9708A. 31 January

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 outputSocial optimal level of output

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
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 goodPrice changeDemand change from substitution effectDemand change from income effect


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