O Level Economics Paper 1

1

Economics O Level Paper 1 Solved Topical & Yearly MCQ’s (2003-2017) Article No. 141

Editorial Board: Imran Latif Ambreen Ishfaq Hammad Hussain Uzair Shahed Islam

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Title

Economics O Level P-1 ( Solved Topical & Yearly MCQ’s)

Author

Imran Latif Cell: +923004410900 Email: imranlatifmalik@gmail.com

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Edition

2018

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Preface This book provides a thorough exercise of paper 1 for students taking Cambridge International Examinations O-Level Economics. MCQs from past examinations are sorted into relevant chapters and topics which will enable students to practice their understanding systematically. A key to questions is added at the end of each chapter.

Further help is provided in detailed answers.

We appreciate our students and fellow teachers who helped us to improve this book.

Your suggestions and comments will be highly appreciated.

Editorial Board: Imran Latif Ambreen Ishfaq Hammad Hussain Uzair Shahed Islam

4

Review Board 1. Lahore: Mr. Aslam Tariq, Mr. Mian Mumtaz, Mr. Saeed Afzal, Mr. Kamran Malik , Mr. Shahid Saghir , Mr. Faisal Saeed, Mr. Muhammad Rafi, Mr. Arshad Chudhary, Mr. Ahmed Bilal, Mr. Waqar Khan, Mr. Waqas Iqbal, Mr. Azar Anjum, Mr. Arshad Farooqi, Mr. Rizwan-urRehman, Mr. Irteza Rehman, Mr. Ahmed Javed Paracha, Mr. Ali Rana, Mr. Mazahar Abbas, Mr. Rasheed Kahloon, Mr. Mazhar Muneer, Mr. Mumtaz Ahmad, Miss Nosheen Jamal, Mr. Muhammad Rizwan, Mr. Azeem Qaisar, Mr. Waqas Biag and Mr. Asghar Ali Malik.

2. Islamabad & Rawalpindi Mr. M. Zulfiqar, Mr. Hamood Rehman, Mr. Abdul Salam, Mazhar Hameed Khan, Mr. Ali Yasir, Mr. Asad Ali, Mr. Naveed Iqbal, Mr. Umar Khan, Mr. Sadaqat Ali, Mr. Hamood Ur Rahman and Mian Tahir Siddique, Mr. Saeed Khan.

3. Fisalabad & Jhang Mr. Anwar-ul-Haq, Mr. Aamir Jahangir, Mr. Ahmed Kamal , Mr. Muhammad Sakhi Ahmad, Mr. Javed Iqbal, and Miss Kiran.

4. Sialkot and Gujranwala Mr. Imran Aslam and Mr. Sarwar Imtiaz.

5. Karachi & Multan M. Asif farooq, Miss Shafaq Ahmed, Mr. Siddique Ansari , Mr. Zai, Mr. Munawar Ghazi, Mr. Abdul Kareem Lakhani, Mr. Ali Anwerzada, Miss Khalida Afsar, Miss Amna Basir, Hanah Iqbal Mirza and Mr. Kamran Butt.

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Contents UNIT-1

BASIC ECONOMIC IDEAS .......................................................................................................... 9

1.1 FACTORS OF PRODUCTION .................................................................................................................... 9 1.2 OPPORTUNITY COST AND SCARCITY (BASIC ECONOMIC PROBLEM) ...........................................................12 1.3 PRODUCTION POSSIBILITY CURVE .........................................................................................................18 1.4 LABOUR INTENSIVE AND CAPITAL INTENSIVE ...........................................................................................20 Key..........................................................................................................................................................21 Detailed Answers ................................................................................................................................22 UNIT-2

ECONOMIC SYSTEMS ...............................................................................................................28

2.1 BASIC ECONOMIC QUESTIONS ..............................................................................................................28 2.2 ECONOMIC SYSTEMS ...........................................................................................................................28 Key..........................................................................................................................................................33 Detailed Answers ................................................................................................................................34 UNIT-3

PRODUCTION AND COST .........................................................................................................37

3.1 TYPES OF COSTS ................................................................................................................................37 3.2 PROFIT MAXIZATION ............................................................................................................................45 3.3 DIVISION OF LABOUR ...........................................................................................................................49 3.4 ECONOMICS & DISECONOMIES OF SCALE ...............................................................................................51 3.5 SMALL FIRMS .....................................................................................................................................53 3.6 PRIMARY, SECONDARY & TERTIARY SECTORS ........................................................................................54 Key..........................................................................................................................................................57 Detailed Answers ................................................................................................................................58 UNIT-4

TYPES OF BUSINESS ORGANISATIONS .................................................................................67

4.1 TYPES OF BUSINESS ORGANIZATIONS ....................................................................................................67 4.2 MULTINATIONALS ................................................................................................................................69 Key..........................................................................................................................................................73 Detailed Answers ................................................................................................................................74 UNIT-5

GROWTH AND FINANCE OF FIRMS .........................................................................................76

5.1 SOURCES OF GROWTH OF FIRMS ..........................................................................................................76 5.2 INTEGRATION .....................................................................................................................................76 5.3 STOCK EXCHANGE ..............................................................................................................................78 Key..........................................................................................................................................................79 Detailed Answers ................................................................................................................................80 UNIT-6

DEMAND SUPPLY AND EQUILIBRIUM .....................................................................................82

6.1 DEMAND ............................................................................................................................................82 6.2 SUPPLY .............................................................................................................................................83 6.3 MARKET EQUILIBRIUM & CHANGES ........................................................................................................84 6.4 PRICE CONTROLS ...............................................................................................................................97 Key..........................................................................................................................................................98 Detailed Answers ................................................................................................................................99 UNIT-7 7.1 7.2

ELASTICITY ..............................................................................................................................105 PRICE ELASTICITY OF DEMAND (PED) .................................................................................................105 PRICE ELASTICITY OF SUPPLY (PES) .................................................................................................111

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7.3 ELASTICITY AND TAX INCIDENCE .........................................................................................................112 7.4 TOTAL REVENUE AND EQUILIBRIUM .....................................................................................................113 Key........................................................................................................................................................114 Detailed Answers ..............................................................................................................................115 UNIT-8

SOCIAL COSTS AND BENEFITS .............................................................................................121

8.1 SOCIAL COSTS & BENEFITS ................................................................................................................121 8.2 GOVT. POLICIES AND THEIR LIMITATIONS / PRIVATE VS GOVT. PRODUCTION ............................................123 8.3 CAUSES OF MARKET FAILURE .............................................................................................................125 Key........................................................................................................................................................126 Detailed Answers ..............................................................................................................................127 UNIT-9

LABOUR MARKET ...................................................................................................................130

9.1 FACTORS DETERMINING WAGE RATE ...................................................................................................130 9.2 WAGE DIFFERENTIALS .......................................................................................................................132 9.3 TRADE UNIONS .................................................................................................................................135 9.4 FACTORS AFFECTING CHOICE OF OCCUPATION .....................................................................................138 9.5 TYPES OF PAYMENTS ........................................................................................................................139 9.6 CHANGES IN EARNING IN LIFETIME .......................................................................................................139 9.7 MONEY WAGES AND REAL WAGES ......................................................................................................140 Key........................................................................................................................................................142 Detailed Answers ..............................................................................................................................143 UNIT-10

NATIONAL INCOME .................................................................................................................150

10.1 NATIONAL INCOME CONCEPTS ........................................................................................................150 10.2 CONSUMPTION AND SAVINGS AND SPENDING PATTERNS ....................................................................151 10.3 AGGREGATE DEMAND AND AGGREGATE SUPPLY ...............................................................................155 10.4 STANDARD OF LIVING .....................................................................................................................156 Key........................................................................................................................................................162 Detailed Answers ..............................................................................................................................163 UNIT-11

UNEMPLOYMENT.....................................................................................................................169

11.1 MEANING OF UNEMPLOYMENT ........................................................................................................169 11.2 TYPES AND CAUSES OF UNEMPLOYMENT ..........................................................................................169 11.3 EFFECTS OF UNEMPLOYMENT .........................................................................................................171 11.4 MOBILITY OF LABOUR ....................................................................................................................172 Key........................................................................................................................................................173 Detailed Answers ..............................................................................................................................174 UNIT-12

MACROECONOMIC POLICIES ................................................................................................176

12.1 MACROECONOMIC AIMS, CONFLICTS & POLICIES ...............................................................................176 Key........................................................................................................................................................185 Detailed Answers ..............................................................................................................................186 UNIT-13

ECONOMIC GROWTH ..............................................................................................................191

13.1 MEANING, CAUSES AND EFFECTS OF ECONOMIC GROWTH ..................................................................191 Key........................................................................................................................................................194 UNIT-14

INFLATION ................................................................................................................................197

14.1 14.2

MEANING OF INFLATION .................................................................................................................197 CAUSES OF INFLATION ...................................................................................................................197

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14.3 MEASUREMENT OF INFLATION .........................................................................................................197 14.4 EFFECTS OF INFLATION ..................................................................................................................199 14.5 ACTUAL VALUE AND PERCENTAGE VALUE .........................................................................................200 Key........................................................................................................................................................206 Detailed Answers ..............................................................................................................................207 UNIT-15

TAXES AND GOVERNMENT SPENDING ................................................................................211

15.1 TYPES OF TAX SYSTEMS.................................................................................................................211 15.2 DIRECT & INDIRECT TAXES .............................................................................................................213 15.3 REASONS FOR TAXATION ...............................................................................................................215 15.4 SOURCES OF FINANCE OF GOVERNMENT ..........................................................................................215 15.5 GOVERNMENT BUDGET ..................................................................................................................216 15.6 OTHERS .......................................................................................................................................216 Key........................................................................................................................................................219 Detailed Answers ..............................................................................................................................220 UNIT-16

MONEY AND BANKING ...........................................................................................................224

16.1 MONEY ........................................................................................................................................224 16.2 BANKING ......................................................................................................................................225 Key........................................................................................................................................................227 Detailed Answers ..............................................................................................................................228 UNIT-17

POPULATION............................................................................................................................230

17.1 FACTORS OF GROWTH IN POPULATION .............................................................................................230 17.2 LESS DEVELOPED AND DEVELOPED COUNTRIES ................................................................................234 17.3 AGING POPULATION .......................................................................................................................241 17.4 ABSOLUTE AND RELATIVE POVERTY .................................................................................................243 17.5 TYPES OF POPULATION AND EFFECTS OF GROWTH IN POPULATION ......................................................243 Key........................................................................................................................................................244 Detailed Answers ..............................................................................................................................245 UNIT-18

INTERNATIONAL TRADE ........................................................................................................252

18.1 ABSOLUTE AND COMPARATIVE ADVANTAGE ......................................................................................252 18.2 METHODS OF PROTECTIONISM OR POLICIES .....................................................................................253 18.3 EFFECTS OF FREE TRADE AND PROTECTIONISM ................................................................................254 Key........................................................................................................................................................259 Detailed Answers ..............................................................................................................................260 UNIT-19

EXCHANGE RATE ....................................................................................................................264

19.1 MEANING OF EXCHANGE RATE ........................................................................................................264 19.2 EFFECTS OF EXCHANGE RATE DEPRECIATION AND APPRECIATION .......................................................264 19.3 CAUSES OF EXCHANGE RATE DEPRECIATION AND APPRECIATION ........................................................266 Key........................................................................................................................................................267 Detailed Answer ................................................................................................................................268 UNIT-20

BALANCE OF PAYMENT .........................................................................................................270

20.1 BALANCE OF PAYMENTS ACCOUNTS ................................................................................................270 20.2 CAUSES OF BALANCE OF PAYMENTS DEFICIT OR SURPLUS .................................................................273 20.3 MIXED QUESTIONS ........................................................................................................................275 Key........................................................................................................................................................276 Detailed Answers ..............................................................................................................................277

8

UNIT-21

ADVERTISING, MONOPOLY AND COMPETITION .................................................................280

21.1 CHARACTERISTICS OF PERFECT COMPETITION AND MONOPOLY ..........................................................280 21.2 PRICING AND OUTPUT OF PERFECT COMPETITION AND MONOPOLY ......................................................281 21.3 ADVANTAGES AND DISADVANTAGES OF MONOPOLY ...........................................................................282 21.4 ADVERTISING................................................................................................................................282 Key........................................................................................................................................................283 Detailed Answers ..............................................................................................................................284 UNIT-22

OTHERS ....................................................................................................................................286

22.1 OTHERS .......................................................................................................................................286 Key........................................................................................................................................................294 Detailed Answers ..............................................................................................................................295 UNIT-23 NOVEMBER 2015 TO NOVEMBER 2017………………………………….…………….……….. 298 KEY ALL YEARS..................................................................................................................LAST PAGE

Unit 1

9

Basic economic problem

Unit-1

BASIC ECONOMIC IDEAS

1.1

Factors of production

1

In a market economy, what does the entrepreneur decide?

A B C D

the combination of resources used the demand for the product the equilibrium price of the product the level of profits J05/P1/Q1

2

A boat owner employs a crew to catch fish to sell on the market.

Which factors of production are involved in this activity?

A C

3

labour, capital and enterprise only land, labour and enterprise only

B D

land, labour and capital only land, labour, capital and enterprise J06/P1/Q3

What is an example of the factor of production enterprise?

A C

a shop assistant a shop owner

B D

a shop’s profits a shopping centre N06/P1/Q4

4

$2 bn is invested in developing a country’s natural resources and infrastructure.

Which two factors of production does this refer to directly?

A C

capital and labour enterprise and land

B D

capital and land labour and land J07/P1/Q1

5

Which of the following is a factor of production?

A B C D

the payment of interest on a bank loan the profit declared by a company in its annual report the skill of the managers of a business the taxes paid to the government J08/P1/Q2

6

Hong Kong lacks natural resources. Its best asset is its people.

What can be concluded about Hong Kong’s factors of production?

Well supplied

Poorly supplied

A

Capital

Enterprise

B

Enterprise

Labour

C

Labour

Land

D

Land

Capital J08/P1/Q4

Unit 1

7

10

Basic economic problem

What is not a factor of production?

A C

company shares raw materials

B D

machinery unskilled workers N08/P1/Q1

8

A major airline needs a range of people and equipment. These can be divided into factors of production.

Which is allocated to its correct factor of production? people or equipment

factor of production

A

aircraft

capital

B

computer network

land

C

pilots

enterprise

D

shareholders

laboratory J09/P1/Q2

9

Nolwazi lived in a rural area in Botswana and made baskets to sell to the tourists. The local government gave her a loan to buy a car to take the baskets to the city market.

Which factor of production increased?

A C

capital labour

B D

enterprise land N09/P12/Q1

10

Which statement about the factors of production is correct?

A B C D

A river from which a company draws water is called land.

Raising finance for a company is called capital.

Supervisors employed in a company are called enterprise.

The owner of a company is called labour.

J10/P12/Q1

11

A farmer pays a landowner for the use of a field.

What is the income to the landowner called?

A C

interest rent

B D

profit wages N10/P12/Q1

12

What is a factor of production?

A B C D

an advantage of producing on a large scale a resource used to produce goods and services a sub-section of a manufacturing process a unit of output N10/P12/Q4

Unit 1

13

11

Basic economic problem

Each of the factors of production earns an income.

What are the incomes for land and capital? land

capital

A

rent

interest

B

rent

profit

C

wages

interest

D

wages

profit J11/P12/Q1

14

Which statement about the factors of production is correct?

A B C D

15

Capital includes factories and machinery but not roads and ports.

Enterprise is more often found in the public sector rather than the private sector.

Labour is the factor that takes risks and can become unemployed.

Land is the natural factor that can be improved by human action.

J12/P12/Q2

Two telecommunications companies are to merge to finance investments in new technology, which will be more efficient and require smaller buildings. Three hundred workers will lose their jobs.

What will happen to the factors of production used? land

labour

A

fall

fall

capital rise

enterprise fall

B

fall

fall

uncertain

rise

C

rise

rise

rise

rise

D

uncertain

rise

fall

fall N12/P12/Q3

16

Reena makes a living by selling paintings of the town in which she lives. She sells them in an open air market once a week.

In order to be able to sell more pictures in a week she decides to buy a studio, pay someone to help in the studio and try to increase demand by advertising in the local paper.

Which factors of production were changed?

A C

capital and enterprise labour and capital

B D

enterprise and labour labour only J13/P12/Q3

17

In which case is it possible to set the level of reward before production takes place for the first factor of production but not for the second? first factor

second factor

A

capital

land

B

enterprise

labour

C

labour

capital

D

land

enterprise N13/P12/Q3

Unit 1

18

12

Basic economic problem

What is a factor of production?

A B C D

a semi-skilled, young worker direct taxes received by a government shares in a manufacturing company stocks of money held a bank J14/P12/Q3

19

Which statement about the factors of production is correct?

A B C D

Capital includes man-made machines that do not keep their original value.

Enterprise is a natural factor of production that cannot be taught.

Labour is an immobile factor that does not change its skill level.

Land is only agricultural fields that cannot be improved by human effort.

N14/P12/Q2

20

New oil reserves are discovered.

What has increased in supply?

A

capital

B

enterprise

C

labour

D

land J15/P12/Q2

1.2

Opportunity cost and scarcity (Basic economic problem)

21

An unemployed worker accepts a job.

Which of the following is the opportunity cost of this decision?

A C

the cost of travel to work the leisure time lost

B D

the income from the new job the training in the new job J03/P1/Q1

22

A hospital cannot treat all the people that need treatment. This is an example of A C

excess supply. scarcity.

B D

limited wants. unlimited resources.

J03/P1/Q2, J09/P1/Q5

23

The table shows the various combinations of food and clothing which a village can produce using all its resources. food units clothing units 0 500 100 400 200 250 300 50 400 0 What is the opportunity cost to the village of increasing the production of food from 200 to 300 units?

A C

50 units of clothing 200 units of clothing

B D

100 units of clothing 250 units of clothing N03/P1/Q2

Unit 1

24

13

Basic economic problem

Which statement best explains why drought is an economic problem?

A B C D

Drought cannot be controlled.

Rainfall is unreliable.

The effects of drought involve the government.

Water is a scarce good.

J04/P1/Q2

25

In 2002 the government of Zimbabwe diverted US$18 million, originally intended to support private business, to help feed millions of people threatened by famine. Some of the money was used to import up to 1.8 million tonnes of corn.

What was the opportunity cost to Zimbabwe of this decision?

A C

26

B D

the cost of the 1.8 million tonnes of corn the US$18 million J04/P1/Q3

A woman playing a quiz game starts with no money, but correctly answers the question that is worth $4000. The next question is worth $10 000 but if she answers incorrectly she will leave the game with no money.

What is her opportunity cost of choosing to answer the $10 000 question if her answer is incorrect?

A

27

the cost of the extra food the effect on private business

nothing

B

$4000

C

$6000

D $10 000 N04/P1/Q2, N08/P1/Q5

A factory working at full capacity is producing tennis racquets and golf clubs. The management decides to produce fewer racquets and more clubs because of an increase in demand for golf clubs.

What is the opportunity cost of producing more golf clubs?

A B C D

the cost of retraining some workers to make golf clubs the cost of transporting and selling the extra golf clubs produced the materials bought to make extra golf clubs the tennis racquets that will not now be produced J05/P1/Q3

28

What is the basic economic problem facing all economies?

A C

inequality of income low economic growth

B D

insufficient resources shortages of skilled labour N05/P1/Q1

1

29

A government spends $100 m on employing extra teachers instead of extra nurses.

What will be the opportunity cost of this?

A C

30

$100 m the extra nurses

B D

the cost of training extra teachers the reduction in unemployment among teachers N05/P1/Q3

Construction companies are building new houses on land previously used for farming.

What is the opportunity cost to society of this activity?

A C

improved living conditions B more homes for new homeowners D

less congestion in city centres some farm output J06/P1/Q1

Unit 1

31

14

Basic economic problem

A government decides to spend more on defence and, therefore, cannot spend as much on improving the country’s infrastructure.

What economic idea is illustrated by this decision?

A C

budget surplus opportunity cost

B D

monetary policy specialization N06/P1/Q1

32

The table shows the various combinations of food and clothing which a village can produce using all its resources. food units

clothing units

0

500

100

400

200

250

300

50

400

0

What is the opportunity cost to the village of increasing the production of food from 200 to 300 units?

A C

50 units of clothing 200 units of clothing

B D

100 units of clothing 250 units of clothing J08/P1/Q5

33

What is the basic economic problem facing all societies?

A B C D

how to achieve price stability how to keep employment levels high the extent to which incomes should be redistributed what will be produced, how and for whom?

J09/P1/Q1

34

Commercial companies are cutting down tropical rainforests for hardwood timber.

What is the opportunity cost to society of this activity?

A B C D

tax revenue from the sale of the timber the environment that is destroyed the products made from the timber the profits of the companies J09/P1/Q3

35

What, according to the definition of opportunity cost, is sacrificed when a decision is taken?

A C

an identical alternative the least valuable alternative

B D

any possible alternative the next best alternative N09/P12/Q2

Unit 1

36

15

Basic economic problem

Which terms summarise the nature of the economic problem?

A B C D

finite resources and limited wants finite resources and unlimited wants infinite resources and limited wants infinite resources and unlimited wants J10/P12/Q2, J15/P12/Q1

37

The government of a country with a rapidly increasing population decides to switch resources from investment to increased subsidies to farmers.

What is the opportunity cost of this decision?

A C

38

the profit earned by farmers the reduction in investment

B D

the rent of the land on which food is grown the wages of the farm workers J10/P12/Q4

Which economic change would increase the problem of scarcity?

A C

a decrease in fish stocks an increase in labour productivity

B D

a discovery of a new oil field a reduction in waste J10/P12/Q5

39

What makes choice an important element in the basic economic problem?

A B C D

Increased demand leads to higher market prices.

Limited resources have many alternative uses.

Reaching a market equilibrium may take a long time.

Scarce economic resources are distributed equally.

N10/P12/Q3

40

A government is faced with the choice of spending on either education or healthcare. Of what is this an example?

A C

conservation of resources opportunity cost

B D

monetary policy substitution of factors N10/P12/Q5

41

A firm decides to stop manufacturing ovens and to produce washing machines instead.

What is the opportunity cost to the firm?

A B C D

the additional washing machines produced the cost of producing ovens the cost of producing washing machines the loss of the production of ovens J11/P12/Q2

42

What is meant by the economic problem?

A B C D

how to achieve efficiency with the existence of fixed resources and limited wants how to allocate resources between public and private sectors how to balance unlimited wants against finite resources how to decide which methods to use to exploit all resources J11/P12/Q5

Unit 1

43

16

Basic economic problem

Every business organisation faces the problem of satisfying wants.

What is the reason why wants are not fully satisfied?

A B C D

An economy can only produce a limited amount of goods and services.

Governments cannot print enough money to pay for goods and services.

There is an over-production of goods and services by business organisations.

Workers are too skilled for the requirements of the jobs available.

N11/P12/Q3

44

A university rejects 2000 qualified applicants who wish to study there.

What factor of production could have caused the university to make this decision?

A C

infinite quantity of capital surplus of land

B D

scarcity of labour unlimited supply of enterprise N11/P12/Q4

45

Economics is primarily concerned with A B C D

allocating scarce resources for unlimited wants. controlling unemployment and inflation. determining the level of government expenditure. studying how new wants and economic resources can be produced.

J12/P12/Q1

46

A student leaves school and decides to spend the next two years at a college to improve her qualifications.

What is the opportunity cost to the student of taking this decision?

A B C D

47

the cost of the course fees at the college the increase in job opportunities she will have as a result of her extra qualifications the lost production due to her not being in work the money she would have earned if she had been in work for the two years J12/P12/Q3

In China the government is concerned about the level of poverty and the need for more resources in the poorer regions of the country. As a result, it is increasing its expenditure there and reducing it in the wealthier regions.

Which economic concept does this government policy illustrate best?

A C

diseconomies of scale opportunity cost

B D

market forces specialisation N12/P12/Q1

48

A country with a low income per head discovers large quantities of oil, which eventually makes everybody better off.

Why is the basic economic problem of scarcity not solved by this discovery?

A B C D

People may not get jobs in the oil industry.

People’s wants are always changing and increasing.

Prices of oil can fluctuate on the world market.

Production of oil can damage the environment.

N12/P12/Q2

Unit 1

49

17

Basic economic problem

Why will the economic problem never be solved?

A B C D

People will always want more products than can be produced.

People will never agree on what is the best economic system.

There will always be an uneven distribution of income.

There will always be some people unemployed.

J13/P12/Q1

50

Sam wrote a list of how he would prefer to spend his Saturday afternoon. first choice

go to a cricket match

second choice

watch the annual town parade

third choice

go to the cinema

fourth choice

visit relatives

Unfortunately a thunderstorm caused the cricket match and the town parade to be cancelled. Sam went to the cinema.

What was the opportunity cost of going to the cinema?

A B C D

going to the cricket match watching the town parade visiting his relatives losing his Saturday free time N13/P12/Q1

51

What is the cause of economic scarcity?

A B C D

limited wants with limited resources limited wants with unlimited resources unlimited wants with limited resources unlimited wants with unlimited resources J14/P12/Q1

52

Economics textbooks often start by identifying the existence of the basic economic problem.

What is it that makes this problem ‘basic’?

A B C D

It affects all economies and individuals.

It is the most urgent target of government economic policy.

It only affects low-income developing economies.

It relates to the production of raw materials in the primary sector.

N14/P12/Q1

53

A person makes sandwiches at home for five hours each day. She makes 20 sandwiches per hour, and she sells each sandwich for $2 each.

What is the opportunity cost if she takes a holiday on a working day?

A B C D

$2 $40 20 sandwiches 100 sandwiches J15/P12/Q4

Unit 1

18

1.3

Production possibility curve

54

An economy is producing at X.

X

200 food

Y

150

0

Basic economic problem

75 100 machines

What is the opportunity cost of choosing to produce at Y instead of X? A B C D

25 machines 50 units of food 75 machines 150 units of food J07/P1/Q4

55

The diagram shows the choices for an individual between leisure and earnings.

24 20 16 X

hours of leisure 12 per day 8

Y

4 0 0

20

40

60

80

100

120

earnings $

What is the opportunity cost to the individual of the extra earnings when moving from position X to position Y? A C

$20 4 hours of leisure per day

B D

$80 8 hours of leisure per day N07/P1/Q2, N11/P12/Q1

Unit 1

56

19

Basic economic problem

A country is producing at point X on its production possibility curve which shows how it can allocate its production between capital goods and consumer goods.

A period of recession then causes some of its factories to close.

Which point could represent the country’s new position?

A

B X

capital goods

O

C

D

consumer goods

J13/P12/Q2 57

How does a production possibility curve show that scarcity exists?

A B C D

58

It shows that a rise in demand for one of the products increases its price.

It shows that as more resources are used to produce a product, its price rises.

It shows that at any point outside the production possibility curve an economy is wasting resources.

It shows that there is a limit to the quantity of products that can be produced with existing resources and technology.

N13/P12/Q2

How is an immediate effect of an increase in unemployment illustrated on a production possibility curve diagram?

A B C D

a movement of the production point closer to the curve a movement of the production point further inside the curve a shift of the production possibility curve inwards a shift of the production possibility curve outwards J14/P12/Q2

59

The diagram shows two production possibility curves for an economy.

What could have caused the change in the economy’s production possibility curve from XX to YY? A B C D

a decrease in the price level a large number of industrial disputes a major earthquake an increase in unemployment

N14/P12/Q3

Unit 1

60

20

Basic economic problem

The diagram shows production possibility curves (PPC) for a country that can produce agricultural products or manufactured products.

Its current PPC passes through points Q and S but the country is currently experiencing unemployment.

R

Q agricultural products

S

P

O

manufactured products If there is now full employment at the same time as new agricultural techniques enable an increase in productivity, what would be the movement on the PPC diagram?

A

P to R

B

P to S

C

Q to R

D

1.4

Labour intensive and capital intensive

61

An entrepreneur can use either capital or labour in the production process. The actual combination changes as the prices of the factors alter.

S to Q J15/P12/Q3

When is capital most likely to replace labour?

Price of Capital

Price of Labour

A

Constant

Falling

B

Falling

Rising

C

Rising

Constant

D

Falling

Falling N03/P1/Q23, J06/P1/Q20, N08/P1/Q3

62

What makes an industry capital-intensive?

A B C D

It employs many unskilled workers.

It manufactures expensive products.

It occupies sites on cheap land.

It uses a large amount of equipment and a small labour force N06/P1/Q3

63

A British firm, Dyson, moved production of its vacuum cleaners from the UK to Malaysia.

Why might it have made this change?

A C

average costs would fall market share would fall

B D

average revenue would rise transport costs would rise J07/P1/Q20

Unit 1

21

Basic economic problem

Key Q

Ans.

Q

Ans.

Q

Ans.

Q

Ans.

1

A

17

D

33

D

49

A

2

D

18

A

34

B

50

C

3

C

19

A

35

D

51

C

4

B

20

D

36

B

52

A

5

C

21

C

37

C

53

D

6

C

22

C

38

A

54

B

7

A

23

C

39

B

55

C

8

A

24

D

40

C

56

C

9

A

25

C

41

D

57

D

10

A

26

B

42

C

58

B

11

C

27

D

43

A

59

C

12

B

28

B

44

B

60

A

13

A

29

C

45

A

61

B

14

D

30

D

46

D

62

D

15

B

31

C

47

C

63

A

16

C

32

C

48

B

Unit 1

22

Basic economic problem

Detailed Answers 1.1 1-A

In a market economy there is freedom to enterprise and the entrepreneur combines all factors together in a proportion that minimizes the cost. Therefore entrepreneur decides the allocation of resources in terms of combination of resources used.

2-D

All four factors of production are involved in this activity. Land (all natural resources) will be the sea from which fishes are caught, labour (human efforts) will be the crew employed, capital (manmade resources) will be the boat and entrepreneur (the boat owner who is combining all these factors of production together and is taking the risk of loss).

3-C

Enterprise (or entrepreneur) is the person who combines all the factors of productions and takes the risk of loss. In this case, shop owner is the person who will fit into the definition of enterprise

4-B

Capital refers to all manmade resources and hence infrastructure will come under the category of capital whereas land refers to all the natural resources. The question directly refers to capital and land.

5-C

Factors of production are the scarce resources used in a production process. There are four types of factors of production: land (natural resources), labour (human efforts), capital (manmade resources) and entrepreneur (risk taker). Skills of a manager will be the human efforts and hence will come under the category of labour as factor of production.

6-C

Natural resources include land whereas human efforts include labour. Hence, Hong Kong is well supplied in labour and poorly supplied in land.

7-A

Factors of production include land (natural resources), labour (human efforts), capital (manmade resources) and entrepreneur (risk taker). Company shares are the investment undertaken by the shareholders in a business and investments don’t form a part of any of the above types of factors of production.

8-A

Aircraft comes under the category of capital which includes all the manmade resources.

9-A

Capital includes all the manmade resources and hence car comes under the category of

10-A

Land includes all the natural resources and hence the river used by a company to draw water will come under the category of land.

11-C

The reward/income for parting away from land (in this case a field) is rent.

12-B

Factors of production are all those resources which are used in production of goods and services, e.g., land, labour, capital, etc.

13-A

Rent is an income for land. It is when a person owning land parts away from his or her land he or she earns rent as a compensation/reward or income. Same goes for capital. When a person owning capital parts away from the capital by giving it to someone else, he or she earns interest as a reward/income.

capital.

Unit 1

23

Basic economic problem

14-D

Land refers to all natural resources. Hence, Land is that natural resource that is utilized in order to make further goods and resources.

15-B

The merger will require smaller buildings so the use of land will fall. It has also been mentioned that 300 people will lose their jobs so use of labor will also fall. Investment into technology will increase so use of capital will rise. Enterprise, which is the skill required to combine the factors of production, will also fall since there are fewer firms. Therefore the answer is option A.

16-C

Firstly, since Reena has bought a studio, this means she has employed capital into the production process. Capital is a man-made resource that aids in producing goods, and in the question it has been clearly stated that the studio will help her sell more pictures, so capital has changed. Also, Reena hired someone to help her sell pictures, which means labour is being used. So, the correct answer is option C.

17-D

It is possible to set the level of reward for land because rent is predetermined based on external factors and can easily be calculated before production starts. However, it is not possible to accurately forecast the level of reward expected from enterprise because it is difficult to know whether the business will earn a profit or loss and what amount exactly. The level of reward from the other two factors of production can also be determined to a certain extent. Option D is correct.

18-A

Factors of production are inputs that could help in the production of goods & services. The four main factors of production are labor, capital, land and enterprise. Labor as factor of production is human effort mental or physical that helps in producing goods. A young semi-skilled worker can provide labor services to a firm to help it produce a good and therefore option A is correct.

19-A

One of the factors of production—the inputs necessary to produce commodities—is capital.

'Capital,' in the context of factors of production, refers to all those man-made machines that aid in the production process; thus, option A is correct. The phrase regarding capital not keeping its 'original value' merely refers to the imputed cost of depreciation (or capital consumption), which, in economics, is calculated in terms of opportunity costs, and arises because the asset wears out or becomes obsolete. The factor of production of enterprise refers to entrepreneurs, who take risks and combine the other factors of production in order ensure that the firm produces and operates well; it is not a natural factor of production. Subjects on management are taught in schools and universities, so option B is wrong. 'Labor' refers to workers, and this is, in most cases, a mobile factor of production, and its skill level can be changed through education and vocational programs (among other things), so option C is incorrect. The term 'land' covers all natural resources— whether it be crude oil or coal or agriculture, etc.—and not just agricultural fields. Also, there have been improvements in crops through scientific research; option D is, therefore, wrong.

20-D

Factors of production are all those resources without which production cannot take place. Land refers to all natural resources. Since oil is a natural resource, it is classified as land. Therefore, option D is the answer. Capital refers to all man-made commodities that aid in the production process or improve factor productivity. Enterprise refers to the people who help bring all the other factors of production together in order to initiate and manage a firm. Labour refers to all human effort that is invested into the production process.

1.2 21-C

The worker has to choose between a job and the time he can spend in leisure while not at work. By choosing the job he will forgo the leisure time which will be his opportunity cost

22-C

The hospital has limited resources to cater for all the people who come for treatment and therefore it is an example of scarcity (which arises from limited resources and unlimited wants).

Unit 1

24

Basic economic problem

23-C

When the village increases their production of food from 200 to 300 units, production of clothing falls from 250 to 50 units. Therefore they have to forgo 200 units of clothing (250- 50) which is their opportunity cost of increasing the production of food.

24-D

The economic problem arises from limited resources and unlimited wants, i.e., scarcity. Drought is an economic problem because water is a resource that is scarce in nature.

25-C

The money previously intended for supporting private businesses was now used to feed those who were threatened by famine. The opportunity cost (the benefit of next best alternative forgone) of this decision would be the effect on private businesses (in terms of their growth, expansion, etc).

26-B

Initially, the woman has won $4000. In case she answers the $10000 question incorrectly she would have to forgo those $4000 won which will be her opportunity cost (benefit of next best alternative forgone).

27-D

Opportunity cost is the benefit of the next best alternative forgone. The tennis racquets that would not now be produced because of an increase in the production of golf clubs will be the opportunity cost.

28-B

Basic economic problem arises from limited resources to satisfy all the wants. Hence insufficient resources is the basic economic problem faced by all economies.

29-C

Opportunity cost (the benefit of next best alternative forgone) will be the extra nurses forgone because of the employment of extra teachers.

30-D

Farm-land would be used for the construction of new houses which would lead to a loss of some farm output. This would be the opportunity cost (benefit of next best alternative forgone) of building new houses on land previously used for farming.

31-C

The country has to forgo the improvement in country’s infrastructure because of an increased expenditure on defence. This will be the opportunity cost (benefit of next best alternative forgone) of this decision

32-C

When the village increases their production of food from 200 to 300 units they have to forgo 200 units of clothing (250-50 units of clothing) which is their opportunity cost of increasing the production of food.

33-D

The basic economic problem faced by all societies is what to produce, how to produce and for whom to produce.

34-B

The opportunity cost will be the environment that is destroyed because of cutting down tropical rainforests for hardwood timber.

35-D

Opportunity cost is the benefit of next best alternative forgone.

36-B

Basic economic problem arises from limited resources and unlimited wants.

37-C

Opportunity cost is the benefit of next best alternative forgone. A reduction in investment will be the opportunity cost of increased subsidies to farmers.

38-A

A decrease in fish stocks means a reduction in natural resources which will aggravate the problem of scarcity.

Unit 1

25

Basic economic problem

39-B

Basic economic problem, i.e., limited resources and unlimited wants lead to the making of choice from alternative uses.

40-C

Opportunity cost is the cost of next best alternative forgone. Making a choice between education or healthcare would lead to opportunity cost.

41-D

Opportunity cost is the benefit of next best alternative forgone. If a firm starts producing washing machines instead of ovens its next best alternative forgone will be the loss of ovens it could have produced.

42-C

The basic economic problem arises because of the fact that there are limited resources to cater for unlimited wants. The whole scope of economics rests on this economic problem which tries to tackle how to balance limited resources and unlimited wants.

43-A

Wants are not fully satisfied by a business organization because an economy has limited resources to satisfy unlimited wants of its people and therefore only limited amount of goods can be produced.

44-B

A university has not accepted all the students because it is faced with the problem of scarcity of labour, i.e., it doesn’t have instructors to cater for all the students that have applied and therefore has to reject some of the students.

45-A

Economics is a social science that is concerned with how humans make the best use out of the scarce resources in order to satisfy their unlimited wants. Hence, option A is correct.

46-D

Opportunity cost is the benefit of next best alternative forgone. If a student enrolls in a college instead of working, the next best alternative forgone (opportunity cost) will be the money that student could have received by working. Hence, option D is correct.

47-C

Opportunity cost is the benefit of the next best alternative given up. In this question, the government is reallocating resources towards poorer regions by reducing its expenditure on wealthier regions. This action is best explained by the concept of opportunity cost. Option A applies only to higher costs when scale of production is increased. Since this question is only concerned with the government, option B cannot be the answer. Option D applies when production process is divided so that individuals can become specialized in specific tasks, and so cannot be the correct answer.

48-B

The basic economic problem asserts that scarcity exists in all economies; that is there is finite amount of resources but unlimited wants. Since people’s wants are changing, the society at one time will never be able to fulfill all of people’s wants. The discovery of oil reserves may make some better off but nevertheless will be unable to satisfy all people. Option B is therefore the right answer. Option A is incorrect because people can still get jobs in other industries. Option C is incorrect because fluctuations in oil prices will have no impact on oil reserves and can only marginally change people employed in the oil industry. Option D is irrelevant since environmental damage has nothing to do with the basic economic problem.

49-A

By definition the basic economic problem is that scarcity will always exist in society. That is, people will demand more than can be produced using finite resources. Option A correctly describes the problem of scarcity. Other options are economic problems, but they all stem from the existence of the basic economic problem.

50-C

Opportunity cost is the benefit of the next best alternative forgone. Since the thunderstorm cancelled the cricket match and the parade, the opportunity cost of going to the cinema is the benefit he would have received from visiting his relatives. Therefore option C is correct.

Unit 1

26

Basic economic problem

51-C

Economic scarcity exists because there are finite resources in the world whereas people’s demand are unlimited. So option C is the answer.

52-A

The basic economic problem is that of 'scarcity'—the fact that there are finite resources and unlimited wants. This problem is considered 'basic' because 'it affects all economies and individuals,' and is thus a universal problem; this makes option A the correct answer. It is not the most urgent target of government economic policy (as option B states), and it is also a problem found in free market economies where governments are not present. It affects all economies, and not only low-income developing ones, so option C is incorrect as well. Option D is incorrect because the basic economic problem relates to the lack of resources to produce commodities, not the production of raw materials in the primary sector.

53-D

Opportunity cost refers to the benefit from the next best alternative forgone as the result of an economic decision which involved a choice. She makes 20 sandwiches per hour, and works 5 hours each day; so, in a normal working day, she can produce 20×5=100 sandwiches. However, if she takes a holiday, then she will forego all those sandwiches. Those 100 sandwiches will become the opportunity cost of her decision to take a holiday. This is option D.

1.3 54-B

When the country chooses instead of X, it has an increase of machines from 75 to 100 units but a reduction of food from 200 to 150 units. Hence 50 units of food is the opportunity cost of 25 more units of machines.

55-C

Initial leisure hour on point X is 12. Leisure hour on point Y is 8. When he moves from point X to point Y he forgoes 4 hours (12 – 8) of leisure per day.

56-C

The production possibility curve shows all possible production bundles that an economy can produce given that it is utilizing all resources efficiently. All points on the PPC are efficient. During a recession, an economy begins to contract and certain resources become unemployed. If an economy is not using all of its resources it will produce under the PPC, which is shown by point C.

57-D

Production possibility curve shows all the possible combinations of two commodities that can be produced using existing resources. The concept of scarcity is shown through a PPC as a society can only produce a limited quantity of the goods with existing resources. Option D is correct.

58-B

Unemployment means the society is not utilizing all of its resources and therefore is producing less than its potential. Since it will be producing less than its potential its production point will be shifted inside the curve. So option B is correct.

59-C

The production possibility curve (PPC) shows the maximum possible combinations of two commodities which a country can produce using all of its available resources with economic efficiency—within the constraints of a given state of technology. A major earthquake is a natural disaster which would significantly reduce the potential productive capacity of an economy, thus causing the PPC to shift inwards from XX to YY; option C is, therefore, correct. Option A is incorrect because the price level is irrelevant to the PPC. Option B is incorrect because a large number of industrial disputes might hamper production, causing an economy to produce inside the PPC, but not shifting the PPC inwards. An increase in unemployment would mean that labor is not being fully employed, so option D is incorrect for the same reason: The economy is producing inside the PPC, but there is no inward shift of the PPC itself.

Unit 1

60-A

27

Basic economic problem

The production possibility curve (PPC) shows the maximum possible combinations of two commodities which a country can produce using all of its available resources with economic efficiency, within the constraints of a given state of technology. When the economy is experiencing unemployment, then that means that it is not utilizing all of its resources efficiently; thus, it will produce inside the PPC. So, the initial point that the country is producing at is P. An increase in factor productivity can cause varying shifts in the entire PPC. An introduction of agricultural techniques that enhance productivity will increase the amount of agricultural products that the economy can produce without forgoing any manufactured products. Since the economy is now also at full employment, then that means that it will be producing on its PPC. Therefore, the new possible point at which the economy is producing is R. Thus, the economy moves from P to R, which is option A.

1.4 61-B

Capital will be replaced by labour when it will be more economical for the producer to use capital. It will be economical in a situation when the price of capital falls and price of labour rises.

62-D

Capital intensive industry is one that uses more machines and equipment in proportion to labour.

On the other hand labour–intensive is an industry in which greater proportion of inputs is labour.

63-A

Dyson might have moved production of its vacuum cleaners from the UK to Malaysia because of lower labor wage rates in Malaysia, which would cause its average costs of production to fall. Thus, the answer is option A.