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IB Economics HL 2.3.5 Allocative efficiency and marginal cost Question Bank

Practise IB Economics HL 2.3.5 by analysing allocative efficiency using marginal cost, price and policy interventions.

Syllabus
First assessment 2022
Course
Economics HL
Level
HL

Exam points

  • Explain why allocative efficiency occurs where price or average revenue equals marginal cost in the relevant model.
  • Identify the efficient output and compare it with a profit-maximising or regulated output.
  • Evaluate how a subsidy, externality or market intervention changes efficiency and social surplus.

2.3.5—Allocative efficiency question 1

[Maximum number: 1]

Economists agree that travel by train, instead of by plane or car, should be promoted in Europe because of environmental issues. However, the growth of passenger rail travel in Spain has slowed down. During 2013, millions of passenger-kilometres* travelled on railways in Spain increased by 6.72 %, while in 2019 the annual increase only amounted to 1.36 %.
* passenger-kilometres measure the distance travelled by all passengers over one year

Figure 4 illustrates the monopoly-market structure for tickets on a train between Madrid and Barcelona in Spain. MC is marginal cost, AC is average cost, D is the demand for tickets and M R is marginal revenue.

Figure 4

Figure 4

Using Figure 4, identify the allocatively efficient quantity of tickets.

When the railway firm maximizes its profits, the train is almost half empty. However, when the allocatively efficient quantity of tickets is sold, the firm is making losses.

A railway is a natural monopoly.

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