INTO/NCUK International Foundation

Programme
Economics Examination
January 2010
Time 90 minutes
Instructions:
Students are allowed 5 minutes before the examination starts to read through the
paper. During this time the students must not do any writing.

Section A
Part One - Objective test questions.
Part Two – Data Response questions.

Instructions:
In part one students should choose the best answer from those available.
In part two students answer all the questions based on the data.
Students may use a calculator.
Advice:
Recommendation to take 40-45 minutes on section A.

Section B Essay Section

Instructions:
Students should choose 1 question from 3, each question having
two parts (a and b).

Information:
Mark allocation is shown at the end of each part of a question.
Use the rules of English grammar in your essays with sentences and paragraphs.
Headings, lists and note forms of writing are not appropriate.
Use diagrams and examples where ever they are appropriate.

Advice:
Recommendation to take 45 minutes for this section.
Section A Part One (Objective test questions)
Answer all 20 questions
For each question choose the best answer from A,B,C or D . Write the question number and
your chosen answer on your answer paper, NOT on your question paper.

1. Which of these is an example of the “basic economic problem”?

A A family having to live on a fixed budget unable to buy everything the
children request.
B The UK prime minister experiencing falling popularity
C The economy experiencing a recession
D Rising unemployment

2. The opportunity cost of the purchase of a Nokia mobile phone costing £300 to a
student on limited income would be
A the alternative phone costing £320 that is not purchased
B the cost of the calls made on the phone in the first year of ownership
C the improved opportunities arising out of owning this good
D the benefit of the next best alternative use of the student’s £300

3. Which point on the production Possibility Frontier (PPF1) represents an economy

failing to utilise its resources efficiently and experiencing a recession?

A A
B B
C C
D D

4. Which of the following is not an advantage of a command economy?

A Low unemployment
B Price stability
C Freedom of choice
D Consumer and producer subsidies
5. The situation where consumers have both the means and the desire to purchase of good
is known as
A Joint demand
B Effective demand
C Competitive demand
D Derived demand

6. Which of the following would NOT have caused the move from DD to D1D1 for
domestic air travel?

A The continued rise in average incomes in the UK

B A fall in the price of train travel
C Growth in building of new airports in the UK
D Rising price of aviation fuel

7. Price elasticity of demand for this curve if the price rises from £4 to £6 is

A -0.4
B -2.5
C -1.0
D -0.01
8. The table below shows estimates of UK consumers’ income elasticity of demand for
holidays in 4 different countries.

Country Income elasticity of

demand
China 0.8
Peru 1.0
Italy 1.4
Spain 2.0

From the data it may be concluded that a 10% rise in real incomes would lead to
A a fall in demand for holidays in China
B no change in the demand for holidays in Peru
C a 14% increase in demand for holidays in Italy.
D a 2% increase in demand for holidays in Spain.

9. The equilibrium price in a market

A is the market-clearing price
B changes when demand equals supply
C always increases when demand rises
D is the balance of excess demand and excess supply

10. What does the shaded area in the diagram represent?

A Welfare loss
B Revenue
C Consumer surplus
D Producer surplus

11. Which of the following situations would lead to an increase in equilibrium price?
A Demand is perfectly inelastic and a firm’s labour costs fall.
B Demand is perfectly elastic and a firm’s labour costs rise.
C Supply is perfectly elastic and the price of a substitute good falls
D Demand is perfectly inelastic and a firm’s labour costs rise.
12. Which of the following could be corrected using a buffer stock policy?
A High market prices
B Low market prices
C Fluctuating market prices
D Production of demerit goods

13. What is the Total Cost of producing 6 units if Variable Cost per unit is constant?

Units Total Fixed Total Variable

Costs Costs
0
2 40
4 100
6
8

A 220
B 140
C 66.7
D 120

14. At what number of workers do diminishing returns set in?

Number of workers Total product

1 30
2 70
3 110
4 140
5 170

A 2
B 3
C 4
D 5

15 Which of the following is NOT a source of internal economies of scale?

A Division of labour
B Technical economies
C Government regional grants
D Managerial economies

16 Which of the following would NOT result in a firm increasing its market share of a
particular product?
A Horizontal merger
B Vertical merger backwards
C Good publicity for the company’s brand in a consumer magazine
D Closure of a competitor
17 Which price will the Oligopolistic firm shown below charge

A P1
B P2
C P3
D P4

18 What would be the break-even price and output for this monopolist?

A Q1 P5
B Q2 P2
C Q3 P3
D Q4 P3

19 Which one of the following is most likely to be a feature of monopoly?

A High profits enable competing suppliers to enter the market.
B Choice for the consumer will be restricted.
C It is subject to diseconomies of scale at all output levels.
D Prices must be lower than in more competitive market.
 20. A profit maximising firm is assumed to be producing at a level where
A sales revenue is maximised
B Marginal cost = marginal revenue
C Total revenue > Total cost
D Market share is maximised

Section A (Part Two) – Data Response question

Read the following article and answer the questions that follow in sentences. Avoid copying
out sections from the article as your answer. Instead use your skill as an economist to
interpret the data.

Pollution caused by production is an example of market failure. The main

way of solving the problem of pollution is to make businesses that generate
the pollution take account of it in their costs. This is called internalising the
cost. As a result the firm will have the incentive to change their behaviour to
find ways of cutting the pollution.
For consumers, it is a case of making them recognise that the price they pay
is a more accurate reflection of the full social costs from consumption and
that over consumption might be associated with negative externalities. A
higher price might make consumers think more carefully before buying the
product concerned. It helps send a signal about the value of the product. The
problem is that consumers want cheaper prices and are very concerned by
issues like global warming. The solutions to the negative externalities come
at a price.
Three ways of trying to deal with pollution are through taxation, some form
of pollution permit (carbon trading permits for example) or through some
form of pricing policy such as road pricing. In each case the main aim is to
reduce demand by making consumers more aware of the true cost of
consumption.
Adapted from Bized and NCUK materials

21 Define the term “market failure”. (1)

22 What is the difference between social costs and negative externalities? (1)
23 Explain, partly by using a diagram, how a tax can be used to correct the
market failure of pollution. (3)
24 Which two functions of price are illustrated in the article? (2)
25 Explain how either “pollution permits” or “road pricing” can reduce
pollution. (3)
Section B – Essay Section
Answer one question (answering both parts a and b) from the 3 questions below.

1a Explain what causes the price elasticity of demand for a good to be

inelastic. (10 marks)

1b How do elasticities of demand affect a firm’s pricing decisions?

(10 marks)

2a Explain how firms grow? (8 marks)

2b Discuss the costs and benefits of growing through merger. (12 marks)

3a Explain the characteristics of a Perfect Competition market structure.

(10 marks)

3b Explain the stages a firm in Perfect Competition goes through from

the
short run to the long run. (10 marks)