Economics HL
Microeconomics HL: market structures — Unit 2 HL
- 1.
A perfectly competitive firm faces a market price of $15 per unit. Its total cost function is TC = Q² + 2Q + 10, giving a marginal cost of MC = 2Q + 2. (a) Calculate the profit-maximizing output level, where P = MC. (b) Calculate the firm's total revenue, total cost, and profit at this output.
[5 marks] - 2.
Marking analysis: A learner attempts the following task: “A perfectly competitive firm faces a market price of $15 per unit. Its total cost function is TC = Q² + 2Q + 10, giving a marginal cost of MC = 2Q + 2. (a) Calculate the profit-maximizing output level, where P = MC. (b) Calculate the firm's total revenue, total cost, and profit at this output.” Their response addresses only this point: “Sets P = MC: 15 = 2Q + 2.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 3.
Explain why a perfectly competitive firm can earn supernormal profit in the short run but only normal profit in the long run.
[3 marks] · no calculator - 4.
Marking analysis: A learner attempts the following task: “Explain why a perfectly competitive firm can earn supernormal profit in the short run but only normal profit in the long run.” Their response addresses only this point: “States that if existing firms are earning supernormal profit in the short run, this acts as a signal attracting new firms to enter the industry, since there are no significant barriers to entry.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 5.
A monopolist faces demand P = 100 − 2Q and has a constant marginal cost of MC = 20. (a) Derive the marginal revenue function. (b) Calculate the profit-maximizing output and price, where MR = MC. (c) Calculate the monopolist's profit, assuming no fixed costs.
[5 marks] - 6.
Marking analysis: A learner attempts the following task: “A monopolist faces demand P = 100 − 2Q and has a constant marginal cost of MC = 20. (a) Derive the marginal revenue function. (b) Calculate the profit-maximizing output and price, where MR = MC. (c) Calculate the monopolist's profit, assuming no fixed costs.” Their response addresses only this point: “States total revenue TR = PQ = (100 − 2Q)Q = 100Q − 2Q².” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 7.
Using the monopoly from the previous question (demand P = 100 − 2Q, MC = 20), explain why the monopoly outcome (Q = 20, P = 60) is allocatively inefficient compared to a perfectly competitive outcome in the same market.
[4 marks] · no calculator - 8.
Marking analysis: A learner attempts the following task: “Using the monopoly from the previous question (demand P = 100 − 2Q, MC = 20), explain why the monopoly outcome (Q = 20, P = 60) is allocatively inefficient compared to a perfectly competitive outcome in the same market.” Their response addresses only this point: “States that allocative efficiency requires price to equal marginal cost (P = MC).” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 9.
A firm with market power sells in two separate markets it can keep apart: Market A, with demand P = 50 − Q, and Market B, with demand P = 80 − 2Q. The firm has a constant marginal cost of $10 in both markets. (a) Calculate the profit-maximizing price and quantity in each market. (b) Calculate the firm's total profit from price discrimination.
[5 marks] - 10.
Marking analysis: A learner attempts the following task: “A firm with market power sells in two separate markets it can keep apart: Market A, with demand P = 50 − Q, and Market B, with demand P = 80 − 2Q. The firm has a constant marginal cost of $10 in both markets. (a) Calculate the profit-maximizing price and quantity in each market. (b) Calculate the firm's total profit from price discrimination.” Their response addresses only this point: “Derives MR_A = 50 − 2Q_A and sets MR_A = MC: 50 − 2Q_A = 10, giving Q_A = 20 and P_A = 50 − 20 = $30.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 11.
State three conditions that must hold for a firm to be able to successfully practice price discrimination.
[3 marks] · no calculator - 12.
Marking analysis: A learner attempts the following task: “State three conditions that must hold for a firm to be able to successfully practice price discrimination.” Their response addresses only this point: “States that the firm must have some degree of market/monopoly power (the ability to set price above marginal cost).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 13.
Explain why a monopolistically competitive firm can earn supernormal profit in the short run but typically earns only normal profit in the long run, despite being able to differentiate its product.
[4 marks] · no calculator - 14.
Marking analysis: A learner attempts the following task: “Explain why a monopolistically competitive firm can earn supernormal profit in the short run but typically earns only normal profit in the long run, despite being able to differentiate its product.” Their response addresses only this point: “States that monopolistically competitive markets have low barriers to entry, similar to perfect competition.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 15.
Explain the kinked demand curve model of oligopoly, and describe why it predicts that oligopolists are reluctant to change their prices.
[3 marks] · no calculator - 16.
Marking analysis: A learner attempts the following task: “Explain the kinked demand curve model of oligopoly, and describe why it predicts that oligopolists are reluctant to change their prices.” Their response addresses only this point: “States that the kinked demand curve assumes rival firms will match a price cut (to avoid losing market share) but will not match a price increase (to gain market share from the firm that raised its price).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 17.
Two oligopolists, Firm X and Firm Y, must each simultaneously decide whether to 'Advertise' or 'Not Advertise'. The payoff matrix below shows (Firm X profit, Firm Y profit) in millions of dollars for each combination of strategies: {Both Advertise: (20, 20); X Advertises, Y Does Not: (40, 10); X Does Not, Y Advertises: (10, 40); Neither Advertises: (30, 30)}. (a) Identify Firm X's dominant strategy, if one exists. (b) Identify the Nash equilibrium of this game. (c) Explain why the Nash equilibrium outcome may not be the best outcome for both firms jointly.
[4 marks] · no calculator - 18.
Marking analysis: A learner attempts the following task: “Two oligopolists, Firm X and Firm Y, must each simultaneously decide whether to 'Advertise' or 'Not Advertise'. The payoff matrix below shows (Firm X profit, Firm Y profit) in millions of dollars for each combination of strategies: {Both Advertise: (20, 20); X Advertises, Y Does Not: (40, 10); X Does Not, Y Advertises: (10, 40); Neither Advertises: (30, 30)}. (a) Identify Firm X's dominant strategy, if one exists. (b) Identify the Nash equilibrium of this game. (c) Explain why the Nash equilibrium outcome may not be the best outcome for both firms jointly.” Their response addresses only this point: “Checks Firm X's best response to each of Y's choices: if Y advertises, X earns more by advertising (20 > 10); if Y does not advertise, X still earns more by advertising (40 > 30).” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 19.
Explain why firms in a cartel (collusive oligopoly) each have an individual incentive to secretly break the agreement, even though the cartel as a whole is more profitable if all members cooperate.
[4 marks] · no calculator - 20.
Marking analysis: A learner attempts the following task: “Explain why firms in a cartel (collusive oligopoly) each have an individual incentive to secretly break the agreement, even though the cartel as a whole is more profitable if all members cooperate.” Their response addresses only this point: “States that a cartel typically restricts total output and agrees on a higher, monopoly-like price to maximize joint industry profit.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 21.
Explain why a natural monopoly arises in an industry with very high fixed costs and declining long-run average costs over a large range of output, using the example of water supply infrastructure.
[3 marks] · no calculator - 22.
Marking analysis: A learner attempts the following task: “Explain why a natural monopoly arises in an industry with very high fixed costs and declining long-run average costs over a large range of output, using the example of water supply infrastructure.” Their response addresses only this point: “States that building the water pipe network involves an extremely large fixed cost, which is spread over more and more units of water supplied as output increases.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 23.
Using the monopoly from an earlier question (demand P = 100 − 2Q, constant MC = 20), explain what price and quantity a regulator would set under a 'marginal cost pricing' rule, and state one problem this rule can cause for a natural monopoly with high fixed costs.
[3 marks] - 24.
Marking analysis: A learner attempts the following task: “Using the monopoly from an earlier question (demand P = 100 − 2Q, constant MC = 20), explain what price and quantity a regulator would set under a 'marginal cost pricing' rule, and state one problem this rule can cause for a natural monopoly with high fixed costs.” Their response addresses only this point: “States that marginal cost pricing sets price equal to marginal cost: 100 − 2Q = 20.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 25.
Explain the concept of a 'contestable market', and state why a market with high barriers to entry and exit cannot be contestable, even if it currently has only one firm operating in it.
[3 marks] · no calculator - 26.
Marking analysis: A learner attempts the following task: “Explain the concept of a 'contestable market', and state why a market with high barriers to entry and exit cannot be contestable, even if it currently has only one firm operating in it.” Their response addresses only this point: “Defines a contestable market as one with very low barriers to entry and exit, such that potential competitors could enter quickly if they saw an opportunity for profit, and exit again without significant loss ('hit-and-run' competition).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 27.
In an industry with five firms, market shares are 30%, 25%, 20%, 15%, and 10%. Calculate the four-firm concentration ratio for this industry, and state what this value suggests about the level of competition in the industry.
[3 marks] - 28.
Marking analysis: A learner attempts the following task: “In an industry with five firms, market shares are 30%, 25%, 20%, 15%, and 10%. Calculate the four-firm concentration ratio for this industry, and state what this value suggests about the level of competition in the industry.” Their response addresses only this point: “Identifies the four largest firms' market shares: 30%, 25%, 20%, 15%.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 29.
Explain the 'price leadership' model of oligopoly behavior, in which one dominant firm sets the price and other firms follow.
[3 marks] · no calculator - 30.
Marking analysis: A learner attempts the following task: “Explain the 'price leadership' model of oligopoly behavior, in which one dominant firm sets the price and other firms follow.” Their response addresses only this point: “States that one large, typically lowest-cost firm in the industry (the price leader) sets its profit-maximizing price.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 31.
Explain why high barriers to entry, such as very large start-up capital requirements or exclusive access to a key resource, allow a monopoly to persist in earning supernormal profit in the long run, unlike firms in perfect competition.
[3 marks] · no calculator - 32.
Marking analysis: A learner attempts the following task: “Explain why high barriers to entry, such as very large start-up capital requirements or exclusive access to a key resource, allow a monopoly to persist in earning supernormal profit in the long run, unlike firms in perfect competition.” Their response addresses only this point: “States that supernormal profit in a competitive market normally attracts new entrants, which increases supply and competes the profit away over time.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator