EOS Practice Paper 1

Using all available resources an economy produces different combinations of two types of good, clothes and food, shown on the production possibilities curve (PPC) diagram.

What does the PPC indicate?

• It is more efficient to produce more of clothes than food.

• It is only possible to increase the output of clothes by reducing the output of food.

• The best situation is to produce equal units of clothes and food.

• The cost of producing a unit of clothes is always higher than the cost of producing a unit of food.

A market consists of 10 individuals with different demand curves in a given period.

What is a calculation that could be used as part of the process to determine the market equilibrium in that period?

• at each price add the quantities demanded by each individual

• at each quantity average the price that each individual is prepared to pay

• combine the price elasticity of demand (PED) and the price elasticity of supply (PES) at each price

• determine the PED and multiply it by the quantity demanded

The diagram shows the market for a good. The equilibrium is at point X. The government fixes a minimum price for the good at P2.

What will happen in the market as a result?

• The market equilibrium will remain the same

• The quantity demanded will rise to Q2.

• The quantity supplied will fall to Q3.

• There will be an excess supply.

How might the concept of price elasticity of demand (PED) be useful for a government?

• to determine the effect on employment of a change in income tax

• to determine the effect on government revenue of a rise in the rate of interest

• to determine the effect of providing a public good

• to determine the result of imposing a tariff on imports

Governments sometimes intervene in the economy when the market fails. What is the most likely reason why government intervention may make the situation worse?

• Government decisions can take a long time to have an effect.

• Governments consider the views of both consumers and producers.

• Governments have more resources to calculate costs and benefits than private firms.

• Governments may take decisions to reduce negative externalities.

Which function do central banks and commercial banks have in common?

• acting as a banker’s bank

• controlling monetary policy

• dealing with foreign exchange

• supervising the banking system

What may cause an individual to save a higher proportion of their income?

• a belief that the price of goods will rise in the future

• a fall in the rate of interest paid by the country’s banks

• a fear that income will fall in the future

• a rise in the individual’s wish to enjoy higher consumption immediately

When might a trade union be most likely to achieve a good pay deal for its members?

• when labour costs are a high percentage of the firm’s total costs

• when rival firms successfully introduce an alternative product

• when the firm is introducing capital-intensive production

• when the firm is making large profits

What is found in a competitive market?

• Every firm earns large profits.

• Firms with limited capital can enter the market.

• The costs of production are always lower than in a monopoly.

• There is limited choice for consumers.

What benefit is likely to result from the extension of specialisation within manufacturing?

• For a consumer, there are more individually made goods available.

• For a consumer, there could be a lower cost of living.

• For an employee, job satisfaction will increase

• For an employee, the nature of work is more varied.