9708A. 2 February

1. A small European airline currently produces at point X on its long-run average cost curve. It
wants a bigger share of the European airline market and proposes to merge with another small
European airline. The newly merged firm would produce at point Y on the long-run average cost
curve, as shown.

Why might the newly merged firm be able to produce at point Y?
A The new airline can negotiate discounts when buying fuel.
B The new airline has many layers of management.
C The new airline is unable to hire enough pilots.
D The workforce of the new airline lacks morale and is demotivated.

2. A firm sells its product to consumers in two separate markets, M and N.
Under which conditions will a policy of price discrimination between the two markets be most
profitable for the firm?

3. A community relies on a private company to supply electricity using a coal-fired power station.
The power station causes air pollution which imposes an external cost shown in the diagram.

The government decides to impose a tax on the electricity company to correct market failure.
What represents the tax?

4. Some workers in a low-paid job decide to work longer hours to increase their disposable income.
However, this decision reduces state-provided benefits, leaving them no better off.
What does this describe?
A debt trap
B liquidity trap
C poverty trap
D unemployment trap

5. Which policy is likely to be the least effective means of producing a more equal distribution of
income amongst households?
A the imposition of minimum wage levels below the levels produced by the market
B the introduction of progressive personal income taxes
C the payment of child benefits to low income households
D the removal of sales taxes on food consumed by lower income households


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