Section A (5 Marks * 3 Questions = 15 Marks)
A1 i) Determine whether there will be a change in quantity demanded or a change/shift in demand
• a) A change in the price of a related good
o Shift in demand: If the related good is a substitute (e.g., Pepsi and Coke), an increase
in its price increases demand for the other. If it's a complement (e.g., cars and fuel),
an increase in its price decreases demand for the other.
• b) A change in tastes
o Shift in demand: A shift in consumer preferences will lead to either an increase or
decrease in demand, independent of price.
• c) A change in price
o Change in quantity demanded: Movement along the demand curve rather than a
shift.
• d) A change in income
o Shift in demand: For normal goods, higher income increases demand; for inferior
goods, higher income decreases demand.
• e) A change in consumer expectations
o Shift in demand: If consumers expect higher future prices, current demand
increases, and vice versa.
A1 ii) Effect of a severe drought on wheat supply and equilibrium price of bread
• A severe drought reduces wheat supply, increasing its price.
• Since wheat is a key input for bread, production costs rise.
• Higher costs lead to a leftward shift in the supply curve for bread.
• As a result, the equilibrium price of bread rises, and the quantity supplied in the market
falls.
A2 i) Positive and Negative Externalities of a New Public Park and a Nearby Factory
• Positive externality of the park:
o Increased property values
o Improved public health due to green space
o Better community engagement
• Negative externality of the factory:
o Air and noise pollution
o Health hazards for residents
o Environmental degradation
Other examples of externalities:
• Positive: Education (benefits society through skilled labor)
• Negative: Smoking (passive smoking harms others)
A2 ii) Price Elasticity & Income Elasticity of Demand for Pizza
a) Midpoint Price Elasticity Calculation
b) Income Elasticity Calculation
A3 i) Ceiling Price vs. Floor Price
• Ceiling price: A maximum price set by the government (e.g., rent controls). Helps consumers
but can lead to shortages.
• Floor price: A minimum price (e.g., minimum wage). Helps producers but may cause
surpluses.
• Essential medicines: Often subject to price ceilings to ensure affordability.
A3 ii) Payoff Matrix for Two Competing Companies
• Dominant strategy: A strategy that provides a higher payoff regardless of the competitor's
move.
• If Company A launches and B doesn’t, A earns $30M.
• If Company B launches and A doesn’t, B earns $30M.
• If both launch, they each earn $10M.
• If neither launches, they earn $20M.
• Dominant strategy: Launch (higher risk, but also potential high reward).
Section B (10 Marks * 2 Questions = 20 Marks)
B1 i) Law of Diminishing Returns and Optimal Stage of Production
• Definition: Adding more inputs beyond a certain point decreases additional output.
• Stages:
o Stage I: Increasing returns (underutilization of resources).
o Stage II: Optimal stage (maximizing efficiency).
o Stage III: Negative returns (overuse of inputs).
• Optimal stage: Stage II (maximizes production efficiency).
B1 ii) Perfect Competition in the Long Run
• If firms earn above normal profit: New firms enter, increasing supply and lowering prices.
• If firms earn losses: Some exit, reducing supply and increasing prices.
• In the long run: Firms earn normal profit (zero economic profit).
B2 i) Effect of a Tax on Sugary Beverages
• Equilibrium price and quantity:
o Price increases (due to tax burden).
o Quantity decreases (less demand).
• Impact on Surplus:
o Consumer surplus decreases (higher price, lower consumption).
o Producer surplus decreases (lower sales).
• Deadweight loss:
o Lost efficiency due to reduced market transactions.
B2 ii) Elasticity of Demand and Business Decision Making
• Definition: Measures how quantity demanded responds to price changes.
• Why important?
o Helps businesses set optimal prices.
o Understanding demand sensitivity maximizes revenue.
o Essential for price discrimination strategies.
Section C - Case Study (15 Marks)
C i) Market Structure in the Case Study
• The case describes monopolistic competition:
o Many sellers offering differentiated products (candles, toothbrushes).
o Firms compete based on non-price factors (branding, quality, features).
o Freedom of entry and exit in the market.
C ii) Costs Associated with Differentiated Products
• Significant cost: Advertising
o Differentiation requires strong marketing to create brand recognition.
C iii) Effect of Product Differentiation on Demand Curve
• Demand curve in monopolistic competition:
o Downward-sloping (firms have pricing power).
o More elastic than a monopoly, but less than perfect competition.
• Profit Maximizing Output:
o Firms produce where MR = MC (marginal revenue = marginal cost).
