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IB Economics HL 2.3.5 Allocative Efficiency Questions

Practise IB Economics HL 2.3.5 by explaining the price-equals-marginal-cost condition, efficient output and how interventions can reduce social surplus, using marked exam evidence.

Syllabus
First assessment 2022
Course
Economics HL
Level
HL

Exam points

  • Define allocative efficiency as the best allocation of resources in which social or community surplus is maximized.
  • Identify the allocatively efficient output where price or average revenue equals marginal cost.
  • Explain how subsidies or other interventions can move output away from allocative efficiency and reduce welfare.

IB Economics HL 2.3.5 Allocative Efficiency Questions question 1

[Maximum number: 4]

Firm A, a firm with monopoly power, is producing at a level of output Q' equal to 150000 units per month for which the following are true (all figures are in dollars ($)):

Table 1

Table 1

The values in Table 1 imply the following:

P=AR>MR>AC>MC\mathrm{P}=\mathrm{AR}>\mathrm{MR}>\mathrm{AC}>\mathrm{MC}

Explain why allocative efficiency is achieved, in the absence of externalities, at a level of output where price (average revenue) is equal to marginal cost.

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