IB Economics HL 4.2.2 Quotas Question Bank

Practise IB Economics SL/HL 4.2.2 by applying quotas concepts to exam-style questions.

[Maximum number: 4]

The following diagram illustrates the market for bananas in Country A. D and S represent the domestic demand and supply for bananas, while bananas can be imported at the current world price of $\$ 3$ per kg.

Figure for Question 4.2.2—Quotas question 1 — IB Economics HL

With reference to the diagram, explain why the welfare loss from the imposition of the quota is likely to be greater than the welfare loss resulting from a tariff of $\$ 2$ per kg.

The demand and supply functions for the currency of Country A (the dollar ($)) are given by:

\begin{aligned} & Q d=1900-18 P \\ & Q s=580+12 P \end{aligned}

where Qd is the quantity of dollars demanded per month, Qs is the quantity of dollars supplied per month and P is the price of the dollar, measured in yen ( ¥ ).

$\$ 2$ per kg.
Level ..... Marks
0 The work does not reach a standard described by the descriptors below. ..... 0
1 The written response is limited. ..... 1-2
For explaining that the impact on price and quantity of consumption and

imports would be identical to that of the quota, but the welfare loss would

be greater with a quota.
P= $\$ 5$ , imported quantity $=150000 \mathrm{~kg}, \mathrm{Qd}=300000 \mathrm{~kg}$ .
If the result of the tariff (price, Q d, imports) is identified correctly award [1].
OR
If one welfare loss is identified accurately, award [1].
A response which indicates that the foregone tariff revenue is the reason for the difference, but with little/no accurate supporting evidence, should be awarded [2].

2 The written response is accurate.
For explaining that the welfare loss is likely to be greater for the quota, because, even though the impact on price and quantity is the same in this diagram in the case of a $\$ 2$ tariff, the government does not necessarily benefit in terms of revenue from a quota.
A response which explains that price, quantity (and imports) would be the same with a tariff or quota, but that there would be no tariff revenue with the quota so welfare loss would be greater without reference to the diagram should be awarded [3].
N.B. Some candidates may annotate the diagram - these annotations can be seen and rewarded by looking at the script in full response mode.

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4.2.2—Quotas question 1