OxfordAQA International AS and A-level Economics: Merit goods, imperfections, equity – 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 are matched to OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.1.5.4 to 3.1.5.6 (merit and demerit goods, market imperfections, inequitable distribution of income and wealth), which is International AS content. Every scenario and figure is invented. Start with the study guide, keeping the revision notes to hand. Hub: OxfordAQA A-level Economics. Checklist: printable checklist. Try the free diagnostics too.

Questions

1. Explain why classifying a good as a merit good involves a value judgement. [3]

2. In Town C (illustrative), eye-test clinics have market demand Qd = 150 − 3P and supply Qs = 30 + 3P. Price is in dollars and quantity in tests per week. If people knew the full benefit, demand would be Qd* = 210 − 3P.

(a) Find the equilibrium price and quantity in the unaided market. [2] (b) Find the output that would be desirable and the price at that output. [2] (c) Calculate the net benefit lost because of the market outcome. [2]

3. Drivers in a city cause congestion, a negative externality in consumption. Explain why this does not by itself make car use a demerit good. [4]

4. A second-hand e-bike is worth 1,500 to a buyer if it is sound and 500 if it is faulty. Of the e-bikes offered, 30% are sound. Buyers cannot tell them apart. Owners of sound e-bikes will accept no less than 1,100.

(a) Work out the most a buyer will pay for an e-bike picked blindly. [2] (b) Explain what happens in this market and why it is a market failure. [3]

5. A sole supplier of airport shuttle trips faces demand P = 120 − 2Q, with constant marginal cost of 20 (illustrative units).

(a) Find the output and price in a competitive market. [2] (b) Find the profit-maximising output and price for the monopolist. [3] (c) Calculate the monopolist’s profit and the deadweight loss. [2] (d) Explain why the monopoly outcome is a market failure. [2]

6. A town’s only factory closes. Its workers have skills specific to that plant, while another region has vacancies in care work. Explain how this illustrates market failure. [4]

7. Demand for a crop has a price elasticity of −0.5.

(a) A poor harvest cuts supply by 12%. Estimate the percentage change in price. [2] (b) Calculate the change in growers’ total revenue. [2] (c) In the next year supply rises by 12%. Calculate the revenue change. [2] (d) Explain why price instability is a market failure. [2]

8. A household in Country E (illustrative) receives 34,000 a year. It owns a house worth 210,000 with a mortgage of 120,000, savings of 9,000 and a car worth 7,000, and owes 6,000 on a loan.

(a) Calculate the household’s net wealth. [2] (b) Explain the difference between its income and its wealth. [2]

9. In Country A (illustrative) the shares of income received by each fifth of households, from poorest to richest, are 4%, 8%, 13%, 20% and 55%.

(a) Express the richest fifth’s share as a multiple of the poorest fifth’s. [2] (b) Calculate the combined share of the poorest 40% and of the richest 40%. [2] (c) Explain what these figures cannot tell you about equity. [1]

10. Distinguish between equality and equity, using an example. [4]

11. Evaluate whether a very unequal distribution of income and wealth means the market has failed. [8]

Answers

1. A merit good is one that society judges people should consume more of than they do [1]. Different people and governments hold different views about what is good for people, even when they agree on the facts [1]. There is no objective test, so the classification rests on opinion and can change over time [1]. [3] Examiner insight: Strong answers name the judgement (“people undervalue it”) and do not just say the good is “good for you”.

2. (a) 150 − 3P = 30 + 3P, so 6P = 120 [1]. P = 20 and Q = 90 [1]. (b) 210 − 3P = 30 + 3P, so P = 30 [1] and Q = 120 [1]. (c) At Q = 90 the full-benefit price is (210 − 90)/3 = 40 and the supply price is (90 − 30)/3 = 20, a gap of 20 [1]. Net benefit lost = ½ × 20 × (120 − 90) = 300 [1]. [6] Examiner insight: Show the price gap at the market quantity before the triangle, because the area needs both the height and the quantity difference.

3. Congestion imposes costs on other road users, so it is a negative externality in consumption [1]. A demerit good needs a judgement that consumers overconsume because they misjudge the harm to themselves [1]. Informed drivers understand their own costs, so they are not misjudging their own benefit [1]. The problem is the cost to third parties, so not every good with a consumption externality is a demerit good [1]. [4] Examiner insight: This tests the specification’s point that not all consumption externalities create merit or demerit goods, so state the extra test explicitly.

4. (a) 0.3 × 1,500 = 450 [1]. 0.7 × 500 = 350, so the maximum price is 450 + 350 = 800 [1]. (b) Owners of sound e-bikes want at least 1,100, above 800, so they withdraw [1]. Only faulty e-bikes are left, so buyers expect 500 and the price falls to about that [1]. Sales of sound e-bikes that would benefit both sides never happen, so resources are misallocated because of asymmetric information [1]. [5] Examiner insight: Say who knows more (the seller) and follow the chain through to the missing trades.

5. (a) P = MC: 120 − 2Q = 20, so Q = 50 [1] and P = 20 [1]. (b) MR = 120 − 4Q [1]. Set MR = MC: 120 − 4Q = 20, so Q = 25 [1]. P = 120 − 2 × 25 = 70 [1]. (c) Profit = 25 × (70 − 20) = 1,250 [1]. Deadweight loss = ½ × (70 − 20) × (50 − 25) = 625 [1]. (d) Output (25) is below the competitive level (50) [1]. Price exceeds marginal cost, so some units that are worth more than their cost go unmade, a misallocation [1]. [9] Examiner insight: The marginal revenue curve has twice the slope of demand; using the demand curve as MR is a slip to avoid.

6. The workers’ skills are specific to the plant and do not transfer to care work, which is occupational immobility [1]. They remain unemployed while the vacancies remain unfilled [1]. Output and incomes are lost [1]. Labour is not allocated to where it is valued, so the market misallocates resources [1]. [4] Examiner insight: Use the scenario (plant skills, care vacancies) rather than a general definition of immobility.

7. (a) Price change ≈ quantity change ÷ elasticity [1] = 12 ÷ 0.5 = +24% [1]. (b) Revenue index = 1.24 × 0.88 = 1.0912 [1], so revenue rises about 9.1% [1]. (c) Price falls about 24% [1]. Revenue index = 0.76 × 1.12 = 0.8512, a fall of about 14.9% [1]. (d) Revenue swings from +9.1% to −14.9%, so growers’ incomes are unstable [1]. This uncertainty discourages investment and planning, so resources are misallocated [1]. [8] Examiner insight: Say that the percentage price estimate is a rough guide; it is not an exact result.

8. (a) Assets = 210,000 + 9,000 + 7,000 = 226,000 [1]. Debts = 120,000 + 6,000 = 126,000, so net wealth = 100,000 [1]. (b) Income is a flow of receipts over a period, here 34,000 a year [1]. Wealth is what the household owns net of what it owes at one moment, here 100,000 [1]. [4] Examiner insight: “Flow” and “stock” earn the distinction; give the figures to show you apply it.

9. (a) 55 ÷ 4 [1] = 13.75 times [1]. (b) Poorest 40% = 4 + 8 = 12% [1]. Richest 40% = 20 + 55 = 75% [1]. (c) They measure the degree of inequality but cannot show whether it is fair, because equity is a value judgement [1]. [5] Examiner insight: Interpret the number in a sentence; a bare ratio gives you little to build on.

10. Equality means everyone has the same amount [1]. Equity means fairness or justice, which involves a value judgement [1]. Example: equal pay for a nurse who works long hours and a person who works few hours is equal but many would say unfair [1]. So an equal outcome is not automatically equitable, and an unequal one is not automatically inequitable [1]. [4] Examiner insight: A distinction needs both terms defined and one example; a definition of only one term is incomplete.

11. Consumption depends on income and wealth rather than need [1]. Low-income households may be unable to afford education or healthcare even where the benefit exceeds the cost [1]. Resources then go to goods that richer households can pay for, which is a misallocation [1]. Economic welfare is affected by the distribution [1]. Against: an unequal distribution is not necessarily inequitable, because fairness is a value judgement and some inequality rewards skill and effort [1]. Redistribution may weaken incentives, though extreme inequality can waste talent [1]. The market failure is strongest where low income blocks access to essentials [1]. Judgement: the case rests on the value judgement about fairness and on how unequal the distribution is [1]. [8] Examiner insight: Weigh the two sides and reach a verdict that refers back to the question; a list of points on one side does not evaluate.

Where marks are usually lost

• Stating that a good is a merit good without saying consumers undervalue it.
• Treating every consumption externality as making a good a merit or demerit good.
• Using the demand curve as the marginal revenue curve in monopoly calculations.
• Giving the formula but not the units or the direction of the change.
• Treating the percentage price estimate from elasticity as exact.
• Writing “equal” where the answer needs “equitable”.
• Describing a policy fix when the question asks why the market fails.
• Finishing an evaluation by repeating points without reaching a verdict.

Next steps

• Re-read the revision notes and the study guide.
• Tick off outcomes on the printable checklist and visit the course hub.
• Take the free 10-minute diagnostics.
• Book a free trial class on the trial page.

Official syllabus

Source: the OxfordAQA International AS and A-level Economics specification (9640), version 1.2, from Oxford International AQA Examinations. Covered here: 3.1.5.4, 3.1.5.5, 3.1.5.6.