1.1.3 The economic problem Quiz: Pearson Edexcel Economics A, Unit 1

The 20 questions

1. What is the economic problem?

   • Resources are unlimited but wants are limited, so governments must ration goods to consumers.
   • Consumers always buy the cheapest goods, so the economy never has to make decisions about output.
   • Unlimited wants exist alongside limited resources, so choices must be made about how to allocate them.
   • Firms cannot make a profit when prices are set by the government rather than by the market.

2. Which of these is a renewable resource?

   • Coal mined from a deposit that takes millions of years to form in the ground.
   • Timber from a managed forest that can be replanted after harvesting.
   • Iron ore, which cannot be replaced once it has been extracted from the ground.
   • Crude oil extracted from reserves beneath the seabed in deep-water fields.

3. Which of the following is a non-renewable resource?

   • Solar radiation, which arrives at the earth's surface every day in large quantities.
   • Fish stocks in a sustainably managed fishery that reproduce each year in the wild.
   • Natural gas, which forms over millions of years and cannot be replaced on a human timescale.
   • Wind energy, which is continually replenished by atmospheric conditions across the region.

4. What is an opportunity cost?

   • The cost of importing a product from abroad, including transport costs and any tariffs charged.
   • The price a consumer pays for a good minus the surplus gained from buying it in the market.
   • The total money spent on producing a good, including all fixed and variable costs of output.
   • The value of the next best alternative that is given up when a choice is made.

5. Which statement about scarcity is correct?

   • Scarcity occurs only when governments fail to produce enough goods for their citizens to consume.
   • Scarcity exists because resources are finite relative to the wants people have.
   • Scarcity disappears in a market economy because prices always adjust to clear all demand.
   • Scarcity exists only in developing countries, where resources are too few to meet basic needs.

6. Which of these is an example of an opportunity cost for a government?

   • Collecting value added tax from retailers, which is a source of revenue for public finances.
   • Borrowing money from international lenders at a fixed rate of interest over ten years.
   • Paying civil servants a salary, which is a fixed cost of running the government department.
   • Choosing to spend an extra £1 billion on roads means the same money cannot be used to fund hospitals.

7. Which group is affected by the economic problem?

   • Only producers, since they are the sole users of scarce factors of production in the economy.
   • Consumers, producers and government, since all must make choices with limited resources.
   • Only government, since it is the only agent that has to ration resources among citizens.
   • Only consumers, since firms have unlimited access to all factors of production they need.

8. A government has £10 million to spend. Spending it on a new school means it cannot build a road of equal cost. What is the opportunity cost of building the school?

   • The road that could have been built with the same £10 million.
   • The interest paid on the borrowing used to pay for the school, which is a fixed cost of the project.
   • The £10 million spent on the school, which is the total money cost of the project.
   • The taxes collected from households to fund the school, which are recovered through revenue later.

9. A farmer can grow either wheat or barley on the same land. If wheat is chosen, the farmer forgoes barley output worth £4000. What is the opportunity cost of growing wheat?

   • The profit made from the wheat crop after all production costs have been deducted from revenue.
   • The cost of seed and fertiliser used to grow the wheat crop on the farm this season.
   • £4000 of barley output.
   • £4000 of wheat revenue, which is the value of the wheat that the farmer grows on the land.

10. A household has £200 a month for entertainment. Which best illustrates the economic problem?

    • The household cannot afford all of the goods it wants, so it must choose between cinema visits, concerts and eating out.
    • The household's wants are fully satisfied, so there is no further scarcity for it to face at all.
    • The household has more money than it needs, so it can buy every good it desires without any choice.
    • The household's income is set by the government, so it cannot be affected by scarcity of resources.

11. Which of the following is most likely to be a non-renewable resource used in production?

    • Hydroelectric power generated from river flows that renew with the seasonal rainfall.
    • Cotton grown on farms that can be replanted for each new harvest in the region.
    • Fish caught in a sustainable quota system that allows stocks to recover over time.
    • Crude oil.

12. A country has a limited supply of fertile land. Which is the best description of the economic problem it faces?

    • It must decide how to use the finite land for food, housing and industry, since these wants cannot all be fully met.
    • It must ensure that land is supplied at zero cost so that every citizen can farm for themselves.
    • It must decide whether to abolish land ownership, because land has no economic value in a market.
    • It must decide whether to import all of its food, since land is always more abundant in other countries.

13. Which of these best explains why a choice made by a firm has an opportunity cost?

    • Firms never have to choose, because they are able to use all of their resources for every purpose at once.
    • Resources used to produce one good cannot simultaneously be used to produce another, so the alternative output is forgone.
    • The firm's accounting profit is always lower than its economic profit by the amount of tax it pays.
    • The firm pays wages and rent, which are the only costs that matter to economic decisions made by firms.

14. A student has 3 hours of revision time before an exam and must choose between maths and economics. Which statement is correct?

    • The opportunity cost of maths is the exam fee paid, which is a fixed cost that does not depend on time.
    • Time spent on maths means the economics revision is forgone, so the opportunity cost of maths is that economics revision.
    • There is no opportunity cost, because the student can revise both subjects at once without any loss.
    • The opportunity cost is zero, because the student is revising for their own benefit rather than for money.

15. A government decides to subsidise solar panels rather than spend the same money on flood defences. What is the opportunity cost of the subsidy?

    • The solar panels installed by households, which are the direct output of the subsidy scheme itself.
    • The electricity generated by the solar panels once they are installed on the roofs of homes.
    • The subsidy payments made to households, which are the total cost of running the scheme in full.
    • The flood defences that could have been built with the same funds.

16. Explain why scarcity exists even in a rich economy.

    • Scarcity is eliminated once an economy reaches a high income, because wants are fully satisfied at that point.
    • Wants are unlimited and grow with income, while resources are finite, so scarcity persists at every income level.
    • Rich economies have unlimited resources, so scarcity exists only for people with low incomes in those economies.
    • Scarcity arises only from government policy, so a rich economy with free markets has no scarcity at all.

17. An economy's production possibility frontier shifts outward. What does this suggest about the economic problem?

    • Scarcity remains, because wants still exceed what can be produced, though the set of attainable output combinations has expanded.
    • Scarcity has increased, because more resources have been used up in producing the extra output.
    • Scarcity has been eliminated, because the economy can now produce all of the goods it wants in full.
    • Scarcity has no meaning at this point, since opportunity costs fall to zero when the frontier moves outward.

18. A country decides to exploit a non-renewable oil reserve faster than it can be replaced. Which evaluation is most consistent with the economic problem?

    • Future generations are unaffected, because the price mechanism always replaces depleted resources automatically over time.
    • The country has no opportunity cost, because oil is unlimited in the long run for any economy.
    • The decision removes scarcity from the economy, since the resource will be used up and no further choice will be needed.
    • Present consumption rises, but future generations have less of the resource, so the choice carries an opportunity cost across time.

19. Why might the opportunity cost of a choice differ for a consumer, a firm and a government?

    • Only firms face opportunity costs, because consumers and governments are not required to make choices.
    • Opportunity costs are the same for all agents, since they are always measured only in money terms.
    • Governments face no opportunity costs, because they can always borrow to fund whatever they choose to do.
    • Each agent faces different alternatives and objectives, so the next best option forgone differs between them.

20. A government uses scarce resources to fund a project with a high opportunity cost. What is the best evaluation of whether it should proceed?

    • The project should always proceed, since government spending generates benefits for everyone in the economy.
    • The project should never proceed, since any spending that has an opportunity cost is necessarily inefficient.
    • It depends on comparing the forgone alternative's value with the project's expected benefit, so proceed only if the benefit is larger.
    • The decision is irrelevant to economics, because opportunity costs apply only to private individuals and not to governments.

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