CAIE IGCSE Economics 3. Microeconomic decision-makers Question Bank

Explain two functions of money in Nicaragua.

Medium of exchange (1) used to buy and sell products / used to trade (1).

Store of value (1) used to save / keeps its value over a period of time (1).

4

One mark each for each of two functions identified and one mark for each of two explanations.

Only accept these answers if within the first three listed.

Discuss whether or not small firms benefit Nicaraguan consumers.

Award up to 4 marks for logical reasons why they might, which may include:

- know customers' requirements (1) provide a personal service / see them often (1) may be flexible (1)

- may be many small firms / competitive markets (1) prices may be low (1) quality may be high (1) may offer wider choice collectively than a few large firms (1)

- may provide products for which there is only a low demand (1) niche market (1)

- makes goods more accessible in rural areas (1).

Award up to 4 marks for logical reasons why it might not, which may include:

- may not be able to take advantage of economies of scale (1) examples (1) higher average cost of production (1) higher price (1)

- small firms may have lower profits ( 1 ) may limit investment / funds available (1) fail to raise quality (1)

- may limit choice ( 1 ) individual small firms may have a limited range of products (1) cannot provide all that consumers may want (1).

6

Apply this example to all questions with the command word DISCUSS

$-1(\mathrm{~g}), 1(\mathrm{~h}), 2(\mathrm{~d}), 3(\mathrm{~d}), 4(\mathrm{~d})$ and 5(d)

Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded.

Generic example & Mark

Tax revenue may decrease... & 1

... because of reason e.g. incomes

may be lower.

1

\end{tabular}

Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument.

Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education.

Only reward reference to quality or prices once.
\end{tabular}

Identify two factors that affect borrowing in an economy.

- interest rates

- confidence levels

- wages / incomes

2

Discuss whether or not competition is beneficial for airlines.

Up to 4 marks why it is beneficial:

Competition will lead to airline being forced to be more efficient (1) productivity increase (1) use latest technology (1) reduce wasteful spending (1) quality increases (1) cost of production goes down (1) prices become more affordable (1) increase in quantity demanded (1) total revenue and profit increases (1).

Up to 4 marks why it is not beneficial:

Too much competition means less market share for each airline (1) less quantity demanded (1) airlines may have to advertise more (1) increase cost of production (1) total revenue and profit decreases (1) airlines who can't compete may go bankrupt / leave the market (1). Too much competition may result in the airline being small (1) cannot take advantage of economies of scale (1). An airline may not benefit from becoming more competitive (1) because of brand loyalty (1) lower demand for air travel (1).

6

Analyse why an actor may decide to become a teacher.

Coherent analysis which might include:

Wage rate may be higher (1) enable more goods and services to be purchased (1) higher living standards (1) demand for teachers may increase (1).

Greater job security (1) actors often experience frictional/casual unemployment (1).

More sociable/convenient working hours (1) may fit in more with having children (1) teachers may also enjoy longer holidays (1).

Working conditions may be better (1) may be a safer environment (1) may have better pensions (1).

May find they are better qualified / suited to be a teacher (1) more likely to be successful in the career (1).

May gain more job satisfaction (1) enjoy helping children learn (1).

6

Maximum of 3 marks for a list-like approach.

Discuss whether all monopolies have low costs of production.

In assessing each answer, use the table opposite.

Why some have:

- may earn high profits and so may have incentive to reinvest

- may be small e.g. a local monopoly / low total costs

- may be large and so may experience economies of scale

- state-owned monopolies may be subsidised

Why some do not:

- lack of competition may reduce pressure to keep costs low

- may be small so do not benefit from economies of scale

- may be large so experience diseconomies of scale / high average costs

- may be producing in a country with a high inflation rate

Example of an L3 answer

Monopolies are firms that dominate the market for a particular product. They supply 100\% of the market and usually there are no substitutes to the product it supplies. There is no competition for a monopoly.

A monopoly may not have a low cost of production as it may allocate resources inefficiently. Monopolies do have any competition as they may simply produce low quality products and earn large profits without working hard to lower costs of production.

8

5(d)

A monopoly will usually require a large scale of production to operate and may soon grow too large and face diseconomies of scale. It may have supply constraints pushing up the cost of production. It may be subject to labour diseconomies as the workers feel alienated in such a large enterprise leading to extra cost of labour disputes. All this could promote increased costs of production. Furthermore, governments may implement regulations that the monopoly must rigidly follow increasing the cost of production at each step. However, monopolies may be able to maintain a low cost of production as it grows. It can benefit from economies of scale. The advertising cost will be spread over a large base, lowering costs. Banks will provide loans easily due to available collateral and suppliers will also reduce costs as they can deliver bulk orders lowering their transport costs. These internal economies of scale help monopolies keep low costs of production.

Monopolies may invent new production methods, technologies and invest in R & D to keep their costs low to compete with international firms. They may also try to be efficient if there are high fines or high taxes in the economy.

Example of L2 answer

Monopolies might have low cost of production since the benefit from greater economies of scale such as purchasing economies which means buying in bulk and receiving discounts from the supplier. Another economies of scale could be technical economies which is investing with more capital goods, increasing the productive capacity and reducing average cost.

Level & \multicolumn{1}{|c|}{ Description } & Marks

1 &
There is a simple attempt at using

economic definitions and terminology.

Some reference may be made to

economic theory, with occasional

understanding.

1-2

0

A mark of zero should be awarded for no

creditable content.

\end{tabular}

5(d)

Although having higher economies of scale, there may be diseconomies of scale like managerial diseconomies, which means firms having problems in management of the company, which means firms having problems in management of the company, this will reduce productivity and hence increasing cost of production. Another diseconomy could be communication problems which might occur between the entrepreneur, the workers and the managers.

Example of an L1 answer

Monopolies are single firms where they don't have any other competitors. They might lose money often because it is very tough job to run a monopoly company. They could have low cost of production because if they produce more the price might be the same but if the consumers doesn't want the products would go to waste.