IB DP Economics: Inequality and poverty – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

This set follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topic 3.4, inequality and poverty, for SL and HL. Questions 10 and 11 are HL only. All countries, currencies and figures are invented. The guide says calculators are not permitted in Paper 1, and a four-function calculator or GDC is allowed in Papers 2 and 3. The marks below are a revision aid: the real papers use an analytic markscheme together with markbands.

The study guide and revision notes cover the content. See also the IB DP Economics hub and printable checklist.

Questions

1. Distinguish between income inequality and wealth inequality. [3]

2. Distinguish between equality and equity, using one example. [3]

3. (calculator-free) In Ostrel, a fictional country, the shares of national income received by each fifth of households, poorest first, were 5, 9, 14, 22 and 50 (%) before a reform and 7, 11, 16, 23 and 43 (%) after it.

(a) Find the cumulative share of income held by the poorest 60% of households before and after the reform. [2] (b) Explain what the change shows about the Lorenz curve and about income inequality. [3]

4. (calculator-free) In Dorrin, a fictional country, the absolute poverty line is 10,000 dorrs a year, and the relative poverty line is 50% of median income. The median income is 30,000 dorrs. Four households earn: P 9,500; Q 12,000; R 16,000; S 14,500.

(a) Identify which households are in absolute poverty and which are in relative poverty. [3] (b) Next year the median rises to 36,000 and household R earns 16,800. The absolute line is unchanged. Explain whether household R is in poverty. [2]

5. Explain the difference between a single indicator and a composite indicator of poverty, giving one example of each. [4]

6. Explain two difficulties in measuring poverty. [4]

7. Explain two causes of economic inequality. [6]

8. Examine the possible effects of high income inequality on economic growth and on standards of living. [8]

9. (calculator-free) Three taxes in a fictional country take these amounts from a household:

Tax	Tax paid at income 10,000	Tax paid at income 40,000
X	1,000	8,000
Y	1,500	4,800
Z	1,000	4,000

(a) Classify each tax as progressive, regressive or proportional, showing the average rates. [3] (b) Explain which tax would do most to reduce inequality. [2]

10. (HL only, calculator allowed) In Karmen, a fictional country, the income shares of the five quintiles, poorest first, are 4, 8, 13, 20 and 55 (%).

(a) Calculate the cumulative income shares. [2] (b) Describe how you would construct the Lorenz curve from these data. [2] (c) State the share held by the poorest 60% and comment on it. [2]

11. (HL only, calculator allowed) Ostrel taxes personal income as follows: nothing on the first 12,000; 25% on income from 12,000 to 36,000; 45% on income above 36,000.

(a) Calculate the total tax and the average tax rate for a person earning 30,000. [3] (b) Calculate the total tax and average tax rate for a person earning 60,000, and state what your two average rates show. [3] (c) Ostrel also has a 15% sales tax. Calculate the tax paid by a household that spends 14,000 on taxed goods. [1]

12. In Tarvane, a fictional country with high relative poverty, evaluate transfer payments, a minimum wage and universal basic income as ways of reducing poverty. [12]

Answers

1. Income is a flow received over a period, such as wages and benefits [1]. Wealth is a stock of assets less debts at a point in time [1]. Income inequality is the uneven spread of the first, wealth inequality the uneven spread of the second; a high earner who owns no assets shows the two can differ [1]. [3] Examiner insight: “Distinguish” needs both items addressed side by side; defining only one earns little.

2. Equality means similar economic outcomes for people or groups [1]. Equity means fairness, which is normative, so people hold different views [1]. Example: equal pay for all workers gives equal outcomes, but some may judge it unfair if hours or effort differ widely [1]. [3] Examiner insight: Answers that treat “equity” as a synonym for “equality” lose the contrast the command term asks for.

3. (a) Before: 5 + 9 + 14 = 28% [1]. After: 7 + 11 + 16 = 34% [1]. (b) The poorest 60% hold a larger share, so the Lorenz curve after the reform lies above the old one at that point [1]. The cumulative shares at 20, 40, 60 and 80% are all higher (7, 18, 34, 57 against 5, 14, 28, 50) [1]. The curve is closer to the line of equality, so income inequality has fallen, although it is still below the line, so not equal [1]. [5] Examiner insight: Comparing cumulative shares at several points supports “closer to the line”; one point alone is thin evidence.

4. (a) Relative line = 0.5 x 30,000 = 15,000 [1]. Absolute poverty: P only (9,500 is below 10,000) [1]. Relative poverty: P, Q and S (below 15,000) [1]. (b) New relative line = 0.5 x 36,000 = 18,000, and 16,800 is below it, so R is in relative poverty [1]. R is above the absolute line of 10,000, so not in absolute poverty [1]. [5] Examiner insight: Stating the line you are comparing against makes each judgement checkable; bare lists of household letters are easy to mark wrong.

5. A single indicator uses one measure [1], for example an international poverty line [1]. A composite indicator combines several measures into one index [1], for example the Multidimensional Poverty Index, covering health, education and living standards [1]. [4] Examiner insight: Naming an example without saying what it measures does not show understanding.

6. Difficulty one: poverty lines are arbitrary [1], so moving the line slightly changes how many people count as poor [1]. Difficulty two: prices and needs differ across regions and household sizes [1], so one money threshold treats unlike households alike [1]. (Other valid: informal income, infrequent surveys, income sharing inside households.) [4] Examiner insight: Each difficulty needs an explanation sentence; a list of labels gives the marker little to credit.

7. Cause one, discrimination: employers pay or hire some groups less for equal work [1], lowering those groups’ incomes [1], widening gaps with others [1]. Cause two, differences in human capital: workers with more education and training are more productive [1], so earn higher wages [1], leaving the low-skilled behind [1]. (Any two causes from the guide’s list with mechanism.) [6] Examiner insight: A cause, a mechanism and a link to incomes are three separate steps; “discrimination causes inequality” alone is a label.

8. Growth, harmful: poorer households may be unable to afford education or health care [1], wasting potential output and limiting growth [1]. Growth, helpful: higher rewards for effort and risk, and more saving by richer households, may support investment [1], so the link is not one-way [1]. Standards of living: average income can rise while the poorest gain little [1], so averages overstate how most people live, and poor health and housing lower living standards [1]. Judgement: the effect depends on how large inequality is and on whether it reflects effort or unequal opportunity [1], so a balanced view is better than a claim that inequality always harms or always helps [1]. [8] Examiner insight: “Examine” rewards uncovering assumptions; a reasoned conclusion that is conditional gains more than an unsupported one.

9. (a) X: 10% at 10,000 and 20% at 40,000, rising, so progressive [1]. Y: 15% and 12%, falling, so regressive [1]. Z: 10% and 10%, so proportional [1]. (b) Tax X takes a larger share from higher incomes [1], so it narrows the gap between after-tax incomes most, particularly if the revenue funds support for low earners [1]. [5] Examiner insight: Classify by average rate, not by amount paid; richer households pay more under all three taxes.

10. (a) 4, 12, 25, 45, 100 (%) [2]. (b) Put cumulative % of households (20 to 100) on the horizontal axis and cumulative % of income on the vertical axis [1]. Plot (0, 0) and the five points, join them, and add the 45-degree line of equality [1]. (c) The poorest 60% hold 25% [1], well below 60% on the line of equality, so the curve sags a long way below it and income is unequally distributed, especially with the richest 20% holding 55% [1]. [6] Examiner insight: A construction answer should name both axes as cumulative percentages and include the line of equality.

11. (a) Income in the 25% band = 30,000 − 12,000 = 18,000, and tax = 18,000 x 0.25 [1] = 4,500 [1]. Average rate = 4,500 ÷ 30,000 x 100 = 15% [1]. (b) 12,000 to 36,000: 24,000 x 0.25 = 6,000, and above 36,000: 24,000 x 0.45 = 10,800, so total tax = 16,800 [1], average rate = 16,800 ÷ 60,000 x 100 = 28% [1]. The average rate rises from 15% to 28% as income rises, so the income tax is progressive [1]. (c) 14,000 x 0.15 = 2,100 [1]. [7] Examiner insight: “Calculate” asks for the stages of working; a correct figure with no working risks losing method credit.

12. Transfer payments: cash benefits raise low incomes quickly [1]; they are paid for by taxes, and means-tested versions can weaken incentives to work [1]; targeting them at low-income households makes them more effective against relative poverty than universal payments of the same cost [1]. Minimum wage: raises pay for low earners without direct spending [1]; if above the market wage it can cut jobs or hours, so some low-income households may lose [1]; it helps only those in work, not the unemployed [1]. Universal basic income: simple, no stigma or means test [1]; very costly, since it goes to everyone, and needs high taxes or cuts elsewhere [1]; its effect on poverty depends on the payment level relative to the poverty line [1]. Comparison: the policies differ in cost, speed and targeting [1]. Judgement: a mix is likely to work better than one policy, depending on the labour market and public finances [1]; a clear criterion such as effect on those in deepest poverty supports the verdict [1]. [12] Examiner insight: In extended answers, credit tends to follow analysis and a justified judgement rather than the number of policies listed; the real paper is marked with markbands.

Where marks are usually lost

• Describing a Lorenz curve without naming both axes as cumulative percentages.
• Comparing curves from a single point instead of several points.
• Mixing up absolute and relative poverty when incomes and the median both change.
• Calling a tax progressive because the amount paid rises, not the average rate.
• Using the marginal rate in place of the average rate.
• Giving a final figure with no working in a “calculate” question.
• Listing policies without weighing costs, speed and side effects.
• Giving a one-sided answer to “examine” or “evaluate” questions.

Next steps

• Re-read the study guide for any part you missed, then rework the weakest questions.
• Use the revision notes for the final week.
• Check coverage on the IB DP Economics hub and the printable checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020). This page covers sub-topic 3.4.