O Level Economics chapter 2: The allocation of resources MCQs with answers

By Team Megalecture · Updated 4 Nov 2026

114 exam-style questions on The allocation of resources, each with the answer and a short explanation. Ten of them are below to try. The chapter test draws ten fresh questions each time and is marked the moment you finish, with your score by topic.

114 questions · 10 topics · 10 per test

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What chapter 2 covers

Ten The allocation of resources questions with answers

Try each one, then open the answer. These ten stay the same; the test draws new ones every time.

1. Many parents in a town do not have their children vaccinated because they do not realise how much it helps. What is the most likely consequence?

  1. A
    too many resources go into vaccination, and money is wasted
  2. B
    vaccination becomes a public good supplied by the market
  3. C
    resources are allocated efficiently, as parents choose freely
  4. D
    too few resources go into vaccination, so disease spreads
Show answer

Answer: D. Vaccination is a merit good with external benefits, so leaving it to individual choice leads to under-consumption. Unvaccinated children can pass disease to others, a cost to third parties.

2. A firm raises the price of its product while all other conditions stay the same. What happens to the quantity it sells?

  1. A
    it rises, as supply extends along the supply curve
  2. B
    it falls, as the demand curve shifts to the left
  3. C
    it stays the same, as demand and supply both change
  4. D
    it falls, as demand contracts along the demand curve
Show answer

Answer: D. A higher price with nothing else changed causes a movement up the existing demand curve, so fewer units are sold. The demand curve itself does not shift.

3. Which event causes an extension in the supply of wheat?

  1. A
    the government gives a subsidy to wheat farmers
  2. B
    the price of fertiliser falls
  3. C
    farmers plant better seeds that raise the yield of wheat per acre
  4. D
    demand for bread rises, pushing up the price of wheat
Show answer

Answer: D. More demand for bread raises the demand for, and the price of, wheat, so farmers move up along their supply curve. The other three reduce costs or raise yields, which shifts the supply curve to the right.

4. Why are demerit goods such as cigarettes over-consumed in a free market?

  1. A
    firms are unable to charge a price for them
  2. B
    consumers underestimate the harm the goods cause
  3. C
    their prices are set too high by the firms producing them
  4. D
    they create large external benefits
Show answer

Answer: B. Consumers either lack information about the harm or ignore it, and they do not count the external costs, such as passive smoking. So more is consumed than is best for society.

5. Mangoes are a normal good and bananas are a substitute for mangoes. Which pair of changes would definitely shift the demand curve for mangoes to the left?

  1. A
    a rise in incomes and a fall in the price of bananas
  2. B
    a fall in incomes and a rise in the price of bananas
  3. C
    a fall in incomes and a fall in the price of bananas
  4. D
    a rise in incomes and a rise in the price of bananas
Show answer

Answer: C. Lower incomes reduce demand for a normal good, and cheaper bananas draw buyers away from mangoes, so both shift demand left. In the other pairs the two changes either pull in opposite directions or both shift demand right.

6. What does price elasticity of demand (PED) measure?

  1. A
    how much quantity supplied responds to a change in the product's price
  2. B
    how much quantity demanded responds to a change in the product's price
  3. C
    how much quantity demanded responds to a change in consumers' incomes
  4. D
    how much the price of a product changes when demand changes
Show answer

Answer: B. PED measures the responsiveness of quantity demanded to a change in the good's own price. The responsiveness of quantity supplied to price is price elasticity of supply.

7. The world price of raw cotton rises sharply. What is the most likely effect on the market for cotton cloth made in Pakistan?

  1. A
    the supply of cloth decreases, so its price rises and less is sold
  2. B
    the demand for cloth increases, so its price rises and more is sold
  3. C
    the supply of cloth increases, so its price falls and more is sold
  4. D
    the demand for cloth decreases, so its price falls and less is sold
Show answer

Answer: A. Raw cotton is a cost of making cloth, so dearer cotton shifts the supply of cloth to the left. The price of cloth rises and buyers contract their demand, so sales fall.

8. A government sets a limit on the amount of fish each boat may catch in a year. What is this policy called?

  1. A
    a minimum price
  2. B
    a subsidy
  3. C
    nationalisation
  4. D
    a quota
Show answer

Answer: D. A quota is a limit on the quantity that can be produced, caught or extracted. Fishing quotas help to stop a natural resource from being used up.

9. A government wants to raise as much revenue as possible from a new indirect tax. Which type of product should it tax?

  1. A
    one with many close substitutes
  2. B
    one with perfectly elastic demand
  3. C
    one with price inelastic demand
  4. D
    one with price elastic demand
Show answer

Answer: C. If demand is inelastic, sales fall only a little when the tax raises the price, so the tax is collected on a large quantity. With elastic demand, many buyers switch away and revenue is small.

10. When the price of a product falls, consumers' total spending on it rises. What does this show about the demand for the product?

  1. A
    it has unitary price elasticity
  2. B
    it is price elastic
  3. C
    it is perfectly price inelastic
  4. D
    it is price inelastic
Show answer

Answer: B. Spending rises after a price cut only if quantity demanded rises by a larger percentage than the price falls, which is price elastic demand. With inelastic demand, spending would fall.

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The allocation of resources: questions students ask

How many The allocation of resources MCQs are there?

114, each with the answer and a short explanation, across 10 topics: The role of markets in allocating resources, Demand, Supply, Price determination, Price changes, Price elasticity of demand (PED), Price elasticity of supply (PES), Market economic system, Market failure, Mixed economic system. Every chapter test draws ten of them, so you can take it many times.

Is the O Level Economics chapter 2 test free?

Yes. The test, the answers and the explanations are free and need no sign-up. Sign in only if you want your scores kept across devices.

How is the chapter test marked?

The moment you press Finish: your score, the right answer and an explanation for every question, and the ones you got wrong saved in My mistakes to retry.

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