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Edexcel Advanced GCE Economics 9121 Unit 4 (6354

)

Further Exemplar Questions

Time: 1 hour 15 minutes

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Section A
In this section there are 10 multiple choice questions.

For each question there are five suggested answers; A, B,C, D and E. When you have selected your answer to the question, write the chosen letter against the number of the question in your script.

You can only offer one answer to each question.

After making your selection you should justify your choice with an explanation. Where appropriate, you are encouraged to use diagrams as part of your explanation in the space provided.

You will score one mark for each correct answer and a maximum of three marks for each justification of your answer.

You are advised to spend approximately 30 minutes on this section.

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. ………………………………………………………………………………………. ……………………………………………………………………………………….1) The Competition Commission report on the proposed merger between BSkyB and Manchester United football club expressed concern that the merger. would strengthen BSkyB’s position as a “vertically integrated broadcaster”. ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=P=çÑ=OS . This means that BskyB: A) B) C) D) E) Owns a number of other broadcasting companies around the world Has many business interests unrelated to broadcasting Can reduce the money it has to spend on advertising Makes and distributes programmes to customers Is already a natural monopoly Answer (1 mark) Explanation …………………………………………………………………………. ……………………………………………………………………………………….. if it took place.....

The Director of OFWAT set a value for K of –17% for the Sutton and East Surrey Water PLC for the period April 2000 to April 2001. ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=Q=çÑ=OS .. ………………………………………………………………………………………. This suggests that: A) B) C) D) E) The water company would inevitably be loss making during this period The water company’s prices will be 17% below marginal costs The company’s share price will rise in nominal terms The company’s water prices are likely to rise in real terms The director of OFWAT believes there is room for the water company to make efficiency improvements Answer (1 mark) Explanation …………………………………………………………………………. ……………………………………………………………………………………….. ………………………………………………………………………………………. negative or zero....2) The licences of water companies in the UK provide that in any year they may not increase their prices by more than RPI + K where K may be positive..

………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=R=çÑ=OS .... ……………………………………………………………………………………….3) The diagram shows the revenue and cost position of a monopoly: Price per unit MR AR MC AC V W Which of the following statements is true? A) B) C) D) E) X Y Z Quantity The firm would maximize its revenue at X The firm would be allocatively efficient at V At output W the firm would make a loss At output Z the firm would have zero costs At output Y the firm would be technically efficient Answer (1 mark) Explanation ………………………………………………………………………….... ………………………………………………………………………………………. ……………………………………………………………………………………….

4) In 1993. Zeneca Group PLC. ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=S=çÑ=OS . publicly listed company. One reason for doing this might have been that ICI was facing: A) B) C) D) E) Monopolistic competition Supernormal profits Limit pricing A perfectly contestable market Diseconomies of scale Answer (1 mark) Explanation …………………………………………………………………………... ICI demerged its bioscience businesses of pharmaceuticals.... seeds and biological products into a separate. agrochemicals. ………………………………………………………………………………………. ………………………………………………………………………………………. ………………………………………………………………………………………..

. ………………………………………………………………………………………. Which of the following statements is true for such a firm? A) B) C) D) E) At the profit maximizing level of output marginal profit will be positive At the profit maximizing level of output marginal revenue equals zero At the profit maximizing level of output the price elasticity of demand will be greater than one The firm will necessarily be making supernormal profits Raising output will reduce the firm’s revenue Answer (1 mark) Explanation ………………………………………………………………………….. ……………………………………………………………………………………….. ………………………………………………………………………………………. ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=T=çÑ=OS .5) Assume that a monopoly produces a profit maximising level of output....

………………………………………………………………………………………..... ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=U=çÑ=OS ..6) A regulatory agency is less likely to be concerned that a firm has a large market share if it believes that A) B) C) D) E) There is every prospect that the firm will be able to increase its share further There is good evidence of limit pricing The firm is making high levels of supernormal profits The firm’s advertising expenditure is very high The market is contestable Answer (1 mark) Explanation …………………………………………………………………………. ……………………………………………………………………………………….. ……………………………………………………………………………………….

7) Which of the following markets is closest to the model of monopolistic competition? A) B) C) D E) The UK airline industry The market for branded trainers The market for petrol Hair dressers who engage in local advertising The wholesale commodity market for coffee (1 mark) Answer Explanation …………………………………………………………………………. ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=V=çÑ=OS ....... ………………………………………………………………………………………. ………………………………………………………………………………………. ……………………………………………………………………………………….

... ………………………………………………………………………………………. ……………………………………………………………………………………….8) A monopoly changing from a policy of profit maximization to one of revenue maximization will now be operating at A) B) C) D) E) A higher level of output and higher marginal costs A higher level of output and higher marginal revenue A lower level of output and lower marginal costs A lower level of output and lower marginal revenue A lower level of output but with marginal cost equal to marginal revenue (1 mark) Answer Explanation …………………………………………………………………………. ……………………………………………………………………………………….... ………………………………………………………………………………………… (3 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NM=çÑ=OS .

saddled with too much debt. the company was seen as a potential winner from the dotcom revolution.” (Source: Financial Times 27th January 2001) Table 1 Oftel: BT Price Controls (low to medium spending residential customers) 1993 – 1997 1997 – 2001 2001 RPI – 7. The plan is to float off 25 per cent of the group’s mobile phone assets later this year. In November.uk/history. the company tried to counter this image by announcing a demerger that will lead to BT becoming five separate companies. There will also be flotations of the business services and “Yellow Pages” divisions – BT’s profitable directory of commercial phone numbers. The shares fell 62.2 per cent over 2000. hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NN=çÑ=OS . the telecommunications watchdog.5% No Price Control Planned 5 10 15 (Source: http://www. as investors logged on to the net using BT’s lines. It was also criticised for not doing enough to open up its local network to competition. British Telecom Extract 1 “It was a dismal quarter at the end of a dismal year for investors in British Telecommunications.htm) Extract 2 “Internet users pay more for high-speed access in Britain than in other leading industrialised countries research commissioned by Oftel.Section B Answer EITHER Question 11 OR Question 12 from this section (You should spend approximately 40 minutes on this section) 11. the second worst performance in the Financial Times top 100 companies share index. BT is generally seen to have been overtaken by rivals such as Vodafone. says.oftel. and to have failed with its international strategy. At the start of the year. by mid-year the group was seen as a lumbering giant. A new company will also be formed to own the UK network infrastructure.co.5% RPI – 4.

(10 marks) Give one reason why a regulator such as Oftel may be ineffective (4 marks) To what extent are the suggested de-merged companies for Yellow Pages and ownership of the network infrastructure (extract 1. (4 marks) Why might the regulator have changed the price formula from its previous rate of “RPI – 7. with just 2 per cent of BT’s exchanges currently open to competitors compared with 100 per cent in Germany.000 lines connected compared with 300.5%” ? (4 marks) Discuss one advantage and one disadvantage of having price control periods as long as five years (8 marks) (b) (c) (d) Examine the likely economic consequences of a lack of progress in local loop unbundling (extract 2. which has been faster at allowing competing operators to develop broadband technology for fast internet access. BT is also slower in offering its own broadband services: it now has 15. line 15). This compared with £32 in Germany. The process of allowing the entry of new competitors to establish their own broadband services by connecting to BT’s existing copper wire network at local telephone exchanges is known as ‘local loop unbundling’. The idea is to allow rival firms to use BT’s existing lines for services such as high speed internet access. France and Germany and found that the average monthly charge for residential broadband services was highest in the UK at about £40.000 in Germany. lines 11-13) likely to form contestable markets? (10 marks) (Total marks for Question 11: 40 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NO=çÑ=OS . The unbundling process in the UK has fallen behind other European countries.5 The independent survey undermines previous claims by Oftel that Britain has not slipped behind in the provision of so-called broadband access. BT has been accused of denying access to some of the exchanges rival companies most want. Researchers compared prices in the US.” (Adapted from: The Financial Times 27th January 2001) 10 15 20 (a) (i) (ii) (iii) Explain the meaning of BT’s current price control formula of “RPI – 4. New technology makes possible the use of the existing infrastructure by many firms by enabling phone lines to carry 50 times more data.5%” in table 1.

The UK Consumers’ Association also made a statement. Commission spokeswoman.82 £10.88 £10. Universal Music UK. The organisation pointed to moves by record companies to release UK-only versions of top CDs to stop retailers such as J. (Adapted from: The Financial Times 27th January 2001) 10 15 Table 2 International CD Pricing UK Europe USA Britney Spears “Oops I did it Again” £14. Virgin and Pinnacle – Britain’s largest independent record distributor. The Act prohibits cartels. 10 hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NP=çÑ=OS . CD Pricing Extract 3 “The European Commission has launched an investigation into alleged price-fixing of CDs by music companies. 19th February 2001) Extract 4 “The Office of Fair Trading is investigating whether seven of the world’s largest record companies are guilty of price-fixing. confirming that it had been concerned about high-priced CDs for many years. It has launched a six-month inquiry into Sony.16 £11. The Commission is concerned about the high price of CDs in the EU market compared with the US.77 U2 “All That You Can’t Leave Behind” £12. Bertelsmann Music. Warner Music. up to a maximum of three years. “concerted practices” and abuse of a dominant position. 5 ‘We are looking into the so-called contracts between the largest record companies and retailers to see if there is a policy of maintaining retail prices. EMI. The big record companies agreed last May to drop a policy which required retailers to display a minimum price for CDs in their advertisements. ‘it’s clearly an attempt to partition the market’.63 (Adapted from: The Evening Standard. Sainsbury from importing lower priced CDs from other EU countries to sell at £9. Massive penalties face any record label found guilty of breaching the 1998 Competition Act: up to a tenth of their British turnover for every year of the infringement.99 £12.99. ‘They killed the imports overnight’ an official said. 5 The OFT says it has ‘reasonable grounds for suspecting’ that they have conspired to stop retailers from importing cheaper compact discs from Europe.12.’ said Amelia Torres. a spokeswoman confirmed yesterday.

(10 marks) (i) (ii) Explain the term ‘cartel’ (extract 4. line 7).(Adapted from The Evening Standard. (10 marks) (Total marks for Question 12: 40 marks) (Total marks for Unit 4: 80 marks) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NQ=çÑ=OS . the directors responsible for USA record sales are pursuing sales maximising objectives whilst those with responsibilities for the UK pursue profit maximising objectives. (4 marks) If all firms in the CD industry use cost plus pricing. in the CD industry. explain the data in table 2. and making use of a diagram. On this assumption. such as that contained in the 1998 Competition Act (extract 4. 19th February 2001) (a) (b) (c) Which market structure best describes the UK CD industry? Justify your choice. in fact. how might the data in table 2 be explained? (6 marks) Suppose that. line 9) (4 marks) (d) Why might it be advantageous for firms in the CD industry to engage in collusive behaviour? (6 marks) (e) Evaluate the likely economic benefits of implementing competition policy.

is given. Diseconomies of scale may have led it to reduce the operating size of each business unit. (1 mark) (4) E Diseconomies of scale involve rising long run average costs.e. MR is negative – revenue will be falling as output increases. MR is positive – each unit adds to revenue. to the right of C. (1 mark) ICI may have been experiencing problems co-ordinating the various aspects of its business in terms of lines of control. (2 marks) (5) C Profit maximization takes place where marginal revenue equals marginal cost. the profit maximizing position must feature positive marginal revenue. i. (2) E Candidates need to explain that the RPI is a measure of inflation (or the cost of living) (1 mark) and that the regulator has decided to limit price increases to the rate of inflation less 17%. (2 marks) To the left of C.e. A maximum of 2 marks if a definition only. where PED > 1. This is an example of backwards vertical integration: purchasing a company at an earlier stage of production than itself.Mark Scheme Unit 4 Question (1) D Scheme Marks 1 BSkyB is a TV programme distributor but also a programme maker. This will mean real price reductions for SESW (1 mark) The standard assumption is that rigorous price interventions of this kind are intended as a surrogate for competition – on the premise that there potential efficiency improvements. Purchasing Manchester United football club would give it stronger links with the production of a major part of its business – the broadcasting of sports events. i. (2 marks) 3 1 3 1 3 1 3 1 3 hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NR=çÑ=OS . where marginal profit equals zero. (1 mark) (3) A A firm maximizes its revenue where marginal revenue is equal to zero. For full marks there must be reference to BskyB. where adding one more unit of output adds nothing further to revenue. This implies that profit maximizing monopolies will reduce output to drive up the price so as to operate on the top half of the demand curve. (1 mark) Since firms have positive marginal costs. consistency of decisions across the company. delays in making decisions.

(1 mark) However. An optional point might include the information failure that tends to make patients treat the specialist recommended by their GP as monopolist suppliers of good health.e. At the profit maximizing level of output MR=MC which implies (since MC > 0) that MR is positive. (1 mark) 1 3 1 (7) D There are many buyers and many (independent) sellers in the hair dressing industry. (1 mark) There is good (local) information about prices and low barriers to entry. (1 mark) 3 1 (8) A Candidates will probably find it easiest to answer this question by using a diagram. (1 mark) This allows hit and run competition. Total Marks: 40 3 hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NS=çÑ=OS . Thus price will be set equal to marginal cost. the threat of this may be enough to force a firm with large market share to act as if it is in competition. (1 mark) 3 1 (10) D Candidates must specify the conditions of successful price discrimination (1 mark) but applied specifically to medical treatment (2 marks). by the car they drive). (1 mark) i. and operations are not tradable second hand – so ruling out second hand arbitrage.g. where there are low sunk costs. (1 mark) The low barriers to entry allow any supernormal profits to be competed away. the market is characterized by local advertising: the resulting local brand loyalty means that each firm faces a less than perfectly elastic demand curve: monopolistic competition. Marginal costs will then tend to rise (but explicit reference to diminishing marginal returns is not required. (1 mark) Definition of allocative efficiency: the price taking firm will reduce its price to the bottom of the AC curve (only normal profit) where AC = MC. This allows the firm to raise revenue by raising output.(6) E A contestable market is one where there are low barriers to entry and exit.) 3 1 (9) B Some indication of the definition of perfect competition. Thus surgeons may be able to identify different groups of customers with different elasticities of demand (e. so requiring less regulation.

An obvious (but not essential) division of argument would be micro and macro consequences: Micro: if BT does not grant access to its local loops then it will gain market power as the demand for high bandwidth access increases. However. Also award arguments such as stability of investment decision making. This allows BT to raise their average price in any one year by no more than the rate of inflation less 4. regulatory capture. but full marks only if they are properly explained: asymmetry of information. 11 Section (a) (i) Scheme Marks BT is regulated according to the RPI – X formula. Assessment must consider “to what extent” for level 5: (d) Assessment of contestability of Yellow Pages. (2 marks).g. gives the company time to reap the reward of efficiency improvements in excess of those demanded by the pricing formula. If these change markedly. Potential for hit and run competition. (4 marks).Q. Here X has been set at 4. However. Disadvantages: five years might be thought to be too long for a single formula to accurately reflect changes in BT’s market conditions. then UK firms will face a competitive disadvantage. say. then BT may be able to make supernormal profits for an extended period of time. Germany. These might be lost through unbundling leaving consumers with higher prices. 4 (a) (iii) Advantages: e. 10 (c) Definition of contestability in terms of low barriers to entry and exit. Yellow Pages is a famous brand so there would be significant (sunk) advertising costs for a new entrant. (6 marks) Macro: cheap broadband internet access may be a key supply side feature of the UK economy. However. for example. However. BT had already shed a great deal of labour. particularly low sunk costs. this may be of minor significance in the context of other supply side issues. If the price formula was set annually there would be no profit incentive to beat these efficiency targets. for level 5 marks there must be a significant degree of evaluation. welfare loss. planning etc (4 marks). If access prices in the UK remain higher than those in.5%. complexity of the telecoms industry. or if the regulator was misinformed in the first place.5%.) There will also be a narrowing of consumer choice of broadband services. Getting hold 4 8 4 (a) (ii) (b) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NT=çÑ=OS . Award any relevant analysis. Also award arguments based on too harsh a formula. There are already some rivals in this market (particularly local directories) suggesting that barriers to entry are not insurmountable. allocative inefficiency. This has meant real (and nominal) price cuts in BT’s services to residential customers. (4 marks) Award any of the following. This will allow it to continue to charge high prices (resulting loss of consumer surplus. the lack of interest in unbundling by other telecommunication suppliers may suggest there are significant economies of scale here. The price formula in the early 1990s was quite aggressive: it is likely that Oftel felt that there was less room for efficiency improvements in the current price round.

ie. where AR=AC (2 marks) and profit maximization in terms of MR=MC (2 marks). The discussion of consumers should refer to consumer surplus and choice. (2 marks) The data could then be explained in terms of differences in average costs supplying CDs to different countries. with a simple prisoners’ dilemma. For a level 5 mark answers must contain a significant level of evaluation. such as satellite and cable transmission? (4 marks) 10 Q12 (a) (b) Oligopoly (2 marks). The discussion of producers to price. the potential for lost economies of scale. Alternatively. Clear definition of sales maximization in terms of the maximum level of output which can be produced without making a loss. Definition of cost plus pricing – prices set by adding a constant mark-up to average costs. OPEC (2 marks). the kinked demand curve will no doubt make several appearances. (4 marks) Also. for example.g. differences in transports costs or. Explanation of resulting difference in prices. that the firms involved can act as if a monopoly and thus gain supernormal profits (supported with an appropriate diagram). Alternatively. if the CDs are made locally. illustrated. This seems more straightforwardly to be unlikely to be contestable. interdependent firms suspected of using market power (2 marks). No detailed knowledge of the Competition Acts is required but candidates may draw on the passage. However. i. the potential damage to investment decision making if fines are imposed etc. allow an explanation in terms of differences in standard mark-ups by directors responsible for different countries. Appropriate diagrams will add value. 4 6 (e) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NU=çÑ=OS . Appropriate diagram illustrating these two levels of output (3 marks). related to the data in the table (3 marks). Assessment of Network Infrastructure Company. 10 4 6 (c) (d)(i) (d)(ii) Some analysis of the advantages of oligopolistic collusion. what about alternative technologies. differences in production costs (land. This might include acknowledgement of the information problems of implementing competition policy.e. Laying competing telephone lines is likely to be seen as prohibitively expensive by new entrants. collusive agreements between producers. (6 marks) Effects on both consumers (5 marks) and producers (5 marks) should be considered. There are a few large. contracted. output. This may also impact on consumers in terms of reduced choice if too much uncertainty is created.g. Definition of cartel: formal. some analysis of the price-setting dilemmas of oligopolists. (2 marks) Illustration – e. capital or labour costs). (4 marks).of the required information may also be an irretrievable expense. E. profit and efficiency.

Illustration of this on an AD/AS diagram (1 mark). For a level 5 answer. (1 mark). Question (a) Scheme Understanding “nominal” in terms of cash value.] Resulting multiplied expansion in real output (1 mark).g. or a broad ranging approach that looks at a number of different alternative goals. Total Mark for Question 1: 30 15 Marks 5 (b) (i) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=NV=çÑ=OS . there may be a longer-term influence on AS. e. (1 mark) Definition of GDP in terms of value of goods and services produced in the UK. candidates may discuss shifts in the AS curve caused by increased imported input costs.] Consequences for growth in an AD/AS (or more descriptive) framework (2 marks). Identification of transmission to consumption. There needs to be some consideration of the likely trade-off between high growth and other goals. price stability. Balance of Payments equilibrium. other things remaining the same.10 Exemplar Questions Unit 3 Mark Scheme Unit 3 (Essays) 1. Also accept variants on “value of goods after the rate of inflation has been taken out. investment and the exchange rate (2 marks). a Phillips curve relationship with inflation. (1 mark). [Alternatively. or monetary value. Understanding “real GDP” (volume measure of goods and services produced in the UK). that other things may not be equal.” (3 marks) A depreciation of sterling. reduces the price of UK exports and raises the sterling price of UK imports. that there are uncertainties involved. Illustration on AD/AS diagram (1 mark) [Alternatively. Other goals mentioned in the syllabus include: full employment. income redistribution. 5 (c) Award either an in depth appraisal of (for level 5 at least two) other macroeconomic goals.g. Some critical distance: e. and concern for the environment. candidates must spend some time evaluating their points in the form of “ifs and buts” about the form of the tradeoff. This will tend to raise aggregate demand (1 mark). import/export elasticities or real wage resistance or crowding out (1 mark). 5 (b) (ii) A rise in UK interest rates will tend to reduce aggregate demand.

g.2. investment and the exchange rate (5 marks). Some of the (multiplied) increase in incomes will leak into imports through consumption of foreign goods. (1 mark) The extra investment may make UK exports/ import substitutes more competitive in the longer term (2 marks) or effects of budget policies on current a/c via inflation and export/import prices (2 marks) Some assessment of the likely overall effect e. A fall in the standard rate of income tax will raise household disposable income. specifying the likely transmission through consumption. (1 mark). Analysis of impact of higher interest rates on aggregate demand. (a) The balance of payments records transactions in sterling on the foreign exchange market (there are a number of allowable ways of putting this) (1 mark). Total Mark for Question 2: 30 15 Exemplar Questions Unit 4 Mark Scheme Unit 4 hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=OM=çÑ=OS . also raise aggregate supply (1 mark). reduced inflation in the UK should increase international competitiveness. Reducing (the rate of growth of) real incomes should reduce imports. 5 (b) (i) 5 (b) (ii) 5 (c) Discussion of the consistency of this policy with maintaining a surplus on current account. Putting this in an AD/AS framework to show the reduced pressure on the price level (accept falling AD. (2 marks). trade in services. (3 marks ). investment income and current transfers (3 marks). reducing the price level) (3 marks). in terms of short run/long run or of the significance of elasticities (1 mark). further raising aggregate demand (1 mark) Investment will. other things remaining the same. Reference to multiplied expansion from the increase in AD (1 mark). Illustration of this on AD/AS diagram raising the equilibrium level of income (1 mark). Much will depend on the elasticities. This will raise consumption (1 mark). Investment incentives may raise the level of investment. Main subsections of the current account need to be identified: trade in goods. Some “ifs and buts” about the lags/potential lack of response to the rate rise (2 marks). Meanwhile. in the longer term. A surplus means that purchases of sterling for those reasons exceed sales of sterling. (1 mark) Some extra investment goods may also be imported.

to the right of C. is given. where PED > 1. (1 mark) ICI may have been experiencing problems co-ordinating the various aspects of its business in terms of lines of control.Question (1) D Scheme Marks 1 BSkyB is a TV programme distributor but also a programme maker. i. This will mean real price reductions for SESW (1 mark) The standard assumption is that rigorous price interventions of this kind are intended as a surrogate for competition – on the premise that there potential efficiency improvements. delays in making decisions. (1 mark) Since firms have positive marginal costs. (2 marks) E 3 1 1 1 hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=ON=çÑ=OS . (2 marks) To the left of C. (1 mark) 3 1 3 A (3) A firm maximizes its revenue where marginal revenue is equal to zero. MR is negative – revenue will be falling as output increases. This is an example of backwards vertical integration: purchasing a company at an earlier stage of production than itself. MR is positive – each unit adds to revenue. (2 marks) 3 C (5) Profit maximization takes place where marginal revenue equals marginal cost. consistency of decisions across the company.e. where adding one more unit of output adds nothing further to revenue. the profit maximizing position must feature positive marginal revenue. Purchasing Manchester United football club would give it stronger links with the production of a major part of its business – the broadcasting of sports events. Diseconomies of scale may have led it to reduce the operating size of each business unit. where marginal profit equals zero. (2) E Candidates need to explain that the RPI is a measure of inflation (or the cost of living) (1 mark) and that the regulator has decided to limit price increases to the rate of inflation less 17%. A maximum of 2 marks if a definition only. This implies that profit maximizing monopolies will reduce output to drive up the price so as to operate on the top half of the demand curve. For full marks there must be reference to BskyB.e. (1 mark) 3 E (4) Diseconomies of scale involve rising long run average costs. i.

(1 mark) This allows hit and run competition. (1 mark) However. Marginal costs will then tend to rise (but explicit reference to diminishing marginal returns is not required. (1 mark) D 1 3 (7) There are many buyers and many (independent) sellers in the hair dressing industry.(6) A contestable market is one where there are low barriers to entry and exit. (1 mark) There is good (local) information about prices and low barriers to entry. Thus surgeons may be able to identify different groups of customers with different elasticities of demand (e. (1 mark) D Candidates must specify the conditions of successful price discrimination (1 mark) but applied specifically to medical treatment (2 marks).) B Some indication of the definition of perfect competition. (1 mark) Definition of allocative efficiency: the price taking firm will reduce its price to the bottom of the AC curve (only normal profit) where AC = MC. where there are low sunk costs. Total Marks: 40 3 3 1 3 1 1 1 (9) (10) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=OO=çÑ=OS . by the car they drive). and operations are not tradable second hand – so ruling out second hand arbitrage. This allows the firm to raise revenue by raising output. so requiring less regulation. Thus price will be set equal to marginal cost.e. the market is characterized by local advertising: the resulting local brand loyalty means that each firm faces a less than perfectly elastic demand curve: monopolistic competition. (1 mark) i. the threat of this may be enough to force a firm with large market share to act as if it is in competition. At the profit maximizing level of output MR=MC which implies (since MC > 0) that MR is positive.g. An optional point might include the information failure that tends to make patients treat the specialist recommended by their GP as monopolist suppliers of good health. (1 mark) A 3 (8) Candidates will probably find it easiest to answer this question by using a diagram. (1 mark) The low barriers to entry allow any supernormal profits to be competed away.

for level 5 marks there must be a significant degree of evaluation. This allows BT to raise their average price in any one year by no more than the rate of inflation less 4. Disadvantages: five years might be thought to be too long for a single formula to accurately reflect changes in BT’s market conditions. An obvious (but not essential) division of argument would be micro and macro consequences: Micro: if BT does not grant access to its local loops then it will gain market power as the demand for high bandwidth access increases. 4 (a) (iii) Advantages: e.5%. If these change markedly.) There will also be a narrowing of consumer choice of broadband services. regulatory capture. This has meant real (and nominal) price cuts in BT’s services to residential customers. Yellow Pages is a famous brand so there would be significant (sunk) advertising costs for a new entrant. the lack of interest in unbundling by other telecommunication suppliers may suggest there are significant economies of scale here. These might be lost through unbundling leaving consumers with higher prices. The price formula in the early 1990s was quite aggressive: it is likely that Oftel felt that there was less room for efficiency improvements in the current price round. then BT may be able to make supernormal profits for an extended period of time. BT had already shed a great deal of labour. complexity of the telecoms industry. Getting hold 4 8 4 (a) (ii) (b) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=OP=çÑ=OS . gives the company time to reap the reward of efficiency improvements in excess of those demanded by the pricing formula. However. However. allocative inefficiency. say. If access prices in the UK remain higher than those in. Germany. or if the regulator was misinformed in the first place. 11 Section (a) (i) Scheme Marks BT is regulated according to the RPI – X formula.5%. If the price formula was set annually there would be no profit incentive to beat these efficiency targets. Here X has been set at 4. However. This will allow it to continue to charge high prices (resulting loss of consumer surplus.g. (4 marks). then UK firms will face a competitive disadvantage. welfare loss. 10 (c) Definition of contestability in terms of low barriers to entry and exit. for example. There are already some rivals in this market (particularly local directories) suggesting that barriers to entry are not insurmountable. (6 marks) Macro: cheap broadband internet access may be a key supply side feature of the UK economy. Potential for hit and run competition. this may be of minor significance in the context of other supply side issues. Award any relevant analysis.Q. Also award arguments such as stability of investment decision making. However. planning etc (4 marks). Also award arguments based on too harsh a formula. (2 marks). but full marks only if they are properly explained: asymmetry of information. particularly low sunk costs. Assessment must consider “to what extent” for level 5: (d) Assessment of contestability of Yellow Pages. (4 marks) Award any of the following.

illustrated. where AR=AC (2 marks) and profit maximization in terms of MR=MC (2 marks). (4 marks). the potential for lost economies of scale. collusive agreements between producers. for example. such as satellite and cable transmission? (4 marks) 10 Q12 (a) (b) Oligopoly (2 marks). Explanation of resulting difference in prices. This may also impact on consumers in terms of reduced choice if too much uncertainty is created. the kinked demand curve will no doubt make several appearances.e. E. interdependent firms suspected of using market power (2 marks). that the firms involved can act as if a monopoly and thus gain supernormal profits (supported with an appropriate diagram). (6 marks) Effects on both consumers (5 marks) and producers (5 marks) should be considered. if the CDs are made locally. ie. output.g. with a simple prisoners’ dilemma. some analysis of the price-setting dilemmas of oligopolists. Definition of cartel: formal. capital or labour costs). the potential damage to investment decision making if fines are imposed etc.g. OPEC (2 marks). (4 marks) Also. Definition of cost plus pricing – prices set by adding a constant mark-up to average costs. This might include acknowledgement of the information problems of implementing competition policy. Appropriate diagrams will add value. (2 marks) Illustration – e. No detailed knowledge of the Competition Acts is required but candidates may draw on the passage. Appropriate diagram illustrating these two levels of output (3 marks). differences in transports costs or. differences in production costs (land. Alternatively. (2 marks) The data could then be explained in terms of differences in average costs supplying CDs to different countries. what about alternative technologies. 10 4 6 (c) (d)(i) (d)(ii) Some analysis of the advantages of oligopolistic collusion. i. allow an explanation in terms of differences in standard mark-ups by directors responsible for different countries. 4 6 (e) hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=OQ=çÑ=OS .of the required information may also be an irretrievable expense. There are a few large. The discussion of producers to price. Laying competing telephone lines is likely to be seen as prohibitively expensive by new entrants. This seems more straightforwardly to be unlikely to be contestable. contracted. For a level 5 mark answers must contain a significant level of evaluation. related to the data in the table (3 marks). The discussion of consumers should refer to consumer surplus and choice. Assessment of Network Infrastructure Company. Clear definition of sales maximization in terms of the maximum level of output which can be produced without making a loss. profit and efficiency. Alternatively. However.

12(d)(i) Qu. 8 Qu.5 5 12. 2 Qu. 7 Qu. 11(a)(i) Qu. 12(c) Qu. 11(b) Qu. 11(d) Total Qu. 3 Qu. 12(b) Qu. 10 Total SECTION B Qu. 11(a)(ii) Qu. 12(e) Total Section B as % of marks Section A & B As % of marks 25 2 1 2 1 1 2 2 2 2 10 2 2 2 2 2 10 25 25 30 1 2 2 4 1 4 14 2 4 1 3 4 14 35 20 4 4 8 10 4 10 40 4 6 10 4 6 10 40 Knowledge 2 1 1 2 1 1 1 2 2 2 15 Application 1 1 1 1 1 1 1 1 1 1 10 Analysis 1 1 1 1 1 1 1 1 1 1 10 Evaluation TOTAL 4 4 4 4 4 4 4 4 4 4 40 1 1 1 1 1 5 2 4 1 4 11 5 2 2 1 4 1 6 11 27. 12(d)(ii) Qu.5 hWynr^i=J=d`bypìééçêí=j~íÉêá~äy_ìëáåÉëëyVNON=råáí=Q=ÉñÉãéä~êëKÇçÅ m~ÖÉ=OR=çÑ=OS .10 Exemplar Unit 4 Assessment Objectives Grid Question SECTION A Qu. 5 Qu. 11(a)(iii) Qu. 4 Qu. 6 Qu. 1 Qu. 11(c) Qu. 9 Qu. 12(a) Qu.

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