Economics · Oct / Nov 2025 · Paper 22 · Question 3

0455

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The question as text

In April 2023, a French cosmetics firm merged with an Australian cosmetics firm. It is expected th economies of scale. A manager stated that a key aim is to make the firm’s production more sustainable by using raw materials taken from renewable sources. In most countries, the cosmetics firm’s products, including perfume, are taxed at a higher rate than food.

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3(a)[2]
Define average total cost. Total cost divided by output (2). Cost per unit (1).
3(b)[4]
Explain how using renewable raw materials may affect a firm’s profits. Logical explanation which might include the following.
Using renewable resources may be more expensive (1)
increase costs of production (1)
reduce profits (1).
Can advertise that renewable resources which create less pollution / improve environmental sustainability are being used (1)
increase image of the firm (1)
raise demand (1)
increase profits (1).
Using renewable resources may be subsidised (1). May become cheaper to use renewable resources in the long run (1).
Resources will not be depleted / firms have a constant supply of raw materials (1)
raise profits (1). 4 A simple statement that profits rise or fall with no relevant explanation is 0 marks. Profits rising and profits falling can both be credited if each is explained.
3(c)[6]
Analyse the internal economies of scale that a cosmetics firm could experience. Coherent analysis which might include the following.
Buying / purchasing economies (1)
buy ingredients in bulk at a discount (1).
Labour economies (1)
workers specialising e.g. designing the packaging (1).
Managerial economies (1)
e.g. specialist human resource manager (1).
Technical economies (1)
advanced technology could be used to produce perfume (1).
Financial economies (1)
the firm finding it cheaper / easier to borrow from banks (1).
Research and development economies (1)
develop new perfumes (1).
Selling / marketing economies (1)
lower average advertising costs (1).
Risk-bearing economies (1)
selling perfume in more markets (1). 6 Maximum of 3 marks for a list of different types of internal economies of scale with no development / explanation.
3(d)[8]
Discuss whether or not perfume should be taxed at a higher rate than food. In assessing each answer, use the table opposite. Why it should:
perfume is a luxury whereas food is a necessity
rich spend more on perfume than the poor
taxing food more may increase poverty as poor spend a high proportion of their income on food
perfume is less likely than food to be a merit good
a higher price for perfume will not significantly contribute to inflation, not a significant item in CPI
perfume may be imported while food may be supplied by domestic firms. Why it should not:
demand for perfume may be elastic and so may not raise much revenue. In contrast, inelastic demand for food so may raise high tax revenue
perfume may be an important domestic industry. Higher taxes may result in closure / unemployment
some food is a demerit good e.g. food with a high sugar content
taxing demerit food may improve health
taxing food may reduce obesity. Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 Guidance Level Description There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content.

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