DP1 End of Year Examination 2023 for Practice
MARK SCHEME
ECONOMICS
Higher Level
Paper 2 Type Question
Thursday May 11, 2023 (morning)
1 hour 45 minutes
Instructions to Candidates:
⚫
⚫
⚫
⚫
⚫
⚫
⚫
Do not open this examination paper until instructed to do so.
You are permitted access to a calculator for this paper.
Unless otherwise stated in the question, all numerical answers must be given exactly or
correct to two decimal places.
You must show all your working.
Answer ALL questions.
Use fully labelled diagrams and references to the text/data where appropriate.
The maximum mark for this examination paper is [40 marks].
This question paper consists of 4 printed pages including the cover page.
Page 1 of 9
Study the texts and data below and answer ALL the questions that follow.
TEXT A: Milk Market in Cyprus (Market for Conventional Milk v/s Market for RAU Milk)
1. Excessive demand for milk products in Cyprus have instigated Intensive animal farming,
which results in irrational use of antibiotics by farmers in raising cows. Conventional milk that
contains residues of antibiotics leads to antibiotic resistance among humans and is of great
public health concern in Cyprus. These may cause complicated, untreatable, and prolonged
infections in humans, leading to higher healthcare cost and sometimes death.
2. Through the release of cow waste (including cow faeces / excrement) into water bodies and
other environmental sources, these residual antibodies could spread to the remotest parts of
the country and across borders. The challenges that follow are of local, national, regional,
and international dimensions, as there are no geographic boundaries to impede the spread
of antibiotic resistance among humans. Apart from antibiotic resistance, the presence of
antibiotic residue in water used for household consumption could lead to allergy
(hypersensitivity reaction) ranging from mild skin rash to life-threatening anaphylaxis.
3. Rapid rise in the real GDP of Cyprus, and a choice for a healthy life style by the booming
middle class has increased the demand for unconventional healthy milk in Cyprus.
Awareness about the side effects of consuming milk with antibiotic residues (conventional
milk) have pushed many consumers to buy milk produced from cows treated with antibiotics
only when medically necessary (RAU milk). What this means is that there could potentially
be a large market for milk produced with limited and responsible use of antibiotics (RAU milk).
4. Studies show that RAU milk can be highly expensive (compared to conventional milk) to
produce as limited use of antibiotics requires special care for the cows on aspects like better
shelter, medical care, fodder etc. Nevertheless, responsible use of antibiotics can reduce the
external costs of milk production and the benefits of consumption are huge.
5. Certain researches show that, though the benefits of RAU milk are huge, consumer’s
willingness to pay for the RAU milk was comparable to how much they would pay for the
conventional milk. Experts suggest that financial incentives would entice farmers to make
responsible and only necessary use of antibiotics in the production of milk. Since milk is a
key input in the production of milk based products like cheese and butter, the government of
Cyprus plans to implement a new law requiring all manufacturers of cheese and butter to use
only RAU milk in the production process. The chairman of the largest cheese and butter
manufacturer in Cyprus observed that the new regulation will increase the variable cost of
producing milk based products and the sellers of butter and cheese will react by raising the
price of these products.
Table 1: (PED and YED values estimated for the years 2019-2022)
Butter
Cheese
YED (Income elasticity of demand)
PED (Price elasticity of demand)
Conventional
Milk
-1.2
1.1
Page 2 of 9
1.3
Table 2
Year
Real GDP in billion US$
2020
23.92
2021
25.51
TEXT B: Already High Milk Prices in the Conventional Milk Market
6. Complaints that conventional milk prices in Cyprus are too high have led the government’s
Competition and Consumer Protection Service to investigate whether a cartel exists in the
conventional milk industry. There are indications that farmers are selling their milk at an
identical high price to milk companies (processors) and distributors. Also, the milk companies
and distributors themselves may be uniformly raising their prices, resulting in the most
expensive milk in the European Union (EU).
7. Cyprus has very limited grass pastures for cows to graze on, and fodder (food for cows) is
imported and sold to farmers by a government monopoly. Farmers complain that if
competition existed in the supply of fodder, fodder prices would come down, and this would
allow milk prices to fall. They sell milk at identical prices because they all buy fodder at the
same price from the government monopoly.
8. Milk processing is dominated by two firms, which have also been accused of collusion as
they sell milk at an identical price. The firms claim that the reason for this is that they buy it
at the same price from the milk farmers.
9. The only real competition appears to be at the retail level, where prices range from about
1.15 euros per litre (in supermarkets) to 1.30 euros per litre (in bakeries and kiosks).
According to the Ministry of Commerce, 70 % of milk is bought from the higher-price bakeries
and kiosks. A consumer association is urging consumers to buy milk from the lower price
retailers.
10. The Ministry is urging retailers to cut milk prices voluntarily. Many supermarkets have
responded with price cuts, but bakeries and kiosks refuse to lower their prices, claiming that
the high price they pay to buy milk would result in selling at a loss. The Ministry has received
permission from the EU to impose a price ceiling on milk for approximately 40 days, until
the situation is resolved. Critics of the government argue that its policies are ineffective
because they do not attempt to solve the problem by increasing competition and creating
free market conditions.
Page 3 of 9
(a) Define the term price ceiling (paragraph 10).
[2]
The idea that it is a price fixed by the government. [1]
Precise definition [2]
An explanation that it is any two of the following:
• a price set by the government (or an authority)
• below the equilibrium price
• price cannot go above this price.
(b) Using a supply and demand diagram for the milk market, explain why the elimination of the
government monopoly in fodder could result in a lower price of milk (paragraph 7).
[4]
[1–2 ]
For drawing a correctly labelled supply and demand diagram showing a rightward shift of the
supply curve, resulting in a lower price and larger quantity, or an explanation that the elimination
of the government monopoly in fodder will lower costs of production for milk producers, an
increase in the supply of milk and hence a lower price of milk.
[3–4]
For drawing a correctly labelled supply and demand diagram showing a rightward shift of the
supply curve, resulting in a lower price and larger quantity, and an explanation that the
elimination of the government monopoly in fodder will lower costs of production for milk
producers, an increase in the supply of milk and hence a lower price of milk.
Candidates who incorrectly label diagrams can be rewarded with a maximum of [3 marks].
The vertical axis may be price (or P). The horizontal axis may be output or quantity (or Q).
A title is not necessary.
(c) Using an appropriate diagram, explain which market structure comes closest to describing
the collusive behaviour practiced by the milk companies (processors) (paragraph 8).
[4]
[1–2]
For drawing a correctly labelled monopoly diagram, or for explaining that collusive behaviour of
firms allows them to operate as if they were a monopoly by setting (fixing) a high price for their
product.
[3–4]
For drawing a correctly labelled monopoly diagram, and for explaining that collusive behaviour
of firms allows them to operate as if they were a monopoly by setting (fixing) a high price for their
product
Some candidates may draw a kinked demand curve diagram. If this model is used to explain
why the firms would choose to collude rather than compete, then this may be awarded full marks.
Page 4 of 9
Candidates who incorrectly label diagrams can be rewarded with a maximum of [3 marks].
The vertical axis may be price (or P) or costs and revenue. The horizontal axis may be quantity
(or Q) or output.
A title is not necessary.
(d) Use a diagram to explain why consumption of conventional milk is a source of market failure.
(paragraph 1)
[4]
[1-2 ]
For drawing a market failure diagram of conventional milk showing MSB and MPB with MPB to
the right of MSB and one MSC curve with the vertical separation or shaded welfare loss area
identifying the negative externality of consuming conventional milk or for providing an
explanation that consuming conventional milk leads to external costs affecting third parties with
some reference to the information in the extract. Consumption of conventional milk is an example
of market failure because its costs are borne by society at large rather than by road users OR
because the amount of private transport determined by the market exceeds the optimal amount.
[3-4]
For drawing a market failure diagram of conventional milk showing MSB and MPB with MPB to
the right of MSB and one MSC curve with the vertical separation or shaded welfare loss area
identifying the negative externality of consuming conventional milk AND for providing an
explanation that consuming conventional milk leads to external costs affecting third parties with
some reference to the information in the extract. Consumption of conventional milk is an example
of market failure because its costs are borne by society at large rather than by road users (or
because the amount of private transport determined by the market exceeds the optimal amount).
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
The vertical axis may be price, but could be costs or benefits. The horizontal axis is quantity.
A title is not necessary.
(e) With reference to paragraph 5 and based on the information in Table 1, explain how would
the reaction of the firms producing cheese and butter to the new regulation will affect their sales
revenue.
[3]
An explanation that the firms producing butter and cheese will be pushed to raise their prices to
cover the increased costs and this action will lead to a fall in their sales revenue because the
PED of both the products are greater than one (relatively inelastic demand).
There must be reference to at least one of the PED values given in the table to earn full marks.
Page 5 of 9
(f) (i) Using information from Table 2, calculate the percentage change in the real GDP of Cyprus
between the years 2020 and 2021.
[2]
25.51-23.92 ÷ 23.92 × 100 = 6.65%
[any valid working 1 mark + answer 1 mark]
(ii) Using your answer in part (i), and the information in Table 1, calculate the percentage
change in the quantity demanded of conventional milk due to a change in the real GDP
(income) of Cyprus between the years 2020 and 2021.
[2]
-1.2 = %∆Q ÷ 6.65%
= -7.98%
(OFR)
[1]
[1] or state that there will be a fall in the quantity demanded by 7.98%
(iii) With reference to your answer to part (ii) and/or using the information in Table 1, comment
on the possible effect of the change in the real GDP on the sales revenue of the conventional
milk sellers in Cyprus.
[2]
The command term “comment” require students to use their knowledge and skills to break
down ideas into simpler parts and to see how the parts relate.
An explanation (referring to a fall in the quantity demanded of conventional milk due to the
negative % change in the quantity in part ii) when the real GDP of Cyprus rises which would
lead to fall in in the sales revenue of conventional milk sellers.
Students may only refer to the negative sign of the YED value in the information provided in
the table which is sufficient to justify that the revenue of the conventional milk sellers will fall.
OFR
(g) Paragraph 3 states that “Awareness about the side effects of consuming milk with antibiotic
residues (conventional milk) have encouraged many consumers in Cyprus to buy healthy milk
produced from cows only treated with antibiotics when medically necessary (RAU milk)”. State
two methods that the government of Cyprus could implement to reduce information failure
among consumers about the side effects of consuming conventional milk.
[2]
•
•
•
•
Informative advertising
Product labelling (produced using antibiotics / or the extent of use)
Education / communication through consumer associations
Or any valid policy/action
1 mark for identifying one correct policy
Page 6 of 9
(h) Using information from the text/data and your knowledge of economics, evaluate the policies
that the Cyprus government could use to achieve allocative efficiency in the milk market. [15]
The scope of the question includes market failure due to the negative externalities in the
conventional milk market as well as the supposedly monopolistic / collusive practices and high
prices in the conventional milk market. The scope also includes the under provision of the
healthier RAU milk.
Students may approach the question by identifying suitable policies mentioned or not mentioned
in the extract and discuss how allocative efficiency could be achieved by internalizing the
externalities or by correcting monopolistic / the supposedly collusive behavior of the firms and
the high price in the milk market.
Any of the above approaches or a combination of the approaches is acceptable and should be
appropriately awarded if they meet the marking criteria.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Answers may include the following and several other possibilities:
an explanation that allocative efficiency is achieved when any one of the following condition
is met: where price is equal to marginal cost (or marginal social cost) or MC = AR
where resources are allocated in such a way that neither too much nor too little is produced
from society’s point of view.
policies that encourage the production and consumption of RAU milk like financial incentives
for subsidizing RAU milk producers, encouraging new entrants to the milk market by
increasing competition and encouraging new firms
policies to correct information failure in the conventional milk market
price ceilings (on farmers, fodder producers, processors or retailers) to bring down prices of
a necessary good quickly
privatization and creating a competitive market in the provision of fodder leads to more
efficient allocation of resources
encouraging producers to make voluntary price changes to avoid bureaucracy and opposition
breaking up the presumed cartel to create more competition
reducing tariffs or other trade barriers to encourage the import of low-priced milk
providing subsidies to milk producers.
Evaluation may include
problems associated with price ceilings such as excess demand for conventional milk which
has negative externalities of consumption and production
shortages, parallel markets, high administrative costs
disadvantages of privatization such as the possibility of higher prices for fodder
consumers don’t seem to care about high milk prices as they buy milk from the higher-price
sources (paragraph 9) so to regulate the market may be unnecessary
possibility of lower income for farmers
problems associated with subsidizing RAU milk
candidates may take a different approach which if appropriate, should be rewarded
Page 7 of 9
Page 8 of 9
References: (The texts are adapted from the following websites)
Manyi-Loh, Christy, et al. “Antibiotic Use in Agriculture and Its Consequential Resistance in Environmental Sources: Potential
Public Health Implications.” Molecules (Basel, Switzerland), U.S. National Library of Medicine, 30 Mar. 2018,
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6017557/.
Market for Milk from Cows Using Limited Antibiotics, https://www.foodprocessing.com.au/content/food-designresearch/news/market-for-milk-from-cows-using-limited-antibiotics-405112815.
Turner, Andy. “Cyprus Travel Guide: Places to Visit in Cyprus.” Cyprus Travel Guide | Places to Visit in Cyprus | Rough
Guides, Rough Guides, 26 Apr. 2021, https://www.roughguides.com/cyprus/.
Page 9 of 9