EJC Econs N2021 H2 Paper 2 SAMS

Eunoia JC Economics Dept 1 2021 A-Level Paper 2 SAMS 1. The market for bicycles is often said to generate external benefits such as reduced traffic congestion and reduced air pollution. a) Explain how economic theory suggests consumers act rationally to decide whether or not to buy a bicycle, and how producers of bicycles act rationally to determine their level of output. [10] b) Discuss how government intervention in the market for bicycles could be used to maximise social welfare and consider how likely it is that such intervention will be successful in achieving this aim. [15] Part (a) - Question Analysis Approach Command Word Explain how - Process Question Type Rational decision-making Start point Factors affecting rational decision-making End Point • Whether consumer should buy a bicycle • profit maximizing level of output of a bicycle firm Content and Context Content • Rational decision-making approach o Benefits, Costs, Constraints • Marginalist principle Context Consumers and producers of bicycles Introduction State essay approach: Economic theory suggest that rational consumers and producers will seek to maximize their self-interest when making decisions using the marginalist principle. They will consider factors as such constraints, benefits, costs and consume and produce up to a point where marginal benefits (MB) equals to marginal costs (MC). Marginal benefit of an action is the increase in total benefit that results from carrying out one additional unit of the action while the marginal cost of an action is the increase in total cost that results from carrying out one additional unit of the action. Body Point 1: How economic theory suggests consumers act rationally to decide whether or not to buy a bicycle • Consumers of bicycles seek to maximise utility (satisfaction) and will consume up to a point where marginal private benefit (MPB) = marginal private costs (MPC). • When deciding whether or not to buy a bicycle, consumers consider their budget and time constraint, which is determined by how much savings the consumer has or the income the consumer is earning while time constraint is determined by how much time consumers have for transportation. • The marginal private benefit of using a bicycle includes the convenience it brings, especially for short distance transportation, as well as the health benefits of riding a bicycle as a form of exercise. • The marginal private costs include the monetary cost to buy the bicycle (price of bicycle) and the opportunity costs such as the utility gain if the consumer has bought an e-scooter instead.

Eunoia JC Economics Dept 2 • A rational consumer should only buy a bicycle if and only if the benefits are greater than costs. Body Point 2: Explain how producers of bicycles act rationally to determine their level of output • Producers of bicycle seek to maximise profits and will produce up to a point where marginal revenue (MR) = marginal costs (MC). • They consider their fi nancial constraints such as the a mount of funds available for the production process, resource constraints (availability of limited FOPs) • Benefits of producing bicycles is the revenue gained from selling bicycles which is obtained by price multiplied by quantity. • Costs include wages paid to workers and manufacturing costs such as costs of raw material for the different components of bicycle and costs of machinery to assemble the bicycle. Figure 2: Profit maximising output of a perfectly competitive bicycle firm • With reference to Figure 2, if the rational firm produces bicycle only up to Q1 where MR > MC, his profits can be increased by producing additional unit of bicycle as it will add more to his revenue than the costs. Hence, to maximise profits, a rational producer will increase production until MR = MC at Qe. • On the other hand, if the rational firm produces bicycle at Q2 where MC > MR, the additional production of bicycle has decreased his overall profits. Thus, to maximise profits , a rational producer decrease production until MR = MC at Qe. • The Marginalist principle states that an economic agent should pursue an activity up to the point where MB = MC. Thus, at Qe where MR = MC, there is no incentive for the producer to either increase or reduce production hence the profit -maximising firm will produce at the output where MR = MC. Conclusion In a perfectly competitive market, rational consumers and producers will consume and produce at where demand equals supply. Prices will then act as a signal to allocate resources between consumers and producers. If MPC (equilibrium price) is more than MPB (as reflected by demand curve), consumers will reduce consumption until MPC = MPB based on the marginalist principle while producer will increase production since the equilibrium price (MPB) is more than its MPC Revenue, Cost, Price MC DD = AR = MR = P Quantity E Pe Qe 0 Q1 MR > MC Q2 MR < MC

Eunoia JC Economics Dept 3 (as reflected by the supply curve) . This will maximise consumer and producer surplus, resulting in maximisation of society welfare. Mark Scheme Level Knowledge, Understanding, Application, Analysis Marks L3 Full display of AO1, AO2 and AO3 skills: For an answer that shows well-developed explanation of how consumers and producers of bicycle make rational decisions • clear and accurate explanation of the rational decision- making process and marginalist principle with appropriate diagrams • appropriate examples of costs, benefits and constraints that are related to the market for bicycle 8-10 L2 Uneven display of AO1, AO2 and AO3 skills: For an answer that shows under -developed explanation of how consumers and producers of bicycle make rational decisions • lacks depth of analysis (i.e. , limited effective use of relevant economic analysis or gaps in diagrammatic analysis) • l acks scope in explaining either consumer or producers of bicycle • lacks appropriate examples of costs, benefits and constraints 5-7 L1 Limited display of AO1 and AO2 skills: For an answer that shows limited knowledge of how consumers and producers of bicycle make rational decisions • listing of points, unexplained statements, or descriptive response • many conceptual errors (i.e., using total benefit/costs instead or marginal costs/benefit when explaining marginalist principle , confusion between costs and constraints) • irrelevant response such as on market failure • smattering of points 1-4

Eunoia JC Economics Dept 4 Part (b) - Question Analysis Approach Command Word Discuss how – balanced answer + evaluation Question Type Policy evaluation Start point Government intervention End Point Maximise society welfare Content and Context Content Policies to address market failure Context Market for bicycles Introduction State essay approach: Society welfare is not maximi sed in the market for bicycles as the price mechanism is unable to allocate resources efficiently . The market for bicycles fails due to the presence of positive externalities and imperfect information. Hence government intervention is needed so that society welfare could be maximi sed. However, such government intervention may not always be successful in achieving this aim of maximizing society welfare. Body Point 1: Explain how government intervention such as subsidies can address market failure due to positive externalities and maximise society welfare Figure 3: How subsi