These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All economies, firms and prices are fictional. Only multiplication, addition and subtraction are needed, so a four-function calculator is enough. For production costs, use: total cost = (worker-hours × wage) + (machine-hours × rent).
Question 1 (multiple choice · foundation)
The government of a fictional country decides that its state farms will harvest wheat with machines instead of by hand. Which basic economic question is this decision mainly answering?
- (A) What goods and services to produce
- (B) How to produce goods and services
- (C) For whom to produce goods and services
- (D) Whether resources are scarce
Answer and explanation
Answer: (B). Choosing machines instead of hand labour is a choice of method and resources, which is the “how” question.
- (A) would be the decision to grow wheat at all, or how much. Here the good is already chosen.
- (C) is about who receives the wheat, which this decision does not settle.
- (D) is not one of the three questions. Scarcity is the reason all three questions must be answered; it is not something a society decides.
Question 2 (multiple choice · foundation)
In a market economy, what mainly coordinates the decisions of millions of buyers and sellers?
- (A) Output targets set by a central planning agency
- (B) Prices that result from voluntary buying and selling
- (C) Rations handed out according to need
- (D) A vote by all citizens on how much of each good to make
Answer and explanation
Answer: (B). In a market economy, prices carry information about what is scarce and what is wanted, and create incentives for buyers and sellers to respond. No one directs this; it comes from voluntary exchange.
- (A) is the coordinating mechanism of a command economy.
- (C) is a way a planner might answer “for whom” in a command economy. In a market, goods go to those willing and able to pay.
- (D) describes a political decision, not a market. Voting on every good is not how any of the three systems coordinates production.
Question 3 (multiple choice · core)
In the fictional economy of Quorra, most firms are privately owned and most prices are set in markets. The government provides free primary schooling and pays pensions, funded by an income tax. Which description fits Quorra best?
- (A) A command economy, because the government provides schooling
- (B) A pure market economy, because most firms are private
- (C) A mixed economy, because markets answer most questions but the government also chooses some output and changes who receives it
- (D) It cannot be classified, because it has both private and government activity
Answer and explanation
Answer: (C). Private ownership and market prices answer most of the three questions, but the government answers part of “what” (schooling) and part of “for whom” (pensions funded by taxes). A combination of the two coordinating mechanisms is exactly what “mixed” means.
- (A) overstates one feature. In a command economy the state owns most resources and a central plan sets output; Quorra has neither.
- (B) ignores the government’s role. A pure market economy would leave schooling and pensions to private buyers and sellers.
- (D) misunderstands the term: having both private and government activity is the defining feature of a mixed economy, not a reason it cannot be classified.
Question 4 (calculation · core)
A brickworks in the fictional market economy of Doranth can make 1,000 bricks by either of two methods.
| Method | Worker-hours | Machine-hours |
|---|---|---|
| A | 40 | 4 |
| B | 10 | 10 |
Machine time rents for $30 per machine-hour.
(a) The wage is $12 per worker-hour. Calculate the cost of each method and state which method the firm chooses. (b) The wage falls to $5 per worker-hour, with the same machine rent. Which method does the firm now choose? (c) Calculate the wage at which the two methods cost the same. (d) Explain what parts (a) and (b) show about how a market economy answers the “how to produce” question.
Worked solution
(a) Method A: 40 × $12 + 4 × $30 = $480 + $120 = $600. Method B: 10 × $12 + 10 × $30 = $120 + $300 = $420. B is cheaper by $180, so the firm chooses method B.
(b) Method A: 40 × $5 + 4 × $30 = $200 + $120 = $320. Method B: 10 × $5 + 10 × $30 = $50 + $300 = $350. A is now cheaper by $30, so the firm switches to method A.
(c) A uses 30 more worker-hours than B; B uses 6 more machine-hours, costing 6 × $30 = $180. The costs are equal when 30 × wage = $180, so the wage is $6 per worker-hour. Check: A = 240 + 120 = $360; B = 60 + 300 = $360.
(d) No one ordered the firm to change method. The wage is the price of labour. When labour is scarce and its price is high, the firm saves labour by using more machines (B). When labour becomes cheaper, the firm uses more labour (A). Input prices signal the relative scarcity of resources, and the profit motive makes firms respond, so prices coordinate the “how” decision.
Suggested mark points (4): 1 for both costs and the choice in (a); 1 for both costs and the switch in (b); 1 for $6 with working; 1 for linking the change of method to input prices signalling scarcity and firms seeking lowest cost.
Common error: comparing only the labour costs. The firm cares about total cost, including machine rent.
Question 5 (constructed response · core)
In the fictional command economy of Corvessa, planners told the national clothing factory to make 200,000 winter coats this year. The factory was judged only on the number of coats. It made almost all of them in one medium size, which was quickest to cut. By winter, unsold medium coats filled the warehouses, while people needing small and large coats queued for weeks.
(a) Which of the three basic questions did the planners answer when they set the target of 200,000 coats? (b) Using the ideas of information and incentives, explain why a shortage and a surplus happened at the same time. (c) Explain how a market economy would tend to correct this situation. (d) Identify one limitation of the market’s answer to the “for whom” question in this case.
Model answer and suggested Marlbridge rubric
(a) What to produce (and how much): the target sets which good and what quantity.
(b) Information: the planners did not know how many coats of each size people needed, so the target said nothing about sizes. Incentives: the factory was rewarded for the number of coats, not for making coats people wanted, so it chose the easiest size. The result was too many medium coats (a surplus) and too few small and large coats (a shortage).
(c) Buyers would be willing to pay more for the scarce small and large coats, and unsold medium coats would have to be sold for less. Higher prices for small and large coats would make them more profitable, so firms would make more of them and fewer medium coats. Prices carry the information the planners lacked, and the profit motive gives firms the incentive to act on it.
(d) In a market, coats go to those willing and able to pay. If prices of small and large coats rise, low-income households may not be able to afford them, even though they need them. The market’s answer can be efficient without being fair.
| Point | What earns it |
|---|---|
| 1 | (a) “What to produce” |
| 1 | (b) Planners lacked information about the sizes people needed |
| 1 | (b) Target rewarded quantity, so the factory had no incentive to match sizes to wants |
| 1 | (c) Price changes signal scarcity and profit leads firms to change output |
| 1 | (d) Goods go to those able to pay, so some people in need may go without |
Question 6 (diagram · core)
Three fictional economies are described below.
- Ambria: the state owns the banks, the energy industry and all large factories. Small shops are private. The state sets the prices of basic foods.
- Fenwick: firms are private and prices are set in markets. The government runs only the army, the police and the courts.
- Lusan: firms are private and most prices are set in markets. The government runs a national health service, pays unemployment benefits and sets safety rules for factories.
(a) Draw a labelled spectrum of economic systems and place the three economies on it. (b) Justify the position of each economy, using evidence about ownership and the coordinating mechanism.
Model answer and suggested Marlbridge rubric
(a) A horizontal line or double-headed arrow. Left end labelled “pure command economy (central plan)”; right end labelled “pure market economy (prices)”. (The ends may be swapped if labelled.) From the command end: Ambria closest to the command end; Lusan between the middle and the market end; Fenwick closest to the market end. None of the three should sit exactly at an end. Compare Figure 1 in the study guide.
(b)
- Ambria is nearest the command end: the state owns the most important resources and sets some prices, so government decisions coordinate much of the economy. It is not at the end, because small shops are private and presumably trade at market prices.
- Lusan is a mixed economy closer to the market end: private ownership and prices answer most questions, but the government chooses some output (health care) and changes “for whom” through benefits.
- Fenwick is nearest the market end: private ownership and prices coordinate almost everything. It is not at the end, because the government still provides the army, police and courts, which markets do not supply here.
| Point | What earns it |
|---|---|
| 1 | Spectrum with both ends labelled by system and coordinating mechanism |
| 1 | Correct order: Ambria, Lusan, Fenwick from the command end, with none at an end |
| 1 | Ambria justified by state ownership and state price-setting |
| 1 | Lusan and Fenwick justified, with the difference in the government’s role stated |
Question 7 (explanation · stretch)
A student writes: “Every real economy is mixed. So the command and market models are useless, and every mixed economy is simply halfway between the two.”
(a) State one similarity between a command economy and a market economy. (b) Explain two differences between them. (c) Evaluate the student’s statement.
Model answer and suggested Marlbridge rubric
(a) Any one: both face scarcity; both must answer what, how and for whom to produce; both need some rules about who owns and controls resources; both need a way to coordinate decisions.
(b) Any two, each explained:
- Ownership: in a command economy the state owns most resources; in a market economy private individuals and firms own them.
- Coordinating mechanism: a central plan with output targets, versus prices from voluntary exchange.
- Incentives: meeting targets set by planners, versus earning profit and income.
- For whom: planners decide (rations, set wages), versus those willing and able to pay.
(c) The first sentence is right: no real economy is a pure case. But the models are not useless. They are the two ends of a spectrum, and they let us describe any real economy by asking how far it relies on plans or on prices. They also predict typical strengths and problems: for example, shortages and surpluses where planners lack information, and unequal outcomes where markets decide “for whom”. The second claim is wrong: “mixed” covers a wide range. A mixed economy can rely mainly on markets with a modest government role, or the other way round. Its position depends on its institutions, not on a fixed halfway point. A limitation the student could fairly raise is that one label hides real differences between economies, so the label should be backed by evidence.
| Point | What earns it |
|---|---|
| 1 | One valid similarity |
| 1 | First difference, explained |
| 1 | Second difference, explained |
| 1 | Models judged useful as reference points or for prediction, with a reason |
| 1 | “Halfway” rejected: mixed economies vary in how much they rely on markets |
Accept other well-reasoned evaluations, for example that the models omit politics and culture, as long as a judgement is reached.
How did you do?
- Q1 or Q5(a) wrong: re-read “The three basic questions” in the study guide.
- Q2, Q3 or Q6 wrong: re-read the sections on each system, the comparison table and Figure 1, then Worked example 1.
- Q4 wrong: re-read Worked example 2. Add machine rent as well as wages.
- Q5(b)–(d) or Q7 incomplete: re-read “Similarities, differences and limitations of the models” and Figure 2.
Then tick off the topic checklist.