A1 Mock exam practice part 1

A1 MOCK EXAM REVISIONPART 1

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Name the three major economic agents in microeconomics.

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ConsumersGovernmentFirms

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Name three advantages of a free market economy.

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1. Efficient use of resources due to competition2. Innovation due incentives3. Wider variety of goods/ increased consumer choice.4. Greater flexibility/adaptability5. Lower prices due to competition

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List the THREE functions of the price mechanism

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1. Signalling2. Incentive3. Rationing

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TRUE OR FALSEThe signalling funtion of price informs suppliers to move their resources into or out of a market.

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TRUE.When prices increase tney should increase the quantity supplied of the good as they are likelyt o make profit The opposite is true.

TRUE OR FALSEWhen there is a shortage the price of a good should fall to incentivise customers to buy more.

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The price will rise and this will incentivise consumers to buy less. Hence reducing the demand for the product.

TRUE OR FALSEHayek believes in a free market economy with some government intervention. Adam Smith believes only in the free market.

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FALSEAdam Smith believes in the free market but wirth minimal government intervention---a regulatory role when required. Hayek belives all government intervention inevitably bad.

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Consumer surplus may be defined as...

The difference between the price a consumer is willing to pay and the actual price they pay.

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Define the term opportunity cost.

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The cost of an activity in terms of the next best alternative foregone.

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A good has a Y.E.D. of +2.1. What type of good is this?

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The plus sign means that as income increases so too does the demand for the good. The value of the coefficient is >1, hence it is a luxury good

The cross elasticity of demand for two goods is +.1.8. What does this imply?

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The goods are substitutes.

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Who is rational consumer?

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When the consumer aims to maximise their utility and minimise their costs.It occurs when the marginal benefit is greater than or equal to the marginal cost of a decision.

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List THREE assumptions of rational consumer behaviour?

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1. Consumers always act in their own self-interest.2. Consumers have perfect information.3. Consumers are able to calculate or measure their utility.4. Consumers act independently when making decisions.5. Consumers always aim to maximise utility.

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State THREE factors that often bring about irrational consumer behaviour

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1. Habitual Behaviour---the consumer is not carefully weighing the benefits and costs of a decision.2. Computational limitations---limited time, limited cognitive ability, limited knowledge3. Influenced by others, rather than acting independently.

What does this diagram represent?

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Ad Valorem TaxFor eg. VAT

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Are substitutes

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