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Cambridge International Examinations

Cambridge International Advanced Subsidiary and Advanced Level

ECONOMICS 9708/32
Paper 3 Multiple Choice May/June 2018
1 hour 15 minutes
Additional Materials: Multiple Choice Answer Sheet
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Write in soft pencil.

Do not use staples, paper clips, glue or correction fluid.
Write your name, Centre number and candidate number on the Answer Sheet in the spaces provided
unless this has been done for you.
DO NOT WRITE IN ANY BARCODES.

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 separate Answer Sheet.

Read the instructions on the Answer Sheet very carefully.

Each correct answer will score one mark. A mark will not be deducted for a wrong answer.
Any rough working should be done in this booklet.

This document consists of 11 printed pages and 1 blank page.

IB18 06_9708_32/RP
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1 How is social cost calculated?

A external cost minus external benefit

B external cost minus private cost
C external cost plus private cost MSC = MPC + MEC
D social cost minus social benefit

2 Which government policy is not aimed at correcting inefficiency in resource allocation?

A marginal cost pricing in state owned industries

B permits restricting the pollution of rivers by private firms
C requiring firms to pay a minimum wage
D the provision of public goods at zero price

3 The table shows some of the costs and benefits, in $ millions, associated with a road building
project. Both a government department and a profit-maximising private firm are considering
building the road.
MSC = 525 MSB = 550
private external external social
costs costs benefits benefits

450 75 50 550
MPC = 450 MPB= 500
Who would be willing to build the road?

A Both would be willing to build it.

B Neither would be willing to build it.
C Only the government department would be willing to build it.
D Only the private firm would be willing to build it.

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4 In the diagram, Q1 is the quantity produced of a good as the result of market forces.

price S2 (social cost)

S1 (private cost)

D
O Q1
quantity

Which concept is present at output Q1?

A a government subsidy
B a negative externality
C a positive externality
D a specific tax

5 What would not affect the budget line of an individual consumer?

A the individual’s preference for various goods

B the level of income tax
C the money prices of goods
D the wages earned by the individual

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6 The diagram shows the demand curve for a product.

D
price

O X
quantity

What is maximised at X?

A marginal revenue
B total revenue
C marginal utility
D total utility

7 The diagram shows a firm’s cost and revenue curves.

costs,
revenue
P

MC
MR

D
MR
O Q
output

Which features are associated with the diagram?

A economies of scale and allocative efficiency

B interdependence and allocative efficiency
C price rigidity and economies of scale
D price rigidity and interdependence

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VC FC
8 In the year ending July 2016, airline fuel prices fell by 20.4% while the price of passenger aircraft
increased by around 1.1%.

Assuming no other changes in the passenger airline industry, what was the outcome for fixed
costs and variable costs?

fixed costs variable costs

A decreased decreased
B decreased increased
C increased decreased
D increased increased

9 Which feature of production would make it more likely that an industry is a contestable market?

A advertising has established consumer loyalty

B all firms in the industry share research and development Contestable Mkt :
- competition in mono and oli to keep spn profit in LR
C low fixed costs - Low BTE
D market rivals aim to reduce product differentiation

10 What is an example of backward vertical integration?

A a bakery buying a wheat farm Backward vertical = takeover — to source SS

B a car manufacturer buying a car showroom
C a vineyard buying an apple orchard
D two rival supermarkets joining together

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11 The diagram shows a firm in imperfect competition. It changed its aim from profit maximising to
sales revenue maximising.

cost,
MC
revenue

AC

AR > AC

AR
MR
O
output

Which type of profit was it making in each case?

MC =MR
profit sales revenue
maximising maximising MR=0 , TR max

A normal profit supernormal profit

B subnormal profit normal profit
C supernormal profit normal profit
D supernormal profit supernormal profit

12 An airline sells seats at $100 each three months before a flight, at $150 each one month before
the flight and at $200 each the day before the flight.

What describes this type of market behaviour by the firm?

A limit pricing to deter entry in an imperfect market P.D = same stuff diff price to diff ppl
B price discrimination by a monopoly supplier
C price leadership by an oligopolist
D pricing where price equals average cost under perfect competition

13 What would not be an indication of a divergence between the interests of the managers and the
shareholders of a company?

A an emphasis on sales maximisation

B management salaries which are linked to the long-run growth of the company’s share price
C the acceptance of ‘X’ inefficiency in the company’s production process
D the purchase of artwork for a company’s headquarters

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14 The total cost to a school of employing ten cleaners is $60 per hour.

The school estimates that the hourly marginal cost of employing an eleventh cleaner would be
$11.50.

By how much would the hourly wage have to increase to employ an additional cleaner?

A $0.50 B $0.65 C $2.25 D $11.50

$60/6 = $10
15 What would cause a rise in the productivity of labour? $60 + $11.50 = $71.50
$71.50/11= $6.50
A an increase in indirect taxes so inc $6.50 - $6 = $0.50
B an increase in the quality of capital Technology - RND
C a rise in consumer surplus
D a rise in the elasticity of supply of labour

16 In the diagram D1 and S are the initial demand and supply curves for building workers.

wage
S
TE - min amount a factor keep
Y Z - Below SS curve
U
T
X ER - Anything above TE

D2
R
D1
O V W
quantity of labour

If the demand for building workers increases to D2 by how much does the economic rent earned
by building workers rise?

A RUZ B TUZX C VXZW D XYZ

17 Under which circumstances will a subsidy from the government be most beneficial if there are
externalities from producing good X?

externality caused price elasticity of

by good X demand of good X

A negative <1
B negative >1
C positive <1
D positive >1

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18 Which tax would help a government achieve a more equal distribution of income after tax?

A a constant rate sales tax applicable to all goods and services

B a constant rate tax per person
C an income tax with a constant marginal rate over the whole income range
D an income tax with a tax-free allowance and a constant marginal rate thereafter

19 A country has a population of 100 million. There are 5 million people unemployed and the country
has an unemployment rate of 10%.

What is the size of the labour force? U.rate = Unemployed ppl/ labour force x 100%

A 10 million B 50 million C 90 million D 95 million

20 Which type of unemployment is correctly linked to the description of its cause?

type of
description of the cause
unemployment

A cyclical a change in demand due to holiday periods

B frictional a lack of sufficient information
C structural a temporary change in consumers’ expenditure
D technological a general decrease in the demand for goods

21 Growth rates can be calculated using changes in the value of GDP from year to year.

Why is real GDP per head considered to be a better indicator than nominal GDP per head for this
calculation?

A Real GDP adjusts for price changes by using a base year.

B Real GDP ignores the effects of fluctuations in exchange rates on purchasing power.
C Real GDP includes changes in the size of the population.
D Real GDP measures GDP at factor cost rather than market prices.

22 What would not exist in a free market, open economy?

A autonomous investment
B household saving Open Economy
Y - HH+Firms+G+X-M
C import spending
D indirect taxation

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23 The information in the table is taken from a country’s national income accounts.

US $
income
(millions)

wages 8000
salaries 7000
unemployment benefit 1000
NY does not include pension
and u. benefit pensions 1000
rent 3000
interest 2000

What is the value of national income?

A 17 000 B 19 000 C 20 000 D 21 000

24 What is a part of Keynesian economic analysis?

A a liquidity trap below which interest rates are ineffective

B an equilibrium price that always clears the market
C a small value for the government expenditure multiplier
D a vertical short-run aggregate supply curve

25 What will definitely increase a country’s Gross National Product?

A an increase in income taxes

B an increase in the marginal propensity to import
C an increase in the value of a country’s currency
D increased government expenditure on education

26 According to the accelerator theory, what determines this year’s net investment?

A last year’s consumption

B last year’s output
C the change in last year’s investment
D the change in last year’s national income

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AD shift right
27 Which diagram shows an economy experiencing an increase in actual output but a decline in
potential output?
PPC shift inwards
LRAS shift left
A B

LRAS1 LRAS2 LRAS2 LRAS1

price price
level level

P1
P2 P1
AD1 AD1
AD2 AD2
O Y2 Y1 O Y2 Y1
real GDP real GDP

C D

price LRAS2 LRAS1 price LRAS1 LRAS2

level level

P2
P1 P1
AD2 AD2
AD1 AD1
O Y1 Y2 O Y1 Y2
real GDP real GDP

28 What is likely to follow if a central bank sets negative interest rates?

A an increase in government revenue

B an increase in the rate of inflation
C a reduction in bank lending
D deflation in the economy

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29 The Consumer Prices Index (CPI) fell by 3% in a year. Unemployment was regarded as
unacceptably high.

Which combination of policies would a government be most likely to adopt in such circumstances?

A an appreciation of the currency, together with an increase in the rate of interest

B increased government expenditure on education, together with an increase in taxes to pay
for it
C increased indirect taxes, together with a depreciation in the exchange rate
D reduced income taxes, together with a cut in the rate of interest

30 Other things being equal, what is most likely to result from an increase in a country’s interest
rates?

A a capital inflow
B a depreciation of the currency
C an increase in consumption
D an increase in investment

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