1.2.2 Price Income Cross Elasticities

_______________________
Name:
_
1.2.2 Price; income; cross
elasticities _______________________
Class:
_
_______________________
Date:
_
Time: 429 min.
Marks: 337 marks
Comments:
Page 1 of 70
Q1.
The price elasticity of demand (PED) for petrol used by car drivers in an economy is
estimated to be −0.2
Which one of the following is the most likely reason for the low PED?
A A tax on petrol
B Cycle lanes on many roads
C Few bus and rail services
D Low household incomes
[1 mark]
Q2.
The income elasticity of demand for baked beans is −0.4.
Weekly sales of baked beans are 73 000 tins.
If household incomes fall by 5%, then the new weekly sales of baked bean tins would be
A 63 875
B 71 540
C 74 460
D 82 125
[1 mark]
Q3.
Extract B (lines 2–3) states: ‘a recent survey found that only a third of adults had used a
library in the previous year, a significant fall since data collection began in 2005’.
Explain two reasons why the demand for library services has fallen.
[10 marks]
Q4.
Which one of the following gives a positive value for the cross elasticity of demand?
A A fall in air fares increases the demand for

holidays
B A fall in the cost of car insurance increases the
demand for cars
C A rise in the price of petrol decreases the
demand for cars
D A rise in rail fares increases the demand for
coach travel
Page 2 of 70
[1 mark]
Q5.
A supermarket has estimated values of the income elasticity of demand for some of its
products as shown in the table below.
Product Income elasticity of

demand
Fruit 0.30
Cheese 0.20
Milk 0.10
Eggs 0.01
If incomes increase by 5%, for which of these grocery items will the quantity demanded
increase by more than 1%?
A Eggs
B Fruit
C Fruit and cheese
D Milk and eggs
[1 mark]
Q6.
Extract E (lines 1–2) states ‘in 2007, before the recession, 68% of adults gambled, but by
2010, this had risen to 73%.’
Explain two factors that could have increased the percentage of adults who gamble.
[10 marks]
Q7.
All other things being equal, which one of the following situations would lead to an
increase in equilibrium price?
A Demand is perfectly inelastic and labour costs

rise
B Demand is perfectly elastic and labour costs rise
C Supply is perfectly elastic and the price of a
substitute good falls
D Supply is perfectly inelastic and the price of a
complementary good rises
[1 mark]
Q8.
The diagram below shows the effect of the government increasing the tax on petrol to
reduce pollution.
Page 3 of 70
It can be deduced from the diagram that
A suppliers pay all the tax.

B consumers pay all the tax.
C total tax revenue is P1 P2.
D the share of the tax paid by consumers and
producers is the same.
[1 mark]
Q9.
The table shows the world prices ($/tonne) of various fruits for a two-year period.
Fruit Year 1 Year 2
Oranges 150 80
Apples 200 140
Pears 80 70
Grapes 250 200
Which one of the following is supported by the data?
A The earnings of orange growers will have

decreased between Year 1 and Year 2 if the
demand for oranges is price elastic.
B The trend in the price of apples between Year 1
and Year 2 will encourage apple growers to
increase output.
C The price elasticity of demand is lowest for
pears.
D Total revenue from the sale of grapes will have
Page 4 of 70
fallen between Year 1 and Year 2 if the demand
for grapes is price inelastic.
[1 mark]
Q10.
The diagram below shows demand (D) and supply (S) curves for beef, where the initial
equilibrium price is £25.
Which one of the following combinations, A, B, C or D, is correct?
Cause of the fall in the price Price elasticity of demand

of beef when the price of beef falls
from £25 to £20
Rise in the price of animal

A Between –1 and minus infinity
feedstuffs
Fall in the wage of agricultural

B Between –1 and zero
workers
Lower rent on agricultural

C Between –1 and minus infinity
land
D Rise in the price of lamb Between –1 and zero

[1 mark]
Q11.
A government grants producers of solar panels a subsidy for their product. Which one of
the following is most likely to result in the largest increase in sales?
A Supply is price elastic and demand is price

inelastic
B Supply is price inelastic and demand is price
elastic
C Demand is price inelastic and supply is price
Page 5 of 70
inelastic
D Demand is price elastic and supply is price
elastic
[1 mark]
Q12.
Define the term ‘positive income elasticity of demand’ (Extract F, line 11).
[3 marks]
Q13.
The cross elasticity of demand between goods X and Y is positive. This implies that they
are
A normal goods.
B substitute goods.
C goods in composite demand.
D complementary goods.
[1 mark]
Q14.
THE COSTS OF SMOKING
Extract F: How should governments deal with smokers?
Smoking is a major health issue and cigarettes are regarded as a demerit good. Research 1
by the American Cancer Society suggests that two in three smokers will die early from
cancer, heart disease or other smoking-related diseases. Smoking caused a fifth of all
deaths in the UK in 2010. The cost in terms of lost output, fires, litter and health care was
estimated to be £13.8bn. 5
In 1974, 51% of men and 41% of women in the UK smoked. By 2013, rates had more than
halved, to 22% of men and 19% of women. However, ten million adults still smoke and
200 000 children aged between 11 and 15 start smoking each year.
Indirect taxes added approximately £5.91 to the price of a pack of 20 cigarettes in 2013.
Taxation is one way governments attempt to control cigarette consumption. However, high 10
taxes have encouraged illegal importation of tobacco products into the UK.
Regulation to reduce the consumption of cigarettes is extensive in the UK. From October
2015, drivers will be fined £50 if they smoke when children are in the car. Pictures warning
of the dangers of smoking were introduced on cigarette packs in October 2008. All forms of
tobacco advertising and promotion are now banned, including the display of tobacco 15
products in shops. Since 2007, it has been illegal to sell tobacco products to anyone under
the age of 18. Smoking is now illegal in virtually all enclosed public places and workplaces.
Some argue that government intervention in the UK has gone too far; regulations interfere
with consumer choice and the operation of the free market. Currently, there are 66 000
people in tobacco-related jobs and around £12bn is collected from taxes on tobacco 20
products.
Source: news reports, March 2015
Page 6 of 70
Q15.
The Cost of Smoking Extract F (line 10) states ‘Taxation is one way governments
attempt to control cigarette consumption.’
Explain the effect of indirect taxation on the consumption of cigarettes.
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[10 marks]
Q16.
The Cost of Smoking Extract F (line 12) states ‘Regulation to reduce consumption of
cigarettes is extensive in the UK.’
Use the extracts and your economic knowledge to assess the view that regulation is the
best way of dealing with the market failure that results from the consumption of cigarettes.
[25 marks]
Q17.
All other things being equal, when the equilibrium price of car tyres in a market rises from
£60 to £90, the quantity demanded falls from 2 million units to 1.5 million units. Therefore,
the value of the price elasticity of demand is
A +2.5
B +0.5
C –0.5
D –2.0
[1 mark]
Q18.
An indirect tax on the production of a good will have no effect on its market price if
demand is
Page 7 of 70
A inversely related to price.
B unit elastic.
C perfectly elastic.
D perfectly inelastic.
[1 mark]
Q19.
The cross price elasticity of demand for two products which are close substitutes for each
other will be
A high and positive.

B low and positive.
C low and negative.
D high and negative.
[1 mark]
Q20.
Extract E (lines 2 – 3) states that Arts Council England is an organisation that
‘champions, develops and invests in artistic and cultural experiences that enrich people’s
lives’.
Using the data and your knowledge of economics, evaluate the view that providing
subsidies is the best way to ensure that sufficient resources are devoted to the arts and
cultural activities.
[25 marks]
Q21.
If demand for a product is unit elastic, for a given percentage increase in price, total
revenue will
A rise by the same percentage.
B rise by a smaller percentage.
C fall by the same percentage.
D remain unchanged.
[1 mark]
Q22.
The diagram below shows the market demand and supply curves and the market
equilibrium both before and after an indirect tax is applied to a good.
Page 8 of 70
According to the diagram, the revenue the government collects from this tax is
A £300 000
B £200 000
C £100 000
D £80 000
[1 mark]
Q23.
A supermarket reduces the price of tins of biscuits from £4 to £3 per tin. Subsequently, the
sales increase from 200 to 300 tins of biscuits per day. The price elasticity of demand is
A −2.0
B −1.0
C −0.50
D −0.25
[1 mark]
Q24.
The table below shows the value of income elasticities of demand for three goods, X, Y
and Z, over a period of time.
Income elasticity of
Good
demand
X +2.0
Page 9 of 70
Y +0.2
Z –1.9
From the data in the table, it may be concluded that an increase in consumer income
would lead to
A a decrease in demand for Good Z only.
B an increase in demand for all three goods.
C a more than proportionate increase in demand

for Good Y.
D an equal percentage increase in demand for

Good X.
[1 mark]
Q25.
In the table below, all other things being equal, which combination of factors A, B, C or D
is most likely to enable a firm in a competitive market to increase its market share?
Price elasticity Firm's degree Firm's long

of demand for of product run average
firm's product differentiation cost subject to
Diseconomies
A High Low
of scale
Diseconomies
B Low High
of scale
Economies of
C High High
scale
Economies of
D Low Low
scale
[1 mark]
Q26.
FREE SCHOOL MEALS
Extract B: The rising cost of food
In recent years, food prices have risen faster than incomes, making it harder for many 1
low-income families to buy food which forms a significant part of their total weekly spend.
On average, 11.3% of household income was spent on food in 2011, up from 10.5% in
2007. However, for the poorest 20% of households, their spending on food rose from
15.2% to 16.6% in the same period. Record numbers of people are using 'food banks', 5
where charities provide emergency food to those struggling to feed themselves and their
families.
Page 10 of 70
Food prices have been rising for a number of reasons, including climate change and
population growth. A spokesperson for the Food Ethics Council charity recently called for
food businesses and the Government to tackle the issue of making healthy food 10
affordable, claiming that 'cheap food', which is often an inferior good, was causing
problems for health and the environment.
Many low-income households are already buying so-called 'value' products, so can't
switch to cheaper brands. They are also less likely to buy ethical products such as free-
range eggs. Between 2007 and 2011, the poorest households have cut spending on fruit 15
by 15% and vegetables by 12%, yet their spending on sweets rose by 5%. In 2011, 62%
of adults in England were either obese or overweight, whilst 1 in 20 children has no fruit
or vegetables in their diet.
The cost of treating illnesses caused by bad diet is £6 billion per year. Considerable
amounts of food are wasted each year, much of which is not used in time, bread being 20
the most wasted food. And although much more food waste is being recycled, some still
ends up in scarce landfill waste sites. These externalities cannot be ignored.
Source: News Reports; October 2013
Q27.
Free School Meals Extract B (line 2) states that spending on food by low-income
families 'forms a significant part of their total weekly spend.'
Calculate the income elasticity of demand for food if an increase in income from
£25 000 to £30 000 leads to an increase in the quantity demanded of food of 10%.
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[4 marks]
Q28.
In Free School Meals Extract B (line 11) it states that a spokesperson for the Food
Ethics Council charity recently claimed that ‘cheap foodߣ is often an inferior good.
Draw a supply and demand diagram showing the effects of an increase in income on the
price and quantity sold of an inferior good.
Page 11 of 70
[4 marks]
Q29.
COMMODITY PRICES
Extract E: Competition in the potash market
Potash is one of three main fertiliser products which farmers use to increase their output 1
before planting crops such as wheat. Potash is an important natural resource, but for
many years, the majority of the world’s potash has been sold through two companies,
which set the same prices. The companies effectively worked together as a monopoly.
However, it has recently been announced that the arrangement between these two 5
companies has ended. As a result, the price of potash is expected to fall from around
$400 to $300 per tonne by the end of 2013. It has been estimated that this would cut
total costs by 3% an acre for many producers. This is good news for farmers and it could
also lead to lower food prices in the supermarkets.
The fall in potash prices is in contrast to the situation in the first decade of this century, 10
during which prices tripled, partly due to higher demand in China and India. Although this
encouraged an increased supply, the higher price made the product less affordable,
particularly in India, where the government had also cut farming subsidies.
Although prices may now fall in the short term, this may not last due to continued
population growth and changing patterns in the demand for food. However, with more 15
competition between firms, there should be some gains for buyers, at least for a while.
Source: News reports, October 2013
Q30.
COMMODITY PRICES
Page 12 of 70
Extract F: Commodities markets: should governments intervene?
Oil is another commodity where suppliers have worked together to control prices. The 1
Organization of the Petroleum Exporting Countries (OPEC), a group of 12 major
oil-producing countries, has managed the supply of oil for over 50 years to try to control
the price.
This has reduced fluctuations in price for both producing and consuming countries, 5
although when producers work together, the price tends to be higher than it would be if
there was more competition.
One effect of high oil prices is to encourage the development of other sources of energy.
'Fracking' involves obtaining gas or oil from shale rock using large quantities of water.
There is considerable use of fracking in the US but there are environmental concerns, 10
including air, water and noise pollution. Some countries have banned the technique.
There are large reserves of shale gas in the UK and a firm has undertaken work to
explore the possibility of fracking at a site recently. However, firms will need a licence if
they are to be allowed to begin this type of work in future.
Commodities are vital as the raw materials and energy sources to make finished 15
products. Should market forces be left to determine the price and output of these
commodities or should governments intervene, and if so, which policies are most
appropriate? Does it matter if sellers with considerable market power set the price,
particularly when commodity prices may change frequently otherwise?
Source: News reports, October 2013
Q31.
Commodity Prices Extract E (line 6−7) states that ‘the price of potash is expected to fall
from around $400 to $300 per tonne by the end of 2013.’
Calculate the price elasticity of demand for potash if this fall in price leads to an increase
in the quantity demanded of 10%.
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[4 marks]
Q32.
Commodity Prices Extract E (lines 1−2), states ‘Potash is one of three main fertiliser
products which farmers use to increase their output before planting crops such as wheat. ߣ
Explain the possible effects on the market for wheat of a fall in the price of a fertiliser such
as potash.
Page 13 of 70
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[10 marks]
Q33.
Commodity Prices Extract F (lines 15–16) states that ‘Commodities are vital as the raw
materials and energy sources to make finished products ’.
Using the data in the extracts and your economic knowledge, assess whether market
forces should be left to determine the price of commodities such as potash, oil and gas.
[25 marks]
Q34.
An economy in which average incomes have fallen by 5% has also seen the demand for
holidays overseas fall by 20%. Assuming that nothing else affecting holidays overseas has
changed, it can be concluded that the income elasticity of demand for holidays overseas
is
A + 4.0
B − 4.0
C + 0.25
D − 0.25
[1 mark]
Q35.
The table below shows the cross elasticities of demand for the products of four companies
with respect to the prices of their closest substitutes.
Product of Cross elasticity of demand
Company A +2.0
Page 14 of 70
Company B +1.0
Company C +0.5
Company D +0.1
All other things being equal, which one of the above companies is most likely to possess
the greatest market power?
A Company A
B Company B
C Company C
D Company D
[1 mark]
Q36.
The table below shows the world prices ($ / tonne) of various fruits for a two-year period.
Fruit Year 1 Year 2
Oranges 150 80
Apples 200 140
Pears 80 70
Grapes 250 200


increase output.

pears.

[1 mark]
Q37.
Page 15 of 70
CONGESTION ON THE ROADS
Extract B: Too much traffic on our roads?
The importance of the road network to transport and the economy is not always 1
appreciated. In 2007, 92% of passengers and 67% of freight were transported by road.
However, drivers impose costs on other road users by increasing their journey times, and
inflict costs on non-road users through the generation of greenhouse gases, pollution and
noise. 5
Some argue that the solution to congestion is to persuade people to leave their cars at
home and encourage them to travel by rail, tube or bus. This might be achieved by
charging drivers more. However, increasing the cost of motoring will not be effective if the
positive cross elasticity of demand between travel by car and other forms of passenger
transport is very low. 10
An alternative approach is to increase the subsidies paid to other forms of transport.

Such subsidies could be used to reduce the price charged and/or to improve the quality
of the service provided. In 2011/2012, the bus companies received a subsidy of around
£450 million, and bus passes, offering free off-peak travel to older and disabled people,
cost the government approximately £1 billion. 15
In 2011, despite difficult economic conditions, the railways experienced a 7% increase in

passenger journeys and a 12.5% increase in the volume of freight carried. A £9.4 billion
government-funded investment programme, announced in July 2012, is designed to
increase capacity, reduce journey times and improve reliability. However, attempting to
reduce congestion on the roads by getting people to travel by train is not without its 20
problems. Shifting 10% of the current journeys by road onto rail would require more than
double the current, already overstretched, rail capacity.
Source: News Reports, August 2012
Q38.
Extract C: How should we pay for roads?
Roads, and transport generally, must be paid for. As more cars become electrified and 1
fuel-efficient, the amount of revenue raised from petrol, diesel and other taxes on
vehicles, will fall substantially in the future. The Institute for Fiscal Studies (IFS) estimates
that replacing this lost revenue would require a 50% increase in taxes on fuel and they
have argued that the government should review the present system of road taxes and 5
move towards a nationwide system of road pricing.
One solution is to charge drivers for each mile travelled, with higher prices in congested
areas at peak times. The aim of road pricing is to charge drivers for the costs they
impose on other road users, and non-road users, to optimise the use of scarce road 10
space. A small reduction in the number of vehicles on the road at peak times would
produce a large reduction in congestion.
Taxes on fuel are another way to make the user pay for the external costs of motoring.
Fuel tax collection costs are estimated at just 0.2% of the revenue generated. Road
pricing, on the other hand, has high set-up and running costs (at least 10% of the 15
revenue raised) but these costs are likely to fall due to economies of scale and
improvements in technology. However, there is also the issue of fairness to consider. The
less-well-off motorists may be priced off the roads by a system of road pricing but fuel
taxes also hit the poor hardest.
Source: News Reports, August 2012
Page 16 of 70
Q39.
Define the term ‘cross elasticity of demand’ (Congestion on the Roads Extract B, line
9).
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[3 marks]
Q40.
Congestion on the Roads Extract C (lines 3−4) states that ‘The Institute of Fiscal
Studies (IFS) estimates that replacing this lost revenue would require a 50% increase in
taxes on fuel...’
Explain how the price elasticity of demand for road travel will affect the total revenue that
the government receives if it increases the taxes on fuel.
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[10 marks]
Q41.
Congestion on the Roads Extract B (lines 6−7) states that ‘the solution to congestion is
to persuade people to leave their cars at home and encourage them to travel by rail, tube
or bus’.
Using the data in the extracts and your knowledge of economics, assess which is the best
policy that the government could adopt to reduce congestion on the roads.
[25 marks]
Page 17 of 70
Q42.
HEALTH AND DIET IN THE UK
Extract F: Government intervention − food for thought?
One way to tackle obesity is by not putting on too much weight in the first place. A 1
healthy, balanced diet and regular exercise should be sufficient in most cases. However,
providing nutritional information and promoting healthy eating are not enough – the
government needs to do more.
One option is a tax on junk food, possibly accompanied by subsidies for fruit and 5
vegetables. But will demand be sufficiently price elastic? Such taxes may have to
increase the price of unhealthy food and drinks by as much as 20% to cut consumption
enough to reduce obesity, according to research published in the British Medical Journal.
Denmark, Hungary and France have introduced taxes on a variety of foods and drinks
high in salt, sugar and fat but the UK government faced an outcry when it announced that 10
it would add Value Added Tax (VAT) to hot food such as pasties. Other suggestions
include a ban on firms such as McDonald's and Coca-Cola sponsoring major sports
events like the Olympics. Some head teachers have written to parents forbidding children
from bringing in unhealthy snacks but others believe it has no effect, or that what children
eat is not their responsibility. 15
As food profit margins rise, we get fatter and less healthy. Should companies do more to
persuade their customers to eat more healthily? Should governments intervene? Why
can't we just eat what we want?
Source: News Reports, January 2014
Q43.
Health and Diet in the UK Extract F (lines 3−4) states that ‘providing nutritional
information and promoting healthy eating are not enough − the government needs to do
more’.
Using the data in the extracts and your knowledge of economics, assess the case for and
against government intervention in the markets for food and drink to encourage a healthy
diet.
[25 marks]
Q44.
The table below shows values of income elasticities of demand for four goods, W, X, Y
and Z.
Estimate of income elasticity of

Good
demand
W +0.52
X +0.61
Y −0.49
Z −0.57
From the table, it may be concluded that
Page 18 of 70
A the demand for all four goods is price inelastic.
B the cross price elasticity of demand between

Good X and Good W is positive.
C as incomes rise, the demand for Good Y and

Good Z will rise, but by a smaller percentage.
D as incomes fall, only the demand for Good Y and

Good Z will rise.
[1 mark]
Q45.
A government subsidy would cause the largest fall in the price of a product if its price
elasticity of demand (defined as a positive number) were
A less than 1.
B 1.
C greater than 1.
D infinity.
[1 mark]
Q46.
The price elasticity of demand for a good made by a firm is −0.6. If the firm raises the
price of the good, its revenues will
A rise.
B stay the same.
C fall by more than 6 per cent.
D fall by less than 6 per cent.
[1 mark]
Q47.
The table below shows a household’s demand for four different goods, A, B, C and D, at
two separate income levels.
Units of goods demanded
Income A B C D
£40 000 200 200 200 200
Page 19 of 70
£48 000 280 260 240 200
When income changes from £40 000 to £48 000, for which good (A, B, C or D) does the
household have an income elasticity of demand of unity?
Answer _________________
[1 mark]
Q48.
The table below shows the value of the price elasticity of demand facing each type of
provider of passenger transport.
Coach Airline
Train companies Bus companies
companies companies
-1.4 -0.8 -1.0 -0.5
If the fares charged for the use of each of these forms of transport rose by the same
percentage, which type of provider would see the greatest proportionate increase in total
sales revenue?
A Train companies
B Airline companies
C Bus companies
D Coach companies
[1 mark]
Q49.
The income elasticity of demand for bus travel is –1.5. This means that
A a 10% increase in fares will lead to a 15%

decrease in passengers.
B bus travel is an inferior good.
C bus travel has a negative cross elasticity of

demand.
D as unemployment falls, more people will use

buses.
[1 mark]
Q50.
Page 20 of 70
If there is a negative value for the cross elasticity of demand between two goods, this
means that the two goods are
A complementary to each other.
B both inferior goods.
C unrelated to each other.
D substitutes for each other.
[1 mark]
Q51.
The diagram below shows demand (D) and supply (S) curves for beef, where the initial
equilibrium price is £25.
Which one of the following combinations, A, B, C or D, is correct?
Cause of the fall Price elasticity of demand when the

in the price of beef price of beef falls from £25 to £20
Rise in the price of animal

A Between –1 and minus infinity
feedstuffs
Fall in the wage of agricultural

B Between –1 and zero
workers
C Lower rent on agricultural land Between –1 and minus infinity
D Rise in the price of lamb Between –1 and zero
[1 mark]
Q52.
Page 21 of 70
Extract B: Too much traffic on our roads?
The importance of the road network to transport and the economy is not always 1
appreciated. In 2007, 92% of passengers and 67% of freight were transported by
road. However, drivers impose costs on other road users by increasing their journey
times, and inflict costs on non-road users through the generation of greenhouse
gases, pollution and noise. 5
Some argue that the solution to congestion is to persuade people to leave their cars
at home and encourage them to travel by rail, tube or bus. This might be achieved
by charging drivers more. However, increasing the cost of motoring will not be
effective if the positive cross elasticity of demand between travel by car and other
forms of passenger transport is very low. 10
An alternative approach is to increase the subsidies paid to other forms of transport.

Such subsidies could be used to reduce the price charged and/or to improve the
quality of the service provided. In 2011/2012, the bus companies received a subsidy
of around £450 million, and bus passes, offering free off-peak travel to older and
disabled people, cost the government approximately £1 billion. 15
In 2011, despite difficult economic conditions, the railways experienced a 7%

increase in passenger journeys and a 12.5% increase in the volume of freight
carried. A £9.4 billion government-funded investment programme, announced in July
2012, is designed to increase capacity, reduce journey times and improve reliability.
However, attempting to reduce congestion on the roads by getting people to travel 20
by train is not without its problems. Shifting 10% of the current journeys by road onto
rail would require more than double the current, already overstretched, rail capacity.
Source: news reports, August 2012
Q53.
Extract C: How should we pay for roads?
Roads, and transport generally, have to be paid for, and so the issue is not whether 1
we pay but how we pay. As more cars become electrified and fuel-efficient, the
amount of revenue raised from petrol and diesel taxes, and other taxes on vehicles,
will fall substantially in the future. The Institute for Fiscal Studies (IFS) estimates that
replacing this lost revenue would require a 50% increase in taxes on fuel. A report 5
produced by the IFS has argued that the government should review the present
system of road taxes and move towards a nationwide system of road pricing.
One solution is to charge drivers for each mile travelled, with higher prices in
congested areas at peak times. The aim of road pricing is to charge drivers for the
costs they impose on other road users, and non-road users, to optimise the use of 10
scarce road space. Such a system would mean that drivers would pay less per mile
for the majority of miles driven but would be charged more when high demand for
road space results in congestion. A small reduction in the number of vehicles on the
road at peak times would produce a large reduction in congestion.
Taxes on fuel are another way to make the user pay for the external costs of 15
motoring. Fuel tax collection costs are estimated at just 0.2% of the revenue
generated. Road pricing, on the other hand, has high set-up and running costs,
the best estimate being at least 10% of the revenue raised. However, these costs
are likely to fall as a result of improvements in technology and economies of scale.
There is also the question of fairness to consider. The less-well-off motorists may 20
be priced off the roads by a system of road pricing but fuel taxes also hit the poor
hardest.
Source: news reports, August 2012
Page 22 of 70
Q54.
Define the term ‘positive cross elasticity of demand’ (Congestion on the Roads Extract
B, line 9).
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
[3 marks]
Q55.
Congestion on the Roads Extract C (lines 4 and 5) states that ‘The Institute for Fiscal
Studies (IFS) estimates that replacing this lost revenue would require a 50% increase in
taxes on fuel’.
Explain how the price elasticity of demand for road travel will affect the total revenue that
the government receives if it increases the taxes on fuel.
[10 marks]
Q56.
Congestion on the Roads Extract B (lines 6 and 7) states that ‘the solution to
congestion is to persuade people to leave their cars at home and encourage them to
travel by rail, tube or bus’.
Using the data and your economic knowledge, assess which is the best policy that the UK
government could adopt to reduce congestion on the roads.
[25 marks]
Q57.
HEALTH AND DIET IN THE UK
Extract F: Government intervention − food for thought?
One way to tackle obesity is by not putting on too much weight in the first place. 1
A combination of a healthy, balanced diet and regular exercise should be sufficient in
most cases. However, providing nutritional information and promoting healthy eating
are not enough − the government needs to do more.
One option is a tax on junk food, possibly accompanied by subsidies for fruit and 5
vegetables. But will demand be sufficiently price elastic? Such taxes may have
to increase the price of unhealthy food and drinks by as much as 20% to cut
consumption enough to reduce obesity, according to research published in the
British Medical Journal. However, a spokesman for the Food and Drink Federation
representing food producers and retailers claimed: “When the whole of the food 10
industry is focused on continuing to give hard-pressed families great tasting food at
an affordable price, discussion of adding 20% to food prices seems irresponsible.”
Page 23 of 70
Denmark, Hungary and France have introduced taxes on a variety of foods and
drinks high in salt, sugar and fat but the UK government faced an outcry when it
announced that it would add Value Added Tax (VAT) to hot food such as pasties. 15
Other suggestions include a ban on firms such as McDonald’s and Coca-Cola
sponsoring major sports events such as the Olympics. Some head teachers have
written to parents forbidding children from bringing in unhealthy snacks but others
believe it has no effect, or that what children eat is not their responsibility.
As food profit margins rise, we get fatter and less healthy. Should companies do 20
more to persuade their customers to eat more healthily? Should governments
intervene? Why can’t we just eat what we want?
Source: National Statistics, June 2012
Q58.
Health and Diet in the UK Extract F (lines 3 and 4) states that ‘providing nutritional
information and promoting healthy eating are not enough − the government needs to do
more’.
Using the data and your economic knowledge, assess the case for and against
government intervention in the markets for food and drink to encourage a healthy diet.
[25 marks]
Q59.
An increase in UK incomes leads to an increase in demand for holidays abroad and a
decrease in demand for holidays in the UK. It can therefore be concluded that
A holidays in the UK are an inferior good while

holidays abroad are a normal good.
B the demand for holidays abroad is income elastic

while the demand for holidays in the UK is
income inelastic.
C there is a negative cross price elasticity of

demand between holidays abroad and holidays
in the UK.
D holidays abroad have a high price elasticity of

demand while holidays in the UK have a low
price elasticity of demand.
[1 mark]
Q60.
The diagram below shows the demand (D) and supply (S) curves for cigarettes.
Page 24 of 70
The government imposes an indirect tax on cigarettes which shifts the supply curve from
S1 to S2. Which one of the following, A, B, C or D, shows the share of the total tax revenue
paid by producers and the share paid by consumers?
Producers (£) Consumers (£)
A 50 150
B 150 50
C 0 200
D 450 360
[1 mark]
Q61.
The table below shows the world prices ($ / tonne) of various fruits for a two-year period.
Fruit Year 1 Year 2
Oranges 150 80
Apples 200 140
Pears 80 70
Grapes 250 200

Page 25 of 70
increase output.

pears.

[1 mark]
Q62.
A product has a price elasticity of demand of −0.5. If the price of this product increases by
10%, then total revenue will
A rise by more than 10%.
B rise by less than 10%.
C fall by more than 10%.
D fall by less than 10%.
[1 mark]
Q63.
An inferior good always has
A positive price elasticity of demand.
B many substitutes.
C negative cross elasticity of demand.
D negative income elasticity of demand.
[1 mark]
Q64.
Which one of the following measures of elasticity indicates that two goods are substitutes?
A A negative income elasticity of demand
B A positive price elasticity of demand
C A positive cross elasticity of demand
D A negative price elasticity of demand
Page 26 of 70
[1 mark]
Q65.
The income elasticity of demand for a good is −3. Which one of the following statements is
correct?
A A 20% increase in income leads to a 60% fall in

quantity demanded.
B A 10% increase in price leads to a 30% fall in

quantity demanded.
C The good is a normal good.
D Demand for the good is income inelastic.
[1 mark]
Q66.
The table below shows the price and quantity demanded of two goods, X and Y.
Price of X (£) Quantity demanded of X Quantity demanded of Y
10 20 30
9 24 42
When the price of X falls from £10 to £9, the cross elasticity of demand for Y with respect
to the price of X is
A +4
B +2
C −2
D −4
[1 mark]
Q67.
With the help of an appropriate diagram and the information in The Price of Wheat
Extract B, explain why the world price of wheat changed in 2010.
[10 marks]
Q68.
An economy in which average incomes have fallen by 5% has also seen the demand for
holidays overseas fall by 20%. It can be concluded from this that the income elasticity of
demand for holidays overseas is
Page 27 of 70
A +4.0
B −4.0
C +0.25
D −0.25
[1 mark]
Q69.
The diagram below shows the market demand curve (D) and two market supply curves
(S1 and S2) for a good. The initial market equilibrium is at E1.
An increase in the cost of raw materials used in the production of the good shifts the
supply curve from S1 to S2. What is the price elasticity of demand for the good between E1
and E2?
A − 0.33
B − 1.33
C − 2.00
D − 3.33
[1 mark]
Q70.
RATIONING THE SUPPLY OF HEALTH CARE SERVICES
Extract E: Matching supply and demand for health care services
Scarce resources can be allocated or rationed between competing uses in a number 1
Page 28 of 70
of ways. In a free market, the price mechanism rations the use of scarce resources.
However, governments can also allocate resources, although this may lead to queues
and lengthy waiting lists.
In the UK, most health care services are provided by the National Health Service
(NHS). Many NHS services are free at the point of use for consumers and financed 5
out of taxation. However, an ageing population, changing lifestyles and people’s
changing expectations of their right to health care are all factors which have led to
excess demand for many NHS services.
Demand for most NHS services has always run ahead of supply. The government
could try to match demand with supply either by reducing demand or by increasing 10
supply. Demand could be reduced by charging patients for the health care they
receive. Alternatively, the government could increase the supply of health care
services by spending more on them. However, improvements in medical technology
and the development of new, but usually expensive, drugs are dramatically increasing
the cost of supplying NHS services to meet existing demand, let alone future demand. 15
Increasing the supply of services may simply be unaffordable for the taxpayer.
Perhaps the best route forward is to manage expectations so that people expect less
from the NHS. For example, should people expect free treatment for a leg injury
received while out jogging? Should people expect the NHS to provide a free hip
replacement for a ninety year old who has already received two replacements in the 20
past ten years? These are the kind of questions that might need answering in the
near future.
Source: news reports, 2011
Q71.
With the help of an appropriate diagram and the information in Rationing the Supply of
Health Care Services Extract E, explain how excess demand for NHS services has
increased.
[10 marks]
Q72.
In August 2000, the World Health Organisation said that a 10 % increase in cigarette
prices worldwide would reduce consumption of cigarettes by 4 % in high-income countries
and by 8 % in low-income countries.
The above statement suggests that
A smokers in high-income countries are twice as

addicted to cigarettes as those in low-income
countries.
B demand for cigarettes is price elastic in both low-

income and high-income countries.
C income elasticity of demand for cigarettes is

higher in low-income countries than in high-
income countries.
D price elasticity of demand for cigarettes is

negative in both high-income and low-income
countries.
[1 mark]
Page 29 of 70
Q73.
The table below shows the value of the price elasticity of demand facing each type of
provider of passenger transport.
Bus companies Coach Airlines

Train companies
companies
− 1.4 − 0.8 − 0.7 − 0.5
If the fares charged for the use of each of these forms of transport rose by the same
percentage, which type of provider would see the greatest proportional increase in total
sales revenue?
A Train companies
B Bus companies
C Coach companies
D Airlines
[1 mark]
Q74.
The essential feature of an inferior good is that its
A price elasticity of demand is positive.
B income elasticity of demand is positive.
C price elasticity of demand is negative.
D income elasticity of demand is negative.
[1 mark]
Q75.
An indirect tax on the production of a good will have no effect on price if demand is
A inversely related to price.
B of unitary elasticity.
C perfectly elastic.
D perfectly inelastic.
[1 mark]
Page 30 of 70
Q76.
The cross elasticity of demand for Good Y with respect to the price of Good X is negative.
Which one of the following pair of diagrams, A, B, C or D, illustrates the effect of a fall in
the price of Good X?
Answer _________________
[1 mark]
Q77.
The government was recently advised that a 40% increase in the price of beer would
reduce beer consumption by the rich by 6% and beer consumption by the poor by 20%. It
can be concluded from this that
A demand for beer is price inelastic for both rich

and poor.
B for the rich, beer is an inferior good.
C the rich consume less beer than the poor.
D the demand of the poor for beer is price elastic

while that of the rich is price inelastic.
[1 mark]
Q78.
The diagram below illustrates the demand and supply curves for mobile phones.
Page 31 of 70
From the diagram it can be inferred that the price elasticity of demand for mobile phones
when their price falls from £80 to £60 is
A − 0.4
B − 0.8
C − 2.0
D − 2.5
[1 mark]
Q79.
A small firm is able to buy any amount of a raw material on world markets at the same
price.
This means that it faces a perfectly
A elastic demand curve for the raw material.
B inelastic demand curve for the raw material.
C elastic supply curve for the raw material.
D inelastic supply curve for the raw material.
[1 mark]
Q80.
THE UK HOUSING MARKET
Extract B: Factors affecting UK house prices
In recent decades, with the exception of short periods around 1990 and more 1
recently in 2008 and early in 2009, UK house prices have risen. Several factors have
contributed to rising house prices. These factors include changes in population size,
changes in the number of households and changes in income.
Other factors have been the ease or difficulty of borrowing money to finance house 5
purchase and the fact that the demand for housing is determined not only by people’s
Page 32 of 70
need for shelter but also by people treating housing as a form of wealth.
Elasticities of demand and supply influence how these and other factors affect the price
of housing. It has been estimated that, in the UK, the income elasticity of demand for
houses is positive, with a value that exceeds +1.0. The estimated value of the price 10
elasticity of supply of houses is +0.5.
Source: news reports, 2010
Q81.
With the help of an appropriate diagram, explain how two of the factors mentioned in The
UK Housing Market Extract B may have caused UK house prices generally to rise in
recent years.
[10 marks]
Q82.
The table below shows the world prices ($/tonne) of various grains for a two-year period.
Year 1 Year 2
Wheat 120 85
Barley 160 115
Oats 95 82
Maize 170 130
A The earnings of wheat producers will have

demand for wheat is price elastic.
B The trend in the price of barley between Years 1

and 2 will encourage producers of barley to
increase output.
C The price elasticity of demand is lowest for oats.
D Total revenue from the sale of maize will have

fallen between Years 1 and 2 if the demand for
maize is price inelastic.
[1 mark]
Q83.
The table below shows the cross elasticities of demand for the products of four companies
with respect to the prices of their closest substitutes.
Product of Cross elasticity of
Page 33 of 70
demand
Company A +2.0
Company B +1.0
Company C +0.5
Company D +0.1
All other things being equal, which one of the above companies is most likely to possess
the greatest market power?
A Company A
B Company B
C Company C
D Company D
[1 mark]
Q84.
Which one of the following combinations, A, B, C or D, is true for a normal good which
has a downward sloping demand curve?
Income elasticity Price elasticity

Combination
of demand of demand
A Positive Positive
B Positive Negative
C Negative Negative
D Negative Positive
[1 mark]
Q85.
The price elasticity of demand for a good made by a firm is −0.6. If the firm raises the
price of the good, its revenues will
A rise.
B stay the same.
C fall by more than 6 per cent.
Page 34 of 70
D fall by less than 6 per cent.
[1 mark]
Page 35 of 70
Mark schemes
Q1.
C
[1]
Q2.
C
[1]
Q3.
An answer that: Max

10 marks
Level 3 • identifies two valid factors 8 – 10

• shows sound knowledge and understanding of relevant marks
economic terminology, concepts and principles
• includes good application of relevant economic principles
and/or good use of data to support the response
• includes well-focused analysis with a clear, logical chain
of reasoning
• may include a relevant diagram to support their
explanation
Level 2 • identifies at least one valid factor 4–7
• shows reasonable knowledge and understanding of marks
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles and/or data to the question
• includes some reasonable analysis but it might not be
adequately developed and may be confused in places
explanation
Level 1 • identifies at least one valid factor 1–3
• shows some limited knowledge and understanding of marks
errors are likely
• demonstrates very limited ability to apply relevant
economic principles and/or data to the question
• may include some very limited analysis but the analysis
lacks focus and/or becomes confused
• may include a diagram but the diagram is likely to be
inaccurate in some respects or is inappropriate.
Relevant issues include

• meaning of ‘demand’ (for library services)
• availability and price of substitutes – books from elsewhere, eBooks, other activities
• cross elasticity of demand
• changes to technology and lifestyles
• tastes/preferences
• income
Page 36 of 70
• other factors affecting demand, eg less free time, lack of promotion and awareness
of what libraries offer.
[10]
Q4.
D
[1]
Q5.
B
[1]
Q6.
Level of An answer that: Max

response 10 marks
3 • identifies two valid factors 8 – 10

• shows sound knowledge and understanding of relevant marks
economic terminology, concepts and principles
• includes good application of relevant economic principles
and/or good use of data to support the response
• includes well-focused analysis with a clear, logical chain
of reasoning
explanation
2 • identifies at least one valid factor 4–7
• shows reasonable knowledge and understanding of marks
weaknesses may be present
• includes reasonable application of relevant economic
principles and/or data to the question
• includes some reasonable analysis but it might not be
adequately developed and may be confused in places
explanation
1 • identifies at least one valid factor 1–3
• shows some limited knowledge and understanding of marks
errors are likely
• demonstrates very limited ability to apply relevant
• may include some very limited analysis but the analysis
lacks focus and/or becomes confused
• may include a diagram but the diagram is likely to be
inaccurate in some respects or is inappropriate.
Relevant issues include

• real income
• tastes/advertising/promotion
• technological changes making gambling more accessible
• perceived risk and reward/imperfect information
• availability of substitutes/variety of ’products‘
Page 37 of 70
• elasticity.
[10]
Q7.
A
[1]
Q8.
B
[1]
Q9.
D
[1]
Q10.
B
[1]
Q11.
D
[1]
Q12.
Level of Response Max

response 3 marks
3 • A full and precise definition is given. 3 marks
2 • The substantive content of the definition is correct, but 2 marks

there may be some imprecision or inaccuracy.
1 • Some fragmented points are made. 1 mark
Examples of acceptable definitions, worth 3 marks:

• Income elasticity of demand measures the responsiveness of quantity demanded to
a change in consumers’ incomes. If income elasticity of demand is positive it is a
normal good. (Proportionate / % not required).
• Income elasticity of demand measures the extent to which quantity demanded for a
good changes when income changes. If it is positive, a rise in income leads to a rise
in quantity demanded (or vice versa).
• For stating the correct formula for income elasticity of demand: % change in QD / %
change in income. If it is positive, it is a normal good or a rise in income leads to a
rise in quantity demanded (or vice versa).
Examples of a definition worth 2 marks:

• For stating that positive income elasticity of demand refers to a normal good.
• For stating that a rise (or fall) in income leads to a rise (or fall) in QD.
Page 38 of 70
• A measure of the responsiveness of QD to a change in consumers’ incomes / or
stating the formula. i.e. no attempt to define ‘positive’.
Examples of a definition worth 1 mark:

• A diagram to illustrate the relationship between QD and income for a normal good. 1
for labels and 1 for information shown.
• Incomplete formula; Change in QD / Change in income i.e. no %.
[3]
Q13.
B
[1]
Q15.
Level of Response
Marks
response
3 • Is well organised and develops one or more of the 8 – 10

key issues that are relevant to the question marks
• Shows sound knowledge and understanding
of ;relevant economic terminology, concepts and
principles
• Includes good application of relevant economic
principles and/or good use of data to support the
response
• Includes well-focused analysis with a clear,
logical ;chain of reasoning
• May include a relevant diagram to support their
explanation.
2 • Includes one or more issues that are relevant to 4–7
the question marks
• Shows reasonable knowledge and understanding
of economic terminology, concepts and principles
but some weaknesses may be present
• Includes reasonable application of relevant
• Includes some reasonable analysis but it might not
be adequately developed and may be confused in
places
• May include a relevant diagram to support their
explanation.
1 • Is very brief and/or lacks coherence 1–3
• Shows some limited knowledge and understanding marks
but some errors are likely
• Demonstrates very limited ability to apply relevant
• May include some very limited analysis but the
analysis lacks focus and/or becomes confused
• May include a diagram but the diagram is likely to
be inaccurate in some respects or is inappropriate.
Relevant issues include:

• what is meant by indirect tax and examples of these
Page 39 of 70
• impact of indirect taxes on the costs of supply
• the impact of indirect taxes resulting in a leftward shift of the supply curve
• effects on market price and quantity consumed
• effect that elasticities of demand and supply may have on quantity and price.
[10]
Q16.
Areas for discussion include:
• reasons for market failure
• consumption of tobacco as a source of market failure
• negative externalities in consumption and the application to smoking
• consequences of market failure
• information failure suggests smokers may give greater weight to the immediate
benefits and discount the long-run costs
• over-production and consumption of cigarettes, ie the social optimum level of output
is below the free market output
• tobacco as a demerit good
• regulation versus taxation
• examples of regulation and legislation in the market
• examples of different methods of intervention in the market
• comparing policies that provide incentives to change behaviour to those that use
legislation
• opportunity cost issues of different forms of government intervention
• the impact of the various policies on tax revenues and public expenditure
• reasons for government failure
• unintended consequences of intervention
• the arguments for leaving it to market forces and individual choice.
The use of relevant diagrams to support the analysis should be taken into account when
assessing the quality of the candidate’s response to the question.
Level of Response Marks

response 25 marks
5 Sound, focused analysis and well-supported 21 – 25

evaluation that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts
and principles with few, if any, errors
• includes good application of relevant economic
principles to the given context and, where
appropriate, good use of data to support the
response
• includes well-focused analysis with clear, logical
chains of reasoning
• includes supported evaluation throughout the
response and in a final conclusion.
4 Sound, focused analysis and some supported 16 – 20
evaluation that: marks
• is well organised, showing sound knowledge and
and principles with few, if any, errors
• includes some good application of relevant
economic principles to the given context and,
where appropriate, some good use of data to
support the response
Page 40 of 70
• includes some well-focused analysis with clear,
logical chains of reasoning
• includes some reasonable, supported evaluation.
3 Some reasonable analysis but generally 11 – 15
unsupported evaluation that: marks
• focuses on issues that are relevant to the question,
showing satisfactory knowledge and understanding
but some weaknesses may be present
• includes reasonable application of relevant
economic principles to the given context and,
where appropriate, some use of data to support
the response
• includes some reasonable analysis but which
might not be adequately developed or becomes
confused in places
• includes fairly superficial evaluation; there is likely
to be some attempt to make relevant judgments
but these are not well-supported by arguments
and/or data.
2 A fairly weak response with some understanding 6 – 10
that: marks
• includes some limited knowledge and
and principles but some errors are likely
• includes some limited, application of relevant
economic principles to the given context and/or
data to the question
• includes some limited analysis but it may lack
focus and/or become confused
• includes attempted evaluation which is weak and
unsupported.
1 A very weak response that: 1–5
• includes little relevant knowledge and marks
and principles
• includes application to the given context which, at
best, is very weak
• includes attempted analysis which is weak and
unsupported.
[25]
Q17.
C
[1]
Q18.
C
[1]
Q19.
A
[1]
Page 41 of 70
Q20.
Candidates will need to demonstrate that they are able to evaluate issues and arguments
to support a conclusion if they are to be awarded more than 13 marks.
A maximum of 21 marks should be awarded if there is no explicit reference to the data.
Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks
Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation
Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks
Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks
Level 1 Very weak 0 to 3

Mid-Point 2
marks
There is a number of prompts in Extracts D, E and F to support the use of subsidies for
encouraging a greater participation in the arts and cultural activities, but the extracts also
point towards other methods of intervention / market approach. It is expected that
candidates will refer to at least one cultural activity but this is not essential. Please be
aware that candidates might choose other cultural activities not referred to in the extracts
which is also acceptable, for example, ballet / opera / craftwork. Answers which do not
refer to at least one other method should be restricted to a maximum mark at the top of
Level 3.
Introduction • market failure

• positive externalities
• the arts and cultural activities
• government intervention
• subsidies
• education
• correcting information failure
• market mechanism
Developing the Credit for application can be given for relevant application of
response to economic theory, use of the data and the candidate’s own
the question: knowledge of recent developments in the UK economy.
• Drawing on the information in:
(Application) ◦ Extract D, E and F regarding the arts and cultural
activities
◦ Extract E regarding market failure associated with
Page 42 of 70
positive externalities, the need for government
intervention
◦ Extract F regarding market failure associated with
inequalities / youth unemployment / high prices, the
need for government intervention
◦ Extract E regarding the cost of subsidies / benefits of
subsidies
◦ Extract E regarding alternative methods such as
education
◦ Extract E regarding a more market-based approach
◦ Extract F regarding the costs involved in cultural
activities
◦ Extract F regarding the benefits of subsidies
• Drawing on the candidate’s own knowledge / experience
and knowledge of the arts and cultural activities / current
issues
Developing the • Developing a chain of reasoning to explain:

response to ◦ the nature of the market failure / why there is a need for
the question: government intervention
◦ how subsidies work to correct the market failure
(Analysis) ◦ the arguments for and against the use of subsidies
(strengths and weaknesses)
◦ how education / correcting information failure / other
methods such as maximum price work to correct the
market failure
◦ the arguments for and against the use of other methods
of intervention
◦ the arguments for and against leaving it to the market
mechanism
• Use of subsidy diagrams, externality diagrams and any other
relevant diagrams to develop the analysis
Evaluation • Questioning the assumptions made when developing the

chains of reasoning outlined above.
• Discussing:
◦ whether subsidies provide the best solution and why /
providing the most significant argument
◦ whether another form of government intervention would
provide a better solution and why
◦ the extent of the market failure
◦ whether the market is best left to the market mechanism
◦ market failure versus government failure
• Evaluating the evidence in the data
• Overall evaluation to support the use of subsidies or an
alternative as the best method
Examiners should note that credit can be given for basic evaluation if a candidate simply
states but does not develop arguments. Basic evaluation (and good analysis) would allow
the answer to achieve low Level 4. Stronger evaluation is provided by candidates who are
able to support arguments which fully justify why one method is likely to be the best
compared to an alternative(s). Reward the relevant use of diagrams to support arguments.
[25]
Q21.
D
Page 43 of 70
[1]
Q22.
C
[1]
Q23.
A
[1]
Q24.
A
[1]
Q25.
C
[1]
Q27.
Response: Marks
For a correct answer: 0.5 or ½ (plus sign not needed). 4 marks
For the correct value but the wrong sign: –0.5 or –½. 3 marks
For the correct values top and bottom but the wrong answer: 10/20. 2 marks
For the correct percentage change in price: 20% (ignore sign). 1 mark
For stating the equation of income elasticity of demand.
For any valid attempt at a calculation, even though the answer is
incorrect.
Maximum of 3 marks if the final answer is inaccurate
[4]
Q28.
The correct diagram involves a decrease in demand/shift to the left of the demand
curve and an indication of the resulting decreases in price and quantity sold.
Page 44 of 70
Response Marks
Accurately drawn D/S diagram showing a leftwards shift in D, new 4 marks

equilibrium price level and output, eg P2, Q2, with both axes and all
curves and coordinates correctly labelled (arrows not needed).
Accurately drawn D/S diagram showing a leftwards shift in D with 3 marks

one label missing (axis or curve).
OR
Accurately drawn D/S diagram showing a leftwards shift in D with
one coordinate missing (P or Q).
Accurately drawn D/S diagram showing an initial equilibrium point 2 marks

and a leftwards shift in D with two or more labels missing.
Accurately drawn D/S diagram showing an initial equilibrium point 1 mark

with both axes, both original curves and both coordinates correctly
labelled eg, P1 Q1.
For axes labels:

Horizontal: Quantity or Q (but not QD or QS).
Vertical: Price, P, £ or some monetary symbol. Price level is not acceptable.
[4]
Q31.
Response Marks
For a correct answer: –0.4 or –2/5 4 marks
For the correct value but the wrong sign: 0.4 or 2/5 3 marks
For the correct values top and bottom but the wrong answer: 10/– 2 marks
25
For the correct percentage change in price: 25% (ignore sign). 1 mark
For stating the equation of income elasticity of demand.
For any valid attempt at a calculation, even though the answer is
Page 45 of 70
incorrect.
[4]
Q32.
response 10 marks
• identifies two valid reasons
3 8-10 marks
• shows sound knowledge and understanding of
relevant economic terminology, concepts and
principles
response
• includes well-focused analysis with a clear,
logical chain of reasoning
explanation.
• identifies at least one valid reason
2 4-7 marks
• shows reasonable knowledge and understanding
of economic terminology, concepts and
principles but some weaknesses may be present
• includes some reasonable analysis but it might
not be adequately developed and may be
confused in places
explanation.
• identifies at least one valid reason
1 1-3 marks
• shows some limited knowledge and
understanding of economic terminology,
concepts and principles but some errors are
likely
• demonstrates very limited ability to apply
relevant economic principles and/or data to the
question
• may include some very limited analysis but the
• may include a diagram but the diagram is likely
to be inaccurate in some respects or is
inappropriate.

• fertiliser as a factor of production
• derived demand
• costs of production, profits and product prices
• impact on the market supply of wheat
• expectations
• elasticities of demand and supply
• excess supply and surplus stocks
• short-run versus long-run effects
• impact on the total output and market price.
[10]
Page 46 of 70
Q33.
• why commodity prices matter and the importance of commodities as raw materials
for finished products
• the reasons why commodity prices fluctuate and the significance of such fluctuations
• the significance of elasticities
• why fluctuating and/or rising prices of commodities may cause problems and for
whom
• monopoly power in commodity markets
• external costs associated with the production of some commodities that may not be
adequately reflected in the market price
• other market failures associated with high and/or fluctuating commodity prices
• the benefits of allowing commodity prices to be determined by market forces, eg
rationing, incentive and signalling functions of the price mechanism
• methods of government intervention in the markets for commodities and their
consequences, such as: the development of illegal markets, surplus stocks
• the difference between the short-run and long-run consequences
• the costs and opportunity costs of intervention
• the possibility of intervention leading to government failure and unintended
consequences
• the different consequences for producers and consumers, including different
countries
• equity versus efficiency arguments
• the significance of the data in the Extracts, such as: the volatility of commodity
prices, the nature of the market for potash, possible consequences of the changes
that are occurring in the market for potash, population growth and changing diets,
the oil market and the role of OPEC, externalities associated with developing new
sources of energy.
The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the candidate’s response the question.
[25]
Q34.
A
[1]
Q35.
D
[1]
Q36.
D
[1]
Q39.
Level of Response Max
response 3 marks
3 • A full and precise definition is given. 3 marks
Page 47 of 70
2 • The substantive content of the definition is 2 marks
correct, but there may be some imprecision or
inaccuracy.
1 • Some fragmented points are made. 1 mark
Examples of acceptable definitions

• a measure of the percentage change/increase/decrease in the quantity
demanded of one good resulting from a (given) percentage
change/increase/decrease in the price of another
• the extent to which a change in the price of one product affects the demand for
a different product
• the proportionate change in the demand for good A divided by the
proportionate change in the price of good B
• XED = % change in quantity demanded of good A
% change in price of good B
[3]
Q40.
response 10 marks
• is well organised and develops one or more of
3 8-10 marks
the key issues that are relevant to the question
• shows sound knowledge and understanding of
relevant economic terminology, concepts and
principles
response
• includes well-focused analysis with a clear,
logical chain of reasoning
explanation
• includes one or more issues that are relevant to
2 4-7 marks
the question
• shows reasonable knowledge and understanding
of economic terminology, concepts and
principles but some weaknesses may be present
• includes some reasonable analysis but it might
not be adequately developed and may be
confused in places
explanation
• is very brief and/or lacks coherence
1 1-3 marks
• shows some limited knowledge and
understanding of economic terminology,
concepts and principles but some errors are
likely
• demonstrates very limited ability to apply
relevant economic principles and/or data to the
question
Page 48 of 70
• may include some very limited analysis but the
• may include a diagram but the diagram is likely
to be inaccurate in some respects or is
inappropriate

• derived demand
• inelastic and/or elastic demand
• impact on the cost/price of fuel
• impact on sales/sales revenue
• impact on government revenue
• availability of substitutes
• short run versus long run effects
[10]
Q41.
• Possible reasons that might justify government intervention to reduce
congestion on roads, e.g. roads as a scarce resource, excess demand,
externalities
• The costs of driving imposed on road users and non-road users
• Examples of alternative policies, such as a higher tax on fuel, subsidising
public transport, road pricing, building more roads and their consequences
• The significance of price and cross elasticity of demand
• The financial and opportunity costs of alternative policies
• The possibility of government failure and unintended consequences
• The impact of alternative policies on different groups, such as drivers,
taxpayers, local businesses
• The effects of alternative policies on equity and efficiency
• Short term versus long term issues
• The significance of the growth in the number of cars (Extract A) and/or
changing fuel types
• The significance of other data included in the Extracts, such as: the statistics
relating to bus and rail use, the finance provided to increase this, examples of
recent intervention, the likelihood of success
when assessing the quality of the student’s response the question.
[25]
Q43.
• Possible market failures that might justify government intervention, e.g.
healthy food/drink as a merit good, unhealthy food/drink as a demerit good,
externalities, inadequate information
• The private and external costs of being overweight
• The effects of leaving it to the market and the functions of the price
mechanism
• Examples of intervention, such as tax, subsidy, ban, advertising, and their
consequences
• The effects of intervention on equity and efficiency
• The significance of elasticity
• The financial and opportunity costs of alternative policies
Page 49 of 70
• The possibility of government failure and unintended consequences
• The significance of data included in the Extracts, such as: the extent of the
problem, effects of obesity, changes in eating patterns, other causes of being
overweight, examples of government intervention in other countries, the
likelihood of success
when assessing the quality of the student’s response the question.
[25]
Q44.
D
[1]
Q45.
A
[1]
Q46.
A
[1]
Q47.
C
[1]
Q48.
B
[1]
Q49.
B
[1]
Q50.
A
[1]
Q51.
B
[1]
Q54.
For an acceptable definition such as: 3 marks
Page 50 of 70
• Positive cross elasticity of demand (CED) is a measure of the
percentage increase (or decrease) in the quantity demanded of
one good resulting from a percentage increase (or decrease) in
the price of another.
• CED measures the extent to which a change in the price of one

product affects the demand for a different product. It is positive
when the rise/fall in the price of the first product leads to a rise/fall
in the quantity demanded of the other product.
• CED equals the proportionate change in the demand for good A

divided by the proportionate change in the price of good B. It is
positive when the two products are substitutes.
• CED =
When the change in quantity and price are both positive or are
both negative.
Full marks should be awarded to a student who demonstrates a clear

understanding of the term positive cross elasticity of demand even if the
definition is not exactly the same as the acceptable examples quoted above
Accurate definition of CED but doesn’t explain what is meant by a 2 marks

positive CED.
For correctly quoting the formula for CED but doesn’t explain what is 2 marks
meant by a positive CED.
For stating that the CED is positive if the two products are 2 marks
substitutes.
For drawing an accurately labelled diagram to illustrate positive CED, 2 marks

eg with Price of Good A on the vertical axis and Quantity of Good B
on the horizontal axis.
For identifying a relationship between a change in the price of one 2 marks

good and a change in demand of another good eg no reference to
percentage or to the “extent”
For providing a reasonable example of two products that are likely to 1 mark
have a positive CED, eg train journeys and bus journeys (only credit
one example).
For quoting the formula upside down, eg CED equals the % change 0 marks
in the price of good B divided by the % change in the quantity
demanded of good A.
[3]
Q55.
Relevant issues/logical chains of analysis might include:
Page 51 of 70
One anticipated response when using a diagram
To illustrate the effect of an increase in the tax on fuel, students should shift the supply
curve to the left. The majority of students are likely to include two supply curves on the
diagram but, given that tax is already levied on fuel, some might include 3 supply curves.
Both approaches are acceptable.Some students might also draw 2 separate diagrams, ie
one where demand is relatively elastic and another where demand is relatively inelastic
(accept the slope of the curve as illustrating the relative elasticity of demand).
Figure 1
Figure 2
Examples of 2 acceptable diagrams are shown above. The first diagram illustrates that the
more price inelastic the demand for fuel the larger the increase in tax revenue. The
second diagram just illustrates the tax revenue and does not consider the impact of PED
on the revenue raised. In this case, it is expected that the student will consider this as part
of the discussion.
Neither diagram takes into account the original tax revenue. It is not expected that many
students will draw a diagram that takes into account the original tax revenue but any such
Page 52 of 70
diagrams should also be rewarded as indicated below.
The anticipated written response:

• Define demand, supply, tax, tax revenue, price elasticity of demand (PED), inelastic
PED, elastic PED, or any other relevant term.
• The demand for fuel is derived from the demand for road travel. Demand is likely to
be price inelastic. The tax will lead to a rise in the price of fuel the more inelastic the
PED the smaller the fall (or percentage fall) in sales and hence the greater the
increase in tax revenue. In the short run, since fuel/road travel has few substitutes
demand is likely to be inelastic and so tax revenue is likely to rise but with
development of electrified and more fuel-efficient cars demand will become more
elastic.
• If the percentage increase in price is greater/less than the percentage decrease in
sales, total revenue from selling fuel will increase/decrease if demand is inelastic tax
revenue will increase but even if demand is elastic and the revenue from selling fuel
falls this may be offset by the higher tax rate.
Alternatively as the price of fuel increases demand for electrified and fuel-efficient
cars is likely to increase further reducing tax revenue.
• An explanation of the impact on tax revenue that USES the first diagram above (or
when 2 diagrams are used):
When demand is relatively price inelastic the increase in the tax on fuel will raise the
price from P1 to P2I whereas if demand is relatively price elastic the price will only
rise from P1 to P2E the fall in sales is smaller when demand is relatively inelastic as
can be seen from the diagram the tax revenue is larger when demand is inelasticm
(0P2I – OPXI) × OQ2I than when it is elastic (0P2E – OPXE) × OQ2E.
[10]
Q56.
Extracts A, B and C provide a number of prompts for students and it is expected
that they will make use of this material when developing their answers. It is
anticipated that good answers will analyse the likely impact of at least two and
probably three, or possibly more, methods that the UK Government might use to try
to reduce congestion and attempt to assess the pros and cons of each method.
Although not essential, it is likely that the best answers will also consider the relative
merits of the different policies and conclude by including a supported final
judgement that indicates which method(s) they consider is/are likely to be most
effective (suitable) in reducing congestion.
Issues and areas for discussion (it is expected that students will only cover
some of these issues in the time available):
• roads as a scarce resource

Introduction
• the price of using roads in the UK is not determined by the market
but is influenced by decisions made by government, eg the tax on
fuel
• where the price is too low there will be excess demand for roads
• congestion as a negative externality
• the costs of congestion on other road users and non-road users
• identification of various policies that a government might adopt to
reduce congestion, eg increase taxes on cars/fuel, road pricing
(various forms of road pricing might be mentioned), subsidising
public transport, improving and investing in public transport.
Developing the Credit for application can be given for relevant application of economic
response to the theory, use of the data and the student’s own knowledge of relevant
question: aspects of transport. Examples might include:
Page 53 of 70
• use of the statistical data in Extract A, that shows a substantial
increase in the total number of cars licensed in Great Britain
Application
• drawing on the prompts in Extract B regarding charging drivers
more (lines 7 and 8) and cross elasticity of demand (line 9)
• use of the prompts in Extract B regarding bus travel (paragraph 3),
and rail transport (paragraph 4)
• drawing on the prompts in Extract C regarding fuel taxes (lines 2 −
7)
• drawing on the prompts in Extract C regarding road pricing
(paragraph 2)
• drawing on the prompts in Extract C regarding the costs of
collecting fuel duties and of operating a system of road pricing
(lines 16 to 19)
• drawing on the prompts in Extract C regarding the fairness of
taxing fuel and road pricing (lines 20 − 22)
• use of own knowledge of other forms of road pricing, eg the London
Congestion Charge, toll roads in the UK or abroad
• use of own knowledge of the effectiveness of other approaches to
reducing congestion in the UK or abroad, eg car sharing.
Some examples of relevant economic concepts and principles that
might be applied to this question include: the functions of price,
elasticity, private and social costs, market failure and government
failure.
• developing a chain of reasoning to explain why congestion is an

Developing the
economic problem
response to the
• use of relevant diagrams to support the explanation above
question:
• developing a chain of reasoning to explain how increasing taxes on
fuel will help to reduce congestion
Analysis
• developing a chain of reasoning to explain how a system of road
pricing will help to reduce congestion (various forms of road pricing
might be analysed)
• explaining the importance of PED and CED in relation to the
effectiveness of increasing taxes on fuel and road pricing
• analysis of how subsidising, for example bus and rail transport, will
help to reduce congestion
• use of a relevant diagram to support the previous bullet point
• developing a chain of reasoning to explain how investing in public
transport and/or improving the quality of the service provided will
help to reduce congestion
• analysis of the evidence in the extracts.
• the pros and cons of increasing taxes on fuel
Evaluation
• the pros and cons of building more roads to reduce congestion
• the pros and cons of road pricing
• the pros and cons of different forms of road pricing
• the pros and cons of subsidising travel by bus or rail
• the pros and cons of investing in public transport and/or improving
the quality of the service provided
• possible unintended consequences of the different methods, eg the
impact of road pricing on local business in towns and cities
• the likelihood of government failure, eg inadequate information
means that the government is likely to set a price for using roads
(or the fuel duty) which is too high or too low, government policy is
likely to be swayed by public opinion and electoral success
• equity arguments, eg the impact of the different policies on: the
poorest members of society, the road user versus the taxpayer,
Page 54 of 70
town versus country dwellers, commuters
• the comparative costs to the taxpayer/society of implementing and
operating the different methods, eg the cost of subsidising travel by
bus, the cost of improving the rail network, the cost of investing in
the technology needed to set up a system of road pricing and
operating such a system
• use of the data in the extracts to help to assess the different
methods, eg Extract C paragraph 1 which points out the likelihood
of a long- term decline in fuel duties, Extract B (lines 20−22) which
indicates that it might be impractical to try to achieve a significant
reduction in congestion by just relying on a switch to rail
• consider the view that the only effective way to reduce congestion
is likely to involve a combination of policies
• an overall assessment of the relative merits of the different methods
• a final judgement that considers which method(s) are likely to be
most appropriate.
Examiners should note that credit can be given for basic evaluation if a student
simply identifies some of the arguments for and against the different methods that
might be employed to reduce congestion. Basic evaluation (and good analysis)
would allow the answer to achieve low Level 4. Stronger evaluation is provided by
students who are able to support arguments both for and against the different
methods of reducing congestion by the use of evidence and/or sound economic
analysis.
[25]
Q58.
Extracts D, E and F provide a number of prompts for students and it is expected that they
will make use of this material when developing their answers. It is anticipated that good
answers will consider merit and/or demerit good arguments as well as the pros and cons
of alternative methods of intervention. Although much of the data relates to the UK, the
wording of the question enables students to consider the appropriateness of different
types and amounts of intervention to different countries, but this is not required for
maximum marks. Some students may decide to discuss excess consumption of alcohol
and whilst such a response has some merit, answers which focus mainly on this aspect
are unlikely to warrant more than mid-Level 3.
Issues and areas for discussion (it is expected that students will only cover some
of these issues in the time available):
• identifying the extent of, and problems associated with, obesity

Introduction
• outlining methods of government intervention in the markets for
food and drink.
Developing the Credit for application can be given for relevant application of economic
response to the theory, use of the data and the student’s own knowledge of relevant
question: aspects of the markets for food and drink. Examples might include:
• use of the changes in price of fruit and sugars in Extract D,
(Application)
showing the greater growth in sugar prices since 2000 but the
increased growth in both in the last four years
• drawing on the prompts in Extract E regarding the extent of obesity
(lines 1–4) and the problems it causes for health and production
(lines 5–8)
• use of the prompts in Extract E regarding the causes of poor diet,
Page 55 of 70
including the agricultural policy of the US and EU (lines 12–15)
• drawing on the prompts in Extract E regarding the contribution
played by lack of exercise (lines 16–19)
• drawing on the prompt in Extract F regarding the claim that
providing nutritional information and promoting of healthy eating is
not enough (lines 3–4)
• use of Extract F to identify alternative methods of government
intervention in the markets for food and drink to encourage healthy
eating − a tax on unhealthy food and drinks, subsidies on fruit and
vegetables, a ban on firms such as McDonald's and Coca-Cola
sponsoring major sports events, head teachers writing to parents,
firms persuading customers to eat more healthily or simply leaving
the choice to consumers
• use of own knowledge of, for example, campaigns and other
methods to reduce the consumption of alcohol.
Some examples of relevant economic concepts and principles that
might be applied to this question include: functions of price, merit and
demerit goods, externalities, market failure and government failure.
• developing a chain of reasoning to explain why healthy food and
Developing the
drink may be considered to be merit goods
response to the
• developing a chain of reasoning to explain why unhealthy food and
question:
drink may be considered to be demerit goods
(Analysis) • analysis of the consequences of ‘leaving it to the market’, eg
rationing, incentive and signalling functions
• analysis of the effects of alternative methods of government
intervention, eg tax, subsidy, ban, advertising, etc.
• analysis of the significance of elasticity − using the prompt in
Extract F
• the use of diagrams to illustrate merit and demerit goods plus
alternative forms of intervention. (Strictly speaking the diagrams
should relate to positive and negative externalities in consumption,
however diagrams showing positive and negative externalities in
production are acceptable)
• developing a chain of reasoning to explain how and why
government failure could result
• analysis of the evidence in the extracts.
• the pros and cons of leaving it to the market

Evaluation
• the advantages and disadvantages of alternative methods of
intervention, both separately and in combination
• equity versus efficiency arguments
• the cost and opportunity cost of intervention
• the practicalities of intervention and unintended consequences, eg
the possible formation of a black market
• other priorities of government, perhaps in different countries
• the likelihood of government failure
• an overall assessment of whether or not there should be
government intervention in the markets for food and drink to
encourage healthy eating.
Examiners should note that credit can be given for basic evaluation if a student simply
identifies some of the arguments for and against government intervention in the markets
for food and drink to encourage a healthy diet. Basic evaluation (and good analysis) would
allow the answer to achieve low Level 4. Stronger evaluation is provided by students who
are able to support arguments both for and against intervention by the use of evidence
and/or sound economic analysis.
Page 56 of 70
[25]
Q59.
A
[1]
Q60.
A
[1]
Q61.
D
[1]
Q62.
B
[1]
Q63.
D
[1]
Q64.
C
[1]
Q65.
A
[1]
Q66.
D
[1]
Q67.
When rewarding diagrams, it is important that candidates produce an economically
valid response even if it is not one of the three shown below for the global market
for wheat.
Page 57 of 70
Note: if in Diagram 3 the supply curve shifts by more than the demand curve, the
new equilibrium would depict a fall in the equilibrium quantity of wheat. This is a
valid response.
Extract B mentions two sets of factors that affected the price of wheat in 2010. These
were:
• supply-side factors: the Russian ban on exports; very dry weather; fires
• demand-side factors: increasing demand from emerging-market countries and rising
living standards in poor countries; demand for wheat as an animal feed; the growth
of demand for use as a bio-fuel; growth in the speculative demand for wheat.
Define demand, supply, excess demand, excess supply or any other

relevant term
Do not reward a definition of ‘composite demand’ (question 01)
Russia bans wheat exports causing the supply curve of wheat to fall in
wheat-importing countries and the price of wheat to rise.
Natural events (floods, droughts) reduce the supply of wheat and the price
of wheat to rise.
Rising living standards in poor countries increase the demand for meat
causing the demand for wheat as animal feed to rise and the price of
wheat to rise.
Increased demand for biofuel increases the demand for wheat and the
price of wheat to rise.
An explanation relating to the adjustment process: explaining excess

demand resulting from an increase in demand (or from a decrease in
supply) leading to the price of wheat rising followed by an extension of
supply (or a contraction of demand)
An explanation relating to price elasticity of supply/price elasticity of

demand
[10]
Q68.
A
Page 58 of 70
[1]
Q69.
B
[1]
Q71.
When awarding marks for the diagram, it is important to reward students who produce an
economically valid response even if it is not exactly the same as the diagrams below, for
example, a diagram illustrating an upward sloping supply curve should be rewarded. The
left-hand diagram illustrates an initial state of excess demand when NHS health services
are provided free of charge. It also illustrates the increase in excess demand resulting
from the demand curve for NHS services shifting to the right. Reward also a diagram such
as the right-hand diagram, which shows an increase in excess demand when an above-
zero price is charged (as not all NHS services are provided free). Also reward a diagram
showing an increase in excess demand resulting from the supply curve shifting to the
right, but by not as much as the rightward shift of demand.
Define demand, supply, excess demand, services, merit good or any other
relevant term.
The UK population is ageing; there are more consumers needing drugs /

treatment for longer periods; which increases the demand for health care
services; thereby adding to the initial level of excess demand which
results from NHS services being under-priced or free.
People’s lifestyles are changing e.g. alcohol abuse, child obesity,

diabetes; so people need different types of healthcare; which increases
the demand for health care services; thereby adding to the initial level of
excess demand which results from NHS services being under-priced or
free.
People’s expectations of what they are entitled to are changing; there is

less information failure regarding the different drugs / treatments people
Page 59 of 70
become more dependant on healthcare; which increases the demand for
health care services thereby adding to the initial level of excess demand
which results from NHS services being under-priced or free.
Both the demand for NHS services and the supply of NHS services are
shifting to the right ; but ‘demand is running ahead of supply’; partly
because of difficulties in increasing supply (inelastic supply); because of
limited / lack of government funding ; thereby adding to the initial level of
excess demand which results from NHS services being under-priced or
free.
[10]
Q72.
D
[1]
Q73.
D
[1]
Q74.
D
[1]
Q75.
C
[1]
Q76.
A
[1]
Q77.
A
[1]
Q78.
C
[1]
Q79.
C
[1]
Q81.
Page 60 of 70
When rewarding a diagram, it is important to reward candidates who produce an
economically valid response even if it is not the one shown below (for example the
diagram might show a completely inelastic vertical supply curve).
The anticipated response for the diagram:
Extract B mentions five factors that have contributed to rising house prices. These are:
changes in population size; changes in household size, changes in income, the ease or
difficulty of borrowing money; and demand being affected by people regarding housing as
a form of wealth. Marks are only available for developing / explaining two of these
prompts.
Defining demand and / or supply or any other relevant term apart from
Price Elasticity of Supply:
For changes in population size:
Population has grown, a particular cause of population growth, e.g.

natural growth, immigration; population growth means that more houses
are needed for housing the extra people; this increases the demand for
housing.
For changes in the number of households:
The number of households has increased, a particular cause of the

growth in the number of households, e.g. more young people forming new
households, a fall in household size, this means that more houses are
needed to house the greater number of households, this increases the
demand for housing.
For changes in income:
Incomes have generally grown, a cause of income growth, e.g. economic

growth, higher labour productivity, housing functioning as a normal good,
interpretation of the income elasticity statistic, this increases the demand
for housing.
Page 61 of 70
For changes in the ease of borrowing money to finance house
purchase:
Most houses are purchased by taking out a mortgage, a cut in interest

rates increases the ease of borrowing money, a relaxation of banks’
lending criteria increases the ease of borrowing money, linking the ease of
borrowing money to the growth in mortgage borrowing, this increases the
demand for housing.
For explaining how people’s views of wealth assets affects the

demand for housing
One of the reasons for house purchase stems from the fact that people
view houses as a form of wealth (investment goods), when house prices
are rising, people who own houses generally feel wealthier; linking the
demand for houses to the hope of making capital gains (speculative
gains) by selling later at a higher price, the effect of some other reason
why wealth increases, e.g. rising share prices, this increases the demand
for housing.
The rightward shift of demand along the supply curve creates excess
demand for housing; the price of houses rises to relieve the excess
demand: the greater the inelasticity of supply the greater the price rise,
ceteris paribus; an increase in demand followed by an extension of
supply.
[10]
Q82.
D
[1]
Q83.
D
[1]
Q84.
B
[1]
Q85.
A
[1]
Page 62 of 70
Examiner reports
Q1.
28% of students chose key A, incorrectly believing that a higher petrol tax would reduce
the PED for petrol (whereas a move up the demand curve increases PED). Students
needed to have a good understanding of the determinants of PED to answer this question.
Q2.
This question involved a calculation using an income elasticity of demand. Students often
find it harder to deal with negative numbers, and 43% incorrectly chose key B as they
calculated that sales had fallen by 2% instead of rising by 2%.
Q3.
This question is marked using a level of response mark scheme that assesses knowledge
and understanding, application and analysis. When awarding the mark, a judgement is
made regarding the overall quality of the response. Only a small minority of students
wrote a Level 3 answer with the vast majority of responses falling into Level 2.
Stronger students generally started their answers by identifying two relevant factors taken
from the clear signposting in the extract material and explained with good logical chains of
reasoning, how they have influenced the demand for library services. Good application
was demonstrated by drawing on information provided in the extracts; for example, the
statement that “Changes in technology and lifestyles have caused many to question the
purpose of the local library”. Good answers to this question focused on how changes in
technology, both the availability of, as well as the price of, has strongly influenced the
patterns of how we read and where we read or seek out and gather information. Best
responses were able to draw the link behind the greater availability of a substitute good or
lower costs of production and greater supply of e-Books contributing to a fall in demand
for library services, whilst recognising they might have a positive cross price elasticity of
demand. When this was backed up by relevant diagrams students were able to achieve
full marks.
Many students seemed to view ‘libraries’ only as a place where books can be read or
borrowed rather than the other ‘services’ they might offer. Students that saw this
opportunity were able to develop their analysis along more sophisticated lines.
Many level 2 responses took the reason from the extract but did not adequately develop
the analysis and/or failed to include reasonable application of economic principles or really
made use of the data. Weaker responses tended to focus on lifestyle changes and less
free time but were unable to support this with relevant economic analysis and instead
applied a very general approach, which while correct in terms of rationale, often prevented
them from going much beyond mid-level 2.
Q6.
It is worth re-emphasising that this question is assessed using a level of response mark
scheme; marks are not awarded for each point that is made. It is the overall quality of the
response, that determines the mark awarded.
A fair proportion of the students provided a competent response to this question,

achieving Level 3. These students frequently used a demand and supply curve diagram to
illustrate the effect of an increase in advertising or technology, for example. The diagrams
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were usually backed up by sound analysis, stating that a rise in advertising could impact
on consumer demand whereas an increase in technology could impact on the industry’s
supply. Good students also made use of the extracts; for example, by referring to ‘more
online casinos, faster internet speeds and more people using their phones to gamble’
mentioned in Extract E. The very best answers combined extract material with
sophisticated and robust economic analysis. Students using imperfect information or
recession often found it difficult to expand their points in order to reach level 3.
It was not necessary to include a diagram to achieve full marks for this question but
students should appreciate that, where appropriate, the use of a diagram can be useful in
supporting their analysis. Diagrams are an important part of an economist’s toolkit and it is
up to the student to decide when and how they might be usefully employed.
Many students mistook the concept of overconsumption with that of an increase in

consumption (demand). This led to answers about information failure and lack of
knowledge of the odds of winning that did not explain why gambling had increased. Better
answers focused on increased technology allowing greater ease/convenience of access,
greater use of advertising on many social platforms and the ability of more products/firms
to enter the market through technological advances. A large number of students identified
gambling as an inferior good where consumption increased during the recession while
others went against the data and suggested that rising incomes since had led to an
increase in demand for gambling, thus identifying it as a normal good.
Q15.
It is worth re-emphasising that this question is assessed using a level of response mark
scheme; marks are not awarded for each point that is made. It is the overall quality of the
response, with reference to the standardisation scripts, that determines the mark
awarded.
A fair proportion of the students provided a competent response to this question,

achieving Level 3. These students frequently used a diagram to illustrate the effect of
imposing an indirect tax on the market for cigarettes. The diagrams were usually backed
up by sound analysis, stating that a rise in an indirect tax is equivalent to an increase in
firms’ costs of production, shifting the market supply curve to the left. They often
developed their answers by explaining why the impact on consumption would depend on
the price elasticity of demand for cigarettes. Good students also made use of the extracts;
for example, by referring to the data in Extract D or ‘the illegal importation of tobacco
products’ mentioned in Extract F.
Weaker answers did not focus on the question and digressed into discussing market
failure and the negative externalities of smoking. A significant minority of students believed
that an indirect tax levied on cigarettes is represented by a leftward shift in the demand
curve. This was usually accompanied by a muddled written explanation.
It was not necessary to include a diagram to achieve full marks for this question but
students should appreciate that, where appropriate, the use of a diagram can be useful in
supporting their analysis. Diagrams are an important part of an economist’s toolkit and it is
up to the student to decide when and how they might be usefully employed.
Q16.
There were some very accomplished and thoughtful responses to this question. The best
answers started by explaining the general case for government intervention in relation to
market failure. This was often supported by a relevant diagram and quotes from the
extracts identifying some of the negative externalities generated by smoking. However,
even some of the better students confused the externalities of smoking, the impact on
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third parties, with the long term but under-valued private costs, such as the risk of
contracting smoking-related illnesses. Also, some students did not appreciate that the
negative externalities from smoking are in consumption and not production.
Good students proceeded to assess the relative merits of the different policies that could
be employed to reduce smoking. However, some weaker answers focused on the case
for, and occasionally against, government intervention rather than the best method of
reducing the problem. The question asked students to assess whether or not regulation is
the ‘best way’ of dealing with the market failures that result from the consumption of
cigarettes.
Some students also struggled because they mistakenly believed that all forms of
government intervention are regulation. This meant that they found it impossible to
compare regulation with other forms of intervention such as indirect taxes, subsidising
substitutes such as e-cigarettes and nicotine patches, or providing better information.
Given the ‘clues’ in the extracts, this was surprising. Section 3.1.5.8 of the AS specification
makes a clear distinction between various types of government intervention and students
should understand the difference between them.
It was very encouraging to see that the majority of students made good use of the extracts
to enhance their responses and in some cases, to provide support for judgements made.
For example, many of the better students used Extract D to support the case for
increasing taxes to raise the price of cigarettes. However, only a small minority recognised
that the rise in the price of cigarettes was unlikely to have been the only reason for the fall
in consumption.
Answers often included some supported evaluation throughout the response but many of
the conclusions were too brief or merely repeated a few earlier points. A well-argued
conclusion with a supported final judgement was required to achieve a mark towards the
top of Level 5. The judgement might reasonably have concluded, that to be effective, more
than one approach to reducing smoking is required but whatever the judgement it should
be supported by sound analysis and evidence.
Q17.
Candidates found this question very easy.
Q18.
This was the fourth most difficult question in the test (Key C). The pattern of response,
with a number of candidates selecting response D, indicates that many candidates had
insufficient knowledge and understanding of the implications for market analysis of
different values of price elasticity of demand. If the market demand curve for a good is
perfectly elastic, or horizontal, consumers will demand all that is supplied at the prevailing
price, but demand will fall to zero at any higher price. In this situation the imposition of an
indirect tax on the good will have no effect on the market price, which is response C. In
complete contrast, if demand is perfectly inelastic and the demand curve vertical the
imposition of an indirect tax will cause the market price to rise by the full amount of the
tax, meaning that response D is false.
Q19.
Candidates found this question very easy.
Q20.
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This was a very straightforward question and most students were able to use economic
theory comfortably to analyse the effects of subsidies with regard to arts and cultural
activities. The basic subsidy diagram was well used, and many students also included
relevant externalities diagrams private benefits in the extracts. In order to establish
whether or not subsidies were the 'best' way of dealing with the issue, students were
expected to consider at least one other method, which most duly did with varying degrees
of success. At this point some answers became very general and lacked economic
analysis whilst others provided a list of alternatives and the analysis remained incomplete.
The prompts in the extracts alluded to a number of methods, such as the provision of
licences and education / information provision, and some students suggested maximum
price controls. The best answers went on to properly analyse these methods in the
context. As an example, the theoretical analysis of a maximum price control for theatre /
concert tickets, and the resulting disequilibrium and creation of excess demand, which
was then linked to the hidden economy and ticket touts / the selling on of tickets, a
problem which is of course extremely pertinent today. When answering the essay
questions students must be reminded that they need to demonstrate their ability to write /
think like economists in order to move into band three and beyond. 'General' answers
remain within band two at the most, however, refreshingly fewer of these were seen, and
indeed, it should be noted that the quality of the essays was very high this year.
Q45.
This question had the third lowest facility in the test with only 36 per cent of students
selecting the Key, A. However, the discriminatory power of the question was high,
indicating that the question was answered correctly by the more able students in the test
as a whole. The distribution of responses to the question is indicative of a general
weakness in students’ understanding of the relationship between the numerical value of
elasticity and the slope of the demand curve. The fall in the price of a product, resulting
from the introduction of a government subsidy, will be greater the more inelastic the
demand curve. An inelastic demand curve, by definition, has an elasticity value of less
than 1, which is response A. The other three responses all involve numerical values for
elasticity of unity or greater than unity, irrespective of their sign, and are therefore
incorrect.
Q51.
This question tested students’ ability to apply their knowledge and understanding of
factors affecting the position of the supply curve and price elasticity of demand to the
estimation of the value of elasticity derived from graphical and numerical information in a
demand and supply diagram. The question proved moderately demanding with slightly
less than 50% of students selecting the Key, B. The diagram illustrated a shift in supply
resulting in a reduction in price of 20% and an increase in demand of 16%. This meant
that demand was inelastic over the range of the price variation. Almost 29% of students
went for distractor C, which also involved a correct reason for the shift in the supply curve
but an implied elastic not inelastic value for price elasticity.
Q54.
The majority of students were able to define cross elasticity of demand and/or provide the
correct formula, though some definitions were vague and displayed limited understanding
of the concept. Some went on to earn full marks by identifying the substitute relationship.
A few quoted examples or identified the fact that both must change in the same direction.
However, a significant number ignored the requirement to define the ‘positive’ part of the
term. A few students made use of a diagram to help answer this question. Over 40% of
students scored maximum marks on this part of the question.
Page 66 of 70
Q55.
Just over half of the students achieved at least 8 marks on this question. The mean mark
for this question was 7.3. Many students were able to explain how the PED for road travel
would affect the demand for road travel if the taxes on fuel increased. However, a minority
of students went on to explain how this would affect the government’s revenue. Indeed, if
there were no reference to tax revenue, the answer was constrained to a maximum of 8
marks. Definitions were often included as part of the answer, such as PED and taxation.
Some students did not mention PED and and wrongly assumed that if taxes increased,
demand would fall so revenue would always fall. Elasticity is an important topic and
students should be prepared to apply it to the examination context as well as quote the
formulas.
Q56.
The mean mark for this question was 12.5. There were some very good answers which
included good analysis and evaluation of at least two policies. The analysis was often well
supported by diagrams, and the answers made explicit reference to the data to add weight
to different arguments, for example, the costs of providing bus subsidies or the running
costs of road pricing. Weaker answers tended to be descriptive, sometimes paraphrased
the data, generally lacked economic analysis, and contained superficial evaluation. Most
students concluded that the ‘best’ policy was probably a combination of policies, and a
number of them referred to the current state of the economy and the
inability/unwillingness or otherwise to finance possible schemes.
Q58.
This question required students to discuss the arguments for and against government
intervention in the markets for food and drink. A common approach was to start and end
their answers with why a government should intervene, whilst the majority of the answers
dealt with the pros and cons of various policies. Others focused only on policies, eg a tax
on junk food, and subsidising healthy food, while answers often did not consider the
arguments ‘for and against’. Those who explored market failure, in terms of demerit/merit
goods, and who presented arguments for government failure and then market forces
tended to score highly. They were able to use the data to justify why intervention was
needed. Some drew on their own knowledge of recent developments in these markets,
and the subsequent analysis was well-supported by diagrams. The best answers
contained evaluation and offered a clear final judgement. Weaker answers lacked
economic content, and tended to copy the data rather than use it effectively. The mean
mark for this question was 12.7.
Q62.
This proved to be the most demanding question in the test with less than 32 per cent of
candidates selecting the key, B, and almost 40 per cent of candidates selecting response
D, which made it a prominent distractor. The question involved an elasticity calculation
which typically made for a more demanding question because of a general weakness in
candidates’ ability to undertake numerical tasks. However, in this case the choice of
distractor D by such a high proportion of candidates, and of Distractor C by a further 11.27
per cent, pointed to a more fundamental deficiency in more than half of the candidates’
understanding of the relationship between price elasticity of demand and total revenue.
When demand is price inelastic, any increase in price necessarily results in an increase in
sales revenue. By definition of inelasticity, the proportional decline in sales is less than the
proportional increase in price leading to a rise in total revenue. Distractors C and D both
involved a fall in total revenue which was only possible following a price rise if demand
were price elastic. Given the information that the price elasticity of demand is –0.5,
meaning that it was inelastic, a 10% increase in the price of a product must result in a rise
Page 67 of 70
in total revenue of less than 10%.
Q66.
This was the fourth most difficult question in the test, with a facility of 45.83 per cent.
Although demanding, it was very effective in discriminating between more- and less-able
students. Once again, the difficulty was not entirely unexpected given that the question
involves a numerical calculation as well as knowledge and understanding of the concept
of cross elasticity of demand. The ability to apply the different concepts of demand and
supply elasticities is an essential requirement for undertaking market analysis. Amongst
other things, this requires students to know how to apply the relevant formula to calculate
the sign and value of a demand elasticity relationship. The data shows that the price /
quantity relationship between goods X and Y is negative, so that the two goods are
complementary goods. This means that responses A and B are necessarily incorrect
because they show positive values of the cross elasticity. A 10% reduction in the price of
good X results in a 40% increase in the demand for good Y so that the numerical value for
the cross elasticity of demand is −4, response D.
Q67.
This question appeared to be extremely accessible to most students with the majority
achieving full marks. The data contained an abundance of factors which contributed to the
change in the price of wheat in 2010, and by identifying one or more and developing the
chain of reasoning students easily achieved maximum marks for the explanation. The
answer required a basic demand and supply diagram and as students were clearly
wellprepared many earned all of the marks available for the diagram too. Where students
failed to achieve full marks for this question, it appeared to be because they did not
develop the links in their chain of reasoning sufficiently, often because they merely
described the diagram or simply did not make use of the data.
Q71.
This question represented a change from the norm and clearly some students were not
prepared for this. Very few earned full marks for the diagram in which students were
expected to illustrate an increase in excess demand. Most simply drew a typical demand
and supply diagram with a rightwards shift in demand and made no reference whatsoever
to excess demand. Others did illustrate excess demand at this point, though not
necessarily at zero price, and only a minority actually illustrated an increase in excess
demand. Having said this, many students earned the maximum 10 marks for the
explanation by making good use of the prompts in the data. Only two marks were
available to students who merely listed the relevant factors − students are expected to
develop the links in the chain of reasoning to accumulate marks.
Q72.
This was the most difficult question in the test with a facility of only 40.52%, key D.
Distractor C was a prominent distractor with a response of 41.62%. This was a
disappointing result and indicated the need for significant improvement in candidates’
ability to apply knowledge and understanding of the concepts of price and income
elasticity of demand. The data given in the stem simply related the percentage change in
cigarette consumption to the percentage change in the price of cigarettes in high- and low-
income countries. The data did not include any values for the levels of income in high- and
low-income countries. Consequently, a sound understanding of the formula for income
elasticity would have prevented candidates from making any inference regarding the value
of income elasticity. The same knowledge and understanding should have enabled
candidates to infer that the only valid inference from the data given was of a negative
Page 68 of 70
price elasticity of demand in both high- and low-income countries
Q75.
Only 37.01 per cent of students selected the correct answer, C, while a high percentage of
students, 48.58 per cent, selected distractor D. This question involves a straightforward
test of students’ knowledge and understanding on the implications of price elasticity of
demand for the slope of a demand curve. If the demand curve for a good is perfectly
elastic (horizontal) it implies that demand is unbounded at the prevailing price but falls to
zero if the price rises above the prevailing level. In this case, the introduction of an indirect
tax on the good can have no influence on its price. The imposition of an indirect tax is
born entirely by suppliers and shifts the supply curve leftwards, with a corresponding
reduction in the quantity supplied. The prominent distractor, D, involves a perfectly
inelastic demand curve. A perfectly inelastic demand curve is vertical and the quantity
demanded does not vary with price. In this case, the price will rise by the full amount of
the indirect tax. Understanding of the meaning and implications of differences in the price
elasticity of demand is an essential requirement for the correct application of demand and
supply curve analysis.
Q79.
Only 40.46 per cent of students selected the correct answer, C, although on this question
the other choices were more evenly distributed (ie without a prominent distractor). The
question tested students’ knowledge and understanding of the implications for a firm
facing a perfectly elastic supply curve. Students were expected to know that, faced with a
perfectly elastic (horizontal) supply curve, a firm could buy any amount of a raw material
at an unchanged price. The fact that nearly 60 per cent of students did not know this fact
involving the elasticity of a supply curve is further evidence of gaps in knowledge and
understanding of elasticity concepts in relation to the slopes of demand and supply
curves.
Q81.
This question was generally very well answered, and appeared to be accessible to most
students. Many obtained the maximum of four marks for the diagram and a number also
correctly identified ‘excess demand’ at the original equilibrium price. Whilst this did not
receive any extra marks if the maximum had already been reached, it served as a useful
prompt for additional explanation marks regarding the adjustment process. The vast
majority of students correctly drew a diagram shifting the demand curve to the right and
gaining the full four marks available for this. Some failed to indicate the direction of the
changes in their written answers, for example simply writing ‘changes in population size’,
rather than stating it had increased. Students needed to draw from the prompts in the data
to explain how two factors may have caused a rise in the price of houses. Some students
only referred to one factor and their answers were constrained to ten marks, whilst others
actually explained two factors which had caused a fall in the price of houses, which was
not rewarded. Again, students should be reminded to read questions carefully and answer
the question set.
Q85.
This question involved the concept of elasticity of demand and the relationship between
elasticity of demand and a firm’s sales revenue (average revenue). The relationship is
clearly not well understood by the majority of candidates with only 45.56 per cent correctly
selecting the key, A. The numerical value of − 0.6 means that demand is inelastic and that
an increase in price of X per cent will result in a decline in demand of less than X per cent.
It thus follows that, when demand is inelastic, an increase in price will lead to an increase
Page 69 of 70
in sales revenue.
Page 70 of 70

1.2.2 Price Income Cross Elasticities

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1.2.2 Price Income Cross Elasticities

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_______________________

Time: 429 min.

Marks: 337 marks

Weekly sales of baked beans are 73 000 tins.

A A fall in air fares increases the demand for

Product Income elasticity of

A Demand is perfectly inelastic and labour costs

A suppliers pay all the tax.

Fruit Year 1 Year 2

Apples 200 140

Grapes 250 200

Which one of the following is supported by the data?

A The earnings of orange growers will have

Which one of the following combinations, A, B, C or D, is correct?

Cause of the fall in the price Price elasticity of demand

Rise in the price of animal

Fall in the wage of agricultural

Lower rent on agricultural

D Rise in the price of lamb Between –1 and zero

A Supply is price elastic and demand is price

C goods in composite demand.

Extract F: How should governments deal with smokers?

Source: news reports, March 2015

Explain the effect of indirect taxation on the consumption of cigarettes.

A high and positive.

A rise by the same percentage.

B rise by a smaller percentage.

C fall by the same percentage.

A a decrease in demand for Good Z only.

B an increase in demand for all three goods.

C a more than proportionate increase in demand

D an equal percentage increase in demand for

Price elasticity Firm's degree Firm's long

Extract B: The rising cost of food

Extract E: Competition in the potash market

Product of Cross elasticity of demand

Fruit Year 1 Year 2

Apples 200 140

Grapes 250 200

Which one of the following is supported by the data?

A The earnings of orange growers will have

B The trend in the price of apples between Year 1

C The price elasticity of demand is lowest for

D Total revenue from the sale of grapes will have

Extract B: Too much traffic on our roads?

An alternative approach is to increase the subsidies paid to other forms of transport.

In 2011, despite difficult economic conditions, the railways experienced a 7% increase in

Extract C: How should we pay for roads?

Extract F: Government intervention − food for thought?

Estimate of income elasticity of

From the table, it may be concluded that

B the cross price elasticity of demand between

C as incomes rise, the demand for Good Y and

D as incomes fall, only the demand for Good Y and

B stay the same.

C fall by more than 6 per cent.

D fall by less than 6 per cent.

Units of goods demanded

£40 000 200 200 200 200

-1.4 -0.8 -1.0 -0.5

A a 10% increase in fares will lead to a 15%

B bus travel is an inferior good.

C bus travel has a negative cross elasticity of