Question 18N.3.HL.TZ0.2e.ii
| Date | November 2018 | Marks available | [Maximum mark: 2] | Reference code | 18N.3.HL.TZ0.2e.ii |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Calculate | Question number | e.ii | Adapted from | N/A |
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).
The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its producers of cotton.
San Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize trade, becoming an open economy.
The world price for cotton is $2 per kg. The WTO permits the government of San Marcus to maintain the $8 subsidy.
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]
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.
