Economics

Higher level
Practice
Paper 3

Instructions to candidates
• You are permitted access to a calculator for this paper.
• Answer ALL questions in the boxes provided.
• Unless otherwise stated in the question, all numerical answers must be given exactly or correct
to two decimal places.
• You must show all your working.
• The maximum mark for this examination paper is [25 marks].

14 pages

16EP01
 –6–

2. The following diagram illustrates the demand and cost conditions of a firm.

MC

20.00

18.00 F
Price ($ per unit)

AC

12.00
11.00
10.20

6.00

D, AR

0 17 20 23 26

MR

Quantity per period (thousands of units)

(a) Identify whether this firm is in perfect competition. You must give a reason for
your choice. [2]

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(This question continues on the following page)

16EP06
 –7–

(Question 2 continued)

(b) Identify the profit maximizing level of output for this firm. You must give a reason for
your choice. [2]

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(c) Calculate the total revenues and the total costs and the profits or losses for this firm
at the profit maximizing level of output. [3]

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(d) Identify the level of output this firm would choose if instead of profit it aimed at
maximizing revenues. You must give a reason for your choice. [2]

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(This question continues on the following page)

Turn over

16EP07
 –8–

(Question 2 continued)

(e) Explain the meaning of the term “allocative efficiency” and its implication for social
(community) surplus. [4]

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(f) Referring to the diagram on page 6, identify the level of output that should be produced
for allocative efficiency to be achieved. You must give a reason for your choice. [2]

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(g) Define the term productive efficiency. [2]

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(This question continues on the following page)

16EP08
 –9–

(Question 2 continued)

(h) Calculate the price elasticity of demand when the price decreases from $18.00 per unit
to $12.00 per unit. [2]

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(i) With reference to the firm’s revenues, comment on the price elasticity of demand at
point F of the demand curve in the diagram on page 6. [2]

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(j) Explain why a profit maximizing firm with monopoly power will never choose to operate
on the inelastic portion of its average revenue curve. [4]

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Turn over

16EP09