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General Certificate of Education January 2001 Advanced Subsidiary Examination

ECONOMICS Unit 1 Part 1 Objective Test

Tuesday 23 January 2001 Afternoon Session

ECN1/1

In addition to this paper you will require: an objective test answer sheet; a blue or black ball-point pen; the question paper for Part 2 ECN1/2. You may use a calculator.

Recommended time allowed: 30 minutes for ECN1/1 Instructions Use a blue or black ball-point pen. Do not use a pencil. Answer all questions. For each question there are four alternative responses. When you have selected the response which you think is the best answer to a question, mark this response on your objective test answer sheet. If you wish to change your answer to a question, follow the instructions on your objective test answer sheet. Do all rough work in this book, not on your answer sheet. Information The maximum mark for this paper is 25 marks. Each question carries one mark. No deductions will be made for wrong answers. Advice You are advised not to spend more than 30 minutes on this paper. Do not spend too long on any question. If you have time at the end, go back and answer any question you missed out. Make sure that you hand in both your answer sheet and this question book at the end of the examination.

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2 OBJECTIVE TEST QUESTIONS You are advised not to spend more than 30 minutes on these questions. Each item consists of a question or an incomplete statement followed by four suggested answers or completions. You are to select the most appropriate answer in each case.

1 The production possibility schedule for mobile phones and computers is as follows: Mobile phones 16 15 14 13 11 9 7 0 Computers 0 1 2 3 4 5 6 7

The opportunity cost of the second computer in terms of mobile phones is A B C D 11. 12. 17. 14.

2 Which one of the following statements involves a value judgement? A B C D The higher the income the higher the level of household saving. More of a good is demanded at a lower price. The public sector has decreased in size since 1980. The government must devote more resources to health care.

3 The fundamental economic problem faced by all countries is A B C D too much money chasing too few goods. the using up of the Earths scarce resources. environmental pollution. unlimited wants constrained by limited resources.

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3 4 The demand curve for a normal good will shift to the left if A B C D there is a successful advertising campaign for the good. the price of a good increases. the price of a complementary good increases. the tax on a good increases.

5 The price mechanism helps to allocate resources efficiently because A B C D it results in lower rewards being paid to factors of production when the demand for the product they produce increases. it will lead to a distribution of output amongst individuals on the basis of greatest need. the prices of non-renewable resources will tend to rise as the stock of such resources nears depletion. it will always ensure that competition between firms prevents high profits being earned.

6 The diagram shows a firms supply curves.

Price S2

S1

Quantity

The shift in the supply curve from S1 to S2 could be explained by A B C D

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a decrease in wage rates. the introduction of a per unit tax on the good. a decrease in the rate of VAT. the entry of new firms into the industry. Turn over L

4 7 The income elasticity of demand for an inferior good is A B C D zero. inelastic. unitary. negative.

8 The diagram represents the market for private rented accommodation, which is initially in equilibrium.
Weekly rent S

R D O Number of rooms available

If the government then intervenes in the market and fixes a maximum rent of OR, the result will be A B C D fewer rooms available for people to rent. a rise in the number of rooms available to rent. a surplus of rented accommodation. a reduction in the number of rooms people wish to rent.

9 Evidence suggests that the cross-elasticity of demand between private and public transport, whilst positive, is very low. Therefore, it follows that A B C D a fall in the demand for private transport would cause a small rise in the demand for public transport. a rise in the price of private transport would cause a slight fall in the demand for public transport. a fall in the demand for private transport would cause a small rise in the price of public transport. a rise in the price of private transport would cause a small rise in the demand for public transport.

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5 10 A manufacturer reduces the price of his washing machines by 5% and, as a result, the volume of sales of washing machines rises by 4%. The price elasticity of demand for the good is A B C D -1.25. -1.0. -0.8. indeterminate from available information.

11 The diagram shows the demand and supply curves for a consumer good where P1 is the initial equilibrium price.
Price D1 P2 P1 D2 S1 S2

Q1

Q2

Quantity

The increase in price from P1 to P2 is most likely a result of A B C D an increase in the price of substitutes and a fall in raw material costs. a fall in incomes and a rise in interest rates. an increase in the wages paid to all workers. an increase in income tax and value added tax.

12 The table shows a households demand for four different goods A, B, C and D at two separate income levels. Income 10 000 12 000 A 200 200 Units of goods demanded B C D 200 200 200 240 260 280

Over the above range of income, for which good (A, B, C or D) does the household have an income elasticity of demand of unity? Turn over
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6 13 The table shows estimates of UK consumers income elasticity of demand for holidays in four different countries. Country Turkey Italy Sweden Australia Income Elasticity of Demand 0.8 1.0 1.4 2.0

From the data it may be concluded that a 10% rise in real incomes would lead to A B C D a fall in demand for holidays in Turkey. no change in demand for holidays in Italy. a 14% increase in demand for holidays in Sweden. a 2% increase in demand for holidays in Australia.

14 Because of the existence of economies of scale A B C D most businesses in the UK are large firms. some markets are dominated by monopolies. the service sector has expanded. all small firms are inefficient.

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7 15 The diagram shows an economys production possibility boundary.

Capital goods

Consumer goods

The output of the economy changes from point X to point Y. At point Y A B C D the economy is more productively efficient. more of the economys resources are being utilised. the economy benefits from economies of scale. the opportunity cost of capital goods is higher.

16 An economy can be described as productively efficient if it A B C D continually increases its average standard of living. is operating with full employment of labour. can only produce more of one good by producing less of another. maximises investment in capital goods.

17 When applied to a public good, non-rival means that A B C D there is a single monopoly supplier of the good. the resources used in its production could not have been used to produce other goods. if the good is provided for one person it must be provided for others. consumption of the good by one person does not reduce the amount of the good available to others. Turn over
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8 18 Which one of the following items of public expenditure best represents the provision of a merit good? A B C D Defence. Education. Motorway maintenance. Productivity bonuses for the police.

19 Market failure arises whenever firms A B C D make a loss. experience diseconomies of scale. create externalities. reduce expenditure on research and development.

20 Which one of the following could be an argument for the government providing health care in the United Kingdom? A B C D The private benefit from health care is less than the social benefit. Health care cannot be provided by the free market. Health care is both a merit good and a pure public good. The policy allows for the provision of health care to be maximised.

21 Government failure may result directly from all of the following except A B C D the high cost of administering government policy. government agencies pursuing their own interests. a failure of market prices to reflect social costs. inadequate information about the consequence of government policy.

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9 22 The diagram shows the supply and demand curves for lamb in the UK market.
Price P V W Supply

Demand O X Y Z Quantity

If the government is committed to maintaining a price of P in the market it must buy up a quantity of lamb represented by A B C D XZ. WV. XY. YZ.

23 Continued government subsidies to an industry can be justified if the industry A B C D is more efficient compared with other countries. creates a positive externality for consumers. has a large share of the market. is subject to diseconomies of scale.

24 The effect of a government imposing a minimum price for wheat above the free market equilibrium price will result in A B C D no change in the equilibrium price. a fall in the quantity of wheat supplied. an increase in the demand for wheat. over-production of wheat.

Turn over
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10 25 Which one of the following is an example of government intervention to correct market failure? A B C D An increase in the rate of VAT on all goods and services. The taxation of negative externalities. An increase in teachers salaries. The taxation of public goods.

END OF TEST

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