Economics

1. 1.

   Price rises by 10% and quantity demanded falls by 5%. Using percentage-change PED, calculate price elasticity of demand and predict the direction of total revenue change.

   [3 marks] · no calculator

   Answer explanation

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

   1. Keep the negative sign for the fall in quantity; some conventions report the magnitude, 0.5.
   2. The proportionate quantity fall is smaller than the price rise, so demand is inelastic over this change.
   3. Revenue is price times quantity. Using indices checks the prediction without assuming revenue rises by exactly 5%.

   Marking points

   • PED = -5/10 = -0.5.
   • Demand is price inelastic because |PED| < 1.
   • Total revenue increases: 1.10 x 0.95 = 1.045, a 4.5% rise.

   Examiner tip: Use the convention specified in your course; do not substitute a midpoint formula for the requested percentage changes.

2. 2.

   Demand for a good is much less price elastic than supply. Explain why consumers may bear most of a specific tax and how the tax can affect traded quantity.

   [4 marks] · no calculator

   Answer explanation

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

   1. Who legally remits the tax is not necessarily who bears its economic cost.
   2. Buyers who have few substitutes keep purchasing despite a price rise, while more elastic suppliers adjust quantity more readily.
   3. A lower traded quantity can reduce external costs for harmful goods, but the incidence result alone does not establish an efficient tax rate.

   Marking points

   • The tax creates a wedge between the buyer's price and the seller's net receipt.
   • The less elastic side changes its behaviour less in response to price.
   • Relatively inelastic demand therefore places more of the burden on consumers, other things equal.
   • With conventional downward demand and upward supply, the equilibrium quantity falls.

   Examiner tip: Tax incidence depends on relative elasticities, not just which side receives the tax bill.

3. 3.

   Inflation is driven mainly by imported energy costs while output is weak. Evaluate raising interest rates as the only policy response. Reach a conditional judgement.

   [5 marks] · no calculator

   Answer explanation

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

   1. Distinguish the initial supply shock from later wage/price feedback. Monetary tightening can address the latter more directly than the initial shortage.
   2. Explain both transmission channels and limitations. A stronger currency is possible, not automatic, and borrowers may cut spending before prices respond.
   3. A defensible conclusion supports proportionate tightening if expectations de-anchor, alongside targeted measures, rather than claiming rates alone solve an energy shortage.

   Marking points

   • Higher rates can reduce consumption and investment, lowering demand pressure.
   • They may support the exchange rate and reduce import costs, but this is not guaranteed.
   • They do not directly increase energy supply and may worsen weak output or employment.
   • Consider expectations, time lags and complementary targeted or supply-side policies.
   • Judge according to persistence of inflation and second-round effects, weighing inflation control against output costs.

   Examiner tip: Evaluation needs a reasoned condition or trade-off, not a list of advantages and disadvantages.

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