(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.


Identify a reason why the New Zealand price for milk powder is lower than the
world price. (1 mark)
New Zealand has natural resources that are suited to the production of dairy products.
New Zealand dairy farmers use modern technology in farming.
Fonterra (the monopsony that controls NZ exports of dairy products) can invest in large scale dairy factories to gain advantages of economies of scale.


1. With reference to your answers to Question 2, explain why some dairy farmers
will be forced to leave the industry. (2 marks)
The new equilibrium in GRAPH 9 shows subnormal profits are being made. This will encouraged/force some dairy farmers to leave the industry because, while they may be covering their variable costs, they will not be able to cover all of their fixed costs.


(a) Differentiate between price and non-price competition. (1 mark)
Price competition attempts to attract customers or market share through offering a cheaper price (eg discounting, cheaper deals, favourable payment terms etc). Non price competition attempts to attract customers by using product variation and product differentiation rather than by reducing price. Eg improved packaging, higher quality product, promotions and advertising.
(b) List TWO ways in which New Zealand pizza operators could successfully differentiate their product. (2 marks)
(i) Advertise only organic vegetables used in pizza.
(ii) Distinctive logo on pizza delivery vehicles.
Other correct answers accepted – ½ mark each
(c) Compare the relative merits of price and non-price competition.
(2 marks)
Price competition would be most suitable if demand was elastic. This would increase sales and revenue. If however demand was relatively inelastic, price competition would simply result in lower profits.
Non-price competition avoids price wars and maintains the existing price structure. Promotional costs would increase but these may be recovered through increased sales.


(a) Song’s father works most Saturdays, but he comes to watch him play badminton when he can. What is the opportunity cost to Song’s father of watching him play badminton?
The hours off work
(b) Why is this opportunity cost?
Because his choices are working on Saturday or watching Song play badminton
(c) Describe one way in which Song’s family may have limited means.
The time he has is limited
(d) After a game of badminton, Song usually needs a drink. Explain how a want is different from a need and provide examples to support your answer.
Want=> can go without but makes life enjoyable. Example coke
Need=> must have. Example water
(e) Song realizes the importance of making choices and because of his accounting knowledge is able to understand business terms. Differentiate between accounting and economic profits.
Accounting profit = revenue less expenses
Economic profit = revenue less expenses less opportunity cost


What is demand?
The willingness and ability of consumers to buy a particular product at different prices
(b) Describe the effect on demand for takeaways due to each of the following:
(i) an increase in income levels
Increase in demand – more income usually associated with increased purchasing
(ii) a decrease in the price of dine in restaurant meals
Decrease in demand as dine in meals and takeaways are substitute goods


) If the government imposes special taxes on junk food, explain why the demand for burgers may do down.
Prices of junk food increases
Tax often increase cost => selling price increase therefore expensive so people buy less

Which term is best used to describe a production process that uses relatively more people than machines?
Labor intensive production
(b) What is meant by the term economies of scale?
LRAC decreases over a period of time
(c) After which point do diseconomies of scale begin?
After 50 bags
(d) Outline ONE way the business can achieve economies of scale in the long run.
Technical / managerial / marketing / financial reasons
(e) Calculate the fixed cost of this business if the average variable cost of 40 bags is $5.
AVC = 5 therefore VC = 5*40 = 200
AC = 22 therefore TC = 22*40 = 880
FC = TC – VC = 880 – 200 = 680


(a) Give an example of a spillover cost likely to result from clearing the forest to make way for new roads in Auckland.
Pollution increases, erosion cost
(b) What is the relationship between marginal private cost and marginal social cost with reference to negative externalities of production?
MC + cost of externality = MSC
(c) Define what is meant by the term ‘internalising an externality’
Government action necessary to eliminate the effect of the externality


a. What do points C and D represent?
_______ Maximum production_______
b. Why is point F preferable to point C?
_________ More production_________________
c. What does the position of point A indicate?
_______Underutilization of resource___________________
d. Which letter represents an output combination which is unattainable with current resources and
technologies?
_______________H__________________
e. What is the opportunity cost for the economy to move from point A to point D?
____no opportunity cost ________________

1. If one person’s consumption of a good diminishes other people’s use of that good, the good is said to be
excludable.
2. Which of the following is an example of a public good?
National defence.
3. Which of the following statements is true?
All costs are variable in the long run.
4. If a perfectly competitive firm doubles its output, its total revenue
doubles.
5. If the government wishes to ensure there is a socially optimum level of production of a good with spillover benefits, it should
subsidize its production.
6. Which of the following is a characteristic feature of public goods?
May be enjoyed by free riders once provided for one person.
7. Medical care clearly enhances people’s lives. Therefore, we should consume medical care until
the benefits buyers place on medical care is equal to the cost of providing it.
8. Tariffs are used by government to promote local production. It can be described as a tool to promote
import restrictions.
9. Investment is
the purchase of capital equipment.
10. An economy that interacts with other economies is known as
an open economy.

momentary period: perfectly inelastic
hort run: inelastic
long run: elastic