Explain, with the aid of a diagram, diminishing marginal utility and its link to indifference curves.

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. The marginal rate of substitution between two goods is the ‘linking' concept.
2. Explanation of utility theory and indifference curves.
3. Because of diminishing marginal utility, the MRS is not constant and this explains the shape of the indifference curve.
4. L4 (9-12 marks) For a reasoned and clear explanation of the concepts together with diagrams to illustrate them. Explicit reference to the linkage required.
5. L3 (7-8 marks) For a competent comment but with a limited elaboration of the two concepts, or a reasoned and clear explanation of one concept and limited mention of the other.
6. L2 (5-6 marks) For a superficial explanation concentrating on general concepts with only limited relevant reference to the question.
7. L1 (1-4 marks) For an answer which has a few basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.
8. Indirect tax increases the relative price of a good and there will be both income and substitution effects. These must be shown using indifference curves. Discussion of relative size of income and substitution effects for normal and inferior goods.
9. L4 (9-13 marks) For a thorough explanation of the impact of the indirect tax on both types of good together with relevant diagrams. A discussion on the substitution and income effects of the tax increase. Maximum 11 if no conclusion.
10. L3 (7-8 marks) For a competent explanation which does not fully analyse both types of goods. Full analysis of one type and limited analysis of the other.
11. L2 (5-6 marks) For an accurate though undeveloped comment concentrating on only one type of good.
12. L1 (1-4 marks) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial.