DP Economics

Question 18N.3.HL.TZ0.2

Date	November 2018	Marks available	[Maximum mark: 25]	Reference code	18N.3.HL.TZ0.2
Level	HL	Paper	3	Time zone	TZ0
Command term	Calculate, Define, Draw, Explain, Label, Plot, State	Question number	2	Adapted from	N/A

[Maximum mark: 25]

18N.3.HL.TZ0.2

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).

(a.i)

Define the term social (community) surplus.

[2]

Markscheme

(a.ii)

Calculate the social (community) surplus in the market for cotton in San Marcus.

[2]

Markscheme

consumer surplus

$\frac{{\left( {10 \times 50} \right)}}{2} \times 1000 = 250\,000$

producer surplus

$\frac{{\left( {6 \times 50} \right)}}{2} \times 1000 = 150\,000$

social surplus
250 000 + 150 000

Any valid working is sufficient for [1].

= $400 000

OR

$\frac{{\left( {16 \times 50} \right)}}{2} \times 1000$

Any valid working is sufficient for [1].

= $400 000

An answer of $400 000 or 400 000 (without working) is sufficient for [1].

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]

Markscheme

Drawing a new supply curve parallel and below / to the right of the original supply curve is sufficient for [1].

(b.ii)

Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton producers.

[2]

Markscheme

8 × 75 (× 1000)

Any valid working is sufficient for [1].

= $600 000

An answer of 600 000 or $600 000 (without working) is sufficient for [1].

OFR may apply.

(b.iii)

Calculate the resulting change in producer surplus following the introduction of the subsidy to cotton producers in San Marcus.

[2]

Markscheme

$\frac{{\left( {50 + 75} \right)}}{2} \times \left( {13 - 10} \right) \times 1000$

OR
(0.5 × 75 × 9) − (0.5 × 50 × 6) = 337.5 − 150

Valid working may include:

correct workings for initial PS (0.5 × 50 × 6)
correct workings for final PS (0.5 × 75 × 9)
correct workings for the trapezium $\frac{{\left( {50 + 75} \right)}}{2} \times \left( {13 - 10} \right) \times 1000$

Any valid working is sufficient for [1].

=$187 500

An answer of 187 500 or $187 500 (without working) is sufficient for [1].

OFR may apply.

(b.iv)

Calculate the change in the consumer surplus resulting from the subsidy.

[2]

Markscheme

$\frac{{\left( {50 + 75} \right)}}{2} \times \left( {10 - 5} \right) + 1000$

OR

(0.5 × 75 × 15) − (0.5 × 50 × 10) = 562.5 − 250

Any valid working is sufficient for [1].

Valid working may be:

correct workings for initial CS (0.5 × 50 × 10)
correct workings for final CS (0.5 × 75 × 15)
correct workings for the trapezium $\frac{{\left( {50 + 75} \right)}}{2} \times \left( {10 - 5} \right) + 1000$

= $312 500

An answer of 312 500 or $312 500 (without working) is sufficient for [1].

OFR may apply.

(c)

Explain two reasons why the government of San Marcus may have decided to grant a subsidy to its cotton producers.

[4]

Markscheme

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]

Markscheme

Allocate [1] for each valid function.

Functions may include:

promotes trade liberalization
sets trade rules
ensures that trade rules are adhered to
settles trade related disputes
trade-related technical assistance
a forum for trade negotiations.

NB Describing trade liberalization in two ways (eg removal of barriers, lowering of tariffs) only counts as one function.

Any other valid function(s).

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]

Markscheme

Award [1] for an accurate and labelled world cotton supply curve.

(e.ii)

With reference to your answer to question (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]

Markscheme

initial cost
= $600 000

Calculated earlier on (b)(ii), OFR applies.

new cost of subsidy
8 × 50 × 1000 = $400 000

new cost of subsidy minus initial cost
$400 000 − $600 000

Any valid working is sufficient for [1].

= $200 000 or a decrease of $200 000

An answer of −$200 000 or −200 000 is sufficient for [1].

OFR applies.

(e.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]

Markscheme

NB Responses should refer to the economy of San Marcus, not just one industry such as the consumers or producers of cotton.