Cambridge International AS & A Level

ECONOMICS 9708/31
Paper 3 Multiple Choice NOV/DEC
1 hour 15 minutes

You must answer on the multiple choice answer sheet.

*1770551196*

You will need: Multiple choice answer sheet

Soft clean eraser
Soft pencil (type B or HB is recommended)

INSTRUCTIONS
 There are thirty questions on this paper. Answer all questions.
 For each question there are four possible answers A, B, C and D. Choose the one you consider correct
and record your choice in soft pencil on the multiple choice answer sheet.
 Follow the instructions on the multiple choice answer sheet.
 Write in soft pencil.
 Write your name, centre number and candidate number on the multiple choice answer sheet in the
spaces provided unless this has been done for you.
 Do not use correction fluid.
 Do not write on any bar codes.
 You may use a calculator.

INFORMATION
 The total mark for this paper is 30.
 Each correct answer will score one mark.
 Any rough working should be done on this question paper.

This document has 12 pages. Any blank pages are indicated.

[Turn over

MEMON EXAMINATIONS COUNCIL

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1 Which statement identifies the condition necessary to achieve Pareto optimality?

A All consumers maximize their utility subject to their available income.

B It is not possible to produce greater output with the resources available.
C It is not possible to reallocate resources to make someone better off without someone else
becoming worse off.
D Potential losers from any reallocation of resources cannot be compensated by those who
gain.

2 The diagram shows a production possibility curve (LM) for an economy producing agricultural
goods and manufacturing goods.

L
agricultural
goods
R

T
S
M
O
manufacturing goods

What can be concluded from the diagram?

A The economy must be allocatively efficient at point R.

B The economy is Pareto efficient at point T.
C The economy is productively efficient at point S.
D The opportunity cost is constant as we move from L to M.

3 The private benefit of an activity is greater than the private cost. The social benefit of the same
activity is less than the social cost.

What must be true of the activity?

A external benefit = external cost

B external benefit > external cost

C external benefit < external cost
D external benefit > private benefit

ME pg. 2
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4 What is the central principle of marginal utility theory?

A As more is consumed of a normal good, the additional satisfaction gained increases.

B Consumers are in equilibrium when the marginal utility gained from good X equals the price
of good Y.
C Consumers are in equilibrium when the ratio of the marginal utility of goods X and Y are
equal to the ratio of their prices.
D Consumers are in equilibrium when the total utility gained from good X is the same as gained
from good Y.

4 The diagram shows five budget lines. Line 1 is the original budget line.

food
5

1
2
4
3

O drink

Which pair of budget lines shows a relatively higher price for drink compared with food after a
move from budget line 1?

A 2 and 3 B 2 and 4 C 3 and 5 D 4 and 5

5 Broken rice is an inferior good.

What would be the resulting income and substitution effect on the quantity demanded of broken
rice if its price falls?

quantity demanded quantity demanded

due to income due to substitution
effect effect

A falls falls
B falls rises
C rises falls
D rises rises

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6 Firms in a market decide to collude over the price that they charge for their products.

What is not likely to be a feature of the market?

A Firms have similar cost structures.

B Products of the firms are close substitutes.
C There are high barriers to entry into the market.
D There is a large number of competing firms.

7 Firms often remain small even when growth could result in technical economies of scale.

What is not a likely reason for this?

A Demand for the product tends to change often and rapidly.

B Individual entrepreneurs wish to keep a tight personal control over their own firm.
C The entrepreneurs who establish the firms tend to be ambitious risk-takers.
D The market in which they operate is very specialised in nature, often selling unique products.

8 The diagram shows the short-run equilibrium for a firm operating in a monopolistically competitive
market.

cost,
revenue
AC
P1 MC

AR
MR
O Q1 quantity

What is not likely to occur at the long-run equilibrium?

A The individual firm’s demand curve is more elastic.

B The individual firm’s demand curve has moved left.

C The profit-maximising price is greater than average cost.
D The profit-maximising price is greater than marginal cost.

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9 In which circumstance would direct provision of a product by the government be least likely?

A when fixed costs are very high

B when the demand for the product is very high but unit costs are low
C when the industry faces large natural barriers to entry
D when the minimum efficient scale of production is above the level of demand at current prices

10 The table shows a firm’s total costs corresponding to different levels of output.

units of output 1 2 3 4 5 6 7 8
total cost ($) 8 14 18 22 28 36 46 58

If the market price is $8, within which range of output would a profit-maximising firm in a perfectly
competitive industry produce in the short run?

A 1–2 units B 3–4 units C 5–6 units D 7–8 units

11 What would encourage an increase in the number of small firms?

A increasing government regulation of conditions in the workplace

B more risk-averse (cautious) lending policies by banks
C stronger government laws against the growth of monopoly
D tougher penalties in the case of personal bankruptcy

12 What is not a source of market failure?

A imperfect information
B income inequality
C monopoly
D non-excludability

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11 A government issues free non-tradeable pollution permits to firms. They specify the maximum
amount of polluting gases these firms are allowed to emit. In a change in legislation, the permits
can be traded with other firms.

Assuming that all other costs and revenues remain the same, what will be the impact on the
profits of the firms that are now buyers or sellers of the permits?

profits of buyers profits of sellers

of permits of permits

A decrease decrease
B decrease increase
C increase decrease
D increase increase

14 What is an example of ‘nudge’ theory when applied to encouraging healthy eating?

A advertising the benefits of healthy eating

B increasing tax on sugary foods
C introducing a subsidy for fruit growers
D supermarkets putting fruit near cash registers

15 What is a definition of transfer earnings?

A the amount of earnings above that needed to keep a worker in their current job
B the minimum earnings needed to keep a worker in their current job
C the social security benefits paid to workers whose earnings are below the poverty line
D the amount of earnings needed to cause a worker to change to a different job
16 What is necessary for a firm to practise price discrimination?
A There are many buyers in the market.
B There are many firms in the market.
C The markets can be separated.
D The price elasticity of demand for the product is inelastic.

17 Which is a correct statement about efficiency?

A Allocative efficiency occurs when marginal revenue equals marginal cost.

B An economy is productively efficient when it is producing at a point on its production

possibility curve.
C An economy will improve its allocative efficiency when its production possibility curve moves
outward.
D Productive efficiency occurs when the prices of goods equal their marginal cost of
production.

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18 Which is an example of an external diseconomy?

A Difficulties in coordinating activities in a large organization

B difficulties in motivating workers in a large organization

C higher transport costs as a firm’s market expands

D increased traffic congestion as industries expand

19 Which type of unemployment is associated with a deficiency in aggregate demand?

A cyclical
B frictional
C structural
D voluntary
20 A competitive market becomes a monopoly.
What is likely to happen?
A Consumer surplus will be reduced by the amount of the deadweight loss.

B Producer surplus will be reduced by the amount of the deadweight loss.

C The loss in consumer surplus will be balanced by the increase in producer surplus.

D There will be a transfer of surplus from consumer to producer.

21 Which condition must apply before a market can be regarded as perfectly contestable?

A All firms in the industry produce an identical product.

B All firms in the industry are price-takers.

C There are a large number of firms in the industry.

D There are zero costs of entry to, and exit from, the industry.
22 The table shows the expected costs and benefits from four government projects. The government
can afford only one project.

Which project should the government choose?

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23 Which statement about indifference curves is correct?
A The indifference curves for inferior goods can show higher satisfaction on lower curves.
B The indifference curves for normal goods show a diminishing marginal rate of substitution.
C The indifference curves for perfect complements go through the origin.
D The indifference curves for perfect substitutes are right-angled.
24 The dominant firm in an oligopoly sets up a research institute to carry out new product
development.
Which two features of oligopoly are present in this project?
A creation of barriers to entry and collusion
B creation of barriers to entry and non-price competition
C non-price competition and price leadership
D price leadership and collusion
25 The diagram shows two indifference curves for a consumer.

What can be concluded if the consumer’s equilibrium moves from Q to R?

A The consumer is acting rationally.
B The consumer’s money income is unchanged.
C The opportunity cost of good Y is constant.
D The price of good X has risen.
26 A firm in monopolistic competition that is producing at its profit maximising output is making a loss
in the short run.
For it to continue in production, what must be correct about its average revenue (AR), marginal
revenue (MR) and average variable cost (AVC)?
A AR = MR; AVC > AR
B AR = MR; AVC < AR
C AR > MR; AVC > AR
D AR > MR; AVC < AR

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27 Which feature of oligopoly is being assumed when the demand curve for an individual firm is as
shown?

A price discrimination
B price leadership by the dominant firm
C interdependence between firms
D collusion between firms
28 What is true about the average fixed costs of a firm?
A They fall as output rises at first, but then rise.
B They fall continuously as output rises.
C They increase continuously as output rises.
D They remain unchanged at all output levels.
29 Which feature of an oligopoly can be explained by the kinked demand curve model?
A collusion between firms in the determination of the industry price
B price leadership by one firm in the industry
C the ability of firms to earn abnormal profits in the long run
D the reluctance of firms to alter prices
30 How do commercial banks create money?
A by cashing cheques for their customers
B by increasing their reserves at the central bank
C by making loans to customers
D by charging customers for banking services

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