2018#2 Nov (Subsidy) IB Paper 3 HL

2018 #2 Nov, IB Paper 3 HL

(a)   (i) Define the term social (community) surplus.

      Social Surplus/ Community Surplus is the Consumer Surplus and Producer Surplus added together.

(ii) Calculate the Community Surplus in the Market for cotton in San Marcus.

The Combination of Consumer & Producer Surplus added together equals the total Community Surplus = the area of the triangle = 16 x 50/2 = 400,000

The Government of San Marcus decides to give a subsidy of $8 to its cotton producers.

(b) (i) Draw and Label the new supply curve following the granting of the subsidy

to domestic cotton producers on Figure 3.

(b) (ii) Calculate the cost to government of San Marcos of providing this subsidy to domestic cotton producers.

The Government gives $8 to every producer of cotton for every Kg of cotton produced.

So, with the subsidy 75,000 Kg of cotton will be produced.

Therefore, 75,000 X $8 = $600,000 will be paid to cotton producers.

 

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

 

(iv) Calculate the CHANGE in the consumer surplus resulting from the subsidy.

Consumer Surplus before the Subsidy = 20 – 10 = 10 (height)

At a price of $10, there will be sales of 50 (thousand Kg) (base)

Area of a Triangle is Height x Base divided by 2

So, 10 x 50 = 500/2 = 250

Consumer Surplus after the Subsidy = 20 – 5 = 15 (height)

At a price of $5, there will be sales of 75 (thousand Kg) (base)

Area of a Triangle is Height x Base divided by 2

So, 15 x 75 = 1125/2 = 562.5

 

The Change in consumer surplus after the subsidy is 562.5 – 250 = 312,500

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

 

(1)  Assist buyers of cotton, as cotton subsidies will decrease production costs, (MC will shift right), the supply of cotton increases and price of cotton falls.

(2)  Assist producers (farmers) of cotton, as the profit per unit increases along with the quantity sold farmers will earn higher total revenues.

(3)  Assist the textile industry, as cotton is an input and thus when costs of production decrease textiles will be cheaper and profitability will increase.

(4)  Increase in domestic employment, as more output is produced more workers are demanded.

(5)  Increase exports (reduce imports) by making cotton more competitive in international markets.

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.

 

(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

(ii) -200,000,, The amount of subsidy needed by the government falls from 600,000 down to 400,000 as the world price pushes the price of the good so low that domestic suppliers will only supply 50,000 units.

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