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CIE A-Level Economics 9708 Paper 2 Practice Paper | 60 marks, 1 hour 30 minutes
CIE A-Level Economics 9708 Paper 2 practice paper: Section A data response on a city bus market and a per-journey subsidy (equilibrium, price elasticity of demand, incidence of the subsidy, cost to government) and a Section B essay on subsidies and living standards; 6 questions, 60 marks, 1 hour 30 minutes, with full worked answers and a mark scheme.
Section A Data Response (a) Equilibrium Price and Quantity
Bus fares in a city are P dollars per journey. Monthly demand is Qd = 1,200 – 20P (thousand journeys) and supply is Qs = 20P – 400 (thousand journeys). Find the equilibrium fare and the equilibrium number of journeys, and explain what equilibrium means.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | Bus fares in a city are P dollars per journey. Monthly demand is Qd = 1,200 – 20P (thousand journeys) and supply is Qs = 20P – 400 (thousand journeys). Find the equilibrium fare and the equilibrium number of journeys, and explain what equilibrium means. | Setting 1,200 – 20P equal to 20P – 400 gives 40P = 1,600, so P = 40 and Q = 1,200 – 800 = 400 thousand journeys. The equilibrium fare is 40 dollars and the equilibrium quantity is 400,000 journeys a month. At this fare quantity demanded equals quantity supplied, so there is neither excess demand nor excess supply and no pressure on the fare to change. Marking: correct equation 1 mark; correct price and quantity 1 mark. |
Section A Data Response (b) Price Elasticity of Demand and Total Revenue
The fare rises from 40 dollars to 44 dollars. Using the simple percentage method, calculate the price elasticity of demand, calculate total revenue before and after the rise, and state whether demand is elastic, unit elastic or inelastic.
| # | Question | Answer and marking notes |
|---|---|---|
| 2 | The fare rises from 40 dollars to 44 dollars. Using the simple percentage method, calculate the price elasticity of demand, calculate total revenue before and after the rise, and state whether demand is elastic, unit elastic or inelastic. | At P = 44 the quantity demanded is 1,200 – 880 = 320 thousand. The change in quantity is (320 – 400) / 400 = -20 per cent and the change in price is (44 – 40) / 40 = +10 per cent, so the price elasticity of demand is -20 / 10 = -2. Total revenue before is 40 x 400,000 = 16,000,000 dollars and after is 44 x 320,000 = 14,080,000 dollars, a fall of 1,920,000 dollars. Since the absolute value 2 exceeds 1 demand is elastic, and the fare rise lowers revenue, which matches the calculation. |
Section A Data Response (c) Effect of a Subsidy on Equilibrium
The government pays a subsidy of 6 dollars per journey to the operator. Write the new supply function, find the new equilibrium fare and number of journeys, and explain how the subsidy is shared between consumers and producers.
| # | Question | Answer and marking notes |
|---|---|---|
| 3 | The government pays a subsidy of 6 dollars per journey to the operator. Write the new supply function, find the new equilibrium fare and number of journeys, and explain how the subsidy is shared between consumers and producers. | The new supply is 20(P + 6) – 400 = 20P – 280. Setting this equal to demand gives 1,200 – 20P = 20P – 280, so 40P = 1,480, P = 37 and Q = 1,200 – 740 = 460 thousand journeys. The fare falls from 40 to 37 dollars, so consumers gain 3 dollars per journey, while the operator receives 37 + 6 = 43 dollars, 3 dollars more than before. The 6 dollar subsidy is therefore shared equally: 3 dollars to consumers and 3 dollars to the producer. Journeys rise from 400,000 to 460,000, an increase of 60,000 or 15 per cent. |
Section A Data Response (d) Cost of the Subsidy to the Government
Calculate the monthly and annual cost of the subsidy to the government. If the budget for the subsidy is 30 million dollars a month, what is the shortfall?
| # | Question | Answer and marking notes |
|---|---|---|
| 4 | Calculate the monthly and annual cost of the subsidy to the government. If the budget for the subsidy is 30 million dollars a month, what is the shortfall? | Monthly cost is 6 x 460,000 = 2,760,000 dollars and annual cost is 2,760,000 x 12 = 33,120,000 dollars. Against a budget of 30,000,000 dollars the shortfall is 3,120,000 dollars, which must be met by extra funding, a fare rise or fewer services. Marking: monthly cost 2 marks; annual cost 1 mark; shortfall 1 mark. |
Section A Data Response (e) Evaluating a Subsidy against a Fare Cut
Using the data and economic concepts, evaluate whether a subsidy is more effective than a legal fare cut in raising the number of bus journeys.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | Using the data and economic concepts, evaluate whether a subsidy is more effective than a legal fare cut in raising the number of bus journeys. | A subsidy shifts supply to the right so the fare falls and journeys rise: here the fare falls from 40 to 37 dollars and journeys rise from 400,000 to 460,000 at a monthly cost of 2.76 million dollars. A legal fare cut instead reduces the revenue of the operator, which may respond by cutting services, so supply need not rise and any gain in journeys may not last. Evaluation: demand is elastic (elasticity -2), so a price-based policy works well; the subsidy has an opportunity cost of 2.76 million dollars a month that could fund health or education; operators may keep part of the subsidy by reducing services, so a minimum service level and a fare cap are needed; competition from the railway limits how far a fare cut is passed on. A judgement must weigh the gain in journeys against the cost and state the safeguards required. |
Section B Essay (answer ONE question)
Answer ONE question. (1) Discuss whether a government subsidy is the most effective way to raise consumption of a merit good. (2) Discuss whether a rise in a country GDP necessarily improves the living standards of its people.
| # | Question | Answer and marking notes |
|---|---|---|
| 6 | Answer ONE question. (1) Discuss whether a government subsidy is the most effective way to raise consumption of a merit good. (2) Discuss whether a rise in a country GDP necessarily improves the living standards of its people. | Mark scheme: knowledge 8, application 12, analysis 12, evaluation 8, total 40 marks. Question 1: a subsidy shifts supply right, so price falls and quantity rises (in the data the fare falls from 40 to 37 dollars and journeys rise from 400,000 to 460,000), and it should be compared with price ceilings, advertising, public provision and legislation. Evaluation: the cost of 6 dollars per journey, 2.76 million dollars a month, and its opportunity cost; elastic demand makes a subsidy effective; producers may keep part of the benefit; long-run budget pressure; the risk of abuse. Question 2: a rise in GDP need not raise living standards because population and prices matter (nominal GDP of 500 billion dollars with 25 million people gives 20,000 dollars per head, but 5 per cent inflation cuts real GDP per head to about 19,048 dollars); also consider income distribution, external costs such as pollution and congestion, leisure, non-market activity and sustainability. High-scoring answers take a clear position, support it with data and reach a judgement. |
A TutorZone practice paper; original questions and passages, not publisher material.
