Exam Practice [28 marks]
1. 23M.3.HL.TZ0.1
Capsicum prices reach NZ$24 per kilogram
The price of capsicums, a common vegetable in New Zealand, reached an all-time high of
NZ$24 per kilogram (kg) in 2021. Vegetable prices in New Zealand rose 15 % in 2021, driven by
higher prices for cucumbers, lettuce, capsicums and broccoli.
A consumer prices analyst said “prices for many vegetables typically rise in winter. However, we
are seeing larger rises than usual for this time of the year and for a greater number of
vegetables.” It has been suggested that price increases are larger than usual because of the
market power of the supermarkets in New Zealand.
Figure 1 illustrates a decrease in supply in the market for capsicums in New Zealand.
Figure 1
High profits: New Zealand considers breaking up supermarket duopoly¹
New Zealand’s supermarket industry is dominated by two huge firms, Foodstuffs and
Woolworths. Together, their stores control about 85 % of the total market, giving them significant
market power.
A report by the New Zealand Commerce Commission has found that these supermarkets are
making huge profits and charging some of the highest prices in the OECD².
A government official said the government would “do whatever it takes to make sure New
Zealanders get a fair deal at the checkout”.
The major retailers appear to avoid competing strongly with each other, particularly on price.
Meanwhile, competitors wanting to enter the market or expand face significant barriers to entry,
including a lack of suitable sites for large scale stores.
The government has strict regulations limiting the sites that can be used for building
supermarkets. The big supermarkets have been buying the limited sites in order to prevent
competitors from entering the market.
It has been reported that the entry of a German retailer into the Australian supermarket industry,
which was also dominated by two firms, has increased competition, cut prices by around 13 %
and saved customers more than NZ$2 billion per year.
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¹ duopoly: a market dominated by two firms
² OECD: The Organisation for Economic Co-operation and Development
Figure 2 illustrates a market in which two firms act as a monopolist in the market for cheese by
colluding on the price they charge.
Figure 2
[Source: Taunton, E., Stuff Limited, 2021. Capsicums hit $24 a kilo as vegetables lead sharp rise in food prices [online]
Available at: https://www.stuff.co.nz/business/125735364/capsicums-hit-24-a-kilo-as-vegetables-lead-sharp-rise-in-food-prices [Accessed 15 March 2022] Source
adapted.
McClure, T., 2021. ‘Extraordinary profits’: New Zealand considers breaking up supermarket duopoly [online]
Available at: https://www.theguardian.com/world/2021/jul/29/extraordinary-profits-new-zealand-considers-breaking-up-supermarket-duopoly-woolworths-foodstuffs
[Accessed 15 March 2022] Source adapted. Copyright
Guardian News & Media Ltd 2023.
Ryan, P., 2019. ALDI’s attack on the supermarket duopoly has ‘helped strangle inflation’ [online] Available at:
https://www.abc.net.au/news/2019-05-02/aldi-breaks-supermarket-duopoly-kills-inflation/11073342 [Accessed
15 March 2022] Source adapted.]
(a.i)
Using the information in Figure 1, calculate the price elasticity of demand for capsicums when
the price increases from NZ$18 per kg to NZ$24 per kg.
[2]
Markscheme
Any valid working (correct %Δ Qd
or %Δ P, provided the formula is not inverted) is sufficient for [1]. = –0.82 or 0.82
or 0.81(repeating) or 9/11 An answer of –0.82 or 0.82 or 0.81 without any valid
working is sufficient for [1]. For full marks to be awarded, the response must
provide valid working.
Examiners report
The majority of candidates were able to identify the relevant prices and quantities
and use the correct formula for PED. However, many candidates inverted the
formula, used the final price/quantity as the denominator when calculating
percentages or did not correctly round to 2 decimal places or show as a repeating
decimal.
(a.ii) Calculate the loss in consumer surplus resulting from the increase in the price of capsicums
from NZ$18 per kg to NZ$24 per kg.
[2]
Markscheme
(0.5 × 40 000 (40 – 24)) – (0.5 × 55 000 (40 – 18)) OR Change in CS = 0.5 (55
000 + 40 000) × 6 Any valid working is sufficient for [1] = $285 000 An answer of
285 or 285 000 (or –285 or –285 000) without any valid working is sufficient for
[1]. For full marks to be awarded, the response must provide valid working and
include correct units.
Examiners report
Candidates generally performed the calculation correctly, either by calculating the
initial and final CS or by calculating the area of the relevant trapezium. However, it
was very common to see responses which did not express the answer in 000s
and/or $.
(a.iii) Calculate the revenue per kilogram (after tax has been paid) to producers when the price is
NZ$24 per kg.
[2]
Markscheme
Any valid working (eg division by 1.2) is sufficient for [1] =
$20 An answer of 20 or $20 without any valid working is sufficient for [1]. For full
marks to be awarded, the response must provide valid working and include
correct units. A response that calculates total revenue and that produces a correct
answer of $800 000 may be awarded [1].
Examiners report
The question was generally answered incorrectly. Despite similar questions
appearing in the specimen paper and in both May 2022 and November 2022
examinations it appears that candidates did not know how to perform the
calculation.
(a.iv)
With reference to Figure 1, explain why the price elasticity of demand for capsicums would
change if the price continued to increase beyond NZ$24 per kg.
[4]
Markscheme
A response that does not make some reference to the diagram (eg linear demand
curve; capsicums; a calculation) may be awarded a maximum of [3].
Examiners report
Stronger responses explained clearly why PED changes along a linear demand
curve, often using a mathematical approach. However, a large number of
responses simply explained and applied the law of demand.
(a.v)
Define the term market power.
[2]
Markscheme
Examiners report
Responses were generally good with candidates referring to the idea of price-
setting ability. Weaker responses referred only to the ability to "influence" or to
"control".
(a.vi)
With specific reference to the information in Figure 2, explain how two firms acting as a
monopolist by colluding on price could lead to market failure.
[4]
Markscheme
Examiners report
It is clear that many candidates had not been prepared adequately for this
question. With section 2.11 of the subject guide explicitly linking market power to
market failure it is to be expected that candidates should be able to explain why
the profit-maximizing position for a monopoly is different from the allocatively
efficient position, resulting in underallocation of resources and market failure, and
to recognise a welfare loss. Many candidates asserted incorrectly that "high"
prices would mean that market failure had occurred or that abnormal profit
equates to market failure. Furthermore, many referred to productive inefficiency
(not in the current syllabus) stating incorrectly that it leads to allocative
inefficiency. Some candidates who demonstrated good conceptual understanding
neglected to follow the instruction to use "specific reference to the information in
Figure 2" and so could not earn full marks.
(a.vii) Using the data provided in Figure 2, calculate the profit earned by these firms if they are
operating at the profit-maximizing level of output in the market for cheese.
[2]
Markscheme
Profit = (26 – 18) 80
Any valid working is sufficient for [1].
= $640 000
An answer of 640 or 640 000 without any valid working is sufficient for [1].
For full marks to be awarded, the response must provide valid working and
include correct units.
Examiners report
Generally well-answered, although with a concerning number of unit errors
(ignoring the $000s).
(b) Using the text/data provided and your knowledge of economics, recommend a policy which
could be introduced by the New Zealand Commerce Commission to limit the possible
abuse of market power in the supermarket industry in New Zealand.
[10]
Markscheme
Refer to Paper 3 markbands for May 2022 forward, available under the "My tests"
tab > supplemental materials. Possible policies may include (but are not restricted
to):
• Legislation to force supermarkets to sell part of their business/their land
• Removing barriers to the entry of new competitors
• Sponsoring or facilitating a new competitor
• Price regulation
• Government ownership/nationalization
• Government policy to release more land for building shops/retail activities (deregulation)
• Fines that arise from fair-trading laws (anti-trust legislation)
• Windfall tax on super normal profits
• Any other valid policy.
Examiners report
A wide range of approaches was adopted for the "policy question". Responses
which scored well mostly:
• Selected one clear policy (or two complementary policies where a second policy was
introduced to address a limitation of the first).
• Selected a policy which was appropriate given the context presented.
• Ensured that their response fully explained the recommended policy, incorporating
relevant theory, using appropriate terminology throughout the response and using data
provided to support the recommendation and offer a balanced synthesis/evaluation.
Responses were able to achieve full marks with a fairly concise answer which met
these requirements. Diagrams (although not expected/required) were often used
effectively to support the theory/explanation. However, many "price ceiling"
diagrams used were often accompanied by generic notes on the stakeholder
effects rather than the mechanism and possible limitations of the policy in the
context provided. Candidates who did not score highly tended to demonstrate
some of the following weaknesses:
• Listing/outlining several policies instead of recommending and explaining one policy.
• Summarising the data provided instead of using it to support the recommendation.
• Neglecting to provide a balanced synthesis. Many answers simply explained without any
balance.
• Misreading the data provided and making unrealistic assumptions.
• Neglecting to provide details of the suggested policy. Weaker responses cited
deregulation (without any details), fines (without details of the associated infringement),
anti-monopoly legislation (without details), supply-side policies (without details) or
"encourage foreign firms" (without stating how this could be achieved).
Some weaker policy suggestions included:
• Indirect taxation on groceries.
• Policies to prevent mergers.
• A percentage tax based on market share.
• Privatisation.
• Minimum price legislation.
Some responses also tended to stray into LRAS analysis while many of those
who suggested a maximum price argued that "the shortage would leave room for
new entrants" without discussing the lack of attractiveness of a price-controlled
industry to new entrants. Most candidates who suggested subsidies or price
controls drew a perfectly competitive market diagram and referred to one product
only. It appears that many students were more focused on explaining theory
rather than thinking as a policymaker addressing a real-world issue.
© International Baccalaureate Organization, 2024
