IB DP Economics: Market power (HL) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions follow sub-topic 2.11, market failure – market power, in the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. All of 2.11 is HL only, so every question here is HL only. All firms, countries and figures are invented. Read the market power study guide or the market power revision notes first. Course pages: the IB DP Economics hub and the printable checklist. Try the free diagnostics too.

Questions

1. (HL only) Define market power, and distinguish a price taker from a price maker. [3]

2. (HL only, calculator-free) A made-up grain firm sells at a fixed market price of 11 per unit. Its total cost (TC) is: 0 units 12; 1 unit 22; 2 units 30; 3 units 37; 4 units 45; 5 units 55; 6 units 68.

(a) Calculate the marginal cost of the fifth unit. [1] (b) Determine the profit-maximising output, giving the reason. [2] (c) Work out the profit and classify it as abnormal, normal or a loss. [2]

3. (HL only, calculator-free) In a made-up bus market the seven firms have market shares of 34, 22, 14, 11, 8, 6 and 5 per cent.

(a) Find the CR3 and CR4 concentration ratios. [2] (b) The third and fourth firms merge. Calculate the new three-firm ratio. [1] (c) Comment on what the change suggests about the market. [1]

4. (HL only, calculator allowed) A made-up monopolist faces demand P = 84 - 4Q. Its total cost is TC = 150 + 12Q + 2Q², so MC = 12 + 4Q.

(a) Determine the profit-maximising output and the price the monopolist charges. [3] (b) Calculate the profit. [2] (c) Calculate the welfare loss compared with perfect competition, assuming MC would be the competitive supply curve. [3]

5. (HL only) Sketch a diagram of a natural monopoly and use it to explain why a regulator might set the price where P = AC rather than P = MC. [4]

6. (HL only) Two made-up ferry firms, Seaward and Tidemark, each choose to Hold or Cut their fare. Payoffs are profits (Seaward, Tidemark): both Hold 30, 30; Seaward Hold and Tidemark Cut 10, 50; Seaward Cut and Tidemark Hold 50, 10; both Cut 20, 20.

(a) Explain what each firm will choose if they cannot agree. [3] (b) Explain the incentive to cheat if they agree to Hold. [2] (c) State the risk this matrix shows for firms that do not collude. [1]

7. (HL only) Explain, with reference to a diagram, why a monopolistically competitive firm earning abnormal profit in the short run earns only normal profit in the long run, and comment on its efficiency. [6]

8. (HL only) Explain two advantages of a market dominated by one very large firm. [4]

9. (HL only, essay) A made-up country, Veldmark, has a single firm supplying nearly all its electricity. Evaluate the use of government intervention to respond to abuse of its market power. [10]

10. (HL only, calculator allowed) A made-up firm in a perfectly competitive market has TC = 64 + Q², so MC = 2Q and AC = 64/Q + Q.

(a) Calculate the profit when the market price is 26. [3] (b) Explain what happens in the long run and calculate the long-run price. [3] (c) Show that the firm is allocatively efficient in the long run. [2] (d) Calculate the result if the price is instead 10. [2] (e) Explain what then happens in the market. [2]

Answers

1. Market power is a firm’s ability to influence the price it charges [1]. A price taker has none, so it accepts the market price and faces a horizontal demand curve [1]. A price maker faces a downward-sloping demand curve and chooses a price and quantity along it [1]. Examiner insight: Define the term in your own words before contrasting; a contrast alone does not show you know what the term means.

2. (a) MC = 55 - 45 = 10 [1]. (b) Each unit up to the fifth costs no more than 11 (fifth: 10), but the sixth costs 68 - 55 = 13, above the price [1]. Output = 5 units [1]. (c) TR = 11 × 5 = 55 and TC = 55, so profit = 0 [1]. AR = AC, so normal profit [1]. Examiner insight: Show each difference in TC; write the MC against MR comparison on both sides of the answer so the reasoning is visible.

3. (a) CR3 = 34 + 22 + 14 = 70 per cent [1]; CR4 = 70 + 11 = 81 per cent [1]. (b) Merged firm 25, so the largest three are 34, 25 and 22: CR3 = 81 per cent [1]. (c) Concentration rises, so fewer firms dominate; the market is more oligopolistic, though the ratio alone does not show behaviour [1]. Examiner insight: Re-rank after a merger before adding; adding the old top three is a common slip.

4. (a) MR = 84 - 8Q [1]. MC = MR: 12 + 4Q = 84 - 8Q gives Q = 6 [1]. P = 84 - 24 = 60 [1]. (b) TC = 150 + 72 + 72 = 294 [1]. TR = 360, profit = 66 [1]. (c) Perfect competition: P = MC, 84 - 4Q = 12 + 4Q, so Q = 9 [1]. At Q = 6, MC = 36 and P - MC = 60 - 36 = 24 [1]. Welfare loss = ½ × 3 × 24 = 36 [1]. Examiner insight: Calculate asks for working, so state MR before equating it to MC; the price comes from AR, not MR.

5. Diagram: downward AR with MR below it; AC falling across the whole range of demand; MC below AC [1]. Unregulated output is at MC = MR, with price on AR above AC [1]. At P = MC, the firm makes a loss because MC is below AC, so it would not stay [1]. P = AC gives normal profit and more output than the unregulated case, a workable compromise [1]. Examiner insight: Label MC = MR, P = MC and P = AC as three separate points; unlabelled intersections lose the explanation.

6. (a) If Tidemark holds, Seaward earns 50 by cutting against 30 by holding [1]. If Tidemark cuts, Seaward earns 20 against 10 [1]. So Seaward cuts either way, as does Tidemark: both Cut, earning 20 each [1]. (b) If both hold, each earns 30, but a firm that secretly cuts earns 50 [1], while its rival falls to 10 [1]. (c) A price war, leaving both on 20 rather than 30 [1]. Examiner insight: Quote payoffs from the matrix in the explanation; stating “they cut” without numbers is an assertion, not analysis.

7. Short run: at MC = MR the price (AR) is above AC, giving abnormal profit [1]. Entry is free, so profit attracts new firms [1]. Their close substitutes take sales: this firm’s demand shifts left and becomes more elastic [1]. Entry continues until AR is tangent to AC [1]. At the MC = MR output, AR = AC, so normal profit [1]. P is above MC, so allocative inefficiency, but less than a monopoly, with greater product variety [1]. Examiner insight: The diagram should show the tangency point and the MC = MR quantity below it; describing the shift without drawing it leaves the key step implicit.

8. Economies of scale: spreading fixed cost over more output lowers average cost [1], which can be passed on in lower prices or kept as profit [1]. R&D: abnormal profit can fund research [1], leading to innovation and new or better products [1]. Examiner insight: Explain means give reasons, so each advantage needs a link from cause to effect, not just a name.

9. Plan (indicative, not an official scheme): legislation and regulation, such as a price cap or rules against abuse, explained [1] and linked to price towards AC and higher output [1]; limit, regulator has less cost information than the firm [1]. Government ownership explained [1], with strength, prices can follow social goals [1]; limit, weaker profit incentive, cost to taxpayers [1]. Fines explained [1]; strength, deterrence, limit, hard to prove and may be passed to consumers [1]. Judgement on which suits a natural monopoly, with justification [1] and a labelled diagram or applied reference to Veldmark [1]. Examiner insight: Evaluate invites a weighed judgement, so end with a reasoned conclusion about the case, not a restatement of the list.

10. (a) MC = P: 2Q = 26, Q = 13 [1]. TR = 338 and TC = 64 + 169 = 233 [1]. Profit = 105, abnormal [1]. (b) Abnormal profit attracts entry, market supply increases and the price drops [1]. Entry stops at the lowest AC, where AC = MC: 64/Q + Q = 2Q gives Q = 8 [1]. Price = AC = 64/8 + 8 = 16 [1]. (c) At Q = 8, MC = 16 [1], equal to the price, so P = MC and the firm is allocatively efficient [1]. (d) Q = 5, TR = 50, TC = 64 + 25 = 89, so a loss of 39 [1], since AR is below AC [1]. (e) Firms leave, supply shifts left and price rises [1] until it reaches 16 and firms earn normal profit [1]. Examiner insight: In a multi-step calculation, carry your own earlier values forward and show each substitution so one slip does not hide the rest.

Where marks are usually lost

• Reading the price from MR or MC instead of AR.
• Calling any positive profit “normal”.
• Drawing the welfare loss with MR as one boundary.
• Giving a payoff-matrix answer with no numbers from the matrix.
• Adding the old top firms after a merger.
• Leaving diagram curves or equilibrium points unlabelled.
• Listing government policies without judging their limits.
• Skipping the working in a Calculate question.

Next steps

• Review the market power revision notes and the market power study guide.
• Check the IB DP Economics hub and the printable checklist.
• Take any of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020), sub-topic 2.11.