Y12 Econ - Review Quiz 2

An outward shift in production possibility curves (PPC) may initially raise unemployment.

• True

• False

Answer explanation

An outward shift in PPC raises the potential to produce and may initially raise unemployment in case this additional production capacity is not brought into use instantly.

All goods provided by the government are public goods.

• True

• False

Answer explanation

The government not only provides public goods but also many private goods such as roads, public parks, hospitals and schools. Some of the private goods provided by the government are merit goods.

Public goods must only be provided by the government.

• True

• False

Answer explanation

Public goods, such as defence and streetlights, are non-excludable and non-rival. Since it is not possible to restrict their use only to those who pay a price, a price for their provision cannot be charged and no profits can be made. Therefore, a profit maximizing private sector firm will not produce these goods, making their provision the sole responsibility of the government.

Roads and motorways are examples of public goods; thus, they must be provided by the government.

• True

• False

Answer explanation

Roads and motorways are not public goods. They are excludable and those who do not pay a toll tax can be stopped from using the road. They are also rivals, as there could be road congestion during rush hours, forcing an average commuter to spend more time in travel than they normally would.

A product has price elastic demand (PED) when a rise in its price causes a fall in its quantity demanded.

• True

• False

Answer explanation

A rise in price always causes a fall in the quantity demanded of a product, irrespective of PED. However, the fall in quantity demanded is proportionately higher for goods with price elastic demand.

According to the law of diminishing returns, adding more and more variable inputs will result in falling output.

• True

• False

Answer explanation

Adding more and more variable inputs, such as labour, to a given quantity of fixed input, such as capital, initially raises the output at an increasing rate (increasing returns), but later at a decreasing rate (decreasing returns). Output rises throughout, but it is the rate at which it rises that determines whether the returns are rising or falling.

Goods that are scare because their uses have an opportunity cost.

Goods that are used in the production of other goods, such as factories and offices.

Swapping one good for another without the use of money.

A system of organization where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.