1. When is Pareto efficiency achieved?
A at a level of output that is productively and allocatively efficient
B when everyone has equal amounts of goods and services
C when social benefits are greater than private benefits
D when social marginal benefit is greater than social marginal cost

2. The transport authority in a city is considering building an underground railway to reduce traffic
congestion on the roads.
Which combination would represent an external cost and an external benefit of the use of this
railway?

	External Cost	External Benefit
A	compensation is paid to businesses displaced by construction work	foreign tourists pay to use the railway
B	nearby residents suffer noise from passing trains	there are fewer admissions to hospital as air quality improves
C	overtime payments are made to workers to finish building the railway on time	productivity increases as employees arrive at work more punctually
D	reduced traffic means there are fewer road improvements needed	motorists spend less on fuel

3 The diagram shows the marginal private benefit (MPB), the marginal private cost (MPC) and the
marginal social cost (MSC) of a firm producing chemicals. In a free market, price is at P₁.

Which quantity measures the overproduction of chemicals resulting in the negative production
externality?
A Q₁,Q₂ B Q₁,Q₃ C Q₂,Q₃ D Q₃,Q₄

4. The diagram shows the market price and equilibrium quantity of coffee consumed by an
individual, Jo.
Jo buys X cups of coffee at $2 per cup when she visits her favourite café.

When she is there, the café owner says it is offering unlimited free refills.
How is her consumption most likely to change?
A Jo’s demand for coffee will increase from X to Y where her total utility for coffee is zero.
B Jo’s demand for coffee will increase from X to Y where her marginal utility for coffee is zero.
C Jo will not drink extra coffee because its marginal utility is less than $2.
D Jo will not drink extra coffee because her total utility will fall.

5. The diagram shows a consumer’s initial budget line is GH and a set of indifference curves IC₁,
IC₂ and IC₃ for goods R and S. The original equilibrium for the consumer is point X.
The inflation rate is rising faster than money incomes.
What will be the most likely new equilibrium for the consumer if all real income is spent?

Answers