Cambridge A Level Economics 9708 — 2015 Oct/Nov Paper 3 · Variant 1

1 An economy is said to be economically inefficient if A it is possible to make some people better off without making other people worse off. B the distribution of income is socially unacceptable. C the government sector is growing at the expense of the private sector. D wage rates rise faster than production.

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2 The table shows the total utility that an individual obtains from consuming different quantities of a good. quantity of good total utility (units) (units) 1 20 2 36 3 50 4 62 5 72 6 80 The individual’s marginal utility of money is $1 = 3 units of utility. What is the maximum quantity of the good that the individual will buy when its price is $4? A 2 units B 3 units C 4 units D 5 units

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3 Which statement explains why labour is subject to the law of diminishing returns in the short run? A As additional workers are hired, total output decreases. B As employment increases, the capital-labour ratio falls. C As employment increases, wage rates will have to be increased. D As output increases, eventually diseconomies of scale will occur.

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4 The diagram shows a firm’s initial marginal revenue product of labour curve (MRP1). marginal revenue product of labour MRP1 MRP2 O labour hours What could cause the curve to shift to MRP2? A an increase in labour productivity B an increase in the wage rate C a reduction in labour hours D a reduction in the price of the firm’s product

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5 A worker decides to work fewer hours when there is a rise in her real wage. How is this explained by income and substitution effects? income effect substitution effect balance of effects A negative positive income effect outweighs substitution effect B negative positive substitution effect outweighs income effect C positive negative substitution effect outweighs income effect D positive positive income effect outweighs substitution effect

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6 The diagram shows what happens when the employees of a profit maximising monopsonist employer form a trade union and successfully negotiate a wage rate of OWT. MCL SL wage rate W2 WT W1 MRPL = DL O Q1 Q3 Q2 Q4 employment What is the effect of the new wage rate on employment? A It falls from OQ2 to OQ1. B It falls from OQ2 to OQ3. C It rises from OQ1 to OQ3. D It rises from OQ1 to OQ4.

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7 The schedule shows the short-run marginal cost of producing good X. units of X 1 2 3 4 5 marginal cost ($) 50 40 20 20 60 Given that the total fixed cost is $10, what level of output minimises average total cost? A 2 units B 3 units C 4 units D 5 units

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8 What is most likely to explain why both large and small firms are often found within the same industry? A All firms in the industry produce identical products. B Firms that assemble the final product buy components from specialist firms within the industry. C Production within the industry is subject to diseconomies of scale. D There are significant barriers to the entry of new firms into the industry.

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9 The diagram shows how a firm’s output (Q) changes in response to changes in the number of workers it employs and the number of units of capital (K) it hires. 50 45 40 Q (K = 80 units) 35 30 output 25 (units) Q (K = 40 units) 20 Q (K = 20 units) 15 10 5 0 0 100 200 300 400 500 600 700 800 900 1000 labour (workers) Initially, the firm hires 20 units of capital and employs 200 workers. Assuming factor prices remain constant, what is the shape of the firm’s long-run average cost curve? A downward-sloping B horizontal C upward-sloping D U-shaped

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10 A firm takes over one of its main competitors. What is likely to happen to the price elasticity of demand for the firm’s product and what will be the impact of the takeover on its average cost of production? price elasticity average cost of demand A decreases increases B decreases uncertain C increases increases D increases uncertain

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11 The diagram shows a firm’s cost and revenue curves. MC AC cost, AR revenue MR O output The firm currently aims to maximise its sales volume subject to earning a normal profit. What will be the effect on price and output if it changes its objective to revenue maximisation while retaining the same minimum profit constraint? effect on price effect on output A increase no change B increase reduce C no change no change D no change reduce

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12 In the UK, four bus companies control more than two-thirds of the market. Critics claim that the big four agree to fix prices on some routes to maximise revenue whilst temporarily lowering prices on other routes to drive out smaller competitors. Which anti-competitive practices are the big four bus companies accused of? A collusion and limit pricing B collusion and predatory pricing C limit pricing and price discrimination D price discrimination and predatory pricing

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13 What will increase the likelihood that the firms in an industry will collude to maximise their joint profits? A The industry consists of a large number of producers. B The industry has many differentiated products. C The industry is characterised by rapid technological change. D There are significant barriers to prevent new firms entering the industry.

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14 The diagram shows an industry’s supply and demand curves. S u v price w x D O Q quantity In the absence of externalities, which area in the diagram measures the net loss in economic welfare if the government restricts the level of output to OQ? A u + v B v + w C x D v + w + x

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15 At present, motorists who drive their cars within area 1 on the map pay a daily congestion charge of $8. However, motorists who live within the congestion charge zone are eligible for a 90% discount. X Y Z area 1 area 2 Which car journeys would decrease in number if the congestion zone area were extended to include area 2? A journeys from point X to point Z B journeys from point Y to point X C journeys from point Y to point Z D journeys from point Z to point Y

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16 A government requires all its young citizens to undertake community service for a period of 6 months. The wages paid to those on the community service are below what they would otherwise have earned. What effect will this have on recorded GDP and on national welfare? effect on GDP effect on national welfare A reduction increase B reduction uncertain C unchanged increase D unchanged uncertain

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17 What must result from a rise in the supply of money, if the income velocity of circulation remains unchanged? A a fall in unemployment B a rise in the volume of output C a rise in the general level of prices D a rise in the money value of national income

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18 The table shows data on a country’s gross domestic product (GDP) at market prices and on domestic spending. year 1 year 2 year 3 ($million) ($million) ($million) GDP at market prices 630 650 680 private consumption 460 470 480 government consumption 140 160 170 gross investment 20 30 50 In which of these years will the country be faced with a balance of trade deficit? year 1 year 2 year 3 A no no yes B yes yes no C no yes yes D yes no no

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19 In the diagram, S1 is an economy’s initial saving function. S1 saving S2 O national income If the saving function shifts to S2, what effect will this have on the marginal propensity to consume and on the multiplier? marginal propensity multiplier to consume A decreases decreases B decreases increases C increases decreases D increases increases

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20 In an economy, the volume of output rises by 2% in a year, while the quantity of money rises by 5%. If the velocity of circulation of money remains the same, what will be the approximate increases in the price level and the money value of national income? increase in money increase in price level value of national income A 2% 5% B 2% 7% C 3% 5% D 3% 7%

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21 The diagram shows three different levels of money supply (MS) and three different demand curves for holding money balances (LP). The initial equilibrium is at point X. There is a reduction in bank lending and people decide to hold more money as a precaution against emergencies. What could be the new equilibrium point? A D B rate of X LP interest LP C LP MS MS MS O quantity of money

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22 Cuba, a developing country, achieves health and education standards as high as those found in leading developed countries. Yet, in 2005, its Human Development Index (HDI) value placed it 51st out of 177 countries surveyed. What might have explained its HDI value? A Cuba has a relatively high level of absolute poverty. B Cuba has a relatively large population. C Cuba has a relatively low GDP per head. D Cuba has relatively few people with access to safe water.

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23 Which characteristics are most commonly found in developing countries? saving ratio capital-output ratio A low low B high low C low high D high high

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24 Between 2012 and 2014 a country’s national output fell by 2%. Over the same period its unemployment rate decreased from 6% to 4%. What could explain this? A There was a decrease in labour productivity. B There was a fall in the rate of inflation. C There was an increase in the long-term potential rate of growth. D There was an increase in the size of the labour force.

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25 The table shows government revenue and expenditure of four countries as a % of GDP in 2000 and 2010. Which country moved from a budget deficit position in 2000 to a budget surplus in 2010? revenue (% of GDP) expenditure (% of GDP) 2000 2010 2000 2010 A France 50.2 49.5 51.7 56.6 B Norway 57.7 56.7 42.3 45.5 C Sweden 58.7 52.4 55.1 52.5 D Switzerland 35.2 34.0 35.6 33.8

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26 In an economy operating below full employment, which combination of changes will definitely result in an increase in national income? A a fall in the rate of taxation together with a rise in the saving rate B a rise in government expenditure together with a fall in the propensity to import C a rise in investment expenditure together with a rise in the rate of taxation D a rise in the propensity to save together with a rise in exports

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27 Which tax is most likely to be regressive? A an inheritance tax B a property tax C a sales tax D income tax

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28 Which policy by developed economies would be most beneficial for developing economies? A a ban on resource exploration by mining companies in developing economies B restrictions on investment by global firms in developing economies C the abolition of restrictions on immigration of skilled labour from developing economies D the withdrawal of agricultural subsidies in developed economies

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29 Some European countries experienced a decline in investment spending in 2011-2012. What might a government do to stop such a decline? A increase quotas on imports B lower interest rates C raise income tax D set up training courses

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30 The government decides to raise the rate of Value Added Tax (General Sales Tax). What does this suggest is the government’s main macroeconomic objective? A to reduce the budget deficit B to reduce the inequality of income distribution C to reduce the level of unemployment D to reduce the rate of inflation

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