Question 22N.3.HL.TZ0.a.iv
| Date | November 2022 | Marks available | [Maximum mark: 4] | Reference code | 22N.3.HL.TZ0.a.iv |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Explain | Question number | a.iv | Adapted from | N/A |
“Best Meals” is one of many small catering companies, each of which prepares a variety of different meals for airlines in Country X. Table 1 shows the costs of production in US dollars (US$) on a per hour basis for “Best Meals”.
Table 1
The catering companies buy tomatoes from the domestic market to prepare their meals. Figure 1 illustrates the domestic market for tomatoes, which is perfectly competitive. S is supply and D is demand.
Figure 1
In order to support the incomes of the tomato farmers, the government of Country X has set a price floor (Pmin) at US$2.80 per kilogram.
With reference to Figure 1, explain how the price floor will impact on allocative efficiency in the market for tomatoes.
[4]
A valid alternative approach is to calculate the welfare loss resulting from the price floor
Change in CS = 5600
Change in PS = 0.5 0.4 (16 + 20) = 7200 [1]
Change in G = 2.8 8 = 22 400 [1]
Net welfare loss = 5600 + 7200 22 400 = $20 800 [1]
Any valid working is sufficient for [1]
OFR applies if the change in CS, PS or G is incorrect, but the calculation of net welfare loss is accurate.
Therefore the market is not allocatively efficient [1]
The majority of candidates explained that a price floor would result in a surplus, thus creating allocative inefficiency. However, they did not explain the concept of allocative efficiency effectively by showing that for the last unit, price would be greater than MC, meaning that allocative efficiency would no longer be achieved. An alternative approach involving the calculation of changes in consumer surplus, producer surplus and government spending and revealing a loss in net welfare was accepted.
