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 grea