Tuesday, January 4, 2011

Strategies to Score Well for MCQ Unit 1: Competitive Markets- How They Work and Why They Fail?

1. Each multiple choice question (MCQ) carries 4m. Candidates can generally achieve full 4m by choosing the correct option (1m), provide relevant definition for the concept tested (1m) and explain why or how that answer is related to the question (2m)

2. After years of observation and answering experience, I soon come to realise that there are actually unique techniques that can be employed to improve the answering ability of students. I break them into five, with two diagram techniques, two figure techniques and last one is rejection method

3. Diagram techniques
Is highly applicable to topics related to PPF, opportunity cost, demand and supply, consumer surplus, producer surplus, PED, XED, YED, PES, taxation, subsidy, market failure involving externalities

(a) If a diagram is provided, try to figure out what you can do to that diagram. Normally, you can get 1m-2m by annotating the diagram, shading an area e.g. additional area of consumer surplus, total subsidy payout by government, welfare gain/ loss area etc or adding curves e.g. showing changes in demand or supply or outward shift of PPF

(b) If you can support your answer using a diagram, do not hesitate to draw one. Again it is usually applied in questions related to the topics I highlighted above. It will get you around 1m-2m depending on complexities. For instance, PPF is used to show opportunity cost. As such you can get 1/2m by drawing a PPF and mark on your diagram, how an increase in the production of one good, leads to the fall in the production of another good. Similarly, if the question is about natural disaster striking a country and the impact onto PPF, you can get 1/2m by drawing a PPF shifting inward and of course you have to label the initial PPF and the PPF after disaster

(4) Calculation techniques
Is very applicable to topics highlighted above except market failure involving externalities

(a) If figures are provided, you will usually get 1m by making reference. For instance by saying, “the opportunity cost of producing the first 10million tonnes of agricultural goods is 2millions units of manufactured goods foregone”. You can also score up to 2m by performing calculation. For instance, YED = 0.4 is given in the text. In the answer, you have to put up figure, say YED = 20%/ 50%. In short, you have to explain how is the 0.4 is obtained

(b) In some other situations, you can actually use your own figure to replace word explanations. For instance, PED for petrol is inelastic. Then, in the answer you can put up your own figure, say PED oil = -10%/ 50% = -0.2 as a support to the option chosen although the -0.2 is not there

(5) Rejection method
Candidates can get up to 3m for explaining and correcting the other 3 wrong options. Consider the following examples:

(a) A production possibility frontier can be used to illustrate the concept of (Edexcel, Unit 1, Q1, May 2010)
A. External cost
B. Producer surplus
C. Opportunity cost
D. Equilibrium price

(C) is 1m. Opportunity cost is the next best alternative foregone once a decision is made. Option A is incorrect because external cost is illustrated using the cost-benefit diagram. Option B is also ruled out since producer surplus can only be shown using a demand-supply diagram

(b) Which of the following factors is most likely to cause the price of gold to fall without a shift in the demand curve? (Edexcel, Unit 1, Q2, May 2010)
A. An increase in national income
B. A decrease in price of silver
C. An increase in wages of gold miners
D. A decrease in the cost of machinery used in gold mining

(D)-1m. When machineries are cheaper, it decreases production costs. This creates an incentive to mine for more gold (2m). Option A is incorrect since rise in national income means more income per person. As such more gold will be demanded and its price will increase. This conflicts with the question (1m)

(6) Even if candidates have chosen the wrong option, still candidates can get up to 3m for explaining the incorrect option

(7) Usually there will be 5 questions from How They Work and 3 questions from Why They Fail. Candidates normally don’t do well for questions from Why They Fail. This is because of lack of understanding in terms of what public good is, how pollution permits function or even confused by the way those answers are put up. Sometimes they may sound tricky. As such I strongly suggest students to read up topics like positive and negative externalities and understand how does the cost-benefit diagram works, concept of free rider and public goods, asymmetric information, in what way the free market has failed etc

(8) Sometimes, there might be more than one concept tested at the same time (sometimes even three). For instance, opportunity cost and PPF might go together or mixed economies, free market and market failure might appear simultaneously in the same question. As such it is highly recommended to define all these keywords. The reason is because, we do not know what to expect from the marking schemes. I have seen in some situations, one might score 2m for providing definition of opportunity costs AND PPF and in some cases, they indicate "define either opportunity cost OR PPF for 1m"

Hope this helps!!!

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