Question 21M.3.HL.TZ0.3
| Date | May 2021 | Marks available | [Maximum mark: 25] | Reference code | 21M.3.HL.TZ0.3 |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Calculate, Explain, Identify, Outline, Sketch, State | Question number | 3 | Adapted from | N/A |
Note that a widget is an imaginary product.
In the country of Laurania, the widget industry operates as an oligopoly. The Minister for Finance is worried that the firms in the industry might abuse their power by acting together as a monopoly, and has said that the industry’s concentration ratio is cause for concern.
Outline how a concentration ratio might be used to identify an oligopoly.
[2]
The majority of candidates demonstrated an understanding that a concentration measures market power, but many did not specify that a higher ratio signified greater market power.
Using a diagram to support your answer, explain how monopoly power can create a welfare loss.
[4]
NB The AC curve is not required. If it is included do not penalize any associated errors.
Most candidates were able to draw a diagram depicting monopoly equilibrium with welfare loss indicated. Stronger responses explained clearly that P>MC at the profit-maximizing level of output, resulting in market failure/welfare loss. Lower-achieving responses described the diagram without reference to the idea of allocative efficiency not being achieved.
State two government responses to the abuse of monopoly power.
[2]
Award [1] for each valid government response stated.
Answers may include:
- legislation to prevent collusion between firms
- legislation to prevent mergers deemed to be anti-competitive
- legislation to break up monopolies deemed to be undesirable
- legislation to reduce barriers to entry
- anti-monopoly/antitrust legislation, but not in addition to any of the above four
- trade liberalization measures to encourage competition from overseas
- price regulation
- nationalization/state-ownership
- fines/sanctions against firms
- any other reasonable response.
NB Deregulation should not be accepted unless its nature is indicated (as deregulation could also increase monopoly power).
Well-answered. A small proportion of candidates listed "deregulation" as a response, although it could arguably either increase or reduce monopoly power.
It has been observed that the law of diminishing returns operates in the widget industry.
Outline the law of diminishing returns.
[2]
The majority of candidates were able to achieve 1 mark with reference to increasing inputs having, at some stage, a negative influence on output. However, many responses were not specific enough for level 2, neglecting to refer to the application of more variable factors to one or more fixed factor. It was also common for lower-achieving responses to refer to a decrease in output rather than a decrease in marginal product.
A firm operates under conditions of diminishing returns.
Sketch the marginal product (MP) and average product (AP) curves for this firm.
[2]
Award [1] for an accurate, labelled marginal product curve.
Award [1] for an accurate, labelled average product curve.
NB If the shape of each curve is correct, but the relationship between them is incorrect, then a maximum of [1] may be awarded.
Generally well-answered, with lower achieving responses sketching the two curves with an incorrect intersection.
Sketch the total product (TP) curve for this firm.
[1]
Award [1] for an accurate, labelled TP curve, starting at the origin.
Few candidates produced an accurate sketch which illustrated an increasing gradient and then a decreasing gradient, finally becoming negative so that total product decreased.
The demand curve faced by firms in the widget industry is downward sloping.
Sketch the marginal revenue (MR) curve for firms in the widget industry.
[1]
Award [1] for an accurate, labelled MR curve (MR must be downward-sloping but need not be linear and need not become negative).
This question was answered correctly by the vast majority of candidates.
Sketch the total revenue (TR) curve for firms in the widget industry.
[1]
Award [1] for an accurate, labelled TR curve (must start from the origin, with ever-decreasing gradient, but need not end at the horizontal axis).
Generally well-answered although a significant number of candidates sketched curves which did not start at the origin.
Figure 3 shows the marginal cost (MC) curve, the average variable cost (AVC) curve and the average total cost (ATC) curve for a firm in the widget industry.
Figure 3
Calculate the firm’s total variable costs if output is 20 000 widgets per month.
[1]
20 000 × 18 = $360 000
An answer of $360 000 or 360 000 or 360 (without working) is sufficient for [1].
Well-answered.
Identify the level of output at which the firm would achieve productive efficiency.
[1]
85 000 or 85 (allow 84 000 or 86 000)
Well-answered, although a number of candidates identified the level of output which would achieve production efficiency as 80 000 units Per month — selecting the minimum AVC instead of the minimum ATC.
Calculate the firm’s monthly total fixed costs if output equals 50 000 units per month.
[2]
At 50 000 units, AFC = 15.6 − 12 = 3.6
Any valid working is sufficient for [1].
FC = 3.6 × 50 000 = $180 000
An answer of $180 000 or 180 000 (without working) is sufficient for [1].
Generally well-answered. Some candidates neglected to multiply the fixed cost per unit ($3.6) by the quantity (50 000) but gave an answer of $3.60.
One firm in the widget industry uses the practice of price discrimination, charging a lower price to one group of consumers than to another group, even though there is no difference in the cost of supplying to each group.
State two conditions necessary for price discrimination to take place.
[2]
Award [1] for each valid condition stated.
Conditions may include:
- the firm must possess some degree of market power
- there must be groups of consumers with differing price elasticities of demand for the product
- the firm must be able to prevent resale of the product from one market segment to others / separate the groups.
NB A statement that markets are differentiated/divided is not sufficient for [1].
Generally very well-answered.
Using a diagram (or diagrams), explain why a profit maximizing firm might charge a higher price in one market than in another.
[4]
NB Alternative presentations may include: back to back (mirror) or an additional third diagram indicating the sum of the revenue curves.
Higher-achieving candidates were able to draw an appropriate diagram and show that profit maximization in each market would result in a higher price in the market where demand was less elastic and a lower price in the market where demand was more elastic. However, it was evident that many candidates did not understand this concept. It was common for candidates to draw two diagrams, one a perfectly competitive market and the other a monopoly market, to try and explain price discrimination. Others drew two market diagrams with different equilibrium prices.