Questions

Q1.

Answer the question with a cross in the box you think is correct . If you change
your mind about an answer, put a line through the box and then mark your new
answer with a cross .
Which one of the following is an example of market failure?
A Lower prices create an incentive for firms to switch production to more profitable
activities
B Excessive administrative costs are involved in meeting environmental regulations
C Government provision of street lights that is greater than the social optimum
output
D Insured consumers take more risks in the knowledge that the insurer will pay any
resulting costs

C
(Total for question = 1 mark)

Q2.

Answer the question with a cross in the box you think is correct . If you change
your mind about an answer, put a line through the box and then mark your new
answer with a cross .
Which one of the following is an example of market failure?
A Excessive administration costs associated with government regulation
B Diminishing marginal utility occurring as consumption increases
C Rising stock market prices causing a market bubble
D Unintended consequences after the introduction of a tax

D
(Total for question = 1 mark)
Q3.

'12 million consumers within the UK are on standard variable tariffs for their gas
and electricity. One energy supplier, RWE npower, charged consumers on the
standard variable rate £1 166 per year. However, its cheapest deal was £935 per
year. Consequently the UK Government is introducing a maximum price for gas and
electricity.'
Evaluate the likely impact of the introduction of a maximum price for gas and
electricity.

RWE npower charged consumers on the standard variable rate $1166 per year, however the
cheapest deal was $935 per year. This information gap between the producers and
consumers has resulted to the UK Government introducing a maximum price for gas
electricity. The consumers were not aware of the cheaper deal, which causes them to take
irrational decisions where their utility is not maximised. A maximum price is a price ceiling set
by the government where any prices above it cannot be charged for necessities such as gas
and electricity. As shown on the graph, the supply will drop down from Qe down to Q1, as
the prices dropped from Pe to P1 the producer’s profits will drop, meaning that they will be
forced to reduce their production prices due to the production costs exceeding profits.
Despite the drop in supply, there will be an increase in demand from Qe to Q2 due to the
decrease in prices, which attracts costumers and makes it more affordable for those with
lower incomes. However, there will be a shortage as the Demand is higher than the Supply,
meaning that not everyone will have access to these goods and be able to buy them. If the
Government set an even lower maximum price, then there will be an even bigger shortage,
which in the long-term can have a negative impact on the industry due to lack of investment
as the profits will be extremely low. The maximum price for gas and electricity will decrease
inequality and efficiently allocates resources. It prevents consumers from being manipulated
by companies and allows them to make more rational decisions. However, consumers can
become dependable on the maximum price, and if it’s removed they will not be able to afford
it.
(Total for question = 20 marks)

Q4.

Questions must be answered with a cross in a box . If you change your mind about
an answer, put a line through the box and then mark your new answer with a cross
.
The diagram shows the market for vaccinations against measles.

Which one of the following can be deduced from the diagram?

D
(Total for question = 1 mark)

Q5.
In Oregon, USA, research was conducted in which 10 000 citizens were given health
insurance and 45 000 citizens were not. On average, the 10 000 citizens with health
insurance had far more hospital admissions and emergency department visits.
Explain why the result of this research is an example of moral hazard.
A moral hazard is when one is more exposed to risk because they won’t have to cover the
costs of the damages caused from the risk. In Oregon, 10 000 citizens were given health
insurance and 45 000 were not. The 10 000 citizens with health insurance had more hospital
admissions and emergency department visits as they were less concerned about their health
and took risks as they knew that if they were to face consequences of lack of care about
health, they wouldn’t have to pay due to the health insurance. This is an example of moral
hazard. The 45 000 citizens without health insurance had to worry about their health, not
taking any risks as they knew they’d have to pay hospital bills.

(Total for question = 4 marks)

Q6.

In 2019 the proportion of 25 to 34-year-old people who had received university education
was 70% in South Korea. In contrast it was 50% in the USA and only 28% in Italy.
Evaluate possible microeconomic reasons why education might be underconsumed

.
Underconsumption is when the purchase/ utilisation of goods falls underneath the supply.
As shown in the graph, Qe-Q1 is underconsumption. In the USA, only 50% of 25-34 year
olds received university education, and in Italy only 28%, making education a merit good,
meaning its under-consumed. This underconsumption of education is caused due to failure
of consumers recognizing the benefits of education. This information gap between
consumers and producers could be caused due to a bad advertisement of benefits earned
from education. Consumers are unaware that earning university education can increase their
chances of finding a high paying job, due to their more skilled abilities and better education
hence imperfect education. A higher paying job can increase disposable income, hence a
happier population. Having university doesn’t only benefit consumers, but also the
government. The more people with a university degree, the more people with high paying
jobs, hence an increase in taxes, meaning that the government will earn more revenue. The
Welfare gain is ABC. In addition, the underconsumption of education could also be caused
by poor decision making, where consumers only view the short-run costs and not the long-
run benefits.
 (Total for question = 20 marks)

Q7.

According to the World Health Organization vaccinations prevent more than 2 million deaths
each year. However, in 2014 there were 18.7 million infants not receiving any vaccinations.
Draw an externalities diagram to illustrate the underconsumption of vaccinations.

(Total for question = 4 marks)