2024 Edexcel IGCSE Economics Practice Paper with Answers

Traditional economic theory is built on the assumption that economic agents act rationally. For a consumer, this means making decisions with the primary objective of maximising their total utility (satisfaction) from the consumption of goods and services, subject to their budget constraint.

1 mark for identifying B as the correct option.

To find the Price Elasticity of Demand (PED), apply the following formula:

\(\text{PED} = \frac{\text{% change in quantity demanded}}{\text{% change in price}}\)

1. Calculate the percentage change in quantity demanded:
\(\frac{1,020 - 1,200}{1,200} \times 100 = -15\%\)

2. Calculate the percentage change in price:
\(\frac{10 - 8}{8} \times 100 = +25\%\)

3. Calculate the PED:
\(\text{PED} = \frac{-15\%}{25\%} = -0.6\)

1 mark for identifying A as the correct option.

To calculate the Price Elasticity of Demand (PED), use the formula:

\( \text{PED} = \frac{\\% \text{ change in quantity demanded}}{\\% \text{ change in price}} \)

Substitute the given values into the formula:

\( \text{PED} = \frac{-12\\%}{8\\%} = -1.5 \)

Therefore, the price elasticity of demand for the smartphone is -1.5 (or 1.5).

Award 1 mark for a correct formula or correct substitution of figures: e.g. \( \frac{-12}{8} \) or \( \frac{12}{8} \).
Award 1 mark for the correct final answer: -1.5 or 1.5 (accept either negative or positive value).

Opportunity cost represents the cost of the next best alternative that is given up (foregone) when choosing one option over another.

Award 1 mark for identifying that it is the 'next best alternative'.
Award 1 mark for identifying that this alternative is 'given up', 'sacrificed', or 'foregone'.

According to traditional economic theory, consumers are assumed to act rationally to maximise their utility, which represents the total satisfaction or benefit they derive from consuming goods and services.

Award 1 mark for identifying the primary objective:
* To maximise utility / satisfaction / benefit / happiness.

Reject:
* To maximise profit (this is the objective of firms).
* To minimise spending (as consumers may spend more to get more utility).

A negative externality of production occurs when the production process of a firm inflicts external costs on third parties. A classic example is air pollution or toxic waste discharged by a factory, which negatively affects the health and well-being of the surrounding community without compensation.

Award 1 mark for any valid negative production externality, such as:
* Air / water / noise pollution from a factory.
* Carbon emissions / greenhouse gas emissions from manufacturing.
* Deforestation or habitat destruction caused by timber logging / agriculture.
* Waste and toxic chemical spills from industrial activity.

Reject:
* Negative consumption externalities, e.g. littering, passive smoking, noise from playing music in public.

Step 1: Calculate labour productivity (output per worker) for 2023:
\(\text{Labour Productivity } 2023 = \frac{12,000}{40} = 300\text{ chairs per worker}\)

Step 2: Calculate labour productivity for 2024:
\(\text{Labour Productivity } 2024 = \frac{16,500}{50} = 330\text{ chairs per worker}\)

Step 3: Calculate the percentage change in labour productivity:
\(\text{Percentage Change} = \frac{330 - 300}{300} \times 100 = \frac{30}{300} \times 100 = 10\%\)

Award 1 mark for showing correct method/working of calculating labour productivity for both years (300 and 330).
Award 1 mark for the correct final answer of 10% (or 10).

Note: Award full 2 marks for the correct final answer of 10% (or 10) even if no working is shown.

An increase in the cost of steel (a key input) increases the costs of production for washing machines. This leads to a decrease in supply, causing the supply curve to shift to the left.

**Diagram Description:**
- **Axes:** The vertical axis is labelled 'Price' (or \(P\)) and the horizontal axis is labelled 'Quantity' (or \(Q\)).
- **Initial Equilibrium:** A downward-sloping demand curve \(D\) intersects an upward-sloping supply curve \(S\). The intersection establishes the original equilibrium price \(P\) and equilibrium quantity \(Q\).
- **Shift:** The supply curve shifts to the left from \(S\) to \(S_1\).
- **New Equilibrium:** The new intersection of \(D\) and \(S_1\) establishes a higher equilibrium price \(P_1\) and a lower equilibrium quantity \(Q_1\).

- **1 mark** for correct labelling of axes (Price/\(P\) and Quantity/\(Q\)), original demand and supply curves (\(D\) and \(S\)), and original equilibrium price \(P\) and quantity \(Q\).
- **1 mark** for shifting the supply curve to the left (\(S_1\)).
- **1 mark** for correctly identifying the new equilibrium price \(P_1\) (which must be higher than \(P\)) and quantity \(Q_1\) (which must be lower than \(Q\)).

One disadvantage of the division of labour to a worker is that doing a single specialized task can make the work highly repetitive and tedious (1 mark). This is because the worker performs the exact same limited operation throughout their shift (1 mark). As a result, this monotony can lead to severe boredom, reduced job satisfaction, and a loss of motivation (1 mark).

Award 1 mark for identifying a valid disadvantage, and up to 2 marks for linked development.

Disadvantages may include:
- Repetitive/monotonous work (1 mark) because workers perform only one specific task repeatedly (1 mark) which can lead to boredom and demotivation (1 mark).
- Risk of structural unemployment/redundancy (1 mark) if their specific, narrow skill is no longer demanded due to technological change (1 mark) as they lack the diverse skill set to quickly find another job (1 mark).
- Loss of pride in the final output (1 mark) because they only contribute to a tiny part of the overall production process (1 mark) leading to alienation from the final product (1 mark).

Do not award marks for disadvantages to the firm (e.g., lower total productivity, risk of production stopping if one worker is absent) unless they are clearly linked back to the worker's perspective.

One disadvantage of the division of labour to a worker is that doing a single specialized task can make the work highly repetitive and tedious (1 mark). This is because the worker performs the exact same limited operation throughout their shift (1 mark). As a result, this monotony can lead to severe boredom, reduced job satisfaction, and a loss of motivation (1 mark).

Award 1 mark for identifying a valid disadvantage, and up to 2 marks for linked development.

Disadvantages may include:
- Repetitive/monotonous work (1 mark) because workers perform only one specific task repeatedly (1 mark) which can lead to boredom and demotivation (1 mark).
- Risk of structural unemployment/redundancy (1 mark) if their specific, narrow skill is no longer demanded due to technological change (1 mark) as they lack the diverse skill set to quickly find another job (1 mark).
- Loss of pride in the final output (1 mark) because they only contribute to a tiny part of the overall production process (1 mark) leading to alienation from the final product (1 mark).

Do not award marks for disadvantages to the firm (e.g., lower total productivity, risk of production stopping if one worker is absent) unless they are clearly linked back to the worker's perspective.

The division of labour involves breaking down a production process into a sequence of separate, specialised tasks.

**Benefit 1: Increased productivity and efficiency**
- **Explanation:** Workers specialise in a single task, such as sewing zippers. Through repetition, they become highly proficient ('practice makes perfect'), which increases speed and reduces errors.
- **Application:** In a clothing factory, less time is wasted by workers switching between different tasks and changing tools (e.g., moving from a cutting station to a sewing machine).
- **Analysis:** This increase in productivity leads to a higher output per worker, reducing average costs of production for the firm.

**Benefit 2: Reduced training costs and time**
- **Explanation:** It is faster and cheaper to train a worker to perform one simple, repetitive task than the entire production process of a complex product.
- **Application:** A new employee at the clothing manufacturer can quickly learn how to stitch collars without needing to learn how to design, cut, and fully assemble the entire garment.
- **Analysis:** This lowers the firm's training costs and allows new workers to become productive members of the workforce much faster, improving cost-efficiency.

**Level 1 (1–2 marks):**
- Demonstrates basic knowledge and understanding of the division of labour.
- Fragmented or generalised points with little or no application to a manufacturing firm.
- Limited analysis.

**Level 2 (3–4 marks):**
- Demonstrates some knowledge and understanding of how division of labour benefits a firm.
- Some application to a manufacturing context.
- Begun to develop a chain of analysis showing how division of labour improves productivity or reduces costs.

**Level 3 (5–6 marks):**
- Demonstrates clear, accurate knowledge and understanding of division of labour benefits.
- Strong, relevant application to a clothing or manufacturing firm.
- Logical and well-structured chain of analysis explaining at least two distinct benefits (e.g., reduced time waste, lower training costs, increased output, economies of scale).

The fundamental economic assumption regarding consumer behaviour is that individuals act rationally to maximise their utility. Utility refers to the total satisfaction or benefit derived from consuming a good or service.

1 mark for identifying that consumers aim to maximise utility (a). Reject all other options: (b) describes income which is a constraint, not the end goal of consumption; (c) refers to firms; (d) is not a rational economic goal.

Income Elasticity of Demand (YED) is calculated using the formula: \(YED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\). Substituting the values: \(YED = \frac{+15\%}{+10\%} = +1.5\). Since the YED is positive, organic vegetables are classified as a normal good.

1 mark for the correct calculation of +1.5 and identifying organic vegetables as a normal good (a). Reject all options that use incorrect calculations or incorrect classifications (b, c, d).

Step 1: Calculate the percentage change in quantity supplied. Percentage change in Qs = ((9,200 - 8,000) / 8,000) * 100 = 15%. Step 2: Calculate the percentage change in price. Percentage change in Price = ((15 - 12) / 12) * 100 = 25%. Step 3: Calculate PES. PES = % change in Qs / % change in Price = 15% / 25% = 0.6.

1 mark for correct method showing the percentage changes, e.g., 15% / 25% or correct formula. 1 mark for the correct PES value of 0.6 (accept .6 or 3/5).

An external cost refers to the negative spillover effects (1 mark) suffered by a third party not involved in the consumption or production of a good or service (1 mark).

Award 1 mark for identifying that it is a negative impact/spillover effect/cost on a third party. Award 1 mark for explaining that this third party is outside the market transaction (not the producer or consumer).

To achieve 2 marks, the response must identify a valid advantage of the division of labour to a firm and provide a development of how this benefit is realized.

* **Advantage (1 mark):** Increased productivity / output per worker.
* **Development (1 mark):** Workers specialize in a single task, meaning they become quicker and more skilled at it through repetition, which increases overall efficiency.

Award 1 mark for identifying a valid advantage and 1 mark for explanation/development.

**Advantages include:**
- Increased productivity / efficiency (1)
- Time saved from not switching between different tasks (1)
- Lower training costs (1)
- Greater feasibility of using specialized machinery (1)

**Development/explanation may include:**
- ...meaning workers become highly skilled at repeating a single task, leading to more output per unit of time (1).
- ...which avoids downtime and keeps production running continuously (1).
- ...because employees only need to learn one specific part of the production process (1).

A subsidy is a financial payment made by the government to producers that reduces their costs of production. When public transport providers are subsidised, they can lower their fares. This makes public transport more price-competitive compared to driving private vehicles. As a result, consumers substitute private car journeys for public transport journeys, reducing the external costs of driving such as carbon emissions and road congestion, moving the market closer to the socially optimum allocation of resources.

Award 1 mark for identifying a valid reason, 1 mark for explaining how the subsidy lowers cost or fares, and 1 mark for linking this to the reduction of external costs or increase in social welfare. For example: Award 1 mark for identifying that it reduces negative externalities of driving. Award 1 mark for explaining that the subsidy lowers the price of public transport fares. Award 1 mark for explaining that this leads to a substitution effect, reducing road congestion and air pollution.

### Indicative Content

**Arguments that raising interest rates is effective:**
* **Higher cost of borrowing:** Increasing interest rates from 1.5% to 4.5% makes borrowing more expensive for households and firms in Fredonia. This reduces consumer spending on credit (e.g., cars, houses) and discourages business investment.
* **Increased incentive to save:** Consumers are incentivised to save more rather than spend because of higher returns on savings accounts, which further reduces consumption and shifts Aggregate Demand (AD) to the left, reducing demand-pull inflation.
* **Exchange rate appreciation:** Higher interest rates can attract foreign financial investment ('hot money') seeking higher returns. This increases demand for Fredonia's currency, causing it to appreciate. A stronger currency makes imports cheaper, helping to lower cost-push inflation, and makes exports more expensive, further dampening AD.

**Arguments that raising interest rates is ineffective or has negative side effects:**
* **Cost-push inflation:** If Fredonia's 7.2% inflation is caused by supply-side shocks (such as rising global commodity prices or supply chain disruptions), raising interest rates will not address these root causes but will still depress domestic economic activity, potentially leading to stagflation.
* **Time lags:** Monetary policy changes can take up to 18 to 24 months to fully pass through to the real economy. Thus, the rate hike might not bring immediate relief to the high inflation rate.
* **Negative impact on other objectives:** High interest rates can cause a slowdown in economic growth and lead to higher unemployment as firms cut back on production due to lower consumer spending.
* **Fixed-rate contracts:** If a significant portion of consumers have fixed-rate mortgages or loans, the increase in interest rates will have a minimal immediate impact on their disposable income and spending behavior.

**Conclusion/Evaluation:**
Overall, raising interest rates is a standard and often effective tool to curb demand-pull inflation, but its success in Fredonia depends heavily on the primary cause of the 7.2% inflation. If inflation is driven by excess domestic demand, the policy is likely to be effective over time. However, if it is driven by global supply factors, the policy may cause unnecessary economic pain (such as unemployment) without significantly lowering prices in the short term.

### Marking Grid

| Level | Marks | Descriptor |
|---|---|---|
| **Level 0** | **0** | No rewardable material. |
| **Level 1** | **1-3** | * Demonstrates isolated elements of relevant economic knowledge.
* Weak or no application to the context of Fredonia.
* Very basic or one-sided analysis, with little or no evaluation. |
| **Level 2** | **4-6** | * Demonstrates sound economic knowledge and understanding.
* Reasonable application to the context of Fredonia (e.g., referencing the interest rate rise from 1.5% to 4.5% or inflation of 7.2%).
* Structured chain of reasoning exploring the transmission mechanism of interest rates.
* An attempt at balanced evaluation, though one side may be much stronger. |
| **Level 3** | **7-9** | * Demonstrates thorough economic knowledge and understanding.
* Excellent application to the context of Fredonia throughout.
* Well-structured and logical chain of reasoning showing how interest rates reduce inflation and the limitations of this policy.
* Balanced evaluation leading to a reasoned and justified conclusion/judgment. |

### Guidance for Markers
* **AO2 (Application):** 4 marks
* **AO3 (Analysis):** 3 marks
* **AO4 (Evaluation):** 2 marks

### Indicative Content

**Arguments that raising interest rates is effective:**
* **Higher cost of borrowing:** Increasing interest rates from 1.5% to 4.5% makes borrowing more expensive for households and firms in Fredonia. This reduces consumer spending on credit (e.g., cars, houses) and discourages business investment.
* **Increased incentive to save:** Consumers are incentivised to save more rather than spend because of higher returns on savings accounts, which further reduces consumption and shifts Aggregate Demand (AD) to the left, reducing demand-pull inflation.
* **Exchange rate appreciation:** Higher interest rates can attract foreign financial investment ('hot money') seeking higher returns. This increases demand for Fredonia's currency, causing it to appreciate. A stronger currency makes imports cheaper, helping to lower cost-push inflation, and makes exports more expensive, further dampening AD.

**Arguments that raising interest rates is ineffective or has negative side effects:**
* **Cost-push inflation:** If Fredonia's 7.2% inflation is caused by supply-side shocks (such as rising global commodity prices or supply chain disruptions), raising interest rates will not address these root causes but will still depress domestic economic activity, potentially leading to stagflation.
* **Time lags:** Monetary policy changes can take up to 18 to 24 months to fully pass through to the real economy. Thus, the rate hike might not bring immediate relief to the high inflation rate.
* **Negative impact on other objectives:** High interest rates can cause a slowdown in economic growth and lead to higher unemployment as firms cut back on production due to lower consumer spending.
* **Fixed-rate contracts:** If a significant portion of consumers have fixed-rate mortgages or loans, the increase in interest rates will have a minimal immediate impact on their disposable income and spending behavior.

**Conclusion/Evaluation:**
Overall, raising interest rates is a standard and often effective tool to curb demand-pull inflation, but its success in Fredonia depends heavily on the primary cause of the 7.2% inflation. If inflation is driven by excess domestic demand, the policy is likely to be effective over time. However, if it is driven by global supply factors, the policy may cause unnecessary economic pain (such as unemployment) without significantly lowering prices in the short term.

### Marking Grid

| Level | Marks | Descriptor |
|---|---|---|
| **Level 0** | **0** | No rewardable material. |
| **Level 1** | **1-3** | * Demonstrates isolated elements of relevant economic knowledge.
* Weak or no application to the context of Fredonia.
* Very basic or one-sided analysis, with little or no evaluation. |
| **Level 2** | **4-6** | * Demonstrates sound economic knowledge and understanding.
* Reasonable application to the context of Fredonia (e.g., referencing the interest rate rise from 1.5% to 4.5% or inflation of 7.2%).
* Structured chain of reasoning exploring the transmission mechanism of interest rates.
* An attempt at balanced evaluation, though one side may be much stronger. |
| **Level 3** | **7-9** | * Demonstrates thorough economic knowledge and understanding.
* Excellent application to the context of Fredonia throughout.
* Well-structured and logical chain of reasoning showing how interest rates reduce inflation and the limitations of this policy.
* Balanced evaluation leading to a reasoned and justified conclusion/judgment. |

### Guidance for Markers
* **AO2 (Application):** 4 marks
* **AO3 (Analysis):** 3 marks
* **AO4 (Evaluation):** 2 marks

An appreciation of a currency means its value increases relative to other currencies. This makes foreign currency cheaper to buy, thus reducing the price of imported goods for domestic buyers. Conversely, foreign buyers must pay more of their own currency to purchase the domestic currency, making domestic exports more expensive in foreign markets.

1 mark for identifying the correct impact on imports and exports (b). All other options represent incorrect combinations of exchange rate impacts.

Using the formula: \(\text{Price Elasticity of Demand (PED)} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}\). Rearranging this formula gives: \(\%\text{ change in quantity demanded} = \text{PED} \times \%\text{ change in price}\). Substituting the values: \(-0.4 \times 10\% = -4\%\), which represents a \(4\%\) decrease in quantity demanded.

1 mark for the correct calculation and selecting option (a). No partial marks are awarded for incorrect formulas or calculations.

Adverse weather conditions reduce the harvest of cocoa, which is a key raw material for making chocolate. This increases production costs and reduces the overall supply of chocolate.

This is represented by a leftward shift of the supply curve from \(S\) to \(S_1\).

As a result:
- The equilibrium price of chocolate rises from \(P_1\) to \(P_2\).
- The equilibrium quantity of chocolate falls from \(Q_1\) to \(Q_2\).

To achieve full marks, the diagram must include:
- Correctly labeled vertical axis ('Price' or 'P') and horizontal axis ('Quantity' or 'Q').
- A downward-sloping demand curve labeled 'D'.
- An original upward-sloping supply curve labeled 'S' and a new supply curve shifted to the left labeled '\(S_1\)'.
- The original equilibrium price (\(P_1\)) and quantity (\(Q_1\)) clearly indicated.
- The new equilibrium price (\(P_2\)) and quantity (\(Q_2\)) clearly indicated, with directional arrows showing the shifts.

Award up to 3 marks for a correctly drawn diagram:
- 1 mark for correctly labeled axes (Price and Quantity), downward-sloping demand curve (D), and original equilibrium showing price (\(P_1\)) and quantity (\(Q_1\)).
- 1 mark for shifting the supply curve to the left (from \(S\) to \(S_1\)).
- 1 mark for showing the new equilibrium with a higher price (\(P_2\)) and lower quantity (\(Q_2\)), including appropriate dashed lines or arrows.

The technological breakthrough reduces production costs, which increases the supply of electric vehicles. This is shown by a shift of the supply curve to the right, from \(S\) to \(S_1\).

As a result:
- The equilibrium price falls from \(P_1\) to \(P_2\).
- The equilibrium quantity rises from \(Q_1\) to \(Q_2\).

Diagram details:
- Vertical axis is labeled 'Price' or 'P'.
- Horizontal axis is labeled 'Quantity' or 'Q'.
- Downward-sloping demand curve labeled 'D'.
- Upward-sloping supply curves labeled 'S' and 'S1'.
- Initial equilibrium point indicating \(P_1\) and \(Q_1\).
- New equilibrium point indicating \(P_2\) and \(Q_2\).
- Arrow indicating the shift in supply to the right and/or arrows indicating the change in price (downward) and quantity (rightward).

Award up to 3 marks for a correctly labelled and drawn diagram:
- 1 mark for original demand curve (D), supply curve (S), axes (Price and Quantity) and initial equilibrium \(P_1\) and \(Q_1\).
- 1 mark for shifting the supply curve to the right (from \(S\) to \(S_1\)).
- 1 mark for showing the new equilibrium price \(P_2\) (lower) and quantity \(Q_2\) (higher), with appropriate labeling or directional arrows.

A subsidy is a financial grant given by the government to producers to lower their costs of production. When the government subsidises public transport, providers experience a reduction in operating costs, which shifts the supply curve of public transport to the right. This allows operators to lower fares for consumers. Because public transport and private cars are substitute goods, lower public transport fares will lead to an increase in demand for public transport and a decrease in the demand for private car travel. As fewer people use private cars, there will be a reduction in negative externalities of consumption/production such as air pollution, carbon emissions, and traffic congestion. This reduces the marginal social cost (MSC) of transport, bringing the market closer to the socially optimum level of output and thus reducing market failure.

Level 1 (1-2 marks): Demonstrates basic knowledge of subsidies or negative externalities, but with weak or unstructured economic links. Level 2 (3-4 marks): Provides some logical links showing how a subsidy affects fares and public transport use, with some application to negative externalities of car use. Level 3 (5-6 marks): Shows a clear and coherent chain of economic reasoning, fully explaining the transmission mechanism: subsidy -> lower costs -> lower fares -> substitution away from cars -> reduction in negative externalities (such as pollution or congestion) -> reduction in market failure.

### Potential Positive Impacts:
* **Economic Growth and Employment:** A depreciation of the X-Dollar makes Country X's exports cheaper in foreign currency, increasing foreign demand. Simultaneously, imports become more expensive in terms of X-Dollars, encouraging domestic consumers to switch to domestic substitutes. This increase in net exports \((X - M)\) shifts Aggregate Demand (AD) to the right, leading to increased real GDP (economic growth) and job creation in export-oriented and import-competing industries.
* **Balance of Payments:** If the Marshall-Lerner condition holds (the sum of the price elasticities of demand for exports and imports is greater than 1), the current account balance of Country X is expected to improve.

### Potential Negative Impacts:
* **Inflationary Pressures:**
* *Cost-Push Inflation:* Domestic firms that rely on imported raw materials and capital goods will face higher production costs, which they are likely to pass on to consumers in the form of higher prices.
* *Demand-Pull Inflation:* The outward shift of AD can put upward pressure on prices, especially if Country X is operating near full capacity.
* **Standard of Living:** More expensive imports can reduce the purchasing power of domestic households, particularly for essential goods that cannot be easily produced domestically (such as energy or food).

### Evaluation / Key Considerations:
* **Price Elasticity of Demand (PED):** If the demand for exports and imports is price inelastic, the trade balance might initially deteriorate (the J-curve effect) and inflation will rise without much growth benefit.
* **Spare Capacity:** If Country X has significant spare capacity (high unemployment and idle factories), the increase in AD can lead to economic growth with minimal demand-pull inflation. If the economy is at full employment, the depreciation will primarily cause inflation.
* **Import Dependency:** If Country X is heavily reliant on essential imports, the negative cost-push inflationary impact may outweigh the competitive gains of cheaper exports.

**Level 1: 1–3 Marks**
* Demonstrates isolated knowledge of currency depreciation and/or macroeconomic indicators.
* Identifies basic effects (e.g., exports become cheaper, imports become more expensive) without fully linking them to wider macroeconomic objectives.
* The response is one-sided or lacks structure.

**Level 2: 4–6 Marks**
* Explains the economic mechanism through which depreciation affects macroeconomic performance (such as economic growth, inflation, and the balance of payments).
* Analysis is developed, showing how cheaper exports and more expensive imports shift aggregate demand.
* Begins to offer a balanced perspective, acknowledging both positive impacts (growth, employment) and negative impacts (inflation).

**Level 3: 7–9 Marks**
* Provides a detailed, balanced, and contextualized assessment of the impacts of currency depreciation on Country X's macroeconomic performance.
* Evaluates key factors determining the outcome, such as the price elasticity of demand for exports/imports (Marshall-Lerner condition/J-curve) and the amount of spare capacity in the economy.
* Offers a clear, reasoned conclusion based on the analysis presented.

To find the cost of the shipment in Euros (€), divide the price in US Dollars ($) by the exchange rate ($ per €):

$$\text{Price in Euros} = \frac{\text{Price in USD}}{\text{Exchange Rate (\$ per €)}}$$

$$\text{Price in Euros} = \frac{45,000}{1.25} = 36,000$$

Therefore, the cost is €36,000.

Award 1 mark for showing correct working:
- \( \frac{45,000}{1.25} \) (1)

Award 1 mark for the correct final answer:
- €36,000 (1)

Note: Award 2 marks for the correct final answer (including unit €) even if no working is shown.

An increase in the national minimum wage in Ostland can impact unemployment through several channels. First, raising the minimum wage by 12% increases the marginal cost of labor for firms, especially in labor-intensive industries like retail and hospitality. To maintain profit margins, these firms may reduce their staff numbers or cut hours, leading to higher classical unemployment as the demand for labor contracts. Second, a higher wage rate might encourage more economically inactive individuals to enter the labor market, increasing the supply of labor and expanding the surplus of labor (unemployment) at the new wage floor. Conversely, the increase in wages raises the disposable income of low-wage workers. Because these workers have a high marginal propensity to consume, their increased spending can stimulate aggregate demand for retail and hospitality services. This can lead to an increase in the derived demand for labor, potentially offsetting the initial unemployment effects. Additionally, higher wages can improve employee motivation and reduce staff turnover, raising productivity and allowing firms to absorb the higher wage costs without resorting to layoffs.

AO1 (2 marks): Demonstrates knowledge and understanding of minimum wage and unemployment concepts. AO2 (2 marks): Applies economic terms and concepts to the Ostland scenario (e.g., 12% wage rise, retail and hospitality sectors). AO3 (2 marks): Analyses the impact with logical chains of reasoning. Level 1 (1-2 marks): Identifies basic impacts of a minimum wage, such as higher costs for firms or more pay for workers, with little or no development or application. Level 2 (3-4 marks): Explains how the minimum wage leads to unemployment (e.g., higher costs leading to job cuts in retail/hospitality) or how it might boost spending, with some logical links and context. Level 3 (5-6 marks): Offers a detailed analysis of multiple impacts (e.g., both the cost-push unemployment effect and the demand-pull employment effect), using clear chains of reasoning and fully applying the analysis to Ostland's context.

Arguments in favour of introducing the tariff:
- **Infant Industry Protection**: Veridia's solar manufacturers are in their early stages and lack the economies of scale enjoyed by foreign competitors. A 25% tariff increases the price of foreign imports, allowing local firms to capture a larger market share, grow, and eventually achieve competitiveness.
- **Job Preservation**: Protecting local manufacturers helps preserve employment in Veridia's manufacturing sector, preventing structural unemployment and saving the government from paying unemployment benefits.
- **Government Revenue**: The tariff will generate tax revenue for the Veridian government, which can be reinvested into green infrastructure or research and development.

Arguments against introducing the tariff:
- **Higher Costs for Consumers and Installers**: Imported solar panels will become more expensive. Solar panel installation companies will experience higher costs of production, which they will pass on to households and businesses in the form of higher prices. This could contract the demand for solar energy installations.
- **Environmental Implications**: If solar installations become more expensive, Veridia's transition to renewable energy sources will slow down. This might increase reliance on fossil fuels, exacerbating negative externalities from carbon emissions.
- **Risk of Retaliation**: Foreign governments may respond by imposing retaliatory tariffs on Veridia's exports, hurting other sectors of its economy.
- **Inefficiency**: Without international competition, domestic firms may lack the incentive to innovate or lower their production costs, leading to productive inefficiency.

Evaluation / Conclusion:
- The overall economic effect depends on the price elasticity of demand (PED) for solar panels. If demand is highly price elastic, the tariff will cause a substantial drop in solar energy adoption.
- It also depends on whether the tariff is temporary. If it is phased out once domestic firms reach maturity, it could succeed in building a viable domestic industry. However, if it remains permanent due to political lobbying, it will permanently distort domestic resource allocation.
- The government must weigh the benefits of manufacturing jobs against the potential loss of jobs in the solar installation and maintenance sectors, which might outweigh manufacturing gains.

Level 1 (1-3 marks):
- Demonstrates isolated elements of relevant economic knowledge and understanding.
- Weak or missing application to the context of solar panels/Veridia.
- Answer is structured as a list of facts or points without development.

Level 2 (4-6 marks):
- Demonstrates some economic knowledge and understanding of tariffs and trade protection.
- Applies some relevant economic concepts to the context, though it may be superficial.
- Offers a one-sided analysis of either the benefits or the drawbacks of the tariff.

Level 3 (7-9 marks):
- Demonstrates good economic knowledge and understanding of the effects of tariffs.
- Systematic and appropriate application to the Veridian context.
- Provides a balanced analysis showing both arguments for protecting infant industries/jobs and arguments against (higher consumer costs, environmental impact).

Level 4 (10-12 marks):
- Demonstrates precise and robust economic knowledge and understanding of tariff intervention.
- Thorough, detailed application of economic concepts to the context throughout.
- Offers a balanced, well-developed analysis of both sides.
- Delivers a supported evaluative judgement/conclusion, discussing factors such as the short-run vs long-run effects, elasticity, or potential retaliation.