A2 MCQ PRACTICE MAY23-33

What does the marginal utility diagram show?

• Total utility becomes negative if the quantity consumed increases from Y to Z.

• Total utility decreases if the quantity consumed increases from X to Y.

• Total utility decreases if the quantity consumed increases from Y to Z.

• Total utility is maximised at X.

Answer explanation

Total utility decreases if the quantity consumed increases from Y to Z.

Which row shows a Pareto improvement in the allocation of goods between consumers?

• Row A

• Row B

• Row C

• Row D

Answer explanation

Row A represents a Pareto improvement as it shows an allocation where at least one individual is better off without making any other individual worse off.

Which assumption in relation to an indifference theory diagram is not correct?

• The consumer's income may change.

• The consumer may change their satisfaction-maximising objective.

• The consumers may change their tastes and preferences.

• The relative prices of products may change.

Answer explanation

The consumer may change their satisfaction-maximising objective is not correct because in indifference theory, the consumer's objective is to maximize satisfaction given their preferences and budget constraints.

Which type of efficiency is shown by the shift from long-run average cost curve 1 (LRAC1) to long-run average cost curve 2 (LRAC2)?

• allocative

• dynamic

• Pareto

• productive

Answer explanation

The shift from LRAC1 to LRAC2 represents dynamic efficiency, indicating improvements in technology or processes over time.

A firm wishes to maximize its revenue. Which condition must be met to achieve this goal?

• average cost = average revenue

• marginal cost = average revenue

• marginal cost = marginal revenue

• marginal revenue = zero

Answer explanation

To maximize revenue, the condition that must be met is marginal revenue being equal to zero.

The costs and revenue of four firms operating in a monopolistically competitive market are shown. Which firms will continue to operate in the short run but will shut down in the long run?

• X and W

• X and Y

• W and Z

• Y and Z

Answer explanation

Firms X and Y will continue to operate in the short run due to covering variable costs, but will shut down in the long run as they are unable to cover fixed costs.

A firm at its current level of production finds that its short-run marginal cost is less than its short-run average variable cost. Which conclusion about the firm can be drawn from this information?

• A) Average variable cost is constant.

• B) Average variable cost is falling.

• C) Average variable cost is greater than its average total cost.

• D) Average variable cost is rising.

Answer explanation

Average variable cost is falling because when marginal cost is less than average variable cost, it pulls the average variable cost down.

Steel producer X takes over its main competitor, steel producer Y. What would X expect to happen to the price elasticity of demand for its product and its long-run average cost as a result of this takeover?

• A) Price elasticity of demand decreases, long-run average cost decreases.

• B) Price elasticity of demand decreases, long-run average cost increases.

• C) Price elasticity of demand increases, long-run average cost decreases.

• D) Price elasticity of demand increases, long-run average cost increases.

Answer explanation

The correct choice is A because when a company takes over its main competitor, it gains more market power, leading to a decrease in price elasticity of demand and long-run average cost due to economies of scale.

What is an example of an external cost?

• A) Distribution costs.

• B) Energy costs.

• C) Labour costs.

• D) Road congestion costs.

Answer explanation

Road congestion costs are an example of an external cost because they are not directly paid by the individuals causing the congestion, but impact society as a whole.

The diagram shows the demand for and supply of a good and the marginal social costs (MSC) for that good. Assuming there are no external benefits, which area measures the net social benefit at output OQ?

• x

• x - y

• x + y

• x - y - z

Answer explanation

The correct area measuring the net social benefit at output OQ is x - y.