1. When a firm increases all its inputs fourfold, its output increases threefold.
What does this illustrate?
A decreasing marginal costs
B decreasing returns to scale
C economies of scale
D the law of diminishing returns

2. What represents the transfer earnings of the factor enterprise?
A excess profit
B normal profit
C return on capital
D start-up costs

3. A country has a negative income tax.
The curve NT in the diagram shows the country’s initial tax schedule.

A change in the tax rate causes the schedule to shift to NT1.
How will this affect work incentives and the after-tax distribution of income?

	Work incentives	Distribution of income
A	Strengthen	More equal
B	Strenghten	Less equal
C	Weaken	Less equal
D	Weaken	More equal

4. In which labour market diagram is the economic rent of workers greatest?

5. Which statement about government intervention is correct?
A Government failure may result from policies that have unintended side effects.
B Governments cannot identify the existence of inefficiency.
C Inefficient government policies mean that the market system will be better at resource
allocation.
D Market failure means that government action will necessarily improve the situation.

Answers