1) (i) Explain what is meant by price elasticity of demand and provide at least one example to support your explanation. [15 marks]
(ii) Describe why the demand for some goods is price inelastic. [15 marks]
2) A small London-based health and beauty business is able to produce 9,000 units of beauty products annually. According to available research, the market will take up all of this output at a price of £8 per unit. The firm’s cost structure is as follows:
Direct labour costs £1.50 per unit
Raw materials costs £0.50 per unit
Other variable costs £1.00 per unit, including normal profit
The total fixed costs are £27,000 a year
Calculate:
The average fixed cost [10 marks]
The average variable cost [10 marks]
The average total cost [10 marks]
3) Imagine the fictitious island of Xanadu has an economy that can produce only carrots and potatoes.
(i) Explain the possible effects on the economy’s production possibility curve (PPC) of an advance in technology affecting the production of both carrots and potatoes. [20 marks]
(ii) What if the advance in technology only affected the production of carrots? [20 marks]
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