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Click here to Commence quiz Click here to Commence quiz © APT Initiatives Ltd UNIT 1 Markets & Market Failure 1.2 The Allocation of Resources in Competitive.

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1 Click here to Commence quiz Click here to Commence quiz © APT Initiatives Ltd UNIT 1 Markets & Market Failure 1.2 The Allocation of Resources in Competitive Markets Test 1

2 When the price of a product increases… APT Initiatives Ltd Incorrect Correct Next question demand will shift to the left more will be demanded at each price quantity demanded will rise quantity demanded will fall A rise in price brings about a fall in the quantity demanded, otherwise known as a contraction of demand. A contraction of demand (illustrated by an upward movement along the demand curve) should be distinguished from a decrease in demand (an inward shift of the demand curve). Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 1

3 A shift in a demand curve occurs when… APT Initiatives Ltd Incorrect Correct Incorrect Next question there is a change in price there is an increase in business costs there is a change in income businesses become more efficient The first response results in a movement along the demand curve. The middle two responses relate to changes in supply. Only D causes a shift of the whole demand curve. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 2

4 Which of the following statements is incorrect? A rightward shift of the demand curve can be caused by… APT Initiatives Ltd Correct Incorrect Next question a reduction in the price of the product a reduction in the price of the product a rise in population a rise in the price of a substitute product a rise in the price of a substitute product a rise in income A reduction in price will lead to a downward movement along the demand curve, rather than a shift of the demand curve. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 3

5 A pen manufacturer reduces the price of its latest model by 6% and, as a result, sales volume increases by 4%. Therefore, the price elasticity of demand, to two decimal places must be… APT Initiatives Ltd Incorrect Next question +1.57 -0.67 -2.54 -1.52 4% / -6% = -0.67. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 4

6 The price elasticity of demand for a firms products will change when a business … APT Initiatives Ltd Correct Incorrect Next question is faced with a new competitor manages to reduce its costs experiences a rise in production costs experiences a rise in production costs benefits from a general increase in incomes benefits from a general increase in incomes The entry of new competitors will increase the price elasticity of demand for the products of existing firms, because buyers will have more products to choose from and will, therefore, respond more readily to price changes. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 5

7 When incomes rise by 2%, demand for UK holidays rise by 4%. The income elasticity of demand is… APT Initiatives Ltd Correct Incorrect Next question +2 +20 +0.5 +0.8 4% / 2% = 2. Because quantity and income move in the same direction, the income elasticity is positive; hence the answer is +2. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 6

8 A greengrocer has obtained some market research data which indicates that the income elasticity of demand for potatoes is - 1.56. This means that… APT Initiatives Ltd Incorrect Correct Incorrect Next question demand is income inelastic, and the potatoes are a normal good demand is income inelastic, and the potatoes are a normal good demand is price elastic, and potatoes are a necessity demand is price elastic, and potatoes are a necessity potatoes are an inferior good, and demand is income elastic potatoes are an inferior good, and demand is income elastic potatoes are a normal good, and demand is income elastic potatoes are a normal good, and demand is income elastic Negative income elasticity means that the product is an inferior good. As the coefficient of elasticity is - 1.56 it means that demand is income elastic, ie a 10% fall in income leads to a 15.6% rise in demand. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 7

9 Petrol retailers have noticed that when cars increase in price by 5%, demand for petrol falls by 2%. The cross elasticity of demand for petrol is… APT Initiatives Ltd Incorrect Correct Incorrect Next question -2.5 -0.4 -0.5 -2% / +5% = -0.4. he fact that the figure is negative proves that the relationship is one of complements. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 8

10 Movement up a supply curve arises because of… APT Initiatives Ltd Incorrect Next question improvements in business efficiency an increase in price a reduction in price an increase in tax A change in price (brought about by a rightward shift of the demand curve) leads to an upward movement along the supply curve. A change in anything else causes a shift in the whole curve. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 9

11 A supply curve for a product would shift to the right if there was… APT Initiatives Ltd Incorrect Correct Next question an increase in tax a decrease in price an increase in business costs an improvement in production technology an improvement in production technology A shift to the right means more is supplied at each price (an increase in supply). This could be the result of an improvement in technology which will lead to lower business costs. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 10

12 A rightward parallel shift in a supply curve would occur when business costs … APT Initiatives Ltd Incorrect Correct Incorrect Next question rise by 3% fall by 10% fall by £3 a unit rise by £3 a unit A rightward shift is the result of a fall in the cost of production. The correct answer hinges on the word parallel which is why D is right and B is wrong. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 11

13 A decrease in price elasticity of supply can arise when… APT Initiatives Ltd Incorrect Correct Next question business costs rise business costs fall a business produces various goods for different markets a business produces various goods for different markets government intervenes with more market regulation government intervenes with more market regulation Government regulation acts as a constraint, thus reducing the possibilities for expansion of output and the entry of new firms into the market. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 12

14 A rise in price from £21 to £22 leads to a 5% rise in the quantity supplied. To two decimal places price elasticity of supply is… APT Initiatives Ltd Correct Incorrect Next question +1.05 -1.52 +2.52 -1.05 Even without any calculation we can rule out the first two responses. PES is usually positive and it certainly is in this case. PES = 5% / +4.7610 = +1.05 Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 13

15 Movement up a demand curve to a new equilibrium position could have been caused by… APT Initiatives Ltd Incorrect Next question an increase in price of a substitute product an increase in price of a substitute product a tax imposed on a good an increase in the price elasticity of demand an increase in the price elasticity of demand a shift to the right in the supply curve a shift to the right in the supply curve What happens here is that the tax shifts the supply curve to the left and, as a result, there is a movement along the demand curve to a higher price. A would cause a shift of the demand curve, whereas C is a shift in the supply, which causes a slide down the demand curve. D is concerned with slope of the demand curve, rather than a shift of the demand curve. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 14

16 The conditions of demand and supply of a luxury car brand are shown in the diagram below. The supply curve could have shifted to the left because… APT Initiatives Ltd Incorrect Next question there was a decrease in the price of petrol there was a decrease in the price of petrol the government has imposed a special tax on luxury cars the government has imposed a special tax on luxury cars the costs of manufacture have fallen the costs of manufacture have fallen the price has risen Supply has decreased and this can only be explained by a rise in producers costs. A tax on cars is seen in the same light as a rise in costs; to protect profits, both changes would require a corresponding rise in price. Hence, B is the correct answer. A concerns the demand for cars. C is illustrated by a movement along the supply curve. D would cause a rightward shift of the supply curve. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 15 Quantity O S1S1 S2S2 D1D1 Price

17 The table below shows the demand and supply schedules for pizzas sold by a local takeaway. Following a rise in production costs, supply falls by 80 pizzas at all prices. The new equilibrium price would be … APT Initiatives Ltd Incorrect Correct Next question £2.25 £2.50 £3.00 £2.75 Construct a new supply schedule with 80 fewer pizzas supplied at each price. At price £2.75, 400 pizzas are demanded and 400 are supplied. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 16 Price per PizzaQuantity demanded per week Quantity supplied per week £3.00350510 £2.75400480 £2.50450 £2.25500420

18 Supply in agriculture is typically price inelastic because… APT Initiatives Ltd Correct Incorrect Next question farmers cannot alter output at short notice farmers cannot alter output at short notice farmers rely on the weather farmers can use stocks in response to changes in price farmers can use stocks in response to changes in price there are few substitutes for food Supply is inelastic because agricultural output is subject to the growing cycle and seasons of the year. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 17

19 The price elasticity of supply of houses is estimated to be less than 1. This means that… APT Initiatives Ltd Incorrect Next question supply is price elastic builders cannot easily build more houses in a booming economy builders cannot easily build more houses in a booming economy builders benefit from increased revenue when prices rise builders benefit from increased revenue when prices rise producer revenue will remain unchanged producer revenue will remain unchanged By definition inelasticity of supply means that it is difficult to respond to changes in the market. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 18

20 Which one of the following products or services is not complementary to owner occupied houses? APT Initiatives Ltd Incorrect Correct Next question Mortgages Home improvements Furniture Rented accommodation Rented accommodation is a substitute for owner occupation. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 19

21 The introduction of high definition television can be expected to result in the following with the exception of… APT Initiatives Ltd Incorrect Correct Next question increased demand for new TV sets increased supply of second hand TV sets increased supply of second hand TV sets increased demand for satellite television services increased demand for satellite television services increased price of second hand TV sets increased price of second hand TV sets HD will increase the demand for new sets and, at the same time, increase the supply of second hand sets as people upgrade. The new HD television increases the attractiveness of digital satellite services which should be seen as a complementary service. The one thing it will not lead to is a rise in the price of used sets. If anything, it will put downward pressure on the price of used sets. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 20

22 Coffee and tea are substitute products. A rise in the price of coffee will lead to… APT Initiatives Ltd Correct Incorrect Next question an increase in demand for tea an increase in the quantity demanded of tea an increase in the quantity demanded of tea no change in the demand for tea a contraction in the demand for tea As the two products are substitutes for each other it is to be expected that a rise in the price of coffee will mean people switch to tea. The only issue in dispute is whether it is an increase in demand, or an increase in the quantity demanded. By custom, we use the term an increase in quantity demanded (alternatively an extension of demand) to mean a change brought about by a reduction in the price of the product. The phrase increase in demand is reserved for an increase brought about by something other than a change in the price of the product. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 21

23 The motor industry uses steel to make cars. This relationship is an example of products in … APT Initiatives Ltd Incorrect Next question joint supply derived demand competitive demand substitute demand As the car industry is a major user of steel we can conclude that the demand for steel is, in part, derived from the demand for cars. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 22

24 Which of the following is not a feature of price? APT Initiatives Ltd Incorrect Correct Incorrect Next question It rations available resources It signals market conditions It allocates resources fairly It incentivises buyers and sellers The price mechanism allocates resources, but not necessarily fairly. However, it does definitely ration, signal and incentivise. Therefore, D is the correct answer to the question. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 23

25 When resources are allocated through the price mechanism… APT Initiatives Ltd Incorrect Correct Incorrect Next question prices must fall prices are typically determined by central government prices are typically determined by central government business costs are more likely to be competitive business costs are more likely to be competitive production costs will determine prices production costs will determine prices Competition will force firms to keep down costs and, therefore, D is correct. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 24

26 Which of the following statements is true about a market economy? APT Initiatives Ltd Incorrect Correct Exit Economic decision makers act in ways which will maximise social welfare Economic decision makers act in ways which will maximise social welfare The government has a crucial role to play in ensuring that economic outcomes are fair The government has a crucial role to play in ensuring that economic outcomes are fair Producers determine what is produced, and for whom it is produced Producers determine what is produced, and for whom it is produced Prices help buyers make rational judgements about the value of what they buy Prices help buyers make rational judgements about the value of what they buy Economic theory is based on the assumption that consumers and others make rational decisions. A is certainly not true since economic agents act in their own self interest. B is not true since governments play a minimal role in a market economy. D is not true since producers respond to consumer demand. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 25


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