. Define a ‘natural monopoly’.
Is a firm that can supply goods and services to a entire market at a lower
price then if it had competition

0. Define what is meant by the term ‘merit goods’.
Government considers it as a beneficial product and encourages its production
and consumption.

With reference to the equity versus efficiency tradeoff, explain how increased government encouragement to house owners may increase equity but reduce efficiency.
Fair to produce and provide warm houses but some landlords may wait till
houses run down before getting insulation done.
Insulation companies may not be efficient as they are guaranteed assistance and
work by government.
Every household owner may not be on the same wave length in regards to less
Pressure on the electricity network.


. Explain how the marginal analysis rule is used to decide the level of output that firms should produce to maximise profits or minimise losses.
MC > Mr => produce less
MC < MR => produce more
MC = MR => profit maximising output


Define the term merit good.
Good that is deemed as beneficial for us by govt and they encourage
Its usage

According to government legislation it is compulsory for cyclists to wear helmets. Outline TWO reasons why the government chooses to legislate rather than rely on media campaign.
Easier to enforce and implement
Penalties for non using
Subsidy costs money to government thereby increasing govt expenditure


Suggest ONE other method of internalising the costs of noise pollution. Explain clearly how it would work.
Regulation – restrict the flight times
Provision – airline companies compensate homeowners via noise control
Materials


Explain how a production possibility curve illustrates scarcity. (1 mark)
A point on the PPC shows that an increase in the production of one good can only be achieved by taking resources away form the production of other goods and services. Therefore resources are limited or scarce.
(d) What is the opportunity cost of moving from the production of 8,000 yachts to
the production 10,000 yachts? (1 mark)
The opportunity cost is not producing 15,000 kayaks to gain 2,000 yachts.
(e) With reference to GRAPH 1, explain why production possibility curves are
usually drawn concave to the origin and not as a straight line. (2 marks)
The PPC in GRAPH 1 is drawn concave to the origin because the resources used in the production of yachts are not perfect substitutes to be used in the production of yachts. (1 mark)
The concave PPC illustrates increasing costs. (1/2 mark).
For example moving from Point A to Point C, the opportunity cost is not producing 2,000 yachts to gain 15,000 kayaks. However moving from Point C to Point E, the opportunity cost is not producing 4,000 yachts to only gain 13,000 kayaks. (1/2 mark)


(a) What are two factors that might change the supply of Bok Choy? (1 mark)
Price of related goods, Costs of Production, State of technology, seasonal factors, number of growers. (2 only required – ½ mark each)

(a) Explain why there is a difference in the short run and long run supply curves for Bok Choy. (1 mark)
In the short run there is at least one fixed factor of production. In the long run all inputs can be varied. For example, a vegetable grower can plant more bok choy in the short run but the land he grows on is fixed in supply and so there is a limited increase in the quantity supplied to the change in price. In the long run he can buy more land or more producers can enter the market and so there can be a bigger response in the quantity supplied to the change in price.


Define the term allocative efficiency and state the letter shown on GRAPH 4 that
represents the point of allocative efficiency assuming no externalities.
Allocative efficiency occurs when there is productive efficiency and consumer and producer surplus is maximised.
Allocative efficiency occurs at point c on GRAPH 4 where MC = AR.
(1 mark)
(c) Adam Smith suggested allocative efficiency is best achieved through the operation of the invisible hand or the market mechanism. Explain any TWO conditions that must be met for the market system to work effectively.
Consumer sovereignty.
Perfect competition.
Perfect information.
Perfect mobility
No externalities or public goods.


(a) What are TWO characteristics of a firm competing in a perfectly competitive industry? (1 mark)
Many small firms. Price Taker.
Homogeneous product. No barriers to entry.
Perfect knowledge. Perfect mobility.


Explain why the longrun equilibrium is one of normal profit for perfectly competitive firms. (2 marks)
A firm may make a supernormal profit in the short run. However, as there is perfect information, no barriers to entry and perfect mobility, other firms will enter the industry and increases in market supply will force the price down until normal profits are made. If subnormal profits are made in the short run, firms will leave the industry. Decreases in market supply will force the price up until normal profits are made.


(a) Explain why the Marginal Social Cost (MSC) curve of a Petrochemical plant is above the private Marginal Cost (MC) curve. (1 mark)
There are negative externalities of production, that is the undesirable side-effects of production imposed on others, over and above the private costs of the firm.
Eg pollution of the environment.


(c) State two methods other than taxation that could be used to internalise the externalities associated with the petrochemical industry? (2 marks)
Legal – rules and regulations, fines.
Trade in pollution rights.
Polluter pays charges.