Question 19M.3.HL.TZ0.1h
| Date | May 2019 | Marks available | [Maximum mark: 4] | Reference code | 19M.3.HL.TZ0.1h |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Explain | Question number | h | Adapted from | N/A |
Note that widgets are an imaginary product.
In Country X, the supply and demand for widgets are given by the functions
Qs = − 45 + 4.5P
Qd = 180 − 3P
where P is the price per widget in dollars ($), Qs is the quantity of widgets supplied (thousands per year) and Qd is the quantity of widgets demanded (thousands per year).
The supply (S) and demand (D) functions are represented in Figure 1.
An increase in costs of production has resulted in a new supply function:
Qs1 = − 60 + 3P
Figure 2 shows the demand for and supply of widgets in Country Y.
Figure 2
The government of Country Y decides to impose an indirect tax of $10 per widget.
With reference to Figure 2, explain how the incidence of taxation on consumers and/or producers will be influenced by the price elasticity of supply.
[4]
The majority of candidates encountered difficulty with this question. Most stated that supply was perfectly inelastic, while a significant number identified the relevant learning outcome, “Explain, using diagrams, how the incidence of indirect taxes on consumers and firms differs, depending on the price elasticity of demand and on the price elasticity of supply” – but could not apply the theory to the context provided. As PES = 0, the producers would bear the whole incidence. Many candidates erroneously referred to a decrease on demand resulting from a higher price.
