3.4.1 Efficiency Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. Allocative efficiency occurs when:

   • Total revenue is maximised for the firm in the period
   • Output is at the minimum point of ATC for the firm
   • Price equals marginal cost, so resources go to the goods consumers value most
   • Price equals average cost in every market at every output level

2. Productive efficiency occurs when:

   • Price equals marginal revenue for the firm in the market
   • Total revenue is maximised at the chosen output level
   • The firm produces at maximum capacity regardless of its cost
   • Output is produced at the lowest possible average cost, where ATC is minimised

3. Dynamic efficiency is:

   • Efficiency measured at one point in time only, in a single period
   • Efficiency over time through innovation and investment that lower costs or improve products
   • The fair distribution of income across households in the economy
   • Efficiency achieved only by cutting prices below cost in the market

4. X-inefficiency is:

   • Inefficiency arising when firms face little competitive pressure, so costs are higher than the minimum possible
   • Efficiency that comes from economies of scale in production
   • Efficiency that comes from perfect information in the market
   • The cost of allocating resources through the tax system

5. In a perfectly competitive market in the long run, which efficiencies are achieved?

   • Both productive and allocative efficiency, since price equals marginal cost and minimum ATC
   • Only dynamic inefficiency exists in the long run
   • Neither productive nor allocative efficiency is achieved
   • Only X-inefficiency occurs because firms have no competitors

6. A monopolist sets price above marginal cost and output below minimum ATC. Which efficiencies are lost?

   • Productive efficiency only, since the monopolist produces at minimum ATC
   • Dynamic efficiency only, since monopoly firms always price at MC
   • Allocative efficiency, since price exceeds MC, and productive efficiency, since output is below minimum ATC
   • Neither, because supernormal profit guarantees efficiency in every market

7. Which market structure is most likely to show dynamic efficiency through supernormal profit funding R&D?

   • An oligopoly where large profits can fund research and development
   • A market with zero profits and no investment at any time
   • A market where only government price controls apply to all firms
   • Perfect competition in the long run with normal profit only

8. A firm's price is £12 and its marginal cost is £9. Is allocative efficiency achieved?

   • Yes, because marginal cost equals average total cost at this output
   • No, price is above marginal cost, so too little output is produced for allocative efficiency
   • No, because marginal cost exceeds price in this market
   • Yes, because price exceeds cost by any amount in the market

9. Which is an example of X-inefficiency?

   • A firm reducing waste through lean production methods across its plants
   • A firm building a new factory to expand its capacity for growth
   • A firm whose staff do not minimise costs because it faces little competition
   • A firm benefiting from economies of scale that lower its average costs

10. A firm invests in research that lowers its costs in the future. Which efficiency does this represent?

    • X-inefficiency arising from managerial slack
    • Allocative efficiency in the current period
    • Dynamic efficiency
    • Productive efficiency in the current period only

11. A monopolist raises its price above marginal cost. What is the consumer effect?

    • No change in welfare, because prices do not affect consumers
    • Consumers buy less, and resources are misallocated, creating a deadweight loss
    • Allocative efficiency improves because output is restricted
    • Consumers buy more and society gains overall from the price rise

12. Why is productive efficiency achieved in perfect competition?

    • Firms earn supernormal profit permanently and so have no pressure to cut costs
    • Firms have no competitors, so they can set costs freely
    • Firms produce at minimum ATC, because competition forces them to minimise costs
    • Firms produce at maximum output regardless of the cost involved

13. A firm operates above its minimum ATC. What does this indicate?

    • Dynamic efficiency by definition, since costs are high
    • Productive inefficiency, since the same output could be made at a lower average cost
    • Allocative efficiency, since price equals marginal cost
    • Production at minimum efficient scale

14. Which is most accurate about efficiency in an oligopoly?

    • Efficiency depends on rivalry: collusion can reduce efficiency, while competition in innovation can improve it
    • Oligopoly always achieves allocative efficiency in every market
    • Oligopoly has no efficiency consequences for consumers or firms
    • Oligopoly always achieves productive efficiency in all cases

15. Evaluate: 'Efficiency is always the most important objective for government intervention in markets.'

    • True, because markets with efficiency never need any intervention
    • Overstated: trade-offs exist, as equity, quality, and innovation can conflict with pure static efficiency
    • False, because efficiency is irrelevant to the welfare of consumers
    • True, because efficiency is the only concern of any market policy

16. A monopolist has MC = 5, demand P = 20 - 0.5Q and MR = 20 - Q. What is the allocatively efficient output?

    • Q = 30
    • Q = 15
    • Q = 12.5
    • Q = 20

17. Using the same monopolist (MC = 5, P = 20 - 0.5Q), the profit-maximising price is £12.50. Which describes the allocative inefficiency?

    • Price equals marginal cost, so there is no allocative inefficiency
    • Price exceeds marginal cost by £7.50, so too little is produced relative to allocative efficiency
    • Price is below marginal cost by £7.50, leaving consumers under-supplied
    • Price exceeds average cost by £5, which is an allocative efficiency

18. Why might a monopoly with dynamic efficiency be better than a competitive market in some cases?

    • Monopolies never innovate, so they are always worse for consumers
    • Supernormal profit may fund innovation that lowers costs over time, offsetting static inefficiency
    • Dynamic efficiency only arises from price cuts by firms in any market
    • Monopolies never make profit, so they cannot fund any investment

19. Which two concepts are measured by how far price exceeds marginal cost and output sits above minimum ATC?

    • Allocative and productive inefficiency
    • X-inefficiency and dynamic efficiency
    • Productive and dynamic efficiency
    • Allocative efficiency only, with no productive measure

20. Evaluate: does a perfectly competitive market guarantee dynamic efficiency?

    • Yes, because firms earn zero profit and so all invest fully
    • Not necessarily: normal profit in the long run may limit funds for research and development, so dynamic efficiency can be weak
    • Yes, because every firm in the market innovates continuously
    • No, because perfect competition is never efficient in any sense

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