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AS
ECONOMICS
Paper 1 The operation of markets and market failure

Monday 14 May 2018 Morning Time allowed: 1 hour 30 minutes

Materials For Examiner’s Use
For this paper you must have:
Question Mark
• the insert
• a calculator. Section A
Section B
Instructions
• Use black ink or black ball-point pen. Pencil should only be used for TOTAL
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 insert 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
• The maximum mark for this paper is 70.
• The marks for questions are shown in brackets.
• No deductions will be made for wrong answers.

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Section A Do not write

outside the
box
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 The central purpose of the production of goods and services is to

A achieve more technological innovation.

B maximise exports.

C maximise profits.

D satisfy consumer wants.

[1 mark]

0 2 In an economy, competitive firms supply electricity that is generated using coal-fired

power stations.

If the government tries to reduce pollution by imposing an indirect tax on the firms, this
would

A shift the market demand curve to the left.

B shift the market demand curve to the right.

C shift the market supply curve to the left.

D shift the market supply curve to the right.

[1 mark]

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Do not write
0 3 The price elasticity of demand (PED) for petrol used by car drivers in an economy is outside the
box
estimated to be –0.2.

Which one of the following is the most likely reason for the low PED?

A A tax on petrol

B Cycle lanes on many roads

C Few bus and rail services

D Low household incomes

[1 mark]

0 4 The diagram below shows the demand curve (D) and the supply curve (S) in the market
for tomatoes.

Which one of the following would result in a higher quantity consumed and a lower price
charged for tomatoes?

A A fall in the price of the fertiliser used to grow tomatoes

B A hot summer causes consumers to eat more tomato salad

C The minimum wage for farm workers is increased

D The price of cucumbers falls

[1 mark]

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outside the
0 5 Ben owns a small business that makes hand-made guitars. box

One year he sells 160 guitars, his total revenue is £78 400, and his total costs are
£59 200.

The average profit that Ben earns on each guitar is

A £120

B £370

C £490

D £860

[1 mark]

0 6 Which one of the following is most likely to reduce the benefits of specialisation?

A A reduction in government regulations

B An increase in competition

C Taxes on pollution

D Trade conducted by bartering

[1 mark]

0 7 Smoking cigarettes generates negative consumption externalities.

This means that

A the private benefit from smoking includes the consumption

externalities.

B the social benefit from smoking is less than the private benefit.

C the social benefit from smoking is negative.

D the social optimum level of smoking is zero.

[1 mark]

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0 8 Which one of the following is an example of the economic resource capital? outside the
box

A A bank loan to a small business

B A scientific research laboratory

C Government subsidies for wind power

D Money in a savings account

[1 mark]

0 9 Training provided by firms in a free market economy may be underprovided because

some of the benefits from training may be captured by other firms when the workers
change jobs. Which one of the following best describes this situation?

A A negative production externality and a missing market

B A negative production externality and partial market failure

C A positive production externality and a missing market

D A positive production externality and partial market failure

[1 mark]

1 0 The income elasticity of demand for baked beans is –0.4.

Weekly sales of baked beans are 73 000 tins.

If household incomes fall by 5%, then the new weekly sales of baked bean tins would
be

A 63 875

B 71 540

C 74 460

D 82 125

[1 mark]

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outside the
1 1 There is a large increase in the number of different models of bicycles produced by the box

bicycle industry.

The most likely impact of this would be

A a decrease in advertising expenditure by bicycle firms.

B a fall in the price elasticity of demand for any one model of bicycle.

C an increase in barriers to entry to the bicycle industry.

D an increase in productivity of manufacturing bicycles.

[1 mark]

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outside the
1 2 In the following diagram D1 shows the market demand for smoke alarms when box
consumers have imperfect information about the benefits of installing a smoke alarm. If
consumers had full information, the market demand for smoke alarms would be D2.

Which one of the following policies is most likely to ensure that consumption and
production of smoke alarms are at the social optimum level?

A A maximum price set at P0

B A maximum price set at P2

C A subsidy per unit equal to P1 – P0

D A subsidy per unit equal to P2 – P0

[1 mark]

1 3 In an economy hit by a recession, the owner of a small firm decides to continue to

operate despite making losses.

This decision suggests that

A firms may have objectives other than profit maximisation.

B monopoly power is widespread in the economy.

C some small firms produce merit goods.

D the firm’s average revenue is greater than its average cost.

[1 mark]

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outside the
1 4 The table below shows the relationship between a firm’s output and its production box

costs.

Average variable
Output Average total costs (£)
costs (£)
10 50 80
20 40 55
30 35 45

When the firm increases its output from

A 10 to 20 units, average fixed costs do not change.

B 10 to 20 units, average fixed costs fall by £15.

C 20 to 30 units, average fixed costs fall by £10.

D 20 to 30 units, average fixed costs fall by £15.

[1 mark]

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outside the
1 5 The diagrams below show the impact of an increase in demand for good G and the box
resulting change in the related market for good H.

These changes imply that goods G and H are in

A composite demand.

B derived demand.

C joint demand.

D joint supply.

[1 mark]

1 6 Which one of the following statements about the distribution of income must be correct?

A An unequal distribution of income has to be inequitable

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

C The distribution of income is equitable when everyone has the

same income

D Whether the distribution of income is equitable is a value

judgement
[1 mark]

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outside the
1 7 Which one of the following would generate a short-run disequilibrium with excess box

supply in the market for Cornish pasties?

A A minimum price for Cornish pasties is set above the current

market price

B Higher meat prices increase the cost of producing Cornish pasties

C More advertising increases the demand for Cornish pasties

D The government levies a new indirect tax on Cornish pasties

[1 mark]

1 8 One way to allocate road space in a congested city would be to charge drivers to use
the roads.

One reason why this policy is likely to result in a more efficient allocation of resources is
because

A incentives to build new roads would be higher.

B only higher income drivers would choose to use the roads.

C road use would be rationed to drivers who benefit from it the most.

D the government would raise a large amount of revenue from

drivers.
[1 mark]

1 9 Firms in an industry with a high concentration ratio will typically experience

A a large amount of competition.

B a large degree of monopoly power.

C few economies of scale.

D low prices and profits.

[1 mark]

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outside the
2 0 Online clothes retailers invest in new warehouses to enable them to hold larger stocks box
of clothes.

Other things remaining the same, this is most likely to result in

A a higher price elasticity of supply of clothes sold online.

B an increase in demand for clothes sold online.

C diseconomies of scale in the online clothes industry.

D lower barriers to entry to the online clothes industry.

20
[1 mark]

QUESTION 20 IS THE
LAST QUESTION IN SECTION A

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Section B Do not write

outside the
box

Look at the insert 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 23 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

LIBRARIES

Use the insert 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 ‘public good’ Extract C (line 18).

[3 marks]

Extra space

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2 2 Extract C (lines 11–13) states: ‘A relatively small amount … was spent on libraries outside the
box
in England in 2014/15.’

If the population of England in 2014/15 was 54.5 million, calculate, to the nearest
pound, the amount spent on libraries per person.
[4 marks]

Turn over for the next question

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

percentage of people aged 16–24 and those aged 75+ who visited a library in
England over the period shown.
[4 marks]

Comparison 1

Extra space

Comparison 2

Extra space

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Do not write
2 4 A local authority has a limited sum of money to spend on two services, libraries outside the
box
and other local government services.

Draw a production possibility diagram showing the potential provision of these two
services and assuming resources are fully employed, label a point X where no
resources are used for libraries.
[4 marks]

Turn over for the next question

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outside the
2 5 Extract B (lines 2–3) states: ‘a recent survey found that only a third of adults had box

used a library in the previous year, a significant fall since data collection began in
2005’.

Explain two reasons why the demand for library services has fallen.
[10 marks]

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Do not write
Extra space outside the
box

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outside the
2 6 Extract C (line 10) states: ‘Faced with funding cuts, local authorities have to make box

difficult choices’.

Use the extracts and your knowledge of economics to assess whether local
authorities should continue to provide public libraries.
[25 marks]

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Do not write
outside the
box

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outside the
Extra space box

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Do not write
outside the
box

Turn over ►
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Do not write
outside the
box

50

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

OR outside the
box

Context 2 Total for this context: 50 marks

AGRICULTURE

Use the insert 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 ‘minimum price’ Extract E (line 6).

[3 marks]

2 8 Extract E (lines 8–9) states: ‘One prediction was that 20% of dairy farms would
close in 2016’.

If there were 9633 dairy farms in England and Wales in January 2016, calculate,
to the nearest whole number, how many dairy farms there would be in January
2017 if the prediction for the percentage of dairy farms closing in 2016 is correct.
[4 marks]

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outside the
2 9 Use Extract D to identify two significant points of comparison between the box

changes in employment and output in agriculture, forestry and fishing in the UK

over the period shown.
[4 marks]

Comparison 1

Extra space

Comparison 2

Extra space

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Do not write
3 0 Agricultural production can be divided into genetically modified (GM) food and outside the
box
non-GM food.

Draw a production possibility diagram showing the production of genetically

modified (GM) food and non-GM food and, on the same diagram, draw a new
production possibility curve to show the effect of increased productivity in GM food
but no change in non-GM food.
[4 marks]

Turn over for the next question

Turn over ►
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outside the
3 1 Extract F (lines 2–3) states: ‘Dairy prices are expected to rise in 2017’. box

Explain two factors that could increase the price of milk.

[10 marks]

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Do not write
Extra space outside the
box

Turn over ►
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Do not write
outside the
3 2 Extract F (lines 18–19) states: ‘Should the UK government take an active role in box

agriculture, and if so, what policies should it implement?’

Use the extracts and your knowledge of economics to assess to what extent, if at
all, the UK government should intervene in the agricultural sector.
[25 marks]

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outside the
box

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outside the
box

Extra space

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outside the
box

Turn over ►
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Do not write
outside the
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50

END OF QUESTIONS

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