Edexcel unit 1 June 2010, Q1-8 1) C- The production possibility frontier (PPF) is a diagram showing the maximum potential

output of an economy, assuming that all factors of production are fully and efficiently used. The opportunity cost is the cost of the next best alternative forgone. This is determined by the consumers wants, needs, time a nd income which are important to the PPF because producers decide how best to allocate their resources according to the opportunity cost. The PPF shows how increasing the production of one good means decre asing the supply of another. The points along the curve show the trade- off between these goods and the sacrifice in production of the second good is the opportunity cost. 2) B- The demand curve shows the relationship between the price of a commodity and the amount consumers are willing a nd able to pay. G old and silver are both have elastic demand so the demand changes substantially in response to a small change in price; this means a small decrease in price may substantially increase total revenues. They are also substitute goods which mean the demand of one good will change relative to a change in another. So as the price of silver decreased the total revenue and demand would have increased as consumers buy silver instead of gold. To complete the price of go ld would have to decrease to simply maintain the same level of demand. 3) B- The demand for luxury goods is elastic and is therefore very price sensitive. The consumer surplus is the difference between the maximum amount a consumer is willing to pay and the actual amount they pay. Consumer surplus equation is (amount consumer is willing to pay) (actual amount paid) so Neringas current surplus is 25002000= 500. The reduction of tax would decrease the cost of the holiday because the cruise company would n ot have to pay such a large charged fee from the government. This would decrease the price on outputs and allow the company to lower their prices while still maintaining the same level of profit . A drop in price of the holiday would increase Neringas consumer surplus from C1 to C2. 4) C- A subsidy is a set amount of money given by the government to producers to encourage them to produce and supply more goods. The supply curve has shifted to the right due to the increase in supply, the equilibrium has moved from point A to point B. The area coloured in pink is the cost of the total government expenditure on the subsidy because the government are paying off the burden on consumer and producer within the total revenue as the motivation to produce more of the go od. Therefore the total amount is (10 7) x 150= 450. 5) C- The two graphs show that the supply for good X is increasing while there is an increase in demand for good Y. Computer game consoles and computer game software are complimentary goods because the ch ange in demand for one generates a change in demand for another. The increase in supply of consoles (good X) means more will be sold. This will then cause the demand for computer games (good Y) to increase as well because people want to play them on their new consoles. 7) B- A characteristic of a public good is that has non - excludability and non - rivalry. There is no effective way of adding a monetary cost since its difficult to exclude non

payers so the price mechanism fails l eading to people consuming the good without paying and further adding to the free rider problem . Hence the taxation of the cost of using it is applied to everyone e.g. street lamps. 8) B- On the graph the socially optimum level is at point Y, where the MSB crosses the MSC and the market equilibrium is at point X, where the MPB meets the MPC. The social optimum marks the point where net benefits are maximized for society. The market equilibrium does not reach the s ocially optimum. This is known as market failure which occurs when there is an inefficient allocation of goods and services in a market, here it is showing the under provision of higher education .