Critically discuss the explanation in economic theory of how a rational consumer exercises choice and how it links to a demand curve.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

1. Explanation of diminishing marginal utility or indifference curves and the link to equilibrium price and, through changes in price, to the demand curve; critical comment on the difficulty of calculating marginal utility and its application.
2. L4 (9-12 marks): For a sound explanation of the analysis and a clear understanding; explanation of link to demand; with a comment on the possibility of calculating marginal utility.
3. L3 (7-8 marks): For a competent comment but with limited development of the analysis - may be no clear link to demand – and a very brief critical comment.
4. L2 (5-6 marks): For a brief explanation and with no clear link between equilibrium and demand and no critical comment.
5. L1 (1-4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory.
6. Explanation of changes in consumer equilibrium using indifference analysis to distinguish between the types of good. Indirect tax will increase the price and the answer really needs to consider the distinction between income and substitution effects.
7. L4 (9-13 marks): For a clear analytical discussion of effect of an indirect tax increase is to increase price; income and substitution effect move in same direction for normal good, in opposite directions for inferior good but a price rise would still result in a fall in demand; they move in opposite direction for a Giffen good but a rise in price will lead to a rise in demand.
8. L3 (7-8 marks): For an understanding of a rise in tax causing a rise in price but a clear analysis/discussion of the effect on only two of the goods.
9. L2 (5-6 marks): For a weaker understanding of the effect of the tax change and a poor analysis of the income and substitution effects, maybe just concentrating on the utility explanation or elasticity.
10. L1 (1-4 marks): For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.