A Level Economics H3 Practice Paper 2

TuitionGoWhere Practice Paper Answers — Economics H3 A-Level (Version 2)

Total Marks: 40
Paper: Practice Paper (Microeconomics Focus)

Section A Answers

1. [3 marks]

• Definition: Loss aversion is the tendency for individuals to feel the pain of losses more strongly than the pleasure of equivalent gains (1 mark).
• Application: A consumer may hold a losing investment because realising the loss is psychologically more painful than the hope of breaking even, leading to inertia (2 marks).
• Teaching note: This is bounded rationality; contrast with pure rational model where one cuts losses at marginal cost = benefit.

2. [3 marks]

• Tragedy of commons: When a resource is commonly owned, each user has incentive to maximise own catch since marginal benefit is private but marginal cost is shared (2 marks).
• Context: Villages overfish, depleting stock below sustainable level (1 mark).
• Common mistake: Confusing with public goods; here resource is rivalrous but non-excludable.

3. [3 marks]

• Adverse selection: Hidden information before contract (e.g., high-risk buyers more likely to insure) (1.5 marks).
• Moral hazard: Hidden action after contract (e.g., insured party takes more risk) (1.5 marks).

4. [3 marks]

• Nash equilibrium (pure strategies): A set of choices where no player can improve payoff by unilaterally changing strategy given others' choices (2 marks).
• Example: In a simple game, if both firms advertise and neither wants to switch alone, that is Nash (1 mark).

Section B Answers

5. [5 marks total] (a) [2] Nash equilibrium at (Moderate, Moderate) with (6,6): if BrewCo switches to Aggressive gets 4 (<6); if BeanInc switches gets 4 (<6). Also (Aggressive, Aggressive) is NOT because each can gain by switching to Moderate. So only (Moderate, Moderate). 2 marks for correct identification. (b) [3] Prisoner's dilemma requires dominant strategy to defect leading to worse joint outcome. Here Moderate is not dominant (Aggressive gives 8 if other Moderate). Joint best is (6,6) and achievable, so NOT prisoner's dilemma. 3 marks for explanation.

6. [4 marks]

• Coase: If property rights over fish catch are defined and tradeable, villages can negotiate internally to limit catch at lowest cost (2 marks).
• Permits assign rights; those valuing fishing most buy permits, efficient allocation (2 marks).

7. [4 marks]

• Mechanism: Pay above market wage → workers fear job loss more → reduce shirking (moral hazard) (2 marks).
• Limitation: Higher wage cost reduces profits; may not work if monitoring is impossible (2 marks).

8. [3 marks]

• Bounded will-power: Time-inconsistent preferences; people choose easy default (1 mark).
• Eye-level healthy food exploits default bias, increasing take-up without forbidding (2 marks).

Section C Answers

9. [6 marks] Evaluation

• Yes part: Asymmetric info causes market failure (adverse selection/moral hazard) → intervention (screening, regulation) can improve efficiency (3 marks).
• No part: Not always; private solutions (signalling, reputation) may suffice; intervention has cost and info problems (3 marks).
• Marking: 2 for valid point, 1 elaboration each side; conclusion worth 0 but expected.

10. [6 marks]

• Bias 1: Status quo bias → auto-enrol savings (2 marks).
• Bias 2: Loss aversion → frame as loss of future income if not saving (2 marks).
• Effect: Higher participation due to default and framing (2 marks).
• Marking descriptors: identification (2), mechanism (2), evaluation of effect (2).