Microeconomics practice questions (IB Economics)

Sample questions

All 4 free IB Economics questions on this unit, from the free IB Economics Practice Exam, the free IB Economics Paper 1 Practice Exam and the free IB Economics Paper 2 Practice Questions (Data Response) with Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 120 marks · Indirect taxes & price elasticity of demand (micro)
   Study the following extract and answer the questions that follow. — "Meloria's sugar tax divides opinion." The government of Meloria has introduced an indirect tax of 0.40 dollars per litre on sugary drinks, citing an adult obesity rate that has climbed to 31 percent. In the first year of the tax, the average retail price of sugary drinks rose by 10 percent while the volume of sales fell by 4 percent. The finance ministry expects the tax to raise about 120 million dollars per year, which it says will be earmarked for school nutrition programmes. Drinks manufacturers argue that the tax is regressive and note that many consumers are simply switching to untaxed fruit juices and flavoured milks, some of which contain just as much sugar.
   (a)

   Define the following terms from the text: (i) indirect tax; (ii) regressive (tax).

   [4]
   (b)

   Using figures from the text, calculate the price elasticity of demand for sugary drinks in Meloria. Show your working and comment on your result.

   [3]
   (c)

   Using a demand and supply diagram, explain how the tax of 0.40 dollars per litre affects the market for sugary drinks in Meloria.

   [4]
   (d)

   Using information from the text and your knowledge of economics, evaluate the effectiveness of the tax on sugary drinks in reducing obesity in Meloria.

   [9]
   Show answerFrom the free IB Economics Practice Exam →
2. Question 212 marks · Linear demand & supply, indirect tax (HL Paper 3)
   (HL) In the country of Astria, the weekly market for bottled energy drinks is described by the following linear functions, where $P$ is the price in dollars per bottle and $Q$ is the quantity in thousands of bottles per week.
   $Q_d = 60 - 4P, \qquad Q_s = -12 + 8P$
   (a)

   Calculate the equilibrium price and equilibrium quantity. Show your working.

   [2]
   (b)

   Calculate consumer surplus and producer surplus at this equilibrium.

   [2]
   (c)

   The government imposes an indirect (specific) tax of 1.50 dollars per bottle on producers. Calculate the new equilibrium quantity, the price paid by consumers, and the price received by producers.

   [2]
   (d)

   Calculate the government revenue from the tax.

   [1]
   (e)

   Calculate the welfare (deadweight) loss resulting from the tax.

   [2]
   (f)

   The government's stated aim is to reduce the consumption of energy drinks among teenagers. Using your results from parts (a) to (e), recommend a policy, other than raising the tax further, that the government could use to achieve this aim.

   [3]
   Show answerFrom the free IB Economics Practice Exam →
3. Question 325 marks · Indirect taxes, price elasticity of demand, market failure
   Question 1 — Microeconomics: indirect taxes and elasticity.
   (a)

   Explain how the price elasticity of demand for a good determines the effect of an indirect tax on the market for that good.

   [10]
   (b)

   Using real-world examples, evaluate the view that indirect taxes are the most effective way for a government to reduce the consumption of demerit goods.

   [15]
   Show answerFrom the free IB Economics Paper 1 Practice Exam →
4. Question 429 marks · Minimum price, excess supply, allocative efficiency (micro)
   Study the following extract and answer the questions that follow. — "Kessandria's maize price guarantee." Kessandria is a lower-middle-income country in which about 60 percent of the workforce farms, most of them smallholders growing maize. Last year the government introduced a minimum price of 300 kesh per tonne for maize, 25 percent above the previous market price of 240 kesh, and promised to buy any maize that farmers could not sell. At the minimum price farmers supplied 5.2 million tonnes, but millers and households bought only 4.4 million tonnes; the state grain agency purchased the resulting excess supply of 0.8 million tonnes and now holds it in storage, planning to sell some of it abroad at 200 kesh per tonne. Maize flour accounts for 18 percent of the spending of the poorest fifth of households. Large commercial farms, which grow 45 percent of the crop, have expanded their planting, and fertiliser imports have risen. The finance ministry warns that the programme already costs as much as the primary health budget.
   (a)

   Define the following terms from the text: (i) minimum price [2]; (ii) excess supply [2].

   [4]
   (b)

   Using a demand and supply diagram, explain the effect of the minimum price on the market for maize in Kessandria.

   [4]
   (c)

   Using information from the text, calculate the cost to the government of purchasing the excess supply of maize.

   [2]
   (d)

   Explain how the minimum price affects (i) consumers of maize flour in Kessandria and (ii) the efficiency of resource allocation in the maize market.

   [4]
   (e)

   Using information from the text and your knowledge of economics, evaluate the view that the minimum price is an effective way of raising the incomes of Kessandria's smallholder farmers.

   [15]
   Show answerFrom the free IB Economics Paper 2 Practice Questions (Data Response) with Answers →

Key terms

The definitions and formulas IB Economics expects for microeconomics, typeset as they appear on the paper.

Price elasticity of demand (PED)

The responsiveness of quantity demanded to a change in price. Demand is price elastic when the absolute value exceeds 1 and inelastic when it is below 1; necessities, goods with few substitutes and short time horizons make demand less elastic.

$$PED = \frac{\%\Delta Q_d}{\%\Delta P}$$

Indirect tax and its incidence

A tax on spending, specific (per unit) or ad valorem (a percentage), that shifts supply up by the tax. The burden splits between consumers and producers according to relative elasticities: the less elastic side pays more of it.

Externality

A cost or benefit of production or consumption that falls on third parties. With a negative externality of production, marginal social cost exceeds marginal private cost and the market over-allocates resources, creating a welfare loss.

$$MSC = MPC + \text{external cost}$$

Consumer and producer surplus

Consumer surplus is the area under the demand curve and above the price; producer surplus is the area above the supply curve and below the price. Allocative efficiency, where marginal social benefit equals marginal social cost, maximises their sum.

Price ceiling and price floor

A maximum price set below equilibrium creates a shortage (excess demand); a minimum price set above equilibrium creates a surplus (excess supply), which the government may have to buy. Both move the market away from allocative efficiency.

Linear demand and supply functions (HL)

Demand and supply written as straight lines. Equilibrium is found by setting them equal; a specific tax of $t$ per unit replaces $P$ with $(P - t)$ in the supply function.

$$Q_d = a - bP, \qquad Q_s = c + dP$$

Behavioural economics (HL)

The critique of the rational consumer: bounded rationality, anchoring, framing and default bias mean people do not always maximise utility, which is why nudges (choice architecture) are a policy option alongside taxes and regulation.

Frequently asked questions

Other IB Economics topics

• Introduction to economics
• Macroeconomics
• The global economy

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