4.1.5.10 Market structure, static efficiency, dynamic efficiency and resource allocation Quiz: AQA Economics, Unit 1

The 20 questions

1. Static efficiency is best described as:

   • Efficiency at a given point in time, covering productive and allocative efficiency
   • Efficiency that comes only from new investment and innovation over time
   • Efficiency that depends on the age of the firm's machinery alone
   • Efficiency achieved by reducing employment permanently

2. Dynamic efficiency is best described as:

   • Efficiency that depends only on the number of firms in the market, since the more firms there are
   • Efficiency at one point in time when price equals marginal cost
   • Efficiency achieved over time through innovation, investment and technological change
   • Efficiency achieved by minimising average total cost in the short run

3. Productive efficiency is achieved when firms:

   • Produce at minimum average total cost
   • Keep average fixed cost equal to average variable cost
   • Operate where marginal revenue is zero
   • Set price equal to marginal cost

4. Allocative efficiency is achieved when:

   • Marginal revenue equals average revenue
   • Price equals minimum average total cost
   • Average revenue equals average variable cost
   • Price equals marginal cost

5. Which factor is most likely to influence dynamic efficiency?

   • Spending on research and development
   • The exact allocation of resources within a fixed production process
   • The price elasticity of demand at the current price
   • The number of firms currently operating at minimum average total cost

6. Investment in human capital contributes to dynamic efficiency because it:

   • Eliminates the need for technological change
   • Lowers prices in the short run by cutting wages, since spending on people reduces the price that firms charge to buyers in every period
   • Increases fixed costs without any productivity gain
   • Raises skills and productivity, enabling innovation over time

7. A market has a price of £12 and a marginal cost of £8. Allocative efficiency is:

   • Achieved, since price exceeds marginal cost and so the firm is earning the surplus that signals an efficient use of the resources it
   • Achieved, since price equals average total cost, which means the firm is producing at its lowest cost per unit of output
   • Achieved, since the firm earns abnormal profit
   • Not achieved, since price exceeds marginal cost and output is below the efficient level

8. A firm produces 100 units where average total cost is £20, but minimum average total cost is £16 at 150 units. Is productive efficiency achieved?

   • No, because output is not at minimum average total cost
   • No, because price exceeds average cost
   • Yes, because average cost is above the minimum
   • Yes, because the firm earns abnormal profit, which shows that it is making the best use of its resources in the production process

9. Using conduct and performance indicators to compare market structures means:

   • Judging markets by firms' behaviour, such as pricing and innovation, and by outcomes, such as profits and efficiency
   • Counting only the total output of the largest firm in each industry
   • Measuring only the number of firms in each market
   • Comparing only the branding of firms' products, because the strength of brands is the only measure that shows how well markets perform

10. Why might a monopolist achieve dynamic efficiency more readily than a perfectly competitive firm?

    • Abnormal profit from monopoly can fund large research budgets and investment in new technology
    • Monopolists have no costs, so they can invest without limit
    • Perfectly competitive firms earn abnormal profit that funds research
    • Monopolists always have lower average costs than competitive firms in every period

11. Which statement best evaluates the trade-off between static and dynamic efficiency?

    • There is no trade-off because both are achieved at the same point in time
    • Dynamic efficiency always reduces static efficiency in every market
    • A market that maximises static efficiency may lack the profits to fund innovation, so the best balance depends on the market
    • Static efficiency is always more important than dynamic efficiency

12. Research spending raises output per unit of input in the long run. Which efficiency concept does this illustrate?

    • Static productive efficiency
    • Allocative efficiency at a point in time
    • Consumer surplus maximisation at a point in time
    • Dynamic efficiency

13. Technological change influences dynamic efficiency because it:

    • Moves the market to perfect competition permanently
    • Shifts cost curves down over time, improving efficiency in the long run
    • Reduces consumer surplus to zero in every market
    • Raises average fixed costs without limit

14. Which situation best demonstrates productive inefficiency?

    • A firm producing at an output where its average total cost is above the minimum
    • A firm earning normal profit in the long run
    • A firm setting price equal to marginal cost
    • A firm producing at its minimum average total cost

15. Which is a reason real markets may fail to achieve allocative efficiency?

    • Perfect competition eliminates all costs of production
    • Consumers never respond to price changes
    • Market power allows firms to set price above marginal cost
    • Firms always set price equal to marginal cost to attract customers

16. Which is a dynamic efficiency measure?

    • Investment in research and development as a share of revenue
    • Price equal to marginal cost in the market over the whole of the year
    • The concentration ratio of the largest firms
    • The number of firms operating at minimum average total cost

17. A market where price equals minimum average total cost and also equals marginal cost has which efficiencies?

    • Allocative efficiency only
    • Neither productive nor allocative efficiency
    • Both productive and allocative efficiency
    • Productive efficiency only

18. Why might static efficiency be a poor guide to comparing market structures on its own?

    • It measures only accounting profit and ignores costs
    • It is always identical across all market structures
    • It ignores innovation and investment over time, which can matter more for long-run living standards
    • It ignores innovation and investment over time

19. Which statement correctly links efficiency to market structure?

    • Market structure has no effect on either type of efficiency
    • Perfectly competitive markets are always dynamically efficient, while monopolies never are
    • Oligopolies are always productively efficient because they have few firms
    • Monopolies tend to be less allocatively efficient than perfectly competitive markets, but may be more dynamically efficient

20. Dynamic efficiency is influenced by investment in non-human capital. An example is:

    • Cutting advertising spending to lower current costs
    • Hiring temporary staff to meet a seasonal peak in demand
    • Building a new automated production line that lowers unit costs over time
    • Offering short-term discounts to attract customers

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