IB Economics HL Unit 2 Microeconomics Questions

Build your IB Economics HL Microeconomics foundation by evaluating demand, supply, elasticity and intervention with diagrams and evidence.

Exam points

Explain demand, supply, elasticity and market equilibrium using diagrams, calculations and ceteris-paribus reasoning.
Analyse consumer and producer behaviour, market power and the causes of market failure including public goods, asymmetric information and inequality.
Evaluate government intervention and market outcomes using efficiency, equity, stakeholder, behavioural and real-world trade-offs.

Covered syllabus points

2.1 Demand 2.2 Supply 2.3 Competitive market equilibrium 2.4 Critique of the maximizing behaviour of consumers and producers 2.5 Elasticities of demand 2.6 Elasticity of supply 2.7 Role of government in microeconomics 2.8 Market failure - externalities and common pool or common access resources 2.9 Market failure - public goods 2.10 Market failure - asymmetric information 2.11 Market failure - market power 2.12 The market's inability to achieve equity

[Maximum number: 9]

Read the extracts and answer the questions that follow.
Text A - Overview of Tanzania

(1) Tanzania is one of Africa's fastest growing economies with an average of 7 % annual economic growth since 2000. It is a politically stable country, rich in wildlife and natural resources. However, the growth has been concentrated in urban manufacturing, using capital intensive production. The benefits from this growth have not reached all people and significant inequalities exist between urban and rural areas. Although the relative poverty rate has fallen over the last 15 years, the number of people living in absolute poverty has increased.

(2) Most people are employed in the slow-growing agricultural sector that relies on unskilled labour. Although incomes increased from 2008 to 2018, the demand for agricultural goods only increased by 21 % during this time period. Over 70 % of Tanzania's population lives in rural areas, relying on subsistence farming with limited tradable crops. Only 30 % of land is being used for agricultural production. With investment, the remaining unused land could be developed and generate income for farmers.

(3) The rural sector struggles to meet Tanzania's food requirements due to low levels of skilled labour and productivity. Additionally, high youth unemployment leads to large numbers of unskilled rural youth migrating to the cities, often finding employment in the informal sector where wages and working conditions are poor. Insufficient investment and lack of government support for diversifying the agriculture sector have been blamed for the persistent inequalities and poverty.

(4) Tanzania's cities have experienced a growing middle class with strong purchasing power and political influence who have placed demands on the government for cheaper electricity, better infrastructure, and more imported goods. In response, the government provided subsidies for electricity in city centres and tax benefits to foreign companies operating in Tanzania. There is concern that these measures may worsen inequality and lead to social unrest.

(5) The growth of Tanzania's manufacturing and service sector was funded through aid and large government borrowing, resulting in high national debt. Most of the government borrowing was from foreign sources and in US dollars (US$), which is a concern due to a recent depreciation of the Tanzanian shilling (Tanzania's currency) against the US$. Some of the debt was borrowed domestically and placed upward pressure on interest rates. Higher interest rates have resulted in crowding out but helped keep inflation under control.
Text B - Strategies and opportunities for Tanzania

(1) Previous governments have used interventionist supply-side policies to improve access to water, education, and health services. However, the health service improvements are not keeping up with population growth and many young people are still not completing secondary school. Infrastructure has improved, but it is still insufficient as producers in the rural sector find it difficult to reach markets and access supplies.

(2) Aid organizations are currently supporting new sustainable businesses in rural areas through training programmes, especially for women and young people, who make up most of the unemployed in rural areas. Economists have advised the government to improve access to credit through microfinance organizations and to simplify regulations to make it easier to start new businesses.

(3) The government is establishing property rights in rural areas to provide security for farmers. Historically, farmers could easily lose their land, which reduced their incentive to invest in productive farming methods. The government wants to develop Tanzania's land resources and lower its reliance on imported food. To reduce food imports, a subsidy will be granted to dairy farmers to allow them to compete against imported dairy products.

(4) Tanzania is a member of the East African Community (EAC) customs union and common market. However, Tanzania needs to improve human capital and encourage diversification so that the benefits of regional integration can reach the poor. These policies can also help attract foreign direct investment (FDI). Opportunities for growth through trade will expand as the EAC works towards becoming a monetary union in 2024.
Text C - Oil pipeline to be constructed
Tanzania and Uganda plan to construct a major oil pipeline from Uganda through Tanzania, ending at a port in Tanzania. This will attract FDI which could help fund infrastructure and generate jobs. However, environmentalists are concerned about potential ecological damage due to the waste created during the construction of the pipeline. Economists have suggested the waste could be avoided through a circular economy approach in the planning and construction stage.

Table 1: Economic data for Tanzania

Table 2: Development data for Tanzania

* Estimate

(a)

Define the term demand indicated in bold (Text A, paragraph 2).

[ 2 ]

Level	Descriptor	Marks
0	The work does not meet a standard described by the descriptors below.	0
1	Vague definition The idea that it is the amount consumers want of a good or service And one of the following: - at different prices / a given price / price level - in a given period of time - able to buy.	1
2	Accurate definition An understanding that it is the amount of a good or service that individuals are willing and able to buy at different prices / at a given price / price level in a time period (ceteris paribus).	2

(b)

Using information from Text A, paragraph 2 and Table 1, calculate the income elasticity of demand (YED) for agricultural goods in Tanzania considering the change in income between 2008 and 2018.

[ 3 ]

Formula written or applied [1]
$\% \Delta Q d=21 \%$ $\% \Delta Y=\frac{(2538-1880)}{1880} \times 100=35 \%$ $Y E D=\frac{21}{35}=0.6$ [1] for YED calculation [1] correct answer

A student who shows only the YED calculation (21/35) correctly, with a correct answer can be awarded full marks.
[2] only can be awarded for an answer without any working.

Marking guidance:

OFR applies if a student makes a calculation error in the percentage change in income, [2] can be awarded

If a student makes a calculation error in the final YED figure, [2] only can be awarded.

(c)

Using an externalities diagram, explain how the construction of an oil pipeline through Tanzania could result in market failure (Text C).

[ 4 ]

Level

Marks

0

The work does not meet a standard described by the descriptors below.

1

There is a correct diagram OR an accurate written response.

1-2

For a correct negative externality of production diagram with appropriate labelling showing MSC above MPC and market equilibrium quantity indicated above the socially optimum level of output with the welfare loss or externality identified.

OR

For explaining that market failure exists because the oil pipeline creates a negative externality of production due to the negative impact on a 3rd party/environment [1] resulting in a welfare loss/external cost/socially optimum quantity is lower than the market quantity/MSC $\neq \mathrm{MSB}$ [1].

2

There is a correct diagram AND an accurate written response.

3-4

For a correct negative externality of production diagram with appropriate labelling showing MSC above MPC and market equilibrium quantity indicated above the socially optimum level of output with the welfare loss or externality identified.

AND

For explaining that market failure exists because the oil pipeline creates a negative externality of production due to the negative impact on a 3rd party/environment [1] resulting in a welfare loss/external cost/socially optimum quantity is lower than the market quantity/ MSC $\neq \mathrm{MSB}$ [1].

Figure for Answer to Question (c) — IB Economics HL

Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The vertical axis may be price but could be costs or benefits. The horizontal axis is quantity. P and Q are sufficient. A title is not necessary.

[Maximum number: 24]

Note that widgets are an imaginary product.

In Country X, the supply and demand for widgets are given by the functions

\begin{aligned} & Q s=-45+4.5 P \\ & Q d=180-3 P \end{aligned}

where P is the price per widget in dollars ($), Qs is the quantity of widgets supplied (thousands per year) and Q d is the quantity of widgets demanded (thousands per year).

The supply ( S ) and demand ( D ) functions are represented in Figure 1.

Figure 1

(a)

Identify the slope of the supply curve.

[ 1 ]

(b)

Outline the reason why the quantity supplied increases as the price rises.

An increase in costs of production has resulted in a new supply function:

Q s_{1}=-60+3 P

[ 2 ]

(c)

Draw and label the new supply curve on Figure 1.

[ 1 ]

(d)

Using your answer to part (c), outline the reason why an increase in costs of production has resulted in a new supply function.

[ 2 ]

(e)

Calculate the change in producer surplus resulting from the increase in costs of production.

[ 2 ]

$(0.5 \times 20 \times 60000)-(0.5 \times 20 \times 90000)$
Any valid working is sufficient for [1].
$=-\$ 300000$ (or a decrease of $300 000)
An answer of - $300 000 or - 300000 without any working is sufficient for [1].

(f)

Define the term price elasticity of supply.

The time taken to produce goods is an important determinant of the price elasticity of supply.

[ 2 ]

(g)

Apart from time, explain two factors which influence the price elasticity of supply.

Figure 2 shows the demand for and supply of widgets in Country Y .

Figure 2

The government of Country Y decides to impose an indirect tax of $10 per widget.

[ 4 ]

(h)

With reference to Figure 2, explain how the incidence of taxation on consumers and/or producers will be influenced by the price elasticity of supply.

[ 4 ]

Level

Marks

0

The work does not meet a standard described by the descriptors below.

1

The written response is limited.

1-2

For stating that supply is perfectly inelastic [1] and that producers will bear the full burden (incidence) of the tax [1].

OR
$\frac{\% \text { of tax incidence on Consumers }}{\% \text { of tax incidence on producers }}=\frac{\text { PES }}{\text { PED }}[1]$

So, given PED, the more price inelastic supply is, the smaller the incidence on consumers and the greater on producers [1].

2

The written response is accurate.

3-4

For stating that supply is perfectly inelastic [1] and that producers will bear the full burden (incidence) of the tax [1] AND for an explanation that equilibrium price [1] and quantity will not change (so that consumers are not affected but producers bear the full burden/incidence) [1]. OR
$\frac{\% \text { of tax incidence on Consumers }}{\% \text { of tax incidence on producers }}=\frac{\text { PES }}{\text { PED }}[\mathbf{1}] .$

So, given PED, the more price inelastic supply is, the smaller the incidence on consumers and the greater on producers [1]. If PES is zero as it is here [1], then 100% of tax incidence (the full $10.00) will be paid by producers [1] (and 0% by consumers).

(i)

A music concert is to take place in Country Z. 40000 tickets are available for the concert. Figure 3 shows the demand ( D ) for tickets at this concert.

Figure 3

Draw and label the marginal revenue (MR) curve for the concert on Figure 3.

[ 1 ]

(j)

Calculate the maximum revenue that could be earned from selling tickets for the concert.

The fixed costs for the concert have been calculated as $\$ 3$ million, while it is expected that there will be no variable costs.

[ 2 ]

$150 \times 30000$

Any valid working is sufficient for [1].
= $4500000

An answer of $4 500 000, 4500 000, $4.5 million or 4.5 million without any working is sufficient for [1].

Marking guidance:

OFR applies from part (i), depending on where the MR curve cuts the x axis.

(k)

Assuming the event organizers aim to maximize profit, calculate the profit that will be made from the concert.

[ 3 ]

Marking guidance:

Award [1] if the candidate identifies that profit will be maximized where:
MC=MR
OR
MC=0
OR
TR - TC is maximized
ie at 30000 tickets and a price of $\$ 150$ .
$\mathrm{TR}=30000 \times \$ 150=\$ 4.5$ million
TC = $3 million

Profit = 4.5 million -3 million
Any valid working is sufficient for [1].
= $1.5 million
An answer of $1.5 million or 1.5 million or 1500000 without any working is sufficient for [1].

OFR applies, provided either TR or TC is calculated correctly.

[Maximum number: 23]

The market for corn on the island of Nissos is perfectly competitive. The demand and supply for corn in Nissos are given by the functions

\begin{aligned} & Q d=10-0.5 P \\ & Q s=-2+P \end{aligned}

where Q d is the quantity of corn demanded per month in millions of kilograms ( kg ), Q s is the quantity of corn supplied per month in millions of kg and P is the price per kg of corn in dollars ($).

(a)

State two characteristics of a perfectly competitive market.

[ 2 ]

(b)

Using a fully labelled diagram, outline the relationship between marginal product (MP) and average product (AP) of labour.

Figure for Question (b) — IB Economics HL

[ 4 ]

Level	Descriptor	Marks
0	The work does not meet a standard described by the descriptors below.	0
1	The written response is limited. For a fully labelled diagram showing an MP curve that peaks earlier and higher and that intersects AP at its maximum. OR For outlining that MP will fall (due to diminishing returns) [1] and will intersect AP at its maximum, because if MP>AP, AP will rise, and if MP<AP, AP will fall [1].	1-2
2	The written response is accurate. For a fully labelled diagram showing an MP curve that peaks earlier and higher and which intersects AP at its maximum. AND For outlining that MP will fall (due to diminishing returns) [1] and will intersect AP at its maximum, because if MP>AP, AP will rise, and if MP<AP, AP will fall [1].	3-4

(c)

Determine the slope of the market supply function for the corn farmers in Nissos.

[ 1 ]

(d)

Calculate the monthly equilibrium quantity of corn in Nissos.

[ 2 ]

(e)

Plot and label on Figure 1 the market demand curve and the market supply curve for corn in Nissos.

Figure 1

[ 2 ]

Level	Descriptor	Marks
0	The work does not meet a standard described by the descriptors below.	0
1	The response is limited. For an accurate, labelled demand curve OR supply curve OR for accurate demand and supply curves with incomplete labelling.	1
2	The response is accurate. For an accurate, labelled demand curve AND supply curve.	2

(f)

Draw and label the marginal revenue (M R) curve for corn for an individual farmer in Nissos on the grid below.

Figure for Question (f) — IB Economics HL

[ 1 ]

Horizontal line at $\$ 8.00$ with MR label on Figure 1 is sufficient for [1].

Figure for Answer to Question (f) — IB Economics HL

(g)

Using Figure 1, calculate the consumer surplus in Nissos at the market equilibrium.

[ 1 ]

$\frac{1}{2} \times 6(20-8)$

No workings are required.
$36 million is sufficient for [1].

Marking guidance:

OFR applies.

(h)

Advisors to the government of Nissos suggest setting a price floor.

[ 6 ]

(i)

Explain one possible advantage and one possible disadvantage of governments setting a price floor in agricultural markets.

[ 4 ]

(ii)

Draw and label on Figure 1 a curve that illustrates the price floor in Nissos that leads to a monthly surplus of 3 million kg of corn.

The monthly corn surplus created must be purchased by the government of Nissos.

[ 2 ]

(i)

State one measure that the government of Nissos might take to deal with this corn surplus, following the imposition of the price floor.

[ 1 ]

(j)

Using Figure 1, determine the size of the decrease in monthly corn consumption following the imposition of the price floor.

[ 1 ]

(k)

Using Figure 1, calculate the change in consumer expenditure on corn in Nissos.

[ 2 ]

$8 \times 6=\$ 48$ million
$10 \times 5=\$ 50$ million
Any valid working is sufficient for [1].

Change $=\$ 2$ million OR an increase of $\$ 2$ million.
An answer of 2 or 2 million or $\$ 2$ million without working is sufficient for [1].

Marking guidance:

OFR applies.
For full marks to be awarded the response must provide valid working and include correct units.

[Maximum number: 25]

(a)

Explain why products may have different income elasticities of demand.

[ 10 ]

Answers may include:
- Terminology: income elasticity of demand (YED)
- Explanation: that a positive YED is where an increase in income leads to an increase in demand/a decrease in income leads to a decrease in demand and that this is associated with normal goods;
that a negative YED is where an increase in income leads to a decrease in demand/a decrease in income leads to an increase in demand and that is associated with inferior goods;
that some goods may have a high income elasticity of demand (ie income elastic) and some may have a low income elasticity of demand (ie income inelastic).
- Diagram: demand and supply diagram showing relevant shifts of demand, Engel curve.

A maximum of [6] should be awarded if only one aspect of the question is addressed.

Assessment Criteria

Marks ..... Level descriptor
0:
- The work does not reach a standard described by the descriptors below.
1-2:
- The response indicates little understanding of the specific demands of the question.
- Economic theory is stated but it is not relevant.
- Economic terms are stated but they are not relevant.
3-4:
- The response indicates some understanding of the specific demands of the question.
- Relevant economic theory is described.
- Some relevant economic terms are included.
5-6:
- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.
- Relevant economic theory is partly explained.
- Some relevant economic terms are used appropriately.
- Where appropriate, relevant diagram(s) are included.
7-8:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is explained.
- Relevant economic terms are used mostly appropriately.
- Where appropriate, relevant diagram(s) are included and explained.
9-10:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is fully explained.
- Relevant economic terms are used appropriately throughout the response.
- Where appropriate, relevant diagram(s) are included and fully explained.

(b)

Using real-world examples, discuss the assumption that consumers always seek to maximize their utility.

[ 15 ]

Answers may include:
- Terminology: utility.
- Explanation: of the assumption in terms of consumer rationality, perfect information and the maximization of total utility.
- Diagram: not needed for this question.
- Synthesis (discuss): a challenge to the assumption in terms of the limitations to rational consumer choice such as imperfect information, bounded rationality, bounded selfishness, biases - rule of thumb, anchoring and framing, availability;
consideration of the word "always".
- Examples: real-world examples of consumers acting rationally or where there are limitations to their ability to do so.
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

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

Assessment Criteria

Marks ..... Level descriptor
0:
- The work does not reach a standard described by the descriptors below.
1-3:
- The response indicates little understanding of the specific demands of the question.
- Economic theory is stated but it is not relevant.
- Economic terms are stated but they are not relevant.
- The response contains no evidence of synthesis or evaluation.
- A real-world example(s) is identified but it is irrelevant.
4-6:
- The response indicates some understanding of the specific demands of the question.
- Relevant economic theory is described.
- Some relevant economic terms are included.
- The response contains evidence of superficial synthesis or evaluation.
- A relevant real-world example(s) is identified.
7-9:
- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.
- Relevant economic theory is partly explained.
- Some relevant economic terms are used appropriately.
- Where appropriate, relevant diagram(s) are included.
- The response contains evidence of appropriate synthesis or evaluation but lacks balance.
- A relevant real-world example(s) is identified and partly developed in the context of the question.
10-12:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is explained.
- Relevant economic terms are used mostly appropriately.
- Where appropriate, relevant diagram(s) are included and explained.
- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.
- A relevant real-world example(s) is identified and developed in the context of the question.
13-15:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is fully explained.
- Relevant economic terms are used appropriately throughout the response.
- Where appropriate, relevant diagram(s) are included and fully explained.
- The response contains evidence of effective and balanced synthesis or evaluation.
- A relevant real-world example(s) is identified and fully developed to support the argument.

All question bank results loaded

Covered syllabus points

Question 1

Question (a)

Question (b)

Question (c)

Question 2

Question (a)

Question (b)

Question (c)

Question (d)

Question (e)

Question (f)

Question (g)

Question (h)

Question (i)

Question (j)

Question (k)

Question 3

Question (a)

Question (b)

Question (c)

Question (d)

Question (e)

Question (f)

Question (g)

Question (h)

Question (i)

Question (ii)

Question (i)

Question (j)

Question (k)

Question 4

Question (a)

Question (b)