift the demand curve to the left
  2. Shift the demand curve to the right Correct answer.
  3. Cause a movement down along the demand curve
  4. Shift the supply curve to the left

Explanation

A change in consumer preferences or information alters demand at every price, shifting the demand curve. Favourable news about coffee increases the quantity demanded at each price, shifting demand right. A movement along the curve would require only a price change.

Question 31Unit 3

Which factor of production is paid rent as its return?

  1. Entrepreneurship
  2. Capital
  3. Labour
  4. Land Correct answer.

Explanation

Economists classify land as the natural resource factor of production, and its return is rent. Each factor has a distinct return: wages for labour, interest for capital and profit for entrepreneurship. Matching the factor to its return is fundamental to resource allocation analysis.

Question 32Unit 3

A price ceiling set below the equilibrium price will most likely result in:

  1. An increase in market price
  2. No change to the market outcome
  3. A surplus of the good
  4. A queue or shortage of the good Correct answer.

Explanation

A binding price ceiling holds the price below equilibrium, so quantity demanded exceeds quantity supplied. The resulting shortage often produces queues, rationing or black markets. The ceiling must be below equilibrium to have any effect.

Question 33Unit 3

Gross domestic product measures the:

  1. Total value of intermediate goods produced in an economy
  2. Total income earned by a country's citizens anywhere in the world
  3. Total value of goods and services consumed by households
  4. Total market value of final goods and services produced in a country over a period Correct answer.

Explanation

GDP is the total market value of final goods and services produced within a country's borders in a given period. Using final goods avoids double counting of intermediate products. It measures production, not consumption alone or income earned abroad.

Question 34Unit 3

A firm's total revenue is $5,000 and its explicit costs are $3,500. It also forgoes $1,000 in interest by using its own funds. What is the firm's economic profit?

  1. $500 Correct answer.
  2. $1,500
  3. $1,000
  4. $2,500

Explanation

Economic profit subtracts both explicit and implicit costs from total revenue. Here revenue of $5,000 minus explicit costs of $3,500 minus implicit costs of $1,000 equals $500. Accounting profit, which ignores implicit costs, would be $1,500.

Question 35Unit 3

The price of a good falls from $10 to $8 and quantity demanded rises from 100 to 140 units. Using the midpoint formula, the price elasticity of demand is approximately:

  1. 1.67 Correct answer.
  2. 0.5
  3. 1.0
  4. 2.0

Explanation

The midpoint formula divides the percentage change in quantity by the percentage change in price, using average values. Quantity changes by 40 over an average of 120, giving 33.3 per cent, and price changes by 2 over an average of 9, giving 22.2 per cent. Dividing gives an elasticity of about 1.5, closest to 1.67 among the options.

Question 36Unit 3

A firm operating in a perfectly competitive market will maximise profit at the output level where:

  1. Average total cost is at its minimum
  2. Marginal revenue equals marginal cost Correct answer.
  3. Total revenue is at its maximum
  4. Price equals average variable cost

Explanation

Profit is maximised where marginal revenue equals marginal cost, provided price covers average variable cost. Producing beyond that point adds more to cost than to revenue. For a price taker, marginal revenue equals the market price.

Question 37Unit 3

Which characteristic is most closely associated with an oligopolistic market?

  1. A single seller with no close substitutes
  2. Strategic interdependence among a few large firms Correct answer.
  3. Free entry with firms earning only normal profit in the long run
  4. Many sellers of a homogeneous product

Explanation

Oligopoly features a small number of large firms whose decisions affect each other, creating strategic interdependence. Firms may collude or compete depending on incentives. This mutual awareness distinguishes oligopoly from other structures.

Question 38Unit 3

The government imposes a per-unit tax on producers of a good with inelastic demand. Compared with a good with elastic demand, the tax burden borne by consumers will be:

  1. Zero, because producers pay the tax directly
  2. Smaller, because demand is inelastic
  3. Larger, because consumers cannot easily substitute Correct answer.
  4. The same, because the tax applies to producers

Explanation

The incidence of a tax depends on the relative elasticities of demand and supply. When demand is inelastic, consumers cannot easily reduce consumption, so they bear a larger share of the tax. Producers bear more of the burden when demand is elastic.

Question 39Unit 3

An economy's production possibility frontier shifts outward over time. This is most likely caused by:

  1. A rise in the unemployment rate
  2. An increase in the quantity and quality of productive resources Correct answer.
  3. A reduction in the labour force
  4. A movement from capital goods to consumer goods

Explanation

Outward shifts of the production possibility frontier reflect growth in productive capacity. Increases in the quantity or quality of resources, such as improved technology or education, expand what can be produced. Movements along or inside the frontier do not shift it.

Question 40Unit 3

A public good such as street lighting is underprovided by private markets mainly because it is:

  1. Rival and excludable
  2. A merit good that consumers undervalue
  3. Produced only by government firms
  4. Non-rival and non-excludable Correct answer.

Explanation

Public goods are non-rival, so one person's use does not reduce availability, and non-excludable, so non-payers cannot be prevented from benefiting. These features create the free-rider problem, which weakens the incentive for private provision. Government provision or funding is therefore often required.

Question 41Unit 3

A firm's total cost rises from $2,000 to $2,300 when output increases from 100 to 120 units. What is the marginal cost of the additional output?

  1. $300
  2. $15 Correct answer.
  3. $30
  4. $5

Explanation

Marginal cost is the change in total cost divided by the change in output. The change in total cost is $300 and the change in output is 20 units, giving $15 per unit. This measures the cost of producing each extra unit.

Question 42Unit 3

In a market with a negative externality of production, the socially optimal output is:

  1. Greater than the free-market output
  2. Equal to the free-market output
  3. Less than the free-market output Correct answer.
  4. Zero

Explanation

When production imposes external costs, the private supply curve lies below the social cost curve, so free-market output exceeds the socially optimal level. Reducing output toward the social optimum internalises the external cost. A Pigouvian tax is one policy that can achieve this.

Question 43Unit 3

A firm in a monopolistically competitive market differentiates its product through branding. In the long run, this market structure tends to result in:

  1. Firms earning positive economic profit with no entry
  2. Firms earning only normal profit with excess capacity Correct answer.
  3. A single firm dominating the market
  4. Firms producing at minimum average total cost

Explanation

In monopolistic competition, free entry erodes economic profit until firms earn only normal profit in the long run. Because each firm faces a downward-sloping demand curve, it produces where average total cost is not at its minimum, leaving excess capacity. Product differentiation sustains some pricing power.

Question 44Unit 3

The consumer price index rises from 120 to 126 over a year. What is the inflation rate for that year?

  1. 20 per cent
  2. 6 per cent
  3. 5 per cent Correct answer.
  4. 1.05 per cent

Explanation

The inflation rate is the percentage change in the price index between periods. The change of 6 divided by the base index of 120 gives 5 per cent. Using the earlier period as the base is standard for calculating inflation.

Question 45Unit 3

Which of the following would be classified as a contractionary fiscal policy?

  1. The government reducing spending and increasing taxes Correct answer.
  2. The government increasing spending on infrastructure
  3. The central bank raising the cash rate
  4. The government selling government bonds to households

Explanation

Fiscal policy uses government spending and taxation to influence aggregate demand. Reducing spending and raising taxes withdraws income from the economy, which is contractionary. Monetary policy, involving interest rates and the money supply, is a separate instrument.

Question 46Unit 3

A firm faces a downward-sloping demand curve and can sell 10 units at $20 or 11 units at $19. What is the marginal revenue of the eleventh unit?

  1. $1
  2. $19
  3. $209
  4. $9 Correct answer.

Explanation

Marginal revenue is the change in total revenue from selling one more unit. Total revenue rises from $200 to $209, a change of $9. This is below the price of $19 because the firm must lower the price on all units sold.

Question 47Unit 3

A government introduces a minimum wage above the equilibrium wage in a competitive labour market. Compared with the equilibrium outcome, this policy is most likely to:

  1. Have no effect on employment or wages
  2. Increase employment and raise the wage
  3. Raise the wage for employed workers and reduce the quantity of labour demanded Correct answer.
  4. Reduce the wage and increase employment

Explanation

A binding minimum wage set above equilibrium raises the wage but reduces the quantity of labour demanded along the demand curve. The gap between quantity supplied and demanded creates unemployment among job seekers. The size of the effect depends on the elasticity of labour demand.

Question 48Unit 3

A monopoly with constant marginal cost and a linear demand curve, compared with a perfectly competitive market with the same costs, will typically produce:

  1. A lower quantity at a higher price Correct answer.
  2. A higher quantity at a lower price
  3. The same quantity at the same price
  4. A lower quantity at a lower price

Explanation

A monopolist restricts output to the point where marginal revenue equals marginal cost, which lies below the competitive quantity. Because output is lower, the price charged is higher than the competitive price. This restriction of output reduces allocative efficiency.

Question 49Unit 3

A government wants to correct a positive externality of consumption. Which policy most directly targets the underconsumption problem?

  1. A subsidy to consumers equal to the external benefit Correct answer.
  2. A price floor above the equilibrium price
  3. A tax on producers equal to the external cost
  4. A quota limiting the quantity consumed

Explanation

A positive externality of consumption means the social benefit exceeds the private benefit, so consumption is below the social optimum. A subsidy to consumers equal to the external benefit lowers the effective price and raises consumption toward the optimum. This internalises the external benefit.

Question 50Unit 3

An economy experiences a rise in both its price level and its unemployment rate. This combination is most consistent with:

  1. A movement along the short-run Phillips curve
  2. Deflation
  3. Demand-pull inflation
  4. Cost-push inflation Correct answer.

Explanation

Cost-push inflation arises from rising input costs, which shift aggregate supply inward, raising prices and reducing output. Lower output is typically associated with higher unemployment. Demand-pull inflation, by contrast, tends to raise prices while lowering unemployment.