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How To Handle AQA ECON1 Multiple Choice Questions:

In this blog I will try to talk you through my process of answering multiple choice questions. Whilst I am obviously an Economics genius (*cough*), I still have to think about how to answer these questions and hopefully, by explaining how i do it, it will help you.

The paper I have chosen to dissect is June 2013, simply because it is the first one available on the AQA website. It can be found here:

http://filestore.aqa.org.uk/subjects/AQA-ECON1-QP-JUN13.PDF

Question 1:

A particularly easy one for second years, the key to this question, as it so often is, is to read the question properly. On first glance the student in a rush will see “main economic objective” and “market economy” and think that C is the correct answer, especially as the bulk of their revision centred around market failures and the misallocation of resources which must be corrected. The key word was “firms” as their objectives are different to those of governments. Firms (on the whole) want to make profits, so the answer is D.

It’s not A, as, whilst this may be beneficial to the firm, it is not their “main” aim and they may want to do this solely to make bigger profits.It’s not B, as, again, they might want this to happen, but only so that they can sell more and therefore make more profits.It’s not C, because that is what governments should want, and firms aren’t generally out to maximise society’s welfare, just their own.

Question 2:

Phil Hensman @PhilsEconomics

http://filestore.aqa.org.uk/subjects/AQA-ECON1-QP-JUN13.PDF

A relatively straight forward question, but the key to understanding questions on PPFs, if you struggle with them, is to replace the letters with numbers. In an exam I would do this on the question paper.Here for example, I would change S to 500, R to 20 and T to 30.

From this I can easily work out that whatever has occurred has had no effect on Consumer Goods, as it is still only possible to produce 500 of those, so the movement must centre around the production of capital goods only.

The only factors that cause PPFs to shift outwards are an increase or an improvement in the factors of production, but here that must be only in the FoP for Capital Goods.

I think the answer that most students would answer and get it wrong would be B, because it looks like an increase in the FoP, but it isn’t. B says that there has been a switch of FoP towards Capital Goods, not a direct increase. This would mean less Consumer Goods could be made and would be a movement ALONG the PPF, not a shift OF the PPF.

The correct answer is A. Productivity is the amount of goods each worker can produce per hour, if the workers in the Capital Goods industries can now produce more per hour, then more can be produced with the same amount of resources, which is why we can now produce 30 Capital Goods, as opposed to the 10 we could produce before.

It’s not C because PPFs only show what COULD be produced, not what IS being produced, so demand for the goods is irrelevant.

It’s not D because (using the figures I added on earlier) in order to produce 20 Capital Goods we had to give up 500 consumer goods previously, but now it is far less than 500, so the opportunity cost has decreased.


Question 3:

This is quite simple and just tests your knowledge, so, assuming you’ve done some revision on PES, it is easy, but it can be worked even if you haven’t.

A would mean that the quantity supplied would be totally unresponsive to changes in price. Most firms, when they see prices go up, respond by making more of that product, so they do respond to changes in price, so this is clearly wrong.

B and C are wrong for the same reason as the other. The number measures how quickly firms can respond, (B suggests they will respond slowly, C says quickly). I don’t know, nor do you, principally because no time scale is given. How soon after the price change are we measuring the increase in supply? If we don’t know that, we can't tell what the figure will be.

However, we do know that when prices rise, it is in the producers’ interests to increase the supply, so both the price and the quantity will rise. This means the equation (% change in quantity supplied / % change in Price) will always be a positive number (even if the price goes down, suppliers will supply less, so a negative divided by a negative = a positive) so the answer must be D.

Question 4:

A classic case of having to know the theory. At first glance I would have no clue which is the right answer, but using my understanding of the theory I could work it out.


The easiest one of these to remember is the negative externalities in production. When a firm produces pollution, for example, there are negative costs imposed on society, this must mean that the cost to society is greater than the cost to the firm itself, so we must look for a diagram which shows an MSC curve that is higher the MPC curve. This leaves us with A and C as possibilities as both B and D show the opposite.

Diagram A shows us that the social benefits of consuming this good are above the private benefits to the individual, which describes a positive externality in consumption, so therefore we are left with C as the answer, which does indeed show the social benefits of consumption as being lower than the benefits to the individual.

Question 5:


This goes back to our definition of Productivity from Question Two. Productivity is the amount of goods each worker can produce per hour.

So now, we’ve got to consider what will cause the same people to produce more in the same amount of time. Whenever I teach productivity I use the example of having to get a page of Maths sums done.

A - Would an increase in the amount of people wanting Maths sums done enable you to work faster? No, so A is wrong.

B - If your wages fell, would you be able to complete that page more quickly? No, so B is wrong.

C - Would more people trying to do sums mean that you can do sums more quickly? No, you’d still be working at the same speed, so C is wrong.

D - That leaves us with D, (which is a great way of completing multiple choice questions, discount the wrong answers…) but why? Well, in order to know that, we must know what capital investment is. Capital Goods are man-made goods, used to produce other goods and services, so capital investment is spending on these goods. Whilst many students are terrible at remembering the definition of capital, they can pretty much all come up with examples, Machinery for example… So would a piece of machinery enable you to complete sums faster? Yes, if it was a calculator or a computer…

Question 6:


So this question is giving us some examples of market failure and asking us why it is a market failure and which is the best way to deal with it.

A - Factor immobility (such as unemployed workers not moving to where the jobs are, maybe from the North of England to the South East) does cause an inefficient allocation of resources, but taxing products is in no way going to help solve that.

B - Public goods are not provided in a free market economy and so, for example the police force, they are provided by the government, so this is the correct answer.

C - Demerit goods are over-consumed, but putting into place a maximum price would either mean excess demand, if it is below equilibrium, or have no effect at all if it is above equilibrium. Sometimes minimum prices can be used for demerit goods, so this is being used by the examiner to catch people out.

D - Merit Goods are under-provided, but putting into place a minimum price would either mean excess supply above equilibrium, meaning

less people would consume this good, or have no effect if it is set below equilibrium, so

neither would solve the problem.

Question 7:


Scarcity means that there are less resources than there are goods and services wanted by the population.

A - Free goods are those goods without an opportunity cost, such as sunlight or wind. These do exist, (although less sunlight and more wind in England….) so this answer must be wrong.

B - Public Goods are those that have the characteristics of being both non-rivalrous and non-excludable, such as the Police Force or the Army. Again, these do exist, so this answer must be wrong.

C - As there are less resources than we all want, we have to choose what to buy, we can’t simply have everything we want. This is the correct answer.

D - Who knows? There probably has been, but that has not been caused by scarcity, it has been caused by the market mechanism or government failure.

Question 8:

This question is talking about both income and changes in demand, so will probably be something to do with YED, income elasticity of demand.

Foreign holidays have seen an increase as incomes have increased, whereas UK holidays have seen demand decrease as a result of the same increase in income.

To answer this question we need to understand the difference between normal and inferior goods:

Normal Goods - Goods which see demand increase when income levels rise

Inferior Goods - Goods that see demand fall when income levels rise

A - Looks good, incomes have gone up, demand for UK holidays has gone down (must mean they are inferior goods) and demand for foreign holidays has gone up (meaning they are normal goods)

B - We’d need to know how much the demand had gone up/down by and how much income had gone up by to work this out.


C - XED, Cross Price Elasticity deals with changes in PRICE, not changes in INCOME.

D - PED, Price elasticity of Demand deals with changes in PRICE, not changes in INCOME.Question 9:A question where two answers seem likely, we can quickly discount C (If it was non-rivalrous, we wouldn’t have waiting lists for council houses) and D (I’m fairly sure, as I sit in my house that I pay for each month, that there is a housing market, so it is clearly not ‘missing’).

I had to think about this one, but ultimately it came down to the fact that if you live in a council house, you don’t own it, so there is no increase in your wealth, as it is not an asset of yours, so B is wrong. A is right as some people don’t earn enough money to pay for their basic needs, in this

case, shelter, whereas some people own many houses. This is clearly an unsatisfactory allocation of resources.

Question 10:A simple case of understanding your definitions.

A - Composite Demand -Demand for a good that has multiple usesB - Derived Demand - a demand for a commodity, service, etc. which is a consequence of the demand for something else.C - Joint Demand - demand for two or more products (or services) are interdependent, normally because they are used together D - Complementary Demand - Demand for a product generated by the demand for a related but different product


Labour is a classic example of Derived Demand. Nobody wants a pilot, they want what a pilot provides, the skill of flying a plane. If there is more demand air travel, as a consequence, there will be more demand for pilots.An example of composite demand in this market would be flights to LA or flights to New York

An example of joint demand in this market would be flights and passportsAn example of complementary demand in this market would be flights and Duty Free sales

Question 11:Some basic understanding needed here that applies to ALL externality diagrams. The reason for the market failure is that consumers or firms only worry about what benefits they will receive and how much it will cost them. So, in a free market, we need to always initially look for the point where MPC = MPB, which is where the output will be with no intervention.The best option for society is always where the benefit to society is the same as the cost to society, where MSB = MSC, and this is where we need to be.In the diagram above, the free market would see consumption at H, but it needs to be at J, this is where the market failure is, so the answer must be D.It’s not A, as we’re not worried about the price, the market failure is because of the incorrect allocation of resources, society is losing out because not enough is being made.It’s not B as this is the opposite of the correct answer, we need more, not less.It’s not C as the output would be too low in a free market, not too high.


Question 12:There are three basic principles we need to understand in order to answer this question correctly:

1) The size of any tax imposed by the government can be measured as the vertical distance between the two supply curves

2) How much of the tax the consumer pays is shown by how much the price goes up by, the rest is paid by the producer. Eg, if the tax is £50 and the price goes up by £20, the consumer pays £20 and the producer must pay £30

3) Revenue is calculated by P x Q. Eg, what is the tax on each unit and how many units have been sold?

So we can see here that the tax imposed on cigarettes is £4 (the vertical distance between the two supply curves), of which £3 has been passed onto the consumer to pay (the increase in price) which means that the producer must be paying £1. However, all we have calculated is for one packet of cigarettes and actually 50 packets have been sold at the new equilibrium (after the tax has been applied), so we need to multiply these figures by 50 in order to get the correct answer.


The total tax paid is £4 x 50 = £200 This discounts DThe consumers are paying £3 x 50 = £150 and the producers are paying £1 x 50 = £50.Therefore the answer is A, but again the examiners encourage candidates to get it wrong by giving

the same numbers for two answers, but if you know that the price rise is how much the consumers pay, it is clear that they are paying more than the producer.

Question 13:Before the existence of money, we had to swap possessions or labour for new goods and services. This discounts A. As money makes trade easier, B is the correct answer, life would be a lot harder if money did not exist and because it does, it’s easier to buy products.C is wrong, somethings go in and out of fashion and so their price relative to other items fluctuatesD - The opposite of this is true. As we have money, we don’t need to do everything ourselves, we can pay other people to do it, so specialisation becomes easier once money exists.


Question 14:This table shows us the price of a variety of fruits over two years.

A - If demand for a good is very responsive to changes in price (price elastic) and the price goes down, suppliers will sell a huge amount more of this good, so their revenues will increase, so A is wrong.

B - Why would producers grow more of something if they’ll receive less for it? They won’t. The price of apples has gone down, apple growers will switch their FoP to something else, so B is incorrect

C - We have no idea about this. We can work out the % change in price, but we know nothing about the quantity consumed, so C must be wrong.

D - If consumers are not responsive to changes in price (price inelastic) then when the price falls, they won’t really care, so won’t buy many more. As a result the money going to the producers will decrease. (If I buy 50 items at £1 or 40 at 10p, the producer won’t want the price to fall as they’ll receive £4 instead of £50.


Question 15:

A simple case of learning definitions here.

Technical EoS - Getting more output (products) from inputs (Factors of Production)Marketing EoS - Lower average cost (AC) of advertising when the firm becomes biggerPurchasing Eos - Lower AC from buying in bulkFinancial EoS - Lower AC when borrowing money if you are a big firm

Given the explanation, the answer must be A.

Question 16:A - Diseconomies of Scale are as a firm gets larger it’s AC rises. Therefore large firms are far more likely to suffer from these than small firms. Diseconomies of scale make firms less efficient, so A must be wrong.

B - Free riders cause an under-production of public goods. If a good is non-excludable, once it is provided it is not possible to stop people from benefitting, there is no incentive to pay, so people ‘free ride’, i.e. get away with not paying, so there is no incentive for producers to provide it.

C - If I have a ‘flu vaccine, you may not get the ‘flu, and nor will I. Because of my consumption of a good, society has benefitted, as well as me. Therefore the benefits to society (social benefits) are bigger than just my benefit (private benefits) and in a free market this good would be under-provided, so a market failure would arise. This is the correct answer.

D - Markets do provide merit goods, such as education, but not as much as society needs to fully benefit, so state education exists.


Question 17:

If you were the only provider of a product (a monopoly) which a lot of people wanted, what would you do? If you wanted to maximise your profit, you’d put it for sale at a high price. If other suppliers entered the market, you would not be able to charge such a high price, as consumers would go to them. If prices are charged that are higher than they should be, this is a misallocation of resources.

A - The opposite is true, this must be wrong.

B - Yes, seems correct. If other firms entered the market (competitive conditions) you’d charge a lower price

C - Less firms (a monopoly) = less supply/output

D - Economies of Scale are a benefit of monopoly. If AC is low it may cause prices to be lower…

Question 18:


As the cost curves are separate here, this is an externality in production, and, because the cost to society is LOWER than the cost to the individual firm, it must be a positive externality. This means that, in a free market, MPC = MPB, less is produced than is beneficial to society, MSC = MSB. This means the government need to intervene to encourage the makers of this product to make more of it. Taxes discourage, so we can discount B and D.

The key to this is again to remember that we need to be where MSC = MSB, THAT is the point we

need to concentrate on, so the subsidy needs to be the vertical distance between the two curves at that point, FH, so the answer is A.

Question 19:

The PED being -0.5 tells us that, whilst consumers will respond to changes in price, they are not very responsive to that change. So, a large increase in price will mean that they will consume less, but not much less.

If we think about the equation for PED it is:

% change in Quantity Demanded / % change in Price = PED

% change in Quantity Demanded / 10 = 0.5

% change in Quantity Demanded = 5

So, a 10% increase in price leads to a 5% decrease in demand

If I use an example here, using the same numbers:

Before the price rise, 100 people paid £10. Total revenue for the firm = £1000

After the price rise 95 people (a 5% decrease) paid £11 (a 10% increase) = £1045

Therefore the price rise led to an increase in revenue of 4.5%, less than 10%, so the answer is B.

Question 20:


Another case of knowing definitions:

A - As price goes up, demand goes up? Nonsense

B - Does it? Not necessarily

C - Goods with negative XED are complimentary goods

D - As incomes go up, demand goes down? That’s the definition of an inferior good


Question 21:Another common student trap. Index numbers. They cause great confusion, but just think of them as percentage changes.

A - If you look carefully at the data, whilst the start to the end clearly shows an increase, there was a decrease between 2010 and 2011, so this is wrong.

B - Calculating percentages is done by dividing the change by the original and multiplying by 100. In 2008 the change from 2012 was -25, the original was 125, so the equation is:

-25/125 x 100 = 20%

This leads us to the fact that clothing was 20% cheaper in 2008 than in 2012, so this is the right answer.

C - We know what happened to the price, but nothing about the quantity sold. To work out revenue we multiply price x quantity, but we don’t know quantity, so we can’t work it out. C must be wrong

D - Using the same equation as in B, the change = -10, the original was 120, so the equation is:

-10/120 x 100 = -8.33, so D is not correct


Question 22:

There are two types of immobility, geographical immobility- refers to barriers people moving from one area to another to find work and occupational immobility which means that a factor of production can not change its use, for example a piece of land not having planning permission to be changed from farmland to housing.

Here, workers not wanting to switch from being coal miners to being stockbrokers is an example of occupational immobility, so A is the correct answer.

Question 23:

Market failure is where, left to the free market system, there is an allocation of resources which does not provide the maximum possible benefit to society.

A - This shows that if there is high demand for a scarce resource, the price is driven up. This is how the price mechanism works, but is not necessarily a market failure.

B - Looks good. Consumers only care about their private benefits, they don’t care that society also benefits, so they don’t worry about that. This means resources are not allocated in the best possible way to maximise welfare and a market failure is created.

C - That’s the way of the world, it’s not a market failure. If they are not producing a good that is wanted, they should go out of business.

D - Diseconomies of scale are not a market failure, they are just an economic concept


Question 24:

A bit of a twist here, they are using a supply and demand diagram to show a market failure, but their job is to test your understanding, so that’s what they’re doing, even if it is a bit sneaky…

The key is to understand that they want to reduce production and consumption.

A - A price ceiling would mean producers couldn’t charge above P3. They don’t want to anyway, they are happy charging the lower, market clearing price, of P1. This price ceiling would have no effect.

B - A tax is the vertical distance between the two supply curves… This would mean supply would shift upwards to P3. This looks like a good idea as then the quantity produced/consumed would reduce to Q2…

C - A mimimum price below equilibrium would mean that firms couldn’t charge less than P2. They don’t need to, they can charge P1, a much higher price. Clearly wrong.

D - If we shift the supply curve up to P1, the point at which it will cross demand would mean an equilibrium output of more than Q2, so this wouldn’t be a strong enough action to achieve the goal, so is wrong.


Question 25: A negative question. If you don’t read it carefully you might decide the correct answer is A, but A is a reason why it would succeed, not why it would fail. As are B and D, so therefore the answer is C as this is a common reason why these schemes fail, as if they are allowed to produce more than they were anyway, where is the incentive to reduce production?


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