1. Which situation would indicate the presence of an externality?
A Producers’ actions cause a shortage of a particular good.
B Private motorists contribute to traffic congestion in city centres.
C Differences in ability cause inequality in the distribution of income in an economy.
D Increased demand for a good by the rich raises its price for poorer consumers.

2. Building a hospital has a social cost of $200 million. The social benefit is $240 million; external
benefit is $150 million. What can be concluded from this information?
A external benefit is greater than external cost
B external benefit is greater than private benefit
C private benefit is greater than private cost
D the project should not take place

3. A firm produces good X and good Y when the marginal product of both labour and capital is
diminishing. The table shows the marginal products at a given output:

	Marginal product of labour (units)	Marginal product of capital (units)
Good X	4	6
Good Y	8	4

The firm should use … 1 … labour and … 2 … capital in the production of X and … 3 … labour and … 4 … capital in the production of Y.
Which words complete the gaps 1, 2, 3 and 4 if the firm wished to increase productive efficiency?

	1	2	3	4
A	Less	More	More	Less
B	Less	More	More	More
C	More	Less	Less	More
D	More	Less	Less	Less

4. What is equal at all points along an indifference curve for an individual consumer?
A marginal expenditure
B marginal utility
C total expenditure
D total utility

5. The diagram shows the total utility of a good for an individual consumer. Marginal utility gives a
guide to the price a consumer is willing to pay.

What can be concluded about the price a consumer is willing to pay per unit?
A The price a consumer is willing to pay will be higher at Q₀ than Q₁.
B The price a consumer is willing to pay will be higher at Q₃ than Q₀.
C The price a consumer is willing to pay will be highest at Q₂.
D The price a consumer is willing to pay will be the same at Q₁ and Q₃.

Answers