Questions (a) Explain the impact of US legislation increasing the proportion of ethanol to be included in petrol on the market for

corn. [4m] (b) Using a demand and supply diagram, explain the reasons for the rise in tortilla prices. [6m] (c) (i) Identify the type of government policy that has been implemented to prevent the rising prices of tortillas. [1m] (ii) Using a diagram, explain the effects on the market for tortillas should the voluntary price cap be effective. [3m]

(d) Discuss whether the two policies implemented by the Mexican government will be beneficial to society. [6m] Total: 20m

Answers to Questions
(a)Explain the impact of US legislation increasing the proportion of ethanol to be included in petrol on the market for corn. [4m]

Question analysis: for impact on market always analyze impact on equilibrium price & qty of market

Govt policy to increase proportion of ethanol to be included in petrol will increase demand for ethanol [1m] Increased demand for ethanol will increase demand for corn since corn is a factor of production for ethanol [demand for corn is a derived demand derived from demand for ethanol] [1m] Increased demand for corn will lead to an increase in equilibrium price & qty [1m] Explain price adjustment mechanism: at original equilibrium price, an increase in demand leads to Qdd>Qss and therefore a shortage price will rise to new equilibrium as consumers offer higher prices [1m]

Diagram illustrating increase in DD should be drawn as it is useful for illustration

(b)Using a demand and supply diagram, explain the reasons for the rise in tortilla prices. [6m]

From extract, take note of the impact of changes in the market for corn on the market for tortillas and relationship between the 2 goods. Corn is a factor of production for tortillas.

Increased demand of corn for ethanol production has led to increase in Qss of corn used for ethanol production. This will decrease SS of corn for food production (i.e. tortilla production) since corn used for ethanol production and corn used for tortilla production are competitive in supply. [1m]

At the same time, speculative buying for corn (expectation that prices of corn will increase in the future due to high demand for corn for ethanol production) will lead to an increase in demand for corn now. [1m]

Decrease in SS of corn and increase in DD for corn will increase prices of corn significantly. [1m]

Increase in prices of corn will increase the cost of production of tortillas and cause SS of tortillas to fall increase in prices of tortillas [1m]

Explain price adjustment mechanism for increase in prices of tortillas. [1m]

Diagram to illustrate decrease in SS of corn and increase in DD for corn OR diagram showing fall in SS of tortillas with price adjustment mechanism [1m] (c) (i) Identify the type of government policy that has been implemented to prevent the rising prices of tortillas. [1m]

Price ceiling. Define price ceiling.

(ii) Using a diagram, explain the effects on the market for tortillas should the voluntary price cap be effective. [3m]

Shortage results as Qdd > Qss as price ceiling is set below the equilibrium price. [1m] Black market results. [1m] Diagram of price ceiling. [1m]

(d) Discuss whether the two policies implemented by the Mexican government will be beneficial to society. [6m]

Question Analysis: impact on society evaluate according to welfare to society i.e. impact on consumers, producers and government impact on consumers and producers consumer and producer surplus accordingly discuss question requires argument + counter-argument

Introduction: identify 2 policies and explain effects using economic analysis both result in lower prices of tortillas Voluntary price cap on tortillas acts as a price ceiling, price is set below equilibrium price reduced price of tortillas Allowing duty-free imports of corn lower cost of production for tortillas due to lower prices of corn increase SS of tortillas lower prices of tortillas

Thesis/Argument: 2 policies are beneficial to society Lower prices would mean consumer surplus beneficial for consumers o Show on diagram for both price ceiling and increase in SS due to duty-free imports of corn Note that in the case of a price ceiling, only consumers who are able to get the good benefit (from qty 0 to Qss)

Lower prices would allow lower-income consumers to consume tortillas which are a necessity (social reason) income redistribution Firms benefit from duty-free imports of corn lower cost of production higher revenue if prices remain the same

Anti-thesis: 2 policies are not beneficial to society

Price ceiling results in a shortage where Qdd > Qss and a deadweight loss for society o However, note that the price cap is voluntary and therefore, not all firms may price at 78 cents as recommended. Shortage could result in consumers bidding prices upwards and firms raising prices to equilibrium Since the price cap is voluntary, the price ceiling may not be effective and may not generate a shortage in the first place

Lower prices mean a loss in producer surplus for firms

Synthesis: weigh argument and counter-argument which is more plausible? Convincing? Voluntary price cap may not be effective since it is purely voluntary government will not be able to fix prices due to market forces negative effects of price ceiling may not occur Duty-free imports of corn likely to benefit both producers and consumers, should producers pass on the reduced cost of production to consumers in the form of lower prices Given benefits are most likely to materialize, but negative effects of policy may not policy likely to be more beneficial than detrimental

Level 1 2

Descriptor Unable to identify or explain effects of policies. Explanation of how policies work contains serious conceptual errors. Able to explain effects of policies on society without conceptual errors. Only 1 policy explained or answer is one-sided, max 3m. Explanation contains errors in application of concepts, max 3m. 4m explanation of effects of policies on society but detail is lacking or examples are insufficient.

Mark Range 1-2 3-4

Able to explain effects of both policies on society with

5-6

sufficient detail and good examples and how they are beneficial or not beneficial to society. Gives conclusion/stand on whether the policies are beneficial or not. For 6m a clear stand is given and stand is justified using economic concepts