PAPER 3
1.The daily supply and demand curves for beef in a city are given by
Qs = −20 + 20P
Qd = 80 − 5P
Where Qs and Qd are the quantities in thousands of kilos and P is the price per kilo
in US$.
(a) Calculate Qs and Qd at a price of US$3 per kilo. [2 marks]
Qs = −20 + 20(3)
= -20 + 60 = 40 000 kilos
Qd = 80 − 5(3)
= 80 -15 = 65 000 kilos
(b) Label the axes on the graph below. [1 mark]
Y- Price of beef in US $
X- Quantity of beef in thousands of kilos
(c) Construct the supply and demand curves on the above graph and identify the Q
intercept for the demand curve and the P intercept for the supply curve. [3 marks]
Qs = −20 + 20P Qd = 80 − 5P
0 = −20 + 20P Qd = 80 − 5(0)
0 = −20 + 20(1) Qd = 80
intercept at (0, 1) (80, 0)
(d) Calculate the equilibrium price and quantity below and identify both of these on
the graph. [4 marks]
−20 + 20P = 80 − 5P Qs = −20 + 20 (4)
25P = 100 Qs = −20 + 80
P = $4 Q = 60 000 kilos
A health scare about the safety of beef leads to a decrease in demand of 25000 kilos at
any price.
(e) State the equation for this new demand curve. [1 mark]
Qd = 80 − 5P
Qd = (80-25) − 5P
Qd = 55 − 5P
(f) Draw the new demand curve on the graph and identify the new Q intercept. [2 marks]
(g) Explain, with reference to the figures, why the price that you calculated in part
(d) is no longer the equilibrium price. [4 marks]
At the old quantity supplied equilibrium price of US$4, with a new demand
curve, there would now be excess of 25 000 kilos. This means that now, at a
price of US$4, quantity demanded will be 35 000 kilos and quantity supplied
will still be 60 000 kilos. The price will have to fall in order to eliminate the
excess quantity supplied and to reach a new equilibrium and market efficiency.
(h) Calculate the new equilibrium price and quantity below and identify both of
these on the graph. [4 marks]
55 − 5P = −20 + 20 75 = 25P 3$ = P
Qs= −20 + 20 (3) Qs= −20 + 60 Q = 40 000 kilos
(i) If the health scare causes a decrease in demand of 25 000 kilos, explain why
the new equilibrium quantity is not 25000 kilos lower than the original
equilibrium quantity. [4 marks]
At the original price of US$4, with the new demand curve, there will be excess
quantity supplied as stated in part g. There will be a movement down the existing supply curve
towards the new equilibrium, but also a shift to the left at each price level by 25 (thousand) of the demand curve in order to eliminate the excess quantity
supplied.
Thus, quantity supplied will fall by 20 000 kilos as price falls, but quantity
demanded will increase by 5000 kilos because of the falling price. So, in the
end, the equilibrium quantity has only fallen by 20 000 kilos, from 60 000 kilos
to 40 000 kilos.
Question 2
The table below shows the income tax rates that apply to different ranges of earnings
for workers in an economy.
Income (US$) Income tax rate (%)
0 – 6000 0
6001 – 20000 20
20001 – 50 000 40
50 001+ 50
• Individual A (low income) earns US$18000 per year and spends US$14000
on goods and services, of which 15% is indirect tax.
• Individual B (middle income) earns US$42000 per year and spends US$28000
on goods and services, of which 15% is indirect tax.
• Individual C (high income) earns US$100000 per year and spends US$45000
on goods and services, of which 15% is indirect tax.
(a) Distinguish between direct and indirect taxes. [2 marks]
Direct taxes are set on income and indirect taxes are set on expenditure
(b) Calculate the amount of income tax paid by individuals A, B and C as a
percentage of their income. [6 marks]
Individual A: ( 0x 6000) + ( 0.2 x 12 000) = 2400 $ (2400/18000) x 100 =13.3%
Individual B: ( 0x 6000) + ( 0.2 x 14000) + (0.4 x 22000) = 11600$ (11600/42000) x 100 =27.62%
Individual C: ( 0x 6000) + ( 0.2 x 14000) + (0.4 x 30000) + (0.5 x 50000) = 39 800$ (39 800/100 000) x 100 =39.8%
(c) With reference to the concepts of average and marginal rates of tax,
use the data from the table to explain whether this type of income tax is
progressive or regressive. [4 marks]
The average rate of a progressive income tax paid increases as the individual's income increases while regressive is vice versa. In this case as shown by the numbers and figures in table and part b, the marginal rate of tax is higher than the average, meaning this tax is progressive.
(d) Calculate the amount of indirect tax paid by individuals A, B and C as a
percentage of their income. [3 marks]
Individual A: ((14 000 x 0.15)/ 18 000) x 100 = 11.67%
Individual B: ((28 000 x 0.15)/ 42 000) x 100 = 10 %
Individual C: ((45 000 x 0.15)/ 100 000) x 100 = 6.75%
(e) Calculate the average rate of total tax (direct + indirect) paid by individuals
A, B and C on their individual incomes. [6 marks]
Individual A: 13.3% + 11.67% = 25%
Individual B: 27.62% + 10% = 37.62%
Individual C: 39.8% + 6.76% = 46.55%
(f) Explain why governments often have tax systems in which the average rate of
tax rises as income rises. [4 marks]
Governments often use progressive income tax to tackle the problem of inequitable distribution of income. They use higher income tax rates on people who earn more income to redistribute the money from the richer citizens to the poorer and therefore be closer to equal distribution and possibilities for everyone.
