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Free International Baccalaureate Diploma Programme Exam Style Questions
Challenge yourself with our free International Baccalaureate Economics past paper questions. Covering a spectrum of economic theories and principles, these questions will aid in reinforcing your understanding and preparation for the IB Economics examinations.
Question 1
Using your understanding of economics, highlight why the price elasticity of supply (PES) for primary commodities tends to be lower relative to the PES for manufactured products.
[ 10 ]
Answer
- Definition of price elasticity of supply: Price Elasticity of Supply (PES) is a measure of the responsiveness of the quantity supplied of a good or service to changes in its price. It indicates how much the quantity supplied changes in percentage terms in response to a one percent change in price.
- Diagram to illustrate PES of manufactured goods and primary commodities: For manufactured goods, the PES tends to be relatively elastic, represented by a flatter supply curve. This indicates that the quantity supplied is highly responsive to changes in price. On the other hand, for primary commodities, the PES tends to be relatively inelastic, represented by a steeper supply curve, indicating that the quantity supplied is less responsive to price changes.
- An explanation of the various determinants of PES (including time, mobility of factors of production, unused capacity and ability to store stocks) leading to an explanation of why the PES for primary commodities tends to be relatively low and PES for manufactured products tends to be relatively high:
- Time: PES is influenced by the time period considered. In the short run, it is challenging for producers to adjust their output levels, leading to relatively inelastic supply. In the long run, firms have more flexibility to adjust production, leading to relatively elastic supply.
- Mobility of Factors of Production: The ease with which factors of production (e.g., labor, capital, raw materials) can be reallocated between different goods affects PES. If factors of production are specialized and not easily transferable, supply is likely to be inelastic.
- Unused Capacity: If producers have unused capacity, they can respond more easily to price changes and increase supply, resulting in a more elastic response.
- Ability to Store Stocks: Goods that can be easily stored, such as manufactured products, tend to have a more elastic supply. Producers can accumulate stocks during periods of low demand and release them when demand increases.
- Examples of PES for primary and manufactured goods, or examples of primary and manufactured products: Primary Commodities: Agricultural products, such as wheat, coffee, and soybeans, typically have a low PES. The supply of these goods is constrained by factors such as weather conditions, land availability, and the time it takes to grow crops. For example, if the price of wheat increases, it is difficult for farmers to immediately increase their wheat output due to the time required for planting and harvesting.
Rationale
Ensure to pay attention to the steepness/slope of the supply curve(s)
Question 2
Evaluate two possible government policy responses to threats of sustainability.
[ 15 ]
Answer
- Definition of sustainability
- An explanation of two possible policies such as legislation, carbon taxes, cap and trade schemes and funding for clean technology. A consideration of the limitations / strengths of government responses generally
- Diagrams to show the application of the policies selected
- Examples of the application of policies
- Synthesis or evaluation (discuss).
Question 3
The weekly demand and supply functions for coffee in Atlantis are expressed by
the following equations:
$ \begin{array} { l } Q d = 90 - 10 p \\ Q s = - 30 + 30 p \end{array} $
Qd and Qs are the respective quantities in hundreds of sacks and $p$ is the price per
sack in euros
Calculate the equilibrium price and quantity.
[ 2 ]
Answer
| We know that in equilibrium $Q d = Q s$ so $ \begin{array} { l } 90 - 10 p = - 30 + 30 p \\ 90 + 30 = 10 p + 30 p \\ 120 = 40 p \\ p = 120 / 40 = 3 \end{array} $ | (1) |
Having found the price we now substitute it in either the Qd or Qs equation.
| $ \text { e.g. } \begin{aligned} Q d & = 90 - ( 10 \times 3 ) \\ & = 90 - 30 \\ & = 60 \left( 00 ^ { \prime } \text { 's } \right) \text { sacks } = 6000 \text { sacks per week. } \end{aligned} $ | (1) |
Question 4
Elaborate on how the introduction of a price floor in an agricultural market affects consumers, producers, and the government.
[ 10 ]
Answer
- Definition of price floor: A price floor is a government-imposed minimum price set above the equilibrium market price. It is intended to provide a higher price level for a particular good or service and is often used to benefit producers, especially in markets where the equilibrium price is deemed too low to ensure their sustainability.
- Diagram to show the impact of a price floor on an agricultural market: In a diagram illustrating the impact of a price floor, the horizontal axis represents quantity, and the vertical axis represents price. The original equilibrium price (Pe) and quantity (Qe) are where the demand and supply curves intersect. When a price floor is introduced above the equilibrium price, it creates a surplus as the quantity supplied (Qs) exceeds the quantity demanded (Qd).
- Explanation of how a price floor leads to a higher price and lower quantity demanded from consumers, and a higher price to producers increases the quantity supplied because it increases revenues and an opportunity cost to governments because of the expense of buying surplus production:
- Higher Price and Lower Quantity Demanded: The price floor creates an artificially higher price (Pf) in the market. This causes a decrease in quantity demanded (Qd) as consumers find the higher price less attractive, leading to excess supply.
- Higher Price and Increased Quantity Supplied: Producers, on the other hand, benefit from the higher price set by the price floor. The higher price incentivizes them to increase production, resulting in a higher quantity supplied (Qs) compared to the equilibrium level.
- Opportunity Cost to Governments: The government faces an opportunity cost when implementing a price floor. While the intention might be to support producers, the surplus created due to excess supply means that the government might need to purchase the surplus output, incurring expenses. This financial burden can be considered the opportunity cost of implementing the price floor.
- Examples of agricultural markets: Minimum Wage for Agricultural Labor: In the context of agricultural labor, a government might impose a minimum wage, acting as a price floor for labor. This ensures that agricultural workers are paid a certain wage level, but it can lead to reduced employment opportunities for workers if the equilibrium wage is below the minimum wage
Question 5
The following table shows the weekly marginal revenue in dollars for sales for the same product by a monopolist in 3 separate markets A, B, and C.
| Units of output | MR A | MR B | MR C |
|---|---|---|---|
| 1 | 24 | 14 | 12 |
| 2 | 20 | 12 | 10 |
| 3 | 16 | 10 | 8 |
| 4 | 12 | 8 | 6 |
| 5 | 8 | 6 | 4 |
| 6 | 4 | 4 | 2 |
Assume that the monopolist produces 12 units per week and aims to maximise its profit.
[ 9 ]
a.
Calculate how many units it will sell in each market per week.
[ 3 ]
Answer
To find the profit maximizing output for 12 units between the 3 markets, we equate the
MR in each market, thus 5 units in market $A , 4$ units in market $B$ and 3 units in market $C$.
Total units $= 12 , \mathrm { MR }$ in each market $= \$ 8$.
b.
Calculate the price it would charge in each market.
[ 6 ]
Answer
To calculate the price in each market we first calculate the TR by adding the MR for each
additional unit and divide each TR by $Q$ to find $A R$. E.g. in market $A , M R$ for $Q 1 = \$ 24 , M R$
for $Q 2 = \$ 20$ so TR for $Q 2 = \$ 24 + \$ 20 = \$ 44$. AR $= \$ 44 / 2 = \$ 22$ and so on.
TR for 5 units in market $A = \$ 80 , A R = \$ 80 / 5 = \$ 16$
TR for 4 units in market $B = \$ 44 , A R = \$ 44 / 4 = \$ 11$
TR for 3 units in market $C = \$ 30 , A R = \$ 30 / 3 = \$ 10$.
Question 6
The following figures relate to the economy of Boozyland which only produces wine, beer, and cheese.
| Product | Output in 2000 | Output in 2005 | Price 2000 ($ per unit) | Price 2005 ($ per unit) |
|---|---|---|---|---|
| Wine | 100 | 200 | 2 | 3 |
| Beer | 100 | 250 | 3 | 4 |
| Cheese | 100 | 140 | 1 | 1.5 |
[ 3 ]
a.
Calculate nominal GDP in Boozyland in 2000 and in 2005.
[ 2 ]
Answer
To calculate nominal GDP we calculate the value of output in each year = Output $\mathrm { x }$ Price
So for 2000: Wine $= \$ 200$, Beer $= \$ 300$ and Cheese $= \$ 100$ Total $= \$ 600$.
For 2005: Wine $= \$ 600$, Beer $= \$ 1000$ and Cheese $= \$ 210$ Total $= \$ 1810$
b.
Calculate the \% increase in nominal GDP from 2000 to 2005.
[ 1 ]
Answer
$\%$ increase in nominal GDP $= [ ( \$ 1810 - \$ 600 ) / \$ 600 ] \times 100 = 201.6 \%$
Question NaN
Using your understanding of economics, highlight why the price elasticity of supply (PES) for primary commodities tends to be lower relative to the PES for manufactured products.
[ 10 ]
Answer
- Definition of price elasticity of supply: Price Elasticity of Supply (PES) is a measure of the responsiveness of the quantity supplied of a good or service to changes in its price. It indicates how much the quantity supplied changes in percentage terms in response to a one percent change in price.
- Diagram to illustrate PES of manufactured goods and primary commodities: For manufactured goods, the PES tends to be relatively elastic, represented by a flatter supply curve. This indicates that the quantity supplied is highly responsive to changes in price. On the other hand, for primary commodities, the PES tends to be relatively inelastic, represented by a steeper supply curve, indicating that the quantity supplied is less responsive to price changes.
- An explanation of the various determinants of PES (including time, mobility of factors of production, unused capacity and ability to store stocks) leading to an explanation of why the PES for primary commodities tends to be relatively low and PES for manufactured products tends to be relatively high:
- Time: PES is influenced by the time period considered. In the short run, it is challenging for producers to adjust their output levels, leading to relatively inelastic supply. In the long run, firms have more flexibility to adjust production, leading to relatively elastic supply.
- Mobility of Factors of Production: The ease with which factors of production (e.g., labor, capital, raw materials) can be reallocated between different goods affects PES. If factors of production are specialized and not easily transferable, supply is likely to be inelastic.
- Unused Capacity: If producers have unused capacity, they can respond more easily to price changes and increase supply, resulting in a more elastic response.
- Ability to Store Stocks: Goods that can be easily stored, such as manufactured products, tend to have a more elastic supply. Producers can accumulate stocks during periods of low demand and release them when demand increases.
- Examples of PES for primary and manufactured goods, or examples of primary and manufactured products: Primary Commodities: Agricultural products, such as wheat, coffee, and soybeans, typically have a low PES. The supply of these goods is constrained by factors such as weather conditions, land availability, and the time it takes to grow crops. For example, if the price of wheat increases, it is difficult for farmers to immediately increase their wheat output due to the time required for planting and harvesting.
Rationale
Ensure to pay attention to the steepness/slope of the supply curve(s)
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