Consumers in Uruguay are eating more processed foods. Factors of production, including enterprise, have responded to this change. Firms in the processed food industry have become more capital-intensive. All of Uruguay's industries were affected by the rise in its inflation rate, from 6.2% in 2017 to 7.7% in 2018. Each question is introduced by stimulus material. In your answers you may refer to the material and/or to other examples you have studied.

Mark scheme

Marking points from the official mark scheme (May/June 2021). The mark or mark type is shown in brackets.

1. [2] (a) Risk bearing (1) setting up / owning a business (1) key decision making / organisation of the other factors of production (1) profit incentive / profit is the reward (1).
2. [4] (b) Logical explanation which might include: Opportunity cost is the (next) best alternative (1) forgone / sacrificed (1).
3. [4] (b) Consumers have limited income / time (1) have to make choices (1) cannot have everything they want (1) if buy more of one product may have to buy less of another / example of what product may be given up to buy another product (1).
4. [6] (c) Coherent analysis which might include: The cost of capital may fall / the price of labour may rise (1) lowering costs of production (1) making the firm more price-competitive (1) may increase profits (1).
5. [6] (c) Advances in technology (1) may improve the quality of capital (1) making it more productive / efficient (1) may increase the quality of products produced (1) raise demand for the products produced (1).
6. [6] (c) Firms may want to reduce human error / more consistent quality / uniform products (1) reduce wastage (1).
7. [6] (c) Firms may want to avoid disruption to production (1) caused by industrial action / strikes / sickness (1) capital equipment does not need to take breaks / can work 24 hours a day (1).
8. [6] (c) There may be a shortage of labour (1) making it difficult to recruit workers (1).
9. [6] (c) A government may reduce taxes on capital goods (1) provide subsidies (1) the rate of interest may be reduced (1) making capital goods more affordable (1).
10. [6] (c) The firm's output may rise (1) reducing the average fixed cost of capital / benefiting from economies of scale (1).
11. [8] (d) Why it might: may increase costs of production; may reduce competitiveness, lowering sales at home and abroad; may upset industrial relations, workers pressing for wage rises; may make it difficult to plan; may discourage savings which can reduce funds available for investment; corporation tax may be moved into a higher tax bracket; may be menu costs / shoe leather costs.
12. [8] (d) Why it might not: may be demand-pull inflation with demand for the firm's products increasing; may be low and stable; may enable a firm to reduce the real cost of any debt; may enable the firm to cut the real cost of wages; may be lower than other countries' inflation rates; may not be foreign substitutes; some industries may have inelastic demand.