2018 Nov Economics - Paper - 3 - HL

N18/3/ECONO/HP3/ENG/TZ0/XX
Economics
Higher level
Paper 3
Thursday 1 November 2018 (morning)

Candidate session number
1 hour
Instructions to candidates
• Write your session number in the boxes above.
• You are permitted access to a calculator for this paper.
• Do not open this examination paper until instructed to do so.
• Answer two questions.
• Answers must be written within the answer 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 your working.
• The maximum mark for this examination paper is [50 marks].
8818 – 5107
17 pages © International Baccalaureate Organization 2018
20EP01
–2– N18/3/ECONO/HP3/ENG/TZ0/XX
Answer two questions. Each question is worth [25 marks]. Answers must be written within the answer
boxes provided.
1. Firm A produces cartons of coffee. Figure 1 illustrates the firm’s total cost (TC) and
variable cost (VC) at different output levels per month.
Figure 1
2000
1800
TC
1600
Costs, revenue ($ per carton)
1400
VC
1200
1000
800
600
400
200
0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
Quantity of cartons of coffee per month
(a) (i) Calculate Firm A’s average fixed costs when it is producing 125 cartons
of coffee per month. [2]
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20EP02
(Question 1 continued)
(ii) Calculate Firm A’s average variable costs when it is producing 125 cartons
of coffee per month. [2]
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20EP03
Figure 2 illustrates the average total cost (ATC), average variable cost (AVC) and marginal cost (MC)
at different output levels for Firm B, which produces cans of tea.
Figure 2
40
30
MC
Costs, revenue ($ per can)
ATC
25
AVC
20
15
10
0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170
Quantity of cans of tea per month
(b) (i) Using Figure 2, calculate the average fixed costs when 80 cans per month are
produced.[1]
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(ii) Using Figure 2, calculate the total costs when 55 cans per month are produced. [2]
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20EP04
(iii) Explain why in the short run, as output increases, marginal costs typically
decrease and then increase. [4]
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The price of tea in the perfectly competitive tea market is presently $21 per can.
(c) (i) Using this information, draw and label the average revenue curve on Figure 2.[1]
(ii) Using Figure 2, identify the quantity of cans per month Firm B must produce
in order to maximize profits. [1]
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(iii) Calculate the economic profit when Firm B is producing at the output level
identified in part (c)(ii). [2]
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20EP05
(d) Sometimes a firm continues to produce in the short run, even when it is making
an economic loss. Explain why the firm might choose to do this. [2]
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(e) Outline why a perfectly competitive firm is a “price taker”. [2]
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(f) Firm B and all the other firms in the tea market begin to sell their tea in distinctive
packages and many differentiate their product with organic tea or fruit flavours.
Explain how the demand curve faced by Firm B will change as a result. [2]
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20EP06
(g) Firm B conducted a market survey and found out that the price elasticity of demand
for its brand of tea is 0.8 among urban customers, whereas it is 1.2 among customers
in rural areas. The sales director said “This information could help Firm B to raise its
revenue, by trying to separate the two markets, provided that certain conditions are
satisfied”. Explain this statement. [4]
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20EP07
2. Figure 3 illustrates the market for cotton in the country of San Marcus, a small closed
economy. Cotton is used as an input in the San Marcus textile industry. Quantity is in
thousands of kilograms (kg).
Figure 3
20
18 Demand (D) Supply (S)
16
14
Price ($ per kg)
12
10
0
0 20 40 60 80 100 120 140
Quantity per period (thousands of kg)
(a) (i) Define the term social (community) surplus.[2]
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20EP08
(ii) Calculate the social (community) surplus in the market for cotton in San Marcus. [2]
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The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its
producers of cotton.
(b) (i) Draw and label the new supply curve following the granting of the subsidy
to domestic cotton producers on Figure 3.[2]
(ii) Calculate the cost to the government of San Marcus of providing this subsidy
to domestic cotton producers. [2]
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(iii) Calculate the resulting change in producer surplus following the introduction
of the subsidy to cotton producers in San Marcus. [2]
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(iv) Calculate the change in the consumer surplus resulting from the subsidy. [2]
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20EP09
– 10 – N18/3/ECONO/HP3/ENG/TZ0/XX
(c) Explain two reasons why the government of San Marcus may have decided to grant
a subsidy to its cotton producers. [4]
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San Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize trade,
becoming an open economy.
(d) State two functions of the WTO. [2]
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20EP10
The world price for cotton is $2 per kg. The WTO permits the government of San Marcus to maintain
the $8 subsidy.
(e) (i) Plot and label the world cotton supply curve that San Marcus now faces
on Figure 3.[1]
(ii) With reference to your answer in part (b)(ii), calculate the change in the cost of
financing the $8 per kg subsidy to the government of San Marcus following the
decision to import cotton from the world market. [2]
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(iii) Explain one possible advantage and one possible disadvantage for the

San Marcus economy of the decision to join the WTO and slowly liberalize trade. [4]
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20EP11
3. The information provided in Table 1 represents data for Country X in 2015.
Table 1
Item $ billion
Imports 289
Transfer payments 253
Saving 82
Exports 234
Income from employment 1160
Taxation 396
Consumer spending 745
Investment 229
Net factor income from abroad –111
Government spending on goods and services 437
(a) Calculate gross domestic product (GDP) for Country X in 2015. [2]
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(b) Calculate gross national income (GNI) for Country X in 2015. [1]
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20EP12
The information provided in Table 2 relates to Country Y.
Table 2
Year Consumer price index (CPI) GDP deflator GDP ($ million)
2014 100 100 4465
2015 105.35 105.11 4814
2016 109.21 108.92 5026
(c) Calculate the rate of consumer price inflation in 2016. [1]
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(d) Using the GDP deflator, calculate the percentage change in real GDP between 2014
and 2015. [2]
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20EP13
Figure 4 represents the circular flow of income in Country A, with values in billions of dollars ($).
Figure 4
FIRMS
Investment (I) Government Spending (G) Exports (X)

$35 bn $25 bn $30 bn
(V)
Banks, etc. Government Abroad
$200 bn
Net saving (S) Net taxes (T) (M)

$40 bn $30 bn $20 bn
HOUSEHOLDS
(e) (i) Identify the term represented in Figure 4 by the letter V.[1]
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(ii) Identify the term represented in Figure 4 by the letter M.[1]
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(f) State the four factor payments which constitute the income flow in
the circular flow of income model. [2]
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20EP14
(g) Define the term leakages.[2]
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(h) Determine the size of the budget surplus/deficit and state which using Figure 4.[1]
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The government of Country A decides to increase the level of taxation to $34 billion.
(i) Using an AD/AS diagram, explain how this may affect the level of unemployment. [4]
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20EP15
Table 3 provides information on the rates of direct tax in Country A.
Table 3
Annual income ($) Rate of direct tax
0–12 000 5 %
12 001– 27 500 12 %
27 501– 60 000 21.5 %
60 001+ 32 %
(j) Calculate the average tax rate for an individual who earns $64 000 per year. [2]
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Table 4 provides information on the household distribution of income in Country A.
Table 4
Percentage of total household

Household quintiles
income earned by each quintile
Lowest 20 % 5 %
2nd lowest 20 % 10 %
3rd lowest 20 % 15 %
2nd highest 20 % 20 %
Highest 20 % 50 %
20EP16
(k) Draw and label the Lorenz curve diagram for Country A on Figure 5.[2]
Figure 5
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90
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70
60
50
40
30
20
10
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0 10 20 30 40 50 60 70 80 90 100
(l) Explain how an increase in the top rate of direct tax from 32 % to 36 % might affect
equity and efficiency in Country A. [4]
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20EP17
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20EP18

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20EP19

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20EP20

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N18/3/ECONO/HP3/ENG/TZ0/XX

Thursday 1 November 2018 (morning)

(This question continues on the following page)

(This question continues on the following page)

(This question continues on the following page)

(This question continues on the following page)

(e) Outline why a perfectly competitive firm is a “price taker”. [2]

(This question continues on the following page)

18 Demand (D) Supply (S)

(a) (i) Define the term social (community) surplus.[2]

(This question continues on the following page)

(This question continues on the following page)

(d) State two functions of the WTO. [2]

(This question continues on the following page)

(iii) Explain one possible advantage and one possible disadvantage for the

3. The information provided in Table 1 represents data for Country X in 2015.

Transfer payments 253

Income from employment 1160

Consumer spending 745

Net factor income from abroad –111

Government spending on goods and services 437

(a) Calculate gross domestic product (GDP) for Country X in 2015. [2]

(b) Calculate gross national income (GNI) for Country X in 2015. [1]

(This question continues on the following page)

The information provided in Table 2 relates to Country Y.

Year Consumer price index (CPI) GDP deflator GDP ($ million)

2014 100 100 4465

2015 105.35 105.11 4814

2016 109.21 108.92 5026

(c) Calculate the rate of consumer price inflation in 2016. [1]

(This question continues on the following page)

Investment (I) Government Spending (G) Exports (X)

Net saving (S) Net taxes (T) (M)

(ii) Identify the term represented in Figure 4 by the letter M.[1]

(This question continues on the following page)

(g) Define the term leakages.[2]

The government of Country A decides to increase the level of taxation to $34 billion.

(This question continues on the following page)

Table 3 provides information on the rates of direct tax in Country A.

Annual income ($) Rate of direct tax

Table 4 provides information on the household distribution of income in Country A.

Percentage of total household

Lowest 20 % 5 %

2nd lowest 20 % 10 %

3rd lowest 20 % 15 %

2nd highest 20 % 20 %

Highest 20 % 50 %

(This question continues on the following page)

Answers written on this page

Answers written on this page

Answers written on this page

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(e) Outline why a perfectly competitive firm is a “price taker”. [2]

(a) (i) Define the term social (community) surplus.[2]

(d) State two functions of the WTO. [2]

(a) Calculate gross domestic product (GDP) for Country X in 2015. [2]

(b) Calculate gross national income (GNI) for Country X in 2015. [1]

(c) Calculate the rate of consumer price inflation in 2016. [1]

(ii) Identify the term represented in Figure 4 by the letter M.[1]

(g) Define the term leakages.[2]