Cambridge International Examinations

Cambridge International Advanced Subsidiary Level and Advanced Level

ECONOMICS 9708/03
Paper 3 Multiple Choice For Examination from 2016
SPECIMEN PAPER
1 hour 15 minutes
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Additional Materials: Multiple Choice Answer Sheet

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

READ THESE INSTRUCTIONS FIRST

Write your Centre number, candidate number and name on the Answer Sheet in the spaces provided unless
this has been done for you.
Write in soft pencil.
Do not use staples, paper clips, glue or correction fluid.
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 15 printed pages and 1 blank page.

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1 All firms in an economy produce at levels of output where price and marginal private cost are
equal.

Why might this not be sufficient to ensure that allocative efficiency is achieved?

A a small number of buyers and sellers

B differences in consumers’ preferences
C product differentiation
D the presence of externalities

2 Which problem might an extension of defined property rights help to resolve?

A a divergence between private and social costs

B imperfect information on the part of consumers
C inequalities of income and wealth
D the exploitation of consumers by a monopoly supplier

3 In a social cost-benefit study what would be included when calculating the net social benefit of
raising the maximum speed limit on motorways from 70 mph to 80 mph?

an increase in an increase in
an increase in a reduction in
fuel revenue from
road deaths journey times
consumption petrol tax

A no no no yes
B yes no yes no
C yes yes no yes
D no yes yes no

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4 The table shows the total utility that an individual derives from consuming different quantities of a
good.

quantity of good total utility

(units) (units)

1 20
2 36
3 50
4 62
5 72
6 80

The individual’s marginal utility of money is $1 = 2 units of utility.

What is the maximum quantity of the good that the individual will buy when its price is $6?

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

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5 In the diagram I1 and I2 are an individual’s indifference curves and JK is her initial budget line.

good Y

I2

I1

O R S L T K

good X

An increase in the price of good X causes her budget line to shift to JL.

Which distances measure the resulting income and substitution effects on the quantity demanded
of good X by the individual?

income effect substitution effect

A RT RS
B RT RL
C ST RS
D ST RL

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6 The diagram shows the long-run average cost curve of a firm which faces constant factor prices.

LRAC

cost

O
output

Which economic concepts in the table explain the shape of the LRAC curve?

economies and the law of the law of

diseconomies diminishing variable
of scale returns proportions

A


B
 
C 


D  

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

MC
costs, revenue $
AC

O MR Q AR
output

What could explain why the firm produces output OQ?

A It is operating in a contestable market.

B It is operating in a perfectly competitive market.
C It is seeking to maximise profits.
D It is seeking to maximise sales revenue.

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8 Which feature of an economy would be most favourable for the survival of small firms?

A capital intensive production

B economies of scale in production
C preference for standardised products
D the widespread availability of bank lending

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

MC
cost,
revenue AC

MR AR
O output

The firm changes its objective from sales revenue maximisation to profit maximisation.

Which groups are most likely to be winners and losers as a result of this change?

winners losers

A customers managers
B managers workers
C workers shareholders
D shareholders customers

10 The demand for a firm’s product is perfectly inelastic.

What will be the effect on the firm’s revenue if it increases its price by 5%?

A Its revenue will be unchanged.

B Its revenue will increase by 5%.
C Its revenue will decrease by 5%.
D Its revenue will fall to zero.

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11 Which policy change might a firm’s owners introduce to deal with a principal agent problem?

A an extension of the firm’s opening hours from 9.00 am–5.00 pm to 8.00 am–8.00 pm
B a switch from monthly salaries to profit-related pay
C a switch from pursuing profit maximisation to the pursuit of sales revenue maximisation
D the introduction of preferential terms for its regular customers

12 What is limit pricing designed to achieve?

A to deter potential competitors from entering a firm’s market

B to minimise a firm’s potential losses
C to set an upper limit on a firm’s profitability
D to set a lower limit on a firm’s market share

13 An industry consists of two firms, X and Y.

The profit-payoff matrix shows how the profits of X and Y vary depending on the prices charged
by the two firms.

price charged by X

PX = $20 PX = $10

price PY = $20 $5mX $9mX

charged by
Y $5mY –$2mY

PY = $10 –$2mX zeroX

$9mY zeroY

In the absence of collusion, what will be X’s profits?

A –$2 million B zero C $5 million D $9 million

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14 The curve in the diagram shows the minimum combinations of capital and labour that are needed
to produce 100 units of output.

capital

Q = 100

O
labour

A firm’s management hires the combination of capital and labour indicated by point G in the
diagram to produce 100 units of output.

Which term best describes this situation?

A lack of specialisation
B managerial diseconomy
C market failure
D X-inefficiency

15 A recent study undertaken in an advanced economy found that simply increasing the income of a
pensioner by $100 will increase their spending on fuel by $3.

However, if the increase is labelled the ‘Cold Weather Fuel Allowance' then $41 will be spent on
fuel.

What can be concluded from this finding?

A The payment of a cold weather fuel allowance should be related to income (means tested).
B The cold weather fuel allowance should be replaced by an equivalent increase in the state
pension.
C People can be relied upon to act in their own best interests.
D People's behaviour does not always conform to economists' traditional expectation of rational
behaviour.

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16 A country has a floating exchange rate and an independent central bank with the power to set
interest rates.

The inflation rate is currently stable at the central bank’s target rate of 5%.

What is likely to happen to interest rates and to the exchange rate if the bank’s target rate was
reduced to 2%?

interest rates exchange rate

A decrease depreciate
B decrease appreciate
C increase depreciate
D increase appreciate

17 The diagram shows the market supply and demand curves for corn.

D S

P2

P1
price

O K L R
output

What should a government do if it is to maintain a minimum price of OP2?

A buy quantity KR
B buy quantity LR
C sell quantity KL
D sell quantity OL

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18 In the diagram, MRPL is a firm’s marginal revenue product of labour curve, S is its supply of
labour curve, and MCL its marginal cost of labour curve.

MCL

W4 S
W3
$
W2
W1

MRPL

O N1 N2
labour

Assuming profit maximisation, how many workers will the firm employ and what wage will it pay?

number
wage
employed

A N1 W1
B N1 W3
C N2 W2
D N2 W4

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19 The Lorenz Curve in the diagram depicts the distribution of household wealth in an economy.

100

% of
household
wealth
w
v

0 100
% of households

How is the economy’s Gini Coefficient of Inequality measured?

A area w
B area w – area v

area w
C
area v

area w
D
area w + area v

20 The table gives the percentage of employment in the primary, secondary and tertiary sectors in
four countries.

Which country is most likely to be a developing country?

primary secondary tertiary

sector % sector % sector %

A 15 40 45
B 30 40 30
C 35 45 20
D 45 35 20

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21 The graph shows GDP per hour worked in the G7 group of countries relative to the United
Kingdom in 2009 and 2010.

Index UK = 100
2009 2010
130

120

110

100

90

80
Japan

Canada

UK (= 100)

Italy

G7 exc. UK

France

Germany

US
Source: ONS

What can be concluded from the graph?

A GDP per hour worked was unchanged in the United Kingdom between 2009 and 2010.
B GDP per worker was lower in the United Kingdom than in Italy in 2009 and 2010.
C Productivity in Japan and the United States was unchanged between 2009 and 2010.
D The gap in GDP per hour worked between Germany and France was unchanged between
2009 and 2010.

22 Which correctly identifies injections into a country’s circular flow of income?

private sector government sector trade sector

I>S G>T M>X

A no yes yes
B yes no no
C yes yes no
D no no yes

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23 Other things remaining unchanged, what is likely to be a consequence of an increase in net cash
withdrawals from the commercial banks?

A an inflationary spiral
B an increase in the cash reserves of the commercial banks
C an increase in the liquidity of the commercial banks
D a restriction in the ability of the commercial banks to lend

24 According to monetarist theory, what will be the short-run effect on the level of output and on the
price level of an unanticipated increase in the money supply?

effect on the
effect on output
price level

A increase increase
B increase no change
C no change increase
D no change no change

25 The diagram shows the determination of the rate of interest in an economy where MS represents
the money supply and LP represents liquidity preference.

MS
LP1 LP2

rate of
interest r2

r1

O
quantity of money

The rate of interest rises as a result of a shift in the liquidity preference curve from LP1 to LP2.

Which policy might be used to try to maintain the rate at r1?

A increased government expenditure

B increases in indirect taxes
C reductions in income tax rates
D the purchase of bonds in the open market

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26 Which policy is likely to promote economic development in a developing economy but may lead
to a decline in the rate of economic growth?

A a policy to increase female participation in the labour market

B a policy to increase immunisation rates
C a policy to reverse environmental degradation
D a policy to promote exports

27 Other things being equal, what is likely to result from an increase in interest rates in a country?

A a capital outflow from the country

B a depreciation of the country’s currency
C a decrease in consumption
D an increase in investment

28 Without any change in government policy, what will be the effect of an economic recession on tax
revenue and on government expenditure?

government
tax revenue
expenditure

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

29 In an economy, the marginal propensity to consume of the unemployed is higher than that of
taxpayers.

The government increases expenditure on unemployment benefits by $10 million.

What will the government need to do if it wishes to keep aggregate demand unchanged?

A raise taxation by less than $10 million

B raise taxation by more than $10 million
C raise taxation by $10 million
D leave taxes unchanged

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30 In the diagram, the curve SRPC1 is an economy’s initial short-run Phillips Curve.

change
in money
wage rates

O
unemployment SRPC2
rate
–
SRPC1

What could cause the curve to shift to SRPC2?

A a depreciation of the currency

B a decrease in the expected rate of inflation
C an increase in interest rates
D an increase in the natural rate of unemployment

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BLANK PAGE

Copyright Acknowledgements:

Question 21 © Statistical Bulletin International Comparisons of Productivity, 2010 – final estimates; Office for National Statistics; 6 March 2012;
http://www.ons.gov.uk/ons/dcp171778-258963.pdf.

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