Practice Paper 2

Total Marks: 50 Time: 80 Minutes

Q1: Multiple Choice Questions (10 x 1 mark)

1. Scarcity in economics refers to:
a) Too much production
b) Limited resources versus unlimited wants
c) High prices
d) Government control
2. Which of the following is a labour factor of production?
a) Land
b) Raw materials
c) Human effort
d) Machinery
3. Which of the following illustrates opportunity cost?
a) Buying a car instead of a bike
b) Saving money
c) Investing in stocks
d) Working overtime
4. The PPC demonstrates:
a) Efficiency in production
b) Consumer preferences
c) Market equilibrium
d) Profit maximization
5. Microeconomics is primarily concerned with:
a) Government policies
b) Individual economic units
c) National economic growth
d) Global trade
6. The invisible hand in a market economy refers to:
a) Government intervention
b) Consumer choice driving the market
c) Market failures
d) Price controls
7. A mixed economic system is characterized by:
a) Only private ownership
b) Only government control
c) Both private and public sectors
d) Absence of markets
8. Which of the following is a goal of firms?
a) Social welfare
b) Profit maximization
c) Environmental protection
d) Community service
9. Which type of economy relies on consumer preferences to drive production?
a) Planned economy
b) Traditional economy
c) Market economy
d) Command economy
10. The primary role of firms is to:
a) Control markets
 b) Produce goods and services
c) Regulate government
d) Limit competition

Q2: (20 marks)

a) What is meant by the term 'factors of production'? (2 marks)
*Reference: Ch2*
b) Explain the significance of opportunity cost in decision-making. (4 marks)
*Reference: Ch3*
c) Illustrate a production possibility curve and explain shifts in the curve. (6 marks)
*Reference: Ch4*
d) Analyze the impact of a market economy on resource allocation. (8 marks)
*Reference: Ch13*

Q3: (20 marks)

a) Compare macroeconomics and microeconomics. (2 marks)
*Reference: Ch5*
b) Discuss how resource allocation works in a mixed economic system. (4 marks)
*Reference: Ch15*
c) Describe the role of firms in an economy. (6 marks)
*Reference: Ch20*
d) Evaluate the production processes in different types of firms. (8 marks)
*Reference: Ch21*

Answers Paper 2
Q1: Multiple Choice Questions (10 x 1 mark)
1. Scarcity in economics refers to:
b) Limited resources versus unlimited wants
Explanation: Scarcity is the fundamental economic problem where there are limited resources to
meet unlimited human wants. This forces individuals and economies to make decisions on how to
allocate these scarce resources effectively.

2. Which of the following is a labour factor of production?

c) Human effort
Explanation: Labour refers to human effort, both mental and physical, used in the production
process. It is one of the four factors of production along with land, capital, and enterprise.

3. Which of the following illustrates opportunity cost?

a) Buying a car instead of a bike
Explanation: Opportunity cost is the next best alternative forgone when a choice is made. In this
case, buying a car means forgoing the opportunity to buy a bike.

4. The PPC demonstrates:

a) Efficiency in production
Explanation: The Production Possibility Curve (PPC) shows the maximum possible output
combinations of two goods that can be produced with available resources and technology,
highlighting efficiency.

5. Microeconomics is primarily concerned with:

b) Individual economic units
 Explanation: Microeconomics focuses on the behaviour of individual households, firms, and
industries, whereas macroeconomics looks at the economy as a whole.

6. The invisible hand in a market economy refers to:

b) Consumer choice driving the market
Explanation: The "invisible hand," a concept introduced by Adam Smith, describes how individual
self-interested actions by consumers and firms in a free market economy help to allocate resources
efficiently.

7. A mixed economic system is characterized by:

c) Both private and public sectors
Explanation: A mixed economy features both private sector businesses and government
intervention in the allocation of resources, blending elements of both market and command
economies.

8. Which of the following is a goal of firms?

b) Profit maximization
Explanation: Firms generally aim to maximize profits by producing goods and services in the most
efficient way possible to increase revenue.

9. Which type of economy relies on consumer preferences to drive production?

c) Market economy
Explanation: In a market economy, production decisions are driven by consumer demand and
preferences, with minimal government intervention.

10. The primary role of firms is to:

b) Produce goods and services
Explanation: Firms are responsible for producing goods and services to meet the needs and wants
of consumers, playing a critical role in resource allocation.

Q2: (20 marks)

a) What is meant by the term 'factors of production? [2 marks]

Reference: Ch2
**Factors of production** are the resources used in the production of goods and services. They
include **land** (natural resources), **labour** (human effort), **capital** (machinery and
equipment), and **enterprise** (entrepreneurial skill to organize and manage the other factors).

b) Explain the significance of opportunity cost in decision-making. [4 marks]

*Reference: Ch3*
Opportunity cost is the value of the next best alternative that is forgone when a choice is made. It is
significant in decision-making because individuals, firms, and governments must allocate scarce
resources, and the concept helps them weigh the benefits of different options. For example, if a firm
decides to invest in new machinery, the opportunity cost may be the alternative projects or
investments it cannot undertake as a result.

c) Illustrate a production possibility curve and explain shifts in the curve. [6 marks]
*Reference: Ch4*
The **Production Possibility Curve (PPC)** shows the maximum output combinations of two goods
that an economy can produce using all its resources efficiently. Points inside the curve represent
inefficient use of resources, while points on the curve represent efficient production.
A **shift outward** of the PPC occurs when there is economic growth, such as an increase in
resources or technological advancement. A **shift inward** represents a reduction in an economy's
capacity to produce, perhaps due to a decrease in resources or a natural disaster.

d) Analyse the impact of a market economy on resource allocation. [8 marks]

*Reference: Ch13*
In a market economy, resource allocation is driven by the forces of supply and demand, with
minimal government intervention. **Consumer preferences** and **prices** act as signals to firms
about what to produce and in what quantities. Firms are motivated by the profit motive to allocate
resources efficiently, focusing on goods and services that consumers are willing to pay for. This can
lead to innovation and economic growth. However, a market economy may lead to **market
failures**, such as under provision of public goods and inequality, which may require some
government intervention to correct.

Q3: (20 marks)

a) Compare macroeconomics and microeconomics. [2 marks]

*Reference: Ch5*
Macroeconomics deals with the **economy as a whole**, focusing on issues such as inflation,
unemployment, and national income. Microeconomics, on the other hand, focuses on **individual
economic units**, such as households, firms, and markets, and how they make decisions.

b) Discuss how resource allocation works in a mixed economic system. [4 marks]

*Reference: Ch15*
In a **mixed economic system**, resource allocation is a combination of market forces and
government intervention. While the private sector allocates resources based on supply and demand,
the government intervenes in key areas, such as healthcare and education, to ensure equitable
distribution of resources and to correct market failures. The balance between market-driven and
government-directed allocation varies across countries.

c) Describe the role of firms in an economy. [6 marks]

*Reference: Ch20*
Firms play a crucial role in producing goods and services to meet consumer needs. They employ
factors of production (land, labour, capital, and enterprise) to create value. Firms are also key drivers
of economic growth and innovation. They contribute to job creation, increase competition, and,
through investment and innovation, drive technological advancements. Furthermore, firms generate
income for owners, employees, and governments (through taxes).

d) Evaluate the production processes in different types of firms. [8 marks]

*Reference: Ch21*
Different types of firms employ varied **production processes** based on their size, objectives, and
industry. For example, **small firms** may focus on labour-intensive production, offering
personalized services. **Large firms** often rely on capital-intensive production, utilizing advanced
machinery and technology to achieve economies of scale. In **service industries**, production may
focus more on human capital and the quality of customer interactions, while in **manufacturing**,
firms aim to optimize machinery and reduce costs. Each type of firm has to choose a production
method that best aligns with its resources, market demand, and long-term goals. Evaluating these
processes involves understanding trade-offs between efficiency, costs, and product quality.