Assuming that 25 000 pencils are produced initially, identify the opportunity cost for Country H if the production of rice is to be increased by 100 %.

State one reason why the production possibility curve (frontier) for Country H might shift outwards.

Table 1 provides information about Good X and Good Y, which are related goods.

Table 1

Using Table 1, calculate the cross price elasticity of demand between Good X and Good Y when the price of Good X increases.

The demand for Good Z is income inelastic.

Define the term income inelastic demand.

Country D is an economically less developed country that specializes in the production of primary products. 

Explain two implications for Country D of a relatively low income elasticity of demand for its primary products.

Good A and Good B are in joint supply.

Using a diagram to support your answer, explain the impact on the market for Good B of an increase in the price of Good A.

Calculate the shortage resulting from the imposition of the maximum price.

Calculate the change in producer surplus resulting from the imposition of the maximum price.

Calculate the change in consumer expenditure on rice resulting from the imposition of the maximum price.

State two methods of non-price rationing.

With reference to Figure 2, outline why the imposition of a maximum price might lead to the creation of a parallel market.

Explain one reason, apart from the possible creation of a parallel market, why the imposition of a maximum price for rice in Islandia might not enable low-income households to buy enough rice to meet their needs.

15 000 pencils

OR 750 pencils per kg of rice

An answer of 15 000 pencils or 15 000 or 750 is sufficient for [1].

Stating that there is an increase in the quantity and/or quality of one or more factors of production
OR an improvement in technology / institutional framework / population, is sufficient for [1].

It is not necessary to name a specific factor of production, but a response which correctly states one factor, e.g. an increase in the quality of labour should be rewarded.

PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.

$\mathrm{XED} =\frac{\%∆Q d \left(Y\right)}{\%∆P \left(X\right)}=\frac{5}{16.67}$

Any valid working (correct %Δ Qd(Y) or %Δ P(X), provided the formula is not inverted) is sufficient for [1].

= 0.3

An answer of 0.3 without any valid working is sufficient for [1].

Implications may include:

• countries that specialize in primary products may need to diversify in order to achieve economic growth
• (relative) income for those working in the primary sector might decrease, leading to greater inequality
• as economic growth occurs, demand for primary products will increase more slowly than the demand for secondary/tertiary products, causing the prices of primary products to increase more slowly than the prices of secondary/tertiary products
• as economic growth occurs, there will be differences in the rate of expansion of primary industries in relation to secondary/tertiary industries/employment
• because the prices of primary products fall relative to manufactures, the terms of trade for countries specializing in the export of primary products may deteriorate. This may threaten the process of economic development
• as Country D specializes in the export of (income inelastic) goods, it will not benefit from global economic growth (the income gap will widen), or the converse could be true. This implication may be phrased as export revenue being relatively stable despite changes in the global economy
• any other reasonable response.

NB Reference to the effects of negative economic growth should be rewarded.

PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.

 The market for Good B

An alternative diagram would be with P of Good A on vertical axis and Q of Good B on horizontal axis and an upward sloping curve. The explanation should be consistent with this diagram. For full marks the response should refer to the quantity of Good B increasing and its price decreasing.

NB If the explanation is vague, [1] may be awarded for an appropriate example (such as any product and its by-product).

A candidate who has provided a correct diagram but refers to quantity supplied (rather than supply) of good B should not be penalized.

The maximum price = $5 × 0.6 = $3.

At $3, Qd = 300 000, Qs = 100 000, so the shortage = 200 000 kg

An answer of 200 or 200 000 is sufficient for [1].

Initial PS = 0.5 × 4 × 200 000 = $400 000

New PS = 0.5 × 2 × 100 000 = $100 000

Any valid working (initial or final PS) is sufficient for [1]

Change in PS = $100 000 – $400 000

= –$300 000 (i.e. a decrease)

OR Decrease in PS = 0.5 × 2 (200 000 + 100 000) = $300 000

An answer of 300 or 300 000 without any valid working is sufficient for [1].

For full marks to be awarded the response must provide valid working and include correct units.

NB OFR applies where a candidate has identified the maximum price incorrectly in part (g).

Initial consumer spending = 5 × 200 000 = $1 000 000

New consumer spending = 3 × 100 000 = $300 000

Any valid working (initial or final consumer expenditure) is sufficient for [1].

= –$700 000 (i.e. a decrease)

An answer of 700 or 700 000 without any valid working is sufficient for [1].

For full marks to be awarded the response must provide valid working and include correct units.

NB OFR applies where a candidate has identified the maximum price incorrectly in part (g). Examiners should not penalize twice for the absence of a negative sign (i.e. in both parts h and i).

Award [1] for each appropriate method, up to a maximum of [2].

Methods may include:

• first-come, first-served (queueing)
• allocation according to sellers’ preferences
• rationing systems using coupons/vouchers or applying a quota per customer/household e.g. distribution according to income level/size of household would be acceptable
• random allocation by ballot
• any other reasonable response.

Candidates struggled to respond accurately to the question by recognizing that rice production would increase from 20 to 40 kg (100 % increase). Candidates were expected to identify the initial and final combination of rice and pencils. 

Very well-answered. A few candidates referred to "more production" but the majority identified a factor which would increase the quantity/quantity of factors of production. 

The question was generally well-answered. Lower-achieving responses mixed the numerator/denominator, calculated the percentages relative to the final price/quantity or took the change in price to be zero. 

A surprising number of students made reference to a response to a change in price rather than income. The major weakness was a tendency to suggest that there would be zero change in the quantity demanded rather than a less than proportionate change.  

This question was generally answered very poorly. Many candidates simply re-stated the definition in the context of primary products. The link to Section 4 of the course was not generally made, with candidates limiting their answers to the likelihood of stability in times of positive growth or recession. Few candidates referred to the idea of slow growth in demand for exports, with implications for the current balance and terms of trade. The strongest responses explained the need for diversification as a result of low YED for primary products. 

The vast majority of candidates appeared to be unaware of the concept of joint supply. Many referred to Good A and Good b as substitutes, complements or goods in competitive supply. Responses focused on demand factors rather than the idea of one product being a by-product of another. 

Generally well-answered. 

There were many errors in the calculation of producer surplus. These included neglecting to use the correct formula for a triangle, confusing producer surplus with producer revenue and many errors related to the use of correct units. Many candidates neglected to specify a negative change. 

Although most candidates calculated the initial level of consumer expenditure accurately, it was common for candidates to identify 300 000 as the new quantity purchased. While this would be the correct quantity demanded it cannot be purchased as only 100 000kg of rice would be supplied. Many candidates neglected to specify a negative change. 

Generally well-answered although a small but nevertheless a surprising number of candidates did not respond or did not understand the term "non-price rationing". Phrases such as "distribution by the government" were provided by lower-achieving candidates.  

Many candidates generally referred to the creation of an "alternative" market arising to meet unsatisfied demand without referring to Figure 2 or explaining why consumers and/or producers would be willing to exchange at a price higher than that of the official market.  

Generally well-answered. Most candidates suggested that the shortage would impact all consumers, including those on lower incomes. Stronger responses provided suggestions as to why those on lower incomes might be impacted disproportionately.