2019 Nov #3 (Exchange Rate Growth Current Account Linear Demand) Paper 3 HL

 2019 Nov #3 (Exchange Rate, Growth, Current Account, Linear Demand) Paper 3 HL

 

(a)  (i) If a visitor to Gardia from the US buys a towel that costs 23 gamma, calculate the cost in US$.

 

$1 = 6.2 gamma

 

23/6.2 = $3.71

 

    (ii) More foreign tourists are visiting Gardia. Outline the effect on the value of the gamma. Give a reason for your answer.

 

As more tourists visit Gardia, they will demand more Gamma to exchange for their foreign currency. This higher demand for Gamma’s will cause the Gamma to appreciate (become stronger).

 

    (iii) State 2 factors that could cause Gardia’s current account to be in a deficit, even though its balance of trade in goods is in surplus.

 

(Understand that the current account consists of more that just goods.)

 

·      Gardia could have a greater deficit on its service account, transport or insurance or tourism.

·      Gardia could have a greater deficit on its income account, in profits, interest or dividends on its overseas assets or in salaries paid from overseas (remittances might be included here)

·      Gardia could have a greater deficit on its current transfer/transfer payments in overseas aid or income remittances or pensions paid overseas.

 

    (iv) Determine the size of Gardia’s current account surplus/deficit when the sum of the financial and capital accounts is US$2 billion.

 

A surplus in the capital account is a deficit in the current account.

 

**A deficit of US$2 billion**

 

(b)  Gardia is aiming to increase its economic growth rate. Explain 2 sources of economic growth for economically less developed countries.

 

·      Human Capital – education or more skill training for citizens

·      Technology Development - or use of technology that increase productivity

·      Technology Adoption – adopting and implementing innovative technologies from overseas with market potential, ex electric cars

·      Institutional Changes – improving the efficiency of the legal system or establishing and protecting property rights.

·      Foreign Direct Investment – to process local materials so that there is more value added domestically or to provide appropriate technologies.

·      Expansionary Fiscal Policy – that will increase AD through raising G or lowering income taxes

·      Export Promotion – that will increase AD or that furthers vertical integration in the export sector.

·      Depreciation of exchange rates – that will lead to exports becoming more competitive/ imports less competitive: so AD increases.

(c) Calculate the additional cost of paying back the loan in gamma in 2019, due to the interest and the change in the exchange rate.

 

2018: 4 x 5.3 = 21.2

2019: 4.2 x 6.2 = 26.04

 

26.04 – 21.2 = 4.84m gamma

(d) Calculate the equilibrium exchange rate for the US$ in terms of gamma.

10 – 2g = -2 + g

add 2 to both sides

12 – 2g = g

add 2g to both sides

12 = 3g

g = 4

or

$1 = 4gamma

(e) Plot and label the new supply curve on Figure 2.

 

Qs = -.5 + g

 

Step 1 – Make (Qs zero) and solve for g

 

0 = -.5 + g

g = .5

US$ (0)  = (.5 gamma)

 

Step 2 – Make (g zero) and solve for Qs

 

Qs = -.5 + 0

Qs = -.5

US$ (-.5)  = (0 gamma)

 

Step 3  - Choose a number for Qs (greater that .5) and solve (I choose 8)

 

Qs = -.5 + g

8 = -.5 + g

add .5 to both sides

8.5 = g

US$ (8) = (8.5 gamma)

(f) (i) Using Figure 2, calculate how many US$ are needed to buy one gamma at the new exchange rate.

 

Look at the graph – equilibrium occurs at US$ (3) for gamma (3.5)

So 1 US$/ 3.5gamma = .285 or 29cents

1gamma = .29$

 

(ii) State 2 reasons that could have caused an increase in the Supply of US$.

 

·      US increases imports or Gardia increases its exports (same thing)

·      Gardia’s interest rates increase or US interest rates decrease

·      Gardia’s inflation rate (PL) falls or the US inflation rate increases

·      US incomes rise at a faster rate than Gardia’s incomes

·      More investment (financial and/or direct) flowing from the US to Gardia

·      US gov’t/cental bank using dollars to buy gamma

·      Speculative selling of dollars (because of expected depreciation)

2019 Nov (Linear Demand Slope of Supply Output/Costs/Revenues Consumer Surplus) Paper 3 HL

2019 Nov 

(Linear Demand, Slope of Supply, Output/Costs/Revenues, Consumer Surplus) 

Paper 3 HL

(c) (i) Determine the slope of the market supply function for corn farmers in Nissos.

(ii) Calculate the monthly equilibrium quantity of corn in Noissos.

Equlibrium is where Qd = Qs

1. Find Price

10 - 0.5P = -2 + P

add +2 to each side

12 - 0.5P = P

add +.5P to each side

12 = 1.5P

P = 8

2. Insert P = 8 and solve Qd

Qd = 10 - 0.5P = 

10 - (0.5 (8)) = 

10 - 4 = 6

Qd = 6m at a Price of $8

3. Insert P = 8 and solve Qs

Qs = -2 + P = 

-2 + 8 = 6

Qs = 6m at a Price of $8

4. Q = 6 million

(d) (i) Plot and label Figure 1 the market demand curve and the market supply curve for corn in Nissos.

Qd = 10 - 0.5P

Step 1 - Make Qd/Qs zero and solve

Step 2 - Make P zero and solve

Step 3 - Plug in a number and solve

(ii) Draw and label the margonal revenue (MR) curve for corn for an individual farmer in Nissos on the grid below.

Understand that Perfectly Competitive firms have horizontal MR curves 

and they produce at Profit Maximization which is where the MR = MC.

(iii) Using Figure 1, calculate the consumer surplus in Nissos at the market equilibrium.

.5 x 6 (20 - 8) = $36m

1/2 x (6 x 12)

Area of Triangle = 1/2 (Base x Height)

2019 May (Linear Demand, Slope of Supply, Producer Surplus) Paper 3 HL

2019 May 

Linear Demand, Slope of Supply, Producer Surplus 

Paper 3 HL

 

(a)  Identify the slope of the supply curve.

 

The supply curve is -45 + 4.5P

 

(b)  Outline the reason why the Qs increases as the price increases.

 

·      At a higher price, the profit margin is greater, so there is an incentive to produce and offer more units. (my favorite)

·      As price increases, profits will be maximized at a higher level of output given an upward-sloping MC curve

·      As marginal costs rise, a firm will be willing to offer more units per period on;y at a higher price.

 

An increase in the costs of production has resulted in a new supply function:

Qs = -60 +3P

 

(c)   Draw and label the new supply curve on figure 1

 

Step 1. Make Qs zero and solve

Step 2. Make P zero and solve

Step 3. Plug in a number and solve

 

Step 1

Qs (0) = -60 + 3P

Qs (0) = -60 + (3 x 20)

Qs (0) = -60 + 60

When P = 20, at a price of 20 there will be zero (0) units supplied

 

Step 2

Qs = -60 + (3 x 0)

Qs = -60

When P = 0, at a price of zero there will be -60 units supplied

 

Step 3

Qs = -60 + 3P

Qs = -60 + (3 x 60)

Qs = -60 + 180

Qs = 120

When P = 60, there will be 120 units supplied

What if we chose a price of 80 and solved

Qs = -60 + 3P

Qs = -60 + (3 x 80)

Qs = -60 + 240

Qs = 180

When P = 80, there will be 180 units supplied

Notice that as the cost of goods increase the supply curve shifts to the left

·      An increase in the costs of production will reduce profitability, causing producers to be less willing to supply units of this good.

·      An increase in costs of production will increase the price at which producers will be willing to supply the same quantity.

(e)  Calculate the change in producer surplus resulting from the increase in costs of production.

PS #1 = 20 x 90,000/ 2 = 900K

PS #2 = 20 x 60,000/ 2 = 600K

 

A decrease of 300,000 in Producer Surplus

2014 May (Linear Demand, PES, Price Ceiling) Paper 3 HL

2014 May (Linear Demand, PES, Price Ceiling) Paper 3 HL

(a)  (i) Calculate the equilibrium price of butter in Country X.

 

Put the Qd on one side and the Qs on the other.

 

884 – 6P = 744 + 4P

 

Subtract 744 from both sides

(884 – 774) – 6P = (744 – 744) + 4P

 

Now we have 140 – 6P = 4P

 

Add 6P to both sides

140 (-6P + 6P) = 4P + 6P

 

Equals 140 = 10P

P = $14

 

(ii)          Calculate the equilibrium quantity per month of butter in Country X.

 

Plug in the P of $14

 

Qd = 884 – 6P

Qd = 884 – (6 x 14)

Qd = 884 – 84

QD = 800

Don’t forget that it is 000kg so the answer is 800,000kg

 

Qs = 744 + 4P

Qs = 744 + (4 x 14)

Qs = 744 + 56

Qs = 800

Don’t forget that it is 000kg so the answer is 800,000kg

 

Assume that incomes in Country X increase. As a result the demand for butter increases by 10,000kg per month at each price.

 

(b)  State the new equation for demand.

 

Qd = 894 – 6P

(c)  (i) Assume the supply changes from

 

Qs = 744 + 4P to Qs = 744 + 5P

 

Outline how this change will affect the steepness of the supply curve.

 

The Supply curve will become less steep (flatter) because for any change  in price, the change in Qs will be greater, hence the supply curve will become shallower/flatter.

 

Slope of the function increases from (+4 to +5) but the axes are reversed (the independent variable is on the vertical) the supply curve will become shallower/flatter.

 

(ii) Assume now that the supply changes from

 

Qs = 744 + 4P to Qs = 544 +4P

 

The supply curve will shift to the left as the Qs has decreased.

 

(d)  (i) Define the term Price Elasticity of Supply (PES).

 

PES = is the responsiveness of supply (or Qs) to a change in price.

 

(ii) The increase in demand of 10,000kg per month (see 3 (b)) has led to a new equilibrium price of $15 and a new equilibrium quantity of 804,000 kg of butter.

 

Calculate the PES for butter between the original and the new market price.

 

Price increased from $14 to $15 = 1/14 = 7.14% increase

Qd increased from 800k to 804k = 4/800 = .5% increase

 

.5/7.14 = .07 (inelastic as between 0 and 1)

(e)  Explain two factors that determine the PES of a product.

 

Time = the longer the time period, the more price elastic supply will be as firms will have more time to adjust to any change in demand/price conditions.

 

Excess Capacity = if it does, then increasing output will be easier so supply will be more price elastic.

 

Storage = the greater the ability to store stocks (goods), the more price elastic supply will be as firms can draw from stocks to increase the quantity supplied.

 

(f)  Calculate the resulting shortage.

Using the original supply and demand functions Qd = 884 – 6P

Qs = 744 + 4P and the government set a price ceiling of $10

Using the original supply and demand functions Qd = 884 – 6P

Qs = 744 + 4P and the government set a price ceiling of $10

 

Qd = 884 – 6P = 884 – (6 x $10) = 884 – 60 = 824 (Qd at $10)

Qs = 744 + 4P = 744 + (4 x $10) = 744 + 40 = 784 (Qs at $10)

 

Shortage  = Qd – Qs = 824 – 784 = 40 (000kg)

(g)  Calculate the change in consumer expenditure (spending) on butter per month resulting from the imposition of the price ceiling.

 

Originally (before the Price Ceiling) consumers spent $11,200,000 on butter

Price x Quantity = ($14 x 800) = 11,200, 000

 

After the Price Ceiling consumers spent $7,840,000 on butter

Price x Quantity = $10 x 784 = 7,840,000

 

Change in Consumer spending = 7840 – 11200 = - 3, 360, 000 (decrease)

 

In essence the question is asking how much is actually bought after the price ceiling.

Understand that if it isn’t produced then it can’t be bought so we focus in on the amount Supplied,,,

 

With the price ceiling only 784,000 will be produced with the price ceiling but 11,200,000 would have been bought and produced without the Price Ceiling.

 

Price Ceilings cause Dead Weight Loss = a loss of consumer and producer surplus.

 

(h)  Explain 2 consequences on consumers of butter if a price ceiling (max price) is imposed.

 

Some consumers win = now will be able to purchase butter at cheaper price

Some consumers will be worse off = unable to obtain butter as shortage

Some consumers will be worse off = forced to purchase butter a higher prices in the underground/ parallel market