Mark Scheme

Section A — Multiple Choice Answer Key

1. B — Resources are scarce but human wants are unlimited.
2. B — The income he could have earned from rearing cattle.
3. B — Point Y only
4. B — What to produce?
5. C — The person who risks capital and organises production.
6. B — Price increases; quantity uncertain
7. C — A change in the price of tea.
8. B — Product X and Product Y are substitute goods.
9. B — A shortage of rice
10. B — Economies of scale
11. C — Steel for car bodies
12. C — One firm is the sole supplier in the market.
13. B — Oligopoly
14. B — Negotiating wage increases with employers
15. B — To reduce demand for cigarettes
16. B — 6.7%
17. C — Cyclical unemployment
18. C — Borrowers with fixed-rate loans
19. A — -$70 million
20. D — $2500 million
21. B — The proportion of income paid in tax falls as income increases.
22. B — Government spending exceeds government revenue.
23. C — Consumer spending decreases because saving becomes more attractive.
24. B — Reducing income tax rates to encourage work incentives
25. B — Exports become cheaper for foreign buyers.
26. B — Exports exceed imports
27. B — Country Y has better healthcare and education outcomes.
28. B — It allows countries to specialise according to comparative advantage.
29. B — Domestic steel producers
30. B — Imposing a tax on the polluting factories

Detailed Mark Scheme Guidance

Question 1: The basic economic problem is the foundation of economics. Accept B only. Option A refers to a specific government finance issue, not the fundamental problem. Option C describes inequality, not scarcity. Option D identifies a symptom, not the underlying problem.

Question 2: Opportunity cost is the next best alternative foregone. The farmer's opportunity cost is what he gives up (cattle rearing income), not what he spends or receives. Accept B only.

Question 3: Productive efficiency occurs when resources are fully employed and production is on the PPC frontier. Point X shows underutilisation (inefficiency). Point Y shows full utilisation (efficiency). Point Z is currently unattainable. Accept B only.

Question 6: Demand increases shifts the curve right (higher price, higher quantity). Supply decreases shifts the curve left (higher price, lower quantity). Both changes push price up, but quantity effect is uncertain (depends on magnitude of shifts). Accept B only.

Question 8: Positive cross elasticity of demand (+2.5) indicates substitutes (when price of X rises, demand for Y increases). Negative cross elasticity would indicate complements. Accept B only.

Question 10: When output increases and average cost per unit falls, the firm experiences economies of scale. Diseconomies occur when average costs rise. Accept B only.

Question 13: Oligopoly is characterized by a few large firms dominating the market. Here, firms A and B control 75% of the market. Accept B only. Not monopoly (multiple firms exist), not perfect competition (high concentration), not monopolistic competition (too few firms with large market shares).

Question 16: Unemployment rate = (Unemployed ÷ Labour force) × 100. Labour force = Employed + Unemployed = 28 + 2 = 30 million. Unemployment rate = (2 ÷ 30) × 100 = 6.7% (rounded to 1 decimal place). Accept B only.

Question 18: Borrowers with fixed-rate loans benefit from inflation because they repay loans with money that has less purchasing power. Savers, fixed-income workers, and pensioners all lose real income/wealth. Accept C only.

Question 19: Balance of trade in goods = Exports of goods - Imports of goods = 450 - 520 = -$70 million (deficit). Services are not included in balance of trade in goods (that would be balance of trade in services or current account balance). Accept A only.

Question 20: Multiplier = 1 ÷ (1 - MPC) = 1 ÷ (1 - 0.8) = 1 ÷ 0.2 = 5. Total increase in national income = Initial injection × Multiplier = $500 million × 5 = $2500 million. Accept D only.

Question 21: A regressive tax takes a higher proportion of income from lower earners than higher earners. As income rises, the proportion paid in tax falls. Accept B only. Option A describes progressive tax. Option C describes a poll tax (specific example of regressive tax, but not the definition). Option D is incorrect.

Question 24: Supply-side policies aim to increase productive capacity and efficiency of the economy. Reducing income tax to encourage work incentives is a supply-side measure. Accept B only. Option A is demand-side (fiscal expansion). Option C is demand-side (monetary policy). Option D is demand-side (fiscal/social policy).

Question 27: HDI (Human Development Index) measures health, education, and living standards, not just income. Country Y must have superior health/education despite lower GDP per capita. Accept B only.

Question 29: Tariffs on imported steel raise the price of imports, making domestic steel more competitive. Domestic steel producers gain market share and can charge higher prices. Accept B only. Consumers, foreign exporters, and retailers of imported goods all face higher costs/reduced sales.

Question 30: Negative externalities from pollution create market failure. Taxes on pollution internalize the external cost, causing the firm to reduce pollution. Accept B only. Subsidies (A) would worsen the problem. Interest rates (C) and unemployment benefits (D) are not targeted at externalities.

Sample Answers with Examiner Commentary

Question 20 — Sample Answers

Grade A (high distinction) answer*

The multiplier formula is 1 ÷ (1 - MPC). Given that the marginal propensity to consume is 0.8, the multiplier = 1 ÷ (1 - 0.8) = 1 ÷ 0.2 = 5.

The initial government spending injection is $500 million. Using the multiplier effect, the total increase in national income = initial injection × multiplier = $500 million × 5 = $2500 million.

Therefore, the answer is D: $2500 million.

Mark: 1/1

Examiner commentary: This is a perfect answer demonstrating complete understanding of the multiplier concept. The candidate correctly applies the multiplier formula, shows clear working, and reaches the correct answer. The response demonstrates mastery of the mathematical application required at IGCSE level, with accurate recall of the formula and precise calculation. The candidate identifies option D confidently based on sound economic reasoning.

Grade C (pass) answer

The multiplier is used to calculate the effect on national income. The MPC is 0.8, so the multiplier is 5. $500 million × 5 = $2500 million, so the answer is probably D.

Mark: 1/1

Examiner commentary: This candidate arrives at the correct answer and demonstrates basic understanding of the multiplier effect. While the working is less detailed than the A* response (no explicit formula stated, says "probably D"), the core calculation is correct and the candidate shows they understand that government spending is multiplied. In a multiple-choice paper, this receives full credit as the correct option was identified. In a structured question context, this would score lower marks due to limited explanation.

Grade E (near miss) answer

The government spends $500 million. The MPC is 0.8, which means people spend 80% of income. So the increase is $500 million × 0.8 = $400 million.

The answer is A: $500 million, because that's what the government spent.

Mark: 0/1

Examiner commentary: This candidate demonstrates a fundamental misunderstanding of the multiplier effect. They confuse the MPC (0.8) with the multiplier itself, and multiply the injection by 0.8 instead of calculating the multiplier as 1÷(1-0.8). Additionally, they contradict their own calculation by then selecting option A ($500 million), suggesting confusion about whether the multiplier causes any change at all. The candidate needs to understand that the multiplier shows how an initial injection creates multiple rounds of spending, generating a total effect larger than the original injection. This is a common error where students recognize the multiplier exists but cannot correctly apply the formula.

Question 6 — Sample Answers

Grade A (high distinction) answer*

When demand increases, the demand curve shifts to the right, causing both equilibrium price and quantity to rise. When supply decreases, the supply curve shifts to the left, causing equilibrium price to rise but equilibrium quantity to fall.

Since both changes push price upward, we can be certain that equilibrium price will increase. However, the effect on quantity is uncertain because the demand increase pushes quantity up while the supply decrease pushes quantity down. The final effect on quantity depends on the relative size of the two shifts.

Therefore, the answer is B: Price increases; quantity uncertain.

Mark: 1/1

Examiner commentary: This is an exemplary response showing sophisticated understanding of simultaneous shifts in demand and supply. The candidate systematically analyzes each shift separately, identifies the combined effect on price (both shifts increase price, so the result is certain), and correctly recognizes that quantity effects oppose each other, making the outcome uncertain. The explanation demonstrates clear economic reasoning and precise use of terminology ("equilibrium price," "shifts," "relative size"). This level of analysis would also score highly in structured questions.

Grade C (pass) answer

Demand increases means more people want the product, so price goes up and quantity goes up. Supply decreases means less is available, so price goes up but quantity goes down. Price definitely increases. Quantity might go up or down depending on which effect is bigger, so quantity is uncertain.

Answer: B

Mark: 1/1

Examiner commentary: This candidate reaches the correct answer with reasonable economic logic, though the explanation is less polished than the A* response. They correctly identify that both shifts affect price in the same direction (upward) and that quantity effects conflict. The language is more informal ("more people want the product") rather than using precise terminology ("rightward shift of the demand curve"), but the core understanding is sound. In a multiple-choice context, this receives full marks; however, in a structured question, the lack of economic terminology would limit the marks awarded.

Grade E (near miss) answer

When demand increases, price and quantity both increase. When supply decreases, price and quantity both decrease. So price is uncertain because one goes up and one goes down. Quantity is also uncertain for the same reason.

I think the answer is C: Price uncertain; quantity increases.

Mark: 0/1

Examiner commentary: This candidate has made a critical error in understanding supply shifts. They incorrectly state that a decrease in supply causes both price and quantity to decrease, when in fact a supply decrease causes price to rise and quantity to fall (movement along the demand curve). This fundamental misunderstanding leads them to conclude that price effects are uncertain (they are not — both shifts increase price) and to select option C, which is incorrect. The candidate needs to revisit the basic effects of demand and supply shifts on equilibrium, particularly understanding that supply decreases push price up, not down. This represents a common misconception where students confuse the direction of price and quantity changes following supply shifts.