2025 Edexcel IAL Economics (YEC11) Practice Paper with Answers

Initially, the resource cost of producing 1 unit of agricultural machinery is equivalent to producing 4 units of grain. When the productivity of grain production doubles, the same amount of resources that previously produced 4 units of grain can now produce \(4 \times 2 = 8\) units of grain. Therefore, the opportunity cost of dedicating resources to produce 1 unit of machinery instead of grain increases to 8 units of grain.

1 mark for the correct answer (C).

- Reject A: Incorrectly halves the opportunity cost.
- Reject B: Assumes opportunity cost remains unchanged.
- Reject D: Incorrectly quadruples the opportunity cost.

Anchoring bias occurs when individuals rely too heavily on the first piece of information offered (the 'anchor') when making decisions. In this case, the original price of £1,200 acts as an anchor, making the sale price of £800 seem like an exceptional deal, causing the consumer to ignore the superior specifications of the alternative £750 laptop.

1 mark for the correct answer (C).

- Reject A: Bounded self-control relates to individuals failing to follow through with decisions due to lack of willpower.
- Reject B: Altruism refers to selfless concern for the well-being of others.
- Reject D: Rules of thumb are simple guidelines used to make quick decisions rather than reacting to a specific anchor.

The price elasticity of supply (PES) is inelastic (PES < 1) because the firm has very little spare capacity (operating at 95%), low levels of finished stocks to draw from, and a long lead time to train new skilled labor. These factors restrict the firm's ability to quickly increase output in response to a price rise.

1 mark for the correct answer (B).

- Reject A: Hiring skilled labor is difficult and slow due to the years of training required.
- Reject C: Low stock levels actually restrict supply responsiveness, making it inelastic, not elastic.
- Reject D: While correct about being inelastic, low stock levels make it harder, not easier, to respond to price changes.

An increase in the demand for beef shifts the demand curve for beef to the right, causing the price of beef to rise. Since beef and leather are in joint supply (producing beef automatically results in the production of animal hides for leather), the increase in beef production leads to an increase in the supply of leather. The supply curve for leather shifts to the right, which causes the price of leather to fall.

1 mark for the correct answer (B).

- Reject A: The price of leather falls, not rises, because supply has increased.
- Reject C: The price of beef rises, not falls, due to the increase in demand.
- Reject D: The price of beef rises, not falls.

The market equilibrium output is determined where private forces intersect, i.e., where Marginal Private Benefit (MPB) equals Marginal Private Cost (MPC). From the table, MPB = MPC = £70 at 13 units of output. The socially optimum output is determined where Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC). From the table, MSB = MSC = £90 at 15 units of output.

1 mark for the correct answer (B).

- Reject A: Incorrectly identifies the socially optimum output as 13 units.
- Reject C: Swaps the market equilibrium and socially optimum levels.
- Reject D: Incorrectly identifies the market equilibrium output as 15 units.

The consumer incidence is the increase in price paid by the consumer, which is \(\pounds 11 - \pounds 10 = \pounds 1\). The producer incidence is the remainder of the £3 unit tax, which is \(\pounds 3 - \pounds 1 = \pounds 2\). The producer receives £11 from the consumer but must pay £3 to the government, retaining only £8 (which is £2 less than the original price of £10).

1 mark for the correct answer (A).

- Reject B: Incorrectly swaps the consumer and producer shares.
- Reject C: Assumes the consumer bears the entire tax burden.
- Reject D: Assumes the tax burden is shared equally between consumer and producer.

1. **Total Tax Revenue**:
\( \text{Total Tax Revenue} = \text{Tax per unit} \times \text{New quantity sold} \)
\( \text{Total Tax Revenue} = \$1.50 \times 8,000 = \$12,000 \)

2. **Tax Burden Allocation**:
- **Consumer tax burden per unit**: \( \text{New price} - \text{Old price} = \$4.10 - \$3.00 = \$1.10 \)
- **Producer tax burden per unit**: \( \text{Total tax per unit} - \text{Consumer burden per unit} = \$1.50 - \$1.10 = \$0.40 \)
- **Total producer tax burden**: \( \text{Producer burden per unit} \times \text{New quantity sold} = \$0.40 \times 8,000 = \$3,200 \)

Award marks as follows:
- 1 mark for the correct calculation of daily total tax revenue: $12,000 (with or without working).
- 1 mark for calculating the consumer tax burden per unit ($1.10) or total consumer burden ($8,800).
- 1 mark for calculating the producer tax burden per unit ($0.40).
- 1 mark for correct calculation of the total producer tax burden: $3,200 (with or without working).

1. **Calculate the multiplier (k)**:
\( k = \frac{1}{1 - \text{MPC}} = \frac{1}{1 - 0.6} = \frac{1}{0.4} = 2.5 \)

2. **Calculate the total change in national income (\( \Delta Y \))**:
\( \Delta Y = k \times \Delta G \)
\( \Delta Y = 2.5 \times \$15\text{ billion} = \$37.5\text{ billion} \)

Award marks as follows:
- 1 mark for the correct formula for the multiplier: \( k = \frac{1}{1 - \text{MPC}} \) or \( k = \frac{1}{\text{MPW}} \).
- 1 mark for the correct calculation of the multiplier value as 2.5.
- 1 mark for multiplying the multiplier value by the change in injection: \( 2.5 \times \$15\text{ billion} \).
- 1 mark for the correct final answer of $37.5 billion (accept $37.5bn or 37.5 billion).

1. **Formula for Supernormal Profit**:
\( \text{Supernormal Profit} = (\text{Price} - \text{Average Total Cost}) \times \text{Quantity} \)

2. **Substitution of Values**:
\( \text{Supernormal Profit} = (\$12.00 - \$8.50) \times 500 \)
\( \text{Supernormal Profit} = \$3.50 \times 500 = \$1,750 \)

3. **Economic Explanation**:
Supernormal profit represents economic profit over and above normal profit. This occurs because the price (average revenue of $12.00) exceeds the average total cost ($8.50) at the profit-maximizing output level where marginal cost equals marginal revenue.

Award marks as follows:
- 1 mark for stating the correct formula for supernormal profit: \( (\text{Price} - \text{ATC}) \times Q \) or \( \text{Total Revenue} - \text{Total Cost} \).
- 1 mark for substituting the correct values: \( (\$12.00 - \$8.50) \times 500 \).
- 1 mark for the correct final calculation of $1,750.
- 1 mark for explaining that supernormal profit occurs because price (average revenue) exceeds average total cost at this profit-maximizing level of output.

1. **Initial US Dollar price**:
\( \text{LCU } 50,000 \times \$0.80 = \$40,000 \)

2. **New US Dollar price**:
\( \text{LCU } 50,000 \times \$0.65 = \$32,500 \)

3. **Change in US Dollar price**:
\( \$32,500 - \$40,000 = -\$7,500 \) (a decrease of $7,500)

4. **Effect on competitiveness**:
Because the US Dollar price of the machine has fallen from $40,000 to $32,500, the machine becomes cheaper for US buyers, thereby increasing the international competitiveness of the exporter.

Award marks as follows:
- 1 mark for calculating the initial price in US Dollars: $40,000.
- 1 mark for calculating the new price in US Dollars: $32,500.
- 1 mark for calculating the correct price change: a decrease of $7,500 (or -$7,500).
- 1 mark for identifying that international competitiveness increases because the USD price has fallen.

1. **Percentage change in price of Brand A**:
\( \% \Delta P_A = \frac{\$4.80 - \$4.00}{\$4.00} \times 100 = +20\% \)

2. **Percentage change in quantity demanded of Brand B**:
\( \% \Delta Q_B = \frac{2,600 - 2,000}{2,000} \times 100 = +30\% \)

3. **Cross Elasticity of Demand (XED)**:
\( \text{XED} = \frac{\% \Delta Q_B}{\% \Delta P_A} = \frac{+30\%}{+20\%} = +1.5 \)

4. **Economic Relationship**:
Since the XED value is positive (+1.5), the two brands of coffee are substitute goods.

Award marks as follows:
- 1 mark for calculating the correct percentage change in price of Brand A: +20% (or 0.2).
- 1 mark for calculating the correct percentage change in quantity demanded of Brand B: +30% (or 0.3).
- 1 mark for calculating the correct XED of +1.5 (accept 1.5, must show working or sign for full accuracy mark).
- 1 mark for identifying that Brand A and Brand B are substitute goods because the XED is positive.

Knowledge (2 marks): Define indirect tax (a tax on spending) and explain that tax incidence depends on the relative price elasticities of demand (PED) and supply (PES). Application (2 marks): Reference the $2 tax rate and the short-run inelastic supply of plastic-packaged soft drinks due to fixed contract lengths. Analysis (2 marks): Explain that when supply is more inelastic than demand, producers are less responsive to price changes and must absorb a larger portion of the tax. The vertical distance of the tax shifts the supply curve upwards by $2, but the market price rises by less than $2, showing that producers bear the majority of the tax burden. Evaluation (2 marks): Evaluate the difference between the short-run and long-run impact. In the long run, supply becomes more elastic as contracts expire, shifting the tax burden onto consumers. Additionally, the impact depends on the PED of consumers; if demand is highly inelastic, consumers may still bear a high absolute burden.

Knowledge: 2 marks for defining indirect tax and tax incidence theory. Application: 2 marks for applying to the $2 tax and short-run inelastic supply. Analysis: 2 marks for explaining why inelastic supply causes producers to bear a larger tax burden using supply/demand mechanisms. Evaluation: 2 marks for evaluating long-run adjustments and the influence of PED.

Knowledge (2 marks): Define negative externality of production and market failure. State that Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + External Cost (EC). Application (2 marks): Reference Sylvania's timber harvesting, identifying the private costs (logging/transport) and the negative externalities (soil erosion, loss of biodiversity, and $15 million flooding costs). Analysis (2 marks): Describe the graphical representation showing MPC and MSC curves (where MSC is above MPC), and a downward-sloping MSB=MPB curve. Show that the free-market output level \(Q_m\) (where MPC=MPB) is greater than the socially optimum output level \(Q_s\) (where MSC=MSB). Explain that this overproduction creates a deadweight welfare loss represented by a shaded triangle pointing to the social optimum.

Knowledge: 2 marks for identifying negative externalities of production and outlining the condition MSC > MPC. Application: 2 marks for referencing the specific private costs and the $15 million external flooding/biodiversity costs. Analysis: 2 marks for explaining the diagram, the overproduction, and the deadweight welfare loss.

Knowledge (2 marks): Define national minimum wage (NMW) as a legal minimum rate of pay. Explain that in a competitive labor market, an effective NMW is set above the market-clearing equilibrium wage rate. Application (2 marks): Identify that Coronia's agricultural sector is competitive, low-skilled, and faces a 15% NMW increase. Analysis (2 marks): Explain using a labor market diagram that the wage increase from \(W_e\) to \(W_{min}\) leads to a contraction in labor demand (as firms face higher marginal cost of labor) and an expansion in labor supply, creating unemployment (excess supply of labor). Evaluation (2 marks): Discuss factors that might mitigate unemployment, such as the efficiency wage theory (higher wages boost morale, reduce turnover, and increase productivity, offsetting the cost). Additionally, if demand for agricultural goods is inelastic, farmers might pass costs to consumers rather than cutting employment, or the short-run demand for labor might be highly inelastic.

Knowledge: 2 marks for defining NMW and its role as a price floor in competitive labour markets. Application: 2 marks for applying to Coronia's low-skilled, competitive agricultural sector. Analysis: 2 marks for explaining the contraction of labour demand, expansion of labour supply, and resulting unemployment. Evaluation: 2 marks for evaluating alternative views (e.g., efficiency wages, productivity gains, or wage elasticity of demand for labour).

Knowledge (2 marks): Define depreciation and the current account. State the Marshall-Lerner condition (depreciation improves the current account only if the sum of PED for exports and imports is greater than 1). Application (2 marks): Identify that the Valer depreciated by 12%, but the current account deficit widened from $4.2 billion to $5.1 billion in the first six months. Analysis (2 marks): Explain the J-Curve concept. In the short run (first six months), trade volumes are fixed due to inelastic demand (consumers and firms take time to adjust to price changes, and existing import contracts must be honored). Consequently, the price of imports rises in domestic currency, increasing the import bill, while export volumes do not increase quickly enough to offset this, causing the deficit to widen initially before it improves in the long run when elasticities increase.

Knowledge: 2 marks for defining depreciation and stating the Marshall-Lerner condition. Application: 2 marks for applying the 12% depreciation and the change in deficit from $4.2bn to $5.1bn. Analysis: 2 marks for explaining the J-Curve effect and why short-run PED for imports and exports is inelastic.

Knowledge (2 marks): Define contractionary monetary policy (raising interest rates to reduce AD) and stagflation (simultaneous high inflation and low economic growth). Application (2 marks): Reference Austra's 8.5% inflation, 0.5% GDP growth, and the interest rate hike from 1.5% to 5.0%. Analysis (2 marks): Explain how higher interest rates increase the cost of borrowing and reward for saving, reducing consumer spending (C) and business investment (I). This shifts AD to the left, reducing demand-pull inflationary pressures and lowering the price level. Evaluation (2 marks): Evaluate the trade-offs of this policy. In stagflation, the primary cause of inflation is often supply-side (cost-push). Shrinking AD does not resolve supply issues (e.g., energy shocks) but severely harms the real economy, risking a deeper recession and higher unemployment, as GDP growth is already extremely low at 0.5%. The policy lag of monetary policy (usually 12-18 months) also makes timing difficult.

Knowledge: 2 marks for defining contractionary monetary policy and stagflation. Application: 2 marks for utilizing the data (8.5% inflation, 0.5% growth, interest rates from 1.5% to 5.0%). Analysis: 2 marks for explaining the transmission mechanism of higher interest rates shifting AD left and lowering inflation. Evaluation: 2 marks for assessing the conflict of macroeconomic objectives, supply-side causes of inflation, and the risk of recession.

### Economic Analysis of a Maximum Price on Rented Properties

A maximum price (or price ceiling) is a legally binding price set below the free-market equilibrium, above which sellers are not permitted to charge. When applied to rental housing (often called rent control), it is designed to protect low-income tenants from high living costs.

#### 1. Diagrammatic Analysis
Consider a market for rental housing where the free-market demand curve is \(D\) and the supply curve is \(S\). The market equilibrium rent is \(P_e\) with equilibrium quantity \(Q_e\).

If the government imposes a maximum rent at \(P_{max}\) (where \(P_{max} < P_e\)):
* **Quantity demanded** increases from \(Q_e\) to \(Q_d\), as lower rents encourage more households to seek independent housing.
* **Quantity supplied** falls from \(Q_e\) to \(Q_s\), as some landlords withdraw properties from the market (e.g., converting them to owner-occupation or short-term holiday lets) and fewer new rental units are built.
* This leads to a persistent housing **shortage** equal to \(Q_d - Q_s\).

#### 2. Positive Economic Effects (Arguments in Favor)
* **Affordability and Poverty Reduction:** Lower rents increase the consumer surplus of existing tenants, leaving them with more disposable income to spend on health, education, and nutrition. This helps to reduce relative poverty and inequality within major urban areas.
* **Social Diversity and Key Workers:** By keeping rents affordable, key workers (such as nurses, teachers, and transit workers) can afford to live near their jobs in the city center. This prevents urban displacement, reduces commuting times (with associated environmental benefits), and maintains essential municipal services.
* **Curtailing Landlord Monopoly Power:** In highly congested cities, land is scarce, giving landlords significant monopoly power. A price ceiling prevents them from exploiting tenants through excessive rent increases and extracting economic rent.

#### 3. Negative Economic Effects (Arguments Against / Market Failure)
* **Creation of a Chronic Shortage:** Since price can no longer rise to clear the market, a chronic shortage \(Q_d - Q_s\) occurs. Many individuals who need housing will be unable to find any rental units.
* **Decline in Housing Quality:** Landlords, facing capped revenues and lower profit margins, have little incentive to maintain or renovate properties. Over time, the quality of the housing stock deteriorates, potentially leading to unsafe and dilapidated living conditions.
* **Emergence of Black Markets and Non-Price Rationing:** Because demand exceeds supply, alternative rationing mechanisms emerge. Landlords may demand illegal side payments ('key money'), discriminate against certain groups, or favor tenants with high credit scores and no children or pets. A shadow market develops where the effective rent paid is higher than \(P_{max}\).
* **Reduced Labor Mobility:** Tenants in rent-controlled apartments are highly reluctant to move for new job opportunities because they would lose their rent-controlled status, leading to labor market immobility.

### Evaluation
* **Short-Run vs. Long-Run Elasticity:** In the short run, the supply of rental housing is highly inelastic because landlords cannot easily sell or convert properties immediately, and tenants cannot instantly change living arrangements. Thus, the shortage \(Q_d - Q_s\) is relatively small, and the policy effectively transfers surplus from landlords to tenants. However, in the long run, both demand and supply are highly elastic. Landlords stop building new rental units and let existing ones deteriorate, while more people move to the city, making the long-run shortage much more severe.
* **Magnitude and Enforcement:** The impact depends on how far below the equilibrium price \(P_{max}\) is set. If it is only slightly below \(P_e\), the disruption is minimal. Additionally, strong enforcement is required to prevent black markets; otherwise, the policy fails.
* **Alternative Policies:** Economists often argue that a more effective way to make housing affordable is to address the root cause—lack of supply. Governments can subsidize the construction of social housing, relax zoning/planning regulations to encourage private development, or provide targeted housing subsidies (vouchers) directly to low-income families, which increases supply rather than restricting it.

### Marking Scheme Breakdown

**Total: 20 Marks**

#### Part 1: Knowledge, Application, and Analysis (AO1, AO2, AO3) — 12 Marks

| Level | Marks | Descriptor |
|---|---|---|
| **Level 3** | 9–12 | • Accurate and comprehensive economic knowledge and understanding.
• Clear and relevant application to the rental housing market, supported by a correctly labeled and integrated supply and demand diagram showing the price ceiling and resulting shortage \(Q_d - Q_s\).
• Coherent, structured analysis of both the positive effects (e.g., affordability, key worker retention, equity) and negative effects (e.g., shortage, quality deterioration, black markets, allocative inefficiency) of the policy. |
| **Level 2** | 5–8 | • Good economic knowledge but lacks depth in some areas.
• Some application to the rental market, but the diagram may be missing, poorly explained, or contain minor errors.
• Analysis is present but may be unbalanced (focusing almost entirely on either the benefits or the drawbacks) or contain logical gaps. |
| **Level 1** | 1–4 | • Basic identification of a maximum price with minimal economic theory.
• Weak or no application to the housing market.
• Description rather than analytical explanation. |

#### Part 2: Evaluation (AO4) — 8 Marks

| Level | Marks | Descriptor |
|---|---|---|
| **Level 3** | 6–8 | • Evaluates the economic effects using sophisticated economic reasoning.
• Clear distinction between short-run and long-run consequences (impact of price elasticity of supply/demand over time).
• Discusses alternative policies (e.g., supply-side reforms, housing subsidies) as a point of comparison.
• Offers a well-reasoned, balanced conclusion/judgment based on the preceding analysis. |
| **Level 2** | 3–5 | • Some evaluative points are made (e.g., mentioning that quality might fall or that a black market might form), but they are not fully developed or integrated.
• The distinction between short-run and long-run impacts is weak or missing.
• Conclusion is present but superficial or not fully supported by the analysis. |
| **Level 1** | 1–2 | • Very basic or generic evaluative comments (e.g., 'it depends on the government').
• No structured conclusion or judgment. |