Price System in the Microeconomy (14 -16)

What is most likely to improve the allocative efficiency of a market?

• a higher market concentration ratio

• collusion between firms in the market

• entry of new firms into the market

• mergers of firms in the market

The diagram shows a market in which there are negative externalities of production and positive externalities of consumption.

What is the marginal external cost at the free market equilibrium level of output?

• EG

• EF

• FG

• HI

What could be included in a cost-benefit analysis of a project to build a road bridge connecting an island community to the mainland?

• A

• B

• C

• D

The table shows the levels of total and average utility at different levels of a consumer’s weekly consumption of a product.

After which level of weekly consumption does the diminishing marginal utility first occur?

• 3

• 4

• 5

• 6

Which statement about a budget line in consumer behaviour theory is correct?

• It illustrates consumer preference between two goods.

• It illustrates combinations of two goods that consumers are able to purchase with a given income.

• It illustrates the least cost combination of goods that yield the same level of utility.

• It illustrates the income effect of a price change.

When the price of a good increases, which statement is correct according to the analysis that uses budget lines and indifference curves?

• The income and substitution effects of the price increase will work in opposite directions in the case of a Giffen good.

• The income effect of the price increase will result in reduced consumption for all goods.

• The new equilibrium position will be where the new budget line meets the original indifference curve.

• The price rise will be represented by a parallel shift inwards of the original budget line.

When is Pareto efficiency achieved?

• at a level of output that is productively and allocatively efficient

• when everyone has equal amounts of goods and services

• when social benefits are greater than private benefits

• when social marginal benefit is greater than social marginal cost

The transport authority in a city is considering building an underground railway to reduce traffic congestion on the roads. Which combination would represent an external cost and an external benefit of the use of this railway?

• A

• B

• C

• D

The diagram shows the marginal private benefit (MPB), the marginal private cost (MPC) and the marginal social cost (MSC) of a firm producing chemicals. In a free market, price is at P₁.

Which quantity measures the overproduction of chemicals resulting in the negative production externality?

• Q₁, Q₂

• Q₁, Q₃

• Q₂, Q₃

• Q₃, Q₄

The diagram shows the market price and equilibrium quantity of coffee consumed by an individual, Jo. Jo buys X cups of coffee at $2 per cup when she visits her favourite café.

When she is there, the café owner says it is offering unlimited free refills. How is her consumption most likely to change?

• Jo’s demand for coffee will increase from X to Y where her total utility for coffee is zero.

• Jo’s demand for coffee will increase from X to Y where her marginal utility for coffee is zero.

• Jo will not drink extra coffee because its marginal utility is less than $2.

• Jo will not drink extra coffee because her total utility will fall.