Five practice questions are below. Answer on the page: each one is marked the moment you pick, the correct option is shown whether or not you found it, and the full explanation opens either way.
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Competitive Market Equilibrium: five questions to try now
Real questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 1
The diagram shows the short-run equilibrium for a firm operating in a monopolistically competitive market. What is not likely to occur at the long-run equilibrium?
Answer: C.
In monopolistic competition entry and exit are free, so short-run supernormal profit attracts new firms and keeps attracting them until that profit has gone. Long-run equilibrium is therefore the position where price equals average cost exactly, leaving normal profit only, which is why price being greater than average cost is the one thing that will no longer be true. The other three all describe the long-run position correctly. Each existing firm's demand curve moves left, because the entrants take a share of the market and fewer customers are left for each firm at any given price. It also becomes more elastic, since consumers now have more close substitutes to switch to if one firm raises its price. Price still exceeds marginal cost, because the demand curve slopes downwards, so marginal revenue lies below price and the profit maximising output leaves a gap between the two. That surviving gap is why monopolistic competition remains allocatively inefficient even once profits are only normal.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 2
The diagram shows a competitive market in equilibrium with price P and quantity Q sold. Which area represents the producer surplus?
Answer: A.
Producer surplus is what producers receive minus the minimum they would have accepted, total revenue minus the area beneath the supply curve. Revenue is price times quantity, the rectangle OPWQ, and the area under the supply curve up to Q is OUWQ. Subtracting one from the other leaves the surplus. The options built from OVWQ measure areas under the DEMAND curve, which give consumer surplus rather than producer surplus.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 3
The table shows a competitive market in equilibrium in two periods. market price period quantity traded (cents) 1 50 10000 2 60 12000 What could explain the change from period 1 to period 2?
Answer: B.
Price AND quantity both rose, which only a rightward shift of DEMAND can produce, a supply shift moves them in opposite directions. A dearer substitute pushes buyers towards this good, so demand rises. An indirect tax would shift supply left, raising price but cutting quantity, and a minimum price creates a surplus rather than a higher traded quantity.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 4
Why might the long-run equilibrium of a profit-maximising firm in a monopolistically competitive market differ from its short-run equilibrium?
Answer: B.
In the short run a monopolistically competitive firm can earn supernormal profit. Low barriers to entry are what make that temporary: new firms come in, each existing firm's demand falls, and profit is competed away to normal in the long run. Advertising and diminishing returns exist in both periods and so do not explain the difference.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 5
A firm in monopolistic competition is maximising profit and producing at the minimum point on its average total cost curve. What could not be correct?
Answer: C.
At the minimum of average total cost, MC equals AC, so A is fine, and B holds for any profit maximiser. Producing at minimum ATC is the LONG-RUN competitive outcome; but under monopolistic competition the long-run equilibrium has AR tangent to a falling AC, not at its lowest point, so the firm cannot be sitting at minimum ATC and earning only normal profit. Normal profit is the claim that cannot hold here.
These questions are drawn from past Cambridge papers, mapped across to this topic because the concept is the same. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
These are the errors that cost marks on competitive market equilibrium, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
Confusing a surplus or shortage (a disequilibrium at a given price) with a shift of a curve.
Shifting a curve to correct a shortage. Shortages are corrected by price changes and movements along the curves.
Forgetting to relabel the new equilibrium price and quantity on the diagram.
Ignoring the price mechanism's three functions when asked how resources are reallocated.
Claiming a determinate outcome when both curves shift.
In surplus calculations, using the wrong intercept, or the pre-shift quantity as the base.
Saying the market is "efficient" without explaining that total surplus is maximised where price equals marginal cost.
Treating allocative efficiency as though it also meant the outcome was fair.
