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S5 Economics Practice Paper: Microeconomics and Macroeconomic Policy
S5 Economics: Microeconomics and Macroeconomic Policy
S5 Economics paper: demand and supply, elasticity, surplus, tax, externalities, costs, monopoly, game theory, GDP, unemployment, CPI and the multiplier. 12 questions, 100 marks, 75 minutes.
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Paper details Level: S5 | Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12 | Answers included
Section A: Microeconomics (Q1-Q4)
Section A
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | In a market, demand is Qd = 140 – 5P and supply is Qs = 20 + 3P (Q in units, P in dollars). (a) Find the equilibrium price and quantity. (3 marks) (b) If the government sets a price ceiling of $12, calculate the shortage. (3 marks) (c) Starting from (a), if a per-unit tax of $4 is imposed on sellers, write the new supply function and find the new equilibrium price. (2 marks) | (a) Set Qd = Qs: 140 – 5P = 20 + 3P, 120 = 8P, P = $15; Q = 140 – 5(15) = 65 units. (b) At P = 12, Qd = 80 and Qs = 56, so the shortage is 24 units. (c) New supply: Qs = 20 + 3(P – 4) = 8 + 3P; 140 – 5P = 8 + 3P, 132 = 8P, P = $16.50 (Q = 57.5 units). Marking: equilibrium condition and price, shortage, tax-adjusted supply and new price. |
| 2 | The price of a product falls from $50 to $45 and monthly sales rise from 400 to 460 units. (a) Using the arc method, calculate the price elasticity of demand and state whether demand is elastic, unit elastic or inelastic. (4 marks) (b) Calculate total revenue before and after the price cut, and explain whether the result is consistent with (a). (2 marks) (c) If the price of a substitute falls, state how the demand curve shifts and how elasticity is affected. (2 marks) | (a) Percentage change in quantity = 60 / 430 = 13.95%; percentage change in price = -5 / 47.5 = -10.53%; arc elasticity = 13.95 / (-10.53) = -1.33, so with |Ed| = 1.33 > 1 demand is elastic. (b) Total revenue was $50 x 400 = $20,000 and becomes $45 x 460 = $20,700; revenue rises, which is consistent with elastic demand. (c) A cheaper substitute shifts the demand curve to the left and makes demand more elastic. Marking: formula and substitution, elasticity judgement, revenue comparison, shift and elasticity change. |
| 3 | In a market, demand is Qd = 100 – 2P and supply is Qs = 3P. (a) Find the equilibrium price and quantity. (2 marks) (b) Calculate consumer surplus, producer surplus and total surplus at equilibrium. (4 marks) (c) If a per-unit tax of $5 is imposed on sellers, find the new price, quantity and tax revenue. (3 marks) | (a) 100 – 2P = 3P, P = $20, Q = 60 units. (b) Consumer surplus = (50 – 20) x 60 / 2 = $900; producer surplus = 20 x 60 / 2 = $600; total surplus = $1,500. (c) New supply Qs = 3(P – 5): 100 – 2P = 3P – 15, 115 = 5P, P = $23, Q = 54; tax revenue = 5 x 54 = $270 (sellers keep $18). Marking: equilibrium, both surpluses, total surplus, post-tax equilibrium and revenue. |
| 4 | A factory has marginal private cost MPC = 10 + 0.5Q, an external cost of $6 per unit, and marginal social benefit MSB = 70 – 0.5Q. (a) Find the free-market quantity and price. (2 marks) (b) Find the socially optimal quantity and price. (2 marks) (c) Calculate the deadweight loss. (3 marks) (d) State the Pigouvian tax per unit that removes the inefficiency and explain why. (2 marks) | (a) Free market: 10 + 0.5Q = 70 – 0.5Q, Q = 60, P = $40. (b) Social optimum: 16 + 0.5Q = 70 – 0.5Q, Q = 54, P = $43. (c) External cost is $6 per unit; deadweight loss = 6 x (60 – 54) / 2 = $18. (d) A Pigouvian tax of $6 per unit equals marginal external cost, internalises the externality and cuts output to the socially optimal 54 units. Marking: two equilibria, external cost, deadweight loss, tax level and reason. |
Section B: Firms, Costs and Market Structure (Q5-Q8)
Section B
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | A firm hires labour with total product: 1 worker = 10, 2 = 24, 3 = 36, 4 = 44, 5 = 48. (a) Calculate marginal product and average product for workers 1 to 5. (4 marks) (b) State from which worker diminishing marginal returns begin and explain how you know. (2 marks) (c) Explain why average product is highest when marginal product equals average product. (2 marks) | (a) Marginal product: 10, 14, 12, 8, 4; average product: 10, 12, 12, 11, 9.6. (b) Diminishing marginal returns begin with the third worker, where marginal product falls from 14 to 12 and keeps falling. (c) When MP exceeds AP, AP rises; when MP is below AP, AP falls; so AP peaks where MP equals AP (12, between the second and third worker). Marking: both rows, turning point, relationship between average and marginal. |
| 6 | A firm has total cost TC = 200 + 10Q + 0.5Q^2. (a) Find total cost, average cost and marginal cost at Q = 20. (3 marks) (b) If the market price is $40, find the profit-maximising output and the profit. (3 marks) (c) Find the shutdown price. (2 marks) | (a) TC = 200 + 200 + 200 = $600; AC = $30; MC = 10 + 20 = $30. (b) P = MC: 40 = 10 + Q, Q = 30; TC = 200 + 300 + 450 = $950; TR = $1,200; profit = $250. (c) AVC = 10 + 0.5Q, whose minimum approaches $10, so the shutdown price is $10. Marking: three cost measures, profit-maximising condition and profit, shutdown price. |
| 7 | A monopolist faces demand P = 100 – 2Q, has constant marginal cost MC = 20 and fixed cost of $200. (a) Derive the marginal revenue function. (2 marks) (b) Find the profit-maximising output, price and profit. (3 marks) (c) Calculate consumer surplus and the deadweight loss compared with perfect competition (P = MC). (4 marks) | (a) TR = 100Q – 2Q^2, so MR = 100 – 4Q. (b) MR = MC: 100 – 4Q = 20, Q = 20, P = $60; TR = $1,200, TC = 20 x 20 + 200 = $600, profit = $600. (c) Consumer surplus = (100 – 60) x 20 / 2 = $400; under perfect competition P = MC = 20 and Q = 40, so deadweight loss = (60 – 20) x (40 – 20) / 2 = $400. Marking: MR derivation, output price and profit, consumer surplus, deadweight loss. |
| 8 | Two firms choose prices. Both high: each earns $12 million. One low, one high: the low-price firm earns $15 million and the high-price firm earns $4 million. Both low: each earns $8 million. (a) Write the payoff matrix in profit terms. (3 marks) (b) Find the Nash equilibrium and explain. (2 marks) (c) Explain why collusion is unstable and state one way to sustain it. (3 marks) | (a) Matrix (firm A profit, firm B profit): high/high (12, 12); low/high (15, 4); high/low (4, 15); low/low (8, 8). (b) The Nash equilibrium is both low (8, 8): whatever the rival does, pricing low pays more (15 > 12 and 8 > 4), so low price is a dominant strategy for both. (c) Collusion would give each $12 million, but cheating yields $15 million, so the incentive to defect is strong; collusion can be sustained by binding agreements, most-favoured-customer clauses, long contracts that raise the cost of defection, or retaliation in repeated games. Marking: matrix, equilibrium and dominant strategy, instability and one sustaining device. |
Section C: Macroeconomics (Q9-Q12)
Section C
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | An economy has private consumption $1,200 billion, investment $450 billion, government spending $380 billion, exports $900 billion, imports $760 billion, and a GDP deflator of 108.5. (a) Use the expenditure approach to calculate nominal GDP. (3 marks) (b) Calculate real GDP. (3 marks) (c) Explain why real GDP is used to compare living standards across years. (2 marks) | (a) Nominal GDP = 1,200 + 450 + 380 + 900 – 760 = $2,170 billion. (b) Real GDP = 2,170 / 1.085 = $2,000 billion. (c) Nominal GDP uses current prices, so inflation raises it even when output is unchanged; real GDP uses base-year prices, removes price changes and therefore measures actual output and living standards. Marking: expenditure approach, deflator use, distinction between the two measures. |
| 10 | An economy has a population aged 15 or above of 5,120,000, employment of 3,600,000 and unemployment of 240,000. (a) Calculate the labour force and the labour force participation rate. (3 marks) (b) Calculate the unemployment rate. (2 marks) (c) If 50,000 unemployed people become discouraged and stop looking for work, calculate the new unemployment rate and explain how the discouraged worker effect affects the meaning of the rate. (3 marks) | (a) Labour force = 3,600,000 + 240,000 = 3,840,000; participation rate = 3,840,000 / 5,120,000 = 75%. (b) Unemployment rate = 240,000 / 3,840,000 = 6.25%. (c) The labour force falls to 3,790,000 and unemployment to 190,000, so the new rate is 190,000 / 3,790,000 = 5.01%; discouraged workers leave the labour force, so the rate falls even though job prospects have not improved, meaning the rate may understate idle labour. Marking: labour force and participation, unemployment rate, new rate and interpretation. |
| 11 | A CPI basket is weighted: food 30%, housing 40%, transport 15%, others 15%. With 2024 as the base year (index = 100), the 2025 price indices are 110, 106, 102 and 105. (a) Calculate the CPI for 2025. (3 marks) (b) Calculate the inflation rate from 2024 to 2025. (2 marks) (c) Explain two reasons why the CPI may overstate the rise in the cost of living. (4 marks) | (a) CPI = 0.30 x 110 + 0.40 x 106 + 0.15 x 102 + 0.15 x 105 = 33 + 42.4 + 15.3 + 15.75 = 106.45. (b) Inflation = (106.45 – 100) / 100 = 6.45%. (c) The basket is fixed, so it ignores substitution towards cheaper goods when relative prices change; it also misses new products, quality improvements and cheaper channels such as discounters and online shopping, so it may overstate the rise in the cost of living. Marking: weighted calculation, inflation rate, two reasons with explanation. |
| 12 | A closed economy has a marginal propensity to consume of 0.8 and real output is $20 billion below potential output. (a) Calculate the expenditure multiplier. (2 marks) (b) Calculate the increase in government spending needed to close the output gap. (3 marks) (c) If the government cuts taxes instead, calculate the required tax cut and compare the two policies. (3 marks) | (a) Multiplier = 1 / (1 – 0.8) = 5. (b) Required increase in government spending = 200 / 5 = $40 billion. (c) Tax multiplier = -0.8 / 0.2 = -4, so the required tax cut is 200 / 4 = $50 billion; a larger tax cut is needed for the same effect, and tax cuts work indirectly through saving behaviour with longer lags, whereas spending on infrastructure injects demand directly and is more certain. Marking: multiplier, spending increase, tax cut and comparison. |
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