Practice Paper 4

Total Marks: 50 Time: 80 Minutes

Q1: Multiple Choice Questions (10 x 1 mark)

1. Which of the following is a fundamental economic problem?

a) Abundance
b) Scarcity
c) Inflation
d) Surplus

2. A production possibility curve is used to illustrate:

a) Demand and supply
b) Cost-benefit analysis
c) Opportunity cost
d) Market competition

3. Which factor of production includes machinery and tools?

a) Land
b) Labour
c) Capital
d) Entrepreneurship

4. The concept of opportunity cost is important because:

a) It ensures efficient production
b) It helps consumers make informed choices
c) It eliminates scarcity
d) It reduces costs

5. What do microeconomics and macroeconomics have in common?

a) They both focus on government policies
b) They both deal with economic behaviour
c) They both study international trade
d) They both analyse market failures

6. A market economy is characterized by:

a) Central planning
b) Private ownership and market-driven decisions
c) Government control of all resources
d) Equal distribution of wealth

7. Which is an example of a mixed economic system?

a) Capitalism with no government intervention
b) Socialism where the government owns all resources
c) A system where both private enterprise and government coexist
d) A barter economy

8. Firms in a competitive market primarily aim to:

a) Provide public goods
b) Maximize consumer welfare
c) Maximize profits
 d) Ensure fair wages

9. The main role of land as a factor of production is to:

a) Provide labour
b) Offer raw materials
c) Generate profits
d) Produce services

10. Which of the following describes a firm?

a) An individual business entity
b) A collection of consumers
c) A non-profit organization
d) A type of government body

Q2: (20 marks)

a) Define the economic problem and its implications. (2 marks)

*Reference: Ch1*
b) Identify and describe the three types of factors of production. (4 marks)
*Reference: Ch2*
c) Discuss the significance of opportunity cost in everyday decision-making. (6 marks)
*Reference: Ch3*
d) Illustrate and analyse a PPC, focusing on efficiency and inefficiency. (8 marks)
*Reference: Ch4*

**Q3: (20 marks)**

a) Differentiate between macroeconomics and microeconomics with examples. (2 marks)
*Reference: Ch5*
b) Explain how markets function to allocate resources. (4 marks)
*Reference: Ch6*
c) Describe the main characteristics of a market economic system. (6 marks)
*Reference: Ch13*
d) Compare a mixed economic system with a command economy. (8 marks)
*Reference: Ch15*

Answers Practice Paper 4

Q1: Multiple Choice Questions

1. **Which of the following is a fundamental economic problem?**

**Answer:** b) Scarcity
**Explanation:** Scarcity refers to the basic economic problem where resources are limited, but
human wants are unlimited. This requires making choices about how to allocate resources
efficiently.

2. **A production possibility curve is used to illustrate:**

**Answer:** c) Opportunity cost
**Explanation:** A Production Possibility Curve (PPC) shows the trade-offs between two goods or
services. It illustrates opportunity cost, which is the next best alternative foregone when making a
choice.

3. **Which factor of production includes machinery and tools?**

 **Answer:** c) Capital
**Explanation:** Capital refers to man-made resources like machinery, tools, and buildings used in
the production of goods and services.

4. **The concept of opportunity cost is important because:**

**Answer:** b) It helps consumers make informed choices
**Explanation:** Opportunity cost highlights the importance of considering the benefits of the
next best alternative when making decisions, which helps consumers and producers allocate
resources wisely.

5. **What do microeconomics and macroeconomics have in common?**

**Answer:** b) They both deal with economic behaviour
**Explanation:** Both microeconomics and macroeconomics study economic behavior, but on
different scales. Microeconomics looks at individuals and firms, while macroeconomics looks at the
economy as a whole.

6. **A market economy is characterized by:**

**Answer:** b) Private ownership and market-driven decisions
**Explanation:** In a market economy, resources are owned privately, and prices and production
decisions are determined by market forces like demand and supply, rather than the government.

7. **Which is an example of a mixed economic system?**

**Answer:** c) A system where both private enterprise and government coexist
**Explanation:** A mixed economy combines elements of both capitalism and socialism, where
the government and private sector share the responsibility of resource allocation.

8. **Firms in a competitive market primarily aim to:**

**Answer:** c) Maximize profits
**Explanation:** Firms in a competitive market aim to maximize profits by efficiently producing
goods and services at the lowest cost and selling them at competitive prices.

9. **The main role of land as a factor of production is to:**

**Answer:** b) Offer raw materials
**Explanation:** Land is a natural resource that provides raw materials for production, such as
minerals, forests, and agricultural products.

10. **Which of the following describes a firm?**

**Answer:** a) An individual business entity
**Explanation:** A firm is a business organization that produces goods or provides services with
the aim of earning profits.

Q2: Structured Questions

a) **Define the economic problem and its implications. (2 marks)**

**Answer:** The economic problem arises because of scarcity—there are limited resources to
meet unlimited wants and needs. This necessitates choices about how to allocate resources, which
leads to opportunity costs in decision-making.

b) **Identify and describe the three types of factors of production. (4 marks)**

**Answer:**
1. **Land:** Natural resources such as minerals, forests, and water used in production.
 2. **Labour:** Human effort, including physical and intellectual skills, used in the production
process.
3. **Capital:** Man-made resources like machinery, tools, and buildings that aid in producing
goods and services.
4. **Entrepreneurship:** The initiative to combine land, labour, and capital to create products and
take on business risks.

c) **Discuss the significance of opportunity cost in everyday decision-making. (6 marks)**

**Answer:** Opportunity cost is crucial in decision-making because every choice involves a trade-
off. For instance, if a person decides to spend money on a holiday, the opportunity cost is what they
could have bought instead, such as saving or investing that money. In everyday life, individuals,
businesses, and governments must weigh opportunity costs to make efficient decisions. This helps in
prioritizing needs and allocating limited resources effectively.

d) **Illustrate and analyse a PPC, focusing on efficiency and inefficiency. (8 marks)**

**Answer:** A Production Possibility Curve (PPC) shows the maximum possible output of two
goods that can be produced with available resources and technology. Points on the curve represent
efficient production, while points inside the curve represent inefficiency due to underutilization of
resources. Points outside the curve are unattainable with current resources. The slope of the PPC
represents the opportunity cost between the two goods.

Q3: Essay Questions

a) **Differentiate between macroeconomics and microeconomics with examples. (2 marks)**

**Answer:**
- **Microeconomics** studies the behaviour of individual consumers, firms, and markets. For
example, it examines how a company sets prices or how consumers respond to price changes.
- **Macroeconomics** looks at the economy as a whole, studying aggregate factors like national
income, inflation, and unemployment. For instance, it deals with government policies on taxation
and interest rates.

b) **Explain how markets function to allocate resources. (4 marks)**

**Answer:** Markets allocate resources through the forces of demand and supply. Prices act as
signals to both buyers and sellers. When demand for a good increases, prices rise, incentivizing
producers to supply more. Conversely, when demand falls, prices decrease, reducing supply. This
price mechanism ensures that resources flow to where they are most valued.

c) **Describe the main characteristics of a market economic system. (6 marks)**

**Answer:**
- **Private Ownership:** Individuals and businesses own resources and means of production.
- **Profit Motive:** Firms operate to maximize profits, providing goods and services efficiently.
- **Consumer Sovereignty:** Consumers have the freedom to choose what to buy, influencing
what firms produce.
- **Competition:** Numerous firms compete to attract consumers, leading to innovation and
efficiency.
- **Minimal Government Intervention:** The government plays a limited role, mostly providing
regulatory oversight.

d) **Compare a mixed economic system with a command economy. (8 marks)**

**Answer:**
 - **Mixed Economy:** Combines elements of both market and command economies. Private and
public sectors coexist, with the government regulating certain industries and providing public goods
like education and healthcare. Most resource allocation is market-driven, but the government
intervenes to address market failures and ensure equity.
- **Command Economy:** The government makes all economic decisions, controlling production,
pricing, and distribution of goods and services. There is little to no private ownership, and the
government owns most resources. Examples include the former Soviet Union and North Korea.
Mixed economies are more flexible, while command economies focus on centralized control, often
leading to inefficiency.