A Level Economics H3 Practice Paper 3

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TuitionGoWhere Practice Paper - Economics H3 A-Level

TuitionGoWhere Practice Paper (AI) — Version 3

Subject: Economics H3
Level: A-Level
Paper: Practice Paper (Microeconomics Focus)
Duration: 1 hour 30 minutes
Total Marks: 50
Name: ______________________
Class: ______________
Date: ______________

Instructions:

• This practice paper is generated from syllabus-first inference. No past-year exam templates were available; content is not exam-derived.
• Answer all questions in Section A and Section B.
• Section A tests data interpretation and application (AO1 and AO2). Section B tests extended reasoning (AO2).
• Use a calculator where helpful.
• Write clearly and show reasoning for all marks.

Section A: Microeconomics Applications (30 marks)

1. [3 marks] A ride-hailing firm observes that after a price surge, existing users keep using the service but new users delay signing up. Using bounded rationality, explain one bias that may cause existing users to remain despite higher prices.

2. [4 marks] The following table shows payoffs (in $ million profit) for two coffee chains, BrewCo and BeanInc, choosing between "Aggressive Promotion" and "Stable Price".

	BrewCo: Aggressive	BrewCo: Stable
BeanInc: Aggressive	(4, 4)	(8, 2)
BeanInc: Stable	(2, 8)	(6, 6)

Identify the Nash equilibrium in pure strategies and explain your reasoning.

3. [3 marks] A government introduces tradable pollution permits to address a tragedy of the commons in a river fishery. State one condition required for the Coase Theorem to efficiently resolve the externality.

4. [4 marks] An insurer cannot observe a driver's true risk level. Explain how adverse selection may arise in this market and suggest one policy measure to reduce it.

5. [3 marks] A consumer refuses to cancel a gym membership she never uses because she already paid a joining fee. Name the fallacy illustrated and define it briefly.

6. [4 marks] Using the concept of competitive advantage, identify two of Porter's five forces that are most relevant when a new entrant threatens a dominant supermarket, and explain why.

7. [3 marks] A nudge places healthier snacks at eye level in a school canteen. State whether this is a change in incentives or a change in choice architecture, and explain.

8. [3 marks] A fisherman overuses a shared lake because he bears none of the depletion cost. Name the market failure and the type of good typically involved.

9. [3 marks] Define "loss aversion" and give one everyday example relevant to student spending.

Section B: Extended Microeconomics Reasoning (20 marks)

10. [10 marks] A smart-meter firm offers households a dynamic pricing plan: electricity is cheaper at night but expensive at peak. Some households procrastinate switching despite savings.
(a) Explain the behavioural concept of time-inconsistent preferences. [4]
(b) Evaluate how a default-enrolment nudge could improve household welfare, using bounded will-power. [6]

11. [10 marks] Two mobile game developers, PixCorp and PlayHub, must choose between "High Quality Update" and "Quick Cash Grab". Payoffs (in $m) are:

	PixCorp: High Quality	PixCorp: Cash Grab
PlayHub: High Quality	(10, 10)	(3, 14)
PlayHub: Cash Grab	(14, 3)	(5, 5)

(a) Identify the prisoner's dilemma outcome and the Nash equilibrium. [4]
(b) Discuss one strategy beyond pricing that could sustain cooperation. [6]

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TuitionGoWhere Practice Paper Answers — Economics H3 A-Level (Version 3)

Section A: Microeconomics Applications (30 marks)

1. [3 marks]
Answer: Status quo bias (or endowment effect).
Teaching note: Bounded rationality describes limits on rational choice. Status quo bias is the tendency to stick with current behaviour even when costs rise. Existing users stay because they are anchored to their prior habit (not because marginal benefit > marginal cost).
Marking: 1 mark for naming bias, 2 marks for correct application to ride-hailing context.

2. [4 marks]
Answer: Nash equilibrium = (BeanInc: Stable, BrewCo: Stable) with payoff (6, 6).
Working: Check each cell: If BeanInc chooses Stable, BrewCo's best response is Stable (6 > 2). If BrewCo chooses Stable, BeanInc's best response is Stable (6 > 8? No: 8 if Aggressive—wait: row BeanInc Stable, col BrewCo Aggressive = (2,8); col BrewCo Stable = (6,6); BeanInc gets 6 vs 2, so Stable). For Aggressive: BeanInc Aggressive, BrewCo Stable gives BeanInc 8 > 4, so Aggressive; BrewCo Aggressive gives BrewCo 4 > 2. So (Aggressive, Aggressive) is also Nash? Check: BeanInc Aggr → BrewCo best Stable (2<4? BrewCo gets 4 in Aggr, 2 in Stable, so BrewCo Aggr). BrewCo Aggr → BeanInc best Aggr (4<8? BeanInc gets 8 in Stable? Wait table: BeanInc Aggr/BrewCo Stable = (8,2) means BeanInc 8. So if BrewCo Stable, BeanInc prefers Aggr (8>6). Thus (Aggr, Stable) not stable. Only (Stable, Stable) where both earn 6 and neither deviates profitably.
Marks: 2 for equilibrium, 2 for reasoning.

3. [3 marks]
Answer: Low transaction costs / clearly defined property rights.
Teaching: Coase Theorem needs negotiable rights and negligible bargaining cost.
Marks: 1 + 2 for condition explanation.

4. [4 marks]
Answer: Adverse selection: high-risk drivers hide risk to get cheap insurance, raising average cost. Measure: screening via telematics.
Marks: 2 for explanation, 2 for measure.

5. [3 marks]
Answer: Sunk cost fallacy; continuing due to unrecoverable past payment.
Marks: 1 name, 2 definition.

6. [4 marks]
Answer: Threat of new entrants, bargaining power of customers.
Reason: New entrant changes rivalry; customers can switch.
Marks: 2 forces, 2 explanations.

7. [3 marks]
Answer: Choice architecture; nudge alters presentation not price.
Marks: 1 + 2.

8. [3 marks]
Answer: Tragedy of commons; common-pool resource.
Marks: 1 + 2.

9. [3 marks]
Answer: Loss aversion = losses felt more than gains. Example: keeping unused notes rather than selling at slight loss.
Marks: 1 def, 2 example.

Section B (20 marks)

10. [10 marks]
(a) [4] Time-inconsistent preferences: preferences change over time; plan to save later but act now.
(b) [6] Default enrolment uses bounded will-power; people stay enrolled, gain savings. Evaluate: welfare up if rational savings > procrastination loss.
Marks: 4 + 6 descriptors.

11. [10 marks]
(a) [4] Prisoner's dilemma: both choose Cash Grab (5,5) though High Quality (10,10) better. Nash = Cash Grab/Cash Grab.
(b) [6] Strategy: reputation/long-term contract.
Marks: 4 + 6.