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2281 · 2.11

Mixed economic system — practice questions

Practice and worked examples for 2281 Mixed economic system. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Compare how a market economy and a planned economy would respond to rising demand for electric vehicles.

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Market economy: Higher consumer demand shifts demand right → price rises → profit incentive attracts firms → supply expands; resources (labour, capital) reallocate via price signals. Firms that fail to adapt lose market share.

Planned economy: Central planners may set EV production quotas, allocate steel and battery inputs, and direct state factories. Response may be slower if planners lack local information; quality and variety may be limited.

Evaluation: Markets adjust quickly but may ignore pollution externalities (→ 3.1). Planners can prioritise long-term goals but risk inefficiency and lack of consumer sovereignty.

Worked example 2

The government of a mixed economy wants to encourage the consumption of solar panels, a merit good that also reduces negative externalities from fossil fuels. The market price for a home solar panel system is $5,000. The government introduces a subsidy of $1,000 per system paid to the supplier. As a result, annual sales increase from 20,000 to 35,000 systems. If the supplier passes on 80% of the subsidy to the consumer in the form of a lower price, calculate: (a) The new price paid by the consumer. (b) The total cost of the subsidy to the government.

Show solution outline

This is an example of government intervention in a mixed economy to correct market failure.

(a) Calculate the new consumer price:

  • Step 1: Calculate the value of the subsidy passed on to the consumer. The subsidy is $1,000, and 80% is passed on. Calculation: 80% of 1,000=0.80∗1,000 = 0.80 * 1,000 = 800.800.

  • Step 2: Calculate the new price for the consumer. The original price is reduced by the amount of the subsidy passed on. Calculation: $5,000 (original price) - $800 (subsidy portion) = 4,200.4,200.

    **The new price paid by the consumer is 4,200.∗∗4,200.**

(b) Calculate the total cost of the subsidy to the government:

  • Step 1: Identify the subsidy per unit and the new quantity sold. Subsidy per unit = 1,000.1,000. New quantity sold = 35,000 systems.

  • Step 2: Calculate the total government expenditure. Total cost = Subsidy per unit × New quantity sold. Calculation: $1,000/system * 35,000 systems = $35,000,000.

    **The total annual cost of the subsidy to the government is 35,000,000.∗∗35,000,000.**

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