Economics Assignment: Test Paper on Government Intervention on the Price System

Topics: Supply and demand, Externality, Market failure Pages: 3 (684 words) Published: November 24, 2012
Economics Assignment: Test Paper on Government Intervention on the Price System

Section A: MCQ

1. The following happens when subsidy is introduced by the government, except: a) Equilibrium price of the good decreases
b) Supply curve of the good shifts to the right
c) No shifts in the demand curve
d) Market failure caused by positive externalities overcome

2. The market has failed if:
a) Market price of the good decreases
b) Many companies are going through a recession
c) The opportunity cost of producing the good increases
d) Excessive amount of resources is devoted for the production of a good

3. What could be the cause of too little production of a good? a) Increased opportunity cost of producing the good
b) Social benefits are not considered
c) Presence of negative externalities
d) Private benefits are not considered

4. Which of the following is an example of market failure caused by moral hazard? a) A person mistreated with the wrong medicine by a doctor b) High production of cigarettes in a market
c) A lighthouse is not available as all fishermen waits for the other to purchase it d) Inaccessibility to education as private sectors monopolize the education sector and sets a very high price

Section B: Case Study

Indonesia successfully stabilized domestic rice prices for more than a quarter of a century from 1969 to 1996 (see graph below). During that period, domestic prices were roughly equal to world prices on average, but were substantially less volatile.

1. Describe what could cause the peak in the world rice prices in 1974. [2] 2. State and explain a method of government intervention that could cause the stable domestic rice prices in Indonesia and how it is used to stabilize the price. [5] 3. Draw the graph of the effects of the method you stated in (2) on the demand and supply of rice in Indonesia. [2] 4. State one disadvantage of using the method...
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