The Operation of Markets and Market Failure · 7135/1

AQA AS Paper 1, June 2020

All 12 written questions and 20 multiple choice questions from AQA AS Paper 1 (June 2020), The Operation of Markets and Market Failure. Case studies: Bus travel and E-cigarettes. Each question shows its marks and topic, with an examiner insight on 4, and opens the question paper and mark scheme at the right page.

Question paperMark schemeInsert

Context 1

Bus travel

Extracts: Take-up of concessionary bus travel schemes for the · Why should the elderly be entitled to free travel on buses? · Is continued free bus travel for elderly people justifiable?

Q25Explain10 marks
Extract C (line 13) states: ‘Both the take-up rate and number of journeys per bus pass have been falling in recent years.’
Explain two factors which could lead to an increase in the demand for bus travel in the future.

TopicPrice determination in a competitive marketDemand & supply

Examiner insight

What to cover
Factors: higher fuel prices or parking costs, lower bus fares, better services, road congestion, and an ageing population.
Watch out
Explain two factors clearly.
Question paper p.14Mark scheme p.10Insert p.1Open in the tool
Q26Evaluate25 marks
Extract C (lines 16–17) states: ‘Perhaps the time has come to stop free bus travel for the 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.

TopicMarket failure and government interventionGovernment intervention (micro)Indirect taxes & subsidies

Examiner insight

What to cover
Free bus travel has external benefits (less congestion, less isolation) and helps pensioners.
Diagram
Subsidy diagram.
Evaluation
Consider cost, opportunity cost and targeting (means-testing or age limits). Judge between all, some or none.
Watch out
Consider all three options.
Question paper p.16Mark scheme p.11Insert p.1Open in the tool

Context 2

E-cigarettes

Extracts: Rates of cigarette smoking in Great Britain by gender, · The decline of conventional smoking · The rise of the e-cigarette

Q30Draw4 marks
Extract E (lines 10–12) states: ‘between 2006 and 2016, the price of tobacco rose by 43% 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.

TopicPrice determination in a competitive marketDemand & supplyIndirect taxes & subsidies

Question paper p.23Mark scheme p.15Insert p.1Open in the toolDraw it: indirect tax diagram
Q31Explain10 marks
Extract E (lines 18–19) states: ‘the growth of e-cigarettes has fallen since, with some smokers switching back to conventional cigarettes.’
Explain two factors which could lead to an increase in the demand for conventional cigarettes.

TopicPrice determination in a competitive marketDemand & supplyCross elasticity

Examiner insight

What to cover
Factors: health fears about e-cigarettes, a fall in the price of cigarettes, habit, social norms, and new e-cigarette taxes or bans.
Watch out
Explain two factors clearly.
Question paper p.24Mark scheme p.16Insert p.1Open in the tool
Q32Evaluate25 marks
Extract F (lines 17–19) states: ‘Should the UK government promote a particular brand of 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.

TopicMarket failure and government interventionGovernment intervention (micro)Merit & demerit goods

Examiner insight

What to cover
E-cigarettes may cut harm from smoking and reduce health costs.
Diagram
Demerit good diagram.
Evaluation
Consider unknown health risks and use by young people. Judge between encourage, discourage or do nothing.
Watch out
Consider all three options.
Question paper p.26Mark scheme p.17Insert p.1Open in the tool
Q21 mark
Figure 1 shows demand (D) and supply (S) in the market for electric cars.
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?
  1. AGreater availability of roadside chargers for electric cars and a rise in workers’ wages
  2. BHigher petrol prices and an increase in workers’ productivity
  3. CIntroduction of a road pricing scheme for all vehicles and higher diesel fuel prices
  4. DLower rail and bus fares and the use of new technology for electric car production
Show the answer

The answer is B.

TopicPrice determination in a competitive marketDemand & supply

Question paper p.3Mark scheme p.3Open in the tool
Q41 mark
Table 1 shows the prices and quantities of rice and pasta sold in a supermarket in one month.
Table 1
Quantity of rice Quantity of pasta Price of rice Price of pasta (000s packets) (000s packets) £2.00 100 £1.50 £2.25 80 £1.50 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
  1. A–2.0
  2. B–0.5
  3. C+0.5
  4. D+2.0
Show the answer

The answer is D.

TopicPrice determination in a competitive marketCross elasticity

Question paper p.4Mark scheme p.3Open in the tool
Q51 mark
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
  1. Aa reduction in diseconomies of scale.
  2. Ban increase in managerial economies of scale.
  3. Cthe existence of external economies of scale.
  4. Dthe presence of technical economies of scale.
Show the answer

The answer is C.

TopicProduction, costs and revenueCosts & economies of scale

Question paper p.4Mark scheme p.3Open in the tool
Q61 mark
Table 2 shows total costs and profit for different levels of output produced by a firm.
Table 2
Output Total cost (£) Profit (£) 50 1000 1000 100 1800 1700 150 2400 2400 When the firm increases its output from
  1. A50 to 100, the price falls by £2
  2. B50 to 100, the price falls by £3
  3. C100 to 150, the price falls by £2
  4. D100 to 150, the price falls by £3
Show the answer

The answer is D.

TopicProduction, costs and revenueRevenue & profit

Question paper p.5Mark scheme p.3Open in the tool
Q71 mark
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?
  1. AFrom the information given, it is impossible to determine whether point E is allocatively efficient
  2. BFrom the information given, it is impossible to determine whether point E is productively efficient
  3. CPoint E is productively and allocatively efficient
  4. DPoint E is productively efficient but allocatively inefficient
Show the answer

The answer is A.

TopicEconomic methodology and the economic problemPPB / PPC

Question paper p.5Mark scheme p.3Open in the tool
Q81 mark
In the market for apples, at the current market price of £3 per kilo, consumers buy 5000 kilos and farmers produce 6000 kilos each week.
It can be concluded that
  1. Aconsumers are unaware of the positive externalities from eating apples.
  2. Bthe government must have set a maximum price for apples.
  3. Cthe prices of substitute fruit such as oranges and pears have risen.
  4. Dthere is disequilibrium in the apple market and the price is likely to fall.
Show the answer

The answer is D.

TopicPrice determination in a competitive marketDemand & supply

Question paper p.6Mark scheme p.3Open in the tool
Q91 mark
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?
  1. AA low concentration ratio in the industry meant that the firm faced little competition
  2. BA low income elasticity of demand enabled the firm to raise the price of its subscription and increase its profits
  3. CThe firm was able to cut average costs by producing and selling a homogeneous product
  4. DThe firm was innovative and this increased barriers to entry for firms wishing to join the industry
Show the answer

The answer is D.

TopicProduction, costs and revenueTechnological change

Question paper p.6Mark scheme p.3Open in the tool
Q101 mark
Which one of the following statements about price elasticity of supply is correct?
Price elasticity of supply
  1. Aincreases when a firm’s labour costs increase.
  2. Bis affected by the amount of spare capacity.
  3. Cmeasures the responsiveness of price to a change in supply.
  4. Dtends to be lower in the long run than in the short run.
Show the answer

The answer is B.

TopicPrice determination in a competitive marketPrice elasticity of supply

Question paper p.6Mark scheme p.3Open in the tool
Q111 mark
Antonio sells ice creams in the local park. In a typical week, he sells 500 ice creams at £2 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?
  1. A£200
  2. B£300
  3. C£500
  4. D£700
Show the answer

The answer is C.

TopicProduction, costs and revenueCosts & economies of scale

Question paper p.7Mark scheme p.3Open in the tool
Q121 mark
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
  1. Aat the social optimum, Q2, the price would be too high.
  2. Bfirms have no incentive to increase output beyond Q1.
  3. Cfirms lack information about the external benefits of loft insulation.
  4. Dthe government has failed to set a minimum price for loft insulation.
Show the answer

The answer is B.

TopicMarket failure and government interventionMerit & demerit goodsImperfect information

Question paper p.7Mark scheme p.3Open in the tool
Q131 mark
A firm producing frozen foods has collected statistics on recent trends in sales of oven 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
  1. Aare a normal good.
  2. Bare an inferior good.
  3. Chave an income elasticity of demand greater than 1.
  4. Dhave an income elasticity of demand less than 0.
Show the answer

The answer is A.

TopicPrice determination in a competitive marketIncome elasticity

Question paper p.8Mark scheme p.3Open in the tool
Q141 mark
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?
  1. AA firm with monopoly power doesn’t need to spend money on research and development to improve its products
  2. BFirms in a perfectly competitive market are more likely to experience diseconomies of scale
  3. CIn a monopoly, a firm can increase the price of the product by limiting its output
  4. DIn a perfectly competitive market, firms differentiate their products to compete with rivals and achieve brand loyalty
Show the answer

The answer is C.

TopicMarket structuresMonopoly & market power

Question paper p.8Mark scheme p.3Open in the tool
Q161 mark
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
  1. Aa rise in consumption of plastic bottles of water.
  2. Ba shortage of plastic bottles of water if the price elasticity of supply is zero.
  3. Cexcess stocks of plastic bottles of water.
  4. Dno excess supply of plastic bottles of water if the price elasticity of demand is zero.
Show the answer

The answer is C.

TopicMarket failure and government interventionPrice controls

Question paper p.9Mark scheme p.3Open in the tool
Q181 mark
The percentage share of total income received by the poorest 20% of households in an 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
  1. Ain this economy, the distribution of income became more equitable.
  2. Bthe incomes of some households moved closer to the average income of the economy.
  3. Cthe incomes of the middle 20% of households in the income distribution did not change.
  4. Dthe gap between the income of the richest household and the poorest household became smaller.
Show the answer

The answer is B.

TopicDistribution of income and wealthInequality & poverty

Question paper p.10Mark scheme p.3Open in the tool
Q201 mark
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?
  1. AThe price and output would be higher
  2. BThe price and output would be lower
  3. CThe price would be higher and the output lower
  4. DThe price would be lower and the output higher 20
Show the answer

The answer is A.

TopicMarket failure and government interventionExternalities

Question paper p.10Mark scheme p.3Open in the tool

Question text is quoted from the question papers, © AQA, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.