2.7 Role of government in microeconomics questions for IB Economics

Using a production possibilities curve (PPC), explain the concepts of scarcity, choice and opportunity cost.

Using real-world examples, evaluate the view that the price mechanism is the best way to allocate scarce resources.

Define the term parallel market indicated in bold in the text (Text A, paragraph 3).

Using information from Text A, paragraph 2, calculate the shortage of bread as a percentage of the quantity demanded at the state price.

Sketch a demand and supply diagram to show the market for bread in Dovrenia's capital city at the state price (Text A, paragraphs 1 and 2).

Using a demand and supply diagram, explain why a parallel market for bread has developed in Dovrenia (Text A, paragraphs 2 and 3).

Explain two reasons why central planners may find it difficult to allocate resources efficiently in the market for bread (Text A, paragraphs 1 and 3).

Using Table 1, calculate the marginal product of the third bag of fertilizer.

Using Table 1 and the information provided, calculate the marginal cost per tonne of the extra tomatoes produced by the fourth bag of fertilizer.

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.

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.

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)

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.

Using a diagram and the information provided, explain why the supply of tomatoes in Veruna is price inelastic.

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.

Using the information provided, explain two reasons why the changes in 2025 reduced the supply of tomatoes in Veruna.

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.

Distinguish between a free market economy and a planned economy in the way each answers the basic economic questions.

Using real-world examples, discuss the view that government intervention in markets does more harm than good.

List two of the basic economic questions indicated in bold in the text (Text A, paragraph 1).

Using information from Text A, paragraph 2, calculate the weekly cost of producing 2000 shirts using each method.

Using information from Text A, paragraph 3, calculate the weekly cost of each method after the minimum wage rises, and identify which method the firm would then choose to minimize costs.

Using a labour market diagram, explain the likely effect of the higher minimum wage on employment in Marovia's garment industry (Text A, paragraphs 2 and 3).

Using Table 1, calculate total milk output in Hallestad in 2025 (in million litres per year).

Using Table 1 and your answer to (a)(i), calculate the percentage change in total milk output between 2015 and 2025.

Using Table 1, outline why total milk output fell even though the average output per farm increased.

Milk processors separate raw milk into cream, which is made into butter, and skimmed milk, which is dried into skimmed milk powder. In 2025 demand for butter rose sharply, and processors increased butter production by 12 %.

Outline why the price of skimmed milk powder is likely to fall.

To support dairy farmers, the government is considering a subsidy of HLD 0.05 per litre of milk, where HLD is the Hallestad dollar. Its economists estimate the effects shown in Table 2.

Table 2: Estimated effects of the milk subsidy

Using Table 2, calculate the cost of the subsidy to the government (in HLD million per year).

Using Table 2, calculate the change in farmers' total revenue (including the subsidy) as a result of the subsidy (in HLD million per year).

Explain two reasons, other than the retirement of farmers, why the number of dairy farms in Hallestad may have fallen.

Hallestad's rivers and lakes contain high levels of nitrates from manure. From 2027, new rules will limit the number of cows that may be kept per hectare of land and require farms to build covered manure stores.

Using a demand and supply diagram and the information provided, explain the likely effect of the new rules on the market for milk in Hallestad.

The following information is available about options for the dairy industry:

• The milk subsidy would cost HLD 113 million a year, about 0.1 % of government spending. Environmental groups argue it would encourage more intensive dairy farming, adding to nitrate pollution.

• Investment grants for covered manure stores and low-emission equipment would help farms meet the 2027 rules; they would cost around HLD 250 million in total over three years.

• A training and succession scheme could help young farmers take over farms from retiring owners, through low-interest loans for buying land and herds.

• Some economists recommend no intervention, arguing that larger farms are more efficient and that the fall in total output has been small.

• Milk prices in Hallestad are set largely by prices in neighbouring countries, and processors can import milk if domestic supply falls.

Using the information provided and your knowledge of economics, recommend a policy that the government of Hallestad could introduce to maintain a stable supply of milk while meeting its water-quality targets.