1

This markscheme is in no way confidential or for the

exclusive use of examiners in this examination session.
It is the property of the no one and should be nicked, copied,
reproduced or distributed to any interested person
without the authorization of anybody.
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1. The diagram below illustrates the production function for a hamburger restaurant

where the output is the number of hamburger meals produced per hour and the
labour is the number of employees per hour.

(a) (i) State at what level of output diminishing marginal returns sets in and
explain your reasoning. [2]

Level Marks
0 The work does not reach a standard described by the descriptors below. 0

1 Vague definition and explanation. 1

The idea that the increase in output becomes less.

2 Accurate definition. 2

The idea that the increase in output created by an additional employee is less than
than previously and that this occurs when the fourth person is employed.

(ii) Explain at what level of output is the marginal product (of labour) zero? [2]

Level Marks
0 The work does not reach a standard described by the descriptors below. 0

1 Vague definition and explanation. 1

The idea that the increase in output is constant or unchanged.

2 Accurate definition. 2

The idea that the increase in output created by an additional employee is constant
and that this occurs when the eighth person is employed.
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The hamburger restaurant has (fixed) capital cost of €10/hour and labour cost of €6/hour
per employee, while the cost of land is €1,50/meal.

(b) (i) Using the diagram on the previous page, calculate the total and average cost
when output is 18 and 22 hamburgers per hour. [3]

10 + (6 x 3 employees) + (1,5 x 18) = 55 and 55/18 = 3.06

Total Cost is €55 or €61 Average cost is €3.06
10 + (6 x 4 employees) + (1,5 x 22) = 67 and 67/22 = 3.05
Total Cost is €67 Average cost is €3.05

(ii) Using your answer from (b) (i), calculate the marginal cost of increasing output
from 18 to 22 hamburgers per hour. [2]

MC = ∆TC/∆Q → (67-55)/(22-18) → 12/4 = 3 or 6/4

Marginal Cost is €3 or €1.5

(c) The average and marginal cost curves for the hamburger restaurant is shown on the
diagram below

The hamburger restaurant faes the AR function of:

AR = 7 - 0.2q

(d) (i) Construct and label the AR function on the diagram on the above diagram.
[2]
 -4- M19/3/ECONO/HP3/ENG/TZ2/XX

(ii) The hamburger restaurant is in a market with many competing firms, what
market structure is it operating under; give reason for your answer. [2]

Level Marks
0 The work does not reach a standard described by the descriptors below. 0

1 Vague definition and explanation. 1

The idea that the it is a monopolistic competition or that many firms are competing
and the AR or demand function has a negative slope.

2 Accurate definition. 2

The idea that the it is a monopolistic competition and that many firms are competing
and the AR or demand function has a negative slope.

(iii) State the MR function in the box below, giving reason for the function, and
construct and label the MR function on the diagram on the previous page.
[3]

Level Marks
0 The work does not reach a standard described by the descriptors below. 0

1 That MR is twice the slope of AR or drawn on the diagram or MR = 7 - 0.4q 1

2 Any two of the above. 2

3 That MR is twice the slope of AR, drawn on the diagram and MR = 7 - 0.4q 3

(e) (i) Define allocative efficiency and productive efficiency. [4]

Level Marks
0 The work does not reach a standard described by the descriptors below. 0

1 Vague definition or one correct definition. 1

The idea that allocative efficiency maximises consumer and producer surplus
where AR = MC or that productive efficiency is when resources used are minimised
where MC = AC (or AC is minimised).

2 Accurate definition. 2

The idea that allocative efficiency maximises consumer and producer surplus
where AR = MC and that productive efficiency is when resources used are minimised
where MC = AC (or AC is minimised).
(ii) With reference to the diagram you constructed on page 3, state the level of
output for allocative and productive efficiency. [2]

Allocative efficiency = 23 or 23.5 (output)

Productive efficiency = 20 or 19.5 (output)
 -5- M19/3/ECONO/HP3/ENG/TZ2/XX

(iii) The hamburger restaurant is maximising revenues. At what level of output and
price will it sell and will it make a profit while doing so? [3]

Level Marks
0 The work does not reach a standard described by the descriptors below. 0

1 Revenues are maximised where MR = 0 or that MR = 0 at the output of 17.5 or

At 17.5 the firm is making a profit AR > AC 1

2 Any two of the above. 2

3 Revenues are maximised where MR = 0, that MR = 0 at the output of 17.5 and

at 17.5 the firm is making a profit AR > AC 3

Turn over
 -6- M19/3/ECONO/HP3/ENG/TZ2/XX

2. The following information provides a simplified version of the calculation of a

consumer price index (CPI).

In Alba, the rate of inflation is measured by the calculation of a CPI. The index is
calculated using the five product categories which are purchased by citizens of Alba
as representative of a “typical basket of goods”.

The weighting given to each product is based on the quantities of each product
purchased by the average household in Alba per week.

Product Average price Quantity of each product purchased

category per unit in € by the average household per month

2018 2019

A 17.25 18.75 23

B 21.00 19.50 13

C 8.25 9.75 37

D 25.50 25.25 9

E 18.50 19.25 18

Assume that 2018 is the base year for the purpose of calculating the CPI.

(a) (i) Calculate the consumer price index (CPI) for Alba in 2019. [3]

(17.75 x 23) + (21 x 13) + (8.25 x 37) + (25.5 x 9) + (18.5 x 18) => 408.25 + 273 +
305.25 + 229.5 + 333 => 1549

(18.75 x 23) + (19.5 x 13) + (9.75 x 37) + (25.25 x 9) + (19.25 x 18) => 431.25 + 253.5 +
360.75 + 227.25 + 346.5 => 1619.25

CPI = (1619.25/1549) x 100 or ((1619.25-1549)/1549) + 100 => 104.5

(ii) State two reasons why the typical basket of goods bought by citizens of Alba
may change over time. [2]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Changes in consumption habits or changes in quality. 1

The idea that consumption habits change over time; spend less on books and
paper and more on electronics and internet access or quality changes; mobile
are more efficient year after year.

2 Changes in consumption habits and changes in quality. 2

The idea that consumption habits change over time; spend less on books and
paper and more on electronics and internet access and quality changes; mobile
 -7- M19/3/ECONO/HP3/ENG/TZ2/XX

are more efficient year after year.

Alba has nominal GDP in billions of € given by the table below:

Year Nominal GDP

2018 237

2019 241

(b) (i) Using your answer from (a) (i), calculate the real GDP of Alba in 2018 and 2019 [2]

2018: (237/100) x 100 = 237 => €237 billion

2019: (241/104.5) x 100 = 230.62 => €230.62 billion

(ii) Using your answer from (b) (i), calculate the economic growth of Alba 2018-19. [2]

((230.62/237) x100) - 100 = -2.69%

(230.62 - 237/237) x 100 = -2.69%

Alba has a population (in thousands) structure given in the table below:

Population

Under 16 918

16-64 3456

Over 64 1026

(c) (i) Calculate the real GDP/capita for Alba in 2019 [3]

Population: 918 + 3456 + 1026 = 5.4 million

GDP/capita: 230620/5.4 = €42 707

(ii) The Total Labour Force is 77% of the working age population of Alba. Using the
table on the previous page calculate the size of the Total Labour Force. [3]

TLF: (2345/100) x 77 = 2661.12 thousands

(iii) The unemployment rate is 4.2%, calculate the number of unemployed in Alba. [2]

Unemployment: (2661.12/100) x 4.2 = 111 767

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(d) Demand-deficient (cyclical) unemployment in Alba currently accounts for 1% of the

total labour force, sketch a labelled diagram of the labour market illustrating this. [4]

Or an AD/AS diagram showing a deflationary/recessionary gap (Keynesian or New

Classical) with an explanation that the GDP below full employment is the result of
demand-deficient unemployment

(This question continues on the following page)

(e) (i) Explain the term hidden (disguised) unemployment. [2]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 A vague explanation. 1

The idea that it is unemployment not accounted for in the statistical calculation.

2 A precise explanation. 2

The idea that it is unemployed individuals who have given up searching for
employment and so are not counted as unemployed in the statistics; are now
outside the total labour force.

(ii) Explain what effect hidden unemployment may have the statistical level of
unemployment. [2]

That it reduces the official data often making unemployment less than it actually is.
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3. The exchange rate of Cymru is £1= €1.25 and due to inflation the Cymru pound has
depreciated by 12%. In Cymru, the PED for imports is 0.9 and the PED for exports is 2.4

(a) (i) Calculate the new exchange rate resulting from the depreciation. [2]

1.25 x 0.12 = 0.15 => 1.25 - 0.15 = 1.1 New Exchange Rate i £1 = €1.1

(ii) Explain how the depreciation has an effect on imports to and exports from
Cymru [3]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Some vague explanation that it has a positive effect on exports and negative
effect on imports. 1

2 That depreciation makes imports more expensive so reducing their demand in

the domestic market or that depreciation makes exports cheaper so increasing
their demand abroad 2

3 That depreciation makes imports more expensive so reducing their demand in

the domestic market and that depreciation makes exports cheaper so increasing
their demand abroad 3

(b) (i) State the Marshall-Lerner Condition and explain whether Cymru fulfills this
condition [3]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Some vague explanation that it depreciation has a positive effect the current
account due to changes in the level of exports and imports. 1

2 That the combines elasticities of exports and imports are greater than one or
that a depreciation or devaluation of the currency will improve the current
account. 2

3 That the combines elasticities of exports and imports are greater than one and
that a depreciation or devaluation of the currency will improve the current
account. 3
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(ii) Sketch a diagram in the space below illustrating the effect of the depreciation on
the current account of Cymru over time [4]

Year Index of Average Index of Average

Export Prices Import Prices

2018 100 103

2019 100 94

(c) (i) Define and explain the terms of trade. [2]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 A vague explanation. 1

The idea that it measures cost of imports and exports.

2 A precise explanation. 2

The idea that it measures how much has to be exported to buy imports or the
formula: (index of average export prices/index of average import prices) x 100.
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(ii) Calculate the terms of trade for Cymru in 2018 and 2019. [4]

(index of average export prices/index of average import prices) x 100

2018 => (100/100) x 100 = 100

2019=> (103/94) x 100 = 109.57 or 109

(d) Explain the relationship between the depreciation of the Cymru pound (£), change in
the current account and change in the terms of trade. [4]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 An explanation of a depreciation that improves the current account, import 1-2

prices rise and export prices fall resulting in changes in respective demand
or that it worsens the terms of trade so more has to be exported to buy the
Same amount of imports.

2 An explanation of a depreciation that improves the current account, import 3-4

prices rise and export prices fall resulting in changes in respective demand
and that it worsens the terms of trade so more has to be exported to buy the
Same amount of imports.

(e) Give two reasons why a government may want to avoid currency depreciation. [3]

Level Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Some vague explanation that it depreciation has a positive effect the current
account due to changes in the level of exports and imports. 1

2 That import prices and inflation may increase or that the increased inflation
may unemployment or a fall in GDP 2

3 That import prices and inflation may increase and that the increased inflation
may unemployment or a fall in GDP or any other plausible reason (e.g. negative
effect on investment) 3