2024 ASR H3 Economics Paper 1 Suggested Answer

2024 A-Level H3 Economics Paper 1 Case Study Question Suggested Answers Qn Question / Suggested Answer Marks (a) Using game theory, explain how the fear of shortages might lead to panic buying. [6] Game theory provides a framework for understanding why the fear of shortages might lead to panic buying even if no actual shortage exists at the point of purchase. In game theory, in contrast to traditional economic analysis, individuals make decisions based not only on their own preferences but also on what they expect others to do. The classic Prisoner's Dilemma and coordination games illustrate how rational individuals, acting in their own self-interest, can produce collectively suboptimal outcome. This model can be applied to the case of panic buying, as follows: Imagine a scenario with two strategies, where the two players in the game are the shopper and everyone else. The shopper has two strategies: • Shop normally (buy what he or she needs) • Panic buy (stockpile excessively) However, the payoff to the shopper depends on what others do as well as the shopper’s own action: • If everyone shops normally, supplies remain available, and everyone benefits as they would be able to purchase the necessary supplies the next time they require it and would not need to stockpile supplies which incur an opportunity cost (the other goods that they could have purchased instead of unnecessarily stockpiling) • If others start panic buying, those who shop normally risk being left with nothing. Nash Equilibrium emerges when each person's strategy is optimal given the strategy of others. If the shopper believes that everyone else will panic buy, the best response is to panic buy as well, to avoid missing out on essentials such as hand santisers. This creates a self-fulfilling prophecy: the fear of shortage leads to stockpiling, which in turn causes the very shortage people feared, meaning both parties ‘lose’ out. The payoff matrix below provides more detail about the potential gains and losses. Shopper Everyone Else Shop Normally Panic Buy Shop Normally (4,4) (1,5) Panic Buy (5,1) (2,2) As shown in the payoff matrix above, the dominant strategy of both players is to ‘Panic Buy’ as the benefits is higher than the strategy of ‘Shop Normally’ regardless of the action of the other player. Thus, the Nash equilibrium will be for both players to Panic Buy leading to a scenario of shortages and bare supermarket shelves. Marker’s comments: Generally, responses were well explained. Candidates demonstrated a strong knowledge and understanding of game theory. A payoff matrix was used to explain how the fear of shortages might lead to panic buying. Stronger responses used the information in the case study to refer to the two players in the game as ‘the shopper’ and ‘everyone else’. They also gave appropriate values for the possible outcomes from the game. Almost all candidates gave clear explanations of how