Nicaragua experienced a 4% decrease in GDP in 2019, although household spending rose. One Nicaraguan product that increased in supply was bananas, which are a merit good. The Nicaraguan government encouraged its banana farmers and its other producers to increase their output. Increases in output can affect a firm's average costs of production. Each question is introduced by stimulus material. In your answer you may refer to this material and/or to other examples that you have studied.

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] Willingness to sell a product
2. [1] and ability to sell a product
3. [1] Supply at a given price / in a given time period.
4. [1] Provide information/education about the benefits of merit goods (consumers may be unaware of full benefits).
5. [1] Provide merit goods free / direct provision (e.g., education and healthcare / nationalise industries producing merit goods).
6. [1] Subsidise the production of merit goods (to lower prices).
7. [1] Subsidise the consumption of merit goods (e.g., providing vouchers).
8. [1] Set a maximum price / price ceiling (to make merit goods more affordable / to lower price).
9. [1] Pass laws / introduce regulation (to make consumption of merit goods compulsory).
10. [1] Remove / cut indirect taxes on merit goods (to make them more affordable / to lower price).
11. [1] Spending may decrease as households may have less income, making them less able to buy goods and services / reducing purchasing power.
12. [1] Lower GDP may reduce confidence / create greater uncertainty, encouraging people to save more.
13. [1] Households may borrow less due to concerns about repayment.
14. [1] Households may expect prices to fall further, delaying purchases.
15. [1] Spending may not decrease if households believe the decrease is temporary, or if interest rates are lower (encouraging borrowing), or if they use past savings to finance spending.
16. [1] Households may spend a higher proportion on basic necessities and less on luxuries/wants.
17. [1] Households may spend a higher proportion of income as saving may fall by more than spending.
18. [1] Households may spend less on imports (or imports may be higher in price / lower in quality).
19. [1] GDP may decrease but GDP per head may rise if population falls by more than GDP, which could influence spending positively.
20. Why a firm might benefit from increased output:
21. • [1] may increase average revenue, if higher output is a result of higher demand
22. • [1] profits may rise if average revenue increases more than average cost
23. • [1] may be able to make greater use of spare capacity
24. • [1] higher output may increase a firm's market power
25. • [1] greater advantage may be taken of technical, marketing, managerial, labour, and risk-bearing economies of scale.
26. Why a firm might not benefit from increased output:
27. • [1] average revenue may fall, as higher output may reduce price
28. • [1] not all of the higher output may be sold / there may be a lack of demand
29. • [1] diseconomies of scale may be experienced (managerial / communication problems, declining labour relations)
30. • [1] growth achieved by vertical merger may lead to problems of co-ordination.