Question 23M.1.HL.TZ2.1
| Date | May 2023 | Marks available | [Maximum mark: 25] | Reference code | 23M.1.HL.TZ2.1 |
| Level | HL | Paper | 1 | Time zone | TZ2 |
| Command term | Discuss, Explain | Question number | 1 | Adapted from | N/A |
Explain why products may have different income elasticities of demand.
[10]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: income elasticity of demand (YED)
- Explanation: that a positive YED is where an increase in income leads to an increase in demand/a decrease in income leads to a decrease in demand and that this is associated with normal goods; that a negative YED is where an increase in income leads to a decrease in demand/a decrease in income leads to an increase in demand and that is associated with inferior goods; that some goods may have a high income elasticity of demand (ie income elastic) and some may have a low income elasticity of demand (ie income inelastic).
- Diagram: demand and supply diagram showing relevant shifts of demand, Engel curve.
A maximum of [6] should be awarded if only one aspect of the question is addressed.
Assessment Criteria
Part (a) 10 marks
For many candidates this was a very straight forward question which they answered to a good standard. However, a significant number of candidates confused income elasticity with price elasticity of demand and were therefore unable to make much progress with their response. Concepts such as normal and inferior goods were often not mentioned.
Using real-world examples, discuss the assumption that consumers always seek to maximize their utility.Â
[15]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: utility.
- Explanation: of the assumption in terms of consumer rationality, perfect information and the maximization of total utility.
- Diagram: not needed for this question.
- Synthesis (discuss): a challenge to the assumption in terms of the limitations to rational consumer choice such as imperfect information, bounded rationality, bounded selfishness, biases – rule of thumb, anchoring and framing, availability; consideration of the word “always”.
- Examples: real-world examples of consumers acting rationally or where there are limitations to their ability to do so.
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Assessment Criteria
Part (b) 15 marks
This question proved a challenge for a number of candidates who seemed to have little understanding of relevant theory, some tried to make the response about negative externalities of consumption rather than looking at the factors such as imperfect information, bounded rationality and bias and so forth that might restrict an individual consumer s effort to maximize utility. Good candidates paid attention to the use of the word "always" in the question. Many responses were limited in detail and would have benefited from a more considered use of real-world examples. Diagrams were not expected for this question.