1. What is not an example of an externality?
A A new firm is established in an area and pays its workers higher wage rates than other firms.
B The flowers planted by a householder in his garden give pleasure to his neighbours.
C The immunisation of children against smallpox reduces the danger of the risk of infection to
others.
D The installation of security cameras in a city centre results in an increase in thefts elsewhere.

2. The diagram shows the long-run equilibrium positions for two firms, X and Y.

What can be deduced about the economic efficiency of the two firms?

3. The production of a good creates a constant marginal external cost at all levels of output.
What value of price elasticity of demand for the good will cause the greatest deadweight welfare
loss from the externality?
A between zero and one
B equal to one
C greater than one
D zero

4. What arises in situations where there are costs or benefits associated with a transaction that are
not fully reflected in market prices?
A allocative efficiency
B allocative inefficiency
C productive efficiency
D productive inefficiency

5 To maximise the satisfaction she derives from a given level of expenditure on two goods, X and
Y, how should a consumer allocate her expenditure between the two goods?
A marginal utility X = marginal utility Y
B marginal utility X × price of X = marginal utility Y
C
D

Answers