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Question 1 Report
A market analyst at a coastal town records the demand and supply of ferry tickets during a music festival. Fig. 1 shows the curves before the festival begins. The ferry firm has a fixed number of boats, so its short-run supply curve is shown as S. Visitors arrive from other parts of the country and are willing to pay more for travel to the island. The figure includes an equilibrium price, P1, and equilibrium quantity, Q1. The analyst is considering whether the firm should increase its ticket price.
(a) What is likely to happen to demand for ferry tickets when festival visitors arrive? [1]
(b) Identify the likely effect on the equilibrium price if supply remains unchanged. [1]
(c) Explain why the ferry firm may be unable to increase the quantity supplied immediately. [2]
(a) Demand for ferry tickets increases, so the demand curve shifts to the right. [1]
(b) With supply unchanged, the equilibrium price increases. [1]
(c) The number of boats or sailings is fixed in the short run. [2] Obtaining additional boats or recruiting trained labour takes time, so the firm cannot immediately increase capacity.
(a) Demand for ferry tickets increases, so the demand curve shifts to the right. [1]
(b) With supply unchanged, the equilibrium price increases. [1]
(c) The number of boats or sailings is fixed in the short run. [2] Obtaining additional boats or recruiting trained labour takes time, so the firm cannot immediately increase capacity.
Question 2 Report
Fig. 1 shows the local rental market in a UK coastal town. In 2019, the government introduced a maximum monthly rent of £700 for newly advertised flats. The policy was intended to help low-income workers whose housing costs had increased faster than income. The price ceiling is shown below the market equilibrium price, Pe. Some landlords have stated that repairs and new construction will be less profitable. A tenants' group argues that the policy is needed because the quantity of affordable housing is too low.
(a) Which condition shown in Fig. 1 indicates that the £700 maximum rent is binding? [2]
(b) Define a price ceiling, using the government policy in this market as context. [3]
(c) Explain one likely effect of this rent ceiling on the quantity and quality of rental housing supplied. [3]
(a) The £700 rent ceiling is binding because it is set below the equilibrium rent, Pe. [1] At this rent, quantity demanded exceeds quantity supplied, shown by Qd being greater than Qs. [1]
(b) A price ceiling is a legal maximum price or rent [1] set by government [1] below the equilibrium market price. [1] Here, the maximum monthly rent is £700.
(c) The lower rent reduces landlords' revenue and profit. [1] Some landlords may withdraw flats from rental or avoid building new flats, reducing the quantity supplied. [1] They may also spend less on repairs, reducing rental-housing quality. [1]
(a) The £700 rent ceiling is binding because it is set below the equilibrium rent, Pe. [1] At this rent, quantity demanded exceeds quantity supplied, shown by Qd being greater than Qs. [1]
(b) A price ceiling is a legal maximum price or rent [1] set by government [1] below the equilibrium market price. [1] Here, the maximum monthly rent is £700.
(c) The lower rent reduces landlords' revenue and profit. [1] Some landlords may withdraw flats from rental or avoid building new flats, reducing the quantity supplied. [1] They may also spend less on repairs, reducing rental-housing quality. [1]
Question 3 Report
A city council in Estara is reviewing how to organise waste collection. Fig. 1 shows a simplified production possibility frontier for the council. It can use its annual budget and labour either to collect household waste or to maintain flood defences. Point B is currently achieved through council departments. A private firm has offered to collect waste using new vehicles, claiming that fewer council workers and lower costs would be needed for each tonne collected. The council must decide whether contracting out this service would improve economic efficiency without harming residents on low incomes.
(a) What does the production possibility frontier in Fig. 1 represent? [3]
(b) Identify which point, A, B, C or D, shows unused resources. [2]
(c) Explain the opportunity cost of moving from point B to point C. [4]
(d) Which objective, economic efficiency or equity, is more likely to be improved by contracting waste collection to a private firm? Explain your answer. [5]
(e) Explain how the government could protect households if the contracted firm increased the price charged for waste collection. [6]
(a) A production possibility frontier shows the maximum possible combinations of two services that can be produced using available labour, capital and budget resources fully and efficiently. [3]
(b) Point D shows unused resources. [2] It lies inside the production possibility frontier.
(c) Moving from B to C increases household waste collection. [4] However, fewer flood-defence maintenance projects can be provided. The lost flood-defence maintenance is the opportunity cost because labour, vehicles and other resources are switched from flood defences to waste collection.
(d) Contracting out is more likely to improve economic efficiency. [5] A private firm has an incentive to reduce costs to earn profit, and new vehicles or better management may increase labour productivity. Lower costs can release council funds for other services. Equity may worsen, however, if the firm charges more and low-income households cannot afford the service.
(e) Government can protect households in several ways. [6]
(a) A production possibility frontier shows the maximum possible combinations of two services that can be produced using available labour, capital and budget resources fully and efficiently. [3]
(b) Point D shows unused resources. [2] It lies inside the production possibility frontier.
(c) Moving from B to C increases household waste collection. [4] However, fewer flood-defence maintenance projects can be provided. The lost flood-defence maintenance is the opportunity cost because labour, vehicles and other resources are switched from flood defences to waste collection.
(d) Contracting out is more likely to improve economic efficiency. [5] A private firm has an incentive to reduce costs to earn profit, and new vehicles or better management may increase labour productivity. Lower costs can release council funds for other services. Equity may worsen, however, if the firm charges more and low-income households cannot afford the service.
(e) Government can protect households in several ways. [6]
Question 4 Report
The finance ministry of Norvale has published the following record after introducing a temporary repair programme for its rail network. The programme employed local labour and gave tax relief to firms replacing damaged equipment. Fig. 1 plots the government's budget balance as a percentage of national income. A negative figure is a budget deficit. In 2025, export demand weakened and production in the manufacturing sector fell. The government is considering whether to keep the higher level of spending, even though borrowing costs have increased.
Fig. 1: Norvale government budget balance
(a) Which year in Fig. 1 has a balanced government budget? [2]
(b) Explain two reasons why the fall in export demand could increase Norvale's budget deficit. [4]
(c) What is meant by an expansionary fiscal policy? [2]
(d) Examine whether Norvale's government should continue the rail repair programme in 2026. [12]
(a) The budget is balanced in 2023. [1] The balance is 0% of national income, meaning government revenue equals government expenditure. [1]
(b) Two explained reasons are required. Lower export sales reduce firms' profits, so corporation-tax revenue falls. [2] Lower production and sales can also reduce indirect-tax receipts. [1] In addition, firms may dismiss workers, reducing income-tax payments, while higher unemployment increases benefit spending. [1] Any two developed chains gain full credit. [4]
(c) Expansionary fiscal policy involves increased government expenditure and/or reduced taxation. [1] Its purpose is to raise aggregate demand, economic growth or employment. [1]
(d) Continuing the programme could raise aggregate demand because rail spending is a government injection. [1] Contractors employ labour, raising household incomes and consumption in other markets through the multiplier process. [2] Better rail infrastructure may lower transport costs, raise productive capacity and improve reliability for exports or tourism. [2] Stronger growth can then increase tax revenue and reduce benefit payments. [1]
However, continued spending increases an existing deficit and public debt. [1] Higher borrowing may mean higher interest payments or future taxes, and can crowd out private investment if interest rates rise. [2] Resources may be diverted from more productive uses; if capacity is already tight, extra demand may cause inflation rather than output growth. [2]
Judgement: Continuation is more convincing if Norvale has unused labour and the rail repairs have a high long-run return. If borrowing costs are high and the economy has limited spare capacity, a smaller, delayed or better-targeted programme may be preferable. This supported evaluation is needed for the final marks. [2]
(a) The budget is balanced in 2023. [1] The balance is 0% of national income, meaning government revenue equals government expenditure. [1]
(b) Two explained reasons are required. Lower export sales reduce firms' profits, so corporation-tax revenue falls. [2] Lower production and sales can also reduce indirect-tax receipts. [1] In addition, firms may dismiss workers, reducing income-tax payments, while higher unemployment increases benefit spending. [1] Any two developed chains gain full credit. [4]
(c) Expansionary fiscal policy involves increased government expenditure and/or reduced taxation. [1] Its purpose is to raise aggregate demand, economic growth or employment. [1]
(d) Continuing the programme could raise aggregate demand because rail spending is a government injection. [1] Contractors employ labour, raising household incomes and consumption in other markets through the multiplier process. [2] Better rail infrastructure may lower transport costs, raise productive capacity and improve reliability for exports or tourism. [2] Stronger growth can then increase tax revenue and reduce benefit payments. [1]
However, continued spending increases an existing deficit and public debt. [1] Higher borrowing may mean higher interest payments or future taxes, and can crowd out private investment if interest rates rise. [2] Resources may be diverted from more productive uses; if capacity is already tight, extra demand may cause inflation rather than output growth. [2]
Judgement: Continuation is more convincing if Norvale has unused labour and the rail repairs have a high long-run return. If borrowing costs are high and the economy has limited spare capacity, a smaller, delayed or better-targeted programme may be preferable. This supported evaluation is needed for the final marks. [2]
Question 5 Report
Read the information below about disposable electronic vapes. A coastal town has found discarded vapes in drains, parks and on beaches after its summer music festival. Users pay a low market price, but the council pays for litter collection and local wildlife groups report batteries and plastic entering the sea. Fig. 1 illustrates the council's estimate of this market. The national government is examining whether a tax, a ban, or stricter rules for retailers would reduce the external costs. Some firms argue that a tax could increase their costs and reduce sales, while health groups state that the existing market price sends the wrong signal to consumers.
(a) Define an external cost. [3]
(b) Explain why MSB is below MPB in Fig. 1. [5]
(c) Which government policy is most likely to reduce the quantity from Q1 towards Q2: a per-unit tax, a subsidy to vape firms, or a cut in retailer business rates? Explain your choice. [6]
(d) Describe two possible disadvantages of a ban on disposable vapes. [6]
(a) An external cost is a cost imposed on a third party by consumption or production which is not paid by the buyer or seller in the market. [3]
(b) MPB measures the benefit received by the vape consumer. However, discarded vapes create litter and clean-up costs for the council, while batteries and plastic can pollute water and harm wildlife. These external costs reduce the benefit to society. Therefore marginal social benefit is below marginal private benefit. [5]
(c) A per-unit tax is most likely to reduce quantity from Q1 towards Q2. It raises the price paid by consumers or their private cost, reducing quantity purchased. The tax makes consumers take more account of the external cost, moving output towards the socially efficient level. A subsidy to vape firms or a cut in retailer business rates would lower costs and may increase quantity instead. [6]
(d) A ban may encourage consumers to buy illegal or unregulated products, which may be unsafe and avoid tax. It may also reduce sales and employment for firms and retailers, lowering income in the sector. Consumers might switch to another harmful product, limiting environmental or health gains. Any two developed disadvantages gain credit. [6]
(a) An external cost is a cost imposed on a third party by consumption or production which is not paid by the buyer or seller in the market. [3]
(b) MPB measures the benefit received by the vape consumer. However, discarded vapes create litter and clean-up costs for the council, while batteries and plastic can pollute water and harm wildlife. These external costs reduce the benefit to society. Therefore marginal social benefit is below marginal private benefit. [5]
(c) A per-unit tax is most likely to reduce quantity from Q1 towards Q2. It raises the price paid by consumers or their private cost, reducing quantity purchased. The tax makes consumers take more account of the external cost, moving output towards the socially efficient level. A subsidy to vape firms or a cut in retailer business rates would lower costs and may increase quantity instead. [6]
(d) A ban may encourage consumers to buy illegal or unregulated products, which may be unsafe and avoid tax. It may also reduce sales and employment for firms and retailers, lowering income in the sector. Consumers might switch to another harmful product, limiting environmental or health gains. Any two developed disadvantages gain credit. [6]
Question 6 Report
The diagram shows aggregate demand, AD, and short-run aggregate supply, SRAS, for Bellora. A cut in income tax has increased household disposable income, moving aggregate demand from AD1 to AD2. Bellora currently has low unemployment, but its central bank has an inflation target of 3%. Firms report that they are already using most available labour and machinery. The government must decide whether rapid economic growth should be its main objective in the following year.
(a) Identify the direction of the change in real GDP from X to Y. [1]
(b) Explain why the tax cut is likely to increase aggregate demand. [3]
(c) Describe one conflict between Bellora's economic growth objective and its inflation objective in this situation. [4]
(a) Real GDP increases from X to Y, since the equilibrium moves rightwards on the real-GDP axis. [1]
(b) A cut in income tax increases households' disposable income. [1] Households can therefore increase consumption spending. [1] Consumption is a component of aggregate demand, so aggregate demand shifts right from AD1 to AD2. [1]
(c) The higher aggregate demand raises real output, so it supports economic growth. [1] However, Bellora has little spare capacity because most labour and machinery are already in use. [1] Firms may bid up wages and other input costs, or raise prices when they cannot readily expand output. [1] Inflation may therefore rise above the 3% target. [1] The conflict is that policies to produce rapid growth can create demand-pull inflation when capacity is constrained.
(a) Real GDP increases from X to Y, since the equilibrium moves rightwards on the real-GDP axis. [1]
(b) A cut in income tax increases households' disposable income. [1] Households can therefore increase consumption spending. [1] Consumption is a component of aggregate demand, so aggregate demand shifts right from AD1 to AD2. [1]
(c) The higher aggregate demand raises real output, so it supports economic growth. [1] However, Bellora has little spare capacity because most labour and machinery are already in use. [1] Firms may bid up wages and other input costs, or raise prices when they cannot readily expand output. [1] Inflation may therefore rise above the 3% target. [1] The conflict is that policies to produce rapid growth can create demand-pull inflation when capacity is constrained.
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