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Question 1 Report
A manufacturer of specialised harvesting machines has developed a patented cutting system. Smaller engineering firms can make ordinary machinery but cannot legally copy this system.
(a) State the barrier to entry created by the patent. [1]
(a) The patent creates a legal barrier to entry, or patent protection. [1]
The law prevents rival firms from copying the patented cutting system. This restricts entry into the market for that specialised technology.
(a) The patent creates a legal barrier to entry, or patent protection. [1]
The law prevents rival firms from copying the patented cutting system. This restricts entry into the market for that specialised technology.
Question 2 Report
Read the information below about a city bus service. The local government pays a subsidy because some routes are used mainly by older residents and students, although the routes make a loss.
(a) State one possible reason why the government may allocate funds to these bus routes. [2]
(a) The government may subsidise the loss-making routes to give people without cars access to work, education or healthcare. This can improve equality and social welfare.
Alternatively, funding bus routes may reduce traffic congestion or pollution. These are external benefits because other people, not only bus passengers, can benefit. Either explained chain gains full credit. [2]
(a) The government may subsidise the loss-making routes to give people without cars access to work, education or healthcare. This can improve equality and social welfare.
Alternatively, funding bus routes may reduce traffic congestion or pollution. These are external benefits because other people, not only bus passengers, can benefit. Either explained chain gains full credit. [2]
Question 3 Report
A bakery separates production into tasks. One group measures ingredients, another operates ovens, and a third packs bread. The owner expects this division of labour to lower costs.
(a) State what is meant by division of labour. [1]
(b) Explain one way division of labour may increase the bakery's output. [2]
For example, a worker who only packs bread does not repeatedly switch between measuring, baking and packing, which saves time.
For example, a worker who only packs bread does not repeatedly switch between measuring, baking and packing, which saves time.
Question 4 Report
Fig. 1 shows demand and supply for rented student rooms in a university district. A new campus building opens nearby, increasing the number of students looking for rooms. Landlords cannot build new rooms during the academic year.
(a) Which demand curve represents the situation after the campus opens? [1]
(b) State why the supply curve is relatively inelastic in this period. [1]
(c) Analyse the likely effects on rent and the number of rooms rented. [2]
(d) Explain one possible benefit to landlords from this change. [2]
(a) The situation after the campus opens is represented by the demand curve labelled D2. More students seek rooms at each rent. [1]
(b) Supply is relatively inelastic because new rooms cannot be built quickly during the academic year. The existing stock of rooms is largely fixed in the short run. [1]
(c) Rent rises because demand increases while supply is fixed or highly inelastic. The number of rooms rented rises little, or remains close to the number of rooms available, because landlords cannot quickly create many additional rooms. [2]
(d) Landlords can charge a higher rent. This raises rental revenue and may raise profit, provided that their costs do not increase by more than the extra revenue. [2]
(a) The situation after the campus opens is represented by the demand curve labelled D2. More students seek rooms at each rent. [1]
(b) Supply is relatively inelastic because new rooms cannot be built quickly during the academic year. The existing stock of rooms is largely fixed in the short run. [1]
(c) Rent rises because demand increases while supply is fixed or highly inelastic. The number of rooms rented rises little, or remains close to the number of rooms available, because landlords cannot quickly create many additional rooms. [2]
(d) Landlords can charge a higher rent. This raises rental revenue and may raise profit, provided that their costs do not increase by more than the extra revenue. [2]
Question 5 Report
A central bank raises its policy interest rate after household borrowing and spending have increased quickly. A small furniture firm has a variable-rate loan and plans to buy new machinery.
(a) State what is likely to happen to the firm's monthly interest payments. [1]
(b) Explain why higher interest rates may reduce inflationary pressure. [2]
(a) The firm's monthly interest payments increase. A variable-rate loan has an interest rate that can rise when the central bank raises its policy rate. [1]
(b) Higher interest rates make borrowing more expensive and make saving more attractive. Households and firms therefore tend to spend less. Lower aggregate demand reduces firms' ability to raise prices, reducing demand-pull inflationary pressure. [2]
(a) The firm's monthly interest payments increase. A variable-rate loan has an interest rate that can rise when the central bank raises its policy rate. [1]
(b) Higher interest rates make borrowing more expensive and make saving more attractive. Households and firms therefore tend to spend less. Lower aggregate demand reduces firms' ability to raise prices, reducing demand-pull inflationary pressure. [2]
Question 6 Report
A technology firm launches a new mobile game. A famous streamer begins recommending it to global consumers, while the price of downloading the game stays the same. The firm can expand its server capacity only after several weeks.
(a) State the factor that is likely to change demand. [1]
(b) Explain why demand for the game is likely to rise. [2]
(c) Analyse one reason why the market price may increase in the short run. [2]
(a) A valid demand factor is celebrity endorsement, advertising, or a change in fashion and tastes. The streamer's recommendation can influence consumers independently of the download price. [1]
(b) The recommendation makes the game better known or more desirable to consumers. As a result, more consumers are willing to buy it at every possible price, so demand rises. [2]
(c) The firm cannot expand server capacity quickly, so supply is constrained in the short run. Increased demand then creates excess demand at the old price, allowing the firm to raise the market price. [2]
(a) A valid demand factor is celebrity endorsement, advertising, or a change in fashion and tastes. The streamer's recommendation can influence consumers independently of the download price. [1]
(b) The recommendation makes the game better known or more desirable to consumers. As a result, more consumers are willing to buy it at every possible price, so demand rises. [2]
(c) The firm cannot expand server capacity quickly, so supply is constrained in the short run. Increased demand then creates excess demand at the old price, allowing the firm to raise the market price. [2]
Question 7 Report
Fig. 1 shows the total revenue and total cost curves for a firm selling refill containers. The market price remains at $6 per container.
(a) Calculate the firm's total revenue at an output of 600 containers. [2]
(b) Use Fig. 1 to identify the output at which the firm breaks even and explain your choice. [3]
(c) Calculate profit when output is 800 containers. [4]
(d) Assess whether the firm should increase output from 600 to 800 containers. [6]
(a) Total revenue is price multiplied by quantity sold. At a constant price of $6 and output of 600 containers:
\[TR=600\times\$6=\$3600\]
Total revenue is $3600 [2].
(b) Break-even occurs where total revenue equals total cost, so profit is zero. The two curves meet at 200 containers [1]. At that output, TR equals TC [1], hence profit is zero [1].
(c) At 800 containers, Fig. 1 gives total revenue of $4800 and total cost of $4200:
\[\text{Profit}=TR-TC=\$4800-\$4200=\$600\]
The firm makes $600 profit [4].
(d) The decision depends on the objective. At 600 containers, total revenue is $3600 and total cost is $3000, so:
\[\text{Profit at 600}=\$3600-\$3000=\$600\]
At 800 containers, profit is also $600. Therefore, increasing output does not increase profit [2]. Over this range, revenue rises by $1200 and costs also rise by $1200, so the extra output adds no extra profit [1]. Producing more could also create capacity, coordination or quality pressures [1].
However, the firm might still raise output to serve more consumers or protect market share [1]. Overall, it should not increase output solely to increase profit, but it may do so if it has a non-profit objective such as maintaining market share [1]. A key examination habit is to compare profit at both outputs, rather than assuming that a higher output must mean higher profit.
(a) Total revenue is price multiplied by quantity sold. At a constant price of $6 and output of 600 containers:
\[TR=600\times\$6=\$3600\]
Total revenue is $3600 [2].
(b) Break-even occurs where total revenue equals total cost, so profit is zero. The two curves meet at 200 containers [1]. At that output, TR equals TC [1], hence profit is zero [1].
(c) At 800 containers, Fig. 1 gives total revenue of $4800 and total cost of $4200:
\[\text{Profit}=TR-TC=\$4800-\$4200=\$600\]
The firm makes $600 profit [4].
(d) The decision depends on the objective. At 600 containers, total revenue is $3600 and total cost is $3000, so:
\[\text{Profit at 600}=\$3600-\$3000=\$600\]
At 800 containers, profit is also $600. Therefore, increasing output does not increase profit [2]. Over this range, revenue rises by $1200 and costs also rise by $1200, so the extra output adds no extra profit [1]. Producing more could also create capacity, coordination or quality pressures [1].
However, the firm might still raise output to serve more consumers or protect market share [1]. Overall, it should not increase output solely to increase profit, but it may do so if it has a non-profit objective such as maintaining market share [1]. A key examination habit is to compare profit at both outputs, rather than assuming that a higher output must mean higher profit.
Question 8 Report
Which one of the following changes would be most likely to reduce the consumption of sugary energy drinks by teenagers: a subsidy to firms, an indirect tax, a fall in wages, or free advertising?
(a) State the policy from the list that the government should use. [1]
(b) Explain how this policy changes the price paid by consumers. [1]
(a) The appropriate policy is an indirect tax. [1]
(b) An indirect tax raises firms' costs of supplying sugary energy drinks. Firms are therefore likely to raise the market price paid by consumers, discouraging consumption. [1]
(a) The appropriate policy is an indirect tax. [1]
(b) An indirect tax raises firms' costs of supplying sugary energy drinks. Firms are therefore likely to raise the market price paid by consumers, discouraging consumption. [1]
Question 9 Report
A furniture producer is operating on its production possibility curve, making 400 chairs and 200 tables each month. Demand for tables rises. The firm can move workers and wood from chair production, or invest in additional machinery.
(a) What does operating on a production possibility curve show about the firm's use of resources? [2]
(b) Explain why increasing table output without investment is likely to have an opportunity cost. [2]
(c) Analyse how additional machinery could change the firm's production possibility curve. [3]
(d) Assess whether the firm should immediately invest in the machinery. [2]
A balanced judgement depends on whether the likely long-term extra revenue exceeds the cost and risk of the machinery.
A balanced judgement depends on whether the likely long-term extra revenue exceeds the cost and risk of the machinery.
Question 10 Report
At a farmers' market, several honey firms lower the price of jars after a large delivery arrives. A shopper notices that some consumers buy extra jars because the price is lower. No change has occurred in tastes, income or the price of substitutes.
(a) What is the name for the relationship between a lower price and a higher quantity demanded? [1]
(b) Explain why this is a movement along the demand curve. [2]
(a) The relationship in which a lower price leads to a higher quantity demanded is the law of demand. [1]
(b) The price of the same good, honey, has changed. Tastes, income and the prices of substitutes have not changed. Therefore quantity demanded changes along the existing demand curve rather than the whole demand curve shifting. [2]
Exam focus: a change in a good's own price causes movement along demand; a change in another determinant causes a demand shift.
(a) The relationship in which a lower price leads to a higher quantity demanded is the law of demand. [1]
(b) The price of the same good, honey, has changed. Tastes, income and the prices of substitutes have not changed. Therefore quantity demanded changes along the existing demand curve rather than the whole demand curve shifting. [2]
Exam focus: a change in a good's own price causes movement along demand; a change in another determinant causes a demand shift.
Question 11 Report
A small fishing harbour has open access to a bay. Each boat owner increases its catch when fish prices rise, but no firm owns the fish stock or limits the number of boats.
(a) Which economic problem may result from open access to the bay? [1]
(b) State one possible government response. [1]
(a) Open access may lead to overuse or depletion of a common resource, often called the tragedy of the commons. Individual boat owners have an incentive to catch more fish, but no owner has an incentive or power to conserve the whole fish stock. [1]
(b) The government could impose a fishing quota to limit catches. [1] A licence limit, closed season, or tax on catches would also be acceptable.
(a) Open access may lead to overuse or depletion of a common resource, often called the tragedy of the commons. Individual boat owners have an incentive to catch more fish, but no owner has an incentive or power to conserve the whole fish stock. [1]
(b) The government could impose a fishing quota to limit catches. [1] A licence limit, closed season, or tax on catches would also be acceptable.
Question 12 Report
The diagram shows aggregate demand, AD, and short-run aggregate supply, AS, in the economy of Mavora. The government cuts income tax, increasing consumer spending.
(a) Which curve shows planned total spending in the economy? [1]
(b) Explain how the tax cut may shift aggregate demand. [2]
(c) Analyse one possible consequence if aggregate demand rises while aggregate supply does not change. [2]
(a) Aggregate demand, AD, shows planned total spending on domestically produced goods and services in the economy. [1 mark]
(b) A cut in income tax raises households’ disposable income, which is income available after tax. Consumers may spend some of this extra income. Since consumption is a component of aggregate demand, aggregate demand shifts to the right. [2 marks]
(c) If aggregate demand rises but aggregate supply does not change, firms face greater demand for the existing level of output. They may respond by raising prices. This creates demand-pull inflation, which is inflation caused by demand rising faster than the economy’s available output. [2 marks]
(a) Aggregate demand, AD, shows planned total spending on domestically produced goods and services in the economy. [1 mark]
(b) A cut in income tax raises households’ disposable income, which is income available after tax. Consumers may spend some of this extra income. Since consumption is a component of aggregate demand, aggregate demand shifts to the right. [2 marks]
(c) If aggregate demand rises but aggregate supply does not change, firms face greater demand for the existing level of output. They may respond by raising prices. This creates demand-pull inflation, which is inflation caused by demand rising faster than the economy’s available output. [2 marks]
Question 13 Report
Table 1 shows the amount of water used each day by two departments in a textile firm. The firm has a fixed daily water supply of 1200 litres.
| Department | Water used per day, litres | Value of output per litre, $ |
|---|---|---|
| Dyeing | 700 | 8 |
| Finishing | 500 | 12 |
(a) Which department should receive extra water if the firm aims to maximise revenue? [1]
(b) Explain the reason for your answer. [1]
(a) The finishing department should receive extra water if the aim is to maximise revenue. [1]
(b) Each litre of water used in finishing produces output worth $12, compared with $8 per litre in dyeing. Allocating an additional scarce litre to finishing therefore generates the higher value of output. [1]
(a) The finishing department should receive extra water if the aim is to maximise revenue. [1]
(b) Each litre of water used in finishing produces output worth $12, compared with $8 per litre in dyeing. Allocating an additional scarce litre to finishing therefore generates the higher value of output. [1]
Question 14 Report
A local council has reviewed four services that households may buy: a measles immunisation, a streaming subscription, designer trainers and a restaurant meal. The council is deciding whether to reduce the price paid by consumers for one service because its consumption may create wider economic benefits.
(a) Which one of the four services is most likely to be a merit good? [1]
(b) State one benefit to people other than the consumer when demand for this service rises. [1]
(c) Explain why the market supply and demand outcome may result in too little of this good being consumed without government action. [2]
(d) Explain one way in which the council could increase consumption of the merit good. [2]
(a) A measles immunisation is most likely to be a merit good. Merit goods create benefits that consumers may undervalue and which can extend beyond the consumer. [1]
(b) One external benefit is a lower risk that other people will catch measles. This benefit is received by people other than the immunised consumer. Reduced pressure on hospitals or fewer workdays lost are also valid. [1]
(c) A consumer deciding whether to pay for immunisation may consider mainly their private benefit. They may not fully take account of the protection given to other people through lower infection risk. As a result, market demand and the quantity consumed are below the socially efficient level. [2]
(d) The council could subsidise or provide free immunisations. This lowers the price paid by consumers, making immunisation more affordable and increasing quantity demanded and consumed. Providing information about health benefits, or requiring immunisation for specified activities, could also increase consumption if explained. [2]
Exam focus: merit goods are under-consumed because private choices may ignore external benefits.
(a) A measles immunisation is most likely to be a merit good. Merit goods create benefits that consumers may undervalue and which can extend beyond the consumer. [1]
(b) One external benefit is a lower risk that other people will catch measles. This benefit is received by people other than the immunised consumer. Reduced pressure on hospitals or fewer workdays lost are also valid. [1]
(c) A consumer deciding whether to pay for immunisation may consider mainly their private benefit. They may not fully take account of the protection given to other people through lower infection risk. As a result, market demand and the quantity consumed are below the socially efficient level. [2]
(d) The council could subsidise or provide free immunisations. This lowers the price paid by consumers, making immunisation more affordable and increasing quantity demanded and consumed. Providing information about health benefits, or requiring immunisation for specified activities, could also increase consumption if explained. [2]
Exam focus: merit goods are under-consumed because private choices may ignore external benefits.
Question 15 Report
Which one of the following best describes a macroeconomic objective pursued by a government that wants stable prices, high employment and sustained growth?
(a) Which objective is concerned directly with a continuing increase in real GDP? [1]
(b) Explain why a government may wish to keep inflation low and stable. [2]
(a) The objective concerned directly with a continuing increase in real GDP is economic growth. [1 mark]
(b) Low, stable inflation makes future prices more predictable. This helps consumers plan spending and helps firms plan costs, prices and investment. It also protects the purchasing power of incomes and savings: when prices rise slowly, a given amount of money loses value less quickly. [2 marks]
(a) The objective concerned directly with a continuing increase in real GDP is economic growth. [1 mark]
(b) Low, stable inflation makes future prices more predictable. This helps consumers plan spending and helps firms plan costs, prices and investment. It also protects the purchasing power of incomes and savings: when prices rise slowly, a given amount of money loses value less quickly. [2 marks]
Question 16 Report
A coastal hotel pumps wastewater into the sea at night. The hotel avoids paying for treatment, while nearby shellfish farmers report lower output and higher cleaning costs.
(a) What is the external cost in this situation? [1]
(b) Explain why the hotel's profit may be higher when it does not treat the wastewater. [1]
(c) State one regulation that could make the hotel take account of the external cost. [1]
(d) Analyse one possible disadvantage of this regulation. [1]
(a) The external cost is the cost imposed by wastewater pollution on shellfish farmers, such as lower output and higher cleaning costs, and on the marine environment. [1]
(b) The hotel's profit may be higher because it avoids the private cost of treating its wastewater. [1]
(c) The government could impose a legal discharge limit. [1] Compulsory wastewater treatment or a pollution permit would also be acceptable.
(d) Monitoring compliance with a discharge limit may be costly. [1] Alternatively, firms may evade the rule, or compliance could raise hotel costs and prices.
(a) The external cost is the cost imposed by wastewater pollution on shellfish farmers, such as lower output and higher cleaning costs, and on the marine environment. [1]
(b) The hotel's profit may be higher because it avoids the private cost of treating its wastewater. [1]
(c) The government could impose a legal discharge limit. [1] Compulsory wastewater treatment or a pollution permit would also be acceptable.
(d) Monitoring compliance with a discharge limit may be costly. [1] Alternatively, firms may evade the rule, or compliance could raise hotel costs and prices.
Question 17 Report
Table 1 gives weekly information from a local market for second-hand guitars. The number supplied includes guitars offered by private sellers and music shops.
| Price per guitar ($) | Quantity demanded | Quantity supplied |
|---|---|---|
| 120 | 80 | 40 |
| 160 | 60 | 60 |
| 200 | 40 | 90 |
(a) Which price produces market equilibrium? [1]
(b) Calculate the surplus at $200. [1]
(c) Analyse why a seller may reduce the price when there is a surplus. [1]
(a) Equilibrium is at \(\$160\), where quantity demanded and quantity supplied are both 60 guitars. [1]
(b) At \(\$200\), 90 guitars are supplied but only 40 are demanded:
\[\text{surplus}=90-40=50\text{ guitars}\]
The surplus is 50 guitars. [1]
(c) A seller may reduce price because a lower price makes guitars more attractive to consumers and helps clear unsold stock. [1]
(a) Equilibrium is at \(\$160\), where quantity demanded and quantity supplied are both 60 guitars. [1]
(b) At \(\$200\), 90 guitars are supplied but only 40 are demanded:
\[\text{surplus}=90-40=50\text{ guitars}\]
The surplus is 50 guitars. [1]
(c) A seller may reduce price because a lower price makes guitars more attractive to consumers and helps clear unsold stock. [1]
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