PRACTICE EXAM PAPER

Pearson Edexcel
Economics (A)
Advanced
Practice Paper 1
Question Paper
Paper 1
Markets and business behaviour
 Write your name here
Surname Other names

Centre Number Candidate Number

Economics (A)
Advanced
Paper 1: Markets and business behaviour
Practice paper Paper reference
Time: 2 hours Paper 1
You do not need any other materials Total Marks

Instructions
• Use black ink or ball-point pen
• Fill in the boxes at the top of this page with your name, centre number and candidate number
• There are three sections in this question paper. Answer all questions from Section A and
Section B. Answer one question from Section C
• Answer the questions in the spaces provided – there may be more space than you need

Information
• The total mark for this paper is 100
• The marks for each question are shown in brackets – use this as a guide as to how much time
to spend on each question

Advice
• Read each question carefully before you start to answer it
• Try to answer every question
• Check your answers if you have time at the end

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Section A
ANSWER ALL QUESTIONS IN THIS SECTION

Use the data to support your answers where relevant. You may annotate and include
diagrams in your answers.
Write your answers in the spaces provided.

1 (a) Provide two positive consequences of having a command based economy. (2 marks)

(b) Explain the underlying assumptions of rational economic thinking. (2 marks)

(c) The role of the state in a mixed economy is to...

A control the price mechanism

B set national minimum wages

C provide essential services

D stop the existence of monopolies
(1 mark)

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2 Due to volatility in the global market for cinnamon, the price of cinnamon has increased from €35 per kg in
February 2016 to €76 in March. The quantity of cinnamon supplied has subsequently increased by 1.2%.
(a) With reference to the information provided, calculate the price elasticity of supply for cinnamon.
You are advised to show your workings. (2 marks)

(b) One factor that could increase the price elasticity of supply of cinnamon is?

A an increase in the demand of cinnamon from the confectionery market

B an increase in the price of a cinnamon substitute

C an increase in farming regulation

D an increase in the size and availability of cinnamon stockpiles
(1 mark)

(c) The government introduces a subsidy to increase the production of cinnamon. Calculate the total
cost of the subsidy to the government. You are advised to show your working. (2 marks)

Price
S

$10
S1
$8

$6

10 12 Quantity (millions kg)

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3 (a) Satwinder runs a gourmet restaurant. The following table shows her costs and revenue over a
fixed time period, when she changes her prices for a main course. Some parts of the table have
been left blank for your own calculations.

Total Marginal Total Marginal

Quantity Price (£)
Revenue (£) Revenue (£) Costs (£) Costs (£)
0 20 3 -
1 19 10
2 18 11
3 17 12
4 16 13
5 15 14

Calculate the profit maximising level of output. You are advised to show all of your workings. (4 marks)

(b) Satwinder offers a lower price at lunch time when she has less demand for her restaurant.

This is an example of:

A predatory pricing

B price discrimination

C limit pricing

D cross subsidisation
(1 mark)

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4 Hutchison Whampoa, the Hong Kong conglomerate which owns Three Mobile, agreed in March 2015
to buy O2 from Telefónica of Spain. Both Three Mobile and O2 are mobile network providers.
(a) This method of integration between Three and O2 is an example of:

A conglomerate integration

B forward vertical integration

C backward vertical integration

D horizontal integration
(1 mark)

(b) Explain one reason for Three wanting to purchase O2. (2 marks)

On the 11th May 2016 the European Commission blocked the purchase as they deemed it uncompetitive.
(c) Explain the role of the competition authorities. (2 marks)

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5 (a) A sugar farmer operates under the conditions of perfect competition. Explain why the sugar
farmer can only earn supernormal profits in the short run and not the long run. (4 marks)

(b) If firms in a perfectly competitive sugar market start to leave, it suggests that
A average variable costs exceed average revenue
B diminishing returns are setting in
C average costs equal average revenue
D average revenue exceeds marginal revenue
(1 mark)

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Section B
Extract A
Ryanair fares cut could prompt price war
The Guardian May 23rd 2016
Michael O’Leary’s pledge to ‘fill our aeroplanes’ could cut summer fares by 7% and winter tickets
by 12%

Holidaymakers could find themselves bagging a cheaper seat on the plane this summer after Ryanair
announced it would cut air fares by an average 7%, raising the prospect of a further price war between
airlines. The Irish no-frills carrier said it would drop fares to keep its planes full, with demand hit by
economic uncertainty and terror attacks, as lower fuel costs cut the cost of flying. Ryanair, Europe’s
biggest airline by passenger numbers, expects prices to drop by around 5-7% this summer, and as much
as 12% in winter.

Chief executive Michael O’Leary said that fares would be lower primarily because of extra supply of seats,
in Ryanair’s fleet and others, while lower oil prices were filtering through to cut costs. The airline has taken
delivery of 41 new 737s from Boeing in the last year with a further 52 coming this year, as it looks to grow
passenger numbers to more than 100m.

“It’s good, because customers are going to get lower air fares and it also puts downwards pressure on our
competitors.”

According to the International Air Transport Association, fares to and from European destinations had
already fallen 11.4% in the first three months of 2016 compared with the same period last year. Britain’s
largest carrier, EasyJet, said earlier this month it had cut fares to lure wary passengers.

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Extract B
Ryanair and EasyJet eye work with rivals
Financial Times Jan 12th 2016
European passengers flying long-haul to the US or further afield could soon find themselves travelling part
of the way on a low-cost airline should Michael O’Leary, Ryanair’s chief executive, get his way.

Europe’s biggest budget airline by revenue has signalled a major shift in strategy by targeting tie-ups
with flag carriers under which it would provide them with passengers for their long-haul flights. EasyJet is
considering a similar move.

This could see Ryanair and EasyJet partner with British Airways or Lufthansa, with passengers initially flying
on the budget airlines’ short-haul passenger jets and then transferring on to the flag carriers’ long-range
aircraft. Through a single transaction with one airline, someone wishing to go from Lyon to New York might
in the future fly from the French city to London’s Heathrow airport with EasyJet, and then switch smoothly
to BA to travel to the US.

Extract C
Flybe boss: ‘Slap congestion charge on mega-airports’
The Times May 27th 2016
Heathrow and Gatwick should be hit with a central London-style congestion charge to boost regional
airports, according to the boss of Britain’s biggest domestic carrier.

Passengers flying out of the two London “mega-airports” should pay twice as much in air tax as those
using airlines from the rest of the country, Saad Hammad claimed. The chief executive of Flybe said that a
dual-charging system was needed to boost airports outside the southeast that struggle to compete with
those around the capital.

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Extract D
Areas near Heathrow suffer more noise despite claims
of quieter planes
The Times 23rd October 2015
Low-flying “super-jumbo” passenger planes have increased noise for some communities around Heathrow,
an independent study has shown.

Research by PA Consulting, commissioned by Heathrow, confirmed complaints from residents that more
planes were being concentrated on a flight path over Twickenham and Teddington, in the London borough
of Richmond, with greatest disruption late at night and early in the morning.

The increased noise was thought to be due to trials of new flight paths, but the study found an underlying
trend after the trials had ended for planes to fly lower than before - causing more disturbance to residents.
Significantly for Heathrow, where noise is one of the biggest issues around further expansion, the lowest
flying were typically modern planes, the A380 super-jumbos.

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6 (a) With reference to Extract 1, explain the reasons why prices are predicted to “drop by around
5-7% this summer, and as much as 12% in winter.”
Use an appropriate diagram in your answer. (5 marks)

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(b) Examine two reasons why Ryanair would want to target ‘tie-ups’ with long haul flights. (8 marks)

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(c) Discuss how the decrease in price of Ryanair flights may influence the behaviour of rival firms.
Use game theory in your answer. (12 marks)

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(d) Assess the extent to which Ryanair can be considered economically efficient. (10 marks)

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(e) Discuss the likely impact of introducing a “congestion charge on mega airports” as a method
of dealing with negative externalities. (15 marks)

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Section C
ANSWER ONE QUESTION IN THIS SECTION

Either

7 To what extent does the threat of competition affect a firm’s behaviour?

Answer with reference to an industry of your choice. (25 marks)

Or

8 Evaluate the factors that determine wages in competitive and non-competitive labour markets. (25 marks)

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