Question 21M.3.HL.TZ0.3b
| Date | May 2021 | Marks available | [Maximum mark: 4] | Reference code | 21M.3.HL.TZ0.3b |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Explain | Question number | b | 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.
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.
