9708A. 8 December

1. The diagram shows two indifference curves and two budget lines for goods X and Y.

The consumer’s initial position is at point F. The consumer’s preferred final position becomes
point H.
What does the movement from F to G represent?
A the income effect of a price fall for X
B the price effect of a price change for X
C the substitution effect of a price fall for X
D the substitution effect of a price rise for X

2. The table shows the total costs at different levels of output for a firm producing chairs.

Output (chairs)Total cost ($)

What is the average variable cost when output is 4 chairs?
A $11 B $17 C $44 D $23.50

3. At which level of output will a firm achieve the aim of sales maximisation?
A where AC = AR
B where AC = MC
C where MC = AR
D where MR = zero

4. In market economies firms can operate under monopolistic competition.
Which feature is not typical of this type of market?
A non-price competition through advertising
B price leadership with few large firms
C promotion of differentiated products
D unrestricted entry results in long-run normal profit

5. When will the ‘principal-agent’ problem occur?
A when managers are not allowed to become shareholders
B when members of a cartel collude to gain higher profit
C when one firm dominates the market
D when owners have different objectives to managers


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