Cambridge International A Level · Economics (9708)

Efficiency and market failure: Practice Questions

5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Efficiency and market failure.

10 questions25 marksFree, no account

Question 1

1 mark

A firm is considered to be productively efficient in the long run if it is producing at which point?

Question 2

1 mark

A firm in a monopolistically competitive market is in long-run equilibrium. Which statement correctly describes its efficiency status?

Question 3

1 mark

A state of Pareto optimality is said to exist in an economy when it is impossible to make one person better off without making someone else worse off. Which condition is necessary for this to be achieved in a multi-product economy?

Question 4

1 mark

In a diagram representing a market with a negative externality in production, the Marginal Private Cost (MPC) is lower than the Marginal Social Cost (MSC). If the market is in equilibrium where \(MPC\) equals Marginal Social Benefit (MSB), what does the triangular area between the \(MSC\) and \(MSB\) curves, from the socially optimal output to the market equilibrium output, represent?

Question 5

1 mark

Which statement best evaluates the relationship between market structures and dynamic efficiency?

Question 6

3 marks

Define productive efficiency and identify the specific point on a firm's Long-Run Average Cost (LRAC) curve where this is achieved.

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Question 7

6 marks

Explain why allocative efficiency is achieved at the point where the Marginal Social Benefit (MSB) equals the Marginal Social Cost (MSC), and why a profit-maximizing monopolist produces less than this optimal quantity.

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Question 8

3 marks

Explain the specific price and cost condition necessary to achieve allocative efficiency and why a monopoly firm typically fails to meet this condition in long-run equilibrium.

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Question 9

3 marks

(a) Define the term Pareto optimality and state the condition required to achieve it in an economy.

(b) Explain the difference between productive efficiency and allocative efficiency, identifying the specific price and cost conditions necessary for each to occur.

(c) Briefly explain why a market fails to achieve allocative efficiency when there is a monopoly power present.

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Question 10

5 marks

(a) Define allocative efficiency and state the condition required for its achievement in a market.
(b) Explain, with the aid of a diagram, why a profit-maximising monopoly is considered to be allocatively inefficient compared to a firm in a perfectly competitive market.

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