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NCEA Level 3 Economics (90629) 2011 — page 1 of 7 Assessment Schedule – 2011 Economics: Understand marginal analysis and the behaviour of firms (90629) Evidence Statement Code Q A1 ONE (a) (b) Evidence Duopoly Strong barriers to entry, differentiated product, strong control over price, imperfect knowledge. Achievement Merit Excellence Any ONE of: Duopoly Two features of duopoly Two methods of differentiated product Monopolistic competition. (Allow follow-through from (a) if monopolistic competition). (c) Eg Location, service, loyalty scheme, advertising. (d) Monopolistic competition A2 TWO OR (a) If a consumer takes an additional bungy jump their extra satisfaction from that jump will diminish. In order for a consumer to purchase an extra jump the price must fall to ensure that the price is equal to or less than the marginal utility of that extra jump. M2 (b) (c) The MU / P of a bungy jump is $150 / $100 = 1.5. Because Toni chose the bungy jump over a skydive, the MU / P of a skydive must have been less than 1.5. Because the price of a skydive is $200, the MU of a skydive must be less than 300 to get MU / P < 1.5 as an answer. TU = 150, 290 MU = 80, 0 (d) Quantity demanded = 4, 2, 1, 0 (e) See Appendix One. (i) and (ii) (f) $800 See Appendix Two. Any THREE of: Recognition that an extra bungy jump will generate a smaller amount of extra satisfaction, and price needing to fall as MU decreases Recognition that MU/P of a sky dive must be less than that of a bungy jump THREE calculations correct in (c) THREE calculations correct in (e) (i) or (ii) Accounting cost is the cost of resources (or explicit cost), and Economic cost includes the opportunity cost of using resources. (Accept “implicit costs” with no mention of opportunity cost). THREE of the answers below. ONE of the answers MUST be either (d) or (f): An extra bungy jump consumed may generate a smaller amount of extra satisfaction, meaning price must fall to be equal to or less than the decreased MU Explanation including calculation of MU / P of a bungy jump = 1.5, and MU / P of skydive needing to be less than 1.5 THREE of four figures correct in (d) Graph drawn correctly in (f) with NO errors to: the scale, axis, and labels Accounting cost AND Economic cost explained, with a calculation of the economic cost (either as $360 000, or $350 000 and opportunity cost of 5% of $200 000). NCEA Level 3 Economics (90629) 2011 — page 2 of 7 Code Q Evidence TWO (g) Accounting cost is the cost of resources used in production. The new bungy jump has an accounting cost of $350,000. Economic cost is the accounting cost plus opportunity costs. The economic cost of the new bungy jump is $350,000 plus $10,000, which was the interest forgone on the savings. Total economic cost is $360,000. Achievement Merit Excellence NCEA Level 3 Economics (90629) 2011 — page 3 of 7 Code Q Evidence A3 THREE OR (a) Dairy farmers are price takers, they must accept the market price for every quantity they produce. Therefore the marginal revenue and average revenue will not change with increased output. M3 OR E3 (b) See Appendix Three. (c) Qe is the output where the dairy farmer’s marginal revenue is equal to marginal cost. At an output below Qe the farmer is missing out on marginal profits up to Qe, and at any output higher than Qe, the farm is making marginal losses on every output after Qe. (d) See Appendix Three for diagrams AND When dairy farmers are making supernormal profits, more farmers will enter the market due to no barriers to entry. This will increase the market supply to S1. As a result, the market price will fall. Because dairy farmers are price takers, they must accept the new market price so their AR / MR / P / D will decrease to AR1 / MR1 / P1 / D1. To continue to maximise profit, this individual dairy farmer will reduce output to where MR1 = MC, to avoid making marginal losses on every unit of output between MR and MR1. In the long run, the price and quantity position for the dairy farmer will be where he makes a normal profit. Achievement Merit Any THREE of: Any TWO of: Average revenue AND marginal revenue will not change Perfect competitors are price takers, and reference to AR and MR not changing with increased output AR / MR curve placed in line with market equilibrium and labelled AND Pe and Qe identified where MR = MC Supernormal profit correctly identified and labelled Qe is where marginal revenue is equal to marginal cost Partial answer to (d) including supply increasing AND AR / MR / D / P decreasing, leading to decreased output. Qe is where MR = MC, and any output EITHER below will result in missing out on marginal profits OR above making marginal losses Explanation to (d), which includes Achievement response AND explanation of more firms entering due to no barriers to entry, and output decreasing to new profit maximising equilibrium (MC = MR1) Correct changes shown on diagrams in Appendix Three. Changes must be clearly marked with new labels or arrows to show curve shifts. Graphs 2 & 3 must line up correctly. Excellence Full explanation in (d), including Merit response AND farmer having to reduce output to avoid making marginal losses on every unit produced between Qe and Q1. Clear linking of a correct graphical response is made to the written response in (d). NCEA Level 3 Economics (90629) 2011 — page 4 of 7 Code Q A3 FOUR OR (a) See Appendix Four. M3 (b) The monopolist will produce at output where MR = MC which is Qe. At this output, consumers will be willing and able to pay price Pe. Should include the idea of the monopolist determining the output, and consumers determining the price. Comments on the output being above and below Qe. OR E3 (c) (d) Evidence Monopoly firms have strong barriers to entry. A monopoly firm making supernormal profits is likely to continue to make supernormal profits, as those barriers to entry will prohibit new entrants into the market. An increase in demand will cause both the AR and MR curves to increase. Fonterra will increase its output in order to maximise profits where the new MR curve intersects the MC curve. If Fonterra did not increase output, it would be missing out on marginal profits between the old and new MR / MC intersection. The price will be determined where the new quantity intersects with the new AR curve. This gives the price that consumers will be willing – and able – to pay for that quantity. The price may be more, equal or less than the original price, depending on how much the increase in demand was. Achievement Merit Any THREE of: Any ONE of: AR curve correctly drawn and located so that the vertical point above where the MR curve intersects the output axis is halfway along the AR curve (allowing for a small margin of error) Pe is the price that consumers are willing and able to pay for Qe, which is the profit maximising quantity, where MC = MR in (b). Pe and Qe must be correct on Graph Four AC curve correctly located so that a supernormal profit is made and also AC intersects MC at the minimum AC value Supernormal profit identified and labelled with Pe and Qe correctly identified Pe is the corresponding price that is determined by the Qe quantity where MC = MR Monopolist will continue to make a supernormal profit in the long-run Partial answer to (d), AR and MR will increase and Quantity will increase. Continue to make a supernormal profit (these must be showing correctly in Graph Four) because of strong barriers to entry in a monopoly market structure in (c) Explanation to (d), which includes AR, MR and Q increasing and referring to Fonterra increasing output to where MC = new MR curve Excellence A full explanation of (d), which includes requirement for Merit plus the idea of Fonterra missing out on marginal profits if it doesn’t increase output, and reference to price being determined where the new MR / MC quantity intersects with the new AR curve. NCEA Level 3 Economics (90629) 2011 — page 5 of 7 Code A1 Q Evidence One Three Four NB if price takers or other appropriate features of a perfect competitor are used in Question Three – Parts (a) or (d) Achievement Merit Excellence OR Strong barriers to entry allowing supernormal profits to continue in Question Four (c) This could then be used as evidence of A1, if evidence is missing from Question One. Judgement Statement Achievement Achievement with Merit Achievement with Excellence Minimum of: Minimum of: Minimum of: 1 A1 1 A1 1 A1 1 A2 1 M2 1 M2 1 A3 1 M3 1 E3 Codes: A1 refers to the first criterion A2 and M2 refer to the second criterion A3, M3 and E3 refer to the third criterion NCEA Level 3 Economics (90629) 2011 — page 6 of 7 Appendix One – Question Two (e) (i) Output / day (Bungy jumps) Total Cost ($) Total Variable Cost ($) Average Variable Cost ($) Average Cost ($) Marginal Cost ($) 19 1 560.00 760.00 40.00 82.11 35.00 20 1 620.00 820.00 41.00 81.00 60.00 21 1 685.00 885.00 42.14 80.24 65.00 22 1 755.00 955.00 43.41 79.77 70.00 23 1 835.00 1 035.00 45.00 79.78 80.00 Appendix Two – Question Two (f) Graph One: Freefall Bungy’s Supply Curve for Bungy Jumps NCEA Level 3 Economics (90629) 2011 — page 7 of 7 Appendix Three – Question Three (b) and (d) (Graphs must line up correctly) Graph Two: An Individual Dairy Farmer Appendix Four – Question Four (a) Graph Three: The Market for Milk