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27 Scholarship Total mark: 15/24 Question 1 Overall, this answer meets the criteria of Scholarship, providing relatively good coverage of most of the key points in the question, effectively used economic models to illustrate their analysis and showing a competent level of economic analysis as well as integration of the resource material in places. To gain a higher grade, this candidate needed to cover all aspects of the question (e.g. the fall in milk prices is not addressed), provide greater depth (e.g. in explaining why dairy farms are examples of perfect competitors), and omit errors of economic theory. The candidate briefly outlines the characteristics of a perfectly competitive industry, though only vaguely connects these characteristics to dairy farming page 3. The candidate correctly outlines the basis on the law of diminishing returns page 3 and relates it generally to dairy farming. However, the candidate then incorrectly connects diminishing returns to a shift of the MC curve rather than to the shape of the marginal cost curve page 4. The candidate correctly illustrates the effect of rising costs on the perfect competitor, including a starting point of supernormal profit, and correctly identifies the decrease in profitmaximising output and the subsequent subnormal profit page 5. They accurately explain why the profit-maximising output falls and that the level of profit may depend on the level of debt of each dairy farm, showing a competent level of economic analysis and integration of the resource material. The candidate accurately illustrates the difference in cost structures that might apply to farms with differing levels of debt and to explain the likely difference on effect dairy farms in the long run page 6. Note that the candidate then goes on to explain the negative flow-on effect of a poorly performing dairy industry for the wider NZ economy. As this topic is outside the scope of the question, little credit can be given. Question Two Overall, the essay is judged to have reached Scholarship standard, being awarded a mark of 5, because the analysis was clear and logical, and the resource material was integrated competently. A more thorough evaluation of the impacts of a tax on sugar-sweetened drinks, including a detailed explanation of the impacts of differences in Price Elasticity of Demand, would have led to a higher grade. On page 11, the candidate explains the externalities associated with excess dietary sugar consumption, and how market failure occurs in the market for sugar-sweetened drinks.

28 The candidate then evaluates the case for government intervention on Page 12 and 13, including a recognising of the efficiency and equity trade-off that may exist when an intervention takes place. The candidate explains advantages and disadvantages of government intervention. Explanation and analysis of different types of government intervention and their effectiveness in achieving efficiency in the market included: a tax on sugar sales and advertising strategies that influence demand page 13 controls on sales, including within schools and public spaces graphic warnings on labels page 14. The candidate produces and effectively communicates a sophisticated economic analysis of externalities associated with sugar-sweetened drinks and of possible government interventions to address these. This demonstrates a high level of analysis and critical thinking. Question Three The candidate produces and effectively communicates a competent economic analysis of the impact that a high level of positive net migration might have on the output gap and inflationary pressures, and the reasoning the Reserve Bank will use in determining the most appropriate monetary policy settings in the near future. This demonstrates a sound level of analysis and critical thinking. However, the evaluation in the essay is inadequate. The description of the economy s potential output is partially incorrect in that it identifies labour as the only resource. A brief description is provided covering why an economy's potential output would be difficult to measure page 19. Inflationary and recessionary gaps are illustrated on an aggregate demand and aggregate supply model. The models contain minor errors in the labelling. A brief description of the inflationary and recessionary gaps is also provided. page 19/20 An explanation of why New Zealand has experienced positive net migration is provided on page 20. The candidate has integrated the resource material into the explanation, but this could have been done more thoroughly. The aggregate demand/aggregate supply model on the top of page 21, illustrates an increase in aggregate demand. The candidate should have shown the full employment line (Yf) shifting outwards due to more labour resources. An explanation is given providing reasons why aggregate demand would increase if there were an increase in net migration. An explanation is provided covering reasons why an increase in positive net migration could lead to an increase in aggregate supply. This change to aggregate supply due to positive net migration could have been illustrated on an aggregate demand/aggregate supply model to show how it would lead to a decrease in the price level. The explanation of why an increase in positive net migration would have an uncertain impact

29 on inflation is not communicated effectively, and the evaluation is inadequate. The evaluation of what type of monetary policy the Reserve Bank should introduce includes some of the factors described in the resource material. These factors were integrated in the evaluation. An explanation of how contractionary monetary policy would lead to a decrease in inflation is provided. This explanation did not add any benefit to the candidate because it was not part of the essay requirements.