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VCE Economics study materials
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VCE Economics practice questions

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Question 1Unit 1: Economics – The Behaviour of Consumers and Businesses

Which of the following best defines opportunity cost?

  1. The total cost of producing an extra unit of output
  2. The difference between total revenue and total cost
  3. The money price paid for a good or service
  4. The value of the next best alternative forgone when a choice is made Correct answer.

Explanation

Opportunity cost is the value of the best alternative sacrificed whenever a resource is committed to one use rather than another. It exists because resources are scarce and every choice excludes alternatives. Money price and accounting costs are separate concepts from the forgone alternative.

Question 2Unit 1: Economics – The Behaviour of Consumers and Businesses

A production possibility frontier that is bowed outward from the origin reflects which situation?

  1. Increasing opportunity cost as production switches between goods Correct answer.
  2. Decreasing total output as more of both goods are produced
  3. Zero opportunity cost because resources are unlimited
  4. Constant opportunity cost as production switches between goods

Explanation

A concave (bowed-out) frontier shows that successively transferring resources toward one good requires giving up ever-larger amounts of the other. This happens because resources are not equally suited to every use. A straight-line frontier would instead indicate constant opportunity cost.

Question 3Unit 1: Economics – The Behaviour of Consumers and Businesses

Which factor of production earns rent as its income?

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

Explanation

The four factors of production are land, labour, capital and enterprise, and each receives a distinctive return. Land (natural resources) earns rent, labour earns wages, capital earns interest and enterprise earns profit. Matching the factor to its reward is the key to this question.

Question 4Unit 1: Economics – The Behaviour of Consumers and Businesses

A consumer's marginal utility from a good is falling as more units are consumed. If the price stays constant, what does rational choice predict?

  1. The consumer will buy additional units only while marginal utility exceeds the price Correct answer.
  2. The consumer will buy the good regardless of its price
  3. The consumer will keep buying more of the good indefinitely
  4. The consumer will stop buying as soon as total utility begins to rise

Explanation

Rational consumers compare the extra satisfaction from another unit with the extra cost of buying it. They continue purchasing while marginal utility is at least as great as the price, and stop once it falls below. Diminishing marginal utility therefore limits how much is bought at a given price.

Question 5Unit 1: Economics – The Behaviour of Consumers and Businesses

A demand curve for a normal good shifts to the right. Which change could cause this?

  1. A fall in consumers' average disposable income
  2. A successful advertising campaign that raises consumer preference for the good Correct answer.
  3. A technological improvement in how the good is produced
  4. A rise in the price of the good itself

Explanation

A rightward shift of demand means consumers want more of the good at every price. Non-price influences such as tastes, income, prices of related goods and population cause such shifts. Advertising that strengthens preferences is a classic taste shifter.

Question 6Unit 1: Economics – The Behaviour of Consumers and Businesses

The price of coffee pods falls and, as a result, the demand for coffee machines rises. What does this indicate about the two goods?

  1. They are unrelated goods
  2. They are substitute goods
  3. They are inferior goods
  4. They are complementary goods Correct answer.

Explanation

Goods are complements when they are consumed together, so a fall in the price of one raises demand for the other. The cross-price relationship here is negative. Substitutes would show the opposite pattern, with a price fall in one reducing demand for the other.

Question 7Unit 1: Economics – The Behaviour of Consumers and Businesses

A supply curve for a product shifts to the left. Which event is most consistent with this shift?

  1. A new tax imposed on each unit produced Correct answer.
  2. An increase in the market price of the product
  3. A fall in the cost of raw materials used in production
  4. An increase in consumer incomes

Explanation

Supply shifts reflect changes in the conditions of production other than the good's own price. Higher input costs, taxes or reduced subsidies raise costs at every output level and shift supply left. A change in the product's own price instead moves along the existing curve.

Question 8Unit 1: Economics – The Behaviour of Consumers and Businesses

In a free market with no government intervention, a shortage occurs when the current price is:

  1. equal to the average cost of production
  2. below the equilibrium price Correct answer.
  3. above the equilibrium price
  4. equal to the equilibrium price

Explanation

At a price below equilibrium, quantity demanded exceeds quantity supplied, creating excess demand. Competitive bidding then pushes the price upward until the two are equal. Above equilibrium the reverse occurs, producing a surplus.

Question 9Unit 1: Economics – The Behaviour of Consumers and Businesses

A government sets a legally enforced minimum price for a good above its equilibrium level. What is the likely result?

  1. No effect, because price controls do not alter market outcomes
  2. Equilibrium restored, because the market clears at the legal price
  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, where suppliers offer more than buyers wish to purchase. The result is excess supply, or a surplus. Sellers may then face unsold stock unless the government purchases the excess or restricts supply.

Question 10Unit 1: Economics – The Behaviour of Consumers and Businesses

A price elasticity of demand coefficient of 0.4 for a product means that demand is:

  1. elastic, so total revenue rises when price falls
  2. inelastic, so total revenue rises when price rises Correct answer.
  3. unit elastic, so total revenue is unchanged when price changes
  4. perfectly elastic, so quantity demanded is infinitely responsive

Explanation

Elasticity is measured as the percentage change in quantity demanded divided by the percentage change in price. A coefficient below one in absolute value indicates inelastic demand, where quantity responds proportionately less than price. Raising price then increases total revenue because the price gain outweighs the fall in sales.

Question 11Unit 1: Economics – The Behaviour of Consumers and Businesses

Which characteristic of a product is most likely to make its demand price inelastic?

  1. The product takes a large share of a consumer's budget
  2. The product is a luxury with many alternatives
  3. Many close substitutes are readily available
  4. The product is a necessity with few substitutes Correct answer.

Explanation

Demand tends to be inelastic when consumers have little choice but to keep buying, as with necessities and goods with few substitutes. Time horizon, budget share and the availability of alternatives all influence elasticity. Necessities with few substitutes are therefore the least responsive to price.

Question 12Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's fixed costs are $200 and each unit it produces adds $5 to total cost. What is the total cost of producing 40 units?

  1. $205
  2. $400 Correct answer.
  3. $800
  4. $200

Explanation

Total cost equals fixed cost plus total variable cost. Variable cost here is 40 units multiplied by $5, which is $200, and adding fixed cost of $200 gives $400. Fixed costs do not change with output, so they are added only once.

Question 13Unit 1: Economics – The Behaviour of Consumers and Businesses

As a firm expands output in the short run, average fixed cost:

  1. falls and then rises, following the marginal cost curve
  2. falls continuously because the same fixed cost is spread over more units Correct answer.
  3. remains constant at every level of output
  4. rises continuously because fixed costs increase with output

Explanation

Average fixed cost equals total fixed cost divided by output. Because total fixed cost is constant in the short run, dividing it by a larger quantity steadily reduces the average. This is why average fixed cost keeps falling and never turns upward.

Question 14Unit 1: Economics – The Behaviour of Consumers and Businesses

Diminishing marginal returns begin when:

  1. fixed costs start to rise
  2. marginal product of the variable input starts to fall Correct answer.
  3. average total cost reaches its minimum
  4. total output starts to fall

Explanation

Diminishing returns occur when adding further units of a variable input to a fixed input yields smaller additions to output. Marginal product therefore peaks and then declines. Total output may still be rising while marginal product falls.

Question 15Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's total revenue is $500 and its total cost is $450. What is its profit?

  1. $500
  2. $50 Correct answer.
  3. $950
  4. $450

Explanation

Profit is total revenue minus total cost. Subtracting $450 from $500 leaves $50. This figure represents economic profit only if total cost includes the opportunity cost of the owner's resources.

Question 16Unit 1: Economics – The Behaviour of Consumers and Businesses

In a perfectly competitive market, an individual firm is best described as:

  1. a price maker facing a downward-sloping demand curve
  2. a price taker facing a horizontal demand curve at the market price Correct answer.
  3. a price leader whose output sets the market price
  4. a monopolist protected by high barriers to entry

Explanation

Perfect competition assumes many small sellers, identical products and perfect information, so no single firm can influence price. Each firm therefore faces a horizontal demand curve at the market price and is a price taker. Its output decision affects only its own sales quantity, not the price.

Question 17Unit 1: Economics – The Behaviour of Consumers and Businesses

Which feature most clearly distinguishes an oligopoly from monopolistic competition?

  1. Oligopolists face no barriers to entry
  2. The number of sellers is small enough that each firm must consider rivals' reactions Correct answer.
  3. Firms in monopolistic competition cannot earn any profit
  4. Products in oligopoly are always homogeneous

Explanation

An oligopoly has few enough sellers that each firm's decisions measurably affect the others, creating strategic interdependence. Monopolistic competition has many small firms, each too small to influence rivals. Product differentiation and entry conditions vary within both structures.

Question 18Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's marginal cost is $8 and its marginal revenue is $12 at its current output. To increase profit, the firm should:

  1. keep output unchanged, because the firm is already maximising profit
  2. reduce output, because marginal revenue exceeds marginal cost
  3. expand output, because each extra unit adds more to revenue than to cost Correct answer.
  4. raise its price above the market level

Explanation

Profit is maximised where marginal revenue equals marginal cost. While marginal revenue exceeds marginal cost, producing another unit adds more to revenue than to cost and raises total profit. The firm should therefore expand until the two are equal.

Question 19Unit 1: Economics – The Behaviour of Consumers and Businesses

A business owner gives up a salary of $60,000 and interest of $5,000 on savings to run her own firm. These forgone amounts are best described as:

  1. implicit costs that form part of economic cost Correct answer.
  2. fixed costs that vary with output
  3. explicit costs recorded in the firm's accounts
  4. sunk costs that cannot affect decisions

Explanation

Implicit costs are the opportunity costs of resources the owner already controls, such as forgone wages and forgone interest. Economic cost includes both explicit payments and these implicit costs. Accounting profit ignores implicit costs, which is why it can exceed economic profit.

Question 20Unit 1: Economics – The Behaviour of Consumers and Businesses

A subsidy paid to producers of a good will most likely:

  1. shift the supply curve to the right and lower the market price Correct answer.
  2. shift the supply curve to the left and raise the market price
  3. shift the demand curve to the right and raise the market price
  4. leave both price and quantity unchanged

Explanation

A subsidy lowers the effective cost of production, so producers are willing to supply more at every price. The supply curve shifts right and the equilibrium price falls while quantity rises. The benefit is shared between producers and consumers depending on elasticities.

Question 21Unit 1: Economics – The Behaviour of Consumers and Businesses

Which situation describes a negative externality?

  1. A consumer enjoys a meal purchased at a restaurant
  2. A firm's training programme raises its workers' future productivity
  3. A factory's emissions impose health costs on nearby residents who are not compensated Correct answer.
  4. A firm lowers its costs by improving efficiency

Explanation

A negative externality is a cost imposed on third parties who are not part of the transaction and receive no compensation. Pollution from a factory is the standard example because the harm falls on residents. Because the firm ignores this cost, output tends to exceed the socially optimal level.

Question 22Unit 1: Economics – The Behaviour of Consumers and Businesses

A good is non-excludable and non-rival in consumption. Such a good is classified as:

  1. a private good
  2. a public good Correct answer.
  3. a merit good
  4. a common resource

Explanation

Non-excludability means people cannot be prevented from consuming the good, and non-rivalry means one person's use does not reduce availability to others. Goods with both characteristics are public goods, which markets tend to underprovide because of free-riding. Common resources are rival but non-excludable.

Question 23Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's production process generates pollution, but it pays nothing for the damage. Compared with the socially optimal output, the firm will most likely:

  1. produce more than the socially optimal quantity Correct answer.
  2. cease production entirely
  3. produce less than the socially optimal quantity
  4. produce exactly the socially optimal quantity

Explanation

When a firm ignores the external cost of pollution, its private cost is below the true social cost. It therefore produces and sells a quantity beyond the level where marginal social cost equals marginal social benefit. The gap is the deadweight loss caused by the externality.

Question 24Unit 1: Economics – The Behaviour of Consumers and Businesses

Which of the following is a normative economic statement?

  1. The government should increase spending on public transport Correct answer.
  2. Total output grew by 2 per cent last year
  3. An increase in the price of a good reduces the quantity demanded
  4. The unemployment rate rose last quarter

Explanation

Normative statements express value judgements about what ought to be and cannot be tested against evidence alone. Positive statements are factual claims that can be verified or refuted with data. Words such as 'should' typically signal a normative claim.

Question 25Unit 1: Economics – The Behaviour of Consumers and Businesses

A consumer's budget is $120, good X costs $10 and good Y costs $20. What is the maximum quantity of good Y the consumer can buy if she spends her entire budget on Y?

  1. 12 units
  2. 6 units Correct answer.
  3. 10 units
  4. 20 units

Explanation

The maximum quantity of a good is found by dividing the budget by that good's price. Dividing $120 by $20 gives 6 units of good Y. Dividing by the price of X would instead give the intercept on the X axis.

Question 26Unit 1: Economics – The Behaviour of Consumers and Businesses

Which statement best describes the economic problem of scarcity?

  1. Only developing countries experience limited resources.
  2. Resources are unlimited but consumer wants are limited.
  3. Wants are unlimited while the resources available to satisfy them are limited. Correct answer.
  4. Scarcity disappears once a country becomes wealthy.

Explanation

Scarcity is the fundamental condition in which human wants are effectively unlimited but the resources used to satisfy them are finite. Because resources are limited, individuals and societies must choose how to allocate them, which creates the need for the study of economics.

Question 27Unit 1: Economics – The Behaviour of Consumers and Businesses

A student has $30 and must choose between a concert ticket costing $30 or a textbook costing $30. She buys the concert ticket. What is the opportunity cost of her decision?

  1. Nothing, because she paid a market price
  2. The concert ticket itself
  3. The textbook she could have bought instead Correct answer.
  4. The $30 she spent on the ticket

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. Because the textbook was the alternative she gave up, its value represents the opportunity cost of attending the concert.

Question 28Unit 1: Economics – The Behaviour of Consumers and Businesses

A production possibility frontier is drawn as a straight line rather than a bowed-out curve. What does this indicate?

  1. Resources are completely unemployed.
  2. The economy cannot produce both goods at the same time.
  3. Opportunity cost increases as more of either good is produced.
  4. Opportunity cost is constant as production shifts between the two goods. Correct answer.

Explanation

The shape of a production possibility frontier reflects how opportunity cost changes along the curve. A straight line means each additional unit of one good requires giving up a constant amount of the other, so opportunity cost is constant.

Question 29Unit 1: Economics – The Behaviour of Consumers and Businesses

Which factor of production earns rent as its reward?

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

Explanation

In factor markets each factor of production receives a distinct reward. Land, meaning all natural resources, earns rent, while labour earns wages, capital earns interest and enterprise earns profit.

Question 30Unit 1: Economics – The Behaviour of Consumers and Businesses

A market has many buyers and sellers, identical products, and no individual participant able to influence the price. Which market structure is described?

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

Explanation

Perfect competition is characterised by many small firms selling homogeneous products, free entry and exit, and price-taking behaviour. No single buyer or seller has enough market share to affect the market price.

Question 31Unit 1: Economics – The Behaviour of Consumers and Businesses

A consumer gains 20 units of satisfaction from the first slice of pizza and 12 units from the second. What does this illustrate?

  1. Negative total utility
  2. Increasing marginal utility
  3. Diminishing marginal utility Correct answer.
  4. Zero total utility

Explanation

Diminishing marginal utility means each additional unit consumed adds less satisfaction than the previous unit. As total satisfaction rises from 20 to 32, the extra satisfaction from the second slice falls, which is the definition of diminishing marginal utility.

Question 32Unit 1: Economics – The Behaviour of Consumers and Businesses

What is the main purpose of a firm keeping accounting records of its costs and revenues?

  1. To guarantee that demand will increase
  2. To set the market price for all competitors
  3. To measure whether it is making a profit or loss Correct answer.
  4. To eliminate all fixed costs

Explanation

Recording costs and revenues allows a firm to calculate profit, which is total revenue minus total cost. This information helps owners assess performance and make decisions about production and pricing.

Question 33Unit 1: Economics – The Behaviour of Consumers and Businesses

In a circular flow model of the economy, what flows from households to firms through factor markets?

  1. Imports
  2. Factors of production Correct answer.
  3. Goods and services
  4. Government taxes

Explanation

Households supply factors of production such as labour and land to firms through factor markets. In return they receive factor incomes, which they use to buy goods and services in product markets.

Question 34Unit 1: Economics – The Behaviour of Consumers and Businesses

The price of a good rises from $10 to $12 and, as a result, quantity demanded falls from 100 to 90 units. Using the midpoint formula, what is the price elasticity of demand?

  1. 0.58 Correct answer.
  2. 1.73
  3. 1.00
  4. 0.10

Explanation

The midpoint formula divides the percentage change in quantity by the percentage change in price. Quantity changes by 10 over an average of 95, giving about 10.5 per cent, while price changes by 2 over an average of 11, giving about 18.2 per cent; dividing yields roughly 0.58.

Question 35Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm finds that the cross-price elasticity of demand between its product and a rival's product is positive and large. What does this suggest about the two goods?

  1. They are complements.
  2. They are inferior goods.
  3. They are close substitutes. Correct answer.
  4. They are unrelated goods.

Explanation

A positive cross-price elasticity means that when the price of one good rises, demand for the other good also rises. This is typical of substitutes, because consumers switch toward the relatively cheaper alternative.

Question 36Unit 1: Economics – The Behaviour of Consumers and Businesses

A consumer's income rises by 10 per cent and her purchases of a particular good fall by 4 per cent. What type of good is this?

  1. A luxury good
  2. A Giffen good
  3. An inferior good Correct answer.
  4. A normal good

Explanation

Income elasticity of demand measures how quantity demanded responds to a change in income. A negative income elasticity, as here, indicates an inferior good, for which demand falls as income rises.

Question 37Unit 1: Economics – The Behaviour of Consumers and Businesses

A bakery currently sells 200 loaves a day at $4 each. It raises the price to $4.40 and sales fall to 180 loaves. What happens to total revenue?

  1. Total revenue falls from $800 to $792. Correct answer.
  2. Total revenue falls to $720.
  3. Total revenue stays exactly the same.
  4. Total revenue rises from $800 to $792.

Explanation

Total revenue is price multiplied by quantity sold. Initially it is $800, and after the price rise it is $4.40 multiplied by 180, which equals $792, so revenue falls slightly because demand is elastic over this range.

Question 38Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm produces 100 units with total cost of $2,000 and 101 units with total cost of $2,030. What is the marginal cost of the 101st unit?

  1. $30 Correct answer.
  2. $0.30
  3. $2,030
  4. $20

Explanation

Marginal cost is the change in total cost resulting from producing one additional unit. Total cost rises from $2,000 to $2,030, so the extra cost of the 101st unit is $30.

Question 39Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's average total cost is $15 and its average variable cost is $11 at its current output. What is its total fixed cost if it produces 200 units?

  1. $3,000
  2. $4
  3. $2,200
  4. $800 Correct answer.

Explanation

Average fixed cost equals average total cost minus average variable cost, giving $4 per unit. Multiplying this by 200 units yields total fixed cost of $800.

Question 40Unit 1: Economics – The Behaviour of Consumers and Businesses

Why does the short-run average total cost curve typically fall and then rise as output increases?

  1. Fixed costs increase steadily with every extra unit produced.
  2. Variable costs are always zero in the short run.
  3. Spreading fixed costs over more output initially lowers average cost, but diminishing returns eventually raise it. Correct answer.
  4. Firms always face constant returns to scale in the short run.

Explanation

In the short run some inputs are fixed, so average fixed cost falls continuously as output expands, pulling average total cost down. Eventually diminishing marginal returns cause marginal cost to rise sharply, which pushes average total cost back up.

Question 41Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm sells its output in a perfectly competitive market at $10 per unit. Its marginal cost is $10 at an output of 50 units and rising. What output maximises profit?

  1. 50 units, where price equals marginal cost Correct answer.
  2. Any output, because the firm is a price taker
  3. More than 50 units, because price exceeds marginal cost
  4. Zero units, because the firm earns no profit

Explanation

A perfectly competitive firm maximises profit where marginal revenue, equal to the market price, equals marginal cost. Since price and marginal cost are both $10 at 50 units and marginal cost is rising, this output is the profit-maximising level.

Question 42Unit 1: Economics – The Behaviour of Consumers and Businesses

Which feature is a barrier to entry that helps a monopoly maintain its market power?

  1. Ownership of a key natural resource Correct answer.
  2. Many small firms selling identical products
  3. Perfect information among all buyers
  4. Freedom of firms to enter and exit

Explanation

Barriers to entry protect a monopolist from new competitors and allow it to sustain above-normal profits. Control of an essential input, such as a key natural resource, is one such barrier.

Question 43Unit 1: Economics – The Behaviour of Consumers and Businesses

Two large supermarkets in a town watch each other's pricing decisions closely and rarely change prices without considering the other's likely response. This behaviour is most characteristic of which market structure?

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

Explanation

An oligopoly is a market dominated by a few large firms whose decisions are interdependent. Strategic interaction, where each firm considers rivals' reactions before acting, is a defining feature of oligopoly.

Question 44Unit 1: Economics – The Behaviour of Consumers and Businesses

Which example best illustrates a positive externality?

  1. A household planting trees that improve the neighbourhood's air quality Correct answer.
  2. A driver paying a toll to use a highway
  3. A firm charging a price above its marginal cost
  4. A factory discharging untreated waste into a river

Explanation

A positive externality occurs when a third party benefits from an activity without paying for it. Planting trees improves air quality for neighbours who did not fund the trees, so the social benefit exceeds the private benefit.

Question 45Unit 1: Economics – The Behaviour of Consumers and Businesses

A public park is available to everyone at no charge and one person's use does not reduce another person's enjoyment of it. Which pair of characteristics describes this good?

  1. Excludable and rival
  2. Non-excludable and non-rival Correct answer.
  3. Excludable and non-rival
  4. Non-excludable and rival

Explanation

Non-excludability means people cannot easily be prevented from using the good, and non-rivalry means one person's consumption does not diminish what is available to others. Together these characteristics define a public good.

Question 46Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's production creates pollution that harms nearby residents, and the firm pays no compensation. Compared with the socially optimal output, the firm will most likely:

  1. Produce exactly the socially optimal quantity
  2. Produce more than the socially optimal quantity Correct answer.
  3. Stop producing entirely
  4. Produce less than the socially optimal quantity

Explanation

When a firm does not bear the external cost of pollution, its private cost is below the true social cost. As a result it perceives production as cheaper than it really is and produces beyond the socially optimal quantity, creating a deadweight loss.

Question 47Unit 1: Economics – The Behaviour of Consumers and Businesses

A government imposes a tax equal to the marginal external cost on a firm that pollutes. What is the intended effect?

  1. To increase the firm's output above the free-market level
  2. To shift the firm's private cost curve upward so output falls toward the social optimum Correct answer.
  3. To make the good non-excludable
  4. To eliminate all fixed costs in the industry

Explanation

A Pigouvian tax equal to the marginal external cost makes producers internalise the harm they impose on third parties. The firm's private marginal cost rises toward the social marginal cost, reducing output toward the socially efficient level.

Question 48Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm in monopolistic competition earns above-normal profit in the short run. What is the most likely long-run outcome?

  1. The market becomes a natural monopoly
  2. The firm's fixed costs fall to zero
  3. New firms enter, shifting the demand curve facing each existing firm leftward until normal profit is earned Correct answer.
  4. Existing firms collude to raise prices permanently

Explanation

Monopolistic competition features low barriers to entry, so short-run supernormal profits attract new entrants selling similar but differentiated products. Each firm's share of demand falls until price equals average total cost and only normal profit remains.

Question 49Unit 1: Economics – The Behaviour of Consumers and Businesses

A consumer is choosing between two goods and reaches a point where the marginal utility per dollar spent is higher on good X than on good Y. To maximise total utility, the consumer should:

  1. Buy more of both goods in equal amounts
  2. Stop purchasing both goods
  3. Buy more of good Y and less of good X
  4. Buy more of good X and less of good Y Correct answer.

Explanation

Utility is maximised when the marginal utility per dollar is equal across all goods. If good X delivers more satisfaction per dollar, reallocating spending toward X raises total utility until the ratios are equalised, subject to diminishing marginal utility.

Question 50Unit 1: Economics – The Behaviour of Consumers and Businesses

A firm's marginal revenue is below its marginal cost at its current output, and both curves are rising. What should the firm do to increase profit?

  1. Raise its price above the market level
  2. Increase output until marginal revenue equals marginal cost
  3. Reduce output until marginal revenue equals marginal cost Correct answer.
  4. Keep output unchanged because costs are rising

Explanation

Profit is maximised where marginal revenue equals marginal cost. When marginal cost exceeds marginal revenue, each additional unit adds more to cost than to revenue, so reducing output raises profit until the two are equal.