13 Economics — Test One
ASSESSMENT SCHEDULE
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QUESTION ONE: PRODUCTION POSSIBILITY CURVES
Farmer Matt has some spare land that can be used for producing flowers or free-range eggs. The
table below shows the different combinations possible.
Production Possibilities
Combination Bunches of flowers
Free-range eggs
A
0
10 000
B
200
9 000
C
400
7 000
D
500
4 000
E
550
0
Production Possibilities for Farmer Matt
Flowers (Bunches)
4 of the following:
 Title
 Axis label
 Frontier
labels
 Scales
 Accurate
plotting
E
500
D
C
400
300
A2
B
200
100
2000
4000
6000
8000
A
10000
Free Range eggs
1.
On the graph above, construct a fully labelled and accurate production possibility curve from the
data provided.
2.
What is the opportunity cost for Farmer Matt in moving from combination B to combination C?
2000 free range eggs
A2
3.
Explain why the production possibility curve you have drawn is concave to the origin.
Because resources are not perfect substitutes diminishing returns occur, leading to increasing opportunity costs
4.
M2
Other than the production possibility curve, what is ONE piece of information that Farmer Matt
should consider when deciding what combination of flowers and eggs to produce?
The market price of flowers and eggs
5.
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A2
The Ministry of Agriculture and Fisheries has discovered a new pest that will destroy some of the
flowers Farmer Matt is intending to grow. Show the effect of this pest on the production possibility
curve you have drawn, above.
Any line drawn inside the original that starts at 10,000 eggs
A2
QUESTION TWO: UTILITY AND DEMAND
Hannah is an economics student who likes drinking espresso coffee.
1.
Complete Table 1.
Table 1: Hannah’s Utility Schedule for Espresso Coffee (per day)
Number of
Total Utility
Marginal Utility
Cups
(cents)
(cents)
300
1
300
2.
2
500
200
3
650
150
4
750
100
5
800
50
5/6
A1
Define the Law of Diminishing Marginal Utility.
As consumption increases, MU falls. The rational consumer will seek to maximize satisfaction where P=MU,
therefore only purchasing greater quantities as price falls. This is how the demand curve is derived
Clearly explained
A1
3.
Use the information in Table 1 to complete Hannah’s Demand Schedule for Espresso
Coffee in Table 2.
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Table 2: Hannah’s Demand Schedule for
Espresso Coffee
(cups per day)
Price ($)
Quantity Demanded
4.
1.00
4
1.50
3
2.00
2
2.50
1
3.00
1
A1
For each of the events below:
(a) identify ONE factor that would cause the event
(b) use the graph provided to show how demand for espresso coffee will be affected by the
event.
Event 1: An increase in the quantity demanded of
espresso coffee by Hannah.
Price
p
Cause:
a FALL in the price of espresso coffee
both
A3
p’
D
q
Event 2: An increase in demand for espresso coffee
by Hannah.
q’ Quantity
Price
Cause:
D’
Increase in price of (substitute good / fall in price of
(complimentary good) / increase in income / tastes
D
Quantity
both
A3
5.
Use the Law of Diminishing Marginal Utility to help you explain why demand curves usually slope
downward to the right.
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Consumers seek to maximize utility from their purchases, although MU falls as consumption rises. The optimal
purchase rule states that consumers will purchase up to the point where MU=P, so as MU falls at greater
M1
quantities, so must the price for consumers to be willing and able to purchase the good
QUESTION THREE: ELASTICITY
Chris who works for a pizza takeaway noted that when the company lowered the price of large pizzas
from $14.00 to $11.00, sales increased from 2300 to 3500 per week.
1.
Use the mid-point formula to calculate the price elasticity of demand coefficient for pizzas over the
price range of $14.00 to $11.00 (show your working).
1200/2900 X 12.50/3 =
15000/8700
price elasticity of demand=
2.
1.72 (2dp)
A3
(a) Using you result from Q1, identify whether the demand for pizza is elastic or inelastic?
Elastic (>1)
must match answer to Q1
A3
(b) Suggest the most likely reason for the coefficient you calculated in Q1 above.
Elastic: many close substitutes / luxury item
A3
Inelastic: few substitutes / necessity
must match answer to Q2
3.
‘Price cutting’ suggests pizza companys believe the demand for their pizzas is price elastic.
Explain why.
If a good is price elastic, then a change in price causes a proportionately greater change in the quantity
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M1
demanded. So…
… a cut in the price will lead to a larger increase in sales, and revenues will increase.
OR
… Pizza companies acknowledge that there are many close substitutes for their product,
Chris was able to calculate a coefficient of cross elasticity of demand for pizzas and hamburgers.
4.
(a) The cross-elasticity coefficient calculated will be:
Positive
Negative
(circle one)
(b) Explain why the coefficient has the value you identified in (a) above.
Pizzas and hamburgers are substitute goods, so a rise in the price of one will lead to a rise in the quantity
demanded pf the other. This is a positive relationship yielding a positive elasticity coefficient .
For Assessor’s Use only
Achievement Criteria
Achievement
Merit
Use marginal analysis to
derive the demand
Use marginal analysis to
explain changes in output and
pricing decisions.
Describe the economic problem.
Explain the economic problem
Use concepts of demand
Explain concepts of demand
Excellence
Overall Level of Performance (all criteria within a column are met)
two A1s or better
two A2s or better
three A3s or better
plus one M1
one M2 or M3
plus two more Ms
M3