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Market Failure — Market Power · Paper 1 — Free Economics HL Practice Questions
1FoundationSAQ-SPrice setting and efficiency loss4 marksPaper 1~6 min
In the town of Millbrook, a single firm, AquaPure, supplies all bottled water. AquaPure's profit-maximising quantity is 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 bottles per week.
(a)
State the term that describes the loss of total surplus when a monopoly restricts output below the socially efficient level. [1 mark]
(b)
Using the data provided, explain why AquaPure's profit-maximising behaviour results in a loss of allocative efficiency. [3 marks]
Solutions
2FoundationSAQ-SPrice setting and efficiency loss6 marksPaper 1~9 min
'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.
(a)
State the pricing strategy used by SwiftRail. [1 mark]
(b)
Using the concept of deadweight loss, explain how SwiftRail's pricing strategy affects allocative efficiency compared to a single monopoly price. [2 marks]
(c)
Evaluate whether SwiftRail's pricing strategy produces a net improvement in social welfare. [3 marks]
Solutions
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