Paper 2 Practice: The Central Economic Problem

Original practice material

The places and situations below are fictional. Each question follows the 10-mark plus 15-mark structure, but this two-question topic set is not a complete six-question Paper 2.

Question 1: Allocating scarce waterfront land

The city of Meridia owns a waterfront site. The land could be used for public housing, a technical college, a public park or flood-protection infrastructure. Each project can be built at more than one feasible scale, and some compatible uses may be combined. Officials possess incomplete information about future population, climate risk and how different residents value each option.

(a) Explain how opportunity cost and marginal analysis can guide Meridia’s government when deciding how to use the waterfront site. [10]

(b) Discuss the view that Meridia’s government should choose the feasible use, or combination of uses, with the greatest estimated net benefit. [15]

Question 2: Current consumption and future possibilities

The economy of Lydora currently produces consumer goods and capital goods on its PPC. Its government proposes incentives that would shift resources from current consumer-goods production toward machinery, worker training and production technology.

(a) Explain why producing additional capital goods may involve increasing opportunity cost and how successful investment may affect Lydora’s PPC. [10]

(b) Discuss whether allocating more resources to investment is necessarily the best way to improve Lydora’s living standards over the next decade. [15]

Answer outlines: Paper 2 Central Economic Problem — Outlines.