IB · ECON SL

Economics SL

Microeconomics — Unit 2

Name: ____________________Date: October 14, 2026

1.
The government of a small country imposes a specific tax of $2 per unit on sales of sugary drinks, a good with relatively price-inelastic demand. (a) Explain, describing the demand curve in words, why inelastic demand means most of the tax burden is likely to fall on consumers rather than producers. (b) State the likely effect of this tax on government tax revenue. (c) Explain one reason a government might choose to tax a good with inelastic demand specifically to raise revenue.
[4 marks] · no calculator
Marking points
- States that with inelastic demand, quantity demanded changes proportionally less than price.
- Explains that this allows producers to raise price close to the full tax amount without losing much sales volume, shifting most of the burden to consumers.
- States that government tax revenue is likely to increase, since quantity sold falls only slightly.
- Explains that taxing an inelastic good generates more predictable/reliable revenue than taxing an elastic good, where a tax would cause a much larger fall in quantity sold.
Examiner tip: Tax incidence depends on relative elasticity: the less elastic side of the market bears more of the burden.
2.
Marking analysis: A learner attempts the following task: “The government of a small country imposes a specific tax of $2 per unit on sales of sugary drinks, a good with relatively price-inelastic demand. (a) Explain, describing the demand curve in words, why inelastic demand means most of the tax burden is likely to fall on consumers rather than producers. (b) State the likely effect of this tax on government tax revenue. (c) Explain one reason a government might choose to tax a good with inelastic demand specifically to raise revenue.” Their response addresses only this point: “States that with inelastic demand, quantity demanded changes proportionally less than price.” 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
Marking points
- Recognises credit for the stated point: States that with inelastic demand, quantity demanded changes proportionally less than price.
- Identifies the missing requirement: Explains that this allows producers to raise price close to the full tax amount without losing much sales volume, shifting most of the burden to consumers.
- Identifies the missing requirement: States that government tax revenue is likely to increase, since quantity sold falls only slightly.
- Identifies the missing requirement: Explains that taxing an inelastic good generates more predictable/reliable revenue than taxing an elastic good, where a tax would cause a much larger fall in quantity sold.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
3.
A factory produces a good but also emits pollution that harms nearby residents, a cost not included in the factory's private costs. (a) Identify the type of market failure this represents. (b) State whether the socially optimal output is higher or lower than the free-market output. (c) Suggest one government policy that could correct this market failure.
[3 marks] · no calculator
Marking points
- Identifies a negative externality of production.
- States that the socially optimal output is lower than the free-market output.
- Suggests a valid policy, such as a pollution tax, emissions regulation, or tradeable permits.
Examiner tip: A negative externality means marginal social cost exceeds marginal private cost, so the free market overproduces relative to the social optimum.
4.
Marking analysis: A learner attempts the following task: “A factory produces a good but also emits pollution that harms nearby residents, a cost not included in the factory's private costs. (a) Identify the type of market failure this represents. (b) State whether the socially optimal output is higher or lower than the free-market output. (c) Suggest one government policy that could correct this market failure.” Their response addresses only this point: “Identifies a negative externality of production.” 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
Marking points
- Recognises credit for the stated point: Identifies a negative externality of production.
- Identifies the missing requirement: States that the socially optimal output is lower than the free-market output.
- Identifies the missing requirement: Suggests a valid policy, such as a pollution tax, emissions regulation, or tradeable permits.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
5.
When the price of a particular smartphone model rose from $600 to $660, the quantity demanded fell from 5,000 to 4,200 units per month. (a) Calculate the price elasticity of demand using the percentage change method. (b) State whether demand is elastic, inelastic or unit elastic. (c) Calculate the resulting percentage change in total revenue. (d) State whether the manufacturer's total revenue increased or decreased as a result of the price rise.
[5 marks]
Marking points
- Calculates the percentage change in quantity as −16% (from 5,000 to 4,200).
- Calculates the percentage change in price as +10% (from 600 to 660).
- Calculates PED = −16/10 = −1.6 (magnitude 1.6).
- States that demand is price elastic since the magnitude of PED exceeds 1.
- Calculates new revenue ($660 × 4,200 = $2,772,000) versus old revenue ($600 × 5,000 = $3,000,000) and states that total revenue decreased by about 7.6%.
Examiner tip: When demand is elastic, a price rise always reduces total revenue — you can check your PED calculation against this rule.
6.
Marking analysis: A learner attempts the following task: “When the price of a particular smartphone model rose from $600 to $660, the quantity demanded fell from 5,000 to 4,200 units per month. (a) Calculate the price elasticity of demand using the percentage change method. (b) State whether demand is elastic, inelastic or unit elastic. (c) Calculate the resulting percentage change in total revenue. (d) State whether the manufacturer's total revenue increased or decreased as a result of the price rise.” Their response addresses only this point: “Calculates the percentage change in quantity as −16% (from 5,000 to 4,200).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks]
Marking points
- Recognises credit for the stated point: Calculates the percentage change in quantity as −16% (from 5,000 to 4,200).
- Identifies the missing requirement: Calculates the percentage change in price as +10% (from 600 to 660).
- Identifies the missing requirement: Calculates PED = −16/10 = −1.6 (magnitude 1.6).
- Identifies the missing requirement: States that demand is price elastic since the magnitude of PED exceeds 1.
- Identifies the missing requirement: Calculates new revenue ($660 × 4,200 = $2,772,000) versus old revenue ($600 × 5,000 = $3,000,000) and states that total revenue decreased by about 7.6%.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
7.
A government sets a minimum price for wheat at $5 per kg to support farmers' incomes, above the free-market equilibrium price. At this price, farmers are willing to supply 800 tonnes per month, but consumers are only willing to buy 500 tonnes per month. (a) Calculate the resulting surplus of wheat. (b) State one method the government could use to dispose of this surplus. (c) Explain one negative consequence of this price floor for consumers.
[4 marks]
Marking points
- Calculates the surplus as 800 − 500 = 300 tonnes per month.
- States a valid method to dispose of the surplus, such as the government buying and storing it, exporting it at a loss, or subsidising its use elsewhere.
- Explains that consumers now pay a higher price ($5) than the free-market equilibrium price would have been, reducing their purchasing power and consumer surplus.
- Explains that some consumers who would have bought wheat at the lower equilibrium price are now unable or unwilling to do so at $5, reducing the quantity actually consumed.
Examiner tip: A price floor is only binding (has an effect) when it is set above the free-market equilibrium price; a floor set below equilibrium would have no effect.
8.
Marking analysis: A learner attempts the following task: “A government sets a minimum price for wheat at $5 per kg to support farmers' incomes, above the free-market equilibrium price. At this price, farmers are willing to supply 800 tonnes per month, but consumers are only willing to buy 500 tonnes per month. (a) Calculate the resulting surplus of wheat. (b) State one method the government could use to dispose of this surplus. (c) Explain one negative consequence of this price floor for consumers.” Their response addresses only this point: “Calculates the surplus as 800 − 500 = 300 tonnes per month.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates the surplus as 800 − 500 = 300 tonnes per month.
- Identifies the missing requirement: States a valid method to dispose of the surplus, such as the government buying and storing it, exporting it at a loss, or subsidising its use elsewhere.
- Identifies the missing requirement: Explains that consumers now pay a higher price ($5) than the free-market equilibrium price would have been, reducing their purchasing power and consumer surplus.
- Identifies the missing requirement: Explains that some consumers who would have bought wheat at the lower equilibrium price are now unable or unwilling to do so at $5, reducing the quantity actually consumed.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
9.
A city government imposes a maximum rent of $800 per month on apartments, below the free-market equilibrium rent of $1,100 per month. At $800, landlords are willing to supply 3,000 apartments, while 4,200 households want to rent at that price. (a) Calculate the resulting shortage of apartments. (b) Explain one likely consequence of this shortage in terms of non-price allocation, referring to how landlords might choose among applicants. (c) Explain one reason landlords might reduce spending on maintaining the quality of existing apartments as a result of this policy.
[4 marks]
Marking points
- Calculates the shortage as 4,200 − 3,000 = 1,200 apartments.
- Explains a valid non-price allocation mechanism, such as landlords using waiting lists, personal connections, or first-come-first-served, since price can no longer ration the limited supply.
- Explains that because rent is capped below equilibrium, landlords earn less revenue than before and may cut spending on maintenance to preserve their profit margin.
- Notes that black markets (e.g., under-the-table payments or 'key money') often emerge, whereby prospective tenants pay above the ceiling price to secure a unit.
Examiner tip: A price ceiling only causes a shortage when it is set below the free-market equilibrium price.
10.
Marking analysis: A learner attempts the following task: “A city government imposes a maximum rent of $800 per month on apartments, below the free-market equilibrium rent of $1,100 per month. At $800, landlords are willing to supply 3,000 apartments, while 4,200 households want to rent at that price. (a) Calculate the resulting shortage of apartments. (b) Explain one likely consequence of this shortage in terms of non-price allocation, referring to how landlords might choose among applicants. (c) Explain one reason landlords might reduce spending on maintaining the quality of existing apartments as a result of this policy.” Their response addresses only this point: “Calculates the shortage as 4,200 − 3,000 = 1,200 apartments.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates the shortage as 4,200 − 3,000 = 1,200 apartments.
- Identifies the missing requirement: Explains a valid non-price allocation mechanism, such as landlords using waiting lists, personal connections, or first-come-first-served, since price can no longer ration the limited supply.
- Identifies the missing requirement: Explains that because rent is capped below equilibrium, landlords earn less revenue than before and may cut spending on maintenance to preserve their profit margin.
- Identifies the missing requirement: Notes that black markets (e.g., under-the-table payments or 'key money') often emerge, whereby prospective tenants pay above the ceiling price to secure a unit.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
11.
In a market, the demand function is P = 100 − 2Q and the supply function is P = 20 + 2Q, where P is price in dollars and Q is quantity in thousands of units. (a) Calculate the equilibrium price and quantity. (b) Calculate the value of consumer surplus at the equilibrium. (c) Calculate the value of producer surplus at the equilibrium.
[5 marks]
Marking points
- Sets 100 − 2Q = 20 + 2Q and solves to obtain Q = 20 (thousand units).
- Substitutes back to obtain equilibrium price P = $60.
- States that consumer surplus is the triangular area above the equilibrium price and below the demand curve, from Q = 0 to Q = 20.
- Calculates consumer surplus = 0.5 × 20 × (100 − 60) = $400 thousand.
- Calculates producer surplus = 0.5 × 20 × (60 − 20) = $400 thousand, using the triangular area below the equilibrium price and above the supply curve.
Examiner tip: Both surplus areas are right triangles with a base equal to the equilibrium quantity; only the height (the vertical distance to the demand or supply curve's intercept) differs.
12.
Marking analysis: A learner attempts the following task: “In a market, the demand function is P = 100 − 2Q and the supply function is P = 20 + 2Q, where P is price in dollars and Q is quantity in thousands of units. (a) Calculate the equilibrium price and quantity. (b) Calculate the value of consumer surplus at the equilibrium. (c) Calculate the value of producer surplus at the equilibrium.” Their response addresses only this point: “Sets 100 − 2Q = 20 + 2Q and solves to obtain Q = 20 (thousand units).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks]
Marking points
- Recognises credit for the stated point: Sets 100 − 2Q = 20 + 2Q and solves to obtain Q = 20 (thousand units).
- Identifies the missing requirement: Substitutes back to obtain equilibrium price P = $60.
- Identifies the missing requirement: States that consumer surplus is the triangular area above the equilibrium price and below the demand curve, from Q = 0 to Q = 20.
- Identifies the missing requirement: Calculates consumer surplus = 0.5 × 20 × (100 − 60) = $400 thousand.
- Identifies the missing requirement: Calculates producer surplus = 0.5 × 20 × (60 − 20) = $400 thousand, using the triangular area below the equilibrium price and above the supply curve.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
13.
When the price of coffee rose by 10%, the quantity demanded of tea increased by 4%. (a) Calculate the cross price elasticity of demand (XED) between coffee and tea. (b) State whether coffee and tea are substitutes or complements, based on your answer. (c) Explain what the sign of your answer indicates about the relationship between the two goods.
[4 marks]
Marking points
- Calculates XED = %ΔQd(tea) / %ΔP(coffee) = 4/10 = +0.4.
- States that coffee and tea are substitutes.
- Explains that a positive XED means the two goods move in the same direction: a price rise in coffee causes an increase in quantity demanded of tea, consistent with substitutes.
- States that a value of 0.4 indicates a relatively weak substitute relationship, since a stronger substitute relationship would show an XED value closer to or above 1.
Examiner tip: The sign of XED (positive or negative) identifies substitutes versus complements; the magnitude tells you how strong that relationship is.
14.
Marking analysis: A learner attempts the following task: “When the price of coffee rose by 10%, the quantity demanded of tea increased by 4%. (a) Calculate the cross price elasticity of demand (XED) between coffee and tea. (b) State whether coffee and tea are substitutes or complements, based on your answer. (c) Explain what the sign of your answer indicates about the relationship between the two goods.” Their response addresses only this point: “Calculates XED = %ΔQd(tea) / %ΔP(coffee) = 4/10 = +0.4.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates XED = %ΔQd(tea) / %ΔP(coffee) = 4/10 = +0.4.
- Identifies the missing requirement: States that coffee and tea are substitutes.
- Identifies the missing requirement: Explains that a positive XED means the two goods move in the same direction: a price rise in coffee causes an increase in quantity demanded of tea, consistent with substitutes.
- Identifies the missing requirement: States that a value of 0.4 indicates a relatively weak substitute relationship, since a stronger substitute relationship would show an XED value closer to or above 1.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
15.
As average household income rose by 8%, the quantity demanded of a particular brand of instant noodles fell by 3%. (a) Calculate the income elasticity of demand (YED) for instant noodles. (b) State, with reference to the sign of your answer, what type of good instant noodles represent. (c) Explain what this classification implies about how demand for instant noodles is likely to change during an economic downturn.
[4 marks]
Marking points
- Calculates YED = %ΔQd / %Δincome = −3/8 = −0.375.
- States that a negative YED means instant noodles are an inferior good.
- Explains that during an economic downturn (falling incomes), demand for an inferior good like instant noodles would be expected to rise, as consumers switch away from more expensive substitutes.
- Notes that the small magnitude (0.375) suggests demand is income-inelastic, i.e., relatively insensitive to changes in income.
Examiner tip: Inferior goods have negative YED; normal goods have positive YED, and are further split into necessities (0 < YED < 1) and luxuries (YED > 1).
16.
Marking analysis: A learner attempts the following task: “As average household income rose by 8%, the quantity demanded of a particular brand of instant noodles fell by 3%. (a) Calculate the income elasticity of demand (YED) for instant noodles. (b) State, with reference to the sign of your answer, what type of good instant noodles represent. (c) Explain what this classification implies about how demand for instant noodles is likely to change during an economic downturn.” Their response addresses only this point: “Calculates YED = %ΔQd / %Δincome = −3/8 = −0.375.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates YED = %ΔQd / %Δincome = −3/8 = −0.375.
- Identifies the missing requirement: States that a negative YED means instant noodles are an inferior good.
- Identifies the missing requirement: Explains that during an economic downturn (falling incomes), demand for an inferior good like instant noodles would be expected to rise, as consumers switch away from more expensive substitutes.
- Identifies the missing requirement: Notes that the small magnitude (0.375) suggests demand is income-inelastic, i.e., relatively insensitive to changes in income.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
17.
When the price of a particular vegetable rose from $2.00 to $2.50 per kg, the quantity farmers were willing to supply increased from 10,000 kg to 11,000 kg within the same week. (a) Calculate the price elasticity of supply (PES). (b) State whether supply is elastic or inelastic. (c) Explain one reason why supply of an agricultural good like this vegetable is often relatively inelastic in the short run.
[4 marks]
Marking points
- Calculates %ΔQs = 1,000/10,000 = 10%.
- Calculates %ΔP = 0.50/2.00 = 25%.
- Calculates PES = 10/25 = 0.4, and states that supply is inelastic since the magnitude is less than 1.
- Explains that agricultural production takes a full growing season to adjust, so farmers cannot quickly increase output in response to a price change within the same week.
Examiner tip: Short time periods almost always produce more inelastic supply than long time periods, since firms need time to vary all factors of production.
18.
Marking analysis: A learner attempts the following task: “When the price of a particular vegetable rose from $2.00 to $2.50 per kg, the quantity farmers were willing to supply increased from 10,000 kg to 11,000 kg within the same week. (a) Calculate the price elasticity of supply (PES). (b) State whether supply is elastic or inelastic. (c) Explain one reason why supply of an agricultural good like this vegetable is often relatively inelastic in the short run.” Their response addresses only this point: “Calculates %ΔQs = 1,000/10,000 = 10%.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates %ΔQs = 1,000/10,000 = 10%.
- Identifies the missing requirement: Calculates %ΔP = 0.50/2.00 = 25%.
- Identifies the missing requirement: Calculates PES = 10/25 = 0.4, and states that supply is inelastic since the magnitude is less than 1.
- Identifies the missing requirement: Explains that agricultural production takes a full growing season to adjust, so farmers cannot quickly increase output in response to a price change within the same week.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
19.
Education generates benefits not only for the individual who receives it, such as higher future earnings, but also for society as a whole, such as a more productive workforce and lower crime rates. (a) Identify the type of market failure this represents. (b) State whether the free-market quantity of education consumed is likely to be higher or lower than the socially optimal quantity. (c) Suggest one government policy that could correct this market failure, and briefly explain how it works.
[4 marks] · no calculator
Marking points
- Identifies a positive externality of consumption.
- States that the free-market quantity is likely to be lower than the socially optimal quantity, i.e., education is under-consumed.
- Suggests a valid policy, such as a government subsidy for education, free public provision, or compulsory schooling laws.
- Explains how the suggested policy works, e.g., a subsidy lowers the effective price individuals face, encouraging consumption closer to the socially optimal level.
Examiner tip: With a positive externality, marginal social benefit exceeds marginal private benefit, so the free market under-produces/under-consumes relative to the social optimum — the mirror image of a negative externality.
20.
Marking analysis: A learner attempts the following task: “Education generates benefits not only for the individual who receives it, such as higher future earnings, but also for society as a whole, such as a more productive workforce and lower crime rates. (a) Identify the type of market failure this represents. (b) State whether the free-market quantity of education consumed is likely to be higher or lower than the socially optimal quantity. (c) Suggest one government policy that could correct this market failure, and briefly explain how it works.” Their response addresses only this point: “Identifies a positive externality of consumption.” 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
Marking points
- Recognises credit for the stated point: Identifies a positive externality of consumption.
- Identifies the missing requirement: States that the free-market quantity is likely to be lower than the socially optimal quantity, i.e., education is under-consumed.
- Identifies the missing requirement: Suggests a valid policy, such as a government subsidy for education, free public provision, or compulsory schooling laws.
- Identifies the missing requirement: Explains how the suggested policy works, e.g., a subsidy lowers the effective price individuals face, encouraging consumption closer to the socially optimal level.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
21.
A national flood-defence system protects an entire coastal region: once built, no resident can be excluded from its protection, and one resident benefiting from it does not reduce the protection available to others. (a) Identify the two defining characteristics of a public good illustrated by this example. (b) Explain why a private firm is unlikely to provide this flood-defence system profitably if left to the free market. (c) Suggest how the government could ensure the flood-defence system is provided.
[4 marks] · no calculator
Marking points
- Identifies non-excludability (no resident can be excluded) and non-rivalry (one resident's benefit does not reduce others' benefit).
- Explains the free-rider problem: since no one can be excluded, individuals have an incentive not to pay for the system while still benefiting from it.
- Explains that this makes it unprofitable for a private firm to charge for and provide the good, since most beneficiaries would refuse to pay voluntarily.
- Suggests that the government should provide the flood-defence system directly, funded through general taxation.
Examiner tip: A pure public good must be both non-excludable and non-rivalrous; a good with only one of these properties (e.g., a common resource, or a club good) is a different category of market failure.
22.
Marking analysis: A learner attempts the following task: “A national flood-defence system protects an entire coastal region: once built, no resident can be excluded from its protection, and one resident benefiting from it does not reduce the protection available to others. (a) Identify the two defining characteristics of a public good illustrated by this example. (b) Explain why a private firm is unlikely to provide this flood-defence system profitably if left to the free market. (c) Suggest how the government could ensure the flood-defence system is provided.” Their response addresses only this point: “Identifies non-excludability (no resident can be excluded) and non-rivalry (one resident's benefit does not reduce others' benefit).” 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
Marking points
- Recognises credit for the stated point: Identifies non-excludability (no resident can be excluded) and non-rivalry (one resident's benefit does not reduce others' benefit).
- Identifies the missing requirement: Explains the free-rider problem: since no one can be excluded, individuals have an incentive not to pay for the system while still benefiting from it.
- Identifies the missing requirement: Explains that this makes it unprofitable for a private firm to charge for and provide the good, since most beneficiaries would refuse to pay voluntarily.
- Identifies the missing requirement: Suggests that the government should provide the flood-defence system directly, funded through general taxation.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
23.
Compare a market with many small firms selling an identical product and free entry and exit (perfect competition) to a market with a single firm facing no competition (monopoly), both producing the same underlying good. (a) State which market structure is generally considered allocatively efficient, and explain why, in terms of the relationship between price and marginal cost. (b) Explain why a profit-maximising monopoly is likely to charge a higher price and produce a lower output than a perfectly competitive market for the same good. (c) Identify the term used to describe the loss of total welfare that results from this reduction in output under monopoly.
[5 marks] · no calculator
Marking points
- States that perfect competition is allocatively efficient, because in equilibrium price equals marginal cost (P = MC).
- Explains that monopoly instead sets price above marginal cost, since it maximises profit by producing where MR = MC and then charging the higher price given by the demand curve at that quantity.
- Explains that because the monopolist restricts output below the competitive level to keep price and profit higher, both price is higher and quantity is lower than under perfect competition for the same underlying costs and demand.
- Identifies this restriction of output relative to the competitive outcome as the source of allocative inefficiency in monopoly.
- Identifies the resulting loss of total welfare as a deadweight loss (welfare loss).
Examiner tip: Deadweight loss is the combined loss of consumer and producer surplus that is not transferred to anyone — it simply disappears due to the output restriction.
24.
Marking analysis: A learner attempts the following task: “Compare a market with many small firms selling an identical product and free entry and exit (perfect competition) to a market with a single firm facing no competition (monopoly), both producing the same underlying good. (a) State which market structure is generally considered allocatively efficient, and explain why, in terms of the relationship between price and marginal cost. (b) Explain why a profit-maximising monopoly is likely to charge a higher price and produce a lower output than a perfectly competitive market for the same good. (c) Identify the term used to describe the loss of total welfare that results from this reduction in output under monopoly.” Their response addresses only this point: “States that perfect competition is allocatively efficient, because in equilibrium price equals marginal cost (P = MC).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that perfect competition is allocatively efficient, because in equilibrium price equals marginal cost (P = MC).
- Identifies the missing requirement: Explains that monopoly instead sets price above marginal cost, since it maximises profit by producing where MR = MC and then charging the higher price given by the demand curve at that quantity.
- Identifies the missing requirement: Explains that because the monopolist restricts output below the competitive level to keep price and profit higher, both price is higher and quantity is lower than under perfect competition for the same underlying costs and demand.
- Identifies the missing requirement: Identifies this restriction of output relative to the competitive outcome as the source of allocative inefficiency in monopoly.
- Identifies the missing requirement: Identifies the resulting loss of total welfare as a deadweight loss (welfare loss).
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
25.
A government introduces a subsidy of $3 per unit on locally grown rice to support farmers and keep food affordable. Before the subsidy, the market equilibrium price was $10 per kg and equilibrium quantity was 50,000 kg per week. After the subsidy, the new equilibrium quantity rises to 60,000 kg per week, and the new price paid by consumers falls to $8.50 per kg. (a) Calculate the price received by producers per kg after the subsidy, including the subsidy. (b) Calculate the total cost of the subsidy to the government per week. (c) State one advantage and one disadvantage of using a subsidy to support this market.
[5 marks]
Marking points
- States that the price received by producers equals the price paid by consumers plus the subsidy per unit.
- Calculates the producer price as $8.50 + $3 = $11.50 per kg.
- States that total subsidy cost equals the subsidy per unit multiplied by the new equilibrium quantity.
- Calculates total cost = $3 × 60,000 = $180,000 per week.
- States a valid advantage (e.g., lower prices for consumers, higher farmer incomes, increased domestic output) and a valid disadvantage (e.g., opportunity cost of government spending, or potential overproduction/inefficient resource allocation).
Examiner tip: A subsidy's total cost is always calculated using the new, post-subsidy equilibrium quantity, not the original quantity.
26.
Marking analysis: A learner attempts the following task: “A government introduces a subsidy of $3 per unit on locally grown rice to support farmers and keep food affordable. Before the subsidy, the market equilibrium price was $10 per kg and equilibrium quantity was 50,000 kg per week. After the subsidy, the new equilibrium quantity rises to 60,000 kg per week, and the new price paid by consumers falls to $8.50 per kg. (a) Calculate the price received by producers per kg after the subsidy, including the subsidy. (b) Calculate the total cost of the subsidy to the government per week. (c) State one advantage and one disadvantage of using a subsidy to support this market.” Their response addresses only this point: “States that the price received by producers equals the price paid by consumers plus the subsidy per unit.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks]
Marking points
- Recognises credit for the stated point: States that the price received by producers equals the price paid by consumers plus the subsidy per unit.
- Identifies the missing requirement: Calculates the producer price as $8.50 + $3 = $11.50 per kg.
- Identifies the missing requirement: States that total subsidy cost equals the subsidy per unit multiplied by the new equilibrium quantity.
- Identifies the missing requirement: Calculates total cost = $3 × 60,000 = $180,000 per week.
- Identifies the missing requirement: States a valid advantage (e.g., lower prices for consumers, higher farmer incomes, increased domestic output) and a valid disadvantage (e.g., opportunity cost of government spending, or potential overproduction/inefficient resource allocation).
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
27.
In the market for used cars, sellers typically know much more about a car's true condition and history than potential buyers do. (a) Identify the type of market failure illustrated here. (b) Explain how this information gap could lead buyers to only be willing to pay an average price that reflects the average quality of cars on the market. (c) Explain why this could cause sellers of genuinely high-quality used cars to withdraw from the market, using the term 'adverse selection'.
[4 marks] · no calculator
Marking points
- Identifies asymmetric information as the market failure.
- Explains that because buyers cannot verify true quality, they are only willing to pay a price reflecting the average expected quality of all cars on the market.
- Explains that this average price is too low to be worthwhile for sellers of genuinely high-quality cars, who then withdraw from the market rather than sell at an unfairly low price.
- Explains that this process, whereby the withdrawal of high-quality goods lowers average quality further, is known as adverse selection, and can shrink or collapse the market (a 'market for lemons').
Examiner tip: Adverse selection occurs before a transaction (hidden quality/characteristics); moral hazard occurs after a transaction (hidden behaviour) — do not confuse the two.
28.
Marking analysis: A learner attempts the following task: “In the market for used cars, sellers typically know much more about a car's true condition and history than potential buyers do. (a) Identify the type of market failure illustrated here. (b) Explain how this information gap could lead buyers to only be willing to pay an average price that reflects the average quality of cars on the market. (c) Explain why this could cause sellers of genuinely high-quality used cars to withdraw from the market, using the term 'adverse selection'.” Their response addresses only this point: “Identifies asymmetric information as the market failure.” 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
Marking points
- Recognises credit for the stated point: Identifies asymmetric information as the market failure.
- Identifies the missing requirement: Explains that because buyers cannot verify true quality, they are only willing to pay a price reflecting the average expected quality of all cars on the market.
- Identifies the missing requirement: Explains that this average price is too low to be worthwhile for sellers of genuinely high-quality cars, who then withdraw from the market rather than sell at an unfairly low price.
- Identifies the missing requirement: Explains that this process, whereby the withdrawal of high-quality goods lowers average quality further, is known as adverse selection, and can shrink or collapse the market (a 'market for lemons').
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
29.
A government wants to reduce total carbon emissions from a group of factories using a market-based approach rather than a fixed emissions tax. (a) Outline how a cap-and-trade (tradable permit) scheme would work to reduce total emissions across the group of factories. (b) Explain one reason this approach could achieve emission reductions at a lower overall cost than requiring every factory to cut emissions by the same fixed amount.
[4 marks] · no calculator
Marking points
- Outlines that the government sets a total cap on emissions and issues (or auctions) a matching number of tradable permits to factories.
- Outlines that factories that can reduce emissions cheaply can sell spare permits to factories that find reducing emissions more expensive, while the overall cap ensures total emissions fall to the target level.
- Explains that this allows firms with low abatement costs to make the bulk of the actual reductions, while firms with high abatement costs simply buy permits instead of cutting emissions expensively.
- Explains that this flexibility achieves the same total emissions target at a lower total cost than mandating identical fixed cuts from every factory regardless of their differing abatement costs.
Examiner tip: The efficiency gain of tradable permits comes from letting the market, not the government, decide which firms should cut emissions and which should buy permits instead.
30.
Marking analysis: A learner attempts the following task: “A government wants to reduce total carbon emissions from a group of factories using a market-based approach rather than a fixed emissions tax. (a) Outline how a cap-and-trade (tradable permit) scheme would work to reduce total emissions across the group of factories. (b) Explain one reason this approach could achieve emission reductions at a lower overall cost than requiring every factory to cut emissions by the same fixed amount.” Their response addresses only this point: “Outlines that the government sets a total cap on emissions and issues (or auctions) a matching number of tradable permits to factories.” 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
Marking points
- Recognises credit for the stated point: Outlines that the government sets a total cap on emissions and issues (or auctions) a matching number of tradable permits to factories.
- Identifies the missing requirement: Outlines that factories that can reduce emissions cheaply can sell spare permits to factories that find reducing emissions more expensive, while the overall cap ensures total emissions fall to the target level.
- Identifies the missing requirement: Explains that this allows firms with low abatement costs to make the bulk of the actual reductions, while firms with high abatement costs simply buy permits instead of cutting emissions expensively.
- Identifies the missing requirement: Explains that this flexibility achieves the same total emissions target at a lower total cost than mandating identical fixed cuts from every factory regardless of their differing abatement costs.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.