Introduction to Economics — Free Economics HL Practice Questions

A farmer in Kenya has a fixed plot of land. In one growing season, she can produce either $2000\,\text{kg}$ of maize or $1000\,\text{kg}$ of beans, or any linear combination along her production possibilities frontier (PPF). She currently produces $1500\,\text{kg}$ of maize and $250\,\text{kg}$ of beans.

The island nation of Maldives has a fixed supply of $1{,}000$ hectares of land. Using this land, the country can produce either $200{,}000$ tonnes of tuna per year or $50{,}000$ tonnes of coconuts per year, or any linear combination of the two. The country currently produces $150{,}000$ tonnes of tuna and $12{,}500$ tonnes of coconuts.

The government of Country X imposes a tariff on imported cars.

A specific tariff of USD 10 per unit is imposed on imported electronic components in Country X, a small open economy. The world price is USD 50 per unit. At the world price: - Domestic quantity demanded $= 1000$ units - Domestic quantity supplied $= 200$ units After the tariff: - Domestic price rises to USD 60 - Domestic quantity demanded falls to $800$ units - Domestic quantity supplied rises to $400$ units

In 2023, the government of Country X introduced a policy requiring all large supermarkets to display the carbon footprint of each product next to its price. A government minister stated: *"This policy will empower consumers to make ethical choices and will reduce the nation's environmental damage by at least $15\%$ within two years." An independent economist responded: "Predicting a precise $15\%$ reduction is impossible because consumer behaviour depends on many unpredictable factors, such as income changes and cultural attitudes."*

In 2022, the government of Kenya implemented a $16\%$ value-added tax (VAT) on sanitary pads, arguing that the revenue was needed to fund healthcare. A Kenyan Member of Parliament (MP) stated: "Taxing sanitary pads is unfair because it disproportionately harms low-income women who need these products for dignity and health." A different MP replied: "The tax will raise 2.5 billion Kenyan shillings for hospitals."

A development economist studies the relationship between income level and environmental quality across 20 countries. She collects: - Quantitative

A government in a developing nation is evaluating the success of a new microfinance programme aimed at reducing poverty in rural areas. Two types of evidence are collected. Quantitative

The government of a developing nation, Agroland, is deciding how to allocate its limited resources for the next fiscal year. Agroland has a growing population and a fixed amount of arable land. Currently, it produces $10$ million tonnes of food grains and $5$ million units of textiles. A new report from the Ministry of Planning indicates that if Agroland reallocates resources from textile production to food grain production, it could produce an additional $2$ million tonnes of food grains, but this would reduce textile output by $3$ million units. The Minister of Agriculture argues that this reallocation is essential to address food scarcity, while the Minister of Trade warns that it will harm the export-oriented textile industry, leading to job losses and reduced foreign exchange earnings.

Country X is a small island nation with limited natural resources. Its economy relies on two main sectors: tourism (which employs skilled labour and generates significant foreign exchange earnings) and fishing (which employs unskilled labour and serves the domestic market). A recent volcanic eruption has damaged infrastructure across the island. The government is considering two mutually exclusive recovery policies: - Policy A: Rebuild damaged agricultural land, creating $500$ new farming jobs at a total cost of USD 10 million. - Policy B: Construct a desalination plant to supply fresh water to the tourism sector, creating $300$ new tourism jobs at a total cost of USD 15 million. The government has a fixed recovery budget of USD 20 million.

The government of Country X, a developing nation, has recently imposed a $25\%$ ad valorem tariff on imported textiles. Domestic textile producers are currently operating at $60\%$ capacity, and the government argues the tariff will protect jobs and reduce a persistent current account deficit. However, the textile industry relies on imported synthetic fibres — not subject to the tariff — to produce finished goods. Consumer groups have protested, noting the price of clothing has risen by $12\%$ since the tariff was introduced. Country X's main trading partner, Country Y, has threatened to retaliate with tariffs on Country X's agricultural exports.

The government of Zedland, a developed country, introduced a production subsidy of USD 50 per tonne for domestic steel producers in 2023. The subsidy aimed to reduce reliance on imported steel from Country W, which had been accused of dumping steel at below-cost prices. Prior to the subsidy, Zedland produced 10 million tonnes of steel annually and imported 8 million tonnes at a world price of USD 400 per tonne. After the subsidy, domestic production rose to 14 million tonnes and imports fell to 5 million tonnes. The domestic price remained unchanged at USD 400 per tonne. Consumer groups argue the subsidy wastes taxpayer money, while steel producers claim it saved 2,000 jobs.

Consider a developing economy, Agriana, which relies heavily on subsistence agriculture. The government of Agriana is considering implementing a price floor on the domestic market for rice in order to raise the incomes of small-scale farmers. The government's advisors have constructed Model A, which assumes: - the rice market is perfectly competitive - all farmers are profit-maximising firms - consumers have perfect information about prices - there are no externalities in production or consumption Model A predicts that a price floor set above the equilibrium price will create a persistent surplus of rice, leading to a deadweight loss. A group of international development economists propose Model B, which modifies these assumptions: - many farmers are subsistence farmers who do not respond to price signals in the short run - consumers have imperfect information and may pay higher prices due to local monopolies - rice farming generates positive externalities (e.g., maintaining rural landscapes and reducing urban migration)

Country Zeta is a developing nation considering a new progressive income tax policy. The Minister of Finance states: *"The government should implement a progressive income tax system because it is unfair that the richest $10\%$ of households earn $40\%$ of total national income, while the poorest $20\%$ earn only $5\%$." A government economist responds: "A progressive income tax will reduce the Gini coefficient from $0.55$ to an estimated $0.42$, based on data from similar countries. However, it may also reduce work incentives, leading to a $2\%$ decrease in total tax revenue."* Data for Country Zeta - Current Gini coefficient: $0.55$ - Estimated Gini coefficient after tax reform: $0.42$ - Richest $10\%$ of households: earn $40\%$ of national income - Poorest $20\%$ of households: earn $5\%$ of national income - Predicted change in total tax revenue: $-2\%$

A large multinational corporation, AutoMotive Inc., produces electric vehicles (EVs) in a highly competitive global market. The company uses an economic model (Model X) to forecast its optimal production level. Model X makes the following assumptions: - The firm operates in a perfectly competitive market in the long run. - All costs are variable in the long run. - The production function exhibits constant returns to scale. - Consumer preferences are stable and rational. Model X predicts that in long-run equilibrium AutoMotive Inc. earns zero economic profit. A rival firm, GreenTech Ltd., uses a different model (Model Y) which assumes: - The market is monopolistically competitive due to product differentiation. - There are significant fixed costs in research and development (R&D). - Consumer preferences are influenced by advertising and brand loyalty.

The government of Country X is evaluating two policies to reduce road congestion. Policy A introduces a congestion charge of USD 5 per day for vehicles entering the city centre. Policy B provides a subsidy of USD 3 per day for each commuter using public transport, reducing the effective price of a public transport trip from USD 5 to USD 2. The following data are available: - Average daily number of private vehicles entering the city centre (before any policy): $100{,}000$ vehicles - Average daily number of public transport users (before any policy): $200{,}000$ passengers - Original price per trip for a private vehicle user (fuel, parking, and time cost): USD 10 - Original price per public transport trip: USD 5 - Price elasticity of demand (PED) for private vehicle use: $-0.4$ - Cross-price elasticity of demand (XED) of private vehicle use with respect to public transport price: $+0.5$ - Cross-price elasticity of demand (XED) of public transport use with respect to private vehicle price: $+0.6$ - Government's daily budget for the policy: USD 200,000 $$\text{PED} = \frac{\%\Delta Q_d}{\%\Delta P}, \quad \text{XED} = \frac{\%\Delta Q_d \text{ of Good A}}{\%\Delta P \text{ of Good B}}, \quad \%\Delta = \frac{\text{New} - \text{Old}}{\text{Old}} \times 100$$

A country (Country X) has a labour force of 30 million people. Currently it produces $10$ million tonnes of wheat and $5$ million units of electronics. The opportunity cost of producing one additional unit of electronics is $1.5$ tonnes of wheat.

The government of Country X is considering a tariff on imported rice. The domestic demand for rice is $Q_d = 100 - 2P$ and the domestic supply is $Q_s = -20 + 4P$, where $Q$ is in millions of tonnes and $P$ is the price in USD per tonne. The world price of rice is USD 15 per tonne.