Paper 3 question on Subsidy and tax (HL only)

This question is worth [30 marks]. This paper is based on the new syllabus and contains a
policy response question.
(1) The following table shows the level of quantity supplied and demanded for a product.
Price $ Supply Demand
5 3,500 13,500
10 6,000 11,000
15 8,500 8,500
20 11,000 6,000
25 13,500 3,500
30 16,000 1,000

a. Draw a diagram to represent the above and show the equilibrium level of output. [2
marks]

The government decides to place a $1 indirect tax on the good

b. Illustrate on your diagram the burden of tax paid by the consumer and producer. Indicate
the deadweight loss? [2 marks]
c. Explain the relationship between the PED and PES elasticity for a product and the burden
of tax paid by both consumers and producers? [2 marks]
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

© Mark Johnson,
InThinking www.thinkib.net/Economics 1
2. The following table shows the level of quantity supplied and demanded for a product.

Price $ Supply Demand

2 300 1,900
4 500 1,700
6 700 1,500
8 900 1,300
10 1,100 1,100
12 1,300 900

a. Illustrate the above on a demand and supply diagram, showing the equilibrium price and
quantity. [2 marks]

Presume that the government now provides a subsidy of $4 to the product, reducing the
selling price to $8.
b. Calculate the increase in producer revenue after the subsidy and the total expenditure by
the government. [4 marks]
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
c. Outline who benefits and who loses from the imposition of the subsidy? [2 marks]

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

© Mark Johnson,
InThinking www.thinkib.net/Economics 2
d. Explain two reasons why the government may have chosen to apply a subsidy to the
production of the product? [4 marks]

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
e. Explain the opportunity cost of a government subsidy [2 marks]

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
f. Recommend an alternative policy which could be introduced by the government of the
Country to provide support for a good or service. [10 marks]

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

© Mark Johnson,
InThinking www.thinkib.net/Economics 3
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

[End of question]

© Mark Johnson,
InThinking www.thinkib.net/Economics 4