IB DP Economics: The market and equity (HL) – 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 covers sub-topic 2.12, the market’s inability to achieve equity, which is HL only, so every question is HL. It follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. Read the study guide and the revision notes first, and keep the IB DP Economics hub and the printable checklist to hand. Brannoch is an invented country and its figures are illustrative. Use a calculator only where a question allows one; the guide says Paper 1 is calculator-free.

Questions

1. (HL only) Distinguish between income and wealth. [2]

2. (HL only) State the four factors of production and the factor income that each earns. [4]

3. (HL only) Draw a labelled circular flow diagram for a free market economy, and use it to show where inequality in income arises. [4]

4. (HL only) Brannoch is a free market economy with five equal-sized households. Their yearly incomes in bran, an invented currency, are: A 18, B 22, C 30, D 50, E 130.

(a) Calculate household E’s share of total income. [2] (b) Calculate the combined share of households A and B. [2] (c) Calculate how many times household E’s income is larger than household A’s, to one decimal place. [2]

5. (HL only) In Brannoch, property income (rent, interest and profit) received by households A to E is 0, 0, 4, 10 and 46 bran.

(a) Calculate household E’s share of all property income, to one decimal place. [2] (b) Calculate the percentage of household E’s own income (from question 4) that is property income, to one decimal place. [2]

6. (HL only, calculator allowed) In Brannoch, the market for cleaning staff has demand Qd = 800 - 20w and supply Qs = 60w. The market for specialist surgeons has demand Qd = 460 - 3w and supply Qs = 2w. Here w is the hourly wage in bran and Q is hours in thousands.

(a) Find the equilibrium wage and quantity for cleaning staff. [2] (b) Find the equilibrium wage and quantity for surgeons. [2] (c) Explain, with reference to the factor market, why the two wages differ so much. [3]

7. (HL only, calculator allowed) Household A in Brannoch owns wealth of 600 bran, which earns a 4% return a year. It has 100 bran of other income a year and saves 15% of its total income each year, adding the saving to its wealth at the end of the year. Household B owns wealth of 50 bran, has 30 bran of other income, the same return and the same saving rate.

(a) Calculate A’s wealth at the start of year 3. Give your answer to two decimal places. [3] (b) Calculate B’s wealth at the start of year 3 to two decimal places. [2] (c) Calculate the gap between A’s and B’s incomes in year 3 to one decimal place. [2]

8. (HL only) Explain how unequal ownership of capital leads to unequal incomes in a free market. [4]

9. (HL only) Explain why a household that can sell only low-priced labour receives a low income in a free market. [4]

10. (HL only) Distinguish between equality and equity. [3]

11. (HL only) Explain, using a circular flow diagram, why a free market economy may result in an unequal distribution of income and wealth. [10]

12. (HL only, data response) Brannoch has 100 households. The table shows total yearly income, in millions of bran, by group.

Group	Year 1	Year 6
Bottom 40 households	600	640
Middle 40 households	1,500	1,640
Top 20 households	2,900	3,720

(a) Calculate the top group’s share of total income in each year. [2] (b) Calculate the average income per household in the top group divided by that in the bottom group, in each year, to one decimal place. [3] (c) Analyse how unequal factor ownership could explain the change shown. [3]

Answers

1. Income is a flow earned over a period, for example a year [1], whereas wealth is a stock, the value of assets held on one date [1]. [2] Examiner insight: A “distinguish” answer should make the difference explicit in one sentence rather than defining each term in separate sentences.

2. Labour earns wages [1], land earns rent [1], capital earns interest [1], enterprise earns profit [1]. [4] Examiner insight: Pair each factor with its income in the same line, so that the answer shows you know which return goes with which factor.

3. Households and firms drawn as two boxes [1]. A factor market and a product market named between them [1]. Arrows labelled for factor services, factor incomes, spending, and goods and services, with directions correct [1]. Wages, rent, interest and profit written on the factor income arrow, with a note that income differs because households own different factors at different prices [1]. [4] Examiner insight: Draw it in pencil with a ruler, label everything, and refer to the diagram in your text; a drawing with no labelled markets is hard to give credit to.

4. (a) Total income = 18 + 22 + 30 + 50 + 130 = 250 [1]. Share of E = 130 / 250 = 52% [1]. (b) A + B = 18 + 22 = 40, and 40 / 250 = 16% [1]; the working must show both the sum and the division [1]. (c) 130 / 18 = 7.2222 [1], which is 7.2 times to one decimal place [1]. Examiner insight: Show the total before dividing, so that an error in the final figure still leaves evidence of correct method.

5. (a) Property income total = 0 + 0 + 4 + 10 + 46 = 60 [1]. E’s share = 46 / 60 = 0.7667, so 76.7% [1]. (b) E’s property income as a share of E’s income = 46 / 130 [1] = 35.4% [1]. Examiner insight: Read the denominator carefully: part (a) divides by all property income, part (b) by the household’s own income.

6. (a) 800 - 20w = 60w [1], so 80w = 800, w = 10 bran and Q = 60 x 10 = 600 thousand hours [1]. (b) 460 - 3w = 2w [1], so 5w = 460, w = 92 bran and Q = 2 x 92 = 184 thousand hours [1]. (c) The surgeon wage is 92 / 10 = 9.2 times the cleaning wage [1]. Surgeon supply is small because training is long and costly, while demand is strong, so the wage that clears the market is high [1]. Wages are factor prices set in the factor market, so households that sell different factors receive different incomes without any step in the loop evening them out [1]. [3] Examiner insight: Check each result back into both demand and supply (here 600 and 184); it takes ten seconds and catches arithmetic slips.

7. (a) Year 1: interest = 0.04 x 600 = 24, income = 124, saving = 0.15 x 124 = 18.6, wealth = 618.6 [1]. Year 2: income = 100 + 0.04 x 618.6 = 124.744, saving = 18.71 [1]. Wealth = 618.6 + 18.71 = 637.31 bran [1]. (b) Year 1: income = 30 + 0.04 x 50 = 32, saving = 4.8, wealth = 54.8 [1]. Year 2: income = 32.192, saving = 4.83, so wealth = 54.8 + 4.83 = 59.63 bran [1]. (c) Year 3 incomes: A = 100 + 0.04 x 637.31 = 125.49 and B = 30 + 0.04 x 59.63 = 32.39 [1]. Gap = 125.49 - 32.39 = 93.1 bran [1]. Examiner insight: Keep the full values until the final step and round at the end, or the answer to part (c) can drift by a hundredth.

8. Capital earns interest or profit for its owners [1]. Households with a lot of capital receive a large property income on top of any wages [1]. Households with no capital have only labour income [1]. So where capital ownership is concentrated, income is more unequal than wages alone would be [1]. [4] Examiner insight: Finish with the effect on the distribution of income, not only the description of what capital does.

9. Factor prices are set by demand and supply in the factor market [1]. If many people offer similar low-skilled labour, supply is large relative to demand [1], so the equilibrium wage is low [1]. A household with no other factor to sell has no other income stream to add to that wage [1]. [4] Examiner insight: Link the wage to supply and demand explicitly; saying only “low-skilled workers earn less” restates the question.

10. Equality means shares of income or wealth are the same size [1]. Equity means fairness [1], which is a judgement, so an unequal outcome is not necessarily seen as inequitable, nor an equal one as fair [1]. [3] Examiner insight: A third mark may depend on showing that the two ideas can come apart, so add that sentence.

11. Indicative points only; treat this as a plan for your own answer, not a mark scheme.

• Circular flow drawn and fully labelled: households, firms, factor and product markets, four flows, four factor incomes [3].
• Households own different amounts of factors, so receive different factor incomes (wages only against wages, rent, interest and profit) [2].
• Factor prices come from demand and supply, so scarce and strongly demanded factors earn more [2].
• Wealth earns income and can be saved to build more wealth, so gaps persist and widen, with starting positions differing between households [2].
• A clearly labelled illustrative example, explained, and a point stating that the diagram contains no mechanism that reflects need [1]. [10] Examiner insight: A good diagram earns more when your paragraphs keep pointing back to a named part of it, such as the factor market arrow.

12. (a) Year 1 total = 600 + 1,500 + 2,900 = 5,000, so top share = 2,900 / 5,000 = 58% [1]. Year 6 total = 640 + 1,640 + 3,720 = 6,000, so top share = 3,720 / 6,000 = 62% [1]. (b) Year 1: top average = 2,900 / 20 = 145 and bottom average = 600 / 40 = 15 [1], ratio = 9.7. Year 6: top average = 3,720 / 20 = 186 and bottom average = 640 / 40 = 16, ratio = 11.6 [1]. Answer: 9.7 in year 1 and 11.6 in year 6 [1]. (c) All groups gained, but the top group’s income grew 28.3% against 6.7% for the bottom group [1]. If the top group owns most capital, land and businesses, it receives property income as well as wages, and that rises with the economy [1]. Wealth earns income that can be saved, so the gap widens even without any change in wage rates [1]. [3] Examiner insight: Use the data in the analysis, with a figure for each claim, rather than giving a generic explanation that could fit any table.

Where marks are usually lost

• Not naming the factor market on the diagram, or leaving off the four factor incomes.
• Adding a government to a free market diagram.
• Giving the result of a calculation without any working.
• Dividing by the wrong total, such as using the household’s own income instead of total income.
• Treating a stock as a flow, or the reverse, when answering questions on wealth and income.
• Stating a cause with no effect on the distribution.
• Rounding too early in multi-year compounding questions.

Next steps

• Re-read the study guide for any question that cost you marks.
• Use the revision notes for a final summary and self-test.
• Check your coverage on the IB DP Economics checklist and see the course hub.
• Try the free 10-minute diagnostics to find other weak topics.
• Book a free trial class if you would like help from a teacher.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published February 2020 by the International Baccalaureate Organization. Sub-topic 2.12, the market’s inability to achieve equity (HL only).