PAPER 1 PAST EXAMINATION ESSAY QUESTIONS

HL MICROECONOMICS

a. Explain two reasons why the demand for primary commodities might be price
inelastic.[10]
- Topic:Price Elasticity of Demand
- Define: Inelastic demand, Primary commodities
- Example:The market for cigarettes
- Diagram: Inelastic demand diagram

Planning:
- Explain what inelastic demand is and why (2 reason) there is the inelastic
demand for cigarettes.
- Define: Inelastic demand, Primary commodities (raw materials)
- Reason: Cigarettes - people who smoke become addicted so willing to pay a
higher price (Elasticity coefficient less than 1)
+ Required now, rather than later: High demand (addicted)
+ A small portion of income: A good like cigarettes is a small percentage of
income, therefore the consumers tend to be less concerned about price.
+ Lack of close substitutes: consumers don’t have a lot of choices to buy.
- Diagram:

- Explanation of the diagram:

+ When the price increases, the quantity demanded will fall just a little
+ In order for the word, the consumers will continue to buy cigarettes.

b. Discuss the significance of price elasticity of demand (PED) for a government

imposing an indirect tax on a good.[15]
 - Topic: Indirect tax on a goods
- Define: indirect tax, price elasticity of demand (PED), Inelastic demand,
negative externalities of consumption
- Example: The market for cigarettes
- Diagram: Market for cigarettes with an indirect tax imposed on their scale

Planning:
- Explain what an indirect tax is and why the government would want to tax a
product like cigarettes (negative externalities of consumption)
- Define:
+ indirect tax: is one imposed upon expenditure
+ Price elasticity of demand (PED): is the measure of how much the
quantity demanded of a product changes when there is a change in
the price of the product.
+ Inelastic demand is when quantity demanded is insensitive to a
change in price
- Explain the vital role of price electricity of demand. It gives the signal to the
government to …
- Diagram:

Advantages of price elasticity of demand (PED) for a government imposing an

indirect tax on a good.
- Government uses indirect taxes to raise their revenue
- Limiting the production or consumption of demerit goods
- Predicting which group will bear most of the burden.

Disadvantage of price elasticity of demand (PED) …

 - However, imposing tax will lead to more harm than good, especially
the consumers. In the cigarette example above, the tax burden falls
on the most inelastic side of the market. If demand is more inelastic
than supply, consumers bear most of the tax burden.
- The policy is not working in the short-run since when the demand is
inelastic, consumers are not very responsive to price changes, and
the quantity demanded remains relatively constant when the tax is
introduced. In the case of smoking, the demand is inelastic because
consumers are addicted to the product.
- Increasing the unemployment rate when the government put taxes on
the product that has a relatively elastic demand. This is because when
the price increases due to the imposing tax, there will be a large fall in
the demand of that product. This means the demand for workers is
likely to fall significantly,

a. Explain how two types of economies of scale can lead to a fall in long-run average
costs. [10]
b. Discuss the view that barriers to entry in a monopoly will always lead to abnormal
profits in the long run. [15]

a. Explain the relationship between the law of diminishing returns and a firm’s short-run
cost curves. [10]
b. Evaluate the view that monopoly is an undesirable market structure as it fails to
achieve productive and allocative efficiency. [15]

a. Explain why price elasticity of demand varies along the length of a straight-line
demand curve. [10]
b. Examine the significance of price elasticity of demand for the decision-making of
firms and governments. [15]

a. With reference to the concept of excess demand, explain how a decrease in supply
of a good would lead to a new market equilibrium. [10]
b. A government decides to impose an indirect tax on unhealthy drinks. Discuss the
consequences for the stakeholders in these markets. [15]

a. Explain why some firms might choose the goal of profit maximization while others
might choose to adopt satisficing behaviour. [10]
b. Discuss whether price will always be lower and output will always be higher in perfect
competition compared to monopoly. [15]

a. Explain two reasons why a government might want to subsidise a good or service.
[10]
b. Discuss the view that governments should tax the consumption of gasoline
(petroleum) [15]

a. Explain how the overuse of common access resources can lead to negative
externalities. [10]
b. Discuss the view that the best way to reduce the threat to sustainability, arising from
the burning of fossil fuels, is for the government to provide subsidies to firms that
produce energy through renewable sources. [15]

a. Explain why a loss-making firm in perfect competition would shut down in the long
run. [10]
b. Discuss the view that perfect competition is a more desirable market structure than
monopoly.[15]

a. Explain why prices tend to be relatively rigid in oligopolistic markets. [10]

b. Discuss whether an oligopolistic firm should collude rather than compete. [15]

a. Explain two factors that might give rise to economies of scale for a firm. [10]
 b. Discuss the view that legislation is the best way of dealing with the problem of
monopoly power. [15]

Jason Duong Minh Kiet

a. Explain how an increase in the costs of factors of production would affect the market
price and output of a good. [10]
b. Discuss the consequences for different stakeholders in the economy of the
government providing subsidies on goods, such as renewable energy. [15]

a. Explain why monopoly power may be considered a type of market failure. [10]
b. Examine the role of barriers to entry in making monopoly a less desirable market
structure than perfect competition. [15]

a. Explain why the under-consumption of merit goods causes market failure. [10]
b. Discuss whether there should always be direct provision of public goods by the
government. [15]