October 2020: Paper 1

Mark scheme

Examiner's comment

This question was generally answered well, with many candidates able to accurately draw a diagram showing for a specific tax a parallel shift left in supply to secure the two knowledge marks. A minority illustrated the shift as it was an ad-valorem tax and thus only secured one knowledge mark. The majority were also able to accurately apply the consumer and producer tax incidence. This answer scores the full 4 marks - it clearly shows a parallel shift to the left in supply and the resultant tax incidence carefully annotated to the right of the diagram as best practice, given the writing inside the boxes is not clear. Everything is also correctly labelled - all axes and lines. In addition, they have also applied accurately the tax per litre. This answer scores the 2/4 marks. Again, it clearly shows a parallel shift to the left in supply, but the resultant tax incidence is labelled incorrectly.

Notes from the mark scheme and report

• specific tax is a parallel leftward shift of supply (a pivot is ad valorem and loses a knowledge mark)
• label consumer and producer incidence
• application mark for showing the 58p per litre tax
• report: some labelled the incidence areas the wrong way round

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Answer

A

Mark scheme

Notes from the mark scheme and report

• a higher indirect tax raises price and cuts quantity so both consumer and producer surplus fall (A), whatever the PED of -0.1
• B, C and D each have one surplus rising

Mark scheme

Examiner's comment

This question was generally answered well, with many candidates able to accurately draw a diagram showing MPB, MSB and MSC. The main reason for candidates scoring 2/4 marks as opposed to 4/4 marks was not correctly identifying the external benefit/welfare gain/new social optimum equilibrium. This answer scores the full 4 marks - it clearly shows the welfare gain as well as the free market (Qfm) and social optimum (Qso) outputs. Everything is also correctly labelled - all axes and lines. This answer also scores 4/4 marks. This time there is additional annotation regarding the under-provision with both axes applied.

Notes from the mark scheme and report

• MSB above MPB with MPC = MSC
• market equilibrium at MPB = MPC, social optimum at MSB = MSC
• mark the external benefit and the welfare gain area
• report: the usual loss of 2 marks was not identifying the welfare gain or social optimum

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Answer

C

Mark scheme

Notes from the mark scheme and report

• the £10 000 higher earnings go to the graduate, a private benefit (C)
• A external benefit needs a third party
• B and D are costs

Mark scheme

Examiner's comment

Most responses secured high marks with many explaining and illustrating a secure knowledge or tradable pollution permits using a supply and demand diagram. This was undertaken in a concise manner linking the rise in the price of permits to a fall in pollution levels, with students thus going beyond the four marks for this question. This answer achieves zero marks. Several effects are provided without a valid explanation. This answer achieves 4/4 marks. There is an awareness of how limiting the supply of permits will increase their price in the tradable pollution permits market. This is then further developed and applied in the context of reducing pollution in the long run.

Notes from the mark scheme and report

• fewer permits shift supply of permits left, raising the permit price, so firms pollute less or invest in cleaner technology
• one effect developed in context
• listing several effects without explanation scored 0

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Answer

B

Mark scheme

Notes from the mark scheme and report

• regulation can create unintended consequences, a cause of government failure (B)
• A, C and D reverse the other causes (distorted price signals, information gaps, excessive administrative costs)

Mark scheme

Examiner's comment

A significant number of candidates achieved zero marks or one mark for this question. This was due to them only identifying that total costs were rising. No marks were awarded for simply saying that costs or average costs were rising. There was a mistaken belief that diminishing returns will only occur at output levels greater than Z. There was little evidence of a secure knowledge regarding the relationship between marginal costs and average cost. This answer achieves 1/2 marks for correctly identifying that total costs are rising. Unfortunately, they do not go beyond this to secure a second mark. This answer achieves 2/2 marks for correctly identifying that total cost would be rising (1) at a higher rate than output i.e. at a faster rate (1).

Notes from the mark scheme and report

• beyond Z MC > AC so total cost rises at an increasing rate
• just "costs" or "average costs rise" earns nothing
• report: "a significant number of candidates achieved zero marks or one mark", only saying total cost rises, with little secure knowledge of the MC and AC relationship

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms); QS 6 (calculate cost, revenue and profit (marginal, average, totals))

Answer

B

Mark scheme

Notes from the mark scheme and report

• beyond Z average variable cost rises (B)
• AFC keeps falling as fixed costs are spread, so the AFC distractors (C, D) are wrong
• A wrong as AVC does not fall

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme

Examiner's comment

Most students were able to accurately calculate the answer here. Those who didn't get full marks generally hadn't read the question properly and so didn't calculate what they had been asked to. This answer achieves 1/2 marks for correctly calculating the total variable cost. They also would secure one out of two marks for 300 + 320.Unfortunately they do not provide the final correct calculation required for full marks. This answer achieves 2/2 marks for correctly identifying the answer is £620.

Notes from the mark scheme and report

• AVC = 40% x £2 = £0.80
• TVC = 0.80 x 400 = £320
• TC = £320 + £300 = £620
• report: errors came from misreading what was asked

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 6 (calculate cost, revenue and profit (marginal, average, totals))

Mark scheme

Examiner's comment

This question was answered well, with most candidates able to concisely provide one reason why this business has remained small. Alternative answers came from across the reasons provided in the mark scheme with linked development, and beyond. This is a short but accurate answer that identifies profit satisficing as a linked development of their objective. This answer also scores 2/2 marks for accurate explanation of why this business has remained small. You will notice that this answer is longer than the previous one - however it will still only get the maximum 2 marks

Notes from the mark scheme and report

• one reason (owners keep control, avoid diseconomies of scale, personal service, regional niche, lack of finance) with linked development in context, e.g. 2 million customers already gives satisficing profit

Mark scheme

Examiner's comment

Some students found this question more challenging indicating that they had perhaps not covered organic growth in their revision. Most candidates secured the two marks for identifying growth was internal using profits re-invested and there was no evidence of external growth through mergers. In some cases, time may have been better spent on the longer responses. This answer secures 2/2marks. It secures this by providing an accurate reason why growth can be described as organic and then how it builds on ‘the knowledge of existing workers and managers.’ The answer could be more concise. This is a short but accurate answer that identifies there is no evidence of integrating with another firm and explains how by reinvesting its own profits Bettys’ is growing organically.

Notes from the mark scheme and report

• organic growth is internal: opening new branches funded by reinvested profit
• no evidence of merger or takeover
• report: some had not revised organic growth

Answer

B

Mark scheme

Notes from the mark scheme and report

• merging with a tea supplier is backward vertical integration giving control over input prices (B)
• A external economies arise outside the firm
• C diversification describes a conglomerate merger
• D monopoly power would rise

Mark scheme

Examiner's comment

In this question most students were able to access close to full marks. There was, in most cases, an accurately labelled diagram accompanied by a relevant explanation. However, a significant number of responses ignored the requirement to refer to Figure 1. This answer secure 5/5. A correctly labelled diagram annotated to show a shift right in supply is explained with reference to the data in Figure 1. There is also some explanation of the effect being a rise in consumer surplus and in the diagram of the financial gains to the producer and consumers of the subsidy illustrated in the diagram. This is an excellent answer to this question scoring full marks. An accurate diagram is provided showing a double shift right indicating an increase in subsidy, as allowed in the mark scheme. Accurate reference to the data in Figure 1 is also provided within the careful explanation of the diagram.

Notes from the mark scheme and report

• higher subsidy (£277m to £287.9m, about 3.9%) shifts supply right so fares fall (or rise less than they would with RPI-linked fares)
• 2 KAA marks reserved for an accurate diagram
• report: a significant number ignored Figure 1

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 4 (construct and interpret a range of standard graphical forms); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

With the 'examine' question, the marks are allocated evenly across all four categories – so two marks for each of knowledge, application, analysis, and evaluation. The question specifically asks for ‘two possible factors’. Therefore, students need to ensure they have examined two factors in their answer. The other thing that candidates need to remember is that there are two marks for evaluation here – many answers were well-written but without evaluation they are limited to 6/8 marks. On the whole this was a well answered question. This is an excellent well-structured answer to this question scoring full marks. Two distinct factors are examined – subsidies and a change in the preference for rail as provision to destinations improves. Both policies are also evaluated effectively, worthy of two evaluative marks in both cases. This answer scores 6/8. The response looks at two factors that influenced the demand for rail travel since 2008 and secures 6 marks for knowledge, analysis and application. Unfortunately, they do not evaluate which ‘examine’ as a command word requires.

Notes from the mark scheme and report

• two non-price determinants (incomes after 2008, population, substitute car costs and congestion, quality of service)
• quote about 50 to 65 billion passenger km or about 30%
• report: many answers had no evaluation and were capped at 6 of 8

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question focuses on 3.6.1 d) Government intervention to protect suppliers and employees: nationalisation. Students are asked to discuss the impact of full nationalisation on employees. The best answers did exactly that, drawing from the breadth of data available and applying in some cases their knowledge of the labour market. Where some students fell down on this question was in not focusing specifically on employees but discussing the wider implications of nationalisation. This answer scores 5/10. Economic ideas are applied appropriately but there is a lack of evaluation. This answer scores 10/10. The response is a high-quality answer with top levels for both KAA and evaluation. The answer starts off straight away with good application to the context and then goes on to explain how complete nationalisation may protect employees. This answer is also evaluated well, fully supported by relevant reasoning gained by a breadth of knowledge.

Notes from the mark scheme and report

• nationalisation to protect employees: public sector wage setting, job security, safety, unprofitable routes kept
• evaluate with maximum wages, lack of investment funds and lower quality
• report: weaker answers discussed nationalisation generally rather than employees

Mark scheme, including the levels grid and indicative content

Examiner's comment

In this question the key to success was in ensuring you fully grasped whether the rail network can be considered to be a natural monopoly rather than just a ‘monopoly’. Good answers began from a starting point of explicitly or implicitly defining a natural monopoly and then relating it to the rail network by using the data provided. A diagram was not required but often provided a solid indicator that an understanding of what is a natural monopoly was evident. Answers that just discussed whether the rail network was a monopoly obviously did not fully address what the question has asked of them. This answer scores 9/12. The initial explanation as to whether the rail network can be a natural monopoly is solid. Unfortunately, the evaluation, whilst demonstrating considerable knowledge in context, does not fully address the question set. This answer scores 11/12. This answer demonstrates accurate knowledge with fully integrated examples embedded in solid chains of reasoning. The evaluation is also supported by relevant reasoning.

Notes from the mark scheme and report

• define natural monopoly (high fixed infrastructure costs, falling LRAC over the market, one firm cheapest)
• apply 32 000 km of track and 2 500 stations
• report: answers discussing only "monopoly" did not address the question
• a diagram was not required

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question focused on the likely benefits of price discrimination and required a diagram to support an answer. The best answers used correct diagrams as illustrated in the mark scheme or alternative correct diagrams looking only at young and older rail customers. This was accompanied by clear and in-depth explanation of why this was a benefit and then evaluated with use of the diagram. Some answers also included a judgement, but candidates should note that this is not required in this question. This answer scores 8KAA and 5EV = 13/15. The diagram is not quite spot on, but the response has good supportive chains of reasoning. Focused examples are carefully integrated into knowledge and understanding. Better clarity on profit and revenue indicates one area where it could be better, but responses are not negatively marked. This answer scores 10/15. The response starts by looking at price discrimination between the young and old with a suitable diagram to address the young and valid evaluation = L3 and L2e+. The second point regarding revenue secures L2and L2e. The response though lacks balance and is a narrow response given the demands of the question. 6KAA and 4EV = 10/15.

Notes from the mark scheme and report

• third degree price discrimination diagram (separate markets, different PEDs) required
• benefits: cheaper young person fares (£69.50 v £105.30), cross subsidy keeps services running, spreading peak demand, revenue for investment
• evaluate with adults paying more and loss of consumer surplus

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question was more popular than question 8 with better responses overall. Given the synoptic nature of essay questions the better responses made excellent use of Theme 1 and Theme 3 making use of externalities diagrams as well as theory of the firm diagrams. Whilst diagrams were not required better responses over made use of them thus illustrating higher order thinking. The context has had substantial media coverage and stronger candidates were able to provide rich responses in context. The Paper Summary of the 2019 Principal Examiner report advised on this: “Spend time studying current developments in economics that are relevant to your specification. This not only enriches your understanding of key concepts but will enable you to refer to an industry or a firm of your choice if asked in an essay.” In this case following current developments as covered by broadsheet newspapers may have aided responses. This answer scores 12/25. The response secures the top of Level 2 KAA and there are a couple of cases of Level 2 Evaluation. There is a lack of clarity with the diagrams. This answer scores Level 4 KAA and Level 3 Evaluation = 15KAA + 7Ev = 22/25. This is a high-quality answer that fulfils the requirements of the criteria for KAA Level 4 and evaluation Level 3. A breadth of knowledge is deployed and there is a depth of reasoning with a rich use of context. The only downside is that the conclusion is weak.

Notes from the mark scheme and report

• microeconomic effects of switching: positive XED with electricity, demand shifts in car and fuel markets, profits of EV and oil firms, consumer and producer surplus, reduced negative externalities, lost fuel duty
• better answers used externality and theory of the firm diagrams (not required)
• evaluate with uncertain forecasts, charging infrastructure, external costs of battery production

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question drew on knowledge from 3.4.6 Monopsony, concerning a) Characteristics and conditions for a monopsony to operate and b) Costs and benefits of a monopsony to firms, consumers, employees and suppliers. For evaluation responses may have drawn on 3.6.1 d) Government intervention to protect suppliers and employees: restrictions on monopsony power of firms. Whilst a monopsony diagram was not required many responses did attempt to apply such a diagram to the context with solid chains of reasoning well applied. Weaker candidates tended to focus on Amazon as a monopoly firm and did not seem to have understood what a monopsony firm is about. There is a possibility that some centres may have not covered monopsony as Question 8 was less popular than Question 7 and on the whole responses were not as strong. This answer scores 12/25 marks. There are some elements of knowledge at the start regarding the operating of a monopsony in context, but it does not focus on the broad elements of the question and is thus not wholly convincing. The response is too short, and chains of reasoning run out. The evaluation is better with reference to the context. This answer scores Level 4 KAA and Level 3 Evaluation = 14KAA + 7Ev = 21/25. There are lots of angles in this demonstrating precise knowledge and understanding of concepts alongside being critical of the underlying assumptions made. The use of the perfectly elastic demand curve is perhaps not convincing but negative marking does not occur.

Notes from the mark scheme and report

• monopsony is a dominant buyer: costs to suppliers (lower prices, revenue, profit, possible shut-down), employees of suppliers and consumers (less choice)
• Level 4 must refer to a specific market
• report: weaker answers treated Amazon as a monopoly seller and did not understand monopsony
• Q8 answers "not as strong" as Q7