O Level Economics: The Basic Economic Problem — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available free from your board.

Related: The Basic Economic Problem study guide and revision notes

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Section A

1. State the basic economic problem in one sentence. [2]

2. Name the four factors of production and their corresponding rewards. [4]

3. Define opportunity cost. [2]

Section B

4. Explain why fresh air is generally considered a “free good” in economics, while a free sample handed out in a supermarket is not. [3]

5. A farmer decides to plant wheat on a field instead of using it to graze cattle.

(a) Identify the opportunity cost of this decision. [1] (b) Explain why the opportunity cost is not simply “everything else the farmer could have done with the field.” [2]

6. A factory owner invests in new machinery, employs additional workers, and takes on the personal financial risk of expanding the business.

(a) Identify the factor of production and corresponding reward for each of the three actions described. [3] (b) Explain why the factory owner’s own role is classified separately from the workers they employ. [3]

7. Explain why land is described as completely immobile geographically, while labour has varying degrees of geographical mobility. [3]

8. Explain how population growth and improved education could each affect the labour factor of production differently. [3]

9. A government with a fixed budget decides to build a new hospital instead of a new school.

(a) State the opportunity cost of this decision. [1] (b) Suggest one reason a government might still choose to accept this opportunity cost. [2]

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Answers

1. Resources are finite (scarce), while human wants are effectively unlimited, so choices must constantly be made about how to allocate those scarce resources [2].

2. Land — rent [1]. Labour — wages [1]. Capital — interest [1]. Enterprise — profit [1].

3. Opportunity cost is the value of the next-best alternative given up when a choice is made [2].

4. Fresh air is available in unlimited supply relative to demand, so no one has to give up anything to obtain more of it, making it a free good in the economic sense [1–2]. A free sample, although it has no price tag for the customer, still uses scarce resources (ingredients, packaging, staff time) to produce, meaning something else had to be given up to make it available — it is therefore an economic good, not a free good, despite appearing free to the person receiving it [1–2].

5. (a) The opportunity cost is the cattle grazing (and the resulting output, such as beef or milk) that the field could otherwise have been used for [1]. (b) Opportunity cost specifically refers to the single next-best alternative forgone, not every possible alternative use of the field combined — if grazing cattle was the next-best use compared with growing wheat, that is the opportunity cost, regardless of how many other less attractive options for the field also existed [2].

6. (a) New machinery: capital — reward: interest [1]. Additional workers: labour — reward: wages [1]. Bearing personal financial risk to organise the expansion: enterprise — reward: profit [1]. (b) The factory owner’s role is classified as enterprise, not labour, because it specifically involves organising the other three factors of production and bearing the risk of the business succeeding or failing, which is a distinct function from supplying labour to carry out tasks within the business [2–3].

7. Land is fixed in physical location by definition — a given plot of land cannot be physically relocated, making it completely immobile geographically [1–2]. Labour, by contrast, can move between locations, although this mobility is limited in practice by factors such as cost, family ties, or housing availability, meaning labour has some degree of geographical mobility even though it is not unlimited [1–2].

8. Population growth increases the quantity of labour available, since a larger population generally means more people of working age able to supply labour [1–2]. Improved education instead increases the quality of labour, since a more highly trained and skilled workforce can typically produce more or better output per worker, without necessarily changing the total number of workers available [1–2].

9. (a) The new school that could have been built instead with the same budget [1]. (b) The government might judge that the hospital addresses a more urgent or higher-priority need at that time (for example, an immediate healthcare shortage), making the trade-off worthwhile despite the opportunity cost of forgoing the school [2].

A note on exam technique for this topic

Question 6 illustrates the classification exercise the revision notes identify as the most reliable way to avoid factor-reward mix-ups: naming which factor a described resource or action belongs to, then stating its specific reward, rather than trying to recall the four definitions in the abstract. Question 5 illustrates the opportunity cost precision this topic tests repeatedly — always identify the single next-best alternative, not a general list of everything that was not chosen. This same discipline – naming the single next-best alternative specifically, whether for a consumer, worker, producer, or government – applies across every decision-maker this topic covers, not only the government example tested specifically in question 9 above.