2018 H2 Economics Paper 1 Case Study 1: Suggested Answers
The case study examines fiscal policies for health improvement, using sugar-sweetened beverages as the lens to test elasticity, branding, rational consumer choice, and whether a tax is the best way to deal with the over-consumption of an unhealthy good.
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A two mark calculation, from Extract 1, of the price elasticity of demand for sugar-sweetened beverages given that a 20 per cent rise in price reduces consumption by 24 per cent.
Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.
Substituting the figures, PED equals minus 24 per cent divided by plus 20 per cent.
PED equals minus 1.2.
Show the formula, substitute the two percentages correctly, and arrive at minus 1.2 with the sign.
Tests: PED and PES
A two mark explanation of one possible factor that could lead to the price elastic value calculated.
One factor is the proportion of income spent on the good, which is large for low income and younger consumers. Goods that take up a larger share of a consumer's income tend to have more price elastic demand, since these consumers are more sensitive to a price rise and so cut back proportionately more, giving the elastic value observed.
An alternative factor is the degree of necessity. Sugar-sweetened beverages are non-essential rather than necessities, so when their price rises consumers readily reduce consumption or switch to alternatives, making demand price elastic. Students should select any one factor.
One factor, clearly linked to why demand for the good is price elastic.
Tests: PED and PES
A one mark question naming the economic concept that measures the relationship between the price change of one good and the resulting change in demand for another.
Cross elasticity of demand (XED).
Name cross elasticity of demand.
Tests: YED and XED
A three mark question explaining the value you would expect from that measurement, using the extract figures for the change in water purchases and in taxed beverage sales.
Cross elasticity of demand is the percentage change in quantity demanded of one good divided by the percentage change in the price of the other good. From the extract, purchases of water and non-taxed beverages rose by about 4 per cent while sales of the taxed beverages fell by about 6 per cent.
Working back through the elastic value of minus 1.2 for the taxed beverages, a 6 per cent fall in quantity implies a price rise of about 5 per cent on those beverages. Substituting into the XED formula gives 4 per cent divided by 5 per cent, which is about 0.8.
Since the value is positive, the two goods are substitutes, as a higher price for the taxed beverage raises demand for water. Because the value is below 1, they are weak rather than close substitutes.
Define XED, derive the implied price change, compute a positive value below 1, and interpret it as weak substitutes.
Tests: YED and XED
A four mark question on two economic reasons why producers spend heavily to strengthen brands and differentiate their products.
Influencing tastes and preferences. Successful branding builds recognition and loyalty, raising consumer preference for the firm's product. Demand shifts rightward, raising the quantity demanded at any price and so raising total revenue. As long as the gain in revenue outweighs the marketing cost, profit rises, and the firm also gains an identity that is harder for rivals to imitate.
Lowering price elasticity of demand. Differentiation makes the product seem unique and less substitutable, which lowers its PED. With less elastic demand the firm can raise price without a proportionate loss of sales, giving it pricing power that supports higher revenue and more flexibility to manage cost pressures.
An alternative reason is the effect on cross elasticity of demand: a highly differentiated product is less substitutable, so a lower XED insulates it from rivals' price cuts and stabilises revenue. Students should select any two reasons.
Two distinct reasons, each linked to demand, revenue or elasticity and developed to a profit outcome.
Tests: YED and XED, Monopolistic competition
An eight mark discussion of whether consumers could ever make rational decisions regarding their consumption of sugar-sweetened beverages.
- Set up the rational consumer who weighs marginal utility against price subject to a budget constraint.
- Build the case that a rational decision is possible by identifying the sources of utility a consumer compares against the price.
- Bring in the budget constraint and opportunity cost as a further check on the decision.
- Introduce the condition under which rationality breaks down, and explain the mechanism by which it distorts choice.
- Reach an evaluative judgment on when consumers can and cannot decide rationally, stating what it depends on.
This part is gated. The full model answer with the marginal utility reasoning, the information failure argument and the evaluative judgment, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
A ten mark discussion of whether fiscal intervention is the best government policy to deal with the problems caused by the over-consumption of sugar-sweetened beverages.
- Frame the over-consumption as a market failure and define fiscal intervention as the policy under test.
- Develop the tax route as one fiscal tool and reason through the conditions under which it corrects the failure.
- Develop a second fiscal tool aimed at the healthier alternative and its own limitation.
- Introduce a non fiscal policy that targets a different root of the problem and weigh its strengths and weaknesses.
- Compare fiscal against non fiscal measures and conclude with a supported judgment on the best approach.
This part is gated. The full model answer with the negative externality and tax diagram and the evaluative judgment, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Questions students ask
Where can I get the full worked answers to the 2018 H2 Economics paper 1 case study 1?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2018 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How are these case study suggested answers structured?
The lower mark parts are answered in full. The higher mark parts are outlined here, with the full worked answers reserved for the ETG TYS Answers book and the TYS Crashcourse.
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