3.7 Supply-side policies questions for IB Economics

Explain the four factors of production and the factor income earned by each.

Using real-world examples, evaluate the view that investment in education and training is the most effective way to increase an economy's productive capacity.

Define the term capital goods indicated in bold in the text (Text A, paragraph 2).

Using information from Table 1, calculate the opportunity cost, per unit of capital goods, of moving from combination B to combination D.

Using information from Table 1, determine whether the opportunity cost of capital goods would be higher or lower if the government aimed instead to move from combination D to combination F.

Using a PPC diagram, explain how the government's plan could affect Dranmoor's production possibilities in the future (Text A, paragraph 2).

Using an AD/AS diagram, explain how higher investment in capital goods could allow Dranmoor to grow without increasing inflation (Text A, paragraphs 1 and 2).

Using Table 1, calculate the two-firm concentration ratio (CR2) for grocery retailing in Norvaia.

Using the information provided, outline why the grocery market in Norvaia can be described as an oligopoly.

Harvest Group's total costs in 2024, including normal profit, were NVD 6 156 million. In comparable high-income countries, supermarkets typically earn abnormal profit of 3 % to 5 % of their sales revenue.

Calculate Harvest Group's abnormal profit as a percentage of its sales revenue in 2024.

Each year Harvest and Kelso decide whether to launch a price-cutting campaign on 500 staple products. Table 2 shows their estimated annual profits (NVD million) for each combination of decisions. In each cell, Harvest's profit is shown first.

Table 2: Estimated annual profits of Harvest and Kelso (NVD million)

Neither firm has run a price-cutting campaign in the last six years.

Using Table 2, identify the joint profit-maximizing outcome.

Using Table 2, show that Kelso has an incentive to move away from the joint profit-maximizing outcome.

Using a diagram and the information provided, explain how tacit collusion between Harvest and Kelso could result in a welfare loss in Norvaia's grocery market.

Distinguish between formal collusion and tacit collusion.

The inquiry also found that local planning rules make it very difficult to obtain permission to build new large stores, and that both Harvest and Kelso include clauses in contracts with major food suppliers that prevent the suppliers from selling to new supermarket chains on better terms.

Using the information provided, explain two barriers to entry in Norvaia's grocery market.

The inquiry set out the following possible policy options:

• Require Harvest and Kelso each to sell 15 % of their stores to new competitors. The legal process could take three to four years and is likely to be challenged in court.

• Change national planning rules so that new supermarkets can be built on land currently reserved for industry. Local councils oppose this, and building would take several years.

• Introduce a compulsory grocery code of conduct that bans restrictive clauses in supply contracts, enforced by an ombudsman costing NVD 6 million a year.

• Set maximum prices on 50 staple food items. Retailers warn that they would raise prices on other products and might stock fewer of the controlled items.

• Offer low-interest government loans to an overseas supermarket chain or a consumer cooperative willing to open at least 40 stores.

• Increase the maximum fine for anti-competitive behaviour from 3 % to 10 % of annual turnover.

Using the information provided and your knowledge of economics, recommend a policy the government of Norvaia could introduce to lower grocery prices for households.

Using a production possibilities curve (PPC), explain why an economy that devotes more resources to capital goods today may be able to produce more consumer goods in the future.

Using real-world examples, evaluate the effectiveness of interventionist supply-side policies in increasing an economy's potential output.

Define the term planned economy indicated in bold in the text (Text A, paragraph 1).

Define the term privatization indicated in bold in the text (Text A, paragraph 2).

Using information from Table 1, calculate the percentage change in Seravia's real GDP per capita between 2014 and 2024.

Using a production possibilities curve (PPC) diagram, explain how the removal of central planning may have allowed Seravia to increase output without any increase in its resources (Text A, paragraphs 1 and 2).

Using information from the text/data and your knowledge of economics, discuss the consequences of Seravia's move from a planned economy towards a market economy.

Using Table 1, calculate AirArvo's share of domestic passengers.

Using Table 1, calculate the two-firm concentration ratio (CR2) before the merger.

Determine the two-firm concentration ratio (CR2) after the merger.

AirArvo and Coralis argue that the merger would allow them to benefit from economies of scale.

Define the term economies of scale.

The two airlines estimate that combining their fleets, maintenance and booking systems would reduce their average cost per passenger from SAR 118 to SAR 104.

Calculate the percentage fall in average cost per passenger.

SAR = Sant'Arvo rupee

Using a diagram and the information provided, explain how the merged airline could charge lower fares than before, despite having greater market power.

After the merger, the merged airline and Lagoon Air would each choose whether to set standard fares or low fares. Table 2 shows their estimated annual profits (SAR million). In each cell, the merged airline's profit is shown first.

Table 2: Estimated annual profits after the merger (SAR million)

Using Table 2, identify the merged airline's dominant strategy.

Using Table 2, show that Lagoon Air's dominant strategy is to set low fares.

Using Table 2, identify the likely outcome.

Explain two risks for passengers in Sant'Arvo if the merger goes ahead.

The Sant'Arvo Competition Authority is considering these options:

• Block the merger. Coralis states that it has made losses for three years and may have to cut routes if the merger does not go ahead.

• Approve the merger on condition that the merged airline gives 20 % of its take-off and landing slots at the main airport to Lagoon Air or a new entrant.

• Approve the merger with a cap on fares on routes to the eight most remote islands, reviewed every three years.

• Allow foreign airlines to operate domestic routes, which is currently prohibited.

• Approve the merger and pay subsidies to Lagoon Air to keep operating routes to remote islands.

Using the information provided and your knowledge of economics, recommend a policy the Sant'Arvo Competition Authority could adopt in response to the proposed merger in order to protect the interests of passengers.