SECTION A PRACTICE QUESTIONS

Pearson Edexcel
Economics (A)
Advanced Level

SECTION A
PRACTICE QUESTION BANK

THEME 1
Information:
This resource contains 50 questions, each worth a total
of 5 marks.
The questions are a variety of multiple-choice and
short-answer formats testing knowledge, application and
analysis
Your teacher will inform you about which questions to
answer and how long you have to complete them.
The content of the questions follows the order in which
the featured topics appear in the specification.

QUESTION PAPER
Edexcel A Level Economics (A): Theme 1
Section A Practice Questions

1a Which of the following is not considered to be an economic good?

A Air o
B Food o
C Oil o
D Land o
(1 mark)

1b Explain, using an example, what is meant by the economic problem

(4 marks)

2a Which of the following sentences is a positive statement?

A A cut in the national minimum wage should reduce the number of people who are o
willing to work.
B HS2 (fast speed railway) should be completed as soon as possible. o
C The government should increase the number of minority members in the military. o
D The government ought to supply free training for all unemployed people. o
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

2b State one advantage of allocating resources in a free-market economy.
(1 mark)

2c Explain the importance of the ‘ceteris paribus’ assumption in helping economists to make positive
statements.
(3 marks)

3a Using examples, distinguish between mixed and command economies.

(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

3b The development of money as a medium of exchange allowed for

A the development of free market economies. o

B the development of deferred payments. o
C the development of savings. o
D the expansion of specialisation, exchange and trade. o
(1 mark)

4a Which one of the following is an advantage of the division of labour?

A More individuals are employed so unemployment will fall. o

B Each task is divided up into sections so that workers can complete their task without o
concentration.
C It results in specialisation which might raise costs. o
D Each task is divided up into sections so that workers can complete their task o
accurately in less time.
(1 mark)

4b Department stores, such as John Lewis and Debenham’s, are reported to be struggling in a highly
competitive retail market. In 2018, House of Fraser (another department store) went into
administration before being bought out. Some business analysts suggest that large department
stores cannot compete with smaller, specialised and often-online stores. However, a spokesperson
at John Lewis has said their employees take the time to ‘consult’ more with their customers and
offer a more personalised service with all needs met ‘under one roof’.
Source: https://www.bbc.co.uk/news/business-47470703

With reference to this information, outline one possible advantage and one possible disadvantage
of division of labour in a department store.
(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

5a In the 2018 Autumn Statement, the Chancellor of the Exchequer pledged an increase in spending
on infrastructure of 30%. The most likely opportunity cost of this decision is:

A greater economic growth in the future. o

B a reduction in government spending on recruiting more teachers. o
C a boom in the railway construction industry. o
D a reduction in the rate of VAT set by the government. o
(1 mark)

5b In 2018, annual university tuition fees in England were set at a maximum of £9,250 per year.
Additional costs of attending university include housing, utility bills, books, transport, food and
socialising. On average, these additional costs total £8 990 each year. However, as the charts
below show, there are longer-term benefits to attending university.

Employment rate (%) Median annual salaries (£s)

100 40000

20000
50
0
0 2005 2010 2015 2020
2006 2008 2010 2012 2014 2016 2018
graduate salaries (£s)
graduate non-graduate non-graduate salaries (£s)

With reference to the data, comment upon the likely opportunity cost of choosing to study for a
degree at university.
(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

6a Figure 1

Using Figure 1 above, a shift in the production possibility frontier from OQ to OT may be caused
by:

A an increase in productivity in the production of consumer goods. o

B an overall improvement in productivity in the production of both goods. o
C an increase in productivity in the production of capital goods. o
D more of the existing resources being used to produce capital goods. o
(1 mark)

6b Point K on Figure 1 above indicates that the economy is operating at

A full employment of all factors of production. o

B under-employment of all factors of production. o
C optimal capacity of all factors of production. o
D an efficient combination involving fewer capital goods and more consumer goods. o
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

6c With reference to Figure 1, given that other variables remain constant, then:
A fewer consumer goods are produced at point N as compared to combination M o
B Future economic growth is likely to be higher with combination M as compared to o
N
C he current standard of living must be higher by producing at a combination M as o
compared to N
D Economic growth will move the economy to a more optimal combination M as o
compared to N
(1 mark)

6d With reference to Figure 1, a shift from PPF RV to PPF OT…

A represents long term growth in the economy. o

B represents a fall in productivity in the factors of production. o
C represents a rise in unemployed resources. o
D represents a fall in the number of factors of production available. o
(1 mark)

6e State one way in which it may be possible for the combination of goods at point W to be
consumed.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

7a Using the Production Possibility Frontier diagram below, explain the concept of opportunity cost.
(2 marks)

7b Economists use economic models so that

A real world complexities can be reduced to simplified and explainable relationships. o

B theories upon which economics is based can be tested and analysed. o
C hypotheses can be more accurately tested against any assumptions made about the o
economy.
D a more systematic sequence of steps in a theory can be examined. o
(1 mark)

7c Give two assumptions underpinning the construction of a production possibility frontier model.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

8a Which of the following economists is best known for his work in promoting and encouraging
command economies?

A Friedrich Hayek o
B John Maynard Keynes o
C Karl Marx o
D Adam Smith o
(1 mark)

8b The inability of Cuba’s command economy to provide scarce consumer goods promoted growth
in the “shadow economy”. During the 1990s, workers often stole goods from the state-run factories
they worked in to use in their homes or to sell. As a result, the government was forced to make
some drastic changes in policy. Many small in-home restaurants, bed-and-breakfasts, repair
shops, etc. that had previously been considered "black market" were legalized. State control was
somewhat reduced. The government divided many large state-run farms into smaller co-
operatives). While the farmers who worked for them still had to sell a certain amount of their
produce to the government at set prices, they were now permitted to sell their surplus goods on
the free market via farmers' markets. The government also began to require state-run enterprises
to be more efficient; any enterprise not showing a profit would be closed down

Source: https://www.nationsencyclopedia.com/economies/Americas/Cuba-OVERVIEW-OF-ECONOMY.html#ixzz5iEBztvBk

With reference to the information provided, explain one advantage and one disadvantage of
allocating resources in a command economy.
(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

9a The objective of a rational consumer is to:

A avoid purchasing expensive goods and services.

B purchase as many goods and services as possible to satisfy all wants.
C to buy as much of the cheapest articles as income will allow.
D secure the highest level of satisfaction from disposable income.
(1 mark)

9b Explain how the concept of diminishing marginal utility influences the shape of the demand
curve for crisps, shown below.

(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

10a Define the term “effective demand”.
(1 mark)

10b When drawing a demand curve for one good/service, one assumption made is that:

A all resources are readily available in factor markets. o

B factor prices are held constant. o
C all incomes remain constant. o
D the price of imports of raw materials is held constant. o
(1 mark)

10c In the 2nd quarter of 2018, the travel booking website Expedia reported that owners of UK hotels
were experiencing a large rise in the number of bookings, especially in Cheshire and Wales. As
well as UK families choosing to holiday in the UK rather than abroad, there was a large rise in
bookings from US travelers taking advantage of the weak Sterling exchange rate.

Illustrate and explain the nature of these changes using a demand diagram.
(3 marks)
Draw your diagram here:

Write your explanation here:

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

11a Possible determinants of supply include:

A a decrease in the costs of production and an increase in incomes. o

B a decrease in the costs of production and a rise in the population. o
C an increase the costs of production and a fall in the number of suppliers. o
D an increase in the costs of production and an increase in the number of imports of o
the finished product.
(1 mark)

11b The diagram below represents the market for cigarettes, in the US. A tax on cigarettes shifts the
supply curve from S to S1.

i) Calculate the producer revenue before the tax on cigarettes was imposed. You are
advised to show your workings.
(2 marks)

ii) Calculate the percentage change in producer revenue after the tax has been imposed.
You are advised to show your workings.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

12a An increase in the price of one or more factors of production would cause

A a contraction in supply. o
B an expansion in supply. o
C a rise in supply. o
D a decrease in supply. o
(1 mark)

12b Explain why a market is unlikely to be in disequilibrium in the long term.

(4 marks)

13a Define the term “producer surplus”.

(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

13b The following demand and supply diagram represent car sales for White’s New Cars Ltd during
2019. Initially White’s New Cars could provide cars according to schedule S. However, in the
second half of the year, a change in the market resulted in supply schedule S1.

i) Calculate the change in producer revenue from the first six months of 2019 to the
second six months of 2019. You are advised to show your workings.
(3 marks)

13c The total producer cost on a supply and demand diagram can be calculated by:
A subtracting the producer surplus from the consumer surplus.
B subtracting the producer surplus from the producer revenue.
C subtracting the consumer surplus from the producer surplus.
D adding the producer revenue and the producer surplus.
(1 mark)
14a The price of a high street cup of coffee has risen by 8.5% during 2018. An average British female
coffee drinker was estimated to drink 12 cups of coffee per week in 2017, which fell to 11 cups per
week in 2018.
Source: https://www.gimokacoffee.com/news/coffee-in-the-uk-infographic.html

Calculate the price elasticity of demand of high street coffee for the average British female coffee
drinker. Give your answer to 2 decimal places.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

14b The price elasticity of demand for cups of coffee is likely to be

A perfectly elastic as there are many different coffee sellers on the high street.
B perfectly inelastic as it is habit forming to drink coffee.
C relatively elastic because tea is a close substitute.
D relatively inelastic because it is habit forming to drink coffee.
(1 mark)

14c Given the price elasticity of demand for high street cups of coffee, explain the likely impact on the
average high street seller’s revenue of this increase in the price of a cup of coffee.
(2 marks)

15a The table below shows the quantity of fitness wrist watches demanded and supplied at several
prices.

Price Quantity demanded per Quantity supplied per New quantity supplied per
month (000s) month (000s) month (000s)
£250 110 295
£200 145 275
£150 175 250
£100 205 205
£50 240 185
As a result of an increase in packaging costs for the fitness wrist watches, supply decreased by
75,000 at all prices.

Calculate the change in equilibrium price given the increase in packaging costs. Use the right-
hand column for your workings.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

15b Fitness wrist watches and branded running shoes are likely to have

A a positive price elasticity of demand.

B a positive cross elasticity of demand.
C a negative cross elasticity of demand.
D a negative income elasticity of demand.
(1 mark)

15c Explain the term “unitary price elasticity of demand”

(2 marks)

16a The hot weather experienced during the summer of 2018 resulted in an increase in the global
supply of wheat. As a result, the world price of wheat fell from $198 per tonne at the start of 2018
to $192 per tonne by the end of 2018. As a result of this price fall, farmers are expected to trim
back production in 2019 by 3%.

Using this information, calculate the price elasticity of supply of wheat.

(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

16b The price elasticity of supply of wheat is likely to be

A price elastic as it is a homogenous commodity.

B price elastic as the harvest will supply a set amount of wheat dependent on the
weather.
C price inelastic as supply cannot be increased in the short run.
D price inelastic as supply can be increased in the long run.
(1 mark)

16c Explain what is meant by the term “supply”.

(2 marks)

17a UK earnings grew at their fastest rate for two years in the three months ending in July 2018. Total
pay grew by 2.9%. Sales of organic food and drink grew by 4% in the same period.

Calculate the income elasticity of demand for organic food and drink and interpret the numerical
value in your response. You are advised to show your workings.
(2 marks)

17b The income elasticity of demand for organically grown potato crisps is known to be +1.8. This
means that:

A demand for organic crisps is highly sensitive to changes in price.

B only people with a high income will buy organic crisps.
C organic crisps are a strong substitute for regular crisps.
D demand for organic crisps rises more than proportionately to a change in income.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

17c Explain one reason why knowledge of a product’s income elasticity of demand might be helpful
to a producer.
(2 marks)

18a Krispy Kreme doughnuts sell in the UK at a price of £13.45 for 12 from their website. Tesco sells
very similar iced ring doughnuts at a price of £1 for 4 doughnuts. Explain why Krispy Kreme can
charge such a high price for its doughnuts.
(2 marks)

18b The relationship between Tesco’s bakery items and its sales of ready meals

A is likely to have a cross elasticity of supply value of approximately -3.4

B is likely to have a cross elasticity of supply value of approximately +0.2
C is likely to have a cross elasticity of demand value of approximately -3.4
D is likely to have a cross elasticity of demand value of approximately +0.2
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

18c Outline the likely impact of heavy advertising of a product on its price elasticity of demand.
(2 marks)

19a The UK government placed an indirect tax on high sugar drinks in 2018 and the revenue raised is
to be used to tackle childhood obesity. HMRC (the government’s tax department) raised £154m
in the first six months of the tax, to November 2018. However, the initial predictions were that the
sugar tax would generate £520m in its first year.

Calculate the actual tax revenue as a percentage of its original estimate and using your knowledge
of elasticity, explain why the estimate might have been wrong.

(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

19b Based on the information above for question 19a, sugary drinks in the UK are likely to

A have many complements.

B have many substitutes.
C be price inelastic due to strong branding.
D be inferior goods.
(1 mark)

20a The UK government encouraged homeowners to install solar panels on their roofs by offering a
subsidy to the manufacturers of the panels, starting in 2010. In addition, the technology required
to manufacture these panels has improved, and as consumers became more aware of the need
to use renewable energy, they became more popular with homeowners.

Draw a fully labelled demand and supply diagram to illustrate what has happened in the solar
panel market between 2010 and 2016.

(3 marks)

20b Tesla, a company promoting sustainable energy products, has produced a home storage battery
that can store solar energy throughout the day, which can then be used at night. This could be
an example of
A A substitute product for solar panels on household roofs
B A complement to energy generation plants in the UK
C An inferior good
D A complement to solar panels on household roofs
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

20c Define the term subsidy.
(1 mark)

21a The following demand and supply diagram relates to the market for farm goods.

Which area represents the total subsidy paid to the farmers by the government?

A P2EHB
B Q2HB0
C P1GEP2
D P1GHB
(1 mark)

21b After the subsidy has been granted, which area represents the new consumer surplus?
(1 mark)

21c Explain whether a subsidy is more effective at encouraging consumption when placed on a good
with price elastic demand or a good with price inelastic demand.
(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

22a The following demand and supply diagram represents the market for petrol for van drivers. The
government has imposed a new environmental tax on petrol.

Erica is a typical van driver. Calculate her price elasticity of demand for petrol. You are advised to
show your workings.
(2 marks)

22b Using the diagram above, calculate the total tax revenue paid by Erica to the government each
month. You are advised to show your workings.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

22c The type of tax shown in the diagram above is a
A a direct ad valorem tax.
B a direct specific tax.
C an indirect ad valorem tax.
D an indirect specific tax.
(1 mark)
23a In the UK, there are many different pensions plans available, yet it is considered that not enough
workers save enough money for an adequate pension to fund their retirement. Explain why this
might be the case.
(2 marks)

23b Herd behaviour best describes

A why Apple iPhones are more expensive than its substitutes.

B why stock markets tend to lurch upwards and downwards in significant steps.
C why many individuals wear similar style clothes in the summer to others in their age
group.
D why producers may not act rationally.
(1 mark)

23a OFGEM, the energy watchdog, has recently fined many of the large energy suppliers in the UK for
over-charging loyal customers. Using your knowledge of economics, explain how this over-
charging can exist in some markets.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

24a Explain, using demand and supply diagrams, whether an indirect tax has a greater effect in
reducing consumption in a price elastic market or a price inelastic market.
(4 marks)
Draw your diagrams here:

Write your explanation here:

24b Compared to an indirect tax, a direct tax:

A is easier for consumers to avoid and cheaper for the government to administer
B is harder for consumers to avoid and cheaper for the government to administer
C is harder for consumers to avoid but more expensive for the government to
administer
D is easier for consumers to avoid but more expensive for the government to
administer
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

24a The following demand and supply diagram relates to the market for electric vehicles.

Annotate the above diagram to show a government subsidy granted to the production of electric
vehicles, marking on your diagram the area that represents the producer subsidy and the area
that represents the consumer subsidy. Ensure that your diagram is fully labelled.
(4 marks)

25b A subsidy has which effect on the price mechanism?

A A signal to consumers to buy less

B A rationing effect on consumers
C A signal to producers to join the market
D An incentive to producers to produce less
(1 mark)

26a Which of the following statements best explains the term market failure?

A Economic agents are not maximising their potential gains.

B All factors of production are not fully employed.
C Consumer sovereignty does not exist.
D The allocation of resources is not efficient.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

26b Which of the following best describes an externality?

A External economies of scale

B Private costs plus external costs
C Social costs minus private costs
D Social benefits plus external benefits
(1 mark)

26c Using an example of your choice, explain the term social benefit.
(2 marks)

26d Define the term government failure.

(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

27a The Government operates a scheme called Cycle to Work which encourages employees to
commute to work on their cycles. The scheme works by offering tax breaks to individuals who buy
cycles up to the value of £1,000. It also allows employers to loan cycles to employees as a tax-
free benefit, which has the effect of lowering the cost of buying a cycle and accessories for the
employee.

Costs/
Benefits MPC

MPB

Q Quantity of cycle
commutes

Fully adapt and annotate the diagram above to show:

i) The positive externalities associated with cycling
ii) The welfare loss, before the introduction of the tax break
iii) The impact of the tax break on the number of cycle commutes
(3 marks)

27b Outline one reason why the Cycle to Work tax break scheme may not be effective.
(1 mark)

27c Which of the following could be considered positive externalities of the cycle to work scheme?
A Less congestion, less pollution, bus fare savings
B Less congestion, less pollution, NHS savings through healthier commuters
C Less congestion, less pollution, better personal fitness causing weight loss
D Less congestion, less pollution, less need for personal car insurance
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

28a The following table relates to a firm that produces chemicals used in the production of plastic
tubs for storage.

Amount produced Total private cost Total external cost Total social cost
1 150 200
2 280 120
3 450 240
4 700 1250

Fill in the gaps in the table.

(2 marks)

28b With reference to the production of plastic storage tubs, explain the term ‘negative externality’.
(2 marks)

28c Which one of the following could be considered an appropriate government intervention to
reduce overproduction by a firm producing negative externalities?

A An indirect tax per unit of production

B A direct tax per unit of production
C A subsidy to help reduce costs of production to enable clean up technology to be
purchased
D A ban on production
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

29a The NHS runs a healthy eating campaign in which it encourages people to eat at least 5 portions
of fruit and vegetables a day. Draw a cost and benefit diagram to show the potential welfare gain
possible to society if more consumers eat a diet including large quantities of fruit and vegetables.
(4 marks)

29b If the free market equilibrium quantity is below the social optimum quantity, then

A the private cost is greater than the external cost.

B the private benefit is less than the external benefit.
C the social benefit exceeds the private benefit.
D the social cost exceeds the external cost.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

30a Many building sites situated in busy towns and cities must now, by law, erect boarding to hide the
building site, to reduce the noise emitted and to reduce the risk to the general public. Draw a
cost and benefit diagram to illustrate why the government felt these barriers might be necessary.
(4 marks)

30b The law stating that building site barriers must be erected is an example of

A Government intervention to correct market failure

B Government failure to raise awareness of dangers of building sites
C Private intervention to protect building firms from external hazards
D Private intervention to correct market failure
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

31a The following cost and benefit diagram relates to the market for new homes built in the UK. The
government has introduced various incentive schemes to lower the cost of purchasing a new
home to encourage greater consumption.

Costs/
Benefits MPC

P
MSB

MPB

Q Quantity of new
homes
Annotate the diagram to indicate the following:
i) The socially optimum quantity of new homes
ii) The potential welfare gain area if this market failure were to be corrected
(2 marks)

31b The government runs a scheme called ‘help to buy shared ownership’ whereby it will buy part of
the house with you (e.g. 50%) and then charge you rent on the part that it owns. This is most
likely to be an example of
A the government looking to generate an extra stream of revenue by exploiting new
home owners.
B the government intervening to help house builders to sell more houses and
therefore increase their profits.
C the government intervening to reduce the profits for private landlords.
D the government intervening to internalise the externality associated with home
ownership.
(1 mark)

31c State and explain one possible external benefit as a result of building new houses.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

32a A private good’s characteristic of excludability means that

A the benefits of the good are restricted to those who pay for them.
B consumption by one person reduces the amount available for others.
C the benefits of the good are available to all.
D consumption of the good by one person does not reduce the amount available to
others.
(1 mark)

32b Building work on a new flood defence system along the River Severn near Avonmouth will begin
in summer 2019. The scheme involves building a 2.4m high concrete wall and lengthy ‘earthworks’.
Bristol Council and South Gloucestershire Council will each contribute £30m to the scheme, and
the Environment Agency will fund the remaining £40m cost.

With reference to this data and the concept of the free rider problem, explain why flood defences
are usually funded by the government.
(4 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

33a Explain why street lights can be regarded as a public good.
(4 marks)

33b A public good’s characteristic of non-rivalry means that

A consumption of the good by one person does not reduce the amount available to
others.
B consumption by one person reduces the amount available for others.
C the benefits of the good are restricted to the person who pays for them.
D the benefits of the good are available to all.
(1 mark)

34a Define the term “asymmetric information”.

(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

34b According to researchers, eating processed meat such as bacon and sausages can raise the risk
of breast cancer; women who eat high levels of these food types have a 9% increased risk of
cancer compared to those who eat very little of it.

With reference to this example, explain how an information gap can lead to market failure.
(3 marks)

34c Which one of the following would describe a situation where symmetric information is likely to
exist?

A Teachers and students in a school

B Doctors and nurses in a hospital
C A staff briefing about a new contract
D A staff meeting about where to hold the Christmas party
(1 mark)

35a Which one of the following is most likely to explain why a situation of information asymmetry may
exist?

A Certainty about costs and benefits of consumption

B Uncertainty about costs and benefits of consumption
C Uncertainty about costs and benefits of production
D Certainty about the costs and benefits of production
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

35b Gamblers Anonymous is a charity help group set up for compulsive gamblers to help overcome
their addiction to gambling. Explain why market failure exists in the market for gambling in the
UK.
(3 marks)

35c The health warnings put on packets of cigarettes is an example of

A government intervention to correct information asymmetry.

B government intervention to correct government failure.
C private market intervention to correct information asymmetry.
D private market intervention to reduce overconsumption of cigarettes.
(1 mark)

36a The government aims to provide public goods because

A the private market is unlikely to provide them

B people are unwilling to pay for the consumption of them
C firms are likely to make excessive profits if they are permitted to provide them
D it provides excellent employment opportunities for public sector workers
(1 mark)

36b A ‘payday loan’ is a short-term high-interest loan, that is intended to allow borrowers to cover
bills until their next payday. They are often taken out by people earning a relatively low income.
The size of the average payday loan is £250, and the interest paid on that loan is an average of
£150. One company that has, in the past, provided payday loans is Wonga. In 2014, the Financial
Conduct Authority found that the methods used by Wonga to collect the money borrowed by its

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

 customers were unfair and ordered it to pay £2.6m to compensate 45,000 customers. Since that
date, payday loan companies have faced tougher rules on their lending and have also had their
interest rates capped. This hit Wonga’s profits hard, and the company suffered a loss of nearly
£65m in 2016. Wonga went into administration in August 2018, with many former customers
seeking compensation after being mis-sold loans that they could not repay.

With reference to this information and the concept of market failure, explain why the government
aims to regulate the payday loans section of the consumer credit market.
(4 marks)

37a Poisonous and unpleasant emissions from a factory are an example of

A positive externalities in consumption.

B social costs.
C private costs.
D negative externalities in production.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

37b In August 2018, the price of a “carbon credit” in the European Emissions trading scheme rose past
$20 for the first time since 2008. In May 2017, the price of a credit was just $4.40. However, the
price of carbon credits rose in 2018 due to rising demand for air conditioning in the heatwave,
and also as producers scrambled to stockpile credits ahead of future market changes which will
further restrict carbon emissions.

Using a diagram, and with reference to the information, explain how a tradeable pollution permit
system may work to correct market failure.
(4 marks)
Draw your diagram here:

Write your explanation here:

38a When there are positive externalities in consumption then…

A marginal social costs exceed marginal private costs.

B marginal external benefits exceed marginal private benefits.
C marginal social benefits exceed marginal private benefits.
D marginal social costs exceed marginal social benefits.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

38b The cost and benefit diagram below illustrates a firm that has been known to dump chemicals
into a nearby river. The government intend to impose an indirect specific tax on this firm to
internalise the externality.

Costs/ MSC
Benefits

MPC

MPB

Q Quantity

Annotate the diagram to show the effect of internalising the externality by using an indirect tax.

(2 marks)

38c Outline how imposing a tax on this firm may result in government failure.
(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

39a The following diagram relates to the market for labour in which the government requires all firms
to pay a national living wage rate (a minimum wage). In April of each year, the government
increases the national living wage rate. Illustrate the effect of this increase on the diagram below.

Wage rate

Supply of
Labour

Demand
for labour

Quantity
of Labour

(3 marks)

39b The UK’s national living wage rate rose from £7.83 per hour to £8.21 per hour in April 2019. This
is
A an increase of 4.63%
B an increase of 4.85%
C an increase of 3.8%
D a decrease of 4.63%
(1 mark)

39c If the national living wage rises by 5.7% and the rate of inflation is 2.6%

A real income rises by approximately 3.1%

B all workers who earn wages are better off
C firms will employ more workers at the higher wage
D real income rises by 2.6%
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

40a In the UK, sight / vision tests at the optician have a maximum price of £21.31 (from April 2018).
Draw a demand and supply diagram to show the effect of this maximum price.
3 marks)

40b With reference to sight tests, define the term ‘government intervention’.
(1 mark)

41a If the government introduces a minimum price into a market

A the market equilibrium price will fall.

B there would be excess supply in the market.
C there will be no change in the market price
D there will be a shortage of supply in the market.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

41b The following demand and supply diagram shows a market in which a minimum price has been
imposed.

The distance AB represents:

A a contraction in quantity demanded.

B an extension in market supply.
C the excess supply in the market after the minimum price is imposed.
D the welfare loss after the minimum price is imposed.
(1 mark)

41c In May 2018, the Scottish government imposed a minimum price of 50p per unit on all alcohol
sold in the country. Explain one reason why the Scottish government has imposed this minimum
price.
(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

42a The following cost and benefit diagram illustrates the impact of Spinz night club operating in
Newtown.

The external cost associated with this night club in a free market is represented by area

A CIK
B CLK
C ACIJ
D MLKB
(1 mark)

42b The total private cost of operating Spinz night club is equal to area

A ACGO
B BKHOA
C MLKB
D MLHO
(1 mark)

42c The change in consumer surplus if the market failure incurred from Spinz was corrected would
be equal to a loss of area

A ACIJ
B ACEB
C ACKB
D CEK
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

42d To correct the market failure caused by Spinz, the government should

A close the nightclub down

B impose a direct tax on Spinz equivalent to IC
C impose an indirect tax on Spinz equivalent to LK
D impose an indirect tax on Spinz equivalent to IC
(1 mark)

42e If an appropriate tax was imposed on Spinz to correct the market failure

A The nightclub owner would pay an amount of tax equal to ACEB

B The tax revenue would be equal to area MLKB
C The tax revenue would be equal to the deadweight burden
D The tax revenue would be equal to area ACIJ
(1 mark)

43a A number of recent studies suggest that participating in exercise classes can have an unexpectedly
large benefit for participants. For example, children who take part in a 50-minute daily exercise
class have scored significantly better results on tests at school compared to children who do not
take part in the classes. Elderly patients near Nottingham with dementia get the chance to
participate in weekly circuits classes, which have been shown to reduce the risk of falls and lengthy
hospital stays. One NHS Trust near Liverpool provides time and space for its employees to play
team sports, such as netball, several times a week – this has been shown to reduce staff sickness
and absence.

Annotate the diagram above to show the potential welfare gain if the market failure of under-
consumption of exercise classes was corrected. (1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

43b Explain one way in which the government could intervene into the market for exercise classes to
correct the market failure indicated by question 43a.
(3 marks)

43c An example of government failure in the market for exercise classes could be caused by

A charging too high a tax on producers.

B paying too small a subsidy to consumers.
C the increase in injuries resulting from over-exercise.
D the oversupply of information about exercise classes.
(1 mark)

44a In 2007, a ban on smoking in indoor workplaces came into force in the UK. By 2017, surveys
suggest that this ban was supported by 83% of Brits. However, 40% of smokers who visit pubs
have said that they specifically aim to visit pubs that use outdoor patio heaters, so that they stay
warm when they go outdoors to smoke. Patio heaters in UK pubs are estimated to generate an
additional 160 000 tonnes of CO2 emissions each year.

With reference to this example, explain the term ‘government failure’

(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

44b Government failure always arises when
A a government subsidy leads to over-supply and a loss of efficiency.
B the equilibrium price rises for a good or service following a shortage in supply.
C a government finds it necessary to provide a range of public goods.
D the government finds it necessary to supplement the private provision of a good.
(1 mark)

44c Define the term ‘regulation’.

(1 mark)

45a In the United States, there is a 10% sales tax imposed on indoor tanning salons. The demand and
supply diagram below illustrates the impact of this tax.

Annotate the diagram to show the incidence of taxation on i) the consumer and ii) the producer.

(2 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

45b The type of tax imposed on tanning salons shown in Q45a above is known as

A a specific tax.
B an excise duty.
C a tariff.
D an ad valorem tax.
(1 mark)

45c Explain why the US government may be justified in imposing a further tax on tanning salons.
(2 marks)

46a Draw a cost and benefit diagram to represent the market for secondary-school education. Indicate
any potential welfare gain area.
(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

46b In the UK, education is compulsory for children between the ages of 5 and 16 and is provided free
of charge. This is because

A education has many spillover costs to society.

B education is a public good.
C education has positive externalities to society and partial subsidies correct the market
failure.
D education has such large positive externalities to society that public provision
required to correct the market failure.
(1 mark)

46c Schools in England are inspected regularly by Ofsted who is a government department that
reports directly to Parliament. The schools are rated according to their performance on a four-
point scale, from 1 (outstanding) to 4 (inadequate). If the inspectors judge a school to be
inadequate, it could be put into ‘special measures’ which means the school is failing to provide its
pupils with an acceptable standard of education. A school in special measures

A is an example of market failure.

B is an example of government failure.
C is an example of the free rider problem.
D is a misallocation of resources.
(1 mark)

47a A government wishes to increase economic welfare by introducing policies that create external
benefits and private benefits. It should

A reduce the retirement age

B increase the rate of national insurance contributions
C lower the excise duty on cigarettes and alcohol
D invest funds in training schemes for the long term unemployed
(1 mark)

47b A government intervention to correct a market distortion may fail because

A the government may hold imperfect information

B all government intervention corrects market failure
C the opportunity cost of government intervention is zero
D governments can only supply public goods
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

47c Using your knowledge of economics, explain why a congestion charge on vehicles in a busy city
may not correct the market failure associated with congestion.
(3 marks)

48a In the Spring of 2019 in the UK, there were 794 government-approved plans for new “onshore”
wind farms, that all have “planning permission”. However, the land-owners and companies with
permission to put up wind turbines argue that wind turbines are too expensive and that the
government should provide subsidies to support this industry. Prior to 2017, the UK government
did provide subsidies to this sector, but stopped supporting it.

Annotate the diagram to show the likely impact on the market for electricity generated through
wind farms and the total cost of the subsidy, if the UK government re-introduced its policy of
subsidies for wind-farms.
(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

48b Energy that results from wind turbine use is

A a derived demand.
B generated incurring an opportunity cost.
C free of negative externalities.
D a free good.
(1 mark)

48c Define the term ‘non-renewable resource’.

(1 mark)

49a The following diagram relates to the market for energy produced by coal burning.

Costs/
Benefits MPC

MPB

Q Quantity

Annotate the diagram to show the externalities associated with the generation of electricity as a
result of burning coal, and any changes to welfare that might be available to society.
(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

49b The VAT on energy and gas supplied to households is charged at a rate of 5% (below the standard
rate of 20%) because

A the government is not allowed to raise the rate of VAT to the normal 20%
B the government wants to ensure that low-income households can afford necessities
C the gas and electricity are price inelastic in supply
D renewable energy sources are not available as substitutes in all parts of the country
(1 mark)

49c Natural gas is a fossil fuel, usually found in large underground spaces. Shale gas is another fossil
fuel and is trapped in small pockets in shale rocks.

Natural gas and shale gas must be

A substitutes.
B complements.
C renewable sources of energy.
D both free of opportunity cost in collection.
(1 mark)

50a Explain why the demand for buying houses is considered income elastic.
(3 marks)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20

50b The term ‘positive equity’ when used in reference to the housing market means

A the market price of the house is greater than the amount of mortgage loan
B the house has gone up in price
C the amount a house would be worth if it was sold on the open market
D the amount of mortgage left to be paid on a house
(1 mark)

50c When house prices rise and landlords put their rental properties up for sale, this is an example of

A market demand being rationed.

B prices signaling to suppliers to increase supply.
C an opportunity to reduce excess supply of housing.
D a case of asymmetric information.
(1 mark)

EDEXCEL SECTION A PRACTICE QUESTIONS – THEME 1 Copyright tutor2u 2019/20