1. What is necessary to achieve Pareto efficiency?
A Both consumers and producers must be made better off.
B Everybody must be made equally better off.
C One person must benefit without anyone else being worse off.
D The welfare gains must exceed the welfare losses.

2. A local council is considering building a passenger terminal at a port so that it can benefit the large cruise ships that dock there. It undertakes a cost–benefit analysis.
What would be included as an external cost in the local council’s cost–benefit analysis?
A the cost of a ticket for a passenger to travel on a cruise ship
B the cost of fuel to operate the cruise ships
C the costs paid by cruise ships when they dock at the port
D the cost to a fishing fleet of relocating to another port

3. The expected marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC) for the building of a new road are shown in the diagram. The government intervenes so that the socially desirable output is achieved.

Which combination shows the equilibrium output without government intervention and with
government intervention?

	Without government intervention	With government intervention
A	Q4	Q1
B	Q3	Q2
C	Q3	Q4
D	Q4	Q1

Answers

4. A rational consumer chooses what quantities of two products Y and Z to purchase with a given income.
MU_Y and MU_Z are the additions to total utility that would result if the consumer were to purchase an additional unit of each product.
P_Y and P_Z are the current prices of the two products.
Which outcome would represent consumer equilibrium?
A when MU_Y = MU_Z
B when MU_Yx P_Y = MU_Z x P_Z
C when MU_Y x P_Z = MU_Z x P_Y
D it is not possible to tell from the information available

5. The diagrams show a consumer’s indifference curves (IC) and budget lines (BL) for an inferior good and a normal good.
Which diagram shows the effect of a cut in income tax on the consumer’s choice?