1. In an economy, no-one can be made better off without making someone else worse off.
What can be deduced from this?
A Individuals are the best judges of their own well-being.
B Individuals can be relied upon to behave rationally.
C The distribution of income is socially optimal.
D The economy’s resources are allocated efficiently.

2. The diagram shows the costs and benefits of producing a good. The good has negative
externalities in production and positive externalities in consumption. The free market equilibrium
is at point X.
What is the new equilibrium point when the externalities are taken into consideration?

3. The Airports Commission in the UK recommended an expansion of airport X rather than airport Y.
In considering the social costs and benefits of this decision, what would be taken into account
when calculating the external cost?
A the additional noise pollution suffered by residents local to airport X
B the financial loss suffered by airlines operating at airport Y
C the increase in profits of the firm operating airport X
D the monetary cost of the construction to expand airport X

4. What is a correct statement of the equi-marginal utility rule?
A The marginal utility of X must equal the marginal utility of Y.
B The marginal utility of X divided by the price of X must equal the marginal utility of Y divided
by the price of Y.
C The marginal utility of X divided by the price of Y must equal the marginal utility of Y divided
by the price of Y.
D The price of X must equal the price of Y.

5. Which statement is correct?
A A budget line shows the combinations of two goods which can be bought with a given
income.
B A budget line shows the combinations of two goods which a consumer wants to buy.
C A budget line shows the difference between income and expenditure.
D A budget line shows the maximum potential output of two goods with given resources.

Answers