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Edexcel GCE

Economics

Advanced Subsidiary Unit 1 – Markets: how they work

Wednesday 18 January 2006 – Morning Time: 1 hour

Examiner’s use only

Team Leader’s use only

Materials required for examination Nil

Items included with question papers Nil

Instructions to Candidates

In the boxes above, write your centre number, candidate number, your surname, initials and signature. Check that you have the correct question paper. Answer ALL the questions in Section A in the spaces provided in this question paper.

For each question there are four suggested answers: A, B, C or D.

When you have selected your answer to the question, write the chosen letter in the box provided.

You can only offer one answer to each question.

After making your selection you should offer an explanation of why you have made that choice. Your explanation may include a diagram. Answer ONE question from Section B in the spaces provided in this question paper.

Information for Candidates

The marks for individual questions and the parts of questions are shown in round brackets: e.g. (2). The paper is divided into two sections, A and B; both sections are equally weighted, with the total mark on Section A divided by two. The total mark for this paper is 40. There are 20 pages in this question paper. Any blank pages are indicated.

Advice to Candidates

You will be assessed on your ability to organise and present information, ideas, descriptions and arguments clearly and logically, including your use of grammar, punctuation and spelling. You are advised to divide your time equally between Section A and Section B.

This publication may be reproduced only in accordance with Edexcel Limited copyright policy. ©2006 Edexcel Limited.

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©2006 Edexcel Limited. *M22038A0120* Printer’s Log. No. M22038A W850/S6351/57570 5/6/7/5 Turn over www.XtremePapers.net
Leave blank SECTION A Answer ALL questions in this section. Write the letter of your
Leave
blank
SECTION A
Answer ALL questions in this section.
Write the letter of your chosen answer in the box and then
explain your choice in the space provided.
You are advised to spend 30 minutes on this section.
You are encouraged to use a diagram in your explanation where appropriate.
1.
Which of the following statements, referring to the price mechanism in a free market
economy, is true?
A
The price mechanism rations out scarce goods in accordance with consumer wants.
B
Falling prices will encourage resources to enter a market.
C
The price mechanism acts as a signalling device to indicate changes in consumer
demand or producer supply.
D
Excess demand for a good can be eliminated by allowing its price to decrease.
(a)
Answer
(1)
(b)
Explanation
(4)
Q1
(Total 5 marks)
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Leave blank 2. A country has two economic sectors, agriculture and manufacturing. Agricultural goods Output
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2.
A country has two economic sectors, agriculture and manufacturing.
Agricultural goods
Output (million units)
Manufactured goods
Output (million units)
0
90
10
88
20
84
30
78
40
70
50
60
60
48
70
34
80
18
90
0
The production possibility frontier for agricultural and manufactured goods is shown in
the table. From the table it can be deduced that
A
there is a constant opportunity cost in forgoing manufactured goods to produce more
agricultural goods.
B
the opportunity cost of producing agricultural goods increases, the greater the output
of agricultural goods.
C
the opportunity cost of producing manufactured goods decreases, the greater the
output of manufactured goods.
D
the higher the level of agricultural production, the lower will be the opportunity cost
of a further increase in agricultural output.
(a)
Answer
(1)
(b)
Explanation
Q2
(4)
(Total 5 marks)
3
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Leave blank 3. D Price (£) 12 10 8 6 4 2 D 0 20
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3.
D
Price (£)
12
10
8
6
4
2
D
0
20
40
60
80
100
120
Quantity
The diagram shows the demand curve for a good. The demand for this good
A
is unit price elastic along the whole length of the demand curve.
B
changes from being price inelastic to price elastic as price falls from top left to bottom
right along the demand curve.
C
is price inelastic along the whole length of the demand curve.
D
varies in price elasticity over the whole length of the demand curve.
(a)
Answer
(1)
(b)
Explanation
(4)
Q3
(Total 5 marks)
4
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Leave blank 4. Market A Market B Price (£) S 1 Price (£) S S
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4.
Market A
Market B
Price (£)
S 1
Price (£)
S
S
DD
D
0
0
Quantity
Quantity
Market C
Market D
Price (£)
S
Price (£)
S
S
2
D
2
D
D 1
0
0
Quantity
Quantity
Which of the markets, labelled A, B, C and D, illustrates the effects of a subsidy paid to
the producers of a good?
(a)
Answer
(1)
(b)
Explanation
(4)
Q4
(Total 5 marks)
5
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Leave blank 5. Which of the following pairs of goods is likely to have a
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5.
Which of the following pairs of goods is likely to have a positive cross price elasticity of
demand between them?
A
Tea and coffee
B
Leather and beef
C
CD players and CDs
D
Bus travel and potatoes
(a)
Answer
(1)
(b)
Explanation
(4)
Q5
(Total 5 marks)
6
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Leave blank 6. Price of sunscreen lotion S 2 T X P 2 Y P
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6.
Price of sunscreen
lotion
S
2
T
X
P
2
Y
P
1
Z
D 2
D 1
0
Q 1
Q 2
Quantity of sunscreen lotion per time period
The diagram shows the market for sunscreen lotion. In the summer demand is represented
by D 2 and supply by S 2 , with the equilibrium price at 0P 2 . In the winter demand decreases
to D 1 , lowering price to 0P 1 and causing a decrease in the producer surplus equal to the
area:
A
P 2 XZ
B
0P 1 YQ 1
C
P 1 P 2 XY
D
P 2 XT
(a)
Answer
(1)
(b)
Explanation
(4)
Q6
(Total 5 marks)
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Leave blank 7. An individual with a monthly income of £2000 regularly visits the cinema
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7.
An individual with a monthly income of £2000 regularly visits the cinema four times a
month. His monthly income then falls to £1000 and he reduces the number of visits to the
cinema to three times per month. The best estimate for income elasticity of demand is:
A
0.5
B
–0.33
C
2.0
D
–0.5
(a)
Answer
(1)
(b)
Explanation
(4)
Q7
(Total 5 marks)
8
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Leave blank 8. The Market for Bus Transport in Harchester Price per bus journey SS
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8.
The Market for Bus Transport in Harchester
Price per bus
journey
SS
S
1
2
A
v
w
X
B
D
z
y
C
DD
D
1
2
0
Quantity of bus journeys
The diagram shows the supply and demand for bus travel in Harchester. In this town, bus
travel is an inferior good. Real incomes increase and, at the same time, there is a
significant increase in fuel costs for operating buses. If the initial equilibrium position is
indicated by point X, what will be the new equilibrium position, A, B, C or D?
(a)
Answer
(1)
(b)
Explanation
(4)
Q8
(Total 5 marks)
TOTAL FOR SECTION A: 40 MARKS
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Leave blank SECTION B Answer EITHER Question 9 OR Question 10. Indicate which question you
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SECTION B
Answer EITHER Question 9 OR Question 10.
Indicate which question you are answering by marking the box (
). If you change
your mind, put a line through the box (
) and then indicate your new question
with a cross (
).
You are advised to spend 30 minutes on this section.
If you answer Question 9 put a cross in this box
.
Question 9
The Price of Tin
The price of tin has more than doubled to $7,820 a tonne since February 2002 as
speculators rushed into purchasing the metal. The metal was once written off because of the
competition from plastic and aluminium in the packaging industry.
Tighter environmental laws in Japan and Europe have been favourable to tin. These laws
5
have eliminated the use of lead solder in electronics replacing it with tin soldering. The tin
price has also been driven by strong demand from China, a factor that underpins the current
world metal price boom, and by export restrictions on the metal by Indonesia, the world’s
second biggest tin producer.
Ingrid Sternby, a metal analyst at Barclays Capital, said that the Indonesian government’s
10
restriction on tin exports, a measure brought in to reduce smuggling, has created a market
where demand persistently exceeds supply. ‘The market is likely to remain in deficit until
at least 2006,’ she said. This is bad news for the major consumers of tin – the canning,
construction and electronics industries.
Source: adapted from Kevin Morrison, 20 March 2004, Financial Times.
10
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(a)

Using a supply and demand diagram, explain why ‘the price of tin has more than doubled to $7,820 a tonne since February 2002’ (line 1).

(6)

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(b)

Using the passage and your own knowledge, discuss whether the supply of tin is likely to be price elastic or price inelastic. Justify your answer.

(5)

(c)

Assess the likely impact of the rise in price of tin ‘for the major consumers of tin’ (line 12).

(4)

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(d) Examine one ‘demand’ factor and one ‘supply’ factor that might reduce the rate of growth in tin prices.

(5)

Q9

that might reduce the rate of growth in tin prices. (5) Q9 (Total 20 marks) *m22038A01320*
that might reduce the rate of growth in tin prices. (5) Q9 (Total 20 marks) *m22038A01320*

(Total 20 marks)

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Leave blank If you answer Question 10 put a cross in this box . Question
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If you answer Question 10 put a cross in this box
.
Question 10
The Price of Oil
Figure 1
US strategic petroleum reserve
Oil price
(millions of barrels)
($ per barrel)
left hand scale
right hand scale
660
40
640
35
620
30
600
25
580
20
560
540
15
0
2001
2002
2003
2004
Year
The Saudi Arabian government has insisted that Opec (Organisation of Petroleum
Exporting Countries) cut oil output by 1 million barrels per day, despite its current high
price. Ali Naimi, Saudi Arabia’s energy minister and Opec’s most important member,
believes there is a danger of an excess supply in the oil market and that a serious price drop
5
may occur in the coming months.
His fears are based on two factors: first, the build-up of strategic petroleum oil reserves in
the USA, the world’s largest consumer of the commodity; second, the beginning of spring
in the northern hemisphere and the start of a seasonal drop in demand by major American
and European consumers.
10
However, in the meantime, oil prices remain high. This has led to complaints from the US
airline and road haulage industries, prompting the American government to halt its
programme of purchases for the strategic petroleum oil reserve.
Source: adapted from C Hoyos & J Blas, 30 March 2004, Financial Times,
and K Morrison, 15 March 2004, Financial Times.
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(a)

Using a supply and demand diagram, explain the meaning of the phrase ‘there is a danger of an excess supply in the oil market’ (line 4).

(4)

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(b)

(i)

With reference to Figure 1, explain the relationship between the United States’ strategic petroleum oil reserves and the price of oil.

 

(3)

 

(ii) To what extent might the build-up of strategic petroleum oil reserves in the United States undermine the effectiveness of Opec in fixing high oil prices?

 

(5)

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(c)

Assess the likely economic effects of high oil prices on either the airline industry or the road haulage industry in the United States.

(4)

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Leave blank (d) Examine one disadvantage of specialising in the production of oil for a
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(d)
Examine one disadvantage of specialising in the production of oil for a country such
as Saudi Arabia.
(4)
Q10
(Total 20 marks)
TOTAL FOR SECTION B: 20 MARKS
TOTAL FOR PAPER: 40 MARKS
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