Question 22N.3.HL.TZ0.1
| Date | November 2022 | Marks available | [Maximum mark: 30] | Reference code | 22N.3.HL.TZ0.1 |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Calculate, Describe, Determine, Explain, Recommend, Sketch | Question number | 1 | Adapted from | N/A |
“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
Determine the missing cost figures and insert your answers in Table 1.
[2]
For 3 correct figures [1]
For 4 correct figures [2]
OFR applies (e.g. if TC(15) incorrect but AC(15) is then calculated via TC/Q. Also if TC(16) is incorrect but MC(16) is calculated via TC(16) TC(15).
Candidates choosing this question generally demonstrated a good understanding of the relationships between average, marginal and total cost.
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]
For a negatively sloped D (AR) tangential to AC [1]
For the point of tangency being vertically above the profit maximizing output where MR and MC intersect [1]
A response with missing or incorrect labels or without MC intersecting minimum AC may be awarded a maximum of [1]
The vertical axis may be labelled Cost (C), Price (P) or Revenue (R). The horizontal axis may be labelled Quantity (Q) or Output. AC may be labelled ATC. A title is not necessary.
This part was generally done poorly. A significant number of candidates did not identify the market structure as one of monopolistic competition. The phrase "prepares a variety of different meals" indicated that products were not identical. Furthermore, candidates generally found difficulty in sketching an appropriate diagram with the ATC curve tangential to the AD curve at a level of output where MR = MC.
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.
Using Figure 1, calculate the change in the consumer surplus resulting from this government intervention.
[2]
Initial CS = (4 2.4) 16 0.5 = 12.8
Final CS = (4 2.8) 12 0.5 = 7.2
Any valid working is sufficient for [1]
Change in CS = 7.2 12.8 = $5600 (or, a decrease) [1]
An alternative approach with valid workings should be fully rewarded.
e.g. Change in CS = 0.5 0.4 (12 + 16) = $5 600 (decrease)
For full marks to be awarded the response must provide valid working, specify the decrease and include correct units.
Although the question was generally well-answered, a range of errors was evident. Some candidates read data incorrectly from the graph or neglected to specify that consumer surplus would decrease. Others calculated a welfare loss rather than the change in consumer surplus. Some neglected to show correct units ($000).
With reference to Figure 1, explain how the price floor will impact on allocative efficiency in the market for tomatoes.
[4]
A valid alternative approach is to calculate the welfare loss resulting from the price floor
Change in CS = 5600
Change in PS = 0.5 0.4 (16 + 20) = 7200 [1]
Change in G = 2.8 8 = 22 400 [1]
Net welfare loss = 5600 + 7200 22 400 = $20 800 [1]
Any valid working is sufficient for [1]
OFR applies if the change in CS, PS or G is incorrect, but the calculation of net welfare loss is accurate.
Therefore the market is not allocatively efficient [1]
The majority of candidates explained that a price floor would result in a surplus, thus creating allocative inefficiency. However, they did not explain the concept of allocative efficiency effectively by showing that for the last unit, price would be greater than MC, meaning that allocative efficiency would no longer be achieved. An alternative approach involving the calculation of changes in consumer surplus, producer surplus and government spending and revealing a loss in net welfare was accepted.
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]
Expenditures without the tax
Any valid working should be rewarded with [1].
Sales tax paid = 54 506.70 5 1180 = $3326.70
An answer of $3326.70 without working is sufficient for [1].
Any valid alternative calculation should be rewarded.
e.g. 54 506.7 (0.065/1.065) = $3326.70
For full marks to be awarded the response must provide valid working and include correct units.
Although a significant number of candidates were able to calculate the indirect tax correctly, the majority were not prepared for this question and simply calculated the level of expenditure by the rate of indirect tax.
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.]
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]
Impact on business travel:
Any valid working is sufficient for [1].
0.34 4.5= 1.53%
An answer of 1.53%, 1.53 or 1.53 without any valid working is sufficient for [1].
For full marks to be awarded the response must provide valid working, specify the decrease and include correct units.
This question was answered very well.
The Economist Intelligence Unit is predicting that between 2020 and 2030, global incomes will rise on average by 3 % annually.
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]
YED is lower for domestic routes than for international routes
OR an appropriate calculation is used. [1]
Therefore demand for domestic routes will increase by a smaller percentage. [1]
NB Calculations of demand based on the figures without a description of the impact may receive [1].
Most candidates were able to explain that demand for international flights would increase by a greater percentage. However, some candidates merely presented calculations without a description of the relative impacts.
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]
An alternative approach, which should be accepted, is that MSB is below the demand curve and the market failure is caused by a consumption externality.
The y axis may be labelled price but could be costs or benefits and the x axis is labelled quantity.
Most candidates were able to provide an accurate diagram showing negative externalities and to explain that the equilibrium level of output was greater than the socially optimal level — thus indicating market failure. Candidates indicated either production externalities or consumption externalities. While the data might suggest that production externalities would be more appropriate, as "the aviation industry is responsible for a significant market failure" both approaches were accepted.
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]
Refer to paper 3 markbands, available under “your tests” tab > supplemental materials.
Possible policies may include (but are not restricted to):
- Introduce carbon taxes in the aviation industry
- Cap & trade schemes on a wider (global) basis
- Impose indirect (sales) tax on air ticket purchases
- Eliminate fuel and other subsidies paid to airlines
- Subsidize rail and other greener forms of transport
- Enter into international agreements to reduce emissions from the aviation industry
- Ban short-haul flights
- Any other valid policy.
A range of approaches was adopted for the "policy question" although the majority of responses discussed the implementation of an indirect tax on air travel or a carbon tax on pollutants.
Responses which scored well mostly:
- Selected one clear policy.
- Explained clearly how the policy would affect the market for air travel and showed how this effect would impact the emissions which the aviation industry makes to global warming.
- Incorporated theory and appropriate terminology into the explanation.
- Used the data to support the policy and to provide evaluation — for example, the relative effectiveness of the policy for leisure vs business travel or the argument for subsidizing lower-emitting rail travel.
Responses were able to achieve full marks with a fairly concise answer which met these requirements. Diagrams (although not expected/required) were often used effectively to support the theory/explanation.
Candidates who did not score highly tended to demonstrate some of the following weaknesses:
- Outlining several policies while not explaining them in any detail.
- Writing a long introduction which explained the issue rather than concentrating on the policy.
- Neglecting to use the data provided to support the answer. Some candidates included data in a descriptive manner which did not help to justify the recommendation. For example, some candidates focused on specifying the problem (4.9% of global warming caused by the aviation industry) and reference to flights from San Francisco to Paris.
- Neglecting to provide a balanced synthesis. Many answers simply explained one or more ideas without any balance. For example, lower-achieving responses mentioned only that it is difficult to determine the exact size of tax which would ensure allocative efficiency — a fairly generic comment.
