1. When can an economy be said to be economically inefficient?
A when it is possible to make some people better off without making other people worse off
B when the distribution of income is socially unacceptable
C when the government sector is growing at the expense of the private sector
D when wage rates rise faster than production

2. The diagram shows cost and benefit curves for a good in a free market.

Which combination is correct?

	Actual output	Social optimal level of output
A	P1Q1	P3Q3
B	P2Q2	P3Q3
C	P2Q2	P4Q4
D	P3Q3	P4Q4

3. A food processing firm discharges waste water into the lake next to its factory.
What would reduce the difference between the private cost and the social cost of the firm’s
actions?
A Local residents are given the right to buy the firm’s food at a discount.
B The government subsidises the food processing firm.
C The lake is bought by the food processing firm.
D The waste water flows from the lake into the sea.

4 The diagram shows attainable indifference curves, I₁ and I₂, for good X and good Y.
Which point represents the highest level of satisfaction currently attainable?

5. The table shows the substitution effect and income effect for a Giffen good and an inferior good
as the price of the good changes.
Which combination is correct?

	Type of good	Price change	Demand change from substitution effect	Demand change from income effect
A	Giffen	fall	positive	negative
B	Giffen	rise	positive	positive
C	inferior	fall	negative	negative
D	inferior	rise	negative	negative

Answers