Economics

1. 1.

   A price rises from 10 to 12 and quantity demanded falls from 100 to 80. Using initial values as percentage bases, calculate price elasticity of demand and explain the change in total revenue.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Separate a percentage response from an absolute change, and relate the elasticity measure to consumer behaviour.
   2. Quantity changes by -20%; price changes by +20%.
   3. PED = -20/20 = -1 using the stated initial-value method.
   4. Revenue changes from 1000 to 960, a fall of 40.
   5. For these finite changes, the calculated PED of -1 does not imply exactly unchanged revenue; percentage changes use initial bases.

   Marking points

   • Quantity changes by -20%; price changes by +20%.
   • PED = -20/20 = -1 using the stated initial-value method.
   • Revenue changes from 1000 to 960, a fall of 40.
   • For these finite changes, the calculated PED of -1 does not imply exactly unchanged revenue; percentage changes use initial bases.

   Examiner tip: State the elasticity convention and link your conclusion to the data in the question.

2. 2.

   Explain one channel through which a rise in a central bank's policy interest rate can reduce inflation, and give one limitation.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Trace the policy through household or firm decisions before stating its effect on aggregate demand.
   2. Higher lending rates can raise borrowing costs for households or firms.
   3. Consumption or investment may fall, reducing aggregate demand.
   4. Lower demand pressure can slow inflation.
   5. A limitation is a time lag or supply-driven inflation that higher rates do not directly resolve.

   Marking points

   • Higher lending rates can raise borrowing costs for households or firms.
   • Consumption or investment may fall, reducing aggregate demand.
   • Lower demand pressure can slow inflation.
   • A limitation is a time lag or supply-driven inflation that higher rates do not directly resolve.

   Examiner tip: A policy effect is conditional on confidence, spare capacity and timing, not automatic.

3. 3.

   Explain why a negative production externality can cause overproduction relative to the socially efficient output.

   [3 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Compare private and social marginal costs, then locate the market output and the socially efficient output.
   2. Production imposes uncompensated costs on third parties.
   3. Marginal social cost exceeds marginal private cost.
   4. The market considers private costs, so output exceeds the level where marginal social cost equals marginal social benefit.

   Marking points

   • Production imposes uncompensated costs on third parties.
   • Marginal social cost exceeds marginal private cost.
   • The market considers private costs, so output exceeds the level where marginal social cost equals marginal social benefit.

   Examiner tip: A negative production externality concerns costs to third parties, not just a producer's own costs.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.