Test 1 – MCQs

Total 57 questions , Total time 45 mins

Topic - The Market System

Part 1
**Question 1**
What is the basic economic problem faced by all economies?

A. High levels of unemployment.

B. Limited resources to satisfy unlimited wants.
C. Inefficiency in production processes.
D. Low levels of income.
[1 mark]

**Question 2**
Why does scarcity exist in an economy?

A. Resources are distributed equally.

B. Wants and needs are limited.
C. Resources are finite, but wants are infinite.
D. Technology is underdeveloped.a
[1 mark]

**Question 3**
How is opportunity cost best described?

A. The extra cost of producing one more unit.

B. The value of the next best alternative forgone.
C. The difference between total costs and total revenue.
D. The price consumers pay for a good or service.

[1 mark]

**Question 4**
Which of the following is an example of a capital good?

A. A private car.
B. A factory machine.
C. A holiday trip.
D. A mobile phone.
a[1 mark]

**Question 5**
What does a production possibility curve (PPC) illustrate?

A. The amount of profit a firm can make.

B. The opportunity costs of producing different combinations of goods.
C. The total income of consumers in an economy.
D. The efficiency of one worker over another.
[1 mark]
**Question 6**
Why do consumers experience opportunity cost?

A. Resources are abundant.

B. There are many substitute goods.
C. Income is limited, but desires are unlimited.
D. Firms control market prices.
[1 mark]

**Question 7**
What causes a shift outward in a production possibility curve?

A. A rise in unemployment.
B. An increase in available resources or technology.
C. A fall in consumer demand.
D. A reduction in trade with other countries.
[1 mark]

**Question 8**
What is the role of producers in an economy?

A. To consume goods and services.

B. To provide labor for businesses.
C. To supply goods and services to meet consumer demand.
D. To invest in foreign markets.
 [1 mark]

**Question 9**
Which of the following is an example of a public good?

A. A pair of shoes.
B. A mobile phone network.
C. Street lighting.
D. A new television.
[1 mark]

**Question 10**
How does specialization benefit an economy?

A. It increases variety in production.

B. It leads to higher prices for consumers.
C. It allows workers to become more efficient and productive.
D. It reduces total output in an economy.

[1 mark]

Part 2
Question 1
What is the main reason consumers face opportunity cost?
A. Consumers have limited wants.
B. Consumers have limited resources.
C. Producers control consumer choices.
D. Prices of goods are always rising.

[1 mark]

Question 2
Which of the following is a likely result of a decrease in the price of a substitute good?

A. Demand for the substitute good decreases.

B. Demand for the original good increases.
C. Demand for the original good decreases.
D. Supply of the substitute good increases.

[1 mark]

Question 3
What causes a movement along the demand curve?

A. Change in income
B. Change in consumer preferences
C. Change in the price of the good
D. Change in population

[1 mark]

Question 4
Which factor is most likely to cause a shift in the supply curve to the right?

A. An increase in production costs

B. An improvement in technology
C. A decrease in consumer income
D. An increase in the price of a substitute good

[1 mark]

Question 5
What is the term for the quantity of goods that consumers are willing and able to buy at a given price?

A. Demand
B. Supply
C. Equilibrium
D. Surplus
 [1 mark]

Question 6
Which of the following is most likely to happen if the market price is below the equilibrium price?

A. Shortage of goods
B. Surplus of goods
C. Increase in supply
D. Decrease in demand

[1 mark]

Question 7
If the price of a complementary good rises, what is most likely to happen to the demand for the original
good?

A. It will increase.
B. It will decrease.
C. It will remain unchanged.
D. It will fluctuate.

[1 mark]
Question 8
Which of the following best describes market equilibrium?

A. The point where demand exceeds supply

B. The point where supply exceeds demand
C. The point where quantity demanded equals quantity supplied
D. The point where consumers are fully satisfied

[1 mark]

Question 9
What happens to the supply of a good when its production costs decrease?

A. Supply shifts to the left.

B. Supply shifts to the right.
C. There is a movement along the supply curve.
D. The price of the good increases.

[1 mark]

Question 10
Which of the following will cause the demand curve to shift to the right?
A. A fall in consumer income
B. An increase in the price of the good
C. A rise in population
D. A decrease in the price of a substitute

Part 3

**Question 1:**
Why do consumers have to make choices when spending their income?

A. Advertising encourages consumer spending.

B. Consumers have unlimited incomes.
C. Consumer wants cannot all be satisfied with their income.
D. Not all products will be attractive to consumers.
[1 mark]

---

**Question 2:**
What is meant by the term "opportunity cost"?

A. The price paid for a good or service.

B. The next best alternative forgone.
C. The value of all alternatives available.
D. The cost of producing a product.
 [1 mark]

---

**Question 3:**
Which of the following best describes a rational decision by consumers?

A. Purchasing the most expensive product available.

B. Buying a product based on peer pressure.
C. Choosing a product that maximizes satisfaction.
D. Purchasing goods impulsively without thought.
[1 mark]

---
**Question 4:**
Why do firms aim to maximize profits?

A. To provide more jobs for employees.

B. To increase market share.
C. To reduce production costs.
D. To satisfy shareholders.
[1 mark]

---

**Question 5:**
Which of the following is an assumption of traditional economic theory about consumers?
A. Consumers always make choices that increase their wealth.
B. Consumers act to maximize their personal satisfaction.
C. Consumers only buy products on sale.
D. Consumers do not compare products.
[1 mark]

---

**Question 6:**
Why might consumers make irrational choices?

A. Due to lack of perfect information.

B. Because they always consider the opportunity cost.
C. To increase their wealth in the long term.
D. Because they have access to all available resources.
[1 mark]

**Question 7:**
What is the key factor limiting the ability of consumers to satisfy all their wants?

A. Unlimited resources.
B. Scarcity of resources.
C. Advertising restrictions.
D. Availability of substitutes.
[1 mark]
 PART 4
1) What does price elasticity of demand (PED) measure?

A. The responsiveness of demand to a change in supply.

B. The responsiveness of demand to a change in price.
C. The responsiveness of supply to a change in price.
D. The responsiveness of income to a change in demand.

[1 mark]

Question 2
When the price of a product decreases and the total revenue increases, the product is said to be:

A. Price inelastic.
B. Price elastic.
C. Perfectly inelastic.
D. Unitary elastic.

[1 mark]

Question 3
Which of the following is a characteristic of a good with inelastic demand?
A. There are many substitutes available.
B. The good is a necessity.
C. The good is a luxury.
D. Demand changes significantly with a price change.

[1 mark]

4
If a product has a PED value of -0.5, it is considered:

A. Perfectly elastic.
B. Price inelastic.
C. Price elastic.
D. Unitary elastic.

[1 mark]

Question 5
Which factor is likely to make the demand for a product more elastic?

A. The product is a necessity.

B. The product has no close substitutes.
C. The product is a luxury.
D. The product represents a small proportion of consumer income.

[1 mark]

Question 6
Cross elasticity of demand (XED) measures:

A. The relationship between income and demand.

B. The responsiveness of demand for one good to a change in the price of another good.
C. The change in supply when demand changes.
D. The responsiveness of demand to changes in consumer preferences.

[1 mark]

7
A positive cross elasticity of demand (XED) suggests that two goods are:

A. Substitutes.
B. Complements.
C. Unrelated.
D. Inferior goods.
 [1 mark]

Question 8
Income elasticity of demand (YED) for normal goods is:

A. Negative.
B. Zero.
C. Positive.
D. Unitary.

[1 mark]

9
Which of the following would likely result in an increase in the price elasticity of demand for a product?

A. A reduction in the number of substitutes available.

B. A longer time period for consumers to adjust to price changes.
C. The product becomes a necessity.
D. The product has very few alternative uses.

[1 mark]
Question 10
If the price of a substitute good increases, how is the demand for the original good affected?

A. It decreases.
B. It remains constant.
C. It increases.
D. It fluctuates unpredictably.

Part 5

1
Which of the following is a key characteristic of a mixed economy?

A. Only the government makes economic decisions.

B. All resources are allocated by the market.
C. Both the government and the private sector allocate resources.
D. The government controls all production and distribution.

[1 mark]

Question 2
What is the main reason governments provide public goods in a mixed economy?
A. Public goods are profitable for businesses to provide.
B. Public goods are non-excludable and non-rivalrous.
C. Private firms do not want to provide public goods.
D. Governments want to reduce unemployment.

[1 mark]

3
Why do governments impose taxes in a mixed economy?

A. To encourage free-market competition.

B. To reduce income inequality and fund public services.
C. To allow the private sector to produce more goods.
D. To discourage consumer spending.

[1 mark]

Question 4
Which of the following is a benefit of the private sector in a mixed economy?

A. It ensures the equitable distribution of wealth.

B. It increases government spending.
C. It promotes innovation and efficiency.
D. It eliminates market failures.

[1 mark]

Question 5
In a mixed economy, why might the government intervene to correct a market failure?

A. To ensure that businesses can maximize profits.

B. To provide essential goods that the market may not supply adequately.
C. To encourage monopolistic practices.
D. To reduce government spending on public services.

[1 mark]

6
What is one possible disadvantage of a mixed economy?

A. The government may fail to provide public goods.

B. There may be too much government intervention, reducing efficiency.
C. Private firms will dominate all sectors of the economy.
D. The government has no role in regulating the economy.
 [1 mark]

Question 7
Which of the following is an example of a merit good in a mixed economy?

A. Cigarettes
B. Alcohol
C. Healthcare
D. Fast food

[1 mark]

8
Why do governments provide subsidies in a mixed economy?

A. To increase the prices of essential goods.

B. To make goods and services more affordable for low-income consumers.
C. To reduce competition in the market.
D. To increase private sector control over the economy.

[1 mark]
Question 9
Which of the following is a role of the government in a mixed economy?

A. To determine all prices in the market.

B. To own all the factors of production.
C. To regulate and control monopolies.
D. To prevent private businesses from entering any market.

[1 mark]

Question 10
In a mixed economy, how does the government aim to achieve income redistribution?

A. By increasing the prices of luxury goods.

B. By imposing taxes on the wealthy and providing welfare to the poor.
C. By allowing all businesses to set their own prices.
D. By eliminating the private sector.

Part 6

1:
What is a negative externality?
A. A cost imposed on third parties.
B. A benefit received by third parties.
C. A cost imposed on producers.
D. A benefit received by consumers.

[1 mark]

Question 2:
Which of the following is an example of a positive externality?

A. Air pollution from factories.

B. Traffic congestion.
C. Vaccination programs.
D. Littering in public parks.

[1 mark]

3:
Why do externalities lead to market failure?

A. Markets always fail when governments intervene.

B. Externalities cause resources to be allocated inefficiently.
C. Consumers cannot purchase enough goods.
D. Businesses cannot make a profit in competitive markets.

[1 mark]

Question 4:
Which of the following is a government intervention to reduce negative externalities?

A. Providing public goods.

B. Imposing taxes on harmful goods.
C. Subsidizing pollution.
D. Reducing interest rates.

[1 mark]

Question 5:
What happens to social costs when negative externalities exist?

A. Social costs are equal to private costs.

B. Social costs exceed private costs.
C. Social costs are less than private costs.
D. Social costs are unrelated to private costs.
 [1 mark]

6:
Which policy is most effective in internalizing a positive externality?

A. Subsidizing beneficial activities.

B. Increasing income tax.
C. Imposing tariffs on imports.
D. Decreasing government spending.

[1 mark]

Question 7:
Which of the following is an external cost?

A. The wages paid to factory workers.

B. The pollution created by manufacturing.
C. The price of raw materials.
D. The profit earned by a company.

[1 mark]
Question 8:
Why might a firm produce too much of a good that generates a negative externality?

A. The firm does not consider the social costs of production.

B. The firm wants to reduce its total revenue.
C. The firm is forced to produce more by the government.
D. The firm faces increasing costs of production.

[1 mark]

9:
How can the government encourage the production of goods with positive externalities?

A. By banning the goods.

B. By subsidizing their production.
C. By raising taxes on them.
D. By reducing the wages of workers producing these goods.

[1 mark]

Question 10:
What is a potential benefit of internalizing externalities?
A. Reducing the price of public goods.
B. Encouraging overconsumption of demerit goods.
C. Allocating resources more efficiently.
D. Increasing inflation rates.