Microeconomics — Free Economics HL Practice Questions

In the market for pre-owned cars in Country X, sellers know the true condition of their vehicle, while buyers cannot distinguish between high-quality ("peaches") and low-quality ("lemons") cars. The average buyer is only willing to pay USD 6000 for a car of unknown quality. A government inspection scheme is introduced requiring all cars to pass a certified mechanical test before sale, costing USD 500 per car. Sellers of "peaches" welcome the scheme; sellers of "lemons" exit the market.

A farmer in Country X adopts a new automated irrigation system that reduces water usage by $30\%$ and permanently lowers production costs. The government also introduces a subsidy on fertilizers, reducing their price by $20\%$.

Coffee beans are a key input in the production of roasted coffee. In 2024, a severe drought in Brazil destroyed a significant portion of the coffee bean harvest. At the same time, a new automated roasting technology was introduced that reduces the energy costs of coffee roasting by $20\%$.

In the town of Millbrook, a single firm, AquaPure, supplies all bottled water. AquaPure's profit-maximising quantity is $8{,}000$ bottles per week, at a price of USD 3 per bottle. The marginal cost of producing each bottle is constant at USD 1. The socially efficient quantity is $12{,}000$ bottles per week.

'SwiftRail' is a train company operating a natural monopoly on a single route. It charges business travellers USD 120 per ticket and leisure travellers USD 60 per ticket for the same journey. The marginal cost per passenger is constant at USD 40.

Country X has a Gini coefficient of $0.58$, while Country Y has a Gini coefficient of $0.32$.

In a low-income country, the market for basic food staples such as rice is highly competitive. Despite this, many low-income households cannot afford sufficient rice to meet their nutritional needs, resulting in widespread malnutrition.

The government of Kenya introduces a specific tax of $\text{KSh}\,50$ per kilogram on imported sugar to protect domestic sugar producers.

The government of Ghana is considering a per-unit subsidy on the production of malaria vaccines to increase vaccination rates. Currently, the market is at equilibrium with a price of $50$ cedis per dose and $10{,}000$ doses sold per month. The subsidy reduces the price paid by consumers to $40$ cedis per dose, while producers receive $60$ cedis per dose. As a result, the quantity traded rises to $12{,}000$ doses per month.

A rice farmer in Vietnam receives a government subsidy of $2000$ dong per kilogram of rice produced.

A local government introduces a subsidy for electric bicycle manufacturers, reducing their production costs. The market for electric bicycles was initially in equilibrium.

The market for ride-sharing services in Mumbai is initially in equilibrium at a price of $15$ rupees per kilometre, with $500{,}000$ kilometres demanded and supplied per day. The Mumbai city government imposes a specific tax of $5$ rupees per kilometre on ride-sharing companies. The price elasticity of demand for ride-sharing in Mumbai is relatively inelastic, while supply is relatively elastic.

The equilibrium price for cinema tickets in a city is USD 12 and the equilibrium quantity is 8000 tickets per week. During a prolonged heatwave, many consumers choose to stay indoors and stream movies at home instead of visiting cinemas.

A local cinema sells tickets at USD 10 each and currently sells 2,000 tickets per week. After increasing the price to USD 12, weekly ticket sales fall to 1,400.

In Mumbai, India, the local government is considering a fare increase on the suburban railway network, the primary mode of transport for millions of commuters. The estimated price elasticity of demand (PED) for suburban rail travel is $-0.15$. A competing ride-sharing service, CityCabs, has a PED of $-2.5$ for its services in the same area. (a) Explain why the government could increase total revenue by raising suburban railway fares, while CityCabs could not increase its total revenue by raising its fares. [4]

A farmer sells wheat to a large bread-making company. When the market price of wheat falls from USD 200 per tonne to USD 180 per tonne, the quantity of wheat demanded by the company increases from 500 tonnes to 520 tonnes.

In the market for electric vehicles (EVs), the government introduces a subsidy for EV manufacturers, reducing their production costs. Simultaneously, consumers' incomes rise.

A scientific report, widely covered in national media, concludes that regular consumption of mackerel significantly reduces cardiovascular disease risk. At the same time, an unusually severe summer heatwave leads consumers in a coastal town in Japan to shift their meal preferences toward lighter foods.

A local coffee shop notices that when the price of tea increases by $10\%$, the quantity of coffee demanded increases by $5\%$. The price of coffee itself remains unchanged.

In Valoria, the government provides national defence through a professional army. Any resident is protected regardless of whether they pay taxes, and one person being protected does not reduce the protection available to others.

Radio broadcasts are a public good. In Country Z, a private radio station provides news and music. It costs USD 500,000 per year to operate. The station raises revenue only through voluntary listener donations, collecting USD 200,000 annually. The station cannot prevent non-donors from listening.

A farmer applies chemical pesticides to crops. The pesticides drift onto a neighbouring organic farm, reducing its crop yield and profits.

In rural Kenya, a farmer applies fertiliser to her maize crop. The fertiliser increases her yield, but a portion of the nutrients runs off into a nearby river, causing algal blooms that harm downstream fishing communities.

A factory located next to a river releases untreated wastewater, harming fish stocks and reducing water quality for downstream communities.

In the market for organic vegetables in a large city, consumers are assumed to maximise utility by choosing the cheapest option. A recent survey shows that $40\%$ of consumers buy organic vegetables from a premium grocer at prices $50\%$ higher than identical organic vegetables sold at a discount supermarket located 10 minutes further away. The discount supermarket has ample stock.

A furniture manufacturer uses two main inputs: wood (easily sourced from many local suppliers) and skilled carpenters (who are scarce and require months of training). Following a rise in the price of chairs, the firm wishes to increase its quantity supplied.

A government introduces a per-unit tax on the production of a good. Producers of this good have a price elasticity of supply (PES) of $0.4$ in the short run.

A smartphone factory currently operates at $70\%$ of its maximum production capacity. The market price of smartphones suddenly rises. The factory manager must decide how much to increase output.

In the market for pre-owned cars in Country X, sellers know the true condition of their vehicles, while buyers do not. The market contains $50\%$ high-quality cars ("plums") and $50\%$ low-quality cars ("lemons"). Plums are worth $\text{USD }20{,}000$ to sellers and $\text{USD }28{,}000$ to buyers. Lemons are worth $\text{USD }8{,}000$ to sellers and $\text{USD }12{,}000$ to buyers. Buyers, unable to distinguish between the two types, are willing to pay only the expected value of a randomly chosen car.

A health insurance market in Country Y has two types of customers: low-risk individuals, who have a $10\%$ probability of incurring USD 50,000 in medical costs per year, and high-risk individuals, who have a $90\%$ probability of incurring USD 50,000 in medical costs per year. The population is $50\%$ low-risk and $50\%$ high-risk. Insurance companies cannot distinguish between the two types and must offer a single pooled premium. The market is perfectly competitive, so firms earn zero economic profit.

The global market for lithium-ion batteries expanded rapidly alongside the growth of electric vehicles (EVs). In 2021, the price of lithium carbonate — a key input in battery production — rose from USD 6,000 per tonne to USD 17,000 per tonne. In 2022, new extraction technology reduced lithium extraction costs by $30\%$. Over the same period, the price of EVs fell by $15\%$, stimulating further EV production.

The following data refers to Vietnamese Robusta coffee production in 2023. Vietnamese coffee farmers faced a significant rise in the price of urea fertilizer, from USD 300 per tonne to USD 450 per tonne. Over the same period, the global price of Robusta coffee rose by 25 percent due to drought conditions in Brazil. Vietnam is the world's second-largest coffee producer. Some Vietnamese farmers began considering switching to pepper cultivation, which offered stable prices.

Extract: In 2023, the global market for semiconductor chips used in artificial intelligence (AI) processing was dominated by a single firm, TechChip Inc., which held $78\%$ of the market. The next largest competitor held only $8\%$. TechChip's chips were essential for training large AI models and no close substitutes existed. The average price of TechChip's flagship AI chip was USD 32,000, while the estimated marginal cost of production was USD 8,000. Despite rising demand from AI firms, TechChip had not significantly expanded production capacity. New entrants faced barriers including patents, high capital costs, and proprietary manufacturing processes.

The pharmaceutical company PharmaCorp holds the patent for a life-saving drug, CardioSave, used to treat a rare heart condition. The patent grants PharmaCorp exclusive production rights for 15 years. The annual course of treatment is priced at USD 120,000, while the marginal cost of production is USD 6,000. Demand is highly inelastic, as patients have no alternative treatments. In a neighbouring country, a generic manufacturer attempted to produce a cheaper version of CardioSave after the patent expired but faced years of legal challenges from PharmaCorp over minor patent extensions. The country's competition authority is considering imposing a price cap on CardioSave.

The government of Country X, a developing nation in Southeast Asia, has imposed a maximum price (price ceiling) on rice at USD 30 per kilogram. The previous equilibrium price was USD 45 per kilogram. The demand for rice is relatively price inelastic, while the supply of rice is relatively price elastic in the short run. The government's stated goal is to ensure affordable food for low-income households. Local farmers' associations claim the policy will reduce their income and cause a long-run shortage.

The government of Country Y, a high-income European nation, imposes a specific tax of USD 5 per unit on the production of sugary soft drinks. Before the tax, the equilibrium price was USD 10 per unit and equilibrium quantity was 100 million units per year. The demand for sugary soft drinks is relatively price elastic, as consumers can easily switch to diet drinks or water. The supply is relatively price inelastic in the short run due to fixed production capacity. The government intends to reduce consumption and use tax revenue to fund public health programmes.

In the country of Andoria, the market for hover-bikes is perfectly competitive. The demand for hover-bikes is represented by the equation $Q_d = 5000 - 2P$, and the supply of hover-bikes is represented by the equation $Q_s = -1000 + 4P$, where $Q_d$ is the quantity demanded per month, $Q_s$ is the quantity supplied per month, and $P$ is the price in USD.

In the nation of Gilead, the market for organic grain is perfectly competitive. The market is currently in equilibrium at a price of USD 50 per tonne and a quantity of $10{,}000$ tonnes traded per month. A recent scientific report has revealed that organic grain consumption significantly reduces the risk of heart disease. Simultaneously, a new farming technology has lowered the cost of producing organic grain.

A monthly subscription to the cloud-based video streaming service StreamFlix increased in price from USD 10 to USD 12 in 2024. Following this increase, the number of subscribers fell from 5 million to 4.5 million. The streaming market is highly competitive, with several close substitutes available, including CineHub and PrimeTube.

In the country of Andoria, the government is considering imposing a per-unit tax on two goods: insulin, a life-saving medication for diabetics, and tickets to luxury cruise holidays. Market data shows that a $10\%$ increase in the price of insulin leads to a $2\%$ decrease in quantity demanded, while a $10\%$ increase in the price of luxury cruise tickets leads to a $15\%$ decrease in quantity demanded.

In 2022, average monthly household income in Vietnam rose from VND 5.5 million to VND 6.5 million, driven by strong economic growth. Over the same period, the demand for premium coffee (a normal good) increased by $18\%$, while the demand for instant coffee (an inferior good) fell by $12\%$. The price of premium coffee remained stable at VND 80,000 per kilogram throughout this period.

The government of Kenya introduced a tax on sugar-sweetened beverages in 2023 to address rising obesity rates and healthcare costs. Following the tax, the price of a typical soft drink rose from $\text{KES}\,120$ to $\text{KES}\,150$ per litre. Monthly quantity demanded fell from $10$ million litres to $7$ million litres. Sales of bottled water, a close substitute, rose by $25\%$.

A coastal country, Country Z, faces recurring storm surges. The government is considering two options for flood protection: - Option A: Construct a network of sea walls at a cost of USD 200 million. Once built, no resident within the protected area can be excluded from the reduced flood risk, and one resident's protection does not reduce the protection available to any other resident. - Option B: Offer subsidised flood insurance to individual households. Households must apply and pay a reduced premium; those who do not apply receive no coverage.

Coastal City A is a popular tourist destination with a historic lighthouse that has operated for over 150 years. The lighthouse beam warns ships of dangerous rocks and is visible to all vessels within a $30\,\text{km}$ radius. The city council has proposed charging USD 15 person to climb the lighthouse as a tourist attraction. Local shipping companies argue that the lighthouse's navigational function is a public good and must remain freely available. The council states that without tourism revenue it cannot meet the USD 200,000 annual maintenance cost.

The government of Vietnam is considering a subsidy for rice farmers in the Mekong Delta to adopt a new method of growing rice that reduces methane emissions by $40\%$ compared to traditional flooding methods. Methane is a potent greenhouse gas contributing to climate change. The current market price of rice is $5000$ dong per kilogram. The social cost of methane emissions from traditional methods is estimated at $2000$ dong per kilogram of rice produced. The new growing method costs farmers an additional $1500$ dong per kilogram to implement.

The National Health Service (NHS) in the United Kingdom provides free influenza vaccinations to all residents over 65 years of age and to clinically vulnerable groups. The current vaccination rate among these target groups is $72\%$. Epidemiologists estimate that a vaccination rate of $85\%$ across the entire adult population would achieve herd immunity, significantly reducing flu transmission and hospitalisations for all residents, including those not vaccinated. The NHS pays GBP 20 per vaccination. The estimated social benefit per vaccinated person — measured in reduced healthcare costs and lost productivity avoided — is GBP 50. The total adult population of the United Kingdom is 50 million people.

In 2023, the government of the fictional country of Valdoria introduced a tax on sugar-sweetened beverages (SSBs) to reduce their consumption. The tax increased the price of a typical SSB from USD 2.50 to USD 3.50. Following the tax, the quantity demanded of SSBs fell by $25\%$. An economist working for the Valdorian government, Dr. Elara Singh, argued that the policy's success depends on consumers behaving rationally. She stated: "Rational consumers will reallocate their spending from SSBs to healthier alternatives to maximise their utility, given their new budget constraints." However, a consumer rights group responded that many SSB consumers are addicted to sugar or influenced by advertising, and therefore do not behave as the rational model predicts. Definitions for reference: - Utility: the satisfaction a consumer receives from consuming a good or service. - Budget constraint: the limit on consumption bundles a consumer can afford, given income and prices. - Rational behaviour: consumers maximise total utility subject to their budget constraint, equating marginal utility per dollar across all goods.

In 2022, the government of India required all large ride-hailing companies (such as Ola and Uber) to display a surge pricing multiplier prominently on the app screen before a journey is confirmed. The policy was designed to give consumers better information about price changes during periods of high demand. Despite this, data from Mumbai showed that demand for rides during peak rain hours remained almost unchanged after the policy was introduced. Many consumers reported feeling unable to find an alternative mode of transport late at night. A consumer advocacy group argued that the policy failed because consumers are not always rational utility-maximisers.

The global supply of semiconductors (microchips) is dominated by a few large firms, such as TSMC (Taiwan) and Samsung (South Korea). In 2021, a surge in demand for electronics during the COVID-19 pandemic led to a global semiconductor shortage. Manufacturers struggled to increase output quickly because building new fabrication plants ("fabs") requires 2–3 years and costs over USD 10 billion. In contrast, the supply of freshly harvested coffee beans is more responsive to price changes in the short term, as farmers can allocate more land or labour within a single growing season.

The global market for semiconductors experienced severe supply chain disruptions between 2020 and 2023. A sudden surge in demand for consumer electronics coincided with factory shutdowns in key producing countries. Consider two markets within the semiconductor industry: - Market A — Standard memory chips (DRAM): produced using highly automated, standardised processes that can be scaled up or down relatively quickly; spare production capacity exists in several countries. - Market B — Advanced logic chips (3-nanometer processors): require extremely specialised fabrication plants (fabs) that take 3–5 years to build and operate near maximum capacity 24/7. In 2022, the price of standard memory chips rose by $40\%$ and the quantity supplied increased by $60\%$. For advanced logic chips, the price rose by $50\%$ but the quantity supplied increased by only $5\%$.

In the market for pre-owned luxury cars in a European city, sellers know the exact condition of their vehicles, but buyers cannot distinguish between high-quality cars ("plums") and low-quality cars ("lemons") before purchase. The market initially contains 1000 cars: 400 plums and 600 lemons. Buyers are risk-neutral. Buyer's maximum willingness to pay — USD 50,000 — USD 20,000 Seller's minimum acceptable price — USD 40,000 — USD 15,000

The global market for lithium carbonate, a key input in electric vehicle (EV) batteries, experienced significant changes in 2023. The price of lithium carbonate fell from USD 60 000 per tonne in January to USD 40 000 per tonne in December. Over the same period, the quantity of EVs supplied to the global market increased by $15\%$, while the price of EVs fell by $8\%$. A major lithium producer, Albemarle Corp, reduced its mining output by $10\%$ citing lower profitability. Tesla reported a $20\%$ improvement in battery production efficiency due to new automation technology.

A pharmaceutical firm, MedCorp, holds a patent for a life-saving drug, CardioVive, used to treat a rare heart condition. In 2023, MedCorp sold $200{,}000$ units of CardioVive at a price of USD 5000 per unit. The marginal cost of producing each unit is constant at USD 500. $$\text{Lerner Index} = \frac{P - MC}{P} \qquad \text{In monopoly: Lerner Index} = \frac{-1}{PED}$$