Paper 1 Practice: Asteria’s Resource Choices
Original practice material
Asteria, its institutions and all numerical data below are fictional and were constructed for this practice case. They do not describe an actual economy.
Case Study: Protecting an island while meeting present needs
Extract 1: Scarce resources after repeated coastal flooding
Asteria is a small island economy. Its residents want safer neighbourhoods, reliable transport, healthcare, education and a wider range of household services. The island has limited land, skilled labour, construction equipment and public revenue. These resources have alternative uses.
Some construction workers are currently unemployed after several private projects were postponed. At the same time, the government cannot immediately employ every worker on coastal projects because engineering supervisors and specialised equipment are limited. Residents have also reported temporary shortages of bottled water after storms. The planning minister argues that unused labour does not mean Asteria has escaped scarcity.
Extract 2: Production possibilities
With current resources and technology fully and efficiently employed, Asteria can produce the combinations in Table 1 during one year. A coastal-resilience project is a standardised unit of drainage, flood-barrier or evacuation infrastructure. Household services are measured in thousands of service packages.
Table 1: Constructed annual production possibilities
| Combination | Coastal-resilience projects | Household-service packages (thousands) |
|---|---|---|
| A | 0 | 120 |
| B | 1 | 116 |
| C | 2 | 108 |
| D | 3 | 96 |
| E | 4 | 80 |
Actual production is initially two resilience projects and 92,000 household-service packages. A programme matching unemployed workers to existing vacancies could raise household-service production to 104,000 packages while resilience output remains at two projects. Separately, a new construction system could increase the maximum number of resilience projects possible with current labour and land.
Extract 3: How many drainage phases?
The government is considering four sequential phases of an urban-drainage programme. Analysts estimate each phase’s additional social benefit and additional social opportunity cost. The units are comparable index points; a higher number represents a larger estimated effect.
Table 2: Constructed marginal estimates
| Drainage phase | Marginal social benefit | Marginal social cost |
|---|---|---|
| 1 | 42 | 18 |
| 2 | 34 | 23 |
| 3 | 29 | 27 |
| 4 | 19 | 31 |
A feasibility study costing $6 million has already been completed and cannot be refunded. The estimates remain uncertain because the frequency of extreme storms and the value residents place on reduced disruption cannot be known precisely.
Extract 4: Present support or productive capacity?
Because public revenue and construction resources are limited, Asteria cannot implement every proposal immediately.
- Plan R would expand temporary housing assistance and subsidised household services during the next two years. It would give faster support to low-income residents but add little directly to productive capacity.
- Plan K would build drainage systems, train technicians and purchase productive equipment. It would reduce the resources available for present household services but might expand future productive capacity.
Business groups favour Plan K because fewer disruptions may improve future production. Community organisations argue that some households need immediate support and may receive little benefit from infrastructure located elsewhere. Engineers warn that poorly maintained projects may fail to produce the expected capacity gain. The government may divide resources between the plans, but doing so could delay both.
Questions
1
(a) With reference to Table 1:
(i) Calculate the opportunity cost of increasing coastal-resilience production from combination C to combination D. State the unit of your answer. [2]
(ii) Compare this opportunity cost with that of moving from combination B to combination C. [2]
(b) Explain why the unemployment described in Extract 1 does not remove Asteria’s problem of scarcity. [4]
(c) Using production possibility concepts, explain the difference between the effects of the worker-matching programme and the new construction system described in Extract 2. [4]
(d) Assess how the information in Extract 3 should influence the number of drainage phases undertaken. [8]
(e) Discuss whether Asteria’s government should allocate more of its current resources to Plan K rather than Plan R. [10]
[Total: 30]
Suggested use
Allow about 75 minutes. Answer every part and refer to the extracts or tables whenever the command or reasoning requires it.
Answers and marking guidance: Paper 1 Asteria Resource Choices — Answers.