1. The diagram shows the private and social marginal costs and benefits of a demerit good.
What is the socially optimal level of output?

2. Why are public goods an example of market failure?
A Producers undervalue the benefits of a public good.
B Public goods have high fixed costs of production.
C The non-excludability of a public good leads to the free rider problem.
D When a public good is consumed by one person, it is not available to others.

3. A government plans to build a new railway line. One proposed route will pass close to residential areas causing increased noise levels. An alternative shorter route will pass through a nature reserve causing environmental damage but saves travel time for rail users.
In using cost–benefit analysis, which combination shows what should be included as private cost
(PC) and what should be included as external costs (EC)?

4. What is held constant when deriving an individual consumer’s downward-sloping demand curve
for a product?
A marginal utility
B the consumer’s income
C the price of the product
D total utility

5. The diagram shows an individual’s total utility curve as different quantities of a good are
consumed.
At which level of consumption does the individual’s marginal utility become zero?