11 The schedule shows the total utiity derived by a consumer of a good X at different levels of ‘consumoton. quanti ofXconsumed | 1] 2] 3]4]5|)6]7] 8 total utilty (units) 28 | 40 | 50 | 58 | 64 | os | 71 | 73 ‘The consumer obtains two units of satisfaction from the last cent she spends on each good thal she purchases. What isthe maximum number of units of X that she will consume ifthe price of X is 6 oants? AQ BOS c7 Des 2 Inthe diegram, an individual initially chooses combination N on budget fine LI. ‘An increase in his money income accompanied by an increase in the price of good Y causes his ‘budget line to shift to RS, and he now chooses combination T. good Y ° MS ‘good x How does this affect his economic welfare? A. He is definitely better off because his money income has increased. B_ He is definitely worse off because he has to pay more for good Y. © He is better off since combination T, which he now chooses, was not previously available to him. D__ He is worse off since combinations of X and ¥ along LN are no longer available to him. 3. Which statement describes a situation in which ¢ rise in input of factor X, all other ‘actors baing ‘constant, resuits in no chenge in a firm's output? A. There are diminishing retums to factor X. B_ Returns to scale are constant. © There arediseconomies of scale. The marginal product of is zero.1 Which condition defines productive efficiency? ‘Al factors of production are fully employed. Al firms are producing at their profit maximising levels of output. ‘There are no further opportunities for substituting cepital for labour. ‘The output of all goods is produced at the lowest possble cost. voor 2. Ahousehold makes the folowing purchases of frut. fut quantity | price per purchased (kg) | kg ($) bananas 8 1.00 apples 10 050 The household derives twice as much ulilly from the tenth kg of apples as from the fifth kg of bananas. What should the household do to raxinise utilly from the purchase of these fruits? purchase of | purchase of ‘bananas ‘apples A| decrease | increase B | increase | decrease Cc] increase | increase D | nochange | nochange 2 When buying goods not everyone buys the same standard product. There are some who want a cheap product aven thaugh it might be of poor quality, while there are those who are willing to pay more fora luxury or an indviually-made product Customers search fo value but value i not ust inthe price. (adapied rom Now YorkTimesin the Obsener 21.02 10) (a) Explain tho theoretical link between utility, price and the demand for a product. (12) (b) Discuss whether the economic analysis of a rational consumer estimating demand based ‘on value (utility) is valid not only for standard products but also for poor quality and luxury products. [13]a (a) Explain how a consumer allocates expenditure according to the principle of equi-marginal uty and analyse how a change in income might affect that allocation. (b) Discuss how a goverment might achieve a more equal distribution of income. When buying goods not everyone buys the same standard product. There are some who want a cheap product even thought might be of poor quality, while there are those who are willing to pay more for a luxury oF an individually-madie product. Customers search for ‘value but value is not justin the price. (adapted trom New York Times in the Obsorver 24.02.10) (2) Explain the theoretical link between utiliy, price and the demand for a product. [12] Explanation of uilty, marginal utlty, equi marginal principio, derivation of demand curva. (12) ‘L#. Fora sound analyss and explanation with clear understanding ofthe principles involved {and a good siucture to the answer. 9-12 13 Fora competent analysis but more imited explanation maybe ofthe link to the demand curve but stilwits a reasonable structure fo the answer. 7-8 12 For a mare limited analysis probably explanng DMU but with efter an incorrect sfatoment ofthe equlmnarginal prinjple or of a lack of connection to.a demand curve ‘and weh a poorer stucture to the answer 5-6 Lt Foran arswer wnich nas some basic Conec: fax but inauges irelevancies. EOS oF thoory or omissions of anelysi wil bo substanti. 1—4 (b) Discuss whether the economic analysis of a rational consumer estimating demand ‘based on value (utility) Is valid not only for standard products but also for poor quality and lumury produets. 113) Discussion of whether marginal ulilty can be applied 1 all products. Utility involves satstection, might be that a cheaper producti ust 2s accoptable 2s what WOU have Deen ppaid for a ctandaré product - so tho MU would hevo boan abovo the price. Tho lower price ‘ives greater consumer suplis. Alternatively, the cheaper product might have given less ‘Saiisfaction so the MU would not have been as great and would stil be proportional to the price. A dearer product could glve greater satsfaction and stil be accommodated ito the 12 For a imted but acceptable attempt to discuss the Ink to the theory but with lncondlusive or unconvincing discussion and no overall conclusion 5-6 LL1 For an answer which hae some dosio cormet facts but indudea inmlovancies. Error of theory or omissions of analysis wil be substantial. 1-4 (2) 03)2 (@ (b) Explain how a consumer allocates expenditure according to the principle of equi- ‘marginal utility and analyse how a change in income might affect that allocation. [12] Explanation of principle of marginal utlity and equi-marginal utilty allocation. A change in income would shif the demand curve, depending on the nature of the good (normafinferion). Itmay, but not necesserly, alter ils slope. Cendidates should mention both a rise end fallin income, quantity bought wil change. Movements along the supply curve will cause price ‘changes So the equilibrium utiity/price ratio will change, L4. For a reasoned explanation linked to more than one good and clearly structured answer with @ conclusion about what happens as income rises and falls. (9-12) L3. For a fair explanation bul undeveloped answer; possibly with income moving in one direction with comment on effect on pricelutity ratio. Or mention of rise and fall in income but unclear link to price/utility ratio. (7-8) L2 For alimited attempt which does not clearly determine the equilibrium position for more ‘han one good or which does determine that but expresses it as a static model and does ‘not consider income changes, (6) Lt. For an answer which has some basic correct facts but includes irrelevancies. Extors of theory or omiesione of analyeie will be substantial (+4) Discuss how a government might achieve a more equal distribution of income. [13] Discussion of diferent tax policies, of transter payments, of subsidies and suppor. LA. For a reasoned and well argued discuseion with accurate development of the altemative poleies. (013) L3. Fora clear but undeveloped discussion but one which sill deals with more than one type of poly. (7-8) L2_ Fora imted attempt to consider the polices wih @ concentration on one policy, probably Jax changes, only (6) Lt For an answer which has some basic correct facts but includes irrelevancies. Errors of ‘heory or omissions of anaiysis are substantial (1-4)