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AS
ECONOMICS
Paper 1 The operation of markets and market failure

Monday 16 May 2016 Morning Time allowed: 1 hour 30 minutes

Materials
For this paper you must have:
 the source booklet
 a calculator.

Instructions
 Use black ink or black ball-point pen. Pencil should only be used for drawing.
 Fill in the boxes at the top of this page.
 Answer all questions in Section A.
 Answer either Context 1 or Context 2 in Section B.
 You will need to refer to the source booklet provided to answer Section B.
 You must answer the questions in the spaces provided. Do not write outside the box around
each page or on blank pages.
 Do all rough work in this book. Cross through any work you do not want to be marked.

Information
 There are 70 marks available on this paper.
 The marks for questions are shown in brackets.
 No deductions will be made for wrong answers.

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Section A

Answer all questions in this section.

Only one answer per question is allowed.

For each answer completely fill in the circle alongside the appropriate answer.

CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.

If you wish to return to an answer previously crossed out, ring the answer you now wish to
select as shown.

0 1 In a free market economy, the economic problem of what goods should be

produced is usually solved by

A consumers expressing their tastes and preferences in their

pattern of spending.
B households completing business surveys to reveal their
preferred products.
C firms planning their activities to meet production targets set by
government.
D entrepreneurs producing their own goods to satisfy their own
needs and wants.
[1 mark]

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0 2 The diagram below shows a production possibility boundary for an economy that
produces goods and services.

From the diagram it can be concluded that

A point X is productively efficient and point Y is allocatively

efficient.
B point Y is productively efficient and point X is allocatively
efficient.

C points X and Y are allocatively efficient.

D points X and Y are productively efficient.

[1 mark]

0 3 A demand curve is drawn on the assumption that

A quantity demanded always increases as price falls.

B changes in price do not influence supply.

C price elasticity of demand does not vary along the

demand curve.

D factors affecting demand, other than price, remain constant.

[1 mark]

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0 4 Monopoly can provide an example of market failure because firms with

monopoly power

A may produce a larger output than would be supplied in a

competitive market so that they achieve economies of scale.
B may produce a lower output, less efficiently, than would be
supplied by a competitive market.

C always charge high prices and earn high profits.

D have no incentive to meet consumer demands.

[1 mark]

0 5 The cross elasticity of demand between goods X and Y is positive. This implies
that they are

A normal goods.

B substitute goods.

C goods in composite demand.

D complementary goods.
[1 mark]

0 6 Many agricultural products are subject to large fluctuations in price. One reason
why these large fluctuations occur is because the

A demand for agricultural products is income inelastic in the

long run.

B supply of agricultural products is price elastic in the long run.

C supply of agricultural products is price inelastic in the

short run.
D demand for agricultural products is price elastic in the
short run.
[1 mark]

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0 7 A good has a price elasticity of supply of +0.8. At present, the quantity supplied
of the good is 200 units per week at a market price of £800 per unit. If the price
rises to £1000 per unit then the quantity supplied per week would

A increase to 250 units.

B increase to 240 units.

C increase to 360 units.

D decrease to 160 units.

[1 mark]

0 8 A reduction in the market price of a firm’s product will always result in an increase
in its profits or a reduction in its losses if it

A increases its share of the market.

B increases its total revenue by more than its total costs.

C enables it to reduce its average costs.

D leads to a reduction in the price of its inputs.

[1 mark]

0 9 The diagram below shows a firm’s average total cost curve (ATC), with the firm
producing an output of OX.

The firm’s productive efficiency will improve if the

A ATC curve shifts upwards for any given level of output.

B ATC curve shifts downwards for any given level of output.

C firm increases its level of output.

D firm reduces its level of output.

[1 mark]

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1 0 All other things being equal, which one of the following situations always results in
a rise in labour productivity?

A Output falls at a slower rate than the fall in the number of

workers employed
B Output falls at a faster rate than the fall in the number of
workers employed
C Output rises at a slower rate than the rise in the number of
workers employed
D Output always rises as the number of workers employed
increases
[1 mark]

1 1 Which one of the following is the best indicator of the degree of competition in an
industry?

A The industry’s concentration ratio

B The elasticity of supply of the industry’s output

C The number of workers employed in the industry

D The total value of the industry’s sales

[1 mark]

1 2 The table below shows the characteristics of four private sector firms. Which one
of the firms, A, B, C or D, is most likely to be in a competitive market?

Barriers to
Firm Profit
entry
A A Low High

B B Low Low

C C High High

D D High Low
[1 mark]

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1 3 The diagrams below show four possible long run average cost curves (LRAC) for
a firm operating in a market where the annual sales are 400 000 units per year.

All other things being equal, which one of the cost curves, A, B, C or D, is most
likely to enable the firm to achieve monopoly power in the market for its product?

[1 mark]

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1 4 An essential characteristic of a public good is that it is non-excludable. This

means that

A public goods are of equal benefit to all consumers.

B there is no opportunity cost in the provision of public goods.

C people could consume the good without paying for it.

D the government should not levy a tax for providing public

goods.
[1 mark]

1 5 The elasticity of supply of a particular good is more likely to be low

A the shorter the time period under consideration.

B if the good in question has many close substitutes.

C if the good in question is a necessity.

D if complementary goods are required for its consumption.

[1 mark]

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1 6 The diagram below illustrates a market in which a monopolist takes control and
sets a price above the competitive level.

The price charged by the monopolist is OS. If the market had been competitive,
the price would have been OR. Under monopoly, the amount buyers spend on
the product has increased by

A RSTY.

B OS multiplied by OW.

C RSTU.

D RSTY minus WYUV.

[1 mark]

1 7 An increase in the world market price of wheat, following a series of poor

harvests, leading to falling sales is an example of

A market failure due to an externality in production.

B government failure to support agricultural markets.

C scarcity caused by high prices.

D the rationing function of price.

[1 mark]

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1 8 The diagram below shows the market demand curve (D) and two market supply
(S1 and S2) curves for a good. The initial equilibrium point is at E1. The
introduction by the government of an indirect tax per unit of the good results in a
new equilibrium at E2.

The amount of the indirect tax per unit is measured by the

A vertical distance FE2.

B increase in price P1P2.

C the diagonal distance E1E2.

D the horizontal distance GE1.

[1 mark]

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1 9 The diagram below shows the demand and supply curves for a good provided
solely by a free market.

Currently, output is at OQ1. However, there is a misallocation of resources

resulting in market failure. The socially optimal level of production is OQ2. Which
one of the following statements is correct? The diagram shows the market for

A a merit good.

B a public good.

C a good with negative externalities in production.

D a good with positive externalities in production.

[1 mark]

2 0 Which one of the following statements about the distribution of income

must be correct?

A The distribution of income is equitable when everyone has the

same income

B ‘The distribution of income is equitable’ is a positive statement

C An unequal distribution of income is, by definition, inequitable

D Whether the distribution of income is equitable depends on a

value judgement
[1 mark]

QUESTION 20 IS THE LAST

QUESTION IN SECTION A

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Section B

Look at the source booklet and choose to answer EITHER Context 1 OR Context 2.

Answer EITHER Questions 21 to 26 in the spaces below

OR
Questions 27 to 32 on pages 22 to 32 of this answer booklet.

There is a total of 50 marks for either context.

Shade the circle below to indicate which context you have answered.

Context 0 1 Context 0 2

WRONG METHODS CORRECT METHOD

EITHER

Context 1 Total for this Context: 50 marks

THE UK HOUSING MARKET

Use the source booklet provided to study questions 21 to 26 and Extracts A, B and C, and then
answer the questions in the spaces which follow.

2 1 Define the term ‘government failure’ Extract C (lines 20 and 21).

[3 marks]

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2 2 Use Extract C to calculate, to the nearest whole number, the estimated number
of people sleeping on the streets in England on any one night in 2010.
[4 marks]

2 3 Use Extract A to identify two significant points of comparison between the

number of new houses built per year in the UK and the changes in UK population
over the period shown.
[4 marks]

Comparison 1

Extra space

Comparison 2

Extra space

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2 4 Extract C (lines 17 to 19) states ‘Some economists have suggested the

implementation of maximum price controls on rented accommodation that
prevent landlords from charging the market rent.’

Draw a diagram to show the effects of implementing this suggestion on the

market for rented accommodation.
[4 marks]

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2 5 Extract B (lines 10 and 11) states ‘However, the housing market is not a
perfectly competitive market.’

Explain why the housing market is not a perfectly competitive market.

[10 marks]

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2 6 Extract C (lines 20 and 21) states ‘Some are mindful of government failure and
advocate a lesser role for governments.’

Use the extracts and your knowledge of economics to assess the view that
housing markets should be left to market forces with only the minimum of
intervention from governments.
[25 marks]

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Do not answer Context 2 if you have answered Context 1.

OR

Context 2 Total for this Context: 50 marks

THE COSTS OF SMOKING

Use the source booklet provided to study questions 27 to 32 and Extracts D, E and F, and then
answer the questions in the spaces which follow.

2 7 Define the term ‘demerit good’ Extract F (line 1).

[3 marks]

Extra space

2 8 Use Extract D to calculate, to the nearest penny, the mean price of a pack of
20 cigarettes between 2007 and 2013.
[4 marks]

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2 9 Use Extract D to identify two significant points of comparison between the price
and the quantity of cigarettes consumed in the UK from 2007 to 2013.
[4 marks]

Comparison 1

Extra space

Comparison 2

Extra space

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3 0 Extract E (lines 10–11) states ‘Researchers at the Universities of Glasgow and

Stirling offered pregnant smokers up to £400 worth of shopping vouchers to give
up smoking …’

Draw a diagram to show the effect on the market for cigarettes of giving shopping
vouchers to pregnant women as an incentive to stop smoking.
[4 marks]

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3 1 Extract F (line 10) states ‘Taxation is one way governments attempt to control
cigarette consumption.’

Explain the effect of indirect taxation on the consumption of cigarettes.

[10 marks]

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3 2 Extract F (line 12) states ‘Regulation to reduce consumption of cigarettes is

extensive in the UK.’

Use the extracts and your economic knowledge to assess the view that
regulation is the best way of dealing with the market failure that results from the
consumption of cigarettes.
[25 marks]

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END OF QUESTIONS

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