Economics

Higher Level
Paper 3

Instructions to candidates:
● You are permitted to use a calculator for this paper
● Use fully labelled diagrams where appropriate
● Answer all the questions
● Your answers must be written in the boxes provided
● Unless otherwise stated in the question, all numerical answers must be given exactly or correct to
two decimal places
● You must show all of your working
● Total marks 50 marks

1. Refer to the diagram to answer the following questions [14]:

a. Calculate the total tax revenue collected by the government from the imposition of the tax. [2]
Total tax revenue = 30 000 *10 = $300 000

Therefore, the total tax revenue is $300 000.

b. Calculate the incidence of tax paid by the consumer. [2]

The incidence of tax paid by the consumer is $150 000

= 40 000 * 15 - 30 000 * 10

= 300 000

Therefore the change in producer revenue is 300 000 less.

d. Calculate the change in consumer expenditure. [2]

=(15*40 000) - (20*30 000)

=0

There is no change in consumer expenditure.

e. Calculate the value of the consumer surplus after the imposition of the tax. [2]
Consumer surplus after tax = 0.5 * 30 000 * 15

= 225000

The value of consumer surplus after the imposition of the tax 225000

f. Calculate the value of the producer surplus after the imposition of the tax. [2]
Producer surplus after tax = 40 000 * 15 - (30 000 *10)

= 300 000

Therefore the producer surplus after imposition of tax is 300 000.

g. Calculate the welfare loss resulting from the imposition of the tax. [2]
Welfare loss= 10 000 * 10/2 = 50 000
 2. The following diagram illustrates the domestic market for rice in Country Alpha [16].

a. The government in Alpha imposes a price ceiling of $5 per kilogram. Draw and label the price
ceiling on the graph above. [1]

b. Calculate the impact of a price ceiling in the market of rice. [2]

welfare loss = 1/2 (2*2 000) + ½ (1* 2000) = 2000 + 1000 = $3000 welfare loss

c. Calculate the change in consumer expenditure after the imposition of a price ceiling. [2]

Change in consumer expenditure = consumer expenditure before - consumer exp. after

=8000 * 6 - (9000 * 5)

=$3000 less

Therefore, consumers are spending $3000 less after the imposition of the price ceiling.
 d. Calculate the change in producer revenue after the imposition of a price ceiling. [2]

Change in producer revenue= producer revenue before - producer revenue after

= 6*8000 - (5*9000)

= $3000

Therefore, producer revenue decreases by $3000

e. Now the government of Alpha has decided it will impose a floor price of $9 per kilogram on rice.
Draw and label the floor price on the graph above. [1]

← Floor price

f. Calculate the impact of a floor price in the market of rice. [2]

Excess of supply = 14000 - 8000 = 6000kgs excess in supply of rice

Welfare loss = 0.5*6(3000)

= 9000
 g. Calculate the change in consumer expenditure after the imposition of a floor price. [2]

Change in consumer expenditure = consumer expenditure before - after

= 9(14000) - 6(8000)

=-$78000

Therefore, the change in consumer expenditure is that it is $78 000 more.

h. Calculate the change in producer revenue after the imposition of a floor price. [2]

Change in producer revenue = producer revenue before - after

=14 000(9) -6(8000)

=78000

Change in producer revenue is 78 000 increase.

i. Suppose the government decides to purchase any surplus of rice. Calculate the cost of this
government expenditure. [2]

6000kgs excess in supply of rice

Cost of expenditure = 9 *6000

= $54 000

Therefore if the government purchase surplus of rice, it will cost $54 000

3. Figure 3 illustrates the market for cotton in the country of San Marcus, a small closed economy. Cotton is
used as an input in the San Marcus textile industry. Quantity is in thousands of kilograms (kg). [20]

a. Calculate the social (community) surplus in the market for cotton in San Marcus [2].

Community surplus = producer s + consumer s

= (6 * 50 000)/2 + (10 * 50 000)/2

= 400 000

b. The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its
producers of cotton. Draw and label the new supply curve following the granting of the subsidy to
domestic cotton producers on Figure 3. Identify the new equilibrium point and quantity.[2]
New Equilibrium point = (75 000, 5), Quantity at equilibrium =75 000, Price at equilibrium = 5

c. Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton
producers. [2]

Cost of Subsidy = 75 000 (8)=600 000

Therefore, the government needs to pay $600 000 for the cost of the subsidy

d. Calculate the resulting change in consumer expenditure following the introduction of the subsidy to
cotton consumers in San Marcus. [2]

Change in consumer expenditure = Second consumer exp. - 1st consumer exp.

= 75000(5) - 50 0000(10) = -$125 000

e. Calculate the change in producer revenue following the subsidy provided to cotton. [2]

Change in producer revenue= producer expenditure before - producer expenditure after subsidy

= 50000(3) + ½(3*25000)

= $187 500

f. Calculate the resulting change in producer surplus resulting from the subsidy. [2]

Change in consumer surplus= 50000(5)+½(3*25000)

=$312500

Therefore consumer surplus will decrease by $312 500

g. Calculate the resulting change in the consumer surplus resulting from the subsidy. [2]

Change in producer surplus = 50000(5)+½(25000*5)

= $312500

Consumer surplus will increase by $312500

h. Calculate the welfare loss to society from the subsidy provided to cotton in San Marcus. [2]

Welfare loss = ½(25000*8)= 100 000

As a result, the welfare loss is $100 000

i. Analyze the impact to the government of providing the subsidy to the cotton market in San Marcus.
[4]

-by providing the subsidy to the cotton market, the government may have received good opinions from those in

In the cotton industry, political gain.

Government sufferers financially as this it needs to cover the cost of the subsidy

-Subsidy generates welfare loss as a downside.