Paper 3 question on indirect taxation (HL only)
This page contains a paper three type question on demand and supply and the impact of indirect taxation of market equilibrium. A reminder that under the syllabus P3 questions are now graded out of thirty and contain quantitative and qualitative questions.
Lesson time: 50 minutes
Paper three type question practise.
Paper 3 question on Carthy wine (HL only)
This question is worth [30 marks]. This paper is based on the new syllabus and contains a policy response question.
1. (a) The village shop in Carthy has the following weekly demand and supply functions for 1 Ltr bottles of wine:
QD = 1400 − 50P and QS =200+100P
Where QD and QS are quantities in bottles per week and P is the price per bottle in dollars.
(i) Calculate QD and QS at a price of $10 per bottle. [2 marks]
ii. Calculate the price which would result in a demand of 500 bottles per week. [2 marks]
iii. Calculate the equilibrium price and quantity for wine in the store. [2 marks]
(b) On the graph paper provided, draw the demand and supply curves using a price range from $2 to $16 per bottle. [2 marks]
(c) Following a negative report from the government’s health department the government imposes a flat rate tax of $5 per litre bottle.
On the graph, plot the new supply curve to illustrate the effect of the indirect tax. [1 mark]
(d) Calculate the weekly tax revenue earned by the government from the indirect tax. [1 mark]
(e) Calculate the change in weekly consumer spending on wine in the village shop as a result of the tax. [2 marks]
(f) On the graph above shade in the burden of tax paid by both the consumer and producer. [2 marks]
(g) Explain two reasons why the government may wish to place an indirect tax on the beverage. [2 marks](h) Explain the significance of price elasticity of demand theory in any government decision to reduce consumption of certain goods and services. [4 marks]
(i) Using your knowledge of economics suggest two alternative policies available to the government that might be successful in reducing alcohol consumption. [10 marks]
This question paper is available as a PDF file at: P3 question on tax
The mark scheme is available as a PDF file at: Carthy mark scheme