2.11 Market failure: market power questions for IB Economics
104 questions on Market failure: market power, written by Augment in the style of IB exam papers. Six of them are below in full, to answer on paper.
- IB Economics
- Part of 2 Microeconomics
- HL only
Questions by paper and level
| Paper | Questions |
|---|---|
| Paper 1 | 35 |
| Paper 2 | 36 |
| Paper 3 | 33 |
| Every paper | 104 |
Counted on
Questions to try
Written by Augment in the style of IB exams, not past papers. Answer them on paper, then check each one against its markscheme with a free account.
Efficiency is one of the central concepts in economics.
- (a)
Using a production possibilities curve (PPC), explain why an economy producing on its PPC may be productively efficient but not allocatively efficient.
10 marks
- (b)
Using real-world examples, evaluate the view that firms with significant market power always use resources inefficiently.
15 marks
Read the extract and answer the questions that follow.
Text A — Hiring decisions at a greenhouse in Drevania
[1] A family firm in Drevania, an upper-middle-income economy, grows tomatoes in a single greenhouse of fixed size. In the short run, the owner can raise output only by employing more workers. Labour is the only variable cost, and each worker is paid DRV 6 000 per week, where DRV is the Drevanian drev.
[2] The owner notes that the first few workers raise output quickly, because they can specialize in planting, pruning and picking. After a point, however, workers start getting in each other's way between the rows of plants. This illustrates the law of diminishing marginal returns. Weekly output for different numbers of workers is shown in Table 1.
Table 1: Weekly output of tomatoes
Number of workers | Total output (kg per week) |
|---|---|
1 | 400 |
2 | 900 |
3 | 1 500 |
4 | 1 900 |
5 | 2 200 |
6 | 2 400 |
- (a)
Define the term law of diminishing marginal returns indicated in bold in the text (Text A, paragraph 2).
2 marks
- (b)(i)
Using information from Table 1, calculate the marginal product of the fourth worker.
1 mark
- (b)(ii)
Using information from Table 1, identify the number of workers after which diminishing marginal returns set in.
1 mark
- (b)(iii)
Using information from Text A and Table 1, calculate the marginal cost of a kilogram of tomatoes produced by the fifth worker.
2 marks
- (b)(iv)
The market price of tomatoes is DRV 18 per kg. Determine how many workers the owner should employ to maximize profit.
1 mark
- (c)
Using a diagram, explain why the greenhouse will supply a larger quantity of tomatoes only at a higher price (Text A and Table 1).
4 marks
A monopoly faces the demand curve and has constant marginal cost of $20 per unit.
Output (Q) | 10 | 15 | 20 | 25 |
|---|---|---|---|---|
Price ($) | 80 | 70 | 60 | 50 |
Total revenue ($) | 800 | 1050 | 1200 | 1250 |
- (a)
Calculate the profit-maximising level of output.
2 marks
- (b)
Calculate the price the monopolist charges.
2 marks
- (c)
Explain why this outcome is allocatively inefficient.
4 marks
In some markets a small number of large firms compete intensively through advertising rather than price.
- (a)
Explain why a successful advertising campaign by one firm may reduce the demand for a rival firm's product.
10 marks
- (b)
Using real-world examples, evaluate the view that significant market power held by large firms is always undesirable.
15 marks
A fishing company operating on a fixed stretch of coast finds that each extra trawler it sends out adds a smaller catch than the one before, so the marginal cost of each additional tonne of fish rises.
Define the term marginal cost indicated in bold.
2 marks
Tomato farming on the island of Veruna
Veruna is a small upper-middle-income island economy. Tomatoes are the most important vegetable crop. Because they are perishable and expensive to ship, almost all tomatoes sold on the island are grown locally, on a fixed area of farmland. Farmers can raise their yields in the short run by applying more fertilizer to the same land, but each extra bag of fertilizer adds less to the harvest than the one before.
A typical tomato farm pays VRD 300 for a bag of fertilizer, where VRD is the Verunan dollar. Assume that fertilizer is the only variable cost. The yield on one hectare of a typical farm for different amounts of fertilizer is shown in Table 1.
Table 1: Yield of tomatoes on one hectare
Fertilizer applied (bags per hectare) | Yield (tonnes per hectare) |
|---|---|
0 | 10.0 |
1 | 14.0 |
2 | 17.0 |
3 | 19.0 |
4 | 20.0 |
5 | 20.5 |
- (a)(i)
Using Table 1, calculate the marginal product of the third bag of fertilizer.
1 mark
- (a)(ii)
Using Table 1 and the information provided, calculate the marginal cost per tonne of the extra tomatoes produced by the fourth bag of fertilizer.
2 marks
- (a)(iii)
The price farmers receive for tomatoes is VRD 160 per tonne. Using your answer to (a)(ii) and Table 1, determine how many bags of fertilizer per hectare a profit-maximizing farmer would apply, and explain why.
2 marks
- (a)(iv)
Show that, if the price of tomatoes rose to VRD 320 per tonne, a profit-maximizing farmer would increase the quantity of tomatoes supplied from each hectare.
2 marks
- (a)(v)
Tomatoes in Veruna are grown in three regions. The quantities supplied at different prices are shown in Table 2.
Table 2: Quantity of tomatoes supplied per year (thousand tonnes)
Price (VRD per tonne)
North
South
East
160
18
12
6
240
22
15
8
320
25
17
9
Using Table 2, calculate the price elasticity of supply (PES) of tomatoes in Veruna when the price rises from VRD 240 to VRD 320 per tonne.
3 marks
- (a)(vi)
Using a diagram and the information provided, explain why the supply of tomatoes in Veruna is price inelastic.
4 marks
- (a)(vii)
In 2025 the price of imported fertilizer in Veruna rose by 50 % because of higher shipping costs. At the same time, about 8 % of the island's farmland was sold to developers to build hotels for the growing tourism industry.
Sketch a demand and supply diagram to show the effect of these changes on the market for tomatoes in Veruna.
2 marks
- (a)(viii)
Using the information provided, explain two reasons why the changes in 2025 reduced the supply of tomatoes in Veruna.
4 marks
- (b)
The government of Veruna is considering the following options to increase the domestic supply of tomatoes:
A subsidy on fertilizer of VRD 100 per bag. It would cost about VRD 6 million a year. Some economists warn that heavy fertilizer use is already polluting the island's coastal waters, which are important for tourism and fishing.
Grants for greenhouses and drip irrigation, covering half the cost. Greenhouses can more than double yields per hectare, but take two years to build and are affordable mainly for larger farms, even with the grant.
Planning rules protecting farmland from hotel development. The tourism ministry argues that this would limit job creation in the island's fastest-growing industry.
Removing the 30 % tariff on imported tomatoes. Imports would increase supply in the shops but would reduce the incomes of local farmers; imported tomatoes are often damaged in transit.
An agricultural extension service to train farmers in soil testing and efficient fertilizer use. Trials suggest yields rise by about 10 % within two seasons.
Using the information provided and your knowledge of economics, recommend a policy that the government of Veruna could introduce to increase the domestic supply of tomatoes.
10 marks
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More questions in Microeconomics
- 2.1Demand
- 2.2Supply
- 2.3Competitive market equilibrium
- 2.4Critique of the maximising behaviour of consumers and producers
- 2.5Elasticity of demand
- 2.6Elasticity of supply
- 2.7Role of government in microeconomics
- 2.8Market failure: externalities and common pool resources
- 2.9Market failure: public goods
- 2.10Market failure: asymmetric information
- 2.11Market failure: market powerThis page
- 2.12The market’s inability to achieve equity
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