Mock Exam Set 1 - Paper 3

$\underline{\textrm{Sample Answer}}$:

$\begin{aligned} \dfrac{\dfrac{(27-24)}{24} \times 100\\}{\dfrac{(500000-600000)}{600000} \times 100\\}&= 0.75 \\ \end{aligned}$

$\underline{\textrm{Explanation}}$:

$\hspace{1em}$ $Price \ elasticity \ of \ demand = \dfrac{\%\ \textrm{change in quantity demanded}}{\%\ \textrm{change in price}}$

For showing the correct calculations for the percentage changes in quantity demanded and price ($\checkmark$)

• $\%$ $\Delta Q_D$ $= \dfrac{\textrm{(27 - 24)}}{\textrm{24}}$ or 12.5$\%$

• $\%$ $\Delta P$ $= \dfrac{\textrm{(500000 - 600000)}}{\textrm{600000}}$ or 16.67$\%$

For the correct answer ($\checkmark$)

0.75

$\underline{\textrm{Sample Answer}}$:

Because the PED for mobile phones is inelastic, revenue from mobile phone sales will decrease.

$\underline{\textrm{Explanation}}$:
For stating that when the price of mobile phones decreases from Rp.600 000 to Rp.500 000:

• PED for mobile phones is inelastic ($\checkmark$)
• revenue from mobile phone sales will decrease ($\checkmark$)

$\underline{\textrm{Sample Answer}}$:
original profit $=$ (600 000 $-$ 500 000) $\times$ 24 000 $=$ Rp.2 400 000 000
new profit $=$ (500 000 $-$ 460 000) $\times$ 27 000 $=$ Rp.1 080 000 000
The change in profit is $-$ Rp.1 320 000 000 (negative 1.32 billion rupiah)

$\underline{\textrm{Explanation}}$:
Profit $=$ (average revenue $-$ average cost) $\times$ quantity

For showing the correct calculations for:\

• original profit ($\checkmark$)
  (600 000 $-$ 500 000) $\times$ 24 000 $=$ Rp.2 400 000 000\
• new profit ($\checkmark$)
  (500 000 $-$ 460 000) $\times$ 27 000 $=$ Rp.1 080 000 000

For the correct answer ($\checkmark$)

-Rp.1 320 000 000

$\underline{\textrm{Sample Answer}}$:
Average cost is the total cost divided by the total quantity. Marginal cost is the increase in total cost divided by the increase in quantity. In other words, the marginal cost is the additional costs incurred when producing more mobile phones. Because the marginal cost (Rp.140 000) is less than the average cost, the average cost falls, Rp. 500 000 to Rp. 460 000.

$\underline{\textrm{Explanation}}$:
For explaining the difference between average costs (AC) and marginal costs (MC):

• AC is calculated as $\dfrac{\textrm{total costs}}{\textrm{quantity}}$ ($\checkmark$)

• MC is calculated as $\dfrac{\textrm{change in total costs}}{\textrm{change in quantity}}$ ($\checkmark$)

For explaining that MC is the addition to total cost; because MC is less than AC, AC will decrease ($\checkmark$)

For making direct reference to the data in explaining the above ($\checkmark$)

$\underline{\textrm{Sample Answer}}$:
The law of diminishing marginal returns states that when a variable input is added to a fixed input, output increases, then eventually decreases.

$\underline{\textrm{Explanation}}$:
For providing a definition of the law of diminishing marginal returns specifying that:

• (marginal) output eventually decreases ($\checkmark$)
• output changes when more variable inputs are employed ($\checkmark$)

$\underline{\textrm{Sample answer}}$:

According to the law of diminishing marginal returns, marginal costs increase ($\text{\textdollar}$2 to $\text{\textdollar}$3) as output increases. This relates to the law of supply: price increases as quantity supplied increases, and vice versa. At higher prices, producers can cover the increasing marginal costs, and consequently, they are able to increase output.

$\underline{\textrm{Explanation}}$:
$\footnotesize{\textrm{note: The law of supply states that when prices increase, so does the quantity supplied and vice versa.}}$

For drawing an upward-sloping supply curve or marginal cost curve ($\checkmark$) with labelling indicating that as quantity increases, so does price (or marginal costs) ($\checkmark$).

For relating marginal costs to the law of supply:

• When output increases, so do marginal costs ($\checkmark$)
• Consequently, prices must increase to cover increased costs, which corresponds to the law of supply ($\checkmark$)

$\underline{\textrm{Sample answer}}$:

$\dfrac{\textrm{600 000} \times {1 200 000}}{2}$ $=$ Rp. 360 billion

$\underline{\textrm{Explanation}}$:

Welfare loss is the area of the triangle that is lost from community surplus when the allocatively efficient quantity is not produced.

• For correctly applying the formula ($\checkmark$)
  area of a triangle $=$ $\dfrac{{base} \times {height}}{2}$ $\rightarrow$ $\dfrac{\textrm{1 200 000} \times {\textrm{600 000}}}{2}$

• For correctly calculating the welfare loss ($\checkmark$)
  Rp.360 billion

$\underline{\textrm{Sample answer}}$:
Community surplus is maximized when the price is 1 250 000 rupiah.

$\underline{\textrm{Explanation}}$:

$\footnotesize{\textrm{note: Community surplus is maximised at the allocatively efficient quantity (Q*).}}$

According to Figure 2, Q* is produced and consumed when the price is Rp.1 250 000 ($\checkmark$).

$\underline{\textrm{Sample answer}}$:
To increase internet access in Indonesia, the government should provide free or low-cost mobile phones $\textcolor{#4472C4}{[\textbf{PEX}]}$. This government intervention will be effective because Indonesia already has widespread mobile internet coverage. However, though 95$\%$ of Indonesians are covered by the mobile internet network, only 55$\%$ pay to use it $\textcolor{#C34A2C}{[\textbf{T/D}]}$. Of those without access, the high cost of mobile phones was cited as a common reason, especially among low-income Indonesians. Therefore, the Indonesian government can effectively increase internet access by Indonesians if it provides low-cost or free mobile phones to those it can identify as being most in need. Coordinating with other government agencies $\textcolor{#4472C4}{[\textbf{PEX}]}$ like the Sembako program, which provides food assistance to Indonesians, can help identify these households.

Indonesia's existing mobile networks will help lower-income Indonesians bridge the $`$digital divide'. If so, poverty in Indonesia may lessen as low-income households will have better access to employment opportunities, education and health services $\textcolor{#337E8B}{[\textbf{S/E}]}$. Direct provision of mobile phones removes the biggest obstacle to mobile internet access because mobile data in Indonesia is relatively affordable $\textcolor{#4472C4}{[\textbf{PEX}]}$.

It is worth noting that slow mobile broadband speeds $\textcolor{#C34A2C}{[\textbf{T/D}]}$ can hinder increased internet access by overcrowding limited bandwidth, diminishing the impact of increased access. Another difficulty of this policy is the cost to the government, meaning the government may need to cut back in other areas $\textcolor{#337E8B}{[\textbf{S/E}]}$, such as improving network infrastructure.

Despite these difficulties, direct provision has advantages over other policies. The PED for mobile phones is inelastic, so subsidizing the production of mobile phones will have a limited effect. Targeting fixed internet service is also less desirable as it is less useful than mobile internet by nature. Additionally, fixed broadband is also relatively expensive—Indonesia is ranked 131st in the world for the cost of fixed internet service $\textcolor{#C34A2C}{[\textbf{T/D}]}$. Both of these alternatives will be expensive for the Indonesian government, and they will do less in terms of improving internet access. Though expensive, directly providing mobile phones to low-income Indonesians will be the surest step for the Indonesian government to take to expand internet access $\textcolor{#337E8B}{[\textbf{S/E}]}$.

$\underline{\textrm{Explanation}}$:

$\textcolor{#00B2BF}{\textbf{Terminology}\ [\textbf{T}]}$
For correctly using relevant terms ($\checkmark$)

• e.g., government intervention, indirect taxes, subsidies, direct provision, price controls, command and control regulation, consumer nudges, poverty

[1 maximum]

$\textcolor{#4472C4}{\textbf{Policy Explanation}\ [\textbf{PEX}]}$
For identifying a policy that will increase internet access in Indonesia ($\checkmark$)

• e.g., direct provision of mobile phones to low-income Indonesians

For explaining how the policy will be implemented ($\checkmark$)

• e.g., the government can provide low cost or free phones to Indonesians based on certain factors

For explaining how the policy will increase internet access in Indonesia ($\checkmark$)

• e.g., internet data in Indonesia is relatively affordable, therefore, increasing access to internet-ready mobile phones increases internet access

[3 maximum]

$\textcolor{#337E8B}{\textbf{Synthesis and Evaluation}\ [\textbf{S/E}]}$
For explaining a strength of the recommended policy ($\checkmark$)

• e.g., direct provision of mobile phones will help bridge the $`$digital divide'

For explaining a limitation of the recommended policy ($\checkmark$)

• e.g., high opportunity cost to the government

For providing an evaluative statement that specifically resolves the demands of the question ($\checkmark$)

• e.g., because fixed broadband service is relatively expensive in Indonesia, expanding the number of mobile users will be the surest way to increasing internet access

[3 maximum]

$\textcolor{#C34A2C}{\textbf{Use of information from text/data}\ [\textbf{T/D}]}$
For using text/data to illustrate a strength of the policy ($\checkmark$)

• e.g., only 55$\%$ of Indonesians have mobile internet access even though coverage reaches 95$\%$ of the population

For using text/data to illustrate a limitation of the policy ($\checkmark$)

• e.g., quality of mobile internet service is lower than that of regional peers

For using text/data to support adoption of the policy ($\checkmark$)

• e.g., mobile broadband in Indonesia is less expensive than fixed broadband, so improving access to mobile broadband will be more efficient

[3 maximum]

[= 10 maximum]

$\underline{\textrm{Sample Answer}}$:

$Unemployment = \dfrac{3.11}{24.9}$ $\times$ 100 = $12.5\%$

$\underline{\textrm{Explanation}}$:

$Unemployment \ Rate = \dfrac{unemployed}{labour force} \times 100$

For showing the correct calculations ($\checkmark$) and the correct answer ($\checkmark$)

$Unemployment \ in \ 2020 = \dfrac{3.11}{24.9} \times 100 =$ 12.49%

$\underline{\textrm{Sample Answer}}$:

$Secondary \ Sector \ Employment = \dfrac{4.14}{24.9} \times 100 = 16.63\%$

$\underline{\textrm{Explanation}}$:

$Secondary \ employment \ rate = \dfrac{employed \ in \ secondary \ sector}{labour \ force} \times 100$

For showing the correct calculations ($\checkmark$)
$Secondary Sector Employment = \dfrac{4.14}{24.9} \times 100 =$ 16.63%

$\underline{\textrm{Sample Answer}}$:

$2019 \ value = 109 \ million \ \times$ $8.41 =$916 690 000
$2020 \ value = 111 \ million$ $8.09 =$897 990 000
%$\Delta$ = $\dfrac{897 \ 990 \ 000-916 \ 690 \ 000}{916 \ 690 \ 000} \times$ 100 = $-2.04\%$

$\underline{\textrm{Explanation}}$:

$Trade \ Value = quantity \ traded \times price \ per \ unit$

$Percentage \ change = \dfrac{Value \ Year \ 2- Value \ Year \ 1}{Value \ Year \ 1} \times 100$

For showing the correct calculations for:

• $2019 \ value = 109 \ million \times$ $8.41=$916 690 000 ($\checkmark$)
• $2020 \ value = 111 \ million$ $8.09 =$897 990 000 ($\checkmark$)

For correctly calculating the answer($\checkmark$)
$\%\Delta = \dfrac{897 \ 990 \ 000 - 916 \ 690 \ 000}{916 \ 690 \ 000} \times 100$= $-$2.04%

$\underline{\textrm{Sample Answer}}$:

Inflation is a sustained rise in the average price level of an economy.

$\underline{\textrm{Explanation}}$:

For providing a definition for inflation specifying that:

• it is sustained ($\checkmark$)
• it is a rise in the average price level ($\checkmark$)

$\underline{\textrm{Sample Answer}}$:

Between 2018 and 2021 Colombia experienced an increase in their inflation rate year-to-year. Inflation is the persistent increase in average price levels of an economy and has the impact of reducing the purchasing power of money. This has a disproportionate impact on low-income earners as their incomes are much more sensitive to changes in price. Further, the rise in inflation can harm economic growth as consumers react to the rising prices by deferring consumption. Consumers may decide to forgo consumption, especially of durable goods, while they wait for price levels to fall. This will cause a decrease in AD leading to lower economic growth.

$\underline{\textrm{Explanation}}$:

Between 2018 and 2021, Colombia’s inflation rate rose each year.

For explaining two of the consequences below (a-d):

1. the rising inflation disproportionately impacts low income earners ($\checkmark$) because their incomes are much more sensitive to price changes and are more impacted by a decrease in real wages ($\checkmark$).

2. the rising inflation can lead to a decrease in economic growth ($\checkmark$) as consumers may defer consumption while they wait for price levels to fall ($\checkmark$).

3. the rising inflation can lead to cyclical unemployment ($\checkmark$) as real wages fall and firms raise nominal wages they may need to hire fewer workers to compensate for increased costs of production ($\checkmark$).

4. the rising inflation may harm export competitiveness ($\checkmark$) as Colombia goods become relatively more expensive without any change in the exchange rate ($\checkmark$)

$\underline{\textrm{Sample Answer}}$:

$Real \ GDP \ 2016 = \dfrac{282.8}{105.2} \times 100 = US$ $268.82 $billion$

$Real \ GDP \ 2020 = \dfrac{270.3}{122.1} \times 100 = US$ $221.38 $billion$

$Real \ GDP \ per \ capita \ 2016 = \dfrac{268.82 \ billion}{47.63 \ million} = US$ $5 643.95

$Real \ GDP \ per \ capita \ 2020 = \dfrac{221.38 \ billion}{50.93 \ million} = US$ $4 346.75

$\underline{\textrm{Explanation}}$:

$Formula \ for \ Real \ GDP = \dfrac{Nominal \ GDP}{Deflator} \times 100$

$Formula \ for \ Real \ GDP \ per \ capita = \dfrac{Real \ GDP}{population}$

For showing all calculations using the correct data from Table 4 ($\checkmark$)

For correctly calculating real GDP in 2016 and 2020 ($\checkmark$)

• $Real \ GDP \ 2016 = \dfrac{282.8}{105.2} \times 100$ = US$268.82 billion

• $Real \ GDP \ 2020 = \dfrac{270.3}{122.1} \times 100$ = US$221.38 billion

For correctly calculating real GDP per capita in 2016 and 2020 ($\checkmark$)

• $Real \ GDP \ per \ capita \ 2016 = \dfrac{268.82 billion}{47.63 million}$ = US$5,643.92

• $Real \ GDP \ per \ capita \ 2020 = \dfrac{221.38 billion}{50.93 million}$ = US$4,346.67

$\footnotesize{\textrm{note: Own figure rule (OFR) applies to calculating real GDP per capita}}$

$\underline{\textrm{Sample Answer}}$:

The gini coefficient became higher between 2017 and 2020.

$\underline{\textrm{Explanation}}$:

For correctly identifying that a shift of the Lorenz curve away from the line of equality indicates a higher (worsening) gini coefficient ($\checkmark$).

$\underline{\textrm{Sample Answer}}$:

A worsening gini coefficient can signal many things about the condition of an economy. Two key consequences of a worsening gini coefficient would be increased rates of poverty and slowing economic growth and development.

As income is more unequally distributed, this signals that more money is being held by a smaller group of people. This would lead those seeing decreases in their income to be more likely to fall below the poverty line as national income is a zero-sum game. Furthermore, with a larger segment of the population seeing decreases in their incomes they would have less money to spend on improving their level of human capital which would contribute to slower economic growth and development.

$\underline{\textrm{Explanation}}$:

The Lorenz curve shifting outward signifies that income distribution in Colombia is becoming more unequal.

For explaining two of the consequences below (a-d):

1. Increased inequality causes increased poverty rates ($\checkmark$) because lower income earners are most impacted by increased inequality causing more to fall into poverty ($\checkmark$).

2. Increased inequality leads to lower economic growth and development ($\checkmark$) as there is a reduction in the investment in physical and human capital by larger portions of the population ($\checkmark$).

3. Increased inequality leads to social tension ($\checkmark$) as the income gap between high and low earners grows wider and dissatisfaction among low income earners grows ($\checkmark$).

4. Increased inequality leads to lower government investment ($\checkmark$) as tax revenues from both direct and indirect taxes tend to decline even with progressive income tax systems ($\checkmark$).

$\underline{\textrm{Sample answer}}$:
Colombia has seen a worsening of its gini coefficient over the last several years and at the same time has seen its ability to benefit from international trade decrease. Over the same period that their gini coefficient has risen, their real GDP per capita has fallen by approximately $1,300, their terms of trade are worsening as key exports such as bananas are falling in value, and their rates of poverty are among the highest in the region.

To address this problem, the Colombian government could look to adjust their income tax brackets to raise taxes on the highest earners in the country $\textcolor{#4472C4}{[\textbf{PEX}]}$. This would have the impact of giving the government the resources it would need to redistribute income more effectively through a system of transfer payments and government investments in human capital $\textcolor{#4472C4}{[\textbf{PEX}]}$. As a result of this, income would be redistributed from the highest earners to the lowest earners $\textcolor{#337E8B}{[\textbf{S/E}]}$. With $20\%$ of Colombian labour working in the primary sector $\textcolor{#C34A2C}{[\textbf{T/D}]}$ where falling export prices are leading Colombia to show negative growth, investment in human capital can allow the labour force to develop new skills. This could help Colombia develop economically and engage in secondary and tertiary sectors that would grow GDP and lead to higher incomes overall $\textcolor{#4472C4}{[\textbf{PEX}]}$.

This policy can take time to show benefits as there would likely be a lag time after implementing the fiscal policy necessary to reverse the income inequality trends $\textcolor{#337E8B}{[\textbf{S/E}]}$. The fact that Colombia has seen decreases in GDP per capita since 2016 $\textcolor{#C34A2C}{[\textbf{T/D}]}$ is also a large obstacle to this policy. Overall though, this policy would be effective at addressing income inequality in Colombia as the unique forces driving the current state of the economy require long-term solutions like this particularly when one considers that 38.2 percent of Colombians currently live in poverty $\textcolor{#C34A2C}{[\textbf{T/D}]}$ and that poverty rates have been stubbornly high $\textcolor{#337E8B}{[\textbf{S/E}]}$.

$\underline{\textrm{Explanation}}$:

$\textcolor{#00B2BF}{\textbf{Terminology}\ [\textbf{T}]}$
For correctly using relevant terms ($\checkmark$)

• e.g., income inequality, transfer payments, secondary sector, tertiary sector, human capital, terms of trade, gini coefficient

[1 maximum]

$\textcolor{#4472C4}{\textbf{Policy Explanation}\ [\textbf{PEX}]}$
For identifying a policy that will decrease income inequality ($\checkmark$)

• e.g., raising taxes and increasing government spending (expansionary fiscal policy)
  For explaining how the policy will be implemented ($\checkmark$)
• e.g., the government will raise taxes on higher earners to fund transfer payments and investment in human capital
  For explaining how the policy will cause income distribution to improve ($\checkmark$)
• e.g., the government will spend increased tax revenue on programs to improve human capital, moving lower income earners into the secondary and tertiary sectors

[3 maximum]

$\textcolor{#337E8B}{\textbf{Synthesis and Evaluation}\ [\textbf{S/E}]}$
For explaining a strength of the recommended policy ($\checkmark$)

• e.g., as more income is concentrated in the hands of fewer earners, taxing high earners more will give the government the resources it needs to address the core reasons for income inequality

For explaining a limitation of the recommended policy ($\checkmark$)

• e.g., there could be a significant time lag after it is implemented to when there is meaningful change in income distribution

For providing an evaluative statement that specifically resolves the demands of the question ($\checkmark$)

• e.g., income inequality requires long-term solutions and because of Colombia’s falling growth due to lower export prices, changes in human capital would be an effective solution, promoting economic development in Colombia.

[3 maximum]

$\textcolor{#C34A2C}{\textbf{Use of information from text/data}\ [\textbf{T/D}]}$
For using text/data to illustrate a strength of the policy ($\checkmark$)

• e.g., $20\%$ of Colombia’s labour force works in the primary sector

For using text/data to illustrate a limitation of the policy ($\checkmark$)

• e.g., falling GDP per capita since 2016

For using text/data to support adoption of the policy ($\checkmark$)

• e.g., $38.2\%$ of Colombians live in poverty and that rate has not changed much over the last couple of decades

[3 maximum]

[= 10 maximum]