I85PREP
⌘ K
MATSEC AM Economics study materials
MATSEC AM Economics study resources

MATSEC AM Economics practice questions

One question at a time. Build your MATSEC AM Economics understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Basic economic concepts and the market mechanism

A student has just enough money to buy either a €40 economics textbook or a €40 concert ticket, but not both. The student buys the textbook. What is the opportunity cost of this choice?

  1. The textbook that is obtained
  2. The €40 spent on the textbook
  3. The combined value of the textbook and the concert ticket
  4. The concert ticket that is given up Correct answer.

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. The concert ticket is the alternative the student gives up, so it represents the opportunity cost. The €40 is the money price paid, while the textbook is the good actually obtained, not the forgone alternative.

Question 2Basic economic concepts and the market mechanism

Which change will cause a movement along the demand curve for coffee rather than a shift of the demand curve?

  1. A fall in the price of coffee Correct answer.
  2. A fall in the price of tea, a substitute for coffee
  3. A report claiming that coffee improves concentration
  4. A rise in consumers' disposable incomes

Explanation

A change in the good's own price causes a movement along its demand curve, changing quantity demanded. The other listed changes alter a non-price determinant such as income, tastes or the price of a substitute, so they shift the demand curve. Therefore only the fall in the price of coffee produces a movement along the curve.

Question 3Basic economic concepts and the market mechanism

In the market for a normal good, demand increases at the same time as supply decreases. Which statement about the new equilibrium is correct?

  1. Both price and quantity definitely rise.
  2. Price definitely rises, while quantity may rise, fall or remain unchanged. Correct answer.
  3. Price definitely falls, while quantity definitely rises.
  4. Quantity definitely rises, while price may rise, fall or remain unchanged.

Explanation

An increase in demand raises both equilibrium price and quantity, while a decrease in supply raises price but lowers quantity. Price is pushed upward by both changes, so it definitely rises. Quantity is pulled in opposite directions, so its final change depends on the relative sizes of the shifts.

Question 4Basic economic concepts and the market mechanism

A government imposes a price ceiling on bread that is set below the free-market equilibrium price. What is the likely result?

  1. A fall in demand, because consumers respond to the lower legal price
  2. No change, because a price ceiling does not affect market exchanges
  3. A surplus, because quantity supplied exceeds quantity demanded at the ceiling
  4. A shortage, because quantity demanded exceeds quantity supplied Correct answer.

Explanation

A price ceiling below equilibrium is binding because the market price is not allowed to rise to its equilibrium level. At the lower legal price, quantity demanded exceeds quantity supplied, creating a shortage. A price ceiling does not by itself shift the demand curve; it changes the quantity demanded along the curve.

Question 5Basic economic concepts and the market mechanism

A per-unit tax is imposed on producers in a market where demand is perfectly inelastic and supply slopes upward. Who bears the economic burden of the tax?

  1. Consumers and producers share the burden equally in all markets
  2. The government bears the burden through reduced tax revenue
  3. Producers bear the whole burden because the tax is legally collected from them at the point of sale
  4. Consumers bear the whole burden because quantity demanded does not fall Correct answer.

Explanation

With perfectly inelastic demand, quantity demanded does not change when the tax raises the price. The supply curve shifts upward by the tax, and the full tax is passed on to consumers as a higher equilibrium price. Producers receive the same net price as before, so the economic incidence falls entirely on consumers.

Question 6Basic economic concepts and the market mechanism

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

  1. Opportunity cost increases as more of one good is produced. Correct answer.
  2. Opportunity cost is zero for both goods.
  3. Opportunity cost is constant as the output mix changes.
  4. Opportunity cost falls as more of one good is produced.

Explanation

A bowed-out PPF reflects resources that are not equally suited to producing both goods. As production of one good expands, successively larger sacrifices of the other good are required, so marginal opportunity cost rises.

Question 7Basic economic concepts and the market mechanism

Which of these is a positive economic statement?

  1. The government should subsidise childcare to help working parents.
  2. The central bank ought to cut interest rates to support employment.
  3. It is unfair that some households pay a larger share of income in tax.
  4. Higher bus fares are likely to reduce the number of bus journeys. Correct answer.

Explanation

A positive statement is a factual claim about what is or what is likely to happen, and it can be tested against evidence. It does not prescribe what ought to be done or label an outcome as fair.

Question 8Basic economic concepts and the market mechanism

The cross-price elasticity of demand for coffee with respect to the price of tea is +0.8. Which interpretation is correct?

  1. They are substitutes, so a tea price rise raises coffee demand by 0.8%. Correct answer.
  2. They are unrelated, because a positive value shows no relationship.
  3. They are complements, so a rise in tea price reduces coffee demand by 0.8%.
  4. Coffee is inferior, so an income rise reduces coffee demand by 0.8%.

Explanation

A positive cross-price elasticity means that a rise in the price of tea increases demand for coffee, which is the defining relationship for substitutes. With a value of +0.8, a 1% rise in tea price raises coffee demand by 0.8%.

Question 9Basic economic concepts and the market mechanism

A consumer is willing to pay €18 for a concert ticket. She buys one when the market price is €12. What is her consumer surplus on the ticket?

  1. €30
  2. €6 Correct answer.
  3. €18
  4. €12

Explanation

Consumer surplus is the difference between the maximum a buyer is willing to pay and the price actually paid. Here it is €18 − €12 = €6.

Question 10Basic economic concepts and the market mechanism

When the price of a good falls from €10 to €8, quantity demanded rises from 100 to 140 units. Using the midpoint (arc) formula, what is the price elasticity of demand?

  1. 3.0
  2. 0.67
  3. 2.0
  4. 1.5 Correct answer.

Explanation

The midpoint formula gives a quantity change of 40/120 = 33.3% and a price change of 2/9 = 22.2%. Dividing the percentage quantity change by the percentage price change gives 1.5, so demand is elastic over this range.

Question 11Basic economic concepts and the market mechanism

Which of the following is classified as capital in economics?

  1. A baker's skill in decorating cakes
  2. A deposit of iron ore in the ground
  3. A delivery van owned by a bakery Correct answer.
  4. The money a customer uses to buy a loaf of bread

Explanation

In economics, capital means produced resources used to make other goods and services, such as a bakery's delivery van. Human skills are labour, natural deposits are land, and money is a medium of exchange rather than capital.

Question 12Basic economic concepts and the market mechanism

Which statement best defines a free good in economics?

  1. A good available in unlimited quantity at a zero price Correct answer.
  2. A good supplied by the government free of charge to consumers
  3. A good that consumers value but cannot afford
  4. A good whose market price is below equilibrium

Explanation

A free good is not scarce: it is available in unlimited quantity at a zero price, so using it involves no opportunity cost. Government-provided goods, affordable goods, and price-controlled goods can still be scarce economic goods.

Question 13Basic economic concepts and the market mechanism

A firm's supply of a product rises from 200 to 230 units when the price rises by 10%. Using the standard formula, what is the price elasticity of supply?

  1. 0.67
  2. 0.15
  3. 15
  4. 1.5 Correct answer.

Explanation

Price elasticity of supply equals percentage change in quantity supplied divided by percentage change in price. Quantity supplied rises by 30 units from 200, which is 15%, so PES = 15% divided by 10% = 1.5.

Question 14Basic economic concepts and the market mechanism

A government sets a legally enforced minimum price for wheat above the free-market equilibrium price. In the absence of government purchases, which outcome is predicted by standard supply and demand analysis?

  1. Quantity supplied falls below the equilibrium quantity because the higher price discourages production.
  2. Quantity demanded exceeds quantity supplied, creating a shortage.
  3. The market clears at the legal minimum because buyers and sellers must accept it.
  4. Quantity supplied exceeds quantity demanded, creating a surplus. Correct answer.

Explanation

A minimum price above equilibrium prevents the price from falling to the market-clearing level. At the higher price, quantity supplied exceeds quantity demanded, so a surplus appears unless the government buys the excess.

Question 15Basic economic concepts and the market mechanism

In a competitive market, the current price is above the equilibrium price. Which sequence best describes the market adjustment toward equilibrium?

  1. Government purchase of the surplus is required before the market price can adjust.
  2. Consumers bid the price upward, causing quantity supplied to rise and quantity demanded to fall.
  3. Producers cut price to clear unsold stock; quantity demanded rises and quantity supplied falls. Correct answer.
  4. Demand increases automatically to absorb the surplus, leaving the market price unchanged.

Explanation

At a price above equilibrium, quantity supplied exceeds quantity demanded, leaving unsold stock. Sellers reduce price, which raises quantity demanded and lowers quantity supplied until the surplus is eliminated.

Question 16Basic economic concepts and the market mechanism

In a free-market economy, the price mechanism primarily performs which function?

  1. It allocates scarce resources among competing uses through changes in prices. Correct answer.
  2. It removes the need for government to enforce property rights.
  3. It sets a fair distribution of income between households and firms.
  4. It ensures that every consumer can afford the goods that are produced.

Explanation

Prices act as signals and incentives in a market economy. When demand exceeds supply, price rises, which rations the good and encourages more production; when supply exceeds demand, price falls. This is how resources are allocated without central direction.

Question 17Basic economic concepts and the market mechanism

Which factor of production receives profit as its reward?

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

Explanation

In the standard classification, land earns rent, labour earns wages, capital earns interest, and enterprise earns profit. The entrepreneur combines the other factors and bears risk, so profit is the residual reward.

Question 18Basic economic concepts and the market mechanism

A good has an income elasticity of demand of -0.5. How is the good best classified?

  1. An inferior good, because demand falls when income rises. Correct answer.
  2. A Giffen good, because the coefficient is negative.
  3. A normal good, because demand rises when income rises.
  4. A luxury good, because the coefficient is below one.

Explanation

Income elasticity of demand measures the responsiveness of demand to a change in income. A negative coefficient means quantity demanded falls as income rises, which is the defining feature of an inferior good. The magnitude does not by itself identify a Giffen good.

Question 19Basic economic concepts and the market mechanism

A firm faces price-inelastic demand for its product over the current price range. If the firm raises its price, what will happen to total revenue?

  1. It will fall, because the firm will sell substantially fewer units after the price increase.
  2. It will rise, because quantity falls proportionately less than price rises. Correct answer.
  3. It will fall, because the demand curve is inelastic.
  4. It will stay constant, because price and quantity change proportionately.

Explanation

When demand is price-inelastic, the proportional change in quantity demanded is smaller than the proportional change in price. A price rise therefore increases total revenue, since the higher price per unit outweighs the smaller number of units sold.

Question 20Basic economic concepts and the market mechanism

A factory's production creates chemical waste that pollutes a river used by local residents. In the absence of government intervention, which outcome is expected?

  1. Output will equal the socially efficient level, because the market price reflects all costs of production.
  2. Output will exceed the socially efficient level, since the firm ignores external costs. Correct answer.
  3. Output will be zero, because negative externalities make production illegal in a free market.
  4. Output will fall short of the socially efficient level, because private costs exceed social costs.

Explanation

Pollution is a negative externality because the firm's private costs are lower than the social costs of production. The firm chooses output where private marginal cost equals marginal benefit, so too much is produced compared with the social optimum. A tax or regulation could internalise the external cost.

Question 21Basic economic concepts and the market mechanism

In economics, scarcity exists because...

  1. Human wants are unlimited but resources are limited. Correct answer.
  2. Firms can increase output without using additional resources.
  3. Governments decide how much of every good is produced in all economies.
  4. All goods are free because nature provides resources without cost.

Explanation

Scarcity is the fundamental economic problem: wants are effectively unlimited, but the land, labour, capital and enterprise available to satisfy them are limited. Free goods are not scarce, and no economic system removes the need to allocate limited resources.

Question 22Basic economic concepts and the market mechanism

In a competitive market, equilibrium occurs when...

  1. quantity demanded equals quantity supplied at a stable price Correct answer.
  2. quantity demanded exceeds quantity supplied, creating a surplus
  3. quantity supplied exceeds quantity demanded, creating a shortage
  4. the government sets a legal price at which all output is sold

Explanation

Equilibrium is the price at which the quantity demanded equals the quantity supplied, so the market clears. At any other price, shortage or surplus creates pressure for price to change.

Question 23Basic economic concepts and the market mechanism

The price of printer ink, a complement to printers, falls sharply. Assuming all else equal, what happens in the market for printers?

  1. Supply shifts right, so equilibrium price falls and quantity rises
  2. A movement along the demand curve raises quantity demanded
  3. Demand shifts left, so equilibrium price and quantity both fall
  4. Demand shifts right, so equilibrium price and quantity both rise Correct answer.

Explanation

Printer ink is a complement to printers, so a fall in ink's price makes owning and using a printer cheaper. Demand for printers therefore shifts right, raising both equilibrium price and quantity, rather than causing a movement along the printer demand curve.

Question 24Basic economic concepts and the market mechanism

Which change causes the supply curve for oranges to shift to the left?

  1. a fall in the market price of oranges
  2. an improvement in harvesting technology
  3. an increase in consumers' income, with oranges a normal good
  4. an increase in the wages paid to orange pickers Correct answer.

Explanation

An increase in the wages of orange pickers raises a variable cost of production. At every price, producers are willing to supply less, so the supply curve shifts left.

Question 25Basic economic concepts and the market mechanism

In a competitive market with no externalities, which condition makes the equilibrium quantity allocatively efficient?

  1. Total revenue is at its maximum
  2. Consumer surplus equals producer surplus
  3. Average total cost is falling as output expands
  4. Marginal social benefit equals marginal social cost Correct answer.

Explanation

Allocative efficiency requires that the marginal benefit to society of the last unit equals its marginal cost. In a competitive market without externalities, the demand curve reflects marginal social benefit and the supply curve reflects marginal social cost, so their intersection is efficient.

Question 26Basic economic concepts and the market mechanism

In the market for a normal good, which change is represented by a movement along the demand curve rather than a shift of the demand curve?

  1. A rise in the price of a substitute good, with the good's price unchanged
  2. An increase in consumers' incomes, with the good's price unchanged
  3. A fall in the good's own price, with all other influences on demand unchanged Correct answer.
  4. A change in consumer tastes in favour of the good, with the good's price unchanged

Explanation

A movement along a demand curve is caused by a change in the good's own price when all non-price determinants are held constant. A shift of the demand curve occurs when a non-price determinant such as income, the price of a substitute or tastes changes.

Question 27Basic economic concepts and the market mechanism

Which option is the clearest example of derived demand?

  1. A museum lowers its entrance fee and attracts more visitors.
  2. A rise in car demand raises the demand for steel used in cars. Correct answer.
  3. A consumer buys less salt after a fall in her income.
  4. Households buy more ice cream when hot weather raises their desire for cold food.

Explanation

Derived demand arises because an input or intermediate good is wanted for the output it helps to produce. The demand for steel is therefore derived from the demand for cars, not from direct consumption of steel itself.

Question 28Basic economic concepts and the market mechanism

Which factor would make the demand for one particular brand of breakfast cereal more price-elastic?

  1. Several close substitute brands are widely available at similar prices. Correct answer.
  2. The brand is regarded as a necessity with no close alternatives.
  3. The brand is bought habitually by loyal consumers who rarely compare prices.
  4. The brand accounts for a very small share of most households' budgets.

Explanation

Demand becomes more price-elastic when consumers can easily switch to close substitutes. Habitual purchase, a small budget share and the absence of close alternatives all tend to make demand less price-elastic.

Question 29Basic economic concepts and the market mechanism

A government sets a legally enforced maximum price for bread below the market equilibrium price. In the absence of effective rationing, which outcome is most likely?

  1. An immediate shift of the demand curve for bread to the left.
  2. A new equilibrium at the maximum price, with no shortage or surplus.
  3. A surplus of bread, as quantity supplied exceeds quantity demanded.
  4. A persistent shortage, with queuing or unofficial selling above the ceiling price. Correct answer.

Explanation

A maximum price below equilibrium is a binding price ceiling, so quantity demanded exceeds quantity supplied at that price. This creates a persistent shortage, and without rationing queuing or informal higher-price selling is likely.

Question 30Basic economic concepts and the market mechanism

A specific tax of €2 per unit is imposed on sellers in a market where demand is perfectly price-inelastic. Which outcome is expected?

  1. Producers bear the entire tax, quantity traded falls, and the price paid by consumers is unchanged.
  2. No tax revenue is collected because quantity traded falls to zero.
  3. Consumers bear the entire tax, quantity is unchanged, and the consumer price rises by €2. Correct answer.
  4. The tax is shared equally, with consumers paying €1 more and producers receiving €1 less.

Explanation

With perfectly inelastic demand the demand curve is vertical, so the equilibrium quantity cannot change. A tax on sellers shifts supply upward by the full tax, raising the consumer price by the whole €2 while the seller's net receipt is unchanged.

Question 31Basic economic concepts and the market mechanism

A farmer owns a field that could either be used to grow wheat, earning €30,000, or be rented out for €18,000. If the farmer chooses to grow wheat, what is the opportunity cost of that decision?

  1. €30,000, the wheat revenue earned from the field
  2. €18,000, the rent forgone by using the field Correct answer.
  3. €12,000, the difference between the two possible returns
  4. €48,000, the combined value of the two possible uses

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. By growing wheat, the farmer gives up the €18,000 rent that the field could have earned. The €30,000 wheat revenue is the return from the chosen use, not the opportunity cost.

Question 32Basic economic concepts and the market mechanism

A country's production possibility curve shifts outward. Which change is the most direct explanation?

  1. A reallocation of resources from capital to consumer goods
  2. A fall in the unemployment of resources
  3. An improvement in production technology Correct answer.
  4. A movement from inside the curve to a point on it

Explanation

The production possibility curve shows the maximum combinations of two goods an economy can produce with its resources and technology. An improvement in technology raises productive capacity, so the whole curve shifts outward. Lower unemployment or reallocation moves the economy toward or along the existing curve rather than shifting it.

Question 33Basic economic concepts and the market mechanism

The cross-price elasticity of demand between tea and coffee is +1.2. The price of tea rises by 5%. Assuming all else equal, what happens to the quantity demanded of coffee?

  1. It rises by 1.2%
  2. It rises by 6% Correct answer.
  3. It falls by 1.2%
  4. It falls by 6%

Explanation

Cross-price elasticity is calculated as the percentage change in quantity demanded of one good divided by the percentage change in the price of another. Here, +1.2 × 5% = +6%, so coffee demand rises by 6%. The positive sign confirms that tea and coffee are substitutes.

Question 34Basic economic concepts and the market mechanism

A consumer is willing to pay up to €60 for a concert ticket and actually pays €35. Which statement correctly describes the resulting consumer surplus?

  1. €35, because that is the price paid
  2. €95, found by adding willingness to pay to the price
  3. €25, the excess of willingness to pay over price Correct answer.
  4. €60, because willingness to pay is total benefit

Explanation

Consumer surplus is the difference between what a consumer is willing to pay and what the consumer actually pays. It is €60 - €35 = €25. It measures the gain to the consumer from the purchase, not the total value or the price alone.

Question 35Basic economic concepts and the market mechanism

The price of a good rises from €20 to €24, and quantity demanded falls from 100 to 90 units. Using the midpoint formula, what is the price elasticity of demand, and how is demand classified over this range?

  1. -1.73, so demand is inelastic
  2. -1.00, so demand is unit elastic
  3. -0.58, so demand is inelastic Correct answer.
  4. -0.58, so demand is elastic

Explanation

Using the midpoint formula, the percentage change in quantity is (90 - 100)/95 = -10.53%, and the percentage change in price is (24 - 20)/22 = 18.18%. Dividing gives -0.58, and the absolute value below 1 means demand is inelastic over this range.

Question 36Basic economic concepts and the market mechanism

Which of the following is a positive economic statement?

  1. "The rich ought to pay more tax."
  2. "The government should increase spending on healthcare."
  3. "A minimum wage increase will raise low-skilled unemployment." Correct answer.
  4. "It is unfair that some families cannot afford housing."

Explanation

Positive statements are factual claims about what is or will be, and they can in principle be tested against evidence. The claim about a minimum wage and low-skilled unemployment is therefore positive. The other statements use words such as 'should', 'ought' or 'unfair', which express value judgments and make them normative.

Question 37Basic economic concepts and the market mechanism

On a production possibility curve diagram, what does a point inside the curve represent?

  1. Full and efficient use of resources.
  2. A free-market equilibrium.
  3. Inefficient use or unemployment of resources. Correct answer.
  4. An unattainable combination of output.

Explanation

A production possibility curve shows the maximum combinations of two goods that an economy can produce with its resources and technology. A point inside the curve means some resources are idle or not used in their most productive way, so output could be increased without sacrificing the other good. Points on the curve are efficient, while points outside are unattainable with current resources.

Question 38Basic economic concepts and the market mechanism

A government imposes a legally enforced minimum price for a good, set above the free-market equilibrium price. Assuming no other intervention, which outcome is expected?

  1. No change, because the market always returns to equilibrium.
  2. A shortage, because quantity demanded exceeds quantity supplied.
  3. A surplus, because quantity supplied exceeds quantity demanded. Correct answer.
  4. A fall in price to the equilibrium level.

Explanation

A minimum price set above equilibrium is a binding price floor. At the higher legal price, sellers want to supply more than buyers want to purchase, so quantity supplied exceeds quantity demanded and a surplus results. Because the price is not allowed to fall, the surplus can persist unless the government intervenes further.

Question 39Basic economic concepts and the market mechanism

Which pair of characteristics best describes a pure public good?

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

Explanation

A pure public good is non-excludable, meaning people cannot easily be prevented from consuming it, and non-rival, meaning one person's consumption does not reduce the amount available to others. These characteristics create a free-rider problem, so private markets usually underprovide public goods. National defence is a standard example.

Question 40Basic economic concepts and the market mechanism

In a competitive market, demand increases while supply decreases at the same time. Assuming both shifts are of uncertain relative size, what can be concluded with certainty about the new equilibrium?

  1. Both price and quantity rise.
  2. Price falls, but the change in quantity is indeterminate.
  3. Quantity rises, but the change in price is indeterminate.
  4. Price rises, but the change in quantity is indeterminate. Correct answer.

Explanation

An increase in demand raises both equilibrium price and quantity, while a decrease in supply raises price but lowers quantity. The two shifts push price in the same direction, so price must rise. Their effects on quantity work in opposite directions, so the final quantity change depends on the relative sizes of the shifts and cannot be determined with certainty.

Question 41Basic economic concepts and the market mechanism

Which of the following is classified as capital as a factor of production?

  1. A forest used for timber
  2. A delivery van used by a courier firm Correct answer.
  3. Money held in a firm's bank account
  4. The skill of a carpenter

Explanation

In economics, capital refers to manufactured resources, such as machines and vehicles, that are used to produce other goods and services. A delivery van is a produced asset used in the courier's production process, so it is capital.

Question 42Basic economic concepts and the market mechanism

Which of the following is best described as a free good in economics?

  1. Sunshine in a region where it is abundant Correct answer.
  2. Bottled mineral water sold in a shop
  3. A meal provided by a charity
  4. A seat on a commercial flight

Explanation

A free good is available in sufficient quantity to satisfy all wants at zero opportunity cost. Abundant sunshine in such a region meets that definition because using it does not require sacrificing another good.

Question 43Basic economic concepts and the market mechanism

A good has an income elasticity of demand of −0.6. Which description best fits this good?

  1. A luxury good
  2. A normal necessity
  3. A good with perfectly inelastic demand
  4. An inferior good Correct answer.

Explanation

Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. A negative value means that demand falls as income rises, which is the defining characteristic of an inferior good.

Question 44Basic economic concepts and the market mechanism

Which factor is most likely to make the supply of a product more price-elastic?

  1. Production taking place at full capacity
  2. A fixed amount of specialised machinery
  3. A highly perishable product that cannot be stored
  4. A long period to adjust all inputs Correct answer.

Explanation

Price elasticity of supply measures how far quantity supplied responds to a change in price. Supply becomes more elastic when producers have more time and flexibility to adjust all inputs, so a long adjustment period raises elasticity.

Question 45Basic economic concepts and the market mechanism

A firm estimates that the price elasticity of demand for its product is −0.4 over the relevant price range. If the firm raises its price, what will happen to total revenue?

  1. Total revenue will rise because demand is elastic, so quantity sold increases after the price rise.
  2. Total revenue will remain unchanged because the absolute value of elasticity is below one.
  3. Total revenue will fall because demand is inelastic, so quantity demanded falls proportionally more than the price rises.
  4. Total revenue will rise because demand is inelastic, so quantity falls proportionally less than price rises. Correct answer.

Explanation

When the absolute value of price elasticity is below one, demand is price-inelastic, so a price rise causes a proportionally smaller fall in quantity demanded. Total revenue therefore increases because the price effect outweighs the quantity effect.

Question 46Basic economic concepts and the market mechanism

In economics, the problem of scarcity arises because:

  1. human wants are unlimited while the resources available to satisfy them are limited. Correct answer.
  2. resources are unlimited, but the technology needed to use them is not yet available.
  3. prices are set too high for low-income households to afford basic goods.
  4. some countries have too little money in circulation to buy all the goods they want.

Explanation

Scarcity is the universal economic condition in which unlimited wants compete for limited resources. It is not caused by an inadequate money supply, by unlimited resources, or by high prices, although those factors can affect who obtains particular goods.

Question 47Basic economic concepts and the market mechanism

A new production technique lowers the cost of manufacturing solar panels. In a competitive market for solar panels, what is the most likely immediate effect?

  1. The demand curve shifts to the right, raising both price and quantity.
  2. There is a movement up along the existing supply curve as producers charge a higher price.
  3. The supply curve shifts left, raising equilibrium price and lowering equilibrium quantity.
  4. The supply curve shifts right, lowering equilibrium price and raising equilibrium quantity. Correct answer.

Explanation

A fall in production cost is a determinant of supply, so the supply curve shifts to the right. At the original price there is excess supply, which pushes the equilibrium price down and the equilibrium quantity traded up.

Question 48Basic economic concepts and the market mechanism

A consumer derives diminishing marginal utility from successive units of a good and faces a fixed positive price for each unit. Assuming the consumer acts rationally, what does this help to explain?

  1. Why the demand curve for the good is likely to slope downward. Correct answer.
  2. Why the demand curve for the good is perfectly vertical.
  3. Why the consumer's total utility falls as more units are consumed.
  4. Why the consumer will buy an infinite quantity at any positive price.

Explanation

Diminishing marginal utility means each extra unit adds less satisfaction than the previous one. A rational consumer will therefore buy more only if the price falls, which is consistent with a downward-sloping demand curve.

Question 49Basic economic concepts and the market mechanism

The price elasticity of supply for a good is 1.5. If its price rises by 10 per cent, what happens to the quantity supplied, assuming the elasticity remains constant over the range?

  1. It rises by 1.5 per cent.
  2. It rises by 6.7 per cent.
  3. It rises by 15 per cent. Correct answer.
  4. It falls by 15 per cent.

Explanation

Price elasticity of supply equals the percentage change in quantity supplied divided by the percentage change in price. Rearranging gives 1.5 multiplied by 10 per cent, which equals a 15 per cent increase in quantity supplied.

Question 50Basic economic concepts and the market mechanism

A chemical factory discharges waste into a river, imposing costs on local residents that are not reflected in the price of the chemical. In an unregulated competitive market, how does the market outcome compare with the socially efficient outcome?

  1. The good is overproduced and the market price is above the socially efficient price because residents bid up the price.
  2. The good is underproduced because the external cost is added to producers' private costs.
  3. The market outcome is socially efficient because competitive firms always maximise total surplus.
  4. The good is overproduced and the market price is below the socially efficient price. Correct answer.

Explanation

A negative externality of production means marginal social cost exceeds marginal private cost. Firms ignore the external cost, so they supply more than the socially efficient quantity and the market price is too low relative to the social optimum.