Unit 4: Evaluating Economic Models and Policies · 1520U40-1
WJEC A-level Unit 4, June 2018
All 12 written questions from WJEC A-level Unit 4 (June 2018), Evaluating Economic Models and Policies. Each question shows its marks and topic, with an examiner insight on 12, and opens the question paper and mark scheme at the right page.
Section A
Q1(a)
Explain what is meant by a contestable market and, using a diagram, explain why firms in a contestable market tend to earn only normal profit.
Mark splitKnowledge 6Analysis 4
TopicMarket structuresCosts, revenues and profit
Examiner insight
- What to cover
- Define contestability by low barriers to entry and exit and low sunk costs, with new entrants having access to the same technology as incumbents. The key mechanism is the threat of entry: incumbents cut price to normal profit level, or use limit pricing, to avoid attracting hit and run competition.
- Diagram
- Cost and revenue diagram with AR tangential to AC, so only normal profit is earned, and the abnormal profit case shown as the position that would invite entry.
- Watch out
- Any market can be contestable, including one that looks like a monopoly on concentration ratios. Do not simply describe long run equilibrium in perfect competition or monopolistic competition. The missing idea in most answers was that the threat alone is enough.
- How it went in the exam
- Examiners said very few candidates wrote confidently about contestability, and there was very little reference to sunk costs or shared technology.
Q1(b)
Discuss the view that firms in an oligopoly must always be heavily regulated in order to prevent collusion.
Mark splitKnowledge 6Analysis 6Evaluation 8
TopicMarket structures
Examiner insight
- What to cover
- Three blocks of knowledge are needed: oligopoly (few firms, interdependence, high concentration), collusion (overt and tacit, the incentive to act as a monopolist), and regulation (competition authorities, fines, price controls, breaking up cartels).
- Diagram
- If you use the kinked demand curve, draw it correctly with the discontinuous MR. Otherwise a joint profit maximising monopoly diagram is safer.
- Evaluation
- Attack always. It depends on the industry: supermarkets compete hard for market share, while oil producers with inelastic demand collude readily. Weigh the cost of regulation, the risk of regulatory capture and the fact that contestability or price wars may discipline firms anyway.
- Watch out
- Most answers were strong on collusion and weak on regulation, which is half the question. Not one script seen by the Principal drew the kinked demand curve and its MR correctly, and long Prisoners Dilemma detours were rarely made relevant.
- How it went in the exam
- The best answers were built on the nature of the specific industry, with real examples on both sides.
Q2(a)
Explain what is meant by monopoly and, using a diagram, explain why a monopoly may have lower average costs of production than a firm in perfect competition.
Mark splitKnowledge 6Analysis 4
TopicMarket structuresCosts, revenues and profit
Examiner insight
- What to cover
- Define monopoly properly, by price setting power and high barriers to entry, not just a large market share. Then give two reasons for lower average cost: economies of scale from large scale output, and abnormal profits funding investment and dynamic efficiency.
- Diagram
- Long run average cost curve showing the monopolist producing at a much larger scale and lower AC than the small perfectly competitive firm.
- Watch out
- The comparison is the question. Say why the perfectly competitive firm cannot get the same benefits: it is too small for scale economies and earns only normal profit, so it cannot fund investment. Keep the answer about average costs, not costs in general.
- How it went in the exam
- Examiners stressed that precision matters in part (a). Defining monopoly only by market share limited AO1 marks significantly.
Q2(b)
"Concentrated markets are always better for the economy than non-concentrated markets." Discuss.
Mark splitKnowledge 6Analysis 6Evaluation 8
Examiner insight
- What to cover
- Interpret concentration broadly, not just monopoly against perfect competition. Take the effects on a range of stakeholders and on the whole economy: prices and choice for consumers, scale economies and export competitiveness, investment and innovation, wages and employment, regional effects.
- Evaluation
- Attack always. It depends on contestability, regulation, whether scale economies are passed on, and whether the abnormal profits fund innovation. Use micro and macro perspectives.
- Watch out
- A pre learned essay comparing the efficiency of monopoly and perfect competition scores at best a low Band 2 here, because the question is much broader than efficiency. Get the meaning of concentrated and non concentrated right first.
- How it went in the exam
- Examiners saw whole centres reproduce the same rehearsed efficiency essay. The outstanding answers took a wider stakeholder view.
Section B
Q3(a)
Using an appropriate diagram, explain the process by which Neo-classical economists believe that the economy will always adjust to reach long-run equilibrium.
Mark splitKnowledge 6Analysis 4
TopicAggregate supplyDemand, supply and elasticity
Examiner insight
- What to cover
- Explain the neo classical belief as well as the mechanism: markets clear because wages and prices are flexible. From a negative output gap, factor costs fall, SRAS shifts right and output returns to the full employment level at a lower price level.
- Diagram
- AD, SRAS and a vertical LRAS, showing the temporary output gap and SRAS shifting to restore equilibrium at LRAS.
- Watch out
- Most candidates drew the diagram correctly but did not show understanding of the neo classical view itself, in particular flexible labour and product markets. That is where the extra marks were.
- How it went in the exam
- Examiners said this question scored quite highly overall, so the diagram alone is not a differentiator.
Q3(b)
Discuss the likely effectiveness of policies, other than the use of interest rates, to reduce the rate of inflation in an economy.
Mark splitKnowledge 6Analysis 6Evaluation 8
TopicMacroeconomic objectives and policyMeasuring economic performance
Examiner insight
- What to cover
- Exclude interest rates. Cover contractionary fiscal policy and supply side policies, and go further for credit: reversing quantitative easing, using the exchange rate, and direct wage or price controls. Explain exactly why inflationary pressure falls in each case.
- Diagram
- AD and AS, but use it as a tool: name the component of AD or the cost that changes, rather than just showing the price level fall.
- Evaluation
- Answer the question of effectiveness, not side effects. A policy that raises unemployment only counts here if you link the larger pool of labour to weaker wage pressure and so to lower inflation. Distinguish demand pull from cost push causes.
- Watch out
- The commonest evaluation error was listing unwanted side effects instead of judging whether the policy actually reduces inflation.
- How it went in the exam
- Examiners rewarded imaginative policy choices and answers that looked beyond the UK to how other economies tackle inflation.
Q4(a)
Using an appropriate diagram, explain why Keynesian economists believe that government intervention is often essential for decreasing cyclical unemployment.
Mark splitKnowledge 6Analysis 4
TopicMeasuring economic performanceGovernment intervention in markets
Examiner insight
- What to cover
- The question is why intervention is essential, not just how. Explain the Keynesian view that the economy is not self correcting: sticky wages from contracts, unions and minimum wages mean SRAS does not shift back, so a negative output gap persists and only a boost to AD closes it.
- Diagram
- Keynesian AS curve with a horizontal or shallow section, AD shifting right to close the deflationary gap.
- Watch out
- Cyclical unemployment is caused by a lack of demand. Do not write about seasonal or structural unemployment. Link sticky wages to the failure to self correct, otherwise the knowledge earns nothing.
- How it went in the exam
- Examiners said many explained how governments intervene but not why Keynesians think it is essential, which was the actual question.
Q4(b)
Assess the extent to which a fall in unemployment is always desirable.
Mark splitKnowledge 6Analysis 6Evaluation 8
TopicMeasuring economic performance
Examiner insight
- What to cover
- Give the benefits of falling unemployment (output, incomes, tax revenue, lower benefit spending, social effects) and the costs (wage and demand pull inflationary pressure, skill shortages, a possible current account effect through higher imports).
- Diagram
- Phillips curve, or AD and AS with AD near full capacity, showing the price level effect.
- Evaluation
- Pick fewer points and go deeper. Take a range of perspectives: different countries, economies at different stages of development, and which type of unemployment is falling.
- Watch out
- Do not confuse a budget deficit with a current account deficit, and do not assume higher tax revenue automatically means higher government spending. Both errors appeared across the paper.
- How it went in the exam
- Many candidates hit top of Band 3 for AO1 but only top of Band 2 for AO3 and AO4, because each point was too thin. Depth beats coverage.
Section C
Q5(a)
Explain the factors that may result in an improving terms of trade index.
Mark splitKnowledge 6Analysis 4
TopicInternational trade and exchange rates
Examiner insight
- What to cover
- Define the terms of trade as the index of export prices divided by the index of import prices times 100. An improvement means export prices rising relative to import prices. Explain the causes: a stronger exchange rate, higher world commodity prices for exports, rising domestic inflation, changing demand for exports.
- Diagram
- Not essential. If used, an exchange rate diagram showing appreciation raising export prices in foreign currency.
- Watch out
- The terms of trade is not the same as international competitiveness, and an improvement can go with worse competitiveness. Get the formula the right way up and remember it is prices, not volumes.
- How it went in the exam
- This was the worst answered question on the paper. Candidates who wrote the formula correctly generally went on to score very high marks.
Q5(b)
Evaluate the view that running a current account surplus is always better than running a current account deficit for LEDCs.
Mark splitKnowledge 6Analysis 6Evaluation 8
TopicInternational trade and exchange ratesMeasuring economic performance
Examiner insight
- What to cover
- Take the LEDC case specifically. A surplus builds reserves and reduces dependence on borrowing, but a deficit lets an LEDC import capital goods and technology needed for development. Set the current account within the whole balance of payments, including the financial account.
- Evaluation
- Attack always. It depends on what the deficit funds: capital imports for growth or consumer goods. Consider how the deficit is financed, the exchange rate effect and the sustainability of the debt.
- Watch out
- Three recurring errors: confusing the current account with government current spending, using the old two account version of the balance of payments, and assuming the government receives the revenue from a current account surplus. That revenue goes to businesses.
- How it went in the exam
- Examiners rewarded answers that engaged with the financial account counterpart of a surplus, which very few did.
Q6(a)
Explain how and why a "resource curse" may develop in an economy.
Mark splitKnowledge 6Analysis 4
Examiner insight
- What to cover
- Explain the mechanism, not just a list of harms. Heavy exports of one commodity raise demand for the currency, the exchange rate appreciates, and other export sectors become uncompetitive and decline. Add volatile commodity prices, revenue dependence and rent seeking or corruption.
- Diagram
- Foreign exchange market with demand for the currency rising, plus a simple comparison of the declining manufacturing sector.
- Watch out
- The core idea is that over dependence on one resource damages other sectors. Listing the negative consequences of exploiting a resource is not the same thing.
- How it went in the exam
- Full marks went to candidates who explained the exchange rate channel and its effect on other exporters.
Q6(b)
Discuss the extent to which governments of all LEDCs should encourage inward foreign direct investment (FDI).
Mark splitKnowledge 6Analysis 6Evaluation 8
TopicInternational trade and exchange ratesAggregate demand
Examiner insight
- What to cover
- Use the full meaning of FDI, which is investment in productive assets across borders, not only inward activity by multinationals. Give the gains: capital, technology transfer, jobs, training, tax revenue, export capacity. Then the costs: profit repatriation, transfer pricing, environmental and labour standards, and the crowding out of local firms.
- Evaluation
- Should all LEDC governments encourage it is the question. FDI has different consequences in different economies, so distinguish by sector, by the strength of institutions and by the terms of the deal. Use a range of country examples.
- Watch out
- FDI is not a plural noun and does not mean multinationals themselves. Very few candidates reached full marks, mostly because of this narrow reading.
- How it went in the exam
- The best answers used several examples and argued that the effect varies by economy rather than giving a single verdict.
Question text is quoted from the question papers, © WJEC CBAC Ltd, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.