Paper 1 - Microeconomics Mark Scheme 3

Guidance for marking:

• Mark schemes should be applied positively. Irrelevant,

contradictory and wrong material should be ignored.
• If a candidate has not answered the question i.e. has
answered an entirely different question – award only
material that is credit worthy.
• Indicative content is not inclusive of all relevant responses;
appropriate professional judgment should be adopted.

For essay responses in Section B, use the relevant grid for the levels
marking descriptors and range (this is located at the end of this mark
scheme). Identify the range and give the middle (odd range) or higher
mid mark (even range) or higher mark (two mark ranges). Lower or raise
the mark according to quality of response, including quality of written
communication. Quality of written communication should not be a
reason for pushing the candidates up or down a level but it could be
used to push the candidate’s mark up or down within the pre-
determined level.

Section A: Answer all the questions

Q1
A market for bread in a country is defined by the following equations:

QD= 45 – 5P
QS = −30 + 20P

where 𝑄𝐷 and 𝑄𝑆 are the quantity demanded and supplied

respectively per week and P is the price per unit in £ (pounds).
i Calculate the equilibrium price of bread in this market. 2 marks
(show your workings)
.
45 – 5P = −30 + 20P (1 mark) P = 75/25 = £3 (1 mark)

ii Calculate the equilibrium quantity of bread in this market. 2 marks

(show your workings)

QD = 45 – (5*3) (1 mark); QD = 45 - 15 = 30 (1 mark)

iii Calculate the Consumer Surplus for this market. (show your workings)
4 marks
Y axis intercept = 45/5 = 9 (1 mark)
CS height = 9 – 3 = 6 (1 mark)
CS base = 30 (1 mark)
CS = 0.5 * (6 * 30) = 90 (1 mark)
 The government decides to place a minimum price of £4 for bread.

iv Calculate the excess of Supply at the new minimum price (show your 4 marks
workings)

QS = −30 + 20(4) (1 mark or QD mark below)

QS = 50 (1mark)
QD = 45 – 5(4) (1 mark)
QD = 25 (1 mark)
QS – QD = 25 (1 mark)

v Calculate the total amount the government must pay to buy the surplus. 1 mark

£4 * 25 = £100 (1 mark)

vi Calculate the change in the Consumer Surplus after the minimum price. 2 marks
(show your workings)

CS2 = 0.5 * (5 * 25) = 62.5 (1 mark)

∆CS = 90 - 62.5 = 27.5 (1 mark)

Q2a Below is the diagram for a firm in imperfect competition in the long run
 £

100
MC AC1

AC2

30
26
24
21

AR

20 23 32 40
MR Q

i With Average Costs at AC1. Calculate the profit maximising level of 2 marks
output for this firm. You must give a reason for your answer.

Profit max = MC = MR (1 mark) Output = 20 (1 mark)

ii With Average Costs at AC1. Calculate the Total Revenue of the firm if 2 marks
the firm is maximising its profits.

TR = 20 * 30 (1 mark) = 600 (2 marks for correct answer)

iii With Average Costs at AC1. Calculate the Total Costs of the firm if the 2 marks
firm is maximising its profits.

TC = 20 * 30 (1 mark) = 600 (2 marks for correct answer)

iv With Average Costs at AC2. Calculate the Total Costs of the firm if the 2 marks
firm is maximising its profits.

TC = 20 * 24 (1 mark) = 480 (2 marks for correct answer)

v With Average Costs at AC2. Calculate the Supernormal profit of the firm 1 mark
if the firm is maximising its profits.
SNP= 6 * 20 = 120 (1 mark) or TR – TC = 600 – 483 = 120 (1 mark)
SNP = 120 (1 mark for correct answer)

vi With Average Costs at AC2. Calculate the change in Supernormal profit 1 mark
of the firm if the firm is maximising its revenue.
SNP2= 5 * 23 = 115 (1 mark) or TR – TC = 598 – 483 = 115 (1 mark)
∆SNP = 120 – 115 = 5 (1 mark for correct answer)
Q2b
i A firm is a price maker and has a Supernormal profit of £8,000, it has 1 marks
Total Revenue of £20,000 when the price of its product is £10 and
demand is 2,000 units.

TC1 = £20,000 – 8,000 = £12,000 (1 mark)

ii The firm decides to change the price of the product to £12; the firms 4 marks
Price Elasticity of Demand is -1.5.

Calculate the new Total Revenue for the firm.

%∆P = 20% (1 mark)

%∆QD = 20% * -1.5 = -30% (1 mark)
QD2 = 1,400 (1 mark)
TR2 = £12 * 1,400 = £16,800 (1 mark)

Section B – Answer BOTH parts of ONE question

Q1a Using a demand and supply diagram, explain how changes in a 10 Marks
 determinant of demand for gym clothes may lead to an increase in the
price of gym clothes.

Analysis only: At least 1 determinant explained for level 3 or above.

Definitions
Accurate, relevant and supported diagram. Correct diagrams
present but not referred to in text gain L2.

Relevant examples and explanation of any determinants of demand

e.g. price changes of identified substitutes; price changes of
identified complements; changes in fashion and why this would
lead to an increase in the demand etc.

Applied correctly to the example of the gym clothes for L4.

Q1b Evaluate the impacts that an increase in gym clothing prices may have 15 Marks
on gym firms and gym consumers in the UK.

Analysis: At least 2 impacts on gym firms and consumers explained

for level 3 or above.
 Definitions
Accurate, relevant and supported diagrams. Correct diagrams
present but not referred to in text gain L2.

Relevant impacts.
Impact on gyms e.g. decreased revenues for gyms due to the
complementary nature of gym clothes and gym membership;
secondary impacts e.g. reducing costs to reduce prices to keep
customers; special offers and discounts; non price competition
such as better customer service , improved facilities; selling own
brand clothes; increased advertising etc
Impact on consumers e.g. increasing the price of clothes so
reducing CS and consequence; consumers turning to alternative
products; reduced gym membership leading to impact on health etc

Must include reference to gym industry to gain L3 with direct

application of the impacts to the industry to gain L4

Evaluation (Any reasonable evaluation):

For example: questioning ability of the firm to reduce costs; cost

considerations of promotions; uncertain impact of marketing;
actions of other firms over time reducing the impact of marketing
and/or efficiency improvements; the degree of XED elasticity or
inelasticity; degree of price change; significance of impact on CS;
PED of gym clothes in relation to proportion of income; substitutes;
possible gain in utility from higher priced clothing etc

L3 evaluation must relate to the analytical context.

Judgement of comparative consequences of the methods to reach

a conclusion on the relative significance of the impacts for top L3.

Q2a With the use of an example product, explain why governments need to 10 Marks
 supply public goods.

Analysis only: Both conditions of public goods explained for level 3

or above.

Definitions

Identification and explanation of the problem of free riders; non-

rivalrous and non-exclusivity

Use of relevant example with explanation of how the conditions

needed for a public good are met. Explanation of why the private
sector will not supply public goods due to an inability to price or
economically restrict access. Reference to positive externalities
associated with public goods.

Clearly applied analysis to example Public good to gain L4.

Q2b Evaluate policies that could be used to promote the consumption of 15 Marks
products with positive externalities in production in an industry of your
choice. Support your reasons with a diagram.
 Analysis: At least 2 policies analyzed for level 3 or above.
Definitions

Accurate, relevant and supported diagram. Correct diagrams

present but not referred to in text gain L2.

Identification and explanation of two methods e.g. direct provision

by the public sector; granting subsidies; tax reductions;
infrastructure improvements; regulation to increase competition
e.g. removing barriers to entry; reducing red tape; provision of
training to staff; grants for employment: with the impact explained
in context of the chosen market.

Must include reference to industry of choice to gain L3 with direct

application of the methods to the industry to gain L4

Evaluation (Any reasonable evaluation):

E.g. incentive for corruption; opportunity cost to taxpayer; no

profit incentive for public sector may encourage inefficiency, low
quality, no innovation; government failure; moral hazard of
subsidies; cost to the Government/tax payers; inefficient use of
funds; danger of overprovision; difficulty in measuring value of
externality etc

L3 evaluation must relate to the analytical context.

Judgement of comparative consequences of the methods to reach

a conclusion on the relative significance of the impacts for top L3.

Q3a With the use of a relevant diagram and an example, explain why a profit 10 Marks
maximising monopoly firm is not productively efficient.

Analysis only:
 Accurate, relevant and supported diagram. Correct diagrams
present but not referred to in text gain L2.

Definition of monopoly through the characteristics of the market.

e.g. high barriers to entry; branding; economies of scale etc; price
making; one firm; asymmetrical knowledge so no competition.

Identification of profit maximisation level of output; identification of

productive efficiency level of output; textual explanation of output
being lower than the MES

L4 requires precise diagram and application to an example

Monopoly (can be practical monopoly e.g. Microsoft; Google)

Q3b With the use of a relevant diagram and examples of firms; Evaluate the 15 Marks
possible advantages of a monopoly compared to those of oligopolies.

Analysis: At least 2 advantages analyzed for level 3 or above.

 Explanation of the advantages of the structure to the firm or the
consumer.

Accurate, relevant and supported diagrams

Advantages of monopoly may include lower costs due to

economies of scale with possible lower prices; as a price maker the
ability to gain supernormal profit for dynamic efficiency; may
choose price strategy to gain allocative and/or productive
efficiency; differentiated products offer consumers more choice;
product may need large capital start up costs; natural monopoly

Advantages of Oligopoly may include; lower costs due to

economies of scale with possible lower prices if competing with
other oligopolies; as a price maker the ability to gain supernormal
profit for dynamic efficiency; higher incentive to choose price
strategy to gain allocative and/or productive efficiency; may collude
with other firms to gain market control and supernormal profit;
pressure of possible competition through innovation from rivals
keeping prices low; differentiated products offer consumers more
choice; augmented products offering improved quality of service to
consumers etc

Must include reference to firms of choice to gain L3 with direct

application of the advantages to the firm to gain L4

Evaluation (any reasonable evaluation):

Disadvantages of Monopoly may include: consumers may face

higher prices and lower output due no competition; monopoly may
use techniques such as advertising to keep asymmetrical
information advantages over consumers; loss of CS; monopolies
may use price strategies to prevent new entry into the market e.g.
limit or predatory pricing; firm may become complacent and fail to
innovate; lack of allocative and productive efficiency if profit
maximising; x-inefficiency etc

In the case of oligopolies: consumers may face higher prices and

lower output if oligopolies collude to gain market power; loss of
CS; oligopolies may use techniques such as advertising to keep
asymmetrical information advantages over consumers; oligopolies
may use price strategies to prevent new entry into the market e.g.
limit or predatory pricing etc

L3 evaluation must relate to the analytical context.

Judgement of comparative consequences of the methods to reach

a conclusion on the relative significance of the impacts for top L3.

Generic Marking Grid for Section B

10 Mark Question
Lev Mark Descriptor
el
0 0 A completely inaccurate response

1 1–3 Response shows imprecise knowledge and understanding of

relevant terms, concepts, theories and models. There is very
little knowledge of relevant theory.

Response shows elements of knowledge and understanding of

2 4–5 relevant concepts and theories. Ideas are applied and related
to the economic problem(s) in context, although does not focus
on the broad elements of the question. Essay contains a
narrow response or a two-stage chain of reasoning only.

Response shows accurate knowledge and understanding of

3 6-7 relevant concepts and theories. Relevant ideas are applied and
related directly to the broad elements of the question with
evidence integrated into the answer. Where appropriate,
examples and diagrams are included and applied. The analysis
is clear and logical, although it may lack balance.
Response shows precise knowledge and understanding of
4 8 - 10 relevant concepts, theories and models. Relevant ideas are
effectively applied and directly linked to the broad elements of
the question. Where appropriate, examples and diagrams are
included and applied effectively. The analysis is relevant and
focused with evidence fully and reliably integrated. The
response shows logical and coherent chains of reasoning.
15 Mark Question

Leve Mark Descriptor

l
0 0 A completely inaccurate response
1 1–3 Response shows imprecise knowledge and understanding of
relevant terms, concepts, theories and models.

Response shows elements of knowledge and understanding of

2 4–5 relevant concepts and theories. Relevant ideas are applied and
related to the problem(s) in context, although does not focus
on the broad elements of the question. Essay contains a
narrow response or a two-stage chain of reasoning only.

Response shows accurate knowledge and understanding of

3 6-7 relevant concepts and theories. Relevant ideas are applied and
related directly to the broad elements of the question with
evidence integrated into the answer. The analysis is clear and
logical, although it may lack balance.
Response shows precise knowledge and understanding of
4 8-9 relevant concepts, theories and models. Relevant ideas are
effectively applied and directly linked to the broad elements of
the question. The analysis is relevant and focused with
evidence fully and reliably integrated. The response shows
logical and coherent chains of reasoning.
Leve Mark Descriptor
l
0 0 No evaluative comment
Response shows a generic evaluative comment without
1 1–2 supporting evidence to context. Response shows no evidence
of logical chain of reasoning.

Response shows evidence of evaluation of alternative

2 3–4 approaches/methods which is unbalanced leading to
unsubstantiated judgements. Evaluative comment provided,
but with partially developed chain of reasoning
 Response shows evidence of evaluation supported by relevant
3 5–6 reasoning and appropriate reference to context.
Evaluation is balanced and considers the broad elements of the
question, leading to a substantiated judgement.