1. The diagram shows the long-run average cost curves (LRAC) for a firm.

Which combination of movements correctly describes each type of economy or diseconomy of
scale?

	Internal economies of scale	Internal diseconomies of scale	External economies of scale
A	W to Y	X to W	Z to W
B	W to Y	Y to W	Z to W
C	X to Y	W to Z	W to Y
D	X to Y	Y to X	W to Y

2. The diagram shows the cost and revenue curves for a monopoly market structure.

A monopoly was producing at P₁Q₁ but changed its aim and now produces at P₂Q₂.
What would not have caused this change?
A It has stock it wants to sell.
B It is concerned about new entrants.
C It wants to benefit from greater economies of scale.
D It wants to maximise profits.

3. A government regards fresh fruit and vegetables as merit goods, and subsidises agriculture to
boost their production.
What could be a government failure arising from these subsidies?
A cheaper fresh fruit and vegetables
B land clearance reducing wildlife
C lower spending on treating dietary illnesses
D more jobs picking fruit and vegetables

4. The table shows a firm that has four possible methods of production. Each method has a different cost and causes a different amount of pollution.
The government decides that polluting firms must buy pollution permits that cost $90 each. Each
permit allows the firm to emit 1 tonne of pollution. No pollution can be emitted without a permit.
Which method of production has least total cost?

	Cost of production ($ per day)	Pollution caused (tonnes per day)
A	320	3
B	380	2
C	480	1
D	700	0

5. The table shows the average incomes of the richest 20% of households and the poorest 20% of
households in the UK (2015–2016), and the effects of government taxation and benefits on
average income.

	Average income (£) of richest 20%	Average income (£) of poorest 20%
Before taxes and benefits	85 000	7 000
After direct taxes and cash benefits	68 000	13 000
After all taxes (direct and indirect) and all benefits	63 000	17 000

What can be concluded from the information in the table?
A The effects of direct taxation have affected the rich less than the poor.
B The government’s policy achieved income equality across households.
C The government redistributed all income taken from the rich to the poor.
D The government’s policy reduced the income inequality between the poor and the rich.

Answers