Section A

1 Rio de Janeiro wins the vote to host the 2016 Olympic Games

The Brazilian city of Rio de Janeiro has been chosen to host the Olympic Games in 2016.

Winning the vote would seem to have been the easy bit. Holding the games will require effort
and expense on a massive scale. Apart from new stadiums and other sports facilities, the city
will need infrastructure such as new bridges and roads, and also double the number of hotel
rooms. The metro railway line will need to be extended by almost 10 miles (approximately 16
kilometres). The city government has allocated US$14.4 billion to pay for the improvements in
the infrastructure, although it is widely thought that the actual figure will be much higher than
this.

The decaying port area will be redeveloped and the nearby bay will be cleaned as this is
currently affected by sewage and industrial pollution. It is hoped that the construction and
redevelopment work will lead to an increase in the demand for labour, thereby reducing the
city’s high unemployment rate. There are some people, however, who think that government
revenue should be used for other purposes. A spokesperson from the Institute for Studies on
Labour and Society suggested that the money should be spent on getting rid of the city’s worst
slum areas, reducing the high crime rate and doing something about the poverty in a city where
one in six residents is poor.

(a) Identify and give examples of 2 factors of production used in building new stadiums. [4]

(b) Explain why government spending on getting the city ready for the Olympic Games is an
example of opportunity cost. [2]

The money should be spent on getting rid of the city’s worst slum areas, reducing the high
crime rate and doing something about the poverty in a city where one in six residents is poor.

(c) Analyze the social costs and benefits involved in getting the city ready for the Olympic
games. [8] (including important examples from the paragraph above)

The social cost measures the cost to the whole society of an economic activity; it is equal to
the sum of the private cost and the external cost.
External costs: Noise, pollution, traffic, deforestation, relocation
Private costs: Cost of construction of stadiums, money spent on extending the new railway,
14.4 billion on infrastructure, on development of bay and port area, opportunity cost of funds –
as explained in (b).

The social benefit measures the benefit to the whole society of an economic activity; it is
equal to the sum of the private benefit and the external benefit.
External benefits: development of port area and bay area will bring in new tourism/ trade,
benefit people living in that area. Improved infrastructure – new bridges and roads, improved
railways will benefit everyone, increased tourism due to more hotel rooms and Olympic games
will benefit local business.

Private benefit: increased revenue for construction firms, for the government, wages,
employment.

(d) The labour must work hard to finish preparations for the Olympic games on time. Analyse,
using a production possibility curve diagram, how an increase in labour
productivity will affect this economy. [6]
 SECTION B

2 (a) Define Opportunity Cost. [2]

In 2013 the Dubai Government offered residents a gram of gold for every kilogram of weight
lost over a period of 30 days. Such a policy measure was designed to reduce the external costs
arising from overeating, including the eating of too much chocolate

(b) Analyse two reasons why the demand for chocolate may rise in the future. [4]

(c) Both the private sector and the public sector are involved in building houses. In one country
a private firm has built an extra 100 000 houses but, at the same time, its government has
increased income tax significantly. Explain, using a demand and supply diagram, how these two
actions would have affected the equilibrium price and the equilibrium quantity of houses. [6]
(d) Discuss whether a government subsidy to producers will reduce market failure. [8]

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