Example test [138 marks]

1. [Maximum mark: 30] 22N.3.HL.TZ0.1

“Best Meals” is one of many small catering companies, each of which prepares a
variety of different meals for airlines in Country X. Table 1 shows the costs of
production in US dollars (US$) on a per hour basis for “Best Meals”.

Table 1

(a.i) Determine the missing cost figures and insert your answers in
Table 1. [2]

(a.ii) Assuming that this catering market is in long-run equilibrium,

sketch a diagram in which the profit-maximizing level of output
for a firm in this market is shown.

[2]
The catering companies buy tomatoes from the domestic market to prepare their
meals. Figure 1 illustrates the domestic market for tomatoes, which is perfectly
competitive. S is supply and D is demand.

Figure 1

In order to support the incomes of the tomato farmers, the government of

Country X has set a price floor (Pmin) at US$2.80 per kilogram.

(a.iii) Using Figure 1, calculate the change in the consumer surplus

resulting from this government intervention. [2]
(a.iv) With reference to Figure 1, explain how the price floor will
impact on allocative efficiency in the market for tomatoes. [4]

(a.v) Calculate the indirect tax paid by airlines for the catering meals
they bought in 2021 if the domestic indirect tax rate on food
was 6.5% and their expenditure on meals was US$54 506.70. [2]
The information that follows refers to the aviation industry, which is considered
a significant contributor to global warming and climate change.

Table 2: Energy used and carbon dioxide (CO2) emissions for rail travel and
air travel

______________________________________________________

1 joule: a standard unit of energy

2 passenger kilometre: one passenger travelling one kilometre

Table 3: Estimates of price elasticities of demand (PED) for leisure and

business air
travel and estimates of income elasticities of demand (YED) for domestic
and international air travel routes

The aviation sector creates emissions that account for about 4.9% of human
made global warming and its share of greenhouse gas emissions is rapidly
growing.
A flight from San Francisco to Paris can produce around 1.25 metric tons of
carbon emissions per passenger. This is more CO2 than the average person
in certain countries generates in an entire year.
 The energy source for aircraft is not easily substitutable. Road and rail-
based passenger vehicles can switch from carbon-based fuels to renewably
sourced electricity. Aviation emissions are thus not expected to be easily
reduced.
The aviation industry’s growth has also accelerated as a result of subsidies,
including general sales tax and fuel tax exemptions, which are unavailable
to other modes of transport.

[Source: De Bruyckere, L., and Abbasov, F., 2016. Aviation ETS – gaining altitude - An analysis of
the aviation EU ETS
2013-2015 [online] Available at:
https://www.transportenvironment.org/sites/te/files/2016_09_Aviation_ETS_
gaining_altitude.pdf [Accessed 29 September 2021]. Source adapted.

Brajcich, K., 2020. What are Carbon Offsets and How Do They Work? [online] Available at:
https://sustainabletravel.org/how-carbon-offsets-work/ [Accessed 29 September
2021]. Source adapted.

Zeng, Youzhi & Ran, Bin & Zhang, Ning & Yang, Xiaobao, 2021. Estimating the
Price Elasticity of Train Travel
Demand and Its Variation Rules and Application in Energy Used and CO2
Emissions. Sustainability. 13(2), 475.

Table 2 U.S. Department of Energy, U.S. Department of Transportation and U.S.

Environmental Protection Agency, n.d.]
(a.vi) The impact of a 4.5% rise in the price of airline tickets on the
quantity of leisure travel demanded has been calculated to be
−10.26%. Using the figures in Table 3, calculate the impact of

the same 4.5% rise in the price of airline tickets on the quantity
of business travel demanded. [2]
The Economist Intelligence Unit is predicting that between 2020 and 2030,
global incomes will rise on average by 3 % annually.

(a.vii) Using relevant information from Table 3, describe the expected

impact this rise in global incomes will have on the demand for
domestic routes in relation to the demand for international
routes. [2]

(a.viii) The information strongly suggests that the aviation industry is

responsible for a significant market failure. Using this
information and an appropriate diagram, explain the market
failure the aviation industry creates.
[4]
(b) Using the text/data provided and your knowledge of
economics, recommend a policy that may be implemented to
reduce the contribution of emissions the aviation industry
makes to global warming. [10]
2. [Maximum mark: 28] 23M.3.HL.TZ0.1
Capsicum prices reach NZ$24 per kilogram

The price of capsicums, a common vegetable in New Zealand, reached an all-

time high of NZ$24 per kilogram (kg) in 2021. Vegetable prices in New Zealand
rose 15 % in 2021, driven by higher prices for cucumbers, lettuce, capsicums and
broccoli.

A consumer prices analyst said “prices for many vegetables typically rise in
winter. However, we are seeing larger rises than usual for this time of the year
and for a greater number of vegetables.” It has been suggested that price
increases are larger than usual because of the market power of the supermarkets
in New Zealand.

Figure 1 illustrates a decrease in supply in the market for capsicums in New

Zealand.

Figure 1
High profits: New Zealand considers breaking up supermarket duopoly¹

New Zealand’s supermarket industry is dominated by two huge firms, Foodstuffs

and Woolworths. Together, their stores control about 85 % of the total market,
giving them significant market power.

A report by the New Zealand Commerce Commission has found that these
supermarkets are making huge profits and charging some of the highest prices
in the OECD².

A government official said the government would “do whatever it takes to make
sure New Zealanders get a fair deal at the checkout”.

The major retailers appear to avoid competing strongly with each other,
particularly on price. Meanwhile, competitors wanting to enter the market or
expand face significant barriers to entry, including a lack of suitable sites for
large scale stores.

The government has strict regulations limiting the sites that can be used for
building supermarkets. The big supermarkets have been buying the limited sites
in order to prevent competitors from entering the market.

It has been reported that the entry of a German retailer into the Australian
supermarket industry, which was also dominated by two firms, has increased
competition, cut prices by around 13 % and saved customers more than NZ$2
billion per year.
----------------------------------------------------------------------------------------------------------
-------------------

¹ duopoly: a market dominated by two firms

² OECD: The Organisation for Economic Co-operation and Development

Figure 2 illustrates a market in which two firms act as a monopolist in the market
for cheese by colluding on the price they charge.

Figure 2
(a.i) Using the information in Figure 1, calculate the price elasticity
of demand for capsicums when the price increases from NZ$18
per kg to NZ$24 per kg. [2]
(a.ii) Calculate the loss in consumer surplus resulting from the
increase in the price of capsicums from NZ$18 per kg to NZ$24
per kg. [2]

(a.iii) Calculate the revenue per kilogram (after tax has been paid) to
producers when the price is NZ$24 per kg. [2]

(a.iv) With reference to Figure 1, explain why the price elasticity of

demand for capsicums would change if the price continued to
increase beyond NZ$24 per kg. [4]
(a.v) Define the term market power. [2]

(a.vi) With specific reference to the information in Figure 2, explain

how two firms acting as a monopolist by colluding on price [4]
could lead to market failure.
(a.vii) Using the data provided in Figure 2, calculate the profit earned
by these firms if they are operating at the profit-maximizing
level of output in the market for cheese. [2]

(b) Using the text/data provided and your knowledge of

economics, recommend a policy which could be introduced by
the New Zealand Commerce Commission to limit the possible
abuse of market power in the supermarket industry in New
Zealand. [10]
3. [Maximum mark: 30] 22M.3.HL.TZ0.1
Burundi is a landlocked country in Central Africa. Its economy is heavily reliant
on the agricultural sector, which employs 92 % of the labour force but
contributes only 40 % of gross domestic product (GDP). Most of the 11.5 million
population live in poverty, especially in rural areas. The level of food insecurity
(people without access to enough food) is almost twice as high as the average
for sub-Saharan African countries with more than 60 % of the population living
below the poverty line.

Infrastructure in Burundi is poor. There are no railroads and only three major
routes through the country, two of which involve water transport, across Lake
Tanganyika. Access to clean water is low, while fewer than 5 % of the population
have access to electricity. The literacy rate for those aged 15 and over is 61.6 %,
while only 1 % of secondary schools have access to the internet.

Table 1: Labour market data for Burundi (2019)

(a.i) Using the information provided in Table 1, calculate the rate of

unemployment for Burundi in 2019. [2]

Approximately 92 % of the labour force are employed in agriculture, which

contributes 40 % of Burundi’s GDP.
(a.ii) Explain why dependence on primary sector production may be
considered a barrier to economic development. [4]

Trade
The main exports of Burundi in 2018 were gold (41.4 %), coffee (17.3 %) and tea
(9.5 %), while refined petroleum (17.3 %) was its main import. Although the
current account deficit was reduced to 10 % of GDP in 2019, there remains a
huge imbalance between exports and imports. Reserve assets do not cover more
than one month of imports, while the economy relies on foreign aid and foreign
direct investment (FDI) to finance the deficit. The low level of foreign aid is likely
to be insufficient to finance the deficit.

On the upside, Burundi has an abundance of minerals, including 6 % of the

world’s nickel reserves. It is the only African country producing rare-earth
minerals, which are used in many hi-tech products, such as smartphones. The
United States (US) has been keen to diversify its supply of rare-earth minerals
because of its trade dispute with China.

Figure 1 shows the market for gold in Burundi. Dd and Sd represent the yearly
domestic demand and supply functions for gold, while Sw and Sw1 represent the
world supply of gold in 2019 and 2020 respectively. The price of gold is measured
in US dollars (US$) per ounce (oz). The world price increased from US$1500 per
oz to US$1800 per oz between July 2019 and July 2020.
Figure 1

(a.iii) Using the information in Figure 1, calculate the price elasticity

of demand for gold in Burundi when price increases from
US$1500 per oz to US$1800 per oz. [2]
(a.iv) Using the information in Figure 1, calculate the change in the
value of Burundi’s gold exports resulting from the increase in
the price of gold from US$1500 per oz to US$1800 per oz. [2]

Government finance

The budget deficit of Burundi increased in 2019, partly due to an inefficient

system for collection of taxes. Tax rates in Burundi are given in Table 2.

Table 2

* Top rates of personal income tax in other countries are often much higher,
such as 57.2 % in Sweden and 35 % in Mexico.

(a.v) Define the term progressive tax. [2]

A firm in Burundi paid 32 000 Burundi francs (Fbu), including VAT, in order to
purchase a piece of industrial equipment. The rate of VAT for this equipment is
20 %.

(a.vi) Calculate the amount of VAT which was paid on the purchase of
this equipment. [2]

(a.vii) Sketch an AD/AS diagram to illustrate the possible effect on the

Burundian economy in the long run if the government reduces
the rate of corporate income tax from 30 % to 26 %.
 [2]

Gender inequality in Burundi

Table 3 illustrates selected indicators of gender inequality in Burundi compared

with Mexico and Sweden.

Table 3
(a.viii) With reference to the data in Table 3, explain two ways in
which gender inequality might act as a barrier to economic
development in Burundi. [4]

[Source: United Nations Development Programme, 2020. The Next Frontier: Human
Development and the Anthropocene [online] Available at:
http://hdr.undp.org/sites/default/files/Country-Profiles/BDI.pdf [Accessed 20
April 2020]. Source adapted.

The World Bank, n.d. Population, total – Burundi [online] Available at:
https://data.worldbank.org/indicator/SP.POP.
TOTL?locations=BI [Accessed 20 April 2020]. Source adapted.

United Nations Development Programme, n.d. Human Development Reports [online]

Available at:
http://www.hdr.undp.org/en/countries/profiles/BDI [Accessed 20 April 2020].
Source adapted.]
(b) Using the text/data provided and your knowledge of
economics, recommend a policy which could be introduced by
the government of Burundi to reduce income inequality in
Burundi. [10]
4. [Maximum mark: 25] 21M.3.HL.TZ0.3
Note that a widget is an imaginary product.

In the country of Laurania, the widget industry operates as an oligopoly. The

Minister for Finance is worried that the firms in the industry might abuse their
power by acting together as a monopoly, and has said that the industry’s
concentration ratio is cause for concern.

(a) Outline how a concentration ratio might be used to identify an

oligopoly. [2]

(b) Using a diagram to support your answer, explain how

monopoly power can create a welfare loss. [4]
(c) State two government responses to the abuse of monopoly
power. [2]

(d) It has been observed that the law of diminishing returns

operates in the widget industry.

Outline the law of diminishing returns. [2]

A firm operates under conditions of diminishing returns.

(e.i) Sketch the marginal product (MP) and average product (AP)
curves for this firm.

[2]
(e.ii) Sketch the total product (TP) curve for this firm.

[1]
The demand curve faced by firms in the widget industry is downward sloping.

(f.i) Sketch the marginal revenue (MR) curve for firms in the widget
industry.

[1]
(f.ii) Sketch the total revenue (TR) curve for firms in the widget
industry.

[1]
Figure 3 shows the marginal cost (MC) curve, the average variable cost (AVC) curve
and the average total cost (ATC) curve for a firm in the widget industry.

Figure 3
(g.i) Calculate the firm’s total variable costs if output is 20 000
widgets per month. [1]

(g.ii) Identify the level of output at which the firm would achieve
productive efficiency. [1]

(g.iii) Calculate the firm’s monthly total fixed costs if output equals 50
000 units per month. [2]

One firm in the widget industry uses the practice of price discrimination,
charging a lower price to one group of consumers than to another group, even
though there is no difference in the cost of supplying to each group.

(h.i) State two conditions necessary for price discrimination to take

place. [2]
(h.ii) Using a diagram (or diagrams), explain why a profit maximizing
firm might charge a higher price in one market than in another. [4]
5. [Maximum mark: 25] 21N.3.HL.TZ0.3
Table 5 shows selected items of the balance of payments for Laylaland in 2020.
Figures are in millions of US dollars (US$).

Table 5

(a) Distinguish between credit and debit items in the balance of

payments. [2]

(b) State one example of a debit item from the financial account of
the balance of payments. [1]

(c) Using Table 5, calculate the value of net current transfers for
Laylaland in 2020. [1]
Laylaland has a current account deficit of US$1865 million.

(d) Using Table 5, calculate the net exports of goods and services
for Laylaland in 2020. [2]

(e) Explain two methods that Laylaland’s government could use to

correct the current account deficit. [4]

Chia seeds are an agricultural good produced in many countries and priced in US
dollars (US$).
Figure 1 illustrates the market for chia seeds in a small country called
Nofiberland. D is the domestic demand and S is the domestic supply for chia
seeds. Chia seeds can be initially imported at the current world price of US$15.00
per kg. Sw is therefore the world supply faced in Nofiberland with free trade. To
protect Nofiberland producers, the government decides to impose a US$6.00
tariff on chia seed imports. St is therefore the world supply faced in Nofiberland
after the tariff is imposed.

Figure 1

(f ) List two administrative barriers that Nofiberland could have

used to limit imports of chia seeds. [2]
(g) Calculate the price elasticity of demand for chia seeds in
Nofiberland following the imposition of the tariff. [2]

(h) Calculate the change in consumer expenditure on imported

chia seeds in Nofiberland resulting from the imposition of the
tariff. [2]

(i) Calculate the total welfare loss resulting from the imposition of
the tariff on chia seeds. [2]
(j) Outline one reason why the imposition of the tariff would lead
to a welfare loss. [2]

Quinoa is a great source of protein and is thus considered a “super food”. As a

result, the demand for quinoa in advanced economies has lately been rising very
fast while global supply has not changed. A small country called Proteinland
gets 80 % of its export revenues from exporting quinoa to advanced economies.

(k) Describe the impact of the rise in demand for quinoa on the
terms of trade of Proteinland. [1]

(l) Explain how the increase in world demand for quinoa would
likely affect the current account balance of Proteinland. [4]
© International Baccalaureate Organization, 2023