SPECIMEN MATERIAL

SECOND SET

AS
Economics (7135)
Paper 1 The operation of markets and market failure

Specimen 2015 Morning 1 hour 30 minutes

Materials

For this paper you must have:

• the source booklet
• the use of a calculator.

Instructions
• Use a black ball-point pen. Do not use pencil.
• 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.
• Do all rough work in this answer book. Cross through any work you do not want to be marked.
• You must answer the questions in the spaces provided. Do not write outside the box around
each page or on blank pages.

Information

• The marks for questions are shown in brackets.

• The maximum mark for this paper is 70.
• No deductions will be made for wrong answers.

Please write clearly, in block capitals, to allow character computer recognition.

Centre number Candidate number

Surname

Forename(s)

Candidate signature

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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 lozenge 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 Which one of the following would be classified by an economist under the factor of
production known as land?

A a tractor

B a chemical fertiliser

C fish in the ocean

D a farmer

[1 mark]

0 2 A good is excludable if

A it is possible to prevent someone from enjoying

its benefits.

B it is supplied by the government rather than through

the free market.

C one person’s use has no effect on the quantity available

for someone else.

D it is supplied at a zero price.

[1 mark]

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0 3 An economy in which average incomes have fallen by 5% has also seen the demand
for holidays overseas fall by 20%. Assuming that nothing else affecting holidays
overseas has changed, it can be concluded that the income elasticity of demand for
holidays overseas is

A + 4.0

B – 4.0

C + 0.25

D – 0.25

[1 mark]

Turn over for the next question

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0 4 In the diagrams below, S1 and D1 show the original supply and demand curves for
Good X, while S2 and D2 show shifts of these curves.

Which diagram, A, B, C or D, illustrates the effects of an increase in the price of a

good that is complementary to Good X and an increase in labour productivity in the
production of Good X?

[1 mark]

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0 5 Specialisation requires the existence of

A economies of scale.

B economic efficiency.

C a system of exchange.

D rising productivity.

[1 mark]

0 6 The table below shows the total cost at different output levels for a firm.

Output (units) Total cost (£)

1 10

2 16

3 21

4 24

What is the average cost of 3 units of output?

A 3

B 5

C 7

D 63
[1 mark]

Turn over for the next question

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0 7 The UK Government currently subsidises the building of social housing. Social housing
is provided to low income households at rents which are lower than the
free market rent.

Which one of the following would provide an economic justification for these
subsidies?

A The unequal distribution of income and wealth caused by the

free market results in an unsatisfactory allocation of resources.

B Subsidising low cost housing reduces inequalities in the

distribution of wealth.

C Social housing is a public good because it is both non-rival and

non-excludable.

D There is market failure in the housing market because of the

existence of missing markets.

[1 mark]

0 8 In the diagram below, the production possibility frontier shows the various
combinations of cars and vans that a firm can produce when all of its resources are
fully and efficiently employed.

Which one of the following statements is correct?

The opportunity cost of producing one more car is

A greater at X than at Y.

B lower at X than at Y.

C the same at both X and Y.

D zero at both X and Y.

[1 mark]

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0 9 The concentration ratio in a market is measured by

A the number of workers employed in the largest firm

supplying that market.

B the share of that market supplied by a given number

of firms.

C a firm’s profit as a proportion of the value of its sales

in that market.

D the value of sales in that market compared with sales

in other markets.

[1 mark]

1 0 The table below shows the annual demand and supply schedules for an
agricultural good.

Quantity Quantity
Price
demanded supplied
(£)
(000s of units) (000s of units)

10 4 12
9 6 10
8 8 8
7 10 6
6 12 4

The government fixes the minimum price at £9 to be maintained by intervention

buying. How much will such an action cost the government each year?

A £90 000

B £72 000

C £54 000

D £36 000
[1 mark]

1 1 In a typical demand schedule, quantity demanded

A varies directly with price.

B varies proportionately with price.

C is determined by the elasticity of demand.

D varies inversely with price.

[1 mark]

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1 2 Which one of the following is most likely to discourage the growth of a firm?
The existence of

A diseconomies of scale at low levels of output.

B marketing economies of scale at high levels of output.

C large economies of scale at low levels of output.

D competing firms in the same industry.

[1 mark]

1 3 The table below shows the cross elasticities of demand for the products of
four companies with respect to the prices of their closest substitutes.

Product of Cross elasticity of demand

Company A +2.0
Company B +1.0
Company C +0.5
Company D +0.1

All other things being equal, which one of the above companies is most likely to
possess the greatest market power?

A Company A

B Company B

C Company C

D Company D
[1 mark]

1 4 Government intervention to correct market failure may make the situation worse
because

A the information needed to make sound economic decisions is

widely dispersed amongst individuals and firms.

B the government is unable to provide private goods since they

are both rival and excludable.

C positive externalities resulting from the consumption of merit

goods means that they will be underprovided by the state.

D competition amongst firms in the private sector will inevitably

result in an optimum allocation of resources.
[1 mark]

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1 5 The diagram below illustrates the market demand (D) and supply (S) curves for a
good. The production of the good creates a negative externality.

To reduce production and consumption of the good to OQ2, the government could
impose a

A price ceiling of OP3.

B tax of P2P3.

C minimum price of OP2.

D tax of P2P1.
[1 mark]

1 6 Which one of the following is most likely to lead to greater labour productivity in
an industry?

A An increase in market demand

B A fall in wages in the industry

C An increase in the number of firms in the industry

D An increase in capital investment in the industry

[1 mark]

Turn over for the next question

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1 7 In a free market, the rationing function of the price mechanism means that

A an increase in demand, leading to a rise in price, will

encourage new firms to enter the market.

B when there is a shortage of a product, the price will rise and

deter some consumers from buying the product.

C changes in price provide information to both producers and

consumers about changes in market conditions.

D if a product is scarce, a rise in price is likely to make the

shortage worse.

[1 mark]

1 8 The table below shows the world prices ($/tonne) of various fruits for a
two-year period.

Fruit Year 1 Year 2

Oranges 150 80
Apples 200 140
Pears 80 70
Grapes 250 200

Which one of the following is supported by the data?

A The earnings of orange growers will have decreased between

Year 1 and Year 2 if the demand for oranges is price elastic.

B The trend in the price of apples between Year 1 and Year 2

will encourage apple growers to increase output.

C The price elasticity of demand is lowest for pears.

D Total revenue from the sale of grapes will have fallen between
Year 1 and Year 2 if the demand for grapes is price inelastic.
[1 mark]

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1 9 Which one of the following is most likely to be a source of monopoly power?

A The employment of additional workers by a firm as it increases

its size.

B The existence of diseconomies of scale at high levels of output.

C The granting of a patent to a pharmaceutical company for a

newly developed drug.

D The merger of two small firms in a large industry.

[1 mark]

2 0 All other things being equal, supply curves slope upwards from left to right because

A higher prices lead to higher costs.

B lower prices lead to higher output.

C lower prices lead to higher demand.

D higher prices lead to higher profits.

[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 21 to 26 of this answer booklet.

There is a total of 50 marks for either context.

Shade the lozenge 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

CONGESTION ON THE ROADS

Using the provided source booklet, 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 ‘cross elasticity of demand’ (Extract B, line 9).

[3 marks]

Extra space

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2 2 Using Extract A, calculate the mean number of cars using ‘Other fuels’ for the period
2003 to 2012.
[4 marks]

2 3 Using Extract A, identify two significant points of comparison between those cars
in Great Britain that use petrol and those that use diesel over the period shown.
[4 marks]

Comparison 1

Comparison 2

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2 4 In Extract C (line 15) it states that ‘costs are likely to fall due to economies of scale’.

Draw a diagram showing both economies and diseconomies of scale as output

increases.
[4 marks]

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2 5 Extract C (lines 3–4) states that ‘The Institute of Fiscal Studies (IFS) estimates that
replacing this lost revenue would require a 50% increase in taxes on fuel...’

Explain how the price elasticity of demand for road travel will affect the total revenue
that the government receives if it increases the taxes on fuel.
[10 marks]

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2 6 Extract B (lines 6–7) states that ‘the solution to congestion is to persuade people
to leave their cars at home and encourage them to travel by rail, tube or bus’.

Using the data in the extracts and your knowledge of economics, assess which is the
best policy that the government could adopt to reduce congestion on the roads.
[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

HEALTH AND DIET IN THE UK

Using the provided source booklet, 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 ‘private costs’ (Extract E, lines 8–9).

[3 marks]

Extra space

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2 8 Extract E (lines 14–15) states that ‘purchases of fruit in 2012 in the UK were
13% lower than in 2007’.

If the average purchase of fruit per person per week were 855 grammes in 2007,
calculate, to the nearest gramme, how much was bought per person per week in 2012.

[4 marks]

2 9 Using Extract D, identify two significant points of comparison, over the period shown,
between the annual percentage changes in the shop prices of fruit and sugars in the
UK.
[4 marks]
Comparison 1

Comparison 2

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3 0 Extract D shows the annual percentage change in shop prices for fruit and sugars
between 2003 and 2012.

Draw a diagram showing the effects on the price and quantity sold of fruit, of a
successful advertising campaign for sweets, if sweets and fruit are considered to be
substitute goods.
[4 marks]

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3 1 Extract E (lines 12 – 14), states that ‘In the US, subsidies on corn, soya beans and
rice have made the main ingredients used to make processed food cheap compared to
fruit and vegetables’.

Explain how subsidies on corn, soya beans and rice will affect the market for
processed food.
[10 marks]

Extra space

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3 2 Extract F (lines 3–4) states that ‘providing nutritional information and promoting
healthy eating are not enough – the government needs to do more’.

Using the data in the extracts and your knowledge of economics, assess the case for
and against government intervention in the markets for food and drink to encourage
a healthy diet.
[25 marks]

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END OF QUESTIONS

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