P2 - and - P3 - Calculations Questions Answers

ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER MARKSCHEMES
Exam practice
for Paper 2 and 3
calculation questions –
markschemes
1 The foundations of economics
There are no calculations in Chapter 1.
2 Competitive markets: Demand and supply

Question 1 Consumer and producer surplus in free competitive markets
4
a Consumer surplus = ( 8 − 4 ) × = $8 [1 mark]
2
4
Producer surplus = ( 4 − 1) × = $6 [1 mark]
2
Social surplus = 8 + 6 = $14 [1 mark]
3
b Consumer surplus = ( 8 − 5 ) × = $4.5 [1 mark]
2
3
Producer surplus = ( 5 − 3 ) ×= $3 [1 mark]
2
Social surplus = 4.5 + 3 = $7.5 [1 mark]
5
c Consumer surplus = ( 8 − 3 ) × = $12.5 [1 mark]
2
3
Producer surplus (use formula for a trapezium; see page 69 of coursebook) = (1 + 5 ) × = $9 [1 mark]
2
Social surplus 12.5 + 9 = $21.5 [1 mark]
d As price falls and quantity increases along the demand curve, consumer surplus increases,
since consumers benefit from the lower price and the larger quantity. The opposite occurs for
price increases with quantity decreases.
Marks allocation
for vague response [1 mark]
for clear response [2 marks]
1 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021
3
e Consumer surplus = ( 7 − 4 ) × = $4.5 [1 mark]
2
3
Producer surplus = ( 4 − 1) × = $4.5 [1 mark]
2
Social surplus = 4.5 + 4.5 = $9 [1 mark]
4
f Consumer surplus = ( 9 − 5 ) × = $8 [1 mark]
2
4
2
2
g Consumer surplus = ( 5 − 3 ) × = $2 [1 mark]
2
2
2
h As price increases and quantity increases along the supply curve, producer surplus increases,
since producers benefit from the higher price and greater quantity. The opposite occurs for price
increases with quantity decreases.
Marks allocation
for clear response [2 marks]
i Maximum social surplus means that there is:
•• allocative efficiency
•• where MB = MC
•• where society’s or consumers’ preferences are best satisfied.
Marks allocation
for any two correct points from the above [2 marks]
3 Elasticities
Question 2 Price elasticity of demand
−12%
a PED = = −1.2; taking the absolute value it is 1.2. Demand for meat is price
10%
elastic (since PED > 1). [1 mark]
14%
b PED = = −0.93; taking the absolute value it is 0.93. Demand for pizzas is price
−15%
inelastic (since PED < 1). [1 mark]
(12 − 14 )
c 14 = −0.14 or 0.14
(6 − 3)
3
Marks allocation
for some valid workings [1 mark]
for correct answer [2 marks]
(4 − 6)
6 −0.33
d = = −1.65 or 1.65
(18 − 15 ) 0.2
15
Marks allocation
for correct answer [2 marks]
e (HL only) The results show that PED < 1 for low prices and large quantities and PED > 1 for
high prices and large quantities, indicating that PED falls as we go down the demand curve.
Marks allocation
for accurate response [2 marks]
% Q 7%
f PED = 1.5 = = ; therefore %∆P = 7 = 4.67% ; price increases.
% P % P 15
Marks allocation
for correct calculation [1 mark]
for correct direction of change in P [1 mark]
%∆Q
g PED = 2 =
PED ; therefore %∆Q = 20% ; quantity decreases.
10%
Marks allocation
for correct calculation [1 mark]
for correct direction of change in Q [1 mark]
h TR = P × Q therefore from left to right: 42, 72, 90, 96, 90, 72
Marks allocation
for correct answers [2 marks]
i When PED < 1, which occurs for low prices and large quantities, as P increases TR increases;
when PED > 1, which occurs for high prices and low quantities, as P increases TR falls.
Marks allocation
for vague response [1–2 marks]
for accurate response [2–4 marks]
j For perfectly elastic demand, PED = ∞ [1 mark]
the demand curve is horizontal [1 mark]
for perfectly inelastic demand, PED = 0 [1 mark]
the demand curve is vertical [1 mark]
k If PED = 0, Q demanded is completely unresponsive to changes in price, therefore there
will be no change in Q demanded
Marks allocation
l For correctly drawing two intersecting demand curves, indicating the flatter one to be
relatively more elastic at the point of intersection [2 marks]
for outlining that the flatter curve shows that Q demanded has a greater responsiveness
to changes in P therefore is more price elastic
Marks allocation
Question 3 Income elasticity of demand

a The relevant elasticity concept is income elasticity of demand (YED) [1 mark]
To find the YEDs, first calculate the % change in income:
20 − 16
%Δ in income = × 100 = 25%
16
−5%
Bread: YED = = −0.20
25%
15%
= = 0.60
Food: YED
25%
30%
Restaurants: YED = = 1.20
25%
Marks allocation (per item)
b Bread is an inferior good, because YED < 0. [1 mark]
Food is a necessity, because 0 < YED < 1. [1 mark]
Eating in restaurants is a luxury, because YED > 1. [1 mark]
%∆Q %∆Q
c YED = 1.2 = = ; therefore %∆Q = 16.8%
%∆Y 14%
Marks allocation
for some valid working [1 mark]
for correct response [2 marks]
i Quantity increases since YED is positive. [1 mark]
ii This is a luxury since YED > 1. [1 mark]
%∆Q −9% −9%

d YED = −0.7 = = ; therefore %∆Y = = 12.86%
%∆Y %∆Y −0.7
Marks allocation
for correct response [1 mark]
i Income increases since quantity decreases and YED is negative, indicating that income
and demand change in opposite directions. [1 mark]
ii The good is inferior. [1 mark]
Question 4 Price elasticity of supply

2%
a After one month: PES = 0.40
5%
7%
After one year: PES = 1.40
5%
Marks allocation (for each of the two PES calculations)
b Supply was price inelastic after one month because PES < 1, meaning that quantity supplied
has a relatively low responsiveness to changes in price. [1 mark]
Supply was price elastic after one year, because PES > 1, meaning that quantity supplied has a
relatively high responsiveness to changes in price. [1 mark]
c Any two of the following possible factors can account for price inelastic supply after one month
and price elastic supply after one year:
•• length of time
•• mobility of factors of production
•• unused capacity
•• ability to store stocks.
Marks allocation
for correct identification of two points [2 marks]
d If PES = 0, an increase in price of 10% (or any change in price) will lead to a zero change
in quantity supplied, as a PES of zero indicates zero responsiveness of quantity supplied to
changes in price.
Marks allocation
e For perfectly elastic supply, PES = ∞ [1 mark]
the supply curve is horizontal [1 mark]
for perfectly inelastic supply PED = 0 [1 mark]
the supply curve is vertical [1 mark]
f For drawing two supply curves, both of which begin at the origin.
Marks allocation
for each supply curve [1 mark]
g For drawing a supply curve beginning from the vertical axis [1 mark]
for drawing a second supply curve beginning from the horizontal axis [1 mark]
for outlining that the first one shows elastic supply and the second one inelastic supply. [1 mark]
4 Government intervention
Question 5 Price ceilings
a For drawing a diagram with a price ceiling at P = €2 [1 mark]
P( ) 7
6
5 S
4
3
2
D
1
0
1 2 3 4 5 6 7 8 9 10 11 12 Q
thousand kg
per day
Figure Q5
b Shortage = 10 − 6 = 4000 kg per day

Marks allocation
c Initial consumer expenditure = 3 × 8 = €24 000 [1 mark]
Final consumer expenditure = 2 × 6 = €12 000 [1 mark]
Change = 12 000 − 24 000 = −€12 000 or €12 000 decrease [1 mark]
d Initial producer revenue = 3 × 8 = €24 000 [1 mark]
Final producer revenue = 2 × 6 = €12 000 [1 mark]
8
e Initial consumer surplus = ( 7 − 3 ) × = 16 or €16 000 [1 mark]
2
2
Final consumer surplus = ( 7 − 2 ) + ( 4 − 2 ) × = 21 or €21 000 [1 mark]
2
Change = 21 000 − 16 000 = €5 000 increase [1 mark]
3
f Initial producer surplus = ( 8 + 2 ) × = 15 or €15 000 [1 mark]
2
2
Final producer surplus = ( 6 + 2 ) × = 8 or €8 000 [1 mark]
2
Change = 8 000 − 15 000 = −7 000 or €7 000 decrease [1 mark]
(8 − 6 )
g Welfare loss = ( 4 − 2 ) × = 2 or €2000
2
Marks allocation
h To make essential goods or services accessible to people on low incomes. [1 mark]

i Any two of the following: [2 marks]
•• some consumers gain due to the lower price
•• some consumers lose because they cannot get the good
•• some consumers lose because they buy the good at a higher price in parallel markets.
j The price ceiling leads to allocative inefficiency because there is underallocation of resources
to production of the good.
Marks allocation
Question 6 Price floors

a For drawing a diagram with a price floor at P = €5. [1 mark]
P( ) 7
6
S
5
4
3
2
D
1
0
1 2 3 4 5 6 7 8 9 10 11 12 Q
thousand kg
per day
Figure Q6
b Excess supply or surplus = 12 − 4 = 8 or 8000 kg per day

Marks allocation
c Initial consumer expenditure = 3 × 8 = €24 000 [1 mark]
Final consumer expenditure = 5 × 4 = €20 000 [1 mark]
d Initial producer revenue = 3 × 8 = €24 000 [1 mark]
Final producer revenue = 5 × 12 = €60 000 [1 mark]
Change = 60 000 − 24 000 = −€36 000 increase [1 mark]
e Government expenditure to buy surplus 5 × 8 = 40 or €40 000
Marks allocation
f Welfare loss = government spending minus area producer surplus gained (above the demand curve)
8
= 40 − ( 5 − 3 ) × = 40 − 8 = 32 or €32 000
2
Marks allocation
8
g Initial consumer surplus = ( 7 − 5 ) × = 16 or €16 000 [1 mark]
2
4
Final consumer surplus = ( 7 − 5 ) × = 4 or €4000 [1 mark]
2
Change = ( 4 − 16 ) = −12 or €12 000 decrease [1 mark]
3
h Initial producer surplus = ( 8 + 2 ) ×= 15 or €15 000 [1 mark]
2
5
Final producer surplus = (12 + 2 ) × = 35 or €35 000 [1 mark]
2
Change = 35 000 − 15 000 = €20 000 increase [1 mark]
i State one of the following: [1 mark]
•• to support farmers revenues or incomes
•• to raise wages of unskilled workers.
j One of the following for each stakeholder:
i Consumers [1 mark]
•• higher price paid
•• lower quantity bought
•• loss of consumer surplus
ii Producers [1 mark]
•• higher price received
•• larger quantity produced
•• increased revenues
•• increased producer surplus
iii Government [1 mark]
•• burden on the budget
k For drawing a diagram with a minimum wage at €4.00. [2 marks]
l Number of unemployed workers = 10 − 6 = 4 or 4 million [1 mark]
Unemployed due to the fall in quantity of labour demanded = 8 − 6 = 2 or 2 million [1 mark]
Unemployed due to an increase in quantity of labour supplied = 10 − 8 = 2 or 2 million [1 mark]
Question 7 Indirect taxes

Refer to Figure Q7 for the correct answers.
P ($) 2.75
after-tax
2.50 consumer
surplus
2.25 S2 = S+tax
2.00
1.75
Pe2 1.50 welfare loss S
government
1.25 revenue
Pe 1.00
0.75
0.50
after-tax
0.25 producer D
surplus
0 1 2 3 4 5 6 7 8 9 Q
Qe2 Qe units
Figure Q7
a Marks allocation
for drawing a correct demand curve [1 mark]
for drawing a correct supply curve [1 mark]
for correctly identifying equilibrium P and Q [1 mark]
6
b Consumer surplus = ( 2.50 − 1) × = $4.50 [1 mark]
2
6
Producer surplus = (1 − 0.25 ) × = $2.25 [1 mark]
2
Social surplus = 4.5 + 2.25 = $6.75 [1 mark]
c Marks allocation
for correctly drawing the post-tax supply curve [1 mark]
d Marks allocation
for correctly identifying price [1 mark]
for correctly identifying quantity [1 mark]
e Price paid by consumers = $1.50 [1 mark]
Price received by producers = $0.75 [1 mark]
Quantity bought and sold = 4 units [1 mark]
for correctly showing in diagram [1 mark]
f Marks allocation
for correctly identifying:
Government revenue [1 mark]
After-tax consumer surplus [1 mark]
After-tax producer surplus [1 mark]
Welfare loss [1 mark]
g Government revenue = (1.5 − 0.75) × 4 = $3.00 [1 mark]
h Initial consumer expenditure = 1 × 6 = $6.00 [1 mark]
Final consumer expenditure = 1.50 × 4 = $6.00 [1 mark]
There has been no change. [1 mark]
i Initial firm revenue = 1 × 6 = $6.00 [1 mark]
Final firm revenue = 0.75 × 4 = $3.00 [1 mark]
Change = 3 − 6 = −3 or decrease of $3.00 [1 mark]
j From part b initial consumer surplus = $4.50
4
Final consumer surplus = ( 2.5 − 1.50 ) × = $2.00 [1 mark]
2
Change = 2 − 4.5 = −2.5 or decrease of $2.50 [1 mark]
k From part b initial producer surplus = $2.25
4
Final producer surplus = ( 0.75 − 0.25 ) ×
= $1.00 [1 mark]
2
Change = 1 − 2.25 = −1.5 or decrease of $1.25 [1 mark]
(6 − 4 )
l Welfare loss = (1.5 − 0.75 ) × = $0.75
2
Marks allocation
m At the post-tax equilibrium MB > MC, indicating underallocation of resources to the production
of the good. Consumers attach a greater value to the last or marginal unit produced than it costs
to produce that unit. Therefore consumers are not getting enough of it.
The tax creates allocative inefficiency by raising the price and reducing the quantity.
Marks allocation
n Since the tax introduces allocative inefficiency there is welfare loss, which reduces the amount
of social surplus available after the tax is imposed.
Marks allocation
Question 8 Subsidies
Refer to Figure Q8 for the correct answers.
P ($) 2.75
2.50
2.25
2.00
1.75 welfare loss
S
1.50
1.25 gain in producer
surplus S with
Pe 1.00 subsidy
gain in
0.75 consumer
surplus
Pe2 0.50
0.25 D
0 1 2 3 4 5 6 7 8 9 Q
Qe Qe2 units
Figure Q8
a Marks allocation
for drawing a correct demand curve [1 mark]
for drawing a correct supply curve [1 mark]
for correctly identifying equilibrium P and Q [1 mark]
b Marks allocation
for correctly drawing the post-subsidy supply curve. [1 mark]
c Marks allocation
for correctly identifying price [1 mark]
for correctly identifying quantity [1 mark]
d Price paid by consumers = $0.50 [1 mark]
Price received by producers = $1.25 [1 mark]
Quantity bought and sold = 8 units [1 mark]
for correctly showing in diagram [1 mark]
e Marks allocation
for correct identification of gain in consumer surplus [1 mark]
for correct identification of gain in producer surplus [1 mark]
f Government spending = (1.25 − 0.5) × 8 = 6 or $6000
Marks allocation
g Initial consumer expenditure = 1 × 6 = $6.00 [1 mark]

Final consumer expenditure = 0.5 × 8 = $4.00 [1 mark]
Change = 4 − 6 = −$2.00 or $2.00 decrease [1 mark]
h Initial firm revenue = 1 × 6 = $6.00 [1 mark]
Final firm revenue = 1.25 × 8 = $10.00 [1 mark]
Change = 10 − 6 = 4 or increase of $4.00 [1 mark]
6
i Initial consumer surplus = ( 2.5 − 1) × = $4.5 [1 mark]
2
8
Final consumer surplus = ( 2.5 − 0.5 ) × = $8.00 [1 mark]
2
Change 8 − 4.5 = $3.50 increase [1 mark]
6
j Initial producer surplus = (1 − 0.25 ) × = $2.25 [1 mark]
2
8
Final producer surplus = (1.25 − 0.25 ) × = $4.00 [1 mark]
2
Change = 4 − 2.25 = $1.75 increase [1 mark]
Welfare loss = (1.25 − 0.50 ) ×

(8 − 6 )
k = $0.75
2
Marks allocation
l Social welfare is reduced because the gain in consumer and producer surplus is less than the loss
arising from government spending on the subsidy.
Marks allocation
m At the post-subsidy equilibrium MB < MC, indicating overallocation of resources to the
production of the good. Consumers attach a smaller value to the last or marginal unit produced
than it costs to produce that unit. Therefore, consumers are getting too much of it. The subsidy
creates allocative inefficiency by lowering the price and increasing the quantity.
Marks allocation
5 Market failure and socially undesirable

outcomes I: Common pool resources and
negative externalities
Question 9 Negative externalities
Refer to Figure 5.10a in coursebook page 166 for the correct answers to parts a–b.
a Marks allocation
for correctly labelling:
•• S = MSC = MPC [1 mark]
•• MSB [1 mark]
•• MPB [1 mark]
for stating that this is a negative externality of consumption [1 mark]
b Marks allocation
for correctly identifying the welfare loss [1 mark]
c Welfare loss = ( 4 − 2 ) ×
(3 − 2 )
= $1.00
2
Marks allocation
d The market overallocates resources to the production of the good. [1 mark]
Refer to Figure 5.4a in coursebook page 151 for the correct answers to parts e–f.
e Marks allocation
•• D = MSB = MPB [1 mark]
•• MSC [1 mark]
•• MPC [1 mark]
for stating that this is a negative externality of production [1 mark]
f For correctly identifying the welfare loss [1 mark]
Welfare loss = ( 6 − 4 ) ×
( 4 − 3) $1.00
g = [2 marks]
2
h The market overallocates resources to the production of the good. [1 mark]
6 Market failure and socially undesirable outcomes

II: Positive externalities, public goods, asymmetric
information and inability to achieve equity
Question 10 Positive externalities
Refer to Figure 6.2a in coursebook page 175 for the correct answers to parts a–b.
a Marks allocation
•• D = MSB = MPB [1 mark]
•• MSC [1 mark]
•• MPC [1 mark]
for stating that this is a positive externality of production [1 mark]
b Marks allocation
[ ( 5 − 3 ) × ( 4 − 3 )]
c Welfare loss = = $1.00
2
Marks allocation
d The market underallocates resources to the production of the good. [1 mark]
Refer to Figure 6.5b in coursebook page 178 for the correct answers to parts e–f.
e For correctly labelling:
•• S = MSC = MPC [1 mark]
•• MSB [1 mark]
•• MPB [1 mark]
for stating that this is a positive externality of consumption [1 mark]
f Marks allocation
[ ( 5 − 3 ) × ( 3 − 2 )]
g Welfare loss = = $1.00
2
Marks allocation
h The market underallocates resources to the production of the good. [1 mark]
7 Market failure and socially undesirable outcomes

III: Market power (HL only)
Question 11 Revenues and costs
Refer to the table for the correct answers.
Output (or total product) 0 1 2 3 4 5 6

(thousand units)
Total cost (TC) (thousand €) 10 50 60 65 75 95 140
Average cost (AC) (€) − 50 30 21.67 18.75 19 23.33
Marginal cost (MC) (€) − 40 10 5 10 20 45
Total revenue (TR) (thousand €) 0 20 40 60 80 100 120
Average revenue (AR) (€) 0 20 20 20 20 20 20
Profit = TR − TC − 10 − 30 − 20 −5 5 5 − 20
Marginal revenue (MR) (€) − 20 20 20 20 20 20
TC
a AC =
Q
Marks allocation
for correct formula [1 mark]
for accurate responses [3 marks]
for every two correct calculations [1 mark]
∆TC
b MC =
∆Q
Marks allocation
c TR = P × Q
Marks allocation
d AR = P always therefore AR = €20 for all levels of output except when output = 0 [1 mark]
e The firm maximises profit when it produces 5 units of output; 4 units is also an acceptable answer.
Marks allocation
f Profit = €5000
Marks allocation
for accurate response [1 mark]
∆TR
g MR = [1 mark]
∆Q
Marks allocation
h MC = MR = 20 at 5 units of output therefore the results match.
Marks allocation
for accurate response [1 mark]
i This firm cannot be a monopoly because P = MR = 20 for all levels of output, suggesting that
it is a perfectly competitive firm whereas a monopoly faces a downward-sloping demand curve
where P falls as Q increases.
Marks allocation
Question 12 Profits, revenues and costs

Output (or total product) (units) 0 1 2 3 4 5

Price ($) − 30 25 20 15 10
Total cost (TC) ($) 5 25 40 50 65 85
Marginal cost (MC) ($) − 20 15 10 15 20
Total revenue (TR) ($) − 30 50 60 60 50
Average revenue (AR) ($) − 30 25 20 15 10
Marginal revenue (MR) ($) − 30 20 10 0 − 10
a Marks allocation
for each of the four items:
some valid workings [1 mark]
accurate response [2 marks]
b Maximum profit = TR − TC = 60 − 50 = $10 at 3 units of output. (Recall if there are two levels
of output that give the same response select the larger of the two.)
Marks allocation
Because at 3 units of output the firm maximises profit because MC = MR = 20; or,
At 3 units of output the difference between TR and TC is the greatest. [1 mark]
c At 4 units of output loss = $5 or at 5 units of output loss = $35
Marks allocation
for identifying the units of output [1 mark]
for correctly calculating the loss [1 mark]
d AR = P [1 mark]
e This cannot be a perfectly competitive firm because prices fall as quantity increases, whereas the firm
in perfect competition faces a horizontal demand curve with a constant price.
Marks allocation
f Marks allocation
for stating any three of the following: [3 marks]
•• corporate social responsibility
•• market share
•• satisficing
•• growth
•• revenue maximisation
Question 13 Perfect competition

Units of output Total cost (TC) (£) Average cost (AC) (£) Marginal cost (MC) (£)
0 50 - -
1 80 80 30
2 92 46 12
3 95 31.7 3
4 105 26.25 10
5 125 25 20
6 170 28.3 45
a Marks allocation
for each of the two columns:
b For stating that in the long run this firm will shut down where P = minimum AC [1 mark]
for identifying P = £25 [1 mark]
c For stating that normal profit is earned when P = AC. [1 mark]
d Allocative efficiency is achieved when P = MC. [1 mark]
e Marks allocation
for each one of four possible characteristics: [1 mark]
•• large number of small firms
•• homogeneous products
•• no barriers to entry
•• perfect information
•• perfect resource mobility
f Since this is a perfectly competitive firm P = MR therefore MR = £10. Using the MC = MR rule
for profit maximisation, the firm will produce 4 units of output.
Marks allocation
At 4 units of output TR = 4 × 10 = £40 and TC = 4 × 26.25 = £105. Therefore TR − TC = −£65
or a loss of £65.
Marks allocation
Question 14 Monopoly and imperfect competition

Price ($) Quantity Marginal cost Total revenue Marginal revenue Average revenue
(units) (MC) ($) (TR) ($) (MR) ($) (AR) ($)
6 1 5 6 6 6
5 2 3 10 4 5
4 3 2 12 2 4
3 4 3 12 0 3
2 5 5 10 2 2
1 6 7 6 −4 1
a Marks allocation
for each of the three columns:
b This cannot be perfect competition. [1 mark]
Price falls as quantity increases. [1 mark]
c PED > 1 at high price and low quantities, and falls along the demand curve reaching a point
where PED = 1 and then as price falls further PED < 1.
Marks allocation
d Marks allocation
for each one of three characteristics: [1 mark]
•• single or dominant firm
•• no close substitutes
•• high barriers to entry
e Marks allocation
for each one of three characteristics: [1 mark]
•• large number of firms
•• no or low barriers to entry
•• product differentiation
f Using MC = MR, the firm maximises profit by producing 4 units of output.
If AC = $3, then TC 3 × 4 = $12.
At 4 units of output TR = $12.
TR − TC = 12 − 12 = 0, therefore the firm is earning normal profit.
Marks allocation
some valid workings [1–2 marks]
accurate response [3–4 marks]
8 The level of overall economic activity

11 Macroeconomic objectives II: Economic growth,
sustainable level of debt
Question 15 National income accounting and economic growth
a GDP = C + I + G + (X − M) = 950.9 + 300.7 + 350.3 + 95.3 − 132.4 = 1564.8, or Lkl 1564.8 million.
Marks allocation
b GNI = GDP + income from abroad − income sent abroad
GNI = 1564.8 + 25.8 − 173.2 = 1417.3, i.e. Lkl 1417.4 million
Marks allocation
accurate response [2 mark]
c Lakeland’s GDP is larger than its GNI because income sent abroad is greater than income
received from abroad. Possible factors to explain this:
•• Lakeland may host multinational corporations that remit (send back) their profits to their
home country. [1 mark]
•• Lakeland may have foreign workers who remit a portion of their incomes to their
home country. [1 mark]
GDP 1564.8 million
d GDP=
per capita = = 1304.0 , i.e. Lkl 1304 [1 mark]
population 1.2 million
GNI 1417.4 million
GNI=
per capita = = 1181.2 , i.e. Lkl 1181.2 [1 mark]
population 1.2 million
5100 − 5000
e Real GDP growth 2019: × 100 = 2% [1 mark]
5000
5151 − 5100
Real GDP growth 2020: × 100 = 1% [1 mark]
5100
1980 − 2000
f Real GDP per capita growth 2019: × 100 = −1% [1 mark]
2000
1960 − 1980
Real GDP per capita growth 2020: × 100 = −1% [1 mark]
1980
g This is occurring because the rate of growth of the population is greater than the rate of
growth of real GDP, with the result that the amount of real GDP that corresponds to
each person in the population on average falls.
Marks allocation
Question 16 National income accounting and economic growth

Year 2017 2018 2019 2020

Nominal GDP (billion Ftl) 301.5 311.3 309.7 314.0
GDP deﬂator 100.0 104.2 102.7 103.9
Real GDP (billion Ftl) 301.5 298.75 301.56 302.21
Real GDP growth − −0.91% 0.94% 0.22%
a Nominal GDP is the value of output measured in current prices, whereas real GDP is the value
of output measured in constant prices.
Marks allocation
b Accurate response for each of the four items. [1 mark]
c Accurate response for each of the three items. [1 mark]
d Real GDP increased because the amount of output produced in 2019 valued in constant
(2017) prices increased relative to the amount of output produced in 2018, i.e. a larger
amount of output was produced. On the other hand, nominal GDP fell because prices on
average fell (this can be seen in the decrease in the GDP deflator) lowering the value of
output in nominal terms.
Marks allocation
9 Aggregate demand and aggregate supply

10 Macroeconomic objectives I: Low

unemployment, low and stable rate of inﬂation
Question 17 Unemployment and inflation
number of unemployed
a Unemployment rate = × 100 [1 mark]
labour force
Number of unemployed = 2 500 000 − (150 000 + 200 000 + 1 900 000 = 2 250 000 since under-employed
and part-time workers are considered to be employed.
250 000
Unemployment rate = × 100 = 10%
2500 000
Marks allocation
b Size of labour force = 0.47 × 25.73 million = 12.09 million
Unemployed = 2.3 million
2.3
Unemployment rate = × 100 = 19.02%
12.09
Marks allocation
(100 − 103)
c 2016–2017: = −2.91%
(103 ×100 )
2017–2018: 15% (can be read off directly from the price index) [1 mark]
(127 − 115 )
2018–2019: = 10.43% [1 mark]
(115 ×100 )
Marks allocation
in the case of each year:
d Deflation occurred in 2016–2017 because the price level fell.
Disinflation occurred in 2018–2019 because there was a fall in the rate of inflation to
10.43% compared to 15% the previous year.
Inflation occurred in 2017–2018 because there was an increase in the price level.
Marks allocation
for each case:
correct identification [1 mark]
accurate explanation [2 marks]
Question 18 Inflation and the CPI (HL only)

a Refer to the table for the correct answers.
Good Quantity Price Value of Price Value of Price Value of Price Value of
or in per unit basket per unit basket per unit basket per unit basket
service basket (Rvl) (Rvl) (Rvl) (Rvl) (Rvl) (Rvl) (Rvl) (Rvl)
(weight) 2017 2017 2018 2018 2019 2019 2020 2020
X 3 5 15 5 15 6 18 5 15
Y 2 3 6 4 8 6 12 5 10
Z 7 6 42 7 49 7 49 7 49
Total 63 72 79 74
value of
basket
Marks allocation
for each year:
b 2017: 100.00
72
2018: × 100 = 114.29
63
79
2019: × 100 = 125.40
63
74
2020: × 100 = 117.46
63
Marks allocation
for each year:
c 2017–2018: 14.29% (rate of inflation) [1 mark]
125.40 − 114.29 11.2
2018–2019: × 100 = × 100 = 9.72 (rate of inflation) [1 mark]
114.29 114.29
117.46 − 125.40 −7.94
2019–2020: × 100 = × 100 = −6.33 (rate of deflation) [1 mark]
125.40 125.40
d Deflation refers to a fall in the price level from one period to the next. [1 mark]
Disinflation refers to a fall on the rate of inflation from one period to the next. [1 mark]
Deflation occurred in 2019–2020. [1 mark]
Disinflation occurred in 2018–2019. [1 mark]
12 Economics of inequality and poverty

Question 19 Measure of inequality
a A quintile is one part of five equal parts into which a population has been divided
with respect to the distribution of a variable. In this case, the population has been
divided into five equal parts with respect to the distribution of income.
Marks allocation
b The more equal the shares of income within each quintile of the population, the more
equal the distribution of income. The poorest 20% of the population concentrates 9%
of total income in Lakeland, and only 4% in Riverland. At the same time, the wealthiest
20% of the population concentrates the much higher share of 58% of income in Riverland
than the 36% of income in Lakeland. Therefore Lakeland has a more equal distribution
of income.
Marks allocation
c cumulative percentage of income 100
80
60
40
Lakeland
20 Riverland
0 20 40 60 80 100
cumulative percentage of population
The further away lies a country’s Lorenz curve from the diagonal, the more unequal the income
distribution. Therefore Riverland has a more unequal distribution of income than Lakeland.
Marks allocation
for constructing an accurately labelled Lorenz curve diagram [2 marks]
for correctly identifying which Lorenz curve goes with which country [2 marks]
for a vague explanation [1 mark]
for an accurate explanation [2 marks]
d The Gini coefficient is derived as the area between the diagonal and the country’s Lorenz
curve divided by the entire area under the diagonal. Therefore, the greater the Gini coefficient,
the further away lies the country’s Lorenz curve from the diagonal, and the more unequal the
income distribution. Riverland, whose Lorenz curve lies further away from the diagonal,
has a higher Gini coefficient than Lakeland.
Marks allocation
for a vague explanation [1–2 marks]
for an accurate explanation [3–4 marks]
e The Gini coefficient can take values from a minimum of 0, which would indicate
completely equal income distribution, to a maximum of 1, indicating completely unequal
income distribution, where one individual/family takes all the income.
Marks allocation
f Increased emphasis on indirect taxes and lower emphasis on direct taxes will result in a
new Lorenz curve for the country that is further away from the diagonal.
Marks allocation
g The new tax policies are likely to make the income distribution of a country less equal.
Indirect taxes are regressive (tax as a share of income falls as income increases), while
direct taxes are usually proportional or progressive (tax as a share of income remains
constant or increases, respectively, as income increases). The more progressive (less regressive)
a tax system, the greater the income redistribution in favour of increased equality.
Marks allocation
Question 20 Taxation (HL only)

a Marginal tax rates are the tax rates that apply to the highest tax bracket of ones’ income
or the last or marginal dollar. Average tax rates are calculated as a share of total taxable income.
Marks allocation
b i Income of 10 000 Mnl:
tax bracket tax paid (Mnl)

0–7000 Mnl 0
7001–20 000 Mnl 0.10 × 3000 Mnl = 300 Mnl
Total tax 300 Mnl
ii Income of 35 000 Mnl:

0–7000 Mnl 0
7001–20 000 Mnl 0.10 × 13 000 Mnl = 1300 Mnl
20 001–45 000 Mnl 0.25 × 15 000 Mnl = 3750 Mnl
Total tax 5050 Mnl
iii Income of 107 000 Mnl:

0–7000 Mnl 0
7001–20 000 Mnl 0.10 × 13 000 Mnl = 1300 Mnl
20 001–45 000 Mnl 0.25 × 15 000 Mnl = 3750 Mnl
45 001–100 000 Mnl 0.35 × 55 000 Mnl = 19 250 Mnl
100 001 or more Mnl 0.45 × 7000 Mnl = 3150 Mnl
Total tax 29 950 Mnl
Marks allocation
for each level of annual income:
300
c i Income of 10 000 Mnl: average tax rate is × 100 = 3.0% ; marginal tax rate is 10%
10 000
5050
ii Income of 35 000 Mnl: average tax rate is × 100 = 14.43% ; marginal tax rate is 25%
35000
29950
iii Income of 107 000 Mnl: average tax rate is × 100 = 27.99% ; marginal tax rate is 45%
107 000
Marks allocation
for each level of annual income:
correct average tax rate [1 mark]
correct marginal tax rate [1 mark]
15 25000
d i × = 3260.87 Mnl
100 1.15
Marks allocation
3260.87
ii × 100 = 9.32%
35 000
Marks allocation
iii direct = 14.43% (see part c ii above)
indirect = 9.32% (see part d ii above)
14.43 + 9.32 = 23.75%
Marks allocation
e An indirect tax applied on all spending is regressive. A regressive tax is one in which as income
increases, the fraction of income paid as tax decreases. A given amount of tax on spending
to buy a particular good makes up a smaller fraction of income as income increases.
Marks allocation
13 Demand-side and supply-side policies

Question 21 The Keynesian multiplier (HL only)
a An initial increase in spending (which is autonomous, i.e. not caused by an increase in
income) leads to an equivalent increase in real GDP. This real GDP increase corresponds
to an increase in incomes arising from payments to factors of production, which causes a
further increase in consumption spending (induced spending). The increase in consumption
spending causes a further increase in real GDP and incomes, which produce more
consumption spending, and so on ad infinitum. Therefore the final increase in real GDP
is greater than the initial increase in autonomous spending by a multiple of the initial
increase in spending; this multiple is known as the Keynesian multiplier.
Marks allocation
b The multiplier shows that an increase in components of real GDP is likely to lead to a
multiplied effect on real GDP. Policy-makers using demand-side policies (fiscal and
monetary policy) to influence the level of economic activity would be interested in the
size of the multiplier, as this provides information on the size of the change in real GDP
that could be expected given an autonomous change in spending.
Marks allocation
c An MPC = 0.75 means that for any change in income, 75% of it will be a change in
consumption, and the remaining 25% will involve changes in saving, taxes or spending
on imports. For example, a $10 million increase in income will correspond to a
$7.5 million increase in consumption, and $2.5 million increase in the sum of saving,
taxes and spending on imports.
Marks allocation
d If MPC = 0.75, the multiplier = 4. The change in real GDP = the change in
investment × the multiplier = £200 million × 4 = £800 million.
Marks allocation
e MPS = the fraction of additional income that is saved
MPT = the fraction of additional income that is taxed
MPM = the fraction of additional income that is spent on imported goods and services
Marks allocation
accurate response for each term [1 mark]
f MPC + MPS + MPT + MPM = 1; therefore MPC = 1 – (MPS + MPT + MPM), or 1 – MPC =
MPS + MPT + MPM. [1 mark]
1 3
g If MPS + MPT + MPM = , this means that MPC = ; therefore the multiplier = 4.
4 4
Real GDP will fall by an amount equal to the fall in exports times the multiplier = Rvl 5 million ×
4 = Rvl 20 million. Therefore the new level of real GDP = Rvl 470 – Rvl 20 = Rvl 450.
Marks allocation
Rvl 40 million
h The multiplier = 4; therefore government spending must increase by = Rvl 10 million
Rvl 40 million 4
= Rvl 10 million
4
Marks allocation
Question 22 Real versus nominal interest rates

a Real rate of interest = 7 − 3 = 4% [1 mark]
b i in nominal terms 1000 × 1.05 = $1050 [1 mark]
ii in real terms, real rate of interest = 5 − 2 = 3% therefore in real terms 1000 × 1.03 = $1030 [1 mark]
c The real rate of interest is negative at −2% (= 3 − 5) so the real value of savings will fall.
Marks allocation
for an accurate explanation [1 mark]
14 International trade: Part I

Question 23 International trade: Importing versus exporting countries
a Equilibrium price = $3 [1 mark]
Equilibrium quantity = 8000 tonnes [1 mark]
b Fruitland will become an importer of apples. [1 mark]
The world price of $2 is less than the domestic price of $3 therefore other countries can
produce apples at a lower cost than Fruitland. When Fruitland opens up to trade it will
accept the lower world price.
Marks allocation
c At the world price of $2, Fruitland will consume 10 000 tonnes of apples and will produce
6000 tonnes of apples, therefore it will import 4000 tonnes of apples.
Marks allocation
d Fruitland’s import expenditures will be 2 × 3000 = $8000
Marks allocation
e Equilibrium price = $2 [1 mark]
Equilibrium quantity = 4000 tonnes [1 mark]
f Fruitland will become an exporter of kiwis. [1 mark]

The world price of $4 is more than the domestic price of $2, therefore Fruitland can
produce kiwis at a lower cost than other countries. When Fruitland opens up to trade
it will accept the higher world price.
Marks allocation
g At the world price of $4 Fruitland will consume 2000 tonnes of kiwis and will produce
8000 tonnes of kiwis therefore it will export 6000 tonnes of kiwis.
Marks allocation
h Fruitland’s export revenues will be 4 × 6000 = $24 000
Marks allocation
Question 24 Absolute and comparative advantage (HL only)

a Refer to Figure Q24 for the correct answers.
Dairy
products
Oceanland
Grassland
Seafood
Figure Q24 a
Marks allocation
for correctly drawing two linear PPCs [1 mark]
for correctly labelling the axes [1 mark]
for correctly labelling the PPCs [1 mark]
b According to the theory of comparative advantage, each country should produce and export the
good in which it has a comparative advantage or the good in which it has lower opportunity costs. [1 mark]
Grassland should export dairy products and import seafood. [1 mark]
Oceanland should export seafood and import dairy products. [1 mark]
c Refer to the table for correct answers.
Opportunity cost of good A Opportunity cost of good B
20 1 40
Country X = =2
40 2 20
100 50 1
Country Y =2 =
50 100 2
Marks allocation
for each correct calculation [1 mark]
d Country X has a comparative advantage (lower opportunity cost) in the production of good A and
country Y has a comparative advantage (lower opportunity cost) in the production of good B [2 marks]
Country Y has an absolute advantage in the production of both goods as it can produce more of
good A and more of good B than country X. [1 mark]
e 50
40
good A (units)
30 country Y
20 country X
10
0
10 20 30 40 50 60 70 80 90 100
good B (units)
Figure Q24 e
Marks allocation
for correctly drawing two linear PPCs [1 mark]
for correctly labelling the axes [1 mark]
for correctly labelling the two PPCs [2 marks]
f Neither of the two countries can benefit from specialisation and trade because as their
parallel PPCs indicate, they have identical opportunity costs, meaning that neither one
has a comparative advantage in the production of either good.
Marks allocation
Question 25 Tariffs
a Price paid by consumers = 25 − 5 = 20 Rvl [1 mark]
Price received by producers = 25 − 5 = 20 Rvl [1 mark]
b Refer to Figure Q25 for the correct answers.
P (Rv) 50
S
40
30
25
20
D
10
7.5
0
50 70 150 180 Q
thousand kg
per week
Figure Q25
P of seafood with tariff = 25 Rvl [1 mark]

P of seafood without tariff = 20 Rvl [1 mark]
Domestic Q produced with tariff = 70 000 kg [1 mark]
Domestic Q produced without tariff = 50 000 kg [1 mark]
Domestic Q consumed with tariff = 150 000 kg [1 mark]
Domestic Q consumed without tariff = 180 000 kg [1 mark]
Marks allocation
for correctly indicating each of the three variables with and without tariff
c Quantity of imports with the tariff = domestic consumption − domestic production
= 150 000 kg − 70 000 kg = 80 000 kg per week
Marks allocation
Quantity of imports without the tariff = domestic consumption − domestic production
= 180 000 kg − 50 000 kg = 130 000 kg per week
Marks allocation
d Import expenditure with tariff = 20 Rvl × 80 000 kg = 1 600 000 Rvl, or 1.6 million Rvl [1 mark]
Import expenditure after tariff removal = 20 Rvl × 130 000 kg = 2 600 000 Rvl, or 2.6 million Rvl [1 mark]
Change = 2.6 − 1.6 = 1.0 million Rvl or 1 000 000 Rvl increase [1 mark]
e Consumer expenditure with the tariff = 25 Rvl × 150 000 kg = 3 750 000 Rvl, or 3.75 million Rvl [1 mark]
Consumer expenditure without the tariff = 20 Rvl × 180 000 kg = 3 600 000 Rvl, or 3.6 million Rvl [1 mark]
Change = 3.6 million − 3.75 million = −0.15 million Rvl, or 150 000 Rvl decrease [1 mark]
f Producer revenue with the tariff = 25 Rvl × 70 000 kg = 1 750 000 Rvl, or 1.75 million Rvl [1 mark]
Producer revenue without the tariff = 20 Rvl × 50 000 kg = 1 000 000 Rvl, or 1.0 million Rvl [1 mark]
Change = 1.0 million Rvl − 1.75 million Rvl = −0.75 million Rvl, or 750 000 Rvl decrease [1 mark]
g The amount of revenues for the government due to the tariff is the tariff per unit × the quantity of
imports with the tariff = 5 Rvl × 80 000 kg = 400 000 Rvl. This tariff revenue is lost with
the removal of the tariff. [1 mark]
h Foreign producers’ export revenue generated by exports to Riverland with the tariff
= 20 Rvl × 80 000 kg = 1 600 000 Rvl, or 1.6 million Rvl [1 mark]
Foreign producers’ export revenue generated by exports to Riverland without the tariff
= 20 Rvl × 130 000 kg = 2 600 000 Rvl, or 2.6 million Rvl [1 mark]
Therefore foreign producers revenues increased by = 2.6 million Rvl − 1.6 million Rvl
= 1.0 million Rvl [1 mark]
Note these amounts are the same as import expenditures.
150
i Consumer surplus with the tariff = ( 50 − 25 ) × = 1875 , or 1 875 000 Ftl or 1.875 million Ftl
2
180
Consumer surplus without the tariff = ( 50 − 20 ) × = 2700 , or 2 700 000 Ftl or 2.70 million Ftl
2
Change = 2.70 − 1.875 = 0.825, or 825 000 Ftl increase
5
Alternatively take the area of the trapezium: (150 + 180 ) × = 825 , or 825 000 Ftl increase
2
Marks allocation
70
j Producer surplus with the tariff = ( 25 − 7.5 ) × = 612.5 , or 612 500 Ftl
2
50
Producer surplus without the tariff = ( 20 − 7.5 ) × = 312.5 , or 312 500 Ftl
2
Change = 312 500 − 612 500 = −300 000, or 300 000 Ftl decrease
5
Alternatively take the area of the trapezium: ( 70 + 50 ) × = 300 , or 300 000 Ftl decrease
2
Marks allocation
( 70 − 50 )
k ( 25 − 20 ) × = 50
2
( 25 − 20 ) × (180 − 150 ) 
plus  = 75
2
Total = 50 + 75 = 125, or 125 000 Ftl is welfare loss that was recovered
Marks allocation
l Consumers gained because quantity purchased increased while price fell. [2 marks]
Foreign producers gained because they have increased their exports and export revenues. [2 marks]
m Domestic producers lost because they are selling less of the product and receiving a lower price
with reduced revenues. [2 marks]
The government lost due to the loss of tariff revenues. [2 marks]
n Riverland’s trading partners, the seafood exporters, have a comparative or absolute
advantage in seafood production. This is apparent from the point that the world price
of seafood lies below Riverland’s domestic price of seafood under no trade, indicating
that Riverland is less efficient in the production of seafood than other countries. This
causes it to have excess demand (a shortage) for seafood when it opens up to trade,
which is satisfied by imports.
Marks allocation
Question 26 Quotas
a Refer to Figure Q26 for the correct answers.
P
Ftl
36.7
Ftl S domestic
S t quota
20
15 Sw
D
150
2.5
0 100 200 250 350 Q
thousand
400 kg
Figure Q26
Quota = 150 000 kg

Domestic Q produced with quota = 350 000 kg
Domestic Q produced without quota = 250 000 kg
Q of imports without quota = 400 000 kg
Marks allocation
for correctly noting each one of the above on the diagram [1 mark]
b Price with quota = 20 Ftl [1 mark]
Price without quota = 15 Ftl [1 mark]
c Imports with quota = the amount of the quota = 150 000 kg [1 mark]
Imports without the quota = 400 000 kg (given in the question)
Therefore imports increased by 400 000 kg − 150 000 kg = 250 000 kg [1 mark]
d Domestic consumption with the quota = domestic production with quota + quota = 350 000 kg
+ 150 000 kg = 500 000 kg per week.
Marks allocation
Domestic consumption without the quota = domestic production without quota + imports
without quota = 250 000 kg + 400 000 kg = 650 000 kg per week.
Marks allocation
e Consumer expenditure with quota = 20 Ftl × 500 000 kg = 10 000 Ftl, or 10 million Ftl [1 mark]
Consumer expenditure without quota = 15 Ftl × 650 000 kg = 9 750 000 Ftl, or 9.75 million Ftl [1 mark]
Change = 9.75 million − 10 million = −0.25 million Ftl, or decrease of 250 000 Ftl [1 mark]
f Producer revenue with the quota = 20 Ftl × 350 000 kg = 7 000 000 Ftl, or 7 million Ftl [1 mark]
Producer revenue without the quota = 15 Ftl × 250 000 kg = 3 750 000 Ftl, or 3.75 million Ftl [1 mark]
Change = 3.75 million − 7 million = −3.25 million Ftl, or decrease of 3.25 million Ftl [1 mark]
g Foreign producers’ export revenues with the quota = 15 Ftl × 150 000 kg = 2 250 000 Ftl,
or 2.25 million Ftl [1 mark]
Foreign producers’ export revenues without the quota = 15 Ftl × 400 000 kg = 6 000 000 Ftl,
or 6 million Ftl [1 mark]
Change = 6 million − 2.25 million = −3.75 million Ftl increase [1 mark]
h Quota revenue = 150 000 kg × 5 Ftl = 750 000 Ftl [1 mark]
i Consumers gained because quantity purchased increased while price fell. [2 marks]
Foreign producers gained because they have increased their exports and export revenues. [2 marks]
j Domestic producers lost because they are selling less of the product and receiving a lower price
with reduced revenue. [2 marks]
k In the case of tariffs, the domestic government gains from tariff revenue. In the case of
quotas, it is usually the foreign producers who gain the quota revenue, as the domestic
government usually distributes quota licences to foreign governments who then distribute
them to their producers or exporters.
Marks allocation
500
l Consumer surplus with the quota = ( 3.67 − 20 ) × = 4175 or 4 175 000 Ftl, or 4.18 million Ftl
2
650
Consumer surplus without the quota = ( 3.67 − 15 ) × = 7052.5 , or 7 052 500 Ftl or 7.05 million Ftl
2
Change = 7.0 − 4.18 = 2.87, or 2.87 million Ftl increase
5
Alternatively take the area of the trapezium: ( 500 + 650 ) × = 2875 , or 2.87 million Ftl increase
2
Marks allocation
350
m Producer surplus with the quota = ( 20 − 2.5 ) × = 3062.5 , or 3 062 500 Ftl or 3.06 million Ftl
2
250
Producer surplus without the quota = (15 − 2.5 ) × = 1562.5 , or 1 562 500 Ftl or 1.56 million Ftl
2
Change = 1.56 − 3.06 = −1.5, or 1.5 million Ftl decrease
5
Alternatively take the area of the trapezium: ( 350 + 250 ) × = 1500 , or 1.5 million Ftl decrease
2
Marks allocation
(350 − 250 )
n ( 20 − 15 ) × = 250 , or 250 000 Ftl
2
plus (20 − 15) × 150 = 750, or 750 000 Ftl
( 650 − 500 )
plus ( 20 − 15 ) × = 375 , or 375 000 Ftl
2
Total = 1 375 000 Ftl
5
Alternatively take the area of the trapezium: (150 + 400 ) × = 1375 , or 1 375 000 Ftl is
welfare loss that was recovered. 2
Marks allocation
o Marks allocation
for any two of the following: [2 marks]
•• improvement in domestic income distribution
•• increased efficiency in production
•• improvement in the global allocation of resources
Question 27 Production subsidies

a i Price received by producers with production subsidy = 25 +5 = 30 Gsl [1 mark]
Price received by producers without production subsidy = 25 Gsl [1 mark]
ii Price paid by consumers after removal of subsidy = 25 Gsl [1 mark]
b Domestic consumption with subsidy = production + imports = 150 + 75 = 225, or 225 000 kg [1 mark]
Domestic consumption without subsidy remains the same at 225 000 kg [1 mark]
c Quantity of imports without production subsidy = consumption without subsidy minus
production without subsidy = 225 – 80 = 145 or 145 000 kg [1 mark]
d Import expenditures with production subsidy = 25 × 75 000 = 1 875 000 Gsl, or 1.88 million Gsl [1 mark]
Import expenditures without production subsidy = 25 × 145 000 = 3 625 000 Gsl, or
3.63 million Gsl [1 mark]
Change = 3.63 − 1.88 = 1.75 million Gsl increase [1 mark]
e Consumer expenditure = 25 × 225 000 kg = 5 625 000 Gsl, or 5.63 million Gsl [1 mark]
There is no change in consumer expenditure after the removal of the subsidy, since both
the price paid and the quantity purchased remain the same. [1 mark]
f Producer revenue with the production subsidy = 30 × 150 000 = 4 500 000 Gsl, or 4.5 million Gsl [1 mark]
Producer revenue without the production subsidy = 25 × 80 000 kg = 2 000 000 Gsl, or
2 million Gsl [1 mark]
Change = 2 − 4.5 = −2.5 or 2.5 million Gsl decrease [1 mark]
g Government spending to provide the production subsidy = 5 Gsl × 150 000 kg = 750 000 Gsl.
Therefore the government budget gains this amount.
Marks allocation
h Foreign producers’ export revenues with the production subsidy = 25 Gsl × 75 000 kg = 1 875 000 Gsl,
or 1.875 million Gsl [1 mark]
Foreign producers’ export revenues without the subsidy = 25 Gsl × 145 000 kg = 3 625 000 Gsl,
or 3.6 million Gsl [1 mark]
Therefore foreign producers gain by the amount:
3.625 million Gsl − 1.875 million Gsl = 1.75 million Gsl [1 mark]
Note that this is the same as import expenditures.
i Consumer surplus with subsidy is the same as without subsidy since P and Q remain the same.
225 10 125
Consumer surplus = ( 70 − 25 ) × = = 5062.50 , or 5062.50 million Gsl
2 2
Marks allocation
some valid workings
for outline if the subsidy makes any difference [1 mark]
150
j Producer surplus with subsidy = ( 30 − 19.3 ) × = 802.5 , or 802 500 Gsl
2
82
Producer surplus without subsidy = ( 25 − 19.3 ) × = 228 , or 228 000 Gsl
2
Change = 228 − 802.5 = −574.5, or 574 500 Gsl decrease
5
Alternatively take the area of the trapezium: (150 + 80 ) × = 575 , or 575 000 Gsl decrease
2
(the difference with the above result is due to rounding).
Marks allocation
5
k (150 − 80 ) × = 175 , or 175 000 Gsl is welfare loss that was recovered.
2
Marks allocation
l The government has gained by not having to pay the subsidy. [1 mark]
Foreign producers have gained through the increase in their export revenues. [1 mark]
m Domestic producers have lost as their revenues decreased due to the fall in the price and fall in
quantity produced.
Marks allocation
for stating one stakeholder [1 mark]
for outlining why [1 mark]
n Consumers remained unaffected, as both the price they pay and the quantity they buy
remain the same. [2 marks]
Question 28 Export subsidies

a Price of coffee for producers with export subsidy = $2.50 [1 mark]
Price of coffee for consumers with export subsidy = $2.50 [1 mark]
b Price of coffee for producers without export subsidy = $2.00 [1 mark]
Price of coffee for consumers without export subsidy = $2.00 [1 mark]
c Price of coffee received by exporters with export subsidy = $2.00 [1 mark]

d Exports with export subsidy = 40 − 10 = 30, or 30 000 kg [1 mark]
Exports without export subsidy = 30 − 20 = 10, or 10 000 kg [1 mark]
Change = 10 − 30 = −20, or 20 000 decrease [1 mark]
e Export revenues with export subsidy = 2.00 × 30 = 60, or $60 000 [1 mark]
Export revenues without export subsidy = 2.00 × 10 = 20 or $20 000 [1 mark]
Change = 20 − 60 = −40, or $40 000 [1 mark]
f Consumer expenditure with export subsidy = 2.50 × 10 = 25, or $25 000 [1 mark]
Consumer expenditure without export subsidy = 2.00 × 20 = 40 or $40 000 [1 mark]
Change = 40 − 25 = 15, or $15 000 increase [1 mark]
g Producer revenue with export subsidy = 2.50 × 40 = 100, or $100 000 [1 mark]
Producer revenue without export subsidy = 2.00 × 30 = 60, or $60 000 [1 mark]
Change = 60 − 100 = −40, or $40 000 decrease [1 mark]
10
h Consumer surplus with export subsidy = ( 3 − 2.5 ) × = 2.5 , or $2500
2
20
Consumer surplus without export subsidy = ( 3 − 2 ) × = 10 , or $10 000
2
Change = 10 − 2.5 = 7.5, or $7500
0.5
Alternatively take the area of the trapezium: (10 + 20 ) × = 7.5 , or $7500
2
Marks allocation
40
i Producer surplus with export subsidy = ( 2.5 − 0.5 ) × = 40 , or $40 000
2
30
Producer surplus without export subsidy = ( 2 − 0.5 ) × = 22.5 , or $22 500
2
Change = 22.5 − 40 = −1.75, or $17 500 decrease
0.5
Alternatively take the area of the trapezium: ( 30 + 40 ) × = 17.5 , or $17 500 decrease
2
Marks allocation
0.50
j = ( 20 − 10 ) × = 2.50
2
0.50
Plus = ( 240 − 30 ) × = 2.50
2
Total $2.50 + $2.50 = $5.00 is welfare loss that was recovered
Marks allocation
k Government spending on the export subsidy was Q of exports × subsidy per unit
= 30 000 × 0.50 = $15 000 which the government no longer has to spend therefore
there is a gain for the government budget.
Marks allocation
l Marks allocation
for any two of the following: [4 marks]
•• consumers who now buy the good at a lower price and get a larger quantity
•• the government that no longer has to pay for the subsidy
•• foreigners who can export more.
m Producers, as they now receive lower price and produce a smaller quantity therefore having
lower revenues. [2 marks]
15 International trade: Part II

16 Exchange rates and the balance of payments

Question 29 Exchange rates
1
a =
1 Rvl = Mnl 0.4 Mnl
25
Marks allocation
b 1500 Rvl = 1500 × 0.4 Mnl = 600 Mnl
Marks allocation
c Since 1 Mnl = 2.5 Rvl, 175 Mnl = 2.5 × 175 = 437.5 Rvl
Marks allocation
d Since 1 Mnl = 2.7 Rvl, 175 Mnl = 2.7 × 175 = 472.5 Rvl
Marks allocation
e Currency appreciation refers to an increase in the value of the currency expressed in terms of
other currencies in a floating exchange rate system. [1 mark]
Currency depreciation refers to a decrease in the value of the currency expressed in terms of
other currencies in a floating exchange rate system. [1 mark]
In this case, when the value of 1 Mnl changed from 2.5 Rvl to 2.7 Rvl, the Mnl appreciated
(increased in value relative to the Mnl) and the Rvl depreciated (fell in value relative to the Mnl).
Marks allocation
2.7 − 2.5 0.2

f % appreciation of the Mnl = × 100 = × 100 = 8%
2.5 2.5
Marks allocation
g Marks allocation
for each of three valid factors leading to an appreciation of Moutainland’s currency [2 marks]
Question 30 Balance of payments

a For any one country, to show all payments received from other countries and all payments
made to other countries.
Marks allocation
for a vague response [1 mark]
for an accurate response [2 marks]
b See the table below for correct responses.
Marks allocation
for each correct figure [1 mark]
Billion Ocl
Current account
Exports of goods +25
Imports of goods –36
Balance of trade in goods –11
Exports of services +3
Imports of services –2
Balance of trade in services +1
Balance of trade in goods and services –10
Income +3
Current transfers +2
Balance on current account –5
Capital account
Capital transfers –4
Transactions in non-produced, non-financial assets +1
Balance on capital account –3
Financial account
Direct investment +6
Portfolio investment –2
Reserve assets +4
Balance on financial account +8
Balance 0
c Accounts in deficit: the current account and the capital account (debits are larger than credits,
therefore the balance has a negative sign). [2 marks]
Account in surplus: the financial account (credits are larger than debits, therefore the balance has a
positive sign). [1 mark]
d The central bank of Oceanland has bought 4 billion Ocl in 2010 by selling reserve currencies
(reserve assets). The + sign indicates that the 4 billion Ocl are a credit in the financial account,
meaning that there has been an inflow of Ocl. If the central bank had not purchased the Ocl,
there would be an overall deficit in the balance of payments, with an excess of debits over credits,
and the overall balance of the balance of payments would not be zero.
Marks allocation
for a vague response [1–2 marks]
for an accurate response [3–4 marks]
e The depreciation of the Ocl is undertaken with a view to correcting the trade deficit, by
encouraging exports to increase and imports to decrease. Whether or not the depreciation
will have the desired effect depends on the Marshall–Lerner condition, which is that a currency
depreciation will work to reduce the trade deficit if the sum of the price elasticities of demand
(PEDs) for imports and exports is greater than 1; if this sum is less than 1 then the depreciation
will have the effect of making the trade deficit larger. In Oceanland’s case, over the short-term
(less than six months, PEDx + PEDm = 0.49 + 0.39 = 0.86 < 1. Therefore during this period
the trade deficit is likely to become larger and the balance on current account will worsen.
Marks allocation
for a vague response [1–2 marks]
for an accurate response [3–4 marks]
f Over the longer term (more than six months) PEDx + PEDm = 0.75 + 0.83 = 1.66, which is
greater than 1. Therefore during this period it is likely that Oceanland’s trade deficit will start
to shrink and its current account balance will begin to improve.
Marks allocation
for a vague response [1 mark]
for an accurate response [2 marks]
g Marks allocation
for correctly drawing and labelling a J-curve [1–2 marks]
for explaining that the deterioration in the trade balance is likely to occur over the short term
because the PEDs for exports and imports tend to be low over short periods of time, adding
up to less than 1, as in Oceanland’s case. Over longer periods, the PEDs of exports and
imports are likely to increase; if their sum becomes greater than 1, as in Oceanland’s case,
then the depreciation will lead to an improvement in the trade balance.
The J-curve effect can be explained by the Marshall–Lerner condition. [3–4 marks]
Chapter 17–20
There are no calculations in these chapters.

P2 - and - P3 - Calculations Questions Answers

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ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER MARKSCHEMES

2 Competitive markets: Demand and supply

Question 3 Income elasticity of demand

%∆Q −9% −9%

Question 4 Price elasticity of supply

b Shortage = 10 − 6 = 4000 kg per day

h To make essential goods or services accessible to people on low incomes. [1 mark]

Question 6 Price floors

b Excess supply or surplus = 12 − 4 = 8 or 8000 kg per day

Question 7 Indirect taxes

g Initial consumer expenditure = 1 × 6 = $6.00 [1 mark]

Welfare loss = (1.25 − 0.50 ) ×

5 Market failure and socially undesirable

6 Market failure and socially undesirable outcomes

7 Market failure and socially undesirable outcomes

Output (or total product) 0 1 2 3 4 5 6

Question 12 Profits, revenues and costs

Output (or total product) (units) 0 1 2 3 4 5

Question 13 Perfect competition

Question 14 Monopoly and imperfect competition

8 The level of overall economic activity

Question 16 National income accounting and economic growth

Year 2017 2018 2019 2020

9 Aggregate demand and aggregate supply

10 Macroeconomic objectives I: Low

Question 18 Inflation and the CPI (HL only)

12 Economics of inequality and poverty

c cumulative percentage of income 100

Question 20 Taxation (HL only)

tax bracket tax paid (Mnl)

tax bracket tax paid (Mnl)

tax bracket tax paid (Mnl)

13 Demand-side and supply-side policies

Question 22 Real versus nominal interest rates

14 International trade: Part I

f Fruitland will become an exporter of kiwis. [1 mark]

Question 24 Absolute and comparative advantage (HL only)

c Refer to the table for correct answers.

Opportunity cost of good A Opportunity cost of good B

b Refer to Figure Q25 for the correct answers.

P of seafood with tariff = 25 Rvl  [1 mark]

Quota = 150 000 kg 

Question 27 Production subsidies

Question 28 Export subsidies

c Price of coffee received by exporters with export subsidy = $2.00 [1 mark]

15 International trade: Part II

16 Exchange rates and the balance of payments

2.7 − 2.5 0.2

Question 30 Balance of payments

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h To make essential goods or services accessible to people on low incomes. [1 mark]

g Initial consumer expenditure = 1 × 6 = $6.00 [1 mark]

f Fruitland will become an exporter of kiwis. [1 mark]

P of seafood with tariff = 25 Rvl [1 mark]

Quota = 150 000 kg

c Price of coffee received by exporters with export subsidy = $2.00 [1 mark]