Exam questions

Question 1

explain rationing, incentive and signalling function of the price mechanism

Answer 1

rationing: demand > supply so prices are driven up to discourage demand
signalling: rising prices discouraged demand and encouraged producer to enter a market
incentive: motivates producer or consumer to follow a course of action

Question 2

explain one advantage of a free market economy compared to a command economy

Answer 2

competitive markets responsive to consumer but no competition in command to ensure firms are efficient

Question 3

explain why a firm might reduce PED for its products (3)

Answer 3

• quantity demanded does not change significantly with price
• eg good with PED of -0.1 had a 10% price rise, sales volume would fall by 1%
• the lower a products PED the easier it is to boost revenue by increasing price

Question 4

explain an opportunity cost to the government granting subsides to energy suppliers

Answer 4

opportunity cost : value of next best option foregone
•specific references eg education
•government subsides inevitably carry an opportunity cost and in the LR there way may be better ways of saving energy

Question 5

government failure

Answer 5

government intervention leads to net welfare loss in economic welfare

Question 6

explain one microeconomics why government is using tax payers money to fund HS2

Answer 6

imperfect information, if project is undertaken by private sector it may be less likely to happen