Market Power: 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 cost and revenue curves of a profit-maximising monopolist. What measures the total monopoly profit made by the firm?
Answer: D.
Profit is the gap between what a unit sells for and what it costs on average, multiplied by how many units are sold, so you need two readings off the diagram and then a multiplication. The monopolist produces where MC cuts MR, which fixes output at Q. Go straight up from Q to the AR curve to find the price the firm can charge, which is J, and stop on the way at the ATC curve to find the average cost, which is K. The gap JK is therefore the profit on each unit, and multiplying it by the OQ units actually sold gives total profit: JK × OQ. B stops one step early and gives profit per unit rather than the total. M is where MC meets MR, so JM is the gap between price and MARGINAL cost; that is a measure of market power, not of profit, because it says nothing about average cost. C makes the same mistake as A and then multiplies it out.
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
Two firms selling the same type of product find it more efficient to merge.
Which combination describes how the merged firm’s average costs of production and demand curve are expected to change?
Answer: B.
The correct answer is B: average costs fall and the demand curve becomes more inelastic.
Two consequences follow from the merger.
Average costs fall. The merged firm is larger, so it can exploit economies of scale, bulk purchasing, specialised management, spreading fixed costs and indivisible capital over more output. The question states the merger is "more efficient", which is the cost side of that.
Demand becomes more inelastic. The two firms sold the same type of product, so they were substitutes for each other. After merging, one of the closest substitutes has disappeared from the market: a consumer unhappy with the price can no longer switch to the rival. Fewer substitutes means demand responds less to price, so the demand curve becomes steeper, and the merged firm gains market power it can use to raise price.
Why the other options are wrong:
Two consequences follow from the merger.
Average costs fall. The merged firm is larger, so it can exploit economies of scale, bulk purchasing, specialised management, spreading fixed costs and indivisible capital over more output. The question states the merger is "more efficient", which is the cost side of that.
Demand becomes more inelastic. The two firms sold the same type of product, so they were substitutes for each other. After merging, one of the closest substitutes has disappeared from the market: a consumer unhappy with the price can no longer switch to the rival. Fewer substitutes means demand responds less to price, so the demand curve becomes steeper, and the merged firm gains market power it can use to raise price.
Why the other options are wrong:
- A gets costs right but claims demand becomes more elastic. Removing a substitute cannot make consumers more price-sensitive; this is the standard error in the question.
- C and D claim average costs rise. That contradicts "more efficient" and ignores economies of scale. (Diseconomies of scale are possible in a very large merged firm, but the question rules that out.)
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 market structure of an industry changed from being an oligopoly to monopolistic competition. What is most likely to have increased?
Answer: D.
Oligopoly and monopolistic competition differ above all in how many firms there are: a few in oligopoly, many in monopolistic competition. A move from the first to the second therefore means the number of firms has increased, and everything that follows from a market being concentrated moves the other way. The concentration ratio measures the share of output held by the largest few firms, so more firms sharing the market makes it fall rather than rise. Interdependence is the defining feature of oligopoly, where each firm must anticipate how rivals will react to its own price or output decision; once there are many firms, no single one is large enough for its actions to be noticed, so interdependence weakens. An individual firm's power over price falls for the same reason, because its demand curve becomes more elastic as more close substitutes appear. Some price-setting power survives, since the products are still differentiated, but less of it than before.
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
A construction firm estimates that the price elasticity of supply in building a nuclear power plant is +0.1.
What might explain this?
Answer: C.
The correct answer is C: the firm needs time to hire the highly skilled labour required.
A price elasticity of supply of +0.1 is very inelastic: a 10% price rise would raise quantity supplied by only 1%. Something must be preventing the firm from responding, and the scarcity of a specialised input is exactly such a constraint. Nuclear construction needs nuclear engineers, specialist welders and licensed inspectors, people who take years to train and cannot be recruited at short notice however attractive the price becomes.
Why the other options are wrong:
A price elasticity of supply of +0.1 is very inelastic: a 10% price rise would raise quantity supplied by only 1%. Something must be preventing the firm from responding, and the scarcity of a specialised input is exactly such a constraint. Nuclear construction needs nuclear engineers, specialist welders and licensed inspectors, people who take years to train and cannot be recruited at short notice however attractive the price becomes.
Why the other options are wrong:
- A, easily available land, would make supply more elastic by removing a constraint on expansion.
- B, competition from many other construction firms, concerns market structure. It affects the price the firm can charge, not its physical ability to increase output.
- D, a lack of close substitutes for nuclear power, is a determinant of price elasticity of demand. Few substitutes make demand inelastic, which is a statement about buyers, not about the firm's capacity to build.
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
Which explains why, in long-run equilibrium in monopolistic competition, firms make only normal profits?
Answer: D.
Long-run profit is decided by whether outsiders can join the industry, so the answer has to be about entry. Monopolistic competition has no barriers, so supernormal profit attracts newcomers, each existing firm's share of the market shrinks, its demand curve shifts left, and entry continues until only normal profit is left; where firms are making losses, exit runs the same process in reverse. Differentiated products explain why each firm faces a downward sloping demand curve and keeps some power over its own price, but that concerns the shape of the curve rather than its position, so on its own it cannot fix the level of profit. Decreasing returns to scale describe what happens to costs as a single firm expands, which is a property of the cost curve and can occur under any market structure. Consumer resistance is not a term in the model, and buyers refusing to pay high prices would simply produce lower prices rather than the precise erosion of profit to the normal level that the question describes.
What this practice covers
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.
What examiners see students get wrong here
These are the errors that cost marks on market power, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Drawing MR on top of the demand curve. For a straight-line demand curve, MR is twice as steep and lies below it.
- Reading the monopoly price off the MR curve. Find quantity where MR = MC, then read up to the demand curve for price.
- Confusing allocative with productive efficiency.
- Treating the whole loss of consumer surplus as deadweight loss, most of it is transferred, not destroyed.
- Condemning monopoly outright, ignoring economies of scale, dynamic efficiency and contestability.
- Recommending a price cap at MC for a natural monopoly without noting it causes losses.
- Assuming a single firm always has market power, regardless of entry conditions.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Market Power revision notes.