CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.
Coursebook answers
Chapter 13
Economics in context
Learners’ discussion might include:
• Microeconomic issues: demand for vegetable oil is price inelastic; extra tax is designed to switch
consumption to domestic cooking oil.
Macroeconomic issues: an extra 5% tax will increase government revenue; aim is to reduce imports
of cooking oil; impact on current account of balance of payments; could create more employment
through scheme to promote oilseed production.
• Winners: Indian farmers who increase their production of oilseed will receive a higher income; reduced
import bill.
Losers: consumers faced with higher prices; loss of Indian market for producers elsewhere.
• The additional 5% tax on vegetable oil imports may lead to a fall in demand, reducing government
revenue. Farmers may not want to switch to oilseed production.
Activities
Activity 13.1
Imposing an ad valorem tax will shift the supply curve S to the left but as price increases, the new supply
curve S1 will diverge upwards away from the original supply curve. The higher the price, the greater will be
the amount of the ad valorem tax. The incidence of the ad valorem tax will fall more heavily on consumers
as the price of the product increases.
Activity 13.2
1 New Zealand has a higher tax regime than Indonesia and Malaysia with a higher income tax rate on
low earners. Sales tax is significantly higher. There are similar corporate tax rates.
Learners’ answers might include:
2 The lower sales tax in Indonesia and Malaysia is a way of helping lower income families. Marginally
lower income tax rates may provide more of an incentive for top earners to work and remain in
Indonesia and Malaysia. New Zealand is likely to have a higher government spending requirement,
requiring higher taxes.
3 More information is needed on which products are covered by the respective sales taxes and the income
thresholds before income tax is levied.
Activity 13.3
Learners’ answers might include:
• poultry production – cheaper poultry meat for consumers, incentive for farmers to meet market
demand, increased employment on poultry farms, possibly reduced imports, better for the environment
than other types of meat production.
1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
• long-distance rail services – more environmentally acceptable than road or air travel, more opportunity
for workers to travel from remote rural areas to work in urban manufacturing and service centres, may
result in more international tourist visits.
• university education – investment in human capital for future economic development and growth,
benefits students from lower-income families.
Activity 13.4
Learners’ answers might include:
1 It can be assumed that the maximum fare is lower than the free market fare. This is designed to protect
the interests of customers. When there is heavy traffic, the free market fare would be higher. This is
why some yellow cab drivers prefer not to work at such times. The maximum fare is designed to be
competitive with other means of transport in New York, including Uber.
Think like an economist
Learners’ discussion might include:
1 The OECD’s data might appear to support the argument put forward by Australian farmers. Subsidies
from other developed economies, like the USA, EU, Norway and Switzerland are a much higher
percentage of gross farm receipts. Compared to farmers in other high-income economies, farmers in
Australia do not appear to receive much government support.
2 The argument will be helped with further data such as the prices farmers in Australia receive for their
products and, significantly, comparable data for low- and middle-income countries that are important
producers of agricultural products. It is invariably these countries that complain to the WTO about
subsidies paid to farmers in high-income countries.
Exam-style questions: Multiple choice
1 C To be effective, the maximum price of rice should be below the equilibrium price. Potentially, this
can lead to a shortage of rice. This rules out option 2 and therefore D. A subsidy will encourage
rice farmers to produce more rice since at the maximum price, demand is greater than supply.
Rationing is also a valid policy since there are likely to be shortages in the market. So, given both
are relevant, C is the correct response.
2 B At the minimum price, above the equilibrium, supply is greater than demand. This rules out both
of the selling options, C and D. To retain P1 as the minimum price, the government must buy all
of the excess supply in the market. This must be Option B, KR; just buying KL would still lead to
more supply in the market than is demanded.
3 B Imposing a new specific tax will lead to the supply curve shifting to the left. This rules out options
A and D. The crucial point from the diagram is that the demand curve is price elastic and the
supply curve price inelastic. This means that the producer is unable to shift much of the tax
incidence onto consumers; most will therefore fall on producers.
4 C The inelastic supply curve is the most important thing to look out for with this style of question.
This means that consumers pay a higher percentage of total tax receipts than producers. The area
P1 YZP2 represents total tax receipts of which consumers have paid P1YWP.
5 C The payment of a subsidy will increase corn production. The effect on corn prices is uncertain as
there is no indication of the likely change in supply. This rules out A and B. The effect on corn oil
prices cannot be determined.
6 A The market price for wheat will only fall when there is an increase in supply. B is not correct
since buying more supplies will increase the market price. C and D are not components of a
buffer stock scheme.
2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
