Households: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
A student has nothing to do on a Friday evening. She withdraws $5 from the $100 she has in a savings account and buys a present to take to a party, to which admission is free. What does this involve?
Answer: B.
The correct answer is B: an opportunity cost equal to other goods she could have bought for $5.
Opportunity cost is the best alternative given up. She has spent $5, so what she has sacrificed is whatever else that $5 could have bought, or the future consumption it would have funded had it stayed in the savings account. The amount actually spent is what sets the size of the sacrifice.
Why the other options are wrong:
Opportunity cost is the best alternative given up. She has spent $5, so what she has sacrificed is whatever else that $5 could have bought, or the future consumption it would have funded had it stayed in the savings account. The amount actually spent is what sets the size of the sacrifice.
Why the other options are wrong:
- A, an opportunity cost equal to $95, refers to the money remaining in the account. That $95 has not been given up, she still has it, and it is available for future use.
- C claims there is no opportunity cost because entry to the party is free. The admission may be free, but the present was not: $5 of scarce purchasing power has genuinely been surrendered. Free entry does not make the evening costless.
- D claims there is no opportunity cost because she had no better use for her time. This confuses two separate resources. Even if the time had no valuable alternative use, which is what "nothing to do" is meant to support, the money certainly did. Two things are being allocated here, and only one of them was idle.
Question 2
What are two aims that a government normally pursues when managing the performance of the
whole economy?
Answer: A.
The correct answer is A: to encourage an increase in production and to prevent high inflation.
Both halves are standard macroeconomic aims. Encouraging production is the economic growth objective, raising real output, which raises incomes and living standards. Preventing high inflation is the price stability objective, since rapid inflation erodes purchasing power, distorts price signals and discourages saving and long-term investment.
Why the other options are wrong:
Both halves are standard macroeconomic aims. Encouraging production is the economic growth objective, raising real output, which raises incomes and living standards. Preventing high inflation is the price stability objective, since rapid inflation erodes purchasing power, distorts price signals and discourages saving and long-term investment.
Why the other options are wrong:
- B pairs a sensible aim with an unwise one. "No one unemployed" is unattainable, because some frictional unemployment always exists while people move between jobs. And reducing exports is not an aim at all, exports earn foreign currency and support output, so governments try to increase them.
- C proposes giving everyone equal incomes. Governments aim to reduce excessive inequality, not to equalise incomes entirely, which would destroy the incentive to work and to acquire skills. Increasing government revenue is also a means rather than an end.
- D pairs protecting the environment, which is a genuine aim, with reducing interest rates, which is an instrument rather than an objective. Interest rates are moved up or down as conditions require, so a permanently lower rate is not a goal.
Question 3
Which combination is necessary for the construction of a consumer prices index?
Answer: B.
The correct answer is B: a base year yes, price stability no, weights yes.
Take the three items in turn.
A base year is necessary. An index measures prices relative to a starting point, conventionally set at 100. Without a base year there is nothing to compare current prices against.
Price stability is not necessary. Quite the opposite: the whole purpose of a consumer prices index is to measure price changes. If prices were stable there would be nothing for the index to record, so stability is not a requirement for constructing one; it is one possible finding.
Weights are necessary. Each item in the basket is weighted according to its share of typical household spending, so a price rise in a heavily weighted item such as housing or food moves the index more than the same percentage rise in a minor item. Without weights the index would treat a rise in the price of a rarely bought item as seriously as a rise in a staple.
Why the other options are wrong:
Take the three items in turn.
A base year is necessary. An index measures prices relative to a starting point, conventionally set at 100. Without a base year there is nothing to compare current prices against.
Price stability is not necessary. Quite the opposite: the whole purpose of a consumer prices index is to measure price changes. If prices were stable there would be nothing for the index to record, so stability is not a requirement for constructing one; it is one possible finding.
Weights are necessary. Each item in the basket is weighted according to its share of typical household spending, so a price rise in a heavily weighted item such as housing or food moves the index more than the same percentage rise in a minor item. Without weights the index would treat a rise in the price of a rarely bought item as seriously as a rise in a staple.
Why the other options are wrong:
- A includes price stability as necessary, which reverses the purpose of the index.
- C omits weights, leaving an unweighted average that would misrepresent the cost of living.
- D omits the base year, so the index would have no reference point.
Question 4
Which business organisation is most likely to have unlimited liability?
Answer: D.
The correct answer is D: sole trader.
Unlimited liability means the owner is personally responsible for all the business's debts, so personal assets, house, savings, car, can be claimed by creditors if the business fails. A sole trader is not legally separate from their business, so there is no limit on their liability. This is the principal drawback of the form, and it is the price paid for the simplicity and complete control it offers.
Why the other options are wrong:
Unlimited liability means the owner is personally responsible for all the business's debts, so personal assets, house, savings, car, can be claimed by creditors if the business fails. A sole trader is not legally separate from their business, so there is no limit on their liability. This is the principal drawback of the form, and it is the price paid for the simplicity and complete control it offers.
Why the other options are wrong:
- C, a public limited company, has limited liability. Shareholders can lose only what they invested; their personal assets are protected because the company is a separate legal person. This is what makes it possible to raise capital from many small investors.
- B, a multinational, is almost always structured as a limited company, precisely so that investors' exposure is capped.
- A, a co-operative, is normally incorporated with limited liability for its members.
Question 5
What is most likely to be an example of a progressive tax?
Answer: C.
The correct answer is C: income tax.
A progressive tax takes a rising proportion of income as income rises. Income tax achieves this through a tax-free allowance and rising marginal bands: a low earner shielded by the allowance pays a very small average rate, while a high earner pays a much larger proportion of total income. Progressive taxation reduces inequality and lowers the Gini coefficient.
Why the other options are wrong:
A progressive tax takes a rising proportion of income as income rises. Income tax achieves this through a tax-free allowance and rising marginal bands: a low earner shielded by the allowance pays a very small average rate, while a high earner pays a much larger proportion of total income. Progressive taxation reduces inequality and lowers the Gini coefficient.
Why the other options are wrong:
- D, sales tax, is regressive. Low-income households spend a larger share of their income on consumption, so a tax on spending takes a bigger proportional bite from them than from the rich, who save more.
- B, excise duties on cigarettes, is regressive for the same reason and more sharply so, since smoking is more prevalent among lower-income groups, and the duty is a fixed amount per packet regardless of the buyer's income.
- A, customs duties on imported goods, is again a tax on spending and therefore regressive in its incidence.
What this practice covers
These questions are drawn from past Cambridge IGCSE papers and filtered to households. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on households, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Saying poorer households "spend more" than rich ones. They spend a larger proportion, not a larger amount.
- Forgetting that income is the main influence on all three of spending, saving and borrowing.
- Saying higher interest rates always cut spending, without mentioning confidence.
- Confusing saving with investment. Saving is not spending; investment is firms buying capital.
- Ignoring that some borrowing by low-income households is for necessities, not luxuries.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Households revision notes.