2025 OCR AS Level Economics - H060 Practice Paper with Answers

Allocative efficiency occurs when resources are directed to the goods and services that consumers value most, so the output mix matches consumer preferences. C is correct. A describes productive efficiency. B describes full employment of resources, which does not guarantee the right output mix. D is impossible because of scarcity and opportunity cost.

C (1). Distractors: A = productive efficiency confusion; B = full employment confusion; D = ignores scarcity and trade-offs. No partial credit.

Percentage change in quantity demanded = \(\frac{440-500}{500}\times 100 = -12\%\). Percentage change in price = \(\frac{5-4}{4}\times 100 = 25\%\). PED = \(\frac{-12}{25} = -0.48\), so demand is price inelastic. A is correct.

A (1). B = inverted formula (25/12). C = uses absolute price change of £1 over 4 incorrectly. D = uses change in quantity of 60 over 50 incorrectly. Accept no other values.

At £10, \(Q = 40\); at £8, \(Q = 48\). Initial consumer surplus = \(\frac12 \times 40 \times (20-10) = 200\). New consumer surplus = \(\frac12 \times 48 \times (20-8) = 288\). Increase = \(288-200 = 88\) (£ thousand). B is correct.

B (1). A = only the extra triangle area omitted the rectangle. C = 48 x 2 error. D = new consumer surplus rather than the change.

With a negative externality in production, marginal social cost equals marginal private cost plus marginal external cost, so MSC exceeds MPC. The market produces where MPC = MPB, where MSC is greater than MSB, so output is higher than the social optimum. D is correct.

D (1). A and B reverse the relationship (underproduction); C ignores the marginal external cost.

A shift of the PPC requires an increase in the quantity or quality of factors of production. A new raw material reserve increases productive capacity, so B is correct. A is a movement from inside the curve towards it. C is a movement along the curve. D changes demand, not productive capacity.

B (1). A = movement towards the curve; C = movement along the curve; D = demand-side change does not shift PPC.

A maximum price below equilibrium lowers the price producers receive, so quantity supplied contracts, while quantity demanded extends. The quantity traded is limited to the quantity supplied, which is lower than before, and there is excess demand. D is correct.

D (1). A and B wrongly identify excess supply; C wrongly says supply increases (it contracts).

XED = \(\frac{+15\%}{+10\%} = +1.5\). A positive value means that consumers switch to Y when X becomes dearer, so the goods are substitutes. C is correct.

C (1). A = wrong relationship for a positive sign; B = wrong sign and relationship; D = inverted calculation.

A per-unit tax raises the cost of production at every quantity, so firms supply less at each price and the supply curve shifts left. A is correct. B and D reduce costs and shift supply right. C causes an extension of supply along the curve.

A (1). B and D = rightward shifts; C = movement along the curve.

PED = % change in quantity demanded ÷ % change in price = \(-12 \div 8 = -1.5\). The answer is B. A inverts the formula. C ignores the negative sign that results from the inverse relationship. D is not a result of applying the formula correctly.

Key: B (1 mark). Award the mark for B only. Rationale: correct use of % change in quantity ÷ % change in price. A: formula inverted. C: sign error. D: not a valid result of the formula (arbitrary miscalculation).

Productive efficiency occurs when goods and services are produced at the lowest possible cost per unit, using the least resources for each unit. The answer is C. A describes allocative efficiency. B describes full employment, which is not the same as efficiency in production. D concerns equity, not efficiency.

Key: C (1 mark). A: allocative efficiency. B: full employment. D: equity/distribution of output.

Marginal social cost = marginal private cost + marginal external cost = £12 + £5 = £17. The answer is D. A is the external cost alone, B is the private cost alone, and C results from subtracting the external cost from the private cost.

Key: D (1 mark). A: external cost only. B: private cost only. C: external cost subtracted.

At £6, Q = 40, so consumer surplus = \(\tfrac{1}{2} \times 40 \times (14-6) = £160\). At £4, Q = 50, so consumer surplus = \(\tfrac{1}{2} \times 50 \times (14-4) = £250\). The increase is £250 − £160 = £90. The answer is B.

Key: B (1 mark). A: only the rectangle \(40 \times 2\) for existing units. C: rectangle \(50 \times 2\), omitting the new triangle. D: new total consumer surplus, not the increase.

A maximum price below equilibrium lowers quantity supplied and raises quantity demanded, creating excess demand (a shortage). Unmet demand may lead to illegal trading above the legal maximum. The answer is A. B is wrong because producers reduce output. C is wrong because the legal price cannot rise. D is wrong because both price and quantity traded fall, so producer surplus falls.

Key: A (1 mark). B: confuses with a minimum price. C: ignores the legal limit. D: quantity traded falls, not rises.

Margarine is a substitute. A rise in its price makes butter relatively cheaper, so demand for butter shifts right. The answer is C. A causes an extension along the demand curve. B involves a complement, which would reduce demand. D shifts supply, not demand.

Key: C (1 mark). A: movement along the curve. B: complement, demand falls. D: supply-side change.

Extra X = 20 units. Y given up = 10 units. Opportunity cost per unit of X = \(10 \div 20 = 0.5\) units of Y. The answer is D. A inverts the ratio, B is the total Y forgone, and C is the quantity of Y at B.

Key: D (1 mark). A: ratio inverted (cost of Y in X). B: total Y forgone. C: Y at point B.

(a) Fig. 1 gives 44 million cups in 2024.

(b) Percentage change in quantity demanded = (44 - 50) / 50 x 100 = -12%. Percentage change in price = (25 - 20) / 20 x 100 = +25%. PED = -12 / 25 = -0.48. Demand is price inelastic because the absolute value is less than 1.

(c) Customers often buy a drink on the way to work and many do so every day, so the purchase is a habit. Café owners say there are few alternatives when customers are in a hurry. With few substitutes, a rise in price leads to a proportionately smaller fall in quantity demanded.

(d) Revenue = 5p x 44 million = 220 million pence = £2.2 million.

(e) First, the council pays for collection and disposal of dropped cups. This is a cost to third parties (taxpayers) that is not paid by the buyer or the café. Second, litter in streets and parks, and non-recyclable waste, damage the environment and reduce enjoyment of public spaces for other residents. Both are costs to third parties, so marginal social cost exceeds marginal private cost.

(f) Draw price (pence) against quantity (millions) with demand D and supply S (MPC) intersecting at 20p and 50 million. The levy is a per-unit tax, so supply shifts vertically upwards (left) to S + tax by 5p. The new equilibrium is at 25p and 44 million. Price paid by consumers rises and quantity traded falls, so fewer cups are produced and consumed, reducing the external cost. Because demand is inelastic the fall in quantity is relatively small.

(g) Points for effectiveness: litter spending fell from £8.0m to £7.4m, a fall of 7.5%; quantity fell by 12%; revenue of £2.2m funds cleaning and water-refill points, which provide alternatives; it makes users face more of the external cost. Points against: PED of -0.48 means demand fell by less than the price rose, so behaviour changed only modestly; the levy of 5p may be below the true external cost; only one year of data and other factors may explain the fall in litter; the cost falls on regular commuters and lower-income customers; cafés bear administration costs; alternatives such as a ban, regulation or information provision may be more effective; risk of government failure if revenue is not used well. A supported judgement is expected, e.g. the levy is partly effective but its success depends on the size of the levy, the availability of substitutes such as reusable cups and the time period.

(a) 44 million (1). Accept 44 000 000. [1]

(b) -12% / 12% fall in quantity and +25% in price correctly calculated (1). PED = -0.48 (1). Accept 0.48. Accept -0.5 if working is shown. Correct answer with no working gains 2 marks. [2]

(c) Identify a reason: habitual purchase / bought on the way to work / few substitutes available when in a hurry (1). Explain that consumers are therefore not very responsive to price, so the percentage fall in quantity demanded is smaller than the percentage rise in price (1). Reason must be linked to the case study. Max 2 marks. [2]

(d) Levy per cup x cups sold, 5p x 44 million (1). £2.2 million (1). Accept 220 million pence. Do not accept 5p x 50 million. Correct answer with no working gains 2 marks. [2]

(e) Up to 2 marks for each external cost, max 4 marks. Identification of an external cost, e.g. cost of litter collection and disposal paid by the council / taxpayers; damage to the environment or amenity of parks and streets; non-recyclable waste (1). Explanation that it is borne by a third party and not reflected in the price paid by buyer or café, so the MSC is greater than the MPC (1). Any other appropriate response can be credited as appropriate. Do not credit two answers that are the same point reworded. [4]

(f) Diagram: axes labelled price and quantity, with demand and supply curves correctly labelled (1). Supply curve shifted upwards/left, by the amount of the 5p levy (1). Original equilibrium 20p / 50m and new equilibrium 25p / 44m shown or described (1). Explanation: price rises and quantity falls, so less of the good generating the external cost is consumed (1). Accept an MPC/MSC diagram if the levy is shown shifting MPC towards MSC. Max 4 marks. [4]

(g)* Levels of response, 10 marks.
Level 3 (8-10 marks): Good or strong evaluation. Developed analysis, applied to the case study with accurate use of the data in Figs 1 and 2 and economic terms (PED, external cost, price, quantity), supported by well-reasoned arguments both for and against. A supported judgement is reached that is justified by the evidence and considers factors such as size of levy, time period, or alternative policies.
Level 2 (4-7 marks): Reasonable analysis. Some application to the context and some use of evidence. Both sides may be considered but one may be undeveloped. Judgement may be asserted rather than supported.
Level 1 (1-3 marks): Limited knowledge of the levy or external costs, with generic or undeveloped points. Little or no use of the case study. No judgement.
0 marks: No creditworthy response.

Indicative content (not a checklist): quantity fell 12% from 50m to 44m; litter spending fell 7.5% from £8.0m to £7.4m; PED of -0.48 limits the fall in quantity; revenue of £2.2m funds cleaning and refill points; levy may be less than the true marginal external cost; one year of data and other possible causes; regressive impact on regular commuters; alternatives (ban, regulation, information provision); risk of government failure. Any other appropriate response can be credited as appropriate. [10]

Total: 25 marks

Percentage change in price = \( \frac{24 - 20}{20} \times 100 = +20\% \).

Percentage change in quantity demanded = \( \frac{4200 - 5000}{5000} \times 100 = -16\% \).

\( PED = \frac{-16\%}{+20\%} = -0.8 \). Demand is price inelastic over this range.

Method (1): correct percentage changes in both price (+20%) and quantity (-16%), OR the correct formula \( \frac{\%\Delta Q_d}{\%\Delta P} \) applied with correct values.
Accuracy (1): PED = -0.8. Accept 0.8 if the negative sign is omitted. Accept -0.80.
If the final answer is incorrect, award 1 mark for valid working showing at least one correct percentage change used in a quotient. Maximum 2 marks. Any other appropriate response can be credited as appropriate.

Identify the external cost: harbour residents suffer poor air quality and noise (third parties). Explain why it is external: the ferry operator and passengers do not pay for it in the fare, so the private cost is lower than the social cost and the market may over-produce crossings.

Up to 2 marks:
- Identifies a valid external cost from the extract, e.g. noise or poor air quality affecting residents / third parties (1)
- Explains that it is not paid for by the producer or consumer / is not reflected in the fare, so marginal social cost is greater than marginal private cost (1)
Accept: health costs or reduced enjoyment of property as the named cost.
Max 1 mark for a definition of external cost with no reference to the extract.
Any other appropriate response can be credited as appropriate.

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. A lower price means existing customers keep an extra £3 per ticket, and the extension in quantity demanded brings in new customers whose willingness to pay exceeds £8, who gain surplus. Total consumer surplus therefore rises.

Up to 2 marks:
- States that consumer surplus rises / increases (1)
- Explains with context: existing customers pay £3 less per ticket (the area between the old and new price) OR new customers with willingness to pay between £8 and £11 now gain surplus (1)
Accept: a correctly labelled demand diagram with the larger surplus area shown, if supported by explanation.
Max 1 mark if only a definition of consumer surplus is given.
Any other appropriate response can be credited as appropriate.

Draw price/cost on the vertical axis and quantity of processed fish on the horizontal axis. Draw a downward-sloping demand curve (MPB = MSB, as there is no external benefit) and an upward-sloping supply curve labelled MPC. Draw a second, higher curve labelled MSC, above MPC, with the vertical gap between them equal to the marginal external cost (MEC) of the waste water.

The free market produces where MPC = MSB, at Q1 and price P1. The socially efficient output is where MSC = MSB, at Q2, which is lower than Q1. The plant ignores the external cost borne by boat-tour operators and residents, because it is not paid for by the producer. Output is therefore too high between Q2 and Q1, where MSC exceeds MSB. This gives a welfare loss (the triangle between MSC and MSB from Q2 to Q1). Resources are over-allocated to fish processing, so the market fails.

Diagram: up to 2 marks.
- Correctly labelled axes (price/cost and quantity), with demand (MSB/MPB) and supply (MPC) curves labelled (1)
- MSC curve drawn above MPC, with market output Q1 (MPC = MSB) and socially optimal output Q2 (MSC = MSB) shown, Q1 greater than Q2 (1)
Accept the welfare loss triangle shaded. Accept MEC shown as the vertical gap between MSC and MPC.

Explanation: up to 2 marks.
- Identifies that the producer does not bear / ignores the external cost (waste water damage to tour operators and residents), so private costs are lower than social costs (1)
- Explains that the market overproduces (Q1 greater than Q2) or that resources are over-allocated to fish processing, giving a welfare loss / market failure because MSC is greater than MSB for the extra output (1)

Max 4 marks. Do not credit an explanation that is not linked to the context of external costs. If no diagram is drawn, max 2 marks. Any other appropriate response can be credited as appropriate.

Reason 1: Cost-push inflation. The currency has fallen, so imported fuel and machinery cost more in domestic currency. Higher costs of production reduce short-run aggregate supply (the SRAS curve shifts left) and firms raise prices to protect profit margins, so the general price level rises.

Reason 2: Demand-pull inflation. Greater household confidence raises consumption, a component of aggregate demand, so AD shifts right. Retailers cannot restock quickly enough, so output cannot rise to match demand and firms raise prices; the general price level rises, which is measured as a higher CPI.

Maximum 4 marks: up to 2 marks for each of two reasons. Each reason is credited as: identification of a relevant cause drawn from the extract (1); development of the chain of reasoning showing how it leads to a rise in the general price level (1).

Reason 1 - weaker currency / higher import prices (cost-push): identification, e.g. the fall in the currency raises the price of imported fuel and machinery OR costs of production increase (1); development, e.g. firms pass higher costs on as higher prices OR SRAS shifts left so the price level rises (1).

Reason 2 - higher consumer spending (demand-pull): identification, e.g. rising household confidence increases consumption OR aggregate demand rises (1); development, e.g. demand exceeds supply / retailers cannot restock so firms raise prices OR AD shifts right and the price level rises (1).

Accept: imported inflation as a description of Reason 1. Accept: a correct, labelled AD/AS diagram as support for development.
Do not credit: a reason not drawn from the extract unless it is clearly linked to the context. Do not credit a development mark without the identification mark for the same reason. Where two reasons are of the same type (e.g. both cost-push), credit both if distinct (fuel vs machinery is one reason only).
Any other appropriate response can be credited as appropriate.

Market failure: vans create a negative externality in production. Marginal social cost (MSC) = marginal private cost (MPC) + marginal external cost (MEC). Firms ignore the £11 external cost per journey, so too many journeys occur (output above the social optimum, where MSC = MSB), causing a welfare loss.

How the charge helps: a £8 per-van charge raises firms' private costs, shifting MPC upwards by £8 so that it moves closer to MSC. Fig. 1 forecasts journeys falling from 2400 to 2100, a fall of 300, which is \(\frac{300}{2400} \times 100 = 12.5\%\). The average delivery price rises from £6.00 to £6.70, a rise of \(\frac{0.70}{6.00} \times 100 \approx 11.7\%\). Revenue of about £8 x 2100 = £16,800 per day can fund cycle lanes (an alternative to vans for small items, or a way of cutting car use), which may further reduce emissions.

Limitations: (1) The charge of £8 is below the estimated external cost of £11, so the externality is only partly internalised and some welfare loss remains. (2) Firms claim that demand for home delivery is price inelastic and that consumers bear most of the charge, so the incidence falls on households; Fig. 1 shows the fall in journeys (12.5%) is modest, leaving most of the 2100 journeys and their emissions in place. (3) Relocation of depots just outside the boundary may shift emissions and congestion elsewhere without reducing total vans, and vans may still cross the town. (4) Government failure: the council may mis-estimate the external cost, face high enforcement and monitoring costs, or use the revenue poorly. (5) Time: firms may switch to cleaner vehicles in the long run, making the charge more effective over time than in the short run. Alternatives such as tradable permits, regulation of vehicle emissions or subsidies for electric vans may achieve a more certain reduction.

Judgement: the charge is likely to be partly effective in the short run. It moves the market towards the social optimum but does not eliminate the failure. Effectiveness depends on the elasticity of demand, the level of the charge relative to the external cost, the extent of relocation and the quality of enforcement.

Total 10 marks. Assessment objectives: AO1 knowledge, AO2 application, AO3 analysis, AO4 evaluation. Mark using best fit across the levels below.

Level 3 (7-10 marks): Good to strong, well-developed analysis of how the charge corrects (or fails to correct) the externality, applied accurately to the case study and Fig. 1 data. Both sides are considered with developed chains of reasoning (for example internalising the external cost, inelastic demand and incidence, relocation, under-pricing relative to the external cost). Evaluation is supported by evidence and reaches a justified judgement on effectiveness, which may recognise conditions on which the outcome depends. 9-10 marks for a strong, well-supported judgement with consistently integrated context; 7-8 marks for a good response with some imbalance or limited support for the judgement.

Level 2 (4-6 marks): Reasonable analysis with some relevant application to the case study or Fig. 1. Reasoning is developed in places but may be one-sided or incompletely chained. Evaluation is partial, with limited or unsupported judgement. 5-6 marks for two-sided response with some development; 4 marks for mainly one-sided but developed response.

Level 1 (1-3 marks): Limited knowledge of the charge, externality or market failure, with generic or undeveloped statements and little use of the case study. Little or no evaluation. 2-3 marks for some accurate points; 1 mark for a single isolated relevant point.

Level 0: 0 marks for no creditworthy response.

Extended-response quality is assessed through the use of the asterisk. A diagram is not required but may be credited where it shows MPC, MSC, MEC, the charge as an upward shift of MPC, and the new equilibrium compared with the social optimum (labels, curve shift and equilibrium information credited separately within the levels).

Indicative content (supports the descriptors and is not a mandatory checklist):
- Negative externality in production: MSC = MPC + MEC; firms ignore the £11 external cost; overproduction and welfare loss.
- Charge of £8 shifts MPC upwards, partly internalising the externality; Fig. 1 journeys fall by 300 (12.5%); accept any correct calculation.
- Delivery price rises from £6.00 to £6.70 (about 11.7%); revenue of about £16,800 per day (8 x 2100) for cycle lanes. Accept rounding to one decimal place.
- Charge below the external cost so only partial correction; inelastic demand for home delivery and incidence on consumers; relocation of depots (as in the neighbouring town) so emissions are displaced; government failure (inaccurate valuation, enforcement costs, misuse of revenue); short run versus long run (cleaner vehicles); alternatives such as tradable permits, regulation or subsidy.
- Judgement may be that the charge is partly effective, and conditional on elasticity, the size of the charge and enforcement. Any other appropriate response can be credited as appropriate.

Model answer outline.

Diagram: Draw price/cost against quantity of ferry journeys. Show demand (MPB = MSB, since no external benefit assumed), private supply (MPC) and a higher MSC curve above MPC, the vertical gap being the marginal external cost (MEC). The free-market equilibrium is at Qm where MPB = MPC, and the socially optimal output Qs is where MSB = MSC, to the left of Qm. The welfare loss is the triangle between MSC and MSB from Qs to Qm. A per-unit tax equal to the MEC at Qs shifts MPC up (supply shifts left) to MPC + tax, so the new equilibrium is at Qs and the price paid by passengers rises to Ps. The externality is internalised.

Analysis: Operators face higher costs and pass some on in higher fares; quantity falls from Qm to Qs; the welfare loss is removed; tax revenue (tax x Qs) can be used to fund cleaner harbour measures or cut other taxes. The size of the quantity fall depends on PED of ferry journeys: if tourists' demand is price inelastic (few substitutes to reach the islands, journeys are a small part of holiday spending), the tax raises much revenue but reduces output and pollution by little; if demand is elastic, output falls by more. Incidence is shared between operators and passengers depending on PED and PES.

Evaluation: (1) Measuring the MEC (health costs, lost amenity) is hard, so the tax may be set too high or too low, leading to under- or over-correction and possible government failure. (2) A tax on journeys does not reward operators for switching to cleaner engines in the way a tax on emissions would; the tax targets quantity, not pollution per journey. (3) Impact on the local economy: higher fares may cut tourism, harming island businesses and jobs; the tax may be regressive for local residents who rely on ferries. (4) Alternatives: subsidies for electric ferries, tradable pollution permits, regulation of engine standards or information provision; each has costs (subsidy cost to taxpayers, enforcement costs). (5) Time lags: operators need time to switch technology, so short-run effects may be small. (6) Operators may relocate or avoid the tax by using neighbouring ports.

Judgement: The tax can in principle remove the welfare loss, but the extent depends on the accuracy of the tax rate, the PED of demand, the availability of alternatives and the effect on tourism. A well-calibrated tax, with revenue recycled into cleaner transport, is likely to be reasonably effective in the long run; in the short run, with inelastic demand, it is more likely to be a revenue raiser than an effective pollution reducer.

20 marks: AO1 5, AO2 5, AO3 5, AO4 5 (approximately). Use best fit across the levels. Indicative content supports the descriptors and is not a mandatory checklist. Any other appropriate response can be credited as appropriate.

Level 4 (16-20 marks): Strong contextual application to ferries, the harbour and tourists. Well-developed chains of reasoning on how the tax changes costs, price and quantity. Accurate, fully labelled diagram integrated into the answer (MPC, MSC, MEC, demand, Qm, Qs, tax shift, new equilibrium, welfare loss). Several well-supported evaluative points (e.g. PED, difficulty measuring MEC, effects on tourism, alternatives, time lags), leading to a supported and justified judgement on the extent to which the market failure is corrected.

Level 3 (11-15 marks): Good application to context. Reasoning is developed in places. Diagram is mostly accurate and used in the answer, possibly with minor omissions. Evaluation of at least two points with some development; judgement present and partly supported.

Level 2 (6-10 marks): Reasonable knowledge of externalities and taxes with some context. Reasoning is partly developed. Diagram is present but may be incomplete or poorly integrated. Evaluation is limited or asserted; judgement weak or unsupported.

Level 1 (1-5 marks): Limited knowledge, mainly generic statements. Diagram absent or largely incorrect. Little or no evaluation or judgement.

0 marks: No creditworthy response.

Diagram guidance (credit within the level descriptors): correct labelled axes (price/cost and quantity of ferry journeys) (1); MPC/supply and MSC with MEC gap shown (1); demand/MPB = MSB (1); free-market equilibrium Qm and socially optimal Qs identified (1); tax shown as an upward/leftward shift of MPC to MPC + tax with new equilibrium at Qs and price Ps (1); welfare loss triangle shown (1). Accept MSB shown separately if no external benefit is assumed to equal MPB. Reject a tax shown as a shift of demand.

Indicative content: Negative externality in production; MEC from air pollution and health costs; free market overproduces; tax internalises the externality; role of PED and PES in the effect on quantity and incidence; tax revenue use; difficulty valuing MEC; government failure; regressive effects on locals; impact on tourism; alternatives (subsidies, regulation, tradable permits, information); time lags and relocation.

Inflation rate = \((117.6 - 112.0) / 112.0 \times 100 = 5.6 / 112.0 \times 100 = 5.0\%\). A is the result of dividing by the later index (5.6/117.6). C subtracts the index values without converting to a percentage. D has no valid working.

B (1). Accept only 5.0% or 5%. No marks for working if the wrong option is chosen. Rationale: A divides by the Year 2 index instead of the Year 1 index; C gives the index point change; D is not supported by the data.

Cost-push inflation arises when firms' costs of production rise, shifting short-run aggregate supply to the left and raising the price level. Higher imported energy prices raise costs. B, C and D increase aggregate demand and so would cause demand-pull inflation.

A (1). Rationale: A raises costs of production and shifts SRAS left. B, C and D are all increases in components of aggregate demand (consumption or government expenditure), so they are demand-pull causes.

Allocative efficiency occurs when resources are allocated to produce the goods and services that best match consumers' preferences, so that no reallocation could make society better off. A describes productive efficiency, B describes full employment and C describes an equal distribution of income.

D (1). Rationale: A is productive efficiency; B is full employment, a separate objective; C concerns equity, not efficiency.

The plant creates a negative externality of production. Marginal social cost is the private cost to the firm plus the external cost borne by third parties, so MSC = MPC + MEC. A and B reverse the relationship. D mixes benefit and cost concepts.

C (1). Rationale: A and B incorrectly subtract the external cost from the private cost, implying social cost is below private cost; D confuses external cost with external benefit.

Euro area buyers of UK goods must buy pounds, so demand for the pound increases and its value rises. A, C and D each reduce demand for pounds or increase its supply, causing depreciation.

B (1). Rationale: B shifts demand for sterling right. A lowers hot money inflows; C increases the supply of sterling to buy euros; D reduces demand for sterling.

At £8, Q = 40 and consumer surplus = \(0.5 \times 40 \times (12-8) = £80\). At £6, Q = 60 and consumer surplus = \(0.5 \times 60 \times (12-6) = £180\). Increase = 180 − 80 = £100.

D (1). Rationale: B is only the rectangle for the original consumers (40 × 2); C is the new consumer surplus rather than the change; A is not supported by valid working.

The HDI combines health (life expectancy), education (years of schooling) and income per head. The other options include indicators not used in the HDI such as unemployment, carbon emissions, inflation, infant mortality or growth rates.

C (1). Rationale: each distractor contains at least one measure that is not part of the HDI.

Quantity demanded falls by \(0.5 \times 10\% = 5\%\). Because the price rises by more (10%) than quantity falls (5%), total revenue rises, by approximately 4.5%. Demand is inelastic, not elastic, so B is wrong. C ignores the price effect. D would require unit elasticity.

A (1). Rationale: B misclassifies PED of 0.5 as elastic; C considers only the quantity effect; D applies only when PED = −1.

Inflation rate = \((114.8 - 112.0) / 112.0 \times 100 = 2.5\%\). The correct answer is B.

B (1 mark). A divides the change by the new index (2.8/114.8) instead of the original. C gives the absolute index point change, not a percentage. D divides the new index by the old one and expresses it as a percentage, which is not a rate of change.

The rate of inflation has fallen but is still positive, so the price level is still rising, only more slowly. This is disinflation.

B (1 mark). A and D are wrong because deflation is a sustained fall in the general price level, and prices are still rising here. C is wrong because hyperinflation is extremely rapid, accelerating price rises.

Sterling price = dollar price / exchange rate. Before: \(500 / 1.25 = £400.00\). After: \(500 / 1.60 = £312.50\). Sterling has appreciated, so imports become cheaper in pounds.

A (1 mark). B multiplies by the exchange rate instead of dividing it. C reverses the direction of the change. D multiplies by the wrong rate and also gives a rise despite an appreciation.

GDP per capita measures average output per person. It gives no direct information on life expectancy or education, which is why indicators such as the Human Development Index (HDI) combine income with health and education.

B (1 mark). A is wrong because the measure can be calculated for any country with GDP and population data. C is wrong because real GDP per capita adjusts for price changes. D is wrong because population is the denominator of the measure.

Lower confidence reduces consumption, so aggregate demand shifts left. Along a given short-run aggregate supply curve, the equilibrium price level and real GDP both fall.

B (1 mark). A describes a rightward shift of AD. C and D would require a shift of short-run aggregate supply or a different cause, not a fall in AD.

Marginal tax rate = change in tax / change in income \(\times 100 = (10\,000 - 7\,000) / (50\,000 - 40\,000) \times 100 = 30\%\).

C (1 mark). A is the average tax rate on the original income (7 000/40 000). B is the average tax rate on the new income (10 000/50 000). D divides the original tax bill by the change in income (7 000/10 000).

Goods balance = 120 - 150 = -30. Services balance = 80 - 50 = +30. Current account = -30 + 30 + (-10) + (-5) = -£15bn, a deficit.

A (1 mark). B omits one of the income balances (-30 + 30 - 5). C counts only trade in goods and services (0). D gets the sign of the income balances wrong (0 + 10 + 5).

(a) Inflation = (109.2 - 104.0) / 104.0 x 100 = 5.2 / 104.0 x 100 = 5.0%.

(b) Price in 2021 = 5000 x 8.0 = 40 000 koras. Price in 2025 = 5000 x 10.0 = 50 000 koras. Increase = 10 000 koras.

(c) A fall in the kora means each dollar costs more koras, so imported fuel and machinery become dearer in koras. Firms face higher costs of production and pass these on in higher prices (cost-push inflation).

(d) Higher fuel costs shift short-run aggregate supply leftwards (SRAS1 to SRAS2). With AD unchanged, equilibrium moves up the AD curve: the price level rises and real GDP falls.

(e) Examples: households' wages rise more slowly than prices so purchasing power falls; savers holding money in bank accounts find its value falls; firms face higher costs and may reduce investment.

(f) Judgement should weigh interest rate rises (reduce consumption and investment, lower AD, but weak against cost-push inflation caused by the exchange rate and import prices, and reduce investment) against supply-side policy (raises productive capacity, but slow and costly).

(a) 5.0 (%) = 2 marks. Accept 5 or 5.0%. If the answer is incorrect, award 1 mark for correct working, e.g. (109.2 - 104.0) / 104.0 x 100 (1). Reject 9.2% or 4.8%. [2]

(b) 10 000 (koras) = 2 marks. If incorrect, award 1 mark for 40 000 and 50 000 shown, or 5000 x 10.0 or 5000 x 8.0 (1). Accept 10 000 with no units. [2]

(c) Up to 3 marks: Fall in value of the kora / kora depreciates so more koras needed per dollar (1). Imported fuel/machinery/raw materials become more expensive in koras (1). Firms' costs rise and they pass these on as higher prices, so the price level rises (cost-push) (1). Accept a link to import prices rising for households as an alternative. Max 2 marks if no context from the case study (imported fuel, machinery or the kora/dollar rate). [3]

(d) Up to 4 marks: Diagram: axes labelled price level and real GDP, AD, SRAS (1). SRAS shifts left, labelled (1). New equilibrium with higher price level and lower real GDP shown, with PL1, PL2, Y1, Y2 labelled (1). Explanation: higher fuel costs raise firms' costs of production so they supply less at each price level (1). Price level rises and real output falls (1). Max 4 marks overall; diagram and explanation can be credited together. [4]

(e) 2 marks for each consequence, up to 2 consequences. For each: identify a valid consequence (1), applied explanation using the case study (1). Examples: households' wages rise more slowly than prices, so purchasing power falls (1+1); savers' money buys less each year, so the real value of savings falls (1+1); firms facing higher import costs raise prices and may lose competitiveness or cut investment (1+1). Any other appropriate response can be credited as appropriate. Max 2 marks if only one consequence is explained. [4]

(f)* Level 3 (8-10 marks): Good, well-developed analysis of why higher interest rates may reduce inflation (higher borrowing costs and saving rewards reduce consumption and investment, AD shifts left, demand-pull pressure falls) and of the limitations, with strong application to Valdoria (cost-push from import prices and a depreciating kora; investment discouraged as business groups argued), and consideration of at least one alternative such as supply-side policy (training, infrastructure) or policies to support the kora. Evaluation is supported by a justified judgement, e.g. rate rises are effective against demand-pull but of limited use for imported cost-push inflation; a higher rate may also help the kora by attracting funds; effectiveness depends on size of the rate rise, time lags, and the cause of inflation. Diagram(s) may be used and integrated.

Level 2 (4-7 marks): Reasonable analysis with some application to the case study and some evaluative comment, but with limited development or an unsupported or partial judgement.

Level 1 (1-3 marks): Limited knowledge, e.g. a basic statement that higher interest rates reduce spending or that supply-side policies improve supply, with little or no application or judgement.

0 marks: No creditworthy response.

Indicative content (not a mandatory checklist): demand-pull vs cost-push causes; AD falls with higher rates; trade-off with growth, investment and unemployment; time lags; supply-side policies raise long-run aggregate supply but are slow and costly; a higher rate may raise demand for the kora, reducing import costs; the policy rate was raised from 3% to 6% and CPI inflation was still 2.5% in 2025 relative to 2024 data (Fig. 1: (116.4 - 113.6) / 113.6 x 100 = 2.5%), which suggests prices rose more slowly after 2024. Any other appropriate response can be credited as appropriate. [10]

Total: 25 marks.

Step 1: The currency depreciates, so each unit of Valdorian currency buys fewer units of foreign currency. Imported fertiliser and fuel therefore cost more in Valdorian currency.
Step 2: Farmers and food processors face higher costs of production, so they supply less at each price level (short-run aggregate supply shifts left) and raise the prices charged.
Step 3: Higher food prices raise the general price level, which is measured by the CPI. The rise from 112.0 to 117.6 is \(\frac{117.6-112.0}{112.0}\times 100 = 5\%\) inflation. This is cost-push inflation.

Up to 3 marks:
- Depreciation makes imported inputs (fertiliser/fuel) more expensive in domestic currency OR raises firms' costs of production (1)
- Firms pass on higher costs OR short-run aggregate supply decreases / shifts left (1)
- This raises the general price level / prices of food, so the CPI rises (cost-push inflation) (1)

Max 2 marks if there is no application to the extract (e.g. no reference to fertiliser, fuel, food or farmers).
Accept a correct calculation of 5% inflation as support for the final point.
Accept reference to the depreciation also making exports cheaper and raising aggregate demand, as a valid alternative route to inflation, if developed.
Do not credit a statement that the depreciation itself is inflation without a transmission mechanism.
Any other appropriate response can be credited as appropriate.

Fuel is an input into transport and production, so a rise in its price increases firms' costs. The extract states that firms are passing higher transport costs on to customers. If this happens across many firms, the general price level rises. This is cost-push inflation. The extract's CPI figures show this: \( \frac{117.6 - 112.0}{112.0} \times 100 = 5\% \).

Max 2 marks.
- Identifies that higher imported fuel prices raise firms' costs of production, e.g. transport costs (1).
- Explains that firms pass these costs on as higher prices, so the general price level rises, i.e. cost-push inflation (1). The second mark requires a link to the extract (firms passing on higher transport costs).
Accept: a leftward shift of short-run aggregate supply leading to a higher price level, if described clearly.
Accept: use of the CPI data, e.g. a 5% rise in the index, as supporting application, but this is not required.
Do not credit: a one-off rise in a single price described as inflation without reference to the general price level; demand-pull explanations with no link to costs.
Any other appropriate response can be credited as appropriate.

Diagram: vertical axis 'Price of the dinar (e.g. in US dollars)', horizontal axis 'Quantity of dinars'. Downward-sloping demand curve D1 and upward-sloping supply curve S for dinars intersect at equilibrium exchange rate E1 / quantity Q1. D shifts right to D2, giving a higher equilibrium exchange rate E2 and quantity Q2.

Explanation: Foreign buyers need to obtain dinars to pay for Norvale's wool and dairy products. A rise in demand for these exports therefore increases the demand for dinars. With imports unchanged, the supply of dinars (from residents buying foreign currency to pay for imports) is unchanged. In a floating system the exchange rate is determined by demand and supply, so excess demand for dinars at the old rate pushes the value of the dinar up: it appreciates.

Max 4 marks.

Diagram (up to 2 marks):
- Correctly labelled axes (price of the dinar / exchange rate on vertical axis; quantity of dinars on horizontal axis) and demand and supply curves for the dinar, with original equilibrium shown (1).
- Demand curve shifted right (D1 to D2) with a higher new equilibrium exchange rate shown and labelled (1).
Accept: an equivalent diagram using the foreign currency on the vertical axis only if the direction of the change is clearly labelled as an appreciation of the dinar. Do not award the second mark for a movement along a curve or a shift of supply.

Explanation (up to 2 marks):
- Overseas buyers need dinars to buy Norvale's exports, so demand for dinars rises (1).
- Supply of dinars unchanged as imports are unchanged, so the exchange rate rises / the dinar appreciates under a floating system (1).

Any other appropriate response can be credited as appropriate. Do not credit a statement that the dinar depreciates.

The CPI rose from 112.0 to 117.0, so inflation was (117.0 - 112.0) / 112.0 x 100 = 4.5% (approximately). This is not required by the question but confirms that prices rose.

Cause 1 (cost-push): the krona depreciated, so imports of fuel and raw materials became more expensive in krona terms. Manufacturers' costs of production rose, reducing short-run aggregate supply (SRAS shifts left). Firms pass higher costs on in higher prices, so the general price level rises.

Cause 2 (demand-pull): income tax cuts raised households' disposable income and greater borrowing allowed more spending. Consumption, a component of aggregate demand, increased, so AD shifted right. With shops busy and spending strong, firms could raise prices, so the price level rises.

Award marks for TWO causes. Each cause: up to 2 marks, as follows.

Cause 1 - cost-push / imported inflation (max 2):
- Identifies, using the extract, that a fall in the value of the krona / more expensive imported fuel and raw materials / higher unit costs raised costs of production (1)
- Explains that higher costs reduce SRAS (shift left) OR firms pass on higher costs as higher prices, so the price level / CPI rises (1)

Cause 2 - demand-pull (max 2):
- Identifies, using the extract, that income tax cuts / increased household borrowing / higher consumer spending increased demand (1)
- Explains that higher consumption raises aggregate demand (shift right) OR excess demand allows firms to raise prices, so the price level / CPI rises (1)

Max 4 marks. Identification of a cause without use of the extract can be credited only if clearly linked to the context; a generic cause with no link to the extract can receive a maximum of 1 mark. Accept: 'imported inflation' for cost-push; 'rising consumer confidence' where linked to busier shops. Do not credit a cause that is not supported by the extract (for example, rising wages). If more than two causes are given, credit the best two. Where two causes are developed, up to 2 marks each. A correct calculation of inflation (4.5%) without a cause earns 0 marks. Any other appropriate response can be credited as appropriate.

(a)(i) Inflation 2024 = \((113.6 - 109.2)/109.2 \times 100 = 4.03\ldots\) so 4.0%.
(a)(ii) 2023 inflation = \((109.2 - 104.0)/104.0 \times 100 = 5.0\%\). Inflation fell to 4.0% but prices still rose, so this is disinflation.
(b) The dara fell from D4.0 to D5.0 per $1, a 25% depreciation. Imported fuel, fertiliser and machinery parts priced in dollars now cost more dara, raising firms' costs. Firms pass on higher costs, so the general price level rises (cost-push inflation).
(c) Any two, each explained: savings lose real value (case study para 3); workers on fixed pay see falling real income and purchasing power; higher food and transport prices reduce living standards, especially for lower-income households.
(d) Diagram with price level on the vertical axis and real GDP on the horizontal axis; AD, SRAS1 and SRAS2. Higher import prices raise costs of production so SRAS shifts left from SRAS1 to SRAS2. Equilibrium moves up from P1 to P2 and real output falls from Y1 to Y2, so the price level rises.
(e) Indicative content. For: higher rates raise borrowing costs and the return on saving, reducing consumption and investment, so AD falls and demand-pull pressure eases; higher rates may attract hot money inflows, appreciating the dara and lowering import prices; expectations of inflation may fall if the bank is credible. Against: inflation here is mainly cost-push from imported inputs, so lower AD addresses it only indirectly; little household and firm debt means a weak effect on spending; time lags; costs of slower growth and higher unemployment; a conflict between inflation and growth/unemployment objectives; supply-side policies or exchange rate stability may be more effective. Judgement: effectiveness depends on the source of inflation, the degree of indebtedness and the size of the exchange rate effect; in Veldara it is likely to be only partly effective in the short run.

(a)(i) [2] 4.0 (2). OR correct working \((113.6 - 109.2)/109.2 \times 100\) shown but answer incorrect or not rounded to 1 d.p. (1). Accept 4.03 or 4% for 1 mark only if working is shown.
(a)(ii) [1] Disinflation (1). Reject deflation.
(b) [3] Up to 3 marks: identifies that more dara are needed per dollar, i.e. the dara depreciated (1); import prices, priced in dollars, rise in dara terms so costs of fuel, fertiliser and machinery parts rise (1); firms pass on higher costs, so the general price level rises/cost-push or imported inflation (1). Credit use of data, e.g. D4.0 to D5.0 per $1 or a 25% fall, as application.
(c) [4] Up to 2 marks for each of two ways: identification of a way (1) and explanation linked to the case study (1). Accept: savings buy less/lose real value; fixed pay or modest wage growth means falling real income; rising food and transport prices reduce purchasing power and living standards; uncertainty. Max 2 marks if only one way is given. Any other appropriate response can be credited as appropriate.
(d) [5] Diagram (max 3): axes labelled price level and real output/real GDP (1); AD and SRAS curves correctly drawn and labelled (1); SRAS shifts left with new and original equilibrium price and output shown (1). Explanation (max 3): higher import prices raise costs of production (1); SRAS shifts left (1); price level rises and real output falls (1). Max 5 overall.
(e) [10] Best-fit levels. AO1 knowledge/understanding, AO2 application, AO3 analysis, AO4 evaluation; use the descriptors as a whole.
Level 3 (8-10 marks): good, developed analysis of how higher interest rates reduce inflation, with well-applied reference to Veldara (cost-push inflation, low debt, imported inputs, exchange rate); balanced evaluation of strengths and limitations leading to a supported, justified judgement that addresses effectiveness.
Level 2 (4-7 marks): reasonable explanation of how interest rates affect AD and prices with some application to the case study; some evaluative comment, possibly one-sided or with a judgement that is asserted rather than supported.
Level 1 (1-3 marks): limited knowledge of interest rates and inflation, little or no application, generic or undeveloped points; little or no evaluation.
0 marks: no creditworthy response.
Indicative content supports the descriptors and is not a mandatory checklist: higher rates reduce consumption and investment, so AD falls; possible appreciation through hot money lowers import prices; cost-push source limits impact; low debt weakens transmission; time lags; trade-off with growth and unemployment; alternative policies. Any other appropriate response can be credited as appropriate.

Indicative approach (not a mandatory checklist).

Diagram 1 (floating exchange rate): demand and supply of the currency, with the price of the currency on the vertical axis (e.g. units of foreign currency per unit of domestic currency) and quantity of the currency on the horizontal axis. A fall in demand (fewer foreign buyers of exports/assets) and/or a rise in supply (more domestic spending on imports) shifts the curves, giving a lower equilibrium exchange rate.

Diagram 2 (AD/AS): a rise in import prices of fuel and components raises firms' costs, shifting SRAS left, which raises the price level. Cheaper exports and dearer imports raise net exports, shifting AD right, adding further upward pressure on the price level and raising real GDP.

Inflation: imported cost-push inflation is likely to be strong because fuel and components are imported and are needed for production. Demand-pull inflation follows if the economy is near full capacity. Wage demands may follow higher living costs, creating second-round effects.

Current account: exports are cheaper abroad in foreign currency terms and imports dearer at home, so export volumes may rise and import volumes fall, improving the trade in goods and services balance. However, if demand for imported fuel and components is price inelastic, the import bill rises and the balance may worsen at first. Exports using imported components may not become cheaper by much. Primary income and secondary income flows may change in value when converted into domestic currency.

Evaluation: depends on elasticities (PED for imports and exports), the size and speed of the fall, the time period (short run versus long run), spare capacity, the degree of import dependence, the response of trading partners, and whether the central bank raises interest rates to curb inflation, which conflicts with growth. Conflict between objectives (low inflation versus a stronger current account) can be noted. Judgement should be supported: for a country with high import dependence, inflationary effects are likely to be certain and fast, while current account improvement is uncertain and slower.

Total 20 marks. Use a best-fit approach across four levels plus zero. Indicative content supports the descriptors and is not a mandatory checklist. Any other appropriate response can be credited as appropriate.

AO allocation (approximate): AO1 5, AO2 5, AO3 5, AO4 5.

Level 4 (16-20 marks): Strong. Developed, accurate analysis of effects on BOTH inflation and the current account, applied throughout to the context (import dependence for fuel and components). Appropriate diagram(s) accurately drawn, labelled and integrated into the argument. Evaluation is well supported and leads to a reasoned judgement, e.g. weighing elasticities, time lags, spare capacity and policy response.

Level 3 (11-15 marks): Good. Developed analysis of both effects with some contextual application. Diagram(s) mostly accurate and referred to. Evaluation present with some support; judgement may be partly supported.

Level 2 (6-10 marks): Reasonable. Some accurate analysis, probably of one effect in more depth than the other, with limited application. Diagram may have errors or be weakly linked. Evaluation is stated rather than developed.

Level 1 (1-5 marks): Limited. Basic knowledge of depreciation or inflation, little or no development, minimal context. Diagram absent or largely inaccurate. Little or no evaluation.

Level 0 (0 marks): No creditable response.

Diagram guidance:
- Exchange rate diagram: axes labelled (price of the currency, quantity of the currency) (1); correct curve shift(s) labelled (1); new lower equilibrium rate shown (1).
- AD/AS diagram: axes labelled (price level, real GDP) (1); correct curve shift(s), SRAS left and/or AD right (1); new equilibrium price level shown (1).
Accept alternative accurate diagrams for the same effects. A missing diagram caps the response at Level 2 for the mark where the descriptor requires diagram integration.

Indicative content: cost-push inflation through dearer imported fuel and components; demand-pull through higher net exports; second-round wage effects; export competitiveness; import price rises; elasticity of demand for imports and exports; time lags; spare capacity; interest rate response; policy conflict; Accept use of the term depreciation or a fall in a floating exchange rate. Do not credit a devaluation unless it is clear the response refers to a fixed system.