9708A. 1 November

1. Which statement identifies the condition necessary to achieve Pareto optimality?
A All consumers maximise their utility subject to their available income.
B It is not possible to produce greater output with the resources available.
C It is not possible to reallocate resources to make someone better off without someone else
becoming worse off.
D Potential losers from any reallocation of resources cannot be compensated by those who gain.

2. The diagram shows a production possibility curve (LM) for an economy producing agricultural goods and manufacturing goods.

What can be concluded from the diagram?
A The economy must be allocatively efficient at point R.
B The economy is Pareto efficient at point T.
C The economy is productively efficient at point S.
D The opportunity cost is constant as we move from L to M.

3. The private benefit of an activity is greater than the private cost. The social benefit of the same activity is less than the social cost. What must be true of the activity?

A external benefit = external cost

B external benefit > external cost

C external benefit < external cost

D external benefit > private benefit

4. What is the central principle of marginal utility theory?
A As more is consumed of a normal good, the additional satisfaction gained increases.
B Consumers are in equilibrium when the marginal utility gained from good X equals the price
of good Y.
C Consumers are in equilibrium when the ratio of the marginal utility of goods X and Y are
equal to the ratio of their prices.
D Consumers are in equilibrium when the total utility gained from good X is the same as gained from good Y.

5. The diagram shows five budget lines. Line 1 is the original budget line.

Which pair of budget lines shows a relatively higher price for drink compared with food after a move from budget line 1?
A 2 and 3

B 2 and 4

C 3 and 5

D 4 and 5


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