Paper 2 Practice: Price Mechanism and Applications

Original topic practice

The contexts are fictional. This two-question set follows the 10+15 structure but is not a complete Paper 2.

Question 1: Pricing intercity rail travel

A rail operator is considering different fare changes for weekday commuters and weekend leisure travellers. It also expects household incomes and the price of coach travel to change.

(a) Explain how price, income and cross elasticities of demand can help the operator predict changes in rail demand and sales revenue. [10]

(b) Discuss whether differences in price elasticity of demand are sufficient for the operator to decide its fares. [15]

Question 2: Making rental homes affordable

The government of Norvia is considering a binding maximum rent, a subsidy to rental-home providers or measures that release more suitable land for construction.

(a) Explain how a binding maximum rent affects price, quantity demanded, quantity supplied and the allocation of rental homes. [10]

(b) Discuss which policy, or combination of policies, is most likely to improve access to affordable rental homes. [15]

Answer outlines: Paper 2 Price Mechanism — Outlines.