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AS
ECONOMICS
Paper 1 The Operation of Markets and Market Failure

Monday 11 May 2020 Morning Time allowed: 1 hour 30 minutes

Materials
For Examiner’s Use
For this paper you must have:
• the insert Section Mark
• a calculator.
A

Instructions B
• Use black ink or black ball-point pen. Pencil should only be used for drawing. TOTAL
• 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.
• If you need extra space for your answer(s), use the lined pages at the end of
this book. Write the question number against your answer(s).
• 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 box

Answer all questions in this section.

Only one answer per question is allowed.

For each question 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 A resource must be scarce if

A it has an opportunity cost.

B it is non-renewable.

C there is a high demand for it.

D there is a small quantity supplied.

[1 mark]

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0 2 Figure 1 shows demand (D) and supply (S) in the market for electric cars. box

Demand is initially at D1 and supply at S1.

Figure 1

Other things remaining the same, which one of the following combination of events could
have caused demand to shift from D1 to D2 and supply from S1 to S2?

A Greater availability of roadside chargers for electric cars and a rise

in workers’ wages

B Higher petrol prices and an increase in workers’ productivity

C Introduction of a road pricing scheme for all vehicles and higher

diesel fuel prices

D Lower rail and bus fares and the use of new technology for electric
car production
[1 mark]

0 3 Government failure must have occurred when government intervention

A causes income inequality to increase.

B has unintended consequences.

C is based on imperfect information.

D reduces total welfare in the economy.

[1 mark]

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0 4 Table 1 shows the prices and quantities of rice and pasta sold in a supermarket in one box

month.
Table 1

Quantity of rice Quantity of pasta

Price of rice Price of pasta
(000s packets) (000s packets)
£2.00 100 £1.50 40
£2.25 80 £1.50 50

When the price of rice rises from £2.00 to £2.25, the cross elasticity of demand for pasta
with respect to the price of rice is

A –2.0

B –0.5

C +0.5

D +2.0
[1 mark]

0 5 The number of film production companies in a city increases. As a result, the pool of
workers skilled in making films grows. Companies experience a reduction in their average
costs.

The fall in average costs results from

A a reduction in diseconomies of scale.

B an increase in managerial economies of scale.

C the existence of external economies of scale.

D the presence of technical economies of scale.

[1 mark]

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0 6 Table 2 shows total costs and profit for different levels of output produced by a firm. box

Table 2

Output Total cost (£) Profit (£)

50 1000 1000
100 1800 1700
150 2400 2400

When the firm increases its output from

A 50 to 100, the price falls by £2

B 50 to 100, the price falls by £3

C 100 to 150, the price falls by £2

D 100 to 150, the price falls by £3

[1 mark]

0 7 Figure 2 shows the production possibility frontier for an economy producing only two
goods: chickens and cabbages.

Figure 2

Which one of the following statements is true?

A From the information given, it is impossible to determine whether
point E is allocatively efficient

B From the information given, it is impossible to determine whether

point E is productively efficient

C Point E is productively and allocatively efficient

D Point E is productively efficient but allocatively inefficient

[1 mark]

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0 8 In the market for apples, at the current market price of £3 per kilo, consumers buy box

5000 kilos and farmers produce 6000 kilos each week.

It can be concluded that

A consumers are unaware of the positive externalities from eating

apples.

B the government must have set a maximum price for apples.

C the prices of substitute fruit such as oranges and pears have risen.

D there is disequilibrium in the apple market and the price is likely to

fall.
[1 mark]

0 9 An online streaming firm increased its paying subscribers by 300% over a 4-year period.
The firm’s share of the total time people spent watching television doubled and profits
grew rapidly.

Which one of the following is the most likely explanation for the firm’s success?

A A low concentration ratio in the industry meant that the firm faced
little competition

B A low income elasticity of demand enabled the firm to raise the

price of its subscription and increase its profits

C The firm was able to cut average costs by producing and selling
a homogeneous product

D The firm was innovative and this increased barriers to entry for
firms wishing to join the industry
[1 mark]

1 0 Which one of the following statements about price elasticity of supply is correct?

Price elasticity of supply

A increases when a firm’s labour costs increase.

B is affected by the amount of spare capacity.

C measures the responsiveness of price to a change in supply.

D tends to be lower in the long run than in the short run.

[1 mark]

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1 1 Antonio sells ice creams in the local park. In a typical week, he sells 500 ice creams at £2 box

each and his total costs are £700. One week he does not work, so he sells no ice creams
but his total costs are £200.

What are his variable costs in a typical week?

A £200

B £300

C £500

D £700
[1 mark]

1 2 Figure 3 shows the market demand (D1) and supply (S) of loft insulation material. If
consumers have full information about the benefits of insulating their lofts, demand
will be D2.

Figure 3

There is underproduction, Q2 – Q1, of loft insulation material because

A at the social optimum, Q2, the price would be too high.

B firms have no incentive to increase output beyond Q1.

C firms lack information about the external benefits of loft insulation.

D the government has failed to set a minimum price for loft insulation.
[1 mark]

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1 3 A firm producing frozen foods has collected statistics on recent trends in sales of oven box

chips, as shown in Table 3.

Table 3

Average real income of

Average number of bags of oven chips
Year customers
sold per week
(2018 prices)
2018 7800 £23 000
2019 7600 £22 000

These statistics suggest that oven chips

A are a normal good.

B are an inferior good.

C have an income elasticity of demand greater than 1.

D have an income elasticity of demand less than 0.

[1 mark]

1 4 Which one of the following helps to explain why profits are likely to be lower in a perfectly
competitive market than in a monopoly market?

A A firm with monopoly power doesn’t need to spend money on

research and development to improve its products

B Firms in a perfectly competitive market are more likely to

experience diseconomies of scale

C In a monopoly, a firm can increase the price of the product by

limiting its output

D In a perfectly competitive market, firms differentiate their products

to compete with rivals and achieve brand loyalty
[1 mark]

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1 5 Land is in composite demand and can be used to build houses or to provide playing fields. box

When the demand for playing fields increases, there will be

A a decrease in the price of new houses.

B a decrease in the supply of new houses.

C an increase in demand for new houses.

D an increase in output of new houses.

[1 mark]

1 6 A government decides to set a minimum price for plastic bottles of water above the current
market price. The most likely impact of the scheme will be

A a rise in consumption of plastic bottles of water.

B a shortage of plastic bottles of water if the price elasticity of supply

is zero.

C excess stocks of plastic bottles of water.

D no excess supply of plastic bottles of water if the price elasticity of

demand is zero.
[1 mark]

1 7 The production of a good generates positive externalities. This means that at the free
market equilibrium

A the good will be under-produced.

B the price of the good will be too low.

C there will be excess demand for the good.

D the supply of the good will be inelastic.

[1 mark]

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1 8 The percentage share of total income received by the poorest 20% of households in an box

economy rose over one year. Over the same period, the share received by the richest
20% of households fell whilst national income and population remained constant.

It can be concluded that

A in this economy, the distribution of income became more equitable.

B the incomes of some households moved closer to the average

income of the economy.

C the incomes of the middle 20% of households in the income

distribution did not change.

D the gap between the income of the richest household and the
poorest household became smaller.
[1 mark]

1 9 A firm makes more use of division of labour when organising its workforce. The most likely
result will be

A higher labour productivity.

B less capital equipment per worker.

C lower labour turnover.

D lower wage rates.

[1 mark]

2 0 In a free market, the consumption of a good leads to negative externalities. If left to the
free market, how would price and output compare to the social optimum?

A The price and output would be higher

B The price and output would be lower

C The price would be higher and the output lower

D The price would be lower and the output higher 20

[1 mark]

END OF SECTION A

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Section B 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 21 to 30 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

BUS TRAVEL

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 ‘fixed costs’ in Extract B (line 13).

[3 marks]

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2 2 Use Extract A to calculate the difference in the median male and female take-up rates of
concessionary travel schemes for the elderly in England for the years shown.
[4 marks]

2 3 Use Extract A to identify two significant points of comparison between the take-up of
concessionary travel schemes by males and females in England over the period shown.
[4 marks]

Comparison 1

Extra space

Comparison 2

Extra space

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2 4 Extract C (line 7) states: ‘Bus companies also receive subsidies to operate routes in rural box

areas.’

Draw a supply and demand diagram to show the effects on the market for bus travel of the
government providing a subsidy. The total amount of government spending on the
subsidy should be labelled clearly.
[4 marks]

Turn over for the next question

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2 5 Extract C (line 13) states: ‘Both the take-up rate and number of journeys per bus pass box

have been falling in recent years.’

Explain two factors which could lead to an increase in the demand for bus travel in the
future.
[10 marks]

Extra space

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2 6 Extract C (lines 16–17) states: ‘Perhaps the time has come to stop free bus travel for the box

elderly or to limit it to certain groups?’

Use the extracts and your knowledge of economics to evaluate whether the UK
government should continue to provide free bus travel for all, some or no elderly people.
[25 marks]

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50

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

OR

Context 2 Total for this context: 50 marks

E-CIGARETTES

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 ‘social cost’ in Extract E (line 7).

[3 marks]

2 8 Use Extract D to calculate, to one decimal place, the difference between the mean male
and female rates of cigarette smoking in Great Britain for the years shown.
[4 marks]

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

cigarette smoking of males and females in Great Britain over the period shown.
[4 marks]

Comparison 1

Extra space

Comparison 2

Extra space

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3 0 Extract E (lines 10–12) states: ‘between 2006 and 2016, the price of tobacco rose by 43% box

more than general retail prices with the tax now being about 80% of the price.’

Draw a supply and demand diagram to show the effects on the market for cigarettes of the
government imposing an indirect tax. The total amount of government tax revenue should
be labelled clearly.
[4 marks]

Turn over for the next question

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3 1 Extract E (lines 18–19) states: ‘the growth of e-cigarettes has fallen since, with some box

smokers switching back to conventional cigarettes.’

Explain two factors which could lead to an increase in the demand for conventional
cigarettes.
[10 marks]

Extra space

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3 2 Extract F (lines 17–19) states: ‘Should the UK government promote a particular brand of box

e-cigarettes as a ‘healthy alternative’ to conventional cigarettes? Should the use of

e-cigarettes be discouraged or has government intervention already gone far enough?’

Use the extracts and your knowledge of economics to evaluate whether the UK
government should encourage, discourage or do nothing more to affect the use of
e-cigarettes.
[25 marks]

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50

END OF QUESTIONS

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ANSWER IN THE SPACES PROVIDED

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Question Additional page, if required.
number Write the question numbers in the left-hand margin.

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Question Additional page, if required.
number Write the question numbers in the left-hand margin.

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Question Additional page, if required.
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Question Additional page, if required.
number Write the question numbers in the left-hand margin.

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