1.1.3 The Economic Problem — Practice Questions

Seven original multiple-choice questions on the economic problem, written to the style and difficulty of Edexcel Paper 1 Section A. One is a calculation.

7 questions Edexcel A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.1.3 The Economic Problem revision notes.

1. 1. A country has abundant farmland, yet its population still cannot obtain everything it wants. This illustrates that scarcity arises from

   Definition in context

   Select one answer

   A Finite resources set against unlimited wants.

   B Government failure to distribute output fairly.

   C The absence of any renewable resources.

   D Wants that are themselves strictly limited.
   Show model answer

   Answer: A (Finite resources set against unlimited wants.). Scarcity is the relationship between two things: finite resources and infinite wants. Abundance in one resource does not remove it, because the wants still outrun what the whole set of resources can produce.
   This is why the economic problem applies to rich countries as well as poor ones. However much farmland a country has, its land, labour, capital and enterprise are limited in total, so choices about how to use them still have to be made.

   Why the other options are wrong

   • B — Distribution is a separate question — how output is shared out once produced. Scarcity would exist under any distribution, including a perfectly equal one.
   • C — Renewable resources are replenished over time, but they are not unlimited at a point in time. Their presence or absence does not create scarcity.
   • D — This inverts the definition. Scarcity exists precisely because wants are effectively unlimited while the means of satisfying them are not.

2. 2. Table 1 describes four resources used by a bakery.
   Using Table 1, the resource whose reward is interest is

   Data interpretation

   Table 1: Four resources used by a bakery

   	Description
   Resource 1	The wheat fields the flour is grown on
   Resource 2	The ovens installed in the bakery
   Resource 3	The bakers who work the early shift
   Resource 4	The owner who risked her savings to open it

   Select one answer

   A Resource 1.

   B Resource 2.

   C Resource 3.

   D Resource 4.
   Show model answer

   Answer: B (Resource 2.). Each factor of production earns its own reward: land earns rent, labour earns wages, capital earns interest and enterprise earns profit.
   The ovens are manufactured resources used to produce other goods, which makes them capital. Capital earns interest, so Resource 2 is the answer. Working the mapping in this direction — from reward back to factor — is a useful check that you know both lists rather than just one.

   Why the other options are wrong

   • A — The wheat fields are a natural resource, so they are land, and land earns rent.
   • C — The bakers supply human effort, so they are labour, and labour earns wages.
   • D — The owner takes the risk of running the business, so this is enterprise, and enterprise earns profit.

3. 3. A grower has 40 hectares of land. Each hectare produces either £900 of barley or £1,400 of oilseed, and nothing else is worth growing. She plants the whole 40 hectares with barley. The opportunity cost of that decision is

   Calculation

   Select one answer

   A £20,000

   B £36,000

   C £56,000

   D £92,000
   Show model answer

   Answer: C (£56,000). Opportunity cost is the value of the next best alternative forgone. The alternative here is oilseed across the whole 40 hectares.
   Oilseed forgone: 40 × £1,400 = £56,000.
   The barley she does grow is worth 40 × £900 = £36,000, but that is the benefit of the choice, not its cost. Opportunity cost always measures what was given up, which is why it is £56,000 even though the decision itself earns less than that.

   Why the other options are wrong

   • A — This is £56,000 − £36,000, the net amount lost by choosing barley. It is a real quantity, but it is not what opportunity cost measures — the definition is the full value of the alternative, not the difference between the two.
   • B — This is the value of the barley actually grown. It is what the decision produces, not what it sacrifices.
   • D — This adds the two together, £36,000 + £56,000. That counts the land twice, once under each crop, when only one can be planted.

4. 4. A government uses an unexpected budget surplus to build a new hospital. The opportunity cost of that decision is

   Applied reasoning

   Select one answer

   A The full cost of building and staffing the hospital.

   B The tax revenue raised to produce the surplus.

   C The value of the health benefits the hospital delivers.

   D What the funds could otherwise have bought.
   Show model answer

   Answer: D (What the funds could otherwise have bought.). For a government, the opportunity cost of any spending decision is the next best use of the same money — more school places, a road scheme, or lower borrowing.
   The money cost of the hospital appears in the accounts; the opportunity cost does not, which is why it is easy to overlook. It is nonetheless the figure that matters when judging whether the decision was a good one, because a project is only worth doing if it beats the best alternative it displaces.

   Why the other options are wrong

   • A — That is the money cost, and it is what the budget records. Opportunity cost asks what those pounds could have bought instead.
   • B — The revenue was raised before this choice was made. The decision is about how to use a surplus that already exists.
   • C — Health benefits are the benefit of the decision. Costs and benefits are the two sides of the comparison, not the same thing.

5. 5. A country begins meeting a growing share of its electricity demand from wind rather than from gas. In terms of the economic problem, the significance of wind is that it

   Definition in context

   Select one answer

   A Can be replenished, so its use is sustainable.

   B Costs nothing to use once turbines are built.

   C Is not scarce, so it carries no opportunity cost.

   D Removes the need to allocate resources at all.
   Show model answer

   Answer: A (Can be replenished, so its use is sustainable.). Wind is a renewable resource: it is replenished naturally, so using it today does not reduce what is available tomorrow.
   Gas is non-renewable and finite, so every unit burned is one that future generations cannot use. That is the opportunity cost the switch avoids. Note what the switch does not do — turbines, land, steel and maintenance are all scarce, so wind power is renewable without being free.

   Why the other options are wrong

   • B — Turbines wear out, land has alternative uses and maintenance takes labour. The fuel is free; the electricity is not.
   • C — Wind power still uses scarce capital and land, and those have alternative uses. Renewable means replenished, not unlimited at zero cost.
   • D — Every economy allocates scarce resources whatever it burns. Changing the energy source changes the choices, not the need to choose.

6. 6. A software engineer leaves a salaried job to set up her own firm, taking on the risk of failure herself. The factor of production she now supplies that she did not supply before is

   Applied reasoning

   Select one answer

   A Capital.

   B Enterprise.

   C Labour.

   D Land.
   Show model answer

   Answer: B (Enterprise.). Enterprise is the willingness to take the risk of starting or expanding a business, and its reward is profit — which may be negative.
   In her salaried job she supplied labour and was paid a wage regardless of whether the employer succeeded. Setting up on her own, she still supplies labour, but she now also bears the residual risk. That risk-bearing is the factor that is new, and it is what distinguishes an entrepreneur from an employee.

   Why the other options are wrong

   • A — Capital is the manufactured resources the firm uses — computers, servers, equipment. Buying them is a decision she makes, but capital is not a factor she personally supplies by virtue of starting up.
   • C — She supplied labour in her salaried job too, so it is not new. Her hours may have gone up, but the factor has not changed.
   • D — Land is natural resources. Nothing in the scenario alters her supply of them.

7. 7. A country decides to extract and sell its remaining oil reserves as quickly as it can. Judged against the economic problem, the strongest objection is that this

   Applied reasoning

   Select one answer

   A Guarantees the country will run a trade deficit.

   B Imposes a high opportunity cost on future generations.

   C Makes the resource renewable rather than non-renewable.

   D Removes the need for any future economic choices.
   Show model answer

   Answer: B (Imposes a high opportunity cost on future generations.). Oil is non-renewable: once extracted it cannot be replenished. Selling the reserves quickly converts a stock that future generations could have used into income for the present one.
   The opportunity cost of the decision therefore falls largely on people who had no say in it. That is the objection — not that extraction is wrong, but that the cost is borne at a different time from the benefit, which is exactly the case for extracting more slowly.

   Why the other options are wrong

   • A — Selling oil earns export revenue and would tend to improve the trade balance, not worsen it. The objection has nothing to do with trade.
   • C — Nothing about how fast a finite resource is used can make it renewable. The difficulty is precisely that it cannot be replenished.
   • D — Using up one resource does not end scarcity. Wants remain unlimited and the remaining resources are fewer, so the choices become harder rather than unnecessary.