Economics Paper 3 HL Markscheme May 2021

M21/3/ECONO/HP3/ENG/TZ0/XX/M
Markscheme
May 2021
Economics
Higher level
Paper 3
20 pages
–2– M21/3/ECONO/HP3/ENG/TZ0/XX/M
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Notes for examiners:
1. Whenever relevant, carry over marks must be awarded. If a candidate makes an error in
calculation, but then uses the incorrect figure appropriately and accurately in later question
parts, then the candidate may be fully rewarded. This is the “own-figure rule” and you should
put OFR on the script where you are rewarding this.
2. Alternative approaches may be taken in responses to the [4] questions that use A02
command terms. If this is the case and the alternative approaches are valid, then full
credit should be given.
1. (a) Assuming that 25 000 pencils are produced initially, identify the opportunity cost
for Country H if the production of rice is to be increased by 100%. [1]
15 000 pencils
OR 750 pencils per kg of rice
An answer of 15 000 pencils or 15 000 or 750 is sufficient for [1].
(b) State one reason why the production possibility curve (frontier) for Country H
might shift outwards. [1]
Stating that there is an increase in the quantity and/or quality of one or more
factors of production
OR an improvement in technology / institutional framework / population, is
sufficient for [1].
It is not necessary to name a specific factor of production, but a response which

correctly states one factor, eg an increase in the quality of labour should be
rewarded.
(c) Using Table 1, calculate the cross price elasticity of demand between Good X
and Good Y. [2]
%∆
XED = =
%∆ .
Any valid working (correct %Δ Qd(Y) or %Δ P(X), provided the formula is not
inverted) is sufficient for [1].
= 0.3
An answer of 0.3 without any valid working is sufficient for [1].

(d) Define the term income inelastic demand. [2]
Level Marks
0 The work does not meet a standard described by the descriptors 0

below.
1 Vague definition. 1
For an idea that demand/quantity demanded does not change

much/at all when income changes.
2 Accurate definition. 2
The situation where a change in income leads to a less than

proportionate/relatively smaller change in demand/quantity
demanded (or a lower percentage change in demand/quantity
demanded).
(e) Explain two implications for Country D of a relatively low income elasticity of
demand for its primary products. [4]
Level Marks

below.
1 The written response is limited. 1–2
For one implication stated [1].
For one implication explained OR two implications stated [2].
2 The written response is accurate. 3–4
For one implication explained AND one implication stated [3].
For two implications explained [4].
Implications may include:

 countries that specialize in primary products may need to diversify in order to
achieve economic growth
 (relative) income for those working in the primary sector might decrease,
leading to greater inequality
 as economic growth occurs, demand for primary products will increase more
slowly than the demand for secondary/tertiary products, causing the prices of
primary products to increase more slowly than the prices of secondary/tertiary
products
 as economic growth occurs, there will be differences in the rate of expansion
of primary industries in relation to secondary/tertiary industries/employment
 because the prices of primary products fall relative to manufactures, the terms
of trade for countries specializing in the export of primary products may
deteriorate. This may threaten the process of economic development
 as Country D specializes in the export of (income inelastic) goods, it will not
benefit from global economic growth (the income gap will widen), or the
converse could be true. This implication may be phrased as export revenue
being relatively stable despite changes in the global economy
 any other reasonable response.
NB Reference to the effects of negative economic growth should be rewarded.

(f) Using a diagram to support your answer, explain the impact on the market for
Good B of an increase in the price of Good A. [4]
The market for Good B
Level Marks

below.
For a diagram showing an increase in supply (shift to the right)

and a decrease in price/increase in quantity OR an explanation
that if the price of Good A increases, the quantity of Good A
supplied will increase, and as a consequence the supply of
Good B will increase, causing a fall in price and an increase in
quantity of B.
For a diagram showing an increase in supply (shift to the right)

and a decrease in price/increase in quantity AND an explanation
that if the price of Good A increases, the quantity of Good A
supplied will increase, and as a consequence the supply of
Good B will increase, causing a fall in price and an increase in
quantity of B.
An alternative diagram would be with P of Good A on vertical axis and Q of Good B on

horizontal axis and an upward sloping curve. The explanation should be consistent with this
diagram. For full marks the response should refer to the quantity of Good B increasing and
its price decreasing.
NB If the explanation is vague, [1] may be awarded for an appropriate example
(such as any product and its by-product).
A candidate who has provided a correct diagram but refers to quantity supplied
(rather than supply) of good B should not be penalized.
(g) Calculate the shortage resulting from the imposition of the maximum price. [1]
The maximum price = $5 0.6 = $3.
At $3, Qd = 300 000, Qs = 100 000, so the shortage = 200 000 kg
An answer of 200 or 200 000 is sufficient for [1].
(h) Calculate the change in producer surplus resulting from the imposition of the
maximum price. [2]
Initial PS = 0.5 4 200 000 = $400 000
New PS = 0.5 2 100 000 = $100 000
Any valid working (initial or final PS) is sufficient for [1]
Change in PS = $100 000 – $400 000
= –$300 000 (ie a decrease)
OR Decrease in PS = 0.5 2 (200 000 + 100 000) = $300 000
An answer of 300 or 300 000 without any valid working is sufficient for [1].
For full marks to be awarded the response must provide valid working and
include correct units.
NB OFR applies where a candidate has identified the maximum price incorrectly
in part (g).
(i) Calculate the change in consumer expenditure on rice resulting from the
imposition of the maximum price. [2]
Initial consumer spending = 5 200 000 = $1 000 000
New consumer spending = 3 100 000 = $300 000
Any valid working (initial or final consumer expenditure) is sufficient for [1].
= –$700 000 (ie a decrease)
An answer of 700 or 700 000 without any valid working is sufficient for [1].
NB OFR applies where a candidate has identified the maximum price incorrectly
in part (g). Examiners should not penalize twice for the absence of a negative
sign (ie in both parts h and i).
(j) State two methods of non-price rationing. [2]
Award [1] for each appropriate method, up to a maximum of [2].
Methods may include:

 first-come, first-served (queueing)
 allocation according to sellers’ preferences
 rationing systems using coupons/vouchers or applying a quota per
customer/household eg distribution according to income level/size of
household would be acceptable
 random allocation by ballot
(k) With reference to Figure 2, outline why the imposition of a maximum price might
lead to the creation of a parallel market. [2]
Level Marks
below.
1 Vague outline 1
For the idea that some consumers are able/willing to pay a higher
price than the ceiling OR that farmers may be unwilling to sell at
such a low price
2 Accurate outline 2
For an understanding that if some consumers are able/willing to
pay more than the controlled price of $3 OR that farmers may be
unwilling to sell at such a low price,
AND
EITHER some producers are willing to sell (illegally) for more than
the controlled price, a parallel market will result OR some
consumers set up a resale market at higher prices as sellers.
NB For L2, reference must be made to both buyers and sellers

and to a valid figure ($3 or 200 000 kg) from the diagram.
(l) Explain one reason, apart from the possible creation of a parallel market, why the
imposition of a maximum price for rice in Islandia might not enable low-income
households to buy enough rice to meet their needs. [2]
Level Marks
below.
1 Vague explanation 1
For the idea that there will not be enough rice for everyone who
wants to buy.
2 Accurate explanation 2
For an explanation that
EITHER even though rice may now be more affordable, shortages
result in low income families finding it more difficult to access rice
(meaning that low-income households may find it more difficult to
access (than high-income households))
OR maximum price discourages producers from supplying to the
(domestic) market, which makes it less accessible to low-income
households.
NB An alternative valid response may be fully rewarded.

2. (a) Calculate Averna’s nominal gross domestic product (GDP) in 2019. [2]
GDP = 2350 + 1380 + 1624 + (462 – 476)
Any valid working is sufficient for [1].
= $5340 million or $5.34 billion [1]
An answer of $5340 million, $5.34 billion (or 5340 or 5.34) without any valid
working is sufficient for [1].
If a candidate makes a small error in transcribing the figures eg 1642 instead of

1624, then they can still receive [1] for valid working.
Calculating GDP at factor cost (plus subsidies less indirect taxes) may be fully
rewarded:
GDP at factor cost = 2350 + 1380 + 1624 + (462 – 476) + 681 – 759
= $5262 million or $5.26 billion
(b) (i) Define the term price deflator. [2]
Level Marks
0 The work does not meet a standard described by the 0
descriptors below.
For the idea that a price deflator helps to adjust for
inflation.
An understanding that it is a price index used to convert
nominal GDP to real GDP (or any nominal value to its real
value) OR price deflator = nominal GDP/real GDP ( 100).
– 10 – M21/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) Using your answer to part (a), calculate Averna’s real GDP per capita in
2019. [2]
Real GDP = 5340 100/125 = $4272 million
Real GDP per capita = 4 272 000 000/213 600
Any valid working is sufficient for [1] eg using nominal GDP instead of real
GDP (5340/213 600 = $25 000) or neglecting to convert to per capita figure
(=$4272m).
Neglecting to multiply by 100 in calculating real GDP may be considered a
units error.
= $20 000
An answer of $20 000 or 20 000 (without working) is sufficient for [1].
OFR applies from part (a). Per capita figures may be rounded to the
nearest dollar.
(iii) Explain two reasons why an increase in real GDP per capita may not lead
to an improvement in living standards. [4]
Level Marks
below.
For one reason stated [1].
For two reasons stated OR one reason explained [2].
For one reason explained AND one reason stated [3].
For two reasons explained [4].
Reasons may include:

 The distribution of income may become uneven, so that the benefits of
increasing real GDP may not be enjoyed by some.
 Due to structural changes, employment opportunities decrease for some
groups, who will not benefit from higher real GDP.
 More accurate recording of self-provided goods may account for the
increase in real GDP without a corresponding increase in output/income.
 An increase in real GDP may lead to negative environmental effects,
such as poor air quality, meaning that living standards do not improve.
 The composition of output may have changed. An increase in real GDP
that results from an increase in military spending (or without an increase
in spending on health and education) may not improve living standards.
 GNP could be lower than GDP due to profit repatriation by MNCs or to
income remittances overseas by immigrant workers.
 An increase in real GDP might be accompanied by reduced leisure
time/freedom.
 Any other reasonable response.
(c) Calculate the unemployment rate in Buranda. [2]

1.2
100
5.7 1.2
= 17.39% or 17.39
An answer of 17.39% or 17.39 (without working) is sufficient for [1].
(d) Define the term underemployment. [2]
Level Marks
descriptors below.
The idea that people do not have enough work.
An understanding that it is when people are working, but
they are overqualified for the job they hold OR they are
employed part time but would like to work full time.
(e) Identify a period in which Country Y experienced disinflation. [1]
2011 – 2012
OR 2011 – 2013
OR 2012 – 2013
OR 2012
OR 2013
Award [1] for identifying the period correctly.

(f) (i) With reference to the short-run Phillips curve, describe the relationship
between inflation and unemployment in Country Y for the period 2011 to
2016. [2]
Level Marks
descriptors below.
1 Vague description. 1
For the idea that there is a negative (inverse) relationship
between inflation and unemployment for the period 2011 to
2016.
2 Accurate description. 2
For an understanding that there is a negative (inverse)
relationship between inflation and unemployment for the
period 2011 to 2016, indicating that the economy conforms
to the short-run Phillips curve.
NB If the candidate demonstrates awareness of the trade-

off without explicitly mentioning the SRPC, Level 2 may be
awarded.
(ii) Outline how the data for the period 2016 to 2018 may reflect a change in
the short-run Phillips curve for Country Y. [2]
Level Marks
descriptors below.
1 Vague outline. 1
For the idea that the economy does not conform to the
short-run Phillips curve between 2016 and 2018 OR that
both inflation and unemployment have increased.
2 Accurate outline. 2
For an understanding that an increase in both
unemployment and inflation suggests that the short-run
Phillips curve has shifted to the right/upwards between
2016 and 2018.
(g) (i) Calculate Buranda’s terms of trade index for 2008 and 2018. [2]
2008:
.
100 = 97.80
.
An answer of 97.80 is sufficient for [1].
2018:
.
100 = 86.24
.
An answer of 86.24 is sufficient for [1].
NB Candidates who make a similar rounding error/misplace the decimal

point/do not multiply by 100 on both calculations should be penalized once
only.
(ii) Using your answers to part (g)(i), explain how the change in Buranda’s
terms of trade may act as a barrier to economic development. [4]
Level Marks
below.
For an explanation that the deterioration in the terms of trade
means that Buranda must produce and export a greater quantity
of goods and services in order to finance its import spending
OR one of the following:
 reducing the funds available for spending on imported goods
necessary for development such as capital equipment and
pharmaceuticals
 Buranda may be forced to focus on production for export,
limiting opportunities for diversification
 as imports are relatively more expensive a rising current
account deficit may result
For an explanation that the deterioration in the terms of trade
means that Buranda must produce and export a greater quantity
of goods and services in order to finance a given level of imports
AND one of the following:
 reducing the funds available for spending on imported goods
necessary for development such as capital equipment and
pharmaceuticals
 Buranda may be forced to focus on production for export,
limiting opportunities for diversification
 as imports are relatively more expensive a rising current
account deficit may result
3. (a) Outline how a concentration ratio might be used to identify an oligopoly. [2]
Level Marks
below.
1 Vague outline. 1
For the idea that it measures market power/concentration.
For an understanding that it measures the market share of a
certain number of firms, an increase in the ratio indicating fewer
firms dominating the market.
(b) Using a diagram to support your answer, explain how monopoly power can
create a welfare loss. [4]
Level Marks
below.
For an accurate diagram of a firm with monopoly power showing
the equilibrium quantity below the allocatively efficient level of
output OR with the welfare loss indicated accurately
OR an explanation that monopoly power can lead to the firm

producing at a level of output below the allocatively efficient level
of output/producing where P>MC, resulting in a welfare
loss/market failure.
For an accurate diagram of a firm with monopoly power showing
the equilibrium quantity below the allocatively efficient level of
output OR with the welfare loss indicated accurately
AND an explanation that monopoly power can lead to the firm

producing at a level of output below the allocatively efficient level
of output/producing where P>MC, resulting in a welfare
loss/market failure.
NB The AC curve is not required. If it is included do not penalize any associated errors.
(c) State two government responses to the abuse of monopoly power. [2]
Award [1] for each valid government response stated.
Answers may include:

 legislation to prevent collusion between firms
 legislation to prevent mergers deemed to be anti-competitive
 legislation to break up monopolies deemed to be undesirable
 legislation to reduce barriers to entry
 anti-monopoly/antitrust legislation, but not in addition to any of the above
four
 trade liberalization measures to encourage competition from overseas
 price regulation
 nationalization/state-ownership
 fines/sanctions against firms
NB Deregulation should not be accepted unless its nature is indicated (as

deregulation could also increase monopoly power).
(d) Outline the law of diminishing returns. [2]
Level Marks
below.
1 Vague outline. 1
For the idea that output increases/changes at a decreasing rate.
For an understanding that as additional units of a variable factor
of production are employed together with one or more fixed
factors, the marginal returns/product to the variable factor will
decrease at some point.
(e) (i) Sketch the marginal product (MP) and average product (AP) curves for this firm. [2]
Award [1] for an accurate, labelled marginal product curve.

Award [1] for an accurate, labelled average product curve.
NB If the shape of each curve is correct, but the relationship between them
is incorrect, then a maximum of [1] may be awarded.
(ii) Sketch the total product (TP) curve for this firm. [1]
Award [1] for an accurate, labelled TP curve, starting at the origin.
(f) (i) Sketch the marginal revenue (MR) curve for firms in the widget industry. [1]
Award [1] for an accurate, labelled MR curve (MR must be downward-

sloping but need not be linear and need not become negative).
(ii) Sketch the total revenue (TR) curve for firms in the widget industry. [1]
Award [1] for an accurate, labelled TR curve (must start from the origin,
with ever-decreasing gradient, but need not end at the horizontal axis).
(g) (i) Calculate the firm’s total variable costs if output is 20 000 widgets per
month. [1]
20 000 18 = $360 000
An answer of $360 000 or 360 000 or 360 (without working) is sufficient for
[1].
(ii) Identify the level of output at which the firm would achieve productive
efficiency. [1]
85 000 or 85 (allow 84 000 or 86 000)
(iii) Calculate the firm’s monthly total fixed costs if output equals 50 000 units
per month. [2]
At 50 000 units, AFC = 15.6 – 12 = 3.6
FC = 3.6 50 000 = $180 000
An answer of $180 000 or 180 000 (without working) is sufficient for [1].
(h) (i) State two conditions necessary for price discrimination to take place. [2]
Award [1] for each valid condition stated.
Conditions may include:

 the firm must possess some degree of market power
 there must be groups of consumers with differing price elasticities of
demand for the product
 the firm must be able to prevent resale of the product from one market
segment to others / separate the groups.
NB A statement that markets are differentiated/divided is not sufficient for [1].
(ii) Using a diagram (or diagrams), explain why a profit maximizing firm might
charge a higher price in one market than in another. [4]
Level Marks
below.
For a diagram(s) showing two distinct market segments, with
different price elasticities of demand, and profits maximized (MC
= MR) in each market at different prices OR an explanation that
as price elasticities of demand are different, profit can be
maximized by setting different prices with a lower price in the
market with more elastic demand and/or a higher price in the
market with more inelastic demand.
NB Reference to revenue rather than profit should be accepted.

For a diagram(s) showing two distinct market segments, with
different price elasticities of demand, and profits maximized (MC
= MR) in each market at different prices AND an explanation
that as price elasticities of demand are different, profit can be
maximized by setting different prices with a lower price in the
market with more elastic demand and/or a higher price in the
market with more inelastic demand.
NB Reference to revenue rather than profit should be accepted.

NB Alternative presentations may include: back to back (mirror) or an additional

third diagram indicating the sum of the revenue curves.

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M21/3/ECONO/HP3/ENG/TZ0/XX/M

© International Baccalaureate Organization 2021

© Organisation du Baccalauréat International 2021

© Organización del Bachillerato Internacional, 2021

Notes for examiners:

OR 750 pencils per kg of rice

An answer of 15 000 pencils or 15 000 or 750 is sufficient for [1].

It is not necessary to name a specific factor of production, but a response which

An answer of 0.3 without any valid working is sufficient for [1].

(d) Define the term income inelastic demand. [2]

0 The work does not meet a standard described by the descriptors 0

For an idea that demand/quantity demanded does not change

The situation where a change in income leads to a less than

0 The work does not meet a standard described by the descriptors 0

Implications may include:

NB Reference to the effects of negative economic growth should be rewarded.

The market for Good B

0 The work does not meet a standard described by the descriptors 0

1 The written response is limited. 1–2

For a diagram showing an increase in supply (shift to the right)

For a diagram showing an increase in supply (shift to the right)

An alternative diagram would be with P of Good A on vertical axis and Q of Good B on

The maximum price = $5 0.6 = $3.

At $3, Qd = 300 000, Qs = 100 000, so the shortage = 200 000 kg

An answer of 200 or 200 000 is sufficient for [1].

Initial PS = 0.5 4 200 000 = $400 000

New PS = 0.5 2 100 000 = $100 000

Any valid working (initial or final PS) is sufficient for [1]

Change in PS = $100 000 – $400 000

= –$300 000 (ie a decrease)

OR Decrease in PS = 0.5 2 (200 000 + 100 000) = $300 000

Initial consumer spending = 5 200 000 = $1 000 000

New consumer spending = 3 100 000 = $300 000

= –$700 000 (ie a decrease)

(j) State two methods of non-price rationing. [2]

Award [1] for each appropriate method, up to a maximum of [2].

Methods may include:

NB For L2, reference must be made to both buyers and sellers

NB An alternative valid response may be fully rewarded.

GDP = 2350 + 1380 + 1624 + (462 – 476)

Any valid working is sufficient for [1].

= $5340 million or $5.34 billion [1]

If a candidate makes a small error in transcribing the figures eg 1642 instead of

= $5262 million or $5.26 billion

(b) (i) Define the term price deflator. [2]

Real GDP = 5340 100/125 = $4272 million

Real GDP per capita = 4 272 000 000/213 600

An answer of $20 000 or 20 000 (without working) is sufficient for [1].

Reasons may include:

(c) Calculate the unemployment rate in Buranda. [2]

Any valid working is sufficient for [1].

An answer of 17.39% or 17.39 (without working) is sufficient for [1].

(d) Define the term underemployment. [2]

(e) Identify a period in which Country Y experienced disinflation. [1]

Award [1] for identifying the period correctly.

NB If the candidate demonstrates awareness of the trade-

An answer of 97.80 is sufficient for [1].

An answer of 86.24 is sufficient for [1].

NB Candidates who make a similar rounding error/misplace the decimal

OR an explanation that monopoly power can lead to the firm