IB Economics HL 2.11 Market Failure Market Power Topic Practice

Candidates may include:
- a definition of perfect competition
- a definition of losses
- a definition of marginal cost, marginal revenue
- an explanation that profit maximization/loss minimization occurs at the level of output where MC equals MR
- an explanation that the firm makes a loss where ATC exceeds AR (P) at the profit maximizing/loss minimizing level of output
- use of a diagram of perfect competition to illustrate short-run losses at the level of output where MC equals MR
- reference to the condition that AR must be greater than or equal to AVC at the profit maximizing/loss minimizing level of output if the firm is to produce in the short run.

Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded.

Assessment Criteria

Level 0

Marks 0

Completely inappropriate answer.

1

Little understanding of the specific demands of the question. Very little recognition of relevant economic theory. Relevant terms not defined. Significant errors.

1-3

2

Some understanding of the specific demands of the question. Some recognition of relevant economic theory. Some relevant terms defined. Some errors.

4-6

3

Understanding of the specific demands of the question. Relevant economic theory explained and developed. Relevant economic terms defined. Few errors. Where appropriate, diagrams included.

7-8

4

Clear understanding of the specific demands of the question. Relevant economic theory clearly explained and developed. Relevant economic terms clearly defined. No major errors. Where appropriate, diagrams included and explained. Where appropriate, examples used.

9-10

Candidates may include:
- a definition of long run
- a definition of normal profit (zero economic profit)
- an explanation of the characteristics of firms in monopolistic competition
- an explanation of the short run profit maximizing output of a firm operating in monopolistic competition, with the firm making either abnormal profit or loss
- an explanation of how free entry in the long run, will result in a leftward shift in the demand curve facing the monopolistically competitive firm when existing firms are making abnormal profit in the short run
- an explanation of how free exit in the long run, will result in a rightward shift in the demand curve facing the monopolistically competitive firm when existing firms are making losses in the short run
- an explanation of how free entry/exit would lead firms in monopolistic competition to make normal profit in the long run
- use of a diagram showing the abnormal profit/loss of monopolistically competitive firms in the short run
- use of a diagram showing the long run equilibrium where the firm earns normal profit
- examples of monopolistically competitive firms.

Candidates need not examine both abnormal profit and loss scenarios;
an explanation of one or the other is enough for full marks.

Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded.

Assessment Criteria
0 Completely inappropriate answer. ..... 0
1 Little understanding of the specific demands of the question. Very little recognition of relevant economic theory. Relevant terms not defined.
Significant errors. ..... 1-3
2 Some understanding of the specific demands of the question. Some recognition of relevant economic theory. Some relevant terms defined.
Some errors. ..... 4-6
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed. Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. ..... 7-8
4 Clear understanding of the specific demands of the question. Relevant economic theory clearly explained and developed. Relevant economic terms clearly defined. No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. ..... 9-10