AQA A-level Economics: Merit and demerit goods and market imperfections (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), parts Merit and demerit goods and Market imperfections of The market mechanism, market failure and government intervention in markets (3.1.8 on the AQA website, 4.1.8 in the combined PDF). Prepare with the study guide and revision notes. The course hub is AQA A-level Economics and the printable checklist tracks progress. All countries, firms and figures are invented.

Questions

1. Explain what is meant by a merit good and why its classification depends on a value judgement. [4]

2. In Country C, adult evening courses are supplied by private colleges. Q is in thousands of places and values are in currency units (cu). Marginal private benefit is P = 54 − 3Q, marginal social benefit is 66 − 3Q and marginal cost is 6 + Q.

(a) Find market output and price. [2] (b) Find the optimum output and the marginal cost there. [2] (c) Calculate the welfare gain from moving to the optimum. [3]

3. A householder keeps a well-kept front garden that neighbours enjoy. Explain why this product creates a positive externality in consumption but is not normally called a merit good. [4]

4. In Country D, online betting has marginal private benefit P = 70 − 5Q, marginal social benefit 58 − 5Q and marginal cost 10 + Q (Q in thousands of bets).

(a) Find the output and price the market produces. [2] (b) Find the output that maximises social welfare. [1] (c) Calculate the deadweight loss. [3]

5. Explain how imperfect information can lead to over-provision of a demerit good such as an energy drink. [5]

6. In a market for pre-owned bicycles in Country E, 80 of 200 are good and 120 are poor. Buyers value a good one at 500 and a poor one at 250. Sellers of good ones will accept at least 420; sellers of poor ones at least 200. Buyers cannot tell them apart.

(a) Calculate a buyer’s expected value of a bicycle. [2] (b) Explain what happens to the market. [2] (c) Calculate the gains from trade lost. [2]

7. A single firm in Country A faces demand P = 84 − 3Q with constant marginal cost 24 and no fixed cost (Q in thousands).

(a) Find the output and price if the market were competitive. [2] (b) Find the profit-maximising output and price of the monopolist. [3] (c) Calculate its supernormal profit. [1] (d) Calculate the deadweight loss. [2]

8. Suppose instead that, in the market in question 7, a fragmented industry of small firms would have constant marginal cost 60, whereas the single large firm has marginal cost 24. Assess whether monopoly is the worse outcome. [5]

9. Explain how the immobility of factors of production can cause market failure. [4]

10. In Region P of Country G a factory closes and 450 workers become unemployed. Average annual output per worker is 28,000 cu. Region Q has 300 vacancies needing different skills. A scheme retrains 120 of the workers at 6,500 cu each.

(a) Calculate the annual output lost while all 450 are idle. [2] (b) Calculate how many months it takes the extra output of the retrained workers to cover the scheme’s cost. [3] (c) Calculate the vacancies still unfilled. [1]

11. A government classifies online betting as a demerit good. Evaluate whether this classification is justified. [9]

Answers

1. A merit good is one judged to be good for consumers [1], which would be under-consumed in a free market because consumers underestimate its benefit or because it creates external benefits [1]. Whether it is good for people is an opinion about what is better, not a measurable fact [1]. People and governments disagree about this, and views change over time [1]. [4] Examiner insight: A definition on its own is usually not enough here; the second half of the question asks for the reason a judgement is involved, so say who is judging and what they are judging.

2. (a) 54 − 3Q = 6 + Q gives 4Q = 48, so Q = 12 [1] and P = 6 + 12 = 18 [1]. [2] (b) 66 − 3Q = 6 + Q gives 4Q = 60, so Q = 15 [1] and marginal cost is 21 [1]. [2] (c) At Q = 12, MSB = 66 − 36 = 30 and MC = 18, a gap of 12 [1]. Gain = ½ × (15 − 12) × 12 [1] = 18 thousand cu [1]. [3] Examiner insight: Showing each equation you set equal makes it clear which curves you used; a correct triangle height can only be found if both curves are evaluated at the market quantity.

3. Neighbours gain benefit without paying, so there is an external benefit in consumption [1]. A merit good requires a judgement that consumers themselves would be better off consuming more [1]. The householder knows the garden’s value and benefits from it directly, and nobody argues that they under-consume it for their own good [1]. Vaccination differs: it creates an external benefit and people are thought to undervalue it, so it is both [1]. [4] Examiner insight: A clear contrast with a genuine merit good helps to show you understand the specification’s point that an externality alone does not make a product a merit good.

4. (a) 70 − 5Q = 10 + Q gives 6Q = 60, so Q = 10 [1] and P = 20 [1]. [2] (b) 58 − 5Q = 10 + Q gives 6Q = 48, so Q = 8 [1]. [1] (c) At Q = 10, MC = 20 and MSB = 8, a gap of 12 [1]. Loss = ½ × (10 − 8) × 12 [1] = 12 thousand cu [1]. [3] Examiner insight: For a demerit good the triangle lies between the optimum and market output; if your answer is negative or larger than the whole surplus, check you subtracted in the right order.

5. Consumers may underestimate the long-term harm of the drink, perhaps because the effects are delayed or advertising plays them down [1]. Their perceived private benefit is therefore higher than the true private benefit [1]. Demand is higher than it would be with full information [1]. The market produces where perceived marginal private benefit equals marginal cost, which is more than the output where marginal social benefit equals marginal social cost [1]. Resources are over-allocated to the product and there is a welfare loss [1]. [5] Examiner insight: Strong answers name the curve that is wrong (perceived demand) and the consequence for output, rather than only saying that consumers are not well informed.

6. (a) 0.4 × 500 = 200 [1] and 0.6 × 250 = 150, so the expected value is 350 [1]. [2] (b) 350 is below 420, so sellers of good bicycles withdraw [1]. Only poor bicycles are traded, since buyers’ value of 250 exceeds the 200 reserve [1]. [2] (c) 80 × (500 − 420) [1] = 6,400 [1]. [2] Examiner insight: Explain the market’s response in the sequence the information creates; a bare statement that the market fails earns less than showing that good sellers leave.

7. (a) 84 − 3Q = 24 gives Q = 20 [1] and P = 24 [1]. [2] (b) MR = 84 − 6Q [1]. 84 − 6Q = 24 gives Q = 10 [1]. P = 84 − 30 = 54 [1]. [3] (c) (54 − 24) × 10 = 300 [1]. [1] (d) ½ × (20 − 10) × (54 − 24) [1] = 150 [1]. [2] Examiner insight: A common slip is to set MR equal to MC but then read price from the MR curve; take the quantity up to the demand curve.

8. Fragmented competition gives 84 − 3Q = 60, so Q = 8 at P = 60 [1] [1]. The monopoly gives Q = 10 at P = 54 [1]. Consumers pay less and receive more under the monopoly, so the failure is smaller than in a simple comparison [1]. The conclusion depends on the cost saving being real and lasting, and on entry being a threat; a protected monopolist would not necessarily stay at 54, and the advantage disappears if rivals’ cost were below 54 [1]. [5] Examiner insight: A judgement that states the condition under which it holds (the cost difference and the lack of entry threat) is usually more convincing than a general statement that monopolies are good or bad.

9. Occupational immobility means workers’ skills do not transfer easily to expanding sectors [1]. Geographical immobility means housing costs, family ties or information costs prevent moving to where jobs are [1]. As a result unemployment persists in some areas or occupations while vacancies remain unfilled elsewhere [1]. Prices (wages) signal where factors are needed but resources do not respond, so output is lost and resources are misallocated [1]. [4] Examiner insight: Give four distinct ideas; repeating the two types in different words does not add the consequence.

10. (a) 450 × 28,000 [1] = 12,600,000 cu [1]. [2] (b) Cost = 120 × 6,500 = 780,000 [1]. Extra output = 120 × 28,000 = 3,360,000 a year [1]. 780,000 / 3,360,000 × 12 = about 2.8 months [1]. [3] (c) 300 − 120 = 180 [1]. [1] Examiner insight: Convert the payback to months at the end rather than rounding earlier, and include units, because a bare number can be read as years or months.

11. A demerit good is judged harmful and over-consumed [1]. Betting may impose costs on families, a negative externality in consumption [1]. Gamblers may underestimate their losses or the risk of addiction, an information problem [1]. On a diagram, marginal social benefit lies below marginal private benefit, so market output exceeds the optimum and there is a deadweight loss [1]. Yet the classification is a value judgement, and others value individual freedom [1]. Many adults bet with full knowledge for enjoyment, so some of the output may be efficient [1]. The size of the harm is uncertain and differs between people [1]. Better information might correct the problem without restricting the good [1]. Judgement: the label is justified where there is evidence of external cost or systematic misjudgement, but the extent of harm should decide the response, not the label itself [1]. [9] Examiner insight: Evaluation scores better when it ends in a reasoned judgement about the case given, rather than listing arguments for and against.

Where marks are usually lost

• Treating every externality good as a merit or demerit good.
• Giving a classification as fact, with no mention of a value judgement.
• Reading price from the marginal revenue curve instead of the demand curve.
• Using price instead of marginal cost for the height of a monopoly deadweight loss.
• Calculating the welfare triangle from the wrong output levels.
• Explaining information failure without naming what quantity is misallocated.
• Treating immobility as a labour-only issue with no stated consequence.
• Evaluating with a list, without a final judgement and a reason for it.

Next steps

• Review the revision notes and study guide.
• Tick off progress on the printable checklist and see the AQA A-level Economics hub.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, for first teaching from September 2015, published by AQA. Parts used: Merit and demerit goods and Market imperfections.