Economics · 2008 · November · Paper 2 · SL · Question paper

N08/3/ECONO/SP2/ENG/TZ0/XX+ ECONOMICS STANDARD l Ev El PAPER 2 Thursday 20 November 2008 (morning) INSTRUCTIONS TO Ca Nd Ida TES  d o not open this examination paper until instructed to do so.  a nswer three questions.  Use fully labelled diagrams and references to the text / data where appropriate. 2 hours 8808-5105 11 pages © International Baccalaureate Organization 2008 88085105 N08/3/ECONO/SP2/ENG/TZ0/XX+ 8808-5105 – 2 – 1. Study the extract below and answer the questions that follow. Gas (petrol)* prices hardly affect demand  American economists and politicians have been debating whether raising indirect taxes on gas would help cut demand, easing US dependence on oil and fighting global warming.  A study at the University of California suggests that large increases in the price of gas have resulted in only a small reduction in the amount of miles driven by Americans. Further, drivers changed their ways less during the most recent price rises than they did during the period of rapidly rising gas prices of the 1970s. The study suggests that only a very large tax could have a significant effect.  The study examined two periods of rising prices: 1975 to 1980, and 2001 to 2006. In each period, it examined the price elasticity of demand for gas.  Researchers found that for every 10 % increase in price between 1975 and 1980, quantity demanded fell by an average of 2.75 %. However, between 2001 and 2006, every 10 % price increase reduced quantity demanded by only 0.65 %.  Some energy economists predicted that as gas prices rose to record heights, drivers would eventually be forced to cut back on trips and use less gas. The prediction came true. But the change was not significant.  Another study released at the same time, found that the amount of miles driven by the average American in 2005 dropped for the first time in 25 years, but by less than half of a percent. The study attributed the decline to higher prices as well as the aging of the US population, since elderly Americans drive less than those of working age.  Why the difference in gas consumption patterns between the 1970s and the current period? It could be the result of