IB DP Economics: Role of government in microeconomics – 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.

This practice set follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. The subject is sub-topic 2.7, Role of government in microeconomics, at SL and HL. Question 4 part (b) and questions 8 to 11 are HL only. Every market and figure is fictional. The [1] points in the answers are a revision aid; the guide says real papers use an analytic markscheme with markbands.

Teaching is in the study guide and the revision notes. Beyond this sub-topic, the course hub and the checklist to print list what else to cover. The free 10-minute diagnostics help you pick what to do next.

Questions

1. Define the term price floor. [2]

2. Outline two reasons why a government might intervene in a market. [4]

3. The ferry-ticket market on the fictional island of Kestria is in equilibrium. The government sets a maximum ticket price below the equilibrium price. Draw a labelled diagram to show the effect, and state what the diagram shows. [4]

4. The table shows the market for fish landings at the fictional Port Lindel. Price is in cu per tonne and quantity is in tonnes per week.

Price	Quantity demanded	Quantity supplied
11	85	45
13	75	55
15	65	65
17	55	75
19	45	85

(a) State the equilibrium price and quantity. [1] (b) (HL only) The government sets a minimum price of 17 cu. Calculate the surplus. [2] (c) Explain one consequence for taxpayers if the government buys the surplus. [2]

5. In the fictional country of Halvern, the government places a per-unit indirect tax on plastic cutlery. Explain, with the help of a diagram, how the tax affects the price paid by consumers, the price kept by producers and the quantity sold. [5]

6. In the fictional town of Harrowdale, the council pays a subsidy to the sellers of school textbooks. Explain the effects of the subsidy on consumers, producers and the council. [5]

7. Outline one example each of direct provision of services and command and control regulation. [4]

8. (HL only) Outline how a default option works as a consumer nudge, and give one advantage of using it. [3]

9. (HL only, calculator allowed) In the fictional city of Lunarra, the market for handmade paper lanterns has demand Qd = 240 − 2P and supply Qs = −60 + 4P, where P is the price in cu and Q is in thousands per month. The government introduces an indirect tax of 12 cu per lantern.

(a) Find the price and quantity at which this market clears before the tax. [2] (b) Calculate the new quantity and the price paid by consumers. [3] (c) Calculate the government’s tax revenue. [1] (d) Calculate the amount of the tax revenue that comes from the rise in the consumers’ price. [2]

10. (HL only, calculator allowed) In the fictional city of Marenta, the market for taxi trips has demand Qd = 290 − 2P and supply Qs = 3P − 60, where P is the fare in cu and Q is in thousand trips per week. The council sets a maximum fare of 56 cu.

(a) Calculate the shortage. [3] (b) Calculate the change in total spending on trips that take place. [2] (c) Calculate the welfare loss, assuming the trips that take place go to the riders who value them most. [3]

11. (HL only, calculator allowed) In the fictional country of Tessaly, the market for e-scooters has demand Qd = 200 − 2P and supply Qs = 3P − 100, where P is the price in cu and Q is in thousands. The government gives producers a subsidy of 15 cu per scooter.

(a) Calculate the new equilibrium quantity and the price paid by consumers. [3] (b) Calculate what the subsidy costs the government in total. [2] (c) Calculate how much of the subsidy benefits consumers. [2]

12. Evaluate the use of a price floor in the market for an agricultural product such as rice. [10]

Answers

1. A price floor is a legally set minimum price [1] that is set above the free-market equilibrium price, so that it prevents the price falling below that level [1]. [2] Examiner insight: A definition earns more with both the legal minimum and its position above equilibrium; “a price that cannot fall” omits the part that matters.

2. Any two reasons, each with a link. To earn revenue [1]: an indirect tax on a good gives the government money to spend [1]. To correct market failure [1]: a tax on a good with a negative externality lowers consumption towards the socially better level [1]. (Other valid pairs: support low-income households with a ceiling or subsidy; support firms with a subsidy or minimum price.) [4] Examiner insight: With “outline” (a brief account), a reason plus a short link scores better than a list of aims; two reasons are asked for, so spend your time developing two.

3. Axes labelled price (vertical) and quantity (horizontal), with D and S drawn and labelled [1]. Equilibrium price Pe and quantity Qe marked [1]. A horizontal line labelled Pmax drawn below Pe, meeting S at Qs and D at Qd [1]. The diagram shows a shortage equal to Qd − Qs, because Qs is less than Qd [1]. [4] Examiner insight: A ceiling drawn above Pe has no effect, so the line’s position matters; label the shortage as a quantity gap.

4. (a) Price 15 cu per tonne and quantity 65 tonnes [1]. [1] (b) At 17 cu, quantity demanded is 55 and quantity supplied is 75 [1]. Surplus = 75 − 55 = 20 tonnes [1]. [2] (c) Taxpayers fund the purchase [1]: 20 × 17 = 340 cu a week, which could have been spent on other services (opportunity cost) [1]. [2] Examiner insight: Read the columns at the floor price, not at equilibrium. “Explain” asks for a reason, not just “it costs money”.

5. The tax raises the firms’ cost per unit, so supply shifts up by a vertical distance equal to the tax [1]. The new equilibrium has a higher price paid by consumers [1] and a lower quantity [1]. Producers keep the new price minus the tax, which is below the original price [1]. The burden is shared; the side with the steeper curve bears more [1]. [5] Examiner insight: Show the vertical gap between the two supply curves as the tax, and mark the producer’s price on the original curve.

6. The subsidy lowers firms’ costs, so supply shifts downward or right by the subsidy per unit [1]. The price paid by consumers falls and the quantity rises [1]. Producers receive the consumer price plus the subsidy, so their revenue per unit rises [1]. The council pays subsidy per unit × quantity, which is a cost to the taxpayer [1]. The benefit is shared between consumers and producers [1]. [5] Examiner insight: The question names three stakeholders, so give one effect for each.

7. Direct provision: the government supplies a service itself [1], for example a public health clinic funded by taxation [1]. Command and control: the government sets a rule backed by penalties [1], for example a legal limit on the amount of waste a factory may release [1]. [4] Examiner insight: Give each form its own definition and example; two examples of one form do not cover both.

8. A default option is the choice that applies if the person does nothing [1]. For example, a worker is automatically enrolled in a saving plan but may opt out [1]. One advantage: it changes behaviour without banning any choice and is cheap to run [1]. [3] Examiner insight: The point that people can still choose differently is what separates a nudge from a rule.

9. (a) 240 − 2P = −60 + 4P [1], so 6P = 300 and P = 50, Q = 140 (thousand) [1]. [2] (b) New supply: Qs = −60 + 4(P − 12) = −108 + 4P [1]. 240 − 2P = −108 + 4P, so 6P = 348 and P = 58 [1]. Q = 240 − 116 = 124 (thousand) [1]. [3] (c) Revenue = 12 × 124 = 1,488 (thousand cu) [1]. [1] (d) Consumers’ price rises by 58 − 50 = 8 [1]. 8 × 124 = 992 (thousand cu) [1]. [2] Examiner insight: Subtract the tax from the price inside the supply function (or add it to the supply price); subtracting it from the final price instead gives a different, wrong equilibrium. The revenue uses the new quantity.

10. (a) At 56: Qd = 290 − 112 = 178 [1]. Qs = 168 − 60 = 108 [1]. Shortage = 178 − 108 = 70 thousand trips [1]. [3] (b) Before: equilibrium is 290 − 2P = 3P − 60, so P = 70 and Q = 150; spending = 70 × 150 = 10,500; after: 56 × 108 = 6,048 [1]. Fall = 4,452 (thousand cu) [1]. [2] (c) Demand price at Q = 108: 108 = 290 − 2P, so P = 91 [1]. Triangle: base = 150 − 108 = 42, height = 91 − 56 = 35 [1]. Welfare loss = ½ × 42 × 35 = 735 (thousand cu) [1]. [3] Examiner insight: Use Qs for spending after the ceiling, and state your assumption about who gets the trips before computing a welfare loss.

11. (a) Supply with subsidy: Qs = 3(P + 15) − 100 = 3P − 55 [1]. 200 − 2P = 3P − 55, so P = 51 [1]. Q = 200 − 102 = 98 (thousand) [1]. [3] (b) Subsidy per unit × quantity = 15 × 98 [1] = 1,470 (thousand cu) [1]. [2] (c) Original equilibrium price is 60, so the consumers’ price falls by 9 [1]. 9 × 98 = 882 (thousand cu) [1]. [2] Examiner insight: Producers receive 51 + 15 = 66, so their gain is 6 × 98 = 588; check that the two gains add to the cost (882 + 588 = 1,470) before moving on.

12. Indicative creditworthy points; a developed, balanced answer matters more than counting points.

• Define a price floor as a minimum price above equilibrium [1].
• Diagram: floor above Pe, with the surplus Qs − Qd labelled [1].
• Surplus: quantity supplied exceeds quantity demanded at the floor [1].
• Farmers gain a higher price on the quantity sold, supporting incomes [1].
• Consumers pay more and buy less, which hurts low-income households most [1].
• Taxpayers pay if the government buys the surplus; stock may be wasted [1].
• Welfare loss: resources are drawn into production the market does not need [1].
• The high price keeps farmers in the industry and may delay adjustment [1].
• Alternatives such as direct payments can support income with less surplus [1].
• A judgement that depends on the size of the floor and the responsiveness of supply and demand [1]. [10] Examiner insight: “Evaluate” means appraising by weighing up strengths and limitations. A conclusion that takes a side and states its conditions lifts an explanation into evaluation.

Where marks are usually lost

• Placing a ceiling over equilibrium or a floor under it, then claiming a shortage or surplus.
• Moving demand when the policy acts on supply.
• Leaving out axis labels, curve labels, Pe, Qe or the new values.
• Reading the producer price from the wrong curve, or forgetting to take off the tax.
• Using the old quantity in revenue or cost calculations.
• Giving a shortage or surplus as a price gap instead of a quantity gap.
• Covering only one stakeholder.
• Describing a policy without weighing it when the command term is “evaluate”.
• Giving a final number without the working when the command term is “calculate”.

Next steps

• Revisit the study guide wherever you lost marks.
• Run a final recall check with the revision notes.
• Move on through the course hub using the checklist.
• Book a free trial class and have a teacher mark your answers.
• Choose what to tackle next with the free 10-minute diagnostics.

Official syllabus

This page follows the IB Diploma Programme Economics guide, sub-topic 2.7 Role of government in microeconomics, first assessment 2022, published by the International Baccalaureate Organization in February 2020.