As Summer 2017

Question 1

Explain, using marginal analysis from the table above, the concept of opportunity cost. (You may use the last column in answeing the question.) (3 marks)

Answer 1

K/U:
* Definition of opportunity cost

App:
* Increasing opportunity cost (2 small calculations)

Ana:
* Opportunity cost for the economy moving from consumer goods to capital goods is small compared to gains in production

Question 2

Define the term ‘base year’. (1 mark)

Answer 2

Benchmark year

Question 3

The most likely effect of cutting subsidies for the installation of solar panels is to: (1 mark)

Answer 3

C - decrease consumer surplus

Question 4

Explain how the price mechanism responds to excess supply in a free market. (3 marks)

Answer 4

K/U:
* Define excess supply/surplus

App:
* $530 or falling below
* Price mechanism in free market

Ana:
* Steel supply contracts and extension in demand for steel with diagram

Question 5

Which one of the following is likely to result in an increase in carbon emissions? (1 mark)

Answer 5

D - Reducing indirect taxes on steel products

Question 6

Explain why reducing the tuition fee cap may result in excess demand for university places. (3 marks)

Answer 6

K/U:
* Define excess demand/shortage

App:
* University now more affordable for applicants

Ana:
* Lower max price

Question 7

Which one of the following statements is correct? (1 mark)

Answer 7

A - The marginal social benefits exceed the marginal private benefit from university education

Question 8

Explain why ‘bands on tobacco advertising’ (Extract A, line 7) may result in a decrease in the revenue of tobacco firms. Include a supply and demand diagram in your answer. (5 marks)

Answer 8

K:
* Definiton of revenue/diagram

App:
* “can reduce tabacco consumption” leading to a decreased revenue shown in diagram

Ana:
* Demand shift left/less price inelastic
* New equilibrium

Question 9

With reference to the information provided and your own knowledge, assess the view that tabacco consumers switching to e-cigarettes is an example of rational behaviour. (10 marks)

KAA

Answer 9

App:
* Price of e-cigarettes per nicotine cheaper
* PED shows some rational response to price change (e.g. 10% rise causes 4% fall in demand, Extract A)

Reasons rational:
* Smokers aware of finanal gain of switching
* Smokers informed of private health gains (Extract B, para 2)
* Reducing health external costs (e.g. passive smoking) (Extract A, line 15)

Question 10

With reference to the information provided and your own knowledge, assess the view that tabacco consumers switching to e-cigarettes is an example of rational behaviour. (10 marks)

Ev para

Answer 10

Reasons against rational:
* Both products have nicotine which is addictive
* Switch may be short-term
* E-cigarettes complements tabacco smoking, increase nicotine consumption

Question 11

Explain how changes in the price of tabacco cigarettes may affect the demand for e-cigarettes over time. (6 marks)

Answer 11

K/U:
* Definition of XED
* Tabacco cigarettes and e-cigarettes have a positive XED

App:
* e-cigarettes are less harmful so attractive than tobacco cigarettes
* Regulations and health awareness of tobacco

Ana:
* Increase in price of cigarettes changes quantity demanded for far/close substitutes

Question 12

With reference to Extract A, lines 11-13, calculate the price elasticity of demand for tobacco cigarettes in high-income countries and in low-middle-income countries. You are advised to show your working. (4 marks)

Answer 12

• High-income countries = -4%/10% = -0.4
• Low-middle income countries = -5%/10% = -0.5

Question 13

With reference to Figure 1, assess the likely reasons for the difference in price elasticity of demand for tobacco cigarettes and e-cigarettes. (15 marks)

KAA

Answer 13

App:
* PED tobacco cigarettes: -0.35
* PED e-cigarettes: -1.9

Reasons tabacco consumption is price-inelastic, e-cigarettes is price-elastic:
* Income spent on tobacco cigarettes lower than e-cigarettes
* Number of close substitutes
* Tobacco addictive/necessity, e-cigarettes luxury

Question 14

With reference to Figure 1, assess the likely reasons for the difference in price elasticity of demand for tobacco cigarettes and e-cigarettes. (15 marks)

Ev

Answer 14

• Income spent on tobacco cigarettes is rising
• Closer substitutes
• Tobacco addiction

Question 15

Evaluate the impact of governmetn intervention in the cigarettes market. (20 marks)

KAA para

Answer 15

Positive effects of gov intervention:
* Indirect tax
* Min cigarette price
* Regulation (e.g. ban smoking in public/advertise

Question 16

Evaluate the impact of governmetn intervention in the cigarettes market. (20 marks)

Ev

Answer 16

• Negative impact of intervention
• Gov failure