These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All firms, countries and data are fictional. Only multiplication and division are needed, so a four-function calculator is enough.
Question 1 (multiple choice · foundation)
Which statement about a firm in the long run is correct?
- (A) All of the firm’s costs are variable.
- (B) The firm’s total fixed cost stays the same at every output.
- (C) The firm can change its labour but not its capital.
- (D) The firm’s marginal product of labour must be falling.
Answer and explanation
Answer: (A). The long run is long enough to change every input, including buildings and machines. Nothing is fixed, so every cost is variable.
- (B) describes the short run, where at least one input is fixed.
- (C) is again a short-run situation: capital is the fixed input.
- (D) confuses the long run with diminishing marginal returns, which happen in the short run when one input is held constant.
Question 2 (multiple choice · core)
Corvel Glassworks, a fictional firm, increases its workers, furnaces, building space and raw materials all by 50%. Its output rises by 30%. Which term describes this?
- (A) Decreasing returns to scale
- (B) Increasing returns to scale
- (C) Diminishing marginal returns
- (D) Constant returns to scale
Answer and explanation
Answer: (A). All inputs rose by 50%, but output rose by only 30%. Output grew by a smaller percentage than inputs, so there are decreasing returns to scale.
- (B) would need output to rise by more than 50%.
- (C) applies when only one input increases and the others are fixed. Here every input changed.
- (D) would need output to rise by exactly 50%.
Question 3 (multiple choice · core)
Pellow Paper, a fictional firm, has these long-run average total costs:
| Output (thousand reams per week) | 10 | 20 | 30 | 40 | 50 | 60 |
|---|---|---|---|---|---|---|
| LRATC ($ per ream) | 9.00 | 7.50 | 6.80 | 6.50 | 6.50 | 7.10 |
What is Pellow Paper’s minimum efficient scale?
- (A) 10 thousand reams per week
- (B) 40 thousand reams per week
- (C) 50 thousand reams per week
- (D) 60 thousand reams per week
Answer and explanation
Answer: (B). The lowest LRATC is $6.50. It is first reached at 40 thousand reams. The MES is the smallest output at the minimum LRATC.
- (A) is where LRATC is highest in the table, inside the range of economies of scale.
- (C) also has the lowest LRATC, but it is the end of the flat range, not the start.
- (D) is in the range of diseconomies of scale, where LRATC has started to rise.
Question 4 (calculation · core)
Ostra Bakery Group, a fictional firm, can choose its scale. Its long-run total costs are:
| Output (thousand loaves per week) | 5 | 10 | 20 | 30 | 40 | 50 |
|---|---|---|---|---|---|---|
| LRTC ($ thousand per week) | 6.0 | 10.0 | 16.0 | 24.0 | 32.0 | 44.0 |
(a) Calculate LRATC at each output. (b) Identify the output ranges with economies of scale, constant returns to scale and diseconomies of scale. (c) State the MES. (d) What would Ostra’s long-run total cost be if it planned to produce zero loaves? Explain.
Worked solution
(a) LRATC = LRTC ÷ Q. Thousands cancel, so the answer is in dollars per loaf.
| Output (thousand) | 5 | 10 | 20 | 30 | 40 | 50 |
|---|---|---|---|---|---|---|
| LRATC ($ per loaf) | 1.20 | 1.00 | 0.80 | 0.80 | 0.80 | 0.88 |
(b)
- Economies of scale from 5 to 20 thousand loaves: LRATC falls from $1.20 to $0.80. (From 5 to 10, output rises 100% but cost only 66.7%.)
- Constant returns to scale from 20 to 40 thousand: LRATC stays at $0.80. (Output and cost rise by the same percentage.)
- Diseconomies of scale from 40 to 50 thousand: LRATC rises to $0.88. (Output rises 25%, cost 37.5%.)
(c) MES = 20 thousand loaves per week, the smallest output where LRATC is $0.80.
(d) Zero. In the long run every input can be changed, so a firm that plans to produce nothing would hire no workers and keep no premises. There are no fixed costs.
Suggested mark points (4): 1 for all six LRATC values; 1 for all three ranges; 1 for MES = 20 thousand; 1 for zero cost with the reason that no inputs are fixed in the long run.
Common error: dividing output by cost. Check: cost per loaf should be a little over or under a dollar, not about 0.8 loaves per dollar.
Question 5 (graph · core)
Use your results from Question 4.
(a) Draw a correctly labelled LRATC curve for Ostra Bakery Group. Label the three regions and the MES. (b) The price of flour, wages and rent all rise so that Ostra’s cost at every scale is 10% higher. Show the effect on your graph. What happens to the MES?
Model answer and suggested Marlbridge rubric
(a) Horizontal axis: “Output (thousand loaves per week)”. Vertical axis: “Cost per loaf ($)”. Plot the six points from Question 4 and join them: the curve falls from (5, 1.20) to (20, 0.80), is flat to (40, 0.80), then rises to (50, 0.88). Label it LRATC₁. Mark the falling part “economies of scale”, the flat part “constant returns to scale” and the rising part “diseconomies of scale”. Mark the MES at 20 thousand loaves.
(b) Every LRATC value is multiplied by 1.1: $1.32, $1.10, $0.88, $0.88, $0.88 and $0.97 (to 2 d.p.). Draw LRATC₂ above LRATC₁ at every output. The flat part is now at $0.88 and still starts at 20 thousand loaves, so the MES does not change. Higher input prices raise cost per unit at every scale; they do not change the scale at which costs stop falling.
| Point | What earns it |
|---|---|
| 1 | Both axes labelled with units; curve falls, is flat, then rises, matching the data |
| 1 | Three regions and MES correctly labelled at 20 thousand loaves |
| 1 | LRATC₂ drawn above LRATC₁ at every output (an upward shift) |
| 1 | States the MES is unchanged, with a reason |
Do not award the third point for a movement along LRATC₁: a change in input prices is a shift, not a diseconomy of scale.
Question 6 (constructed response · core)
In the fictional country of Brenmoor, two industries are studied. All figures are per year. The market quantity is the quantity buyers want at a price equal to the lowest LRATC.
| Industry | MES | Market quantity |
|---|---|---|
| Glass bottles | 150 million bottles | 600 million bottles |
| Haircuts | 8,000 haircuts | 2,400,000 haircuts |
(a) Calculate the largest number of firms in each industry that can each produce at the MES. (b) Predict which industry is more concentrated, and explain why. (c) A new firm plans to enter the glass bottle industry, producing 30 million bottles a year. Explain the problem it is likely to face. (d) Market demand for glass bottles doubles, so the market quantity becomes 1,200 million. Explain how this affects concentration in the industry.
Model answer and suggested Marlbridge rubric
(a) Glass bottles: 600 ÷ 150 = 4 firms. Haircuts: 2,400,000 ÷ 8,000 = 300 firms.
(b) The glass bottle industry is likely to be more concentrated. Its MES is a quarter of the market, so at most four firms can each reach the lowest average cost. Haircut firms reach their lowest cost at a tiny share of the market, so hundreds of firms can compete at low cost.
(c) 30 million bottles is only 5% of the market and far below the MES of 150 million. The new firm would be in the range of economies of scale, with a higher LRATC than the large existing firms. It would struggle to match their prices and still cover its costs.
(d) 1,200 ÷ 150 = 8 firms can now each reach the MES. The industry can hold more firms at the lowest cost, so it is likely to become less concentrated, although with eight firms it would still have few sellers.
| Point | What earns it |
|---|---|
| 1 | Both numbers of firms correct |
| 1 | Glass bottles identified as more concentrated, with the MES compared with market size |
| 1 | Small entrant below the MES has higher LRATC than rivals |
| 1 | 8 firms and the conclusion that concentration falls |
Question 7 (explanation · stretch)
A manager at the fictional firm Dunlow Printing says: “We hired 20 more workers last month without buying any new presses, and our average cost went up. This proves we have diseconomies of scale.”
(a) Evaluate the manager’s claim. (b) Dunlow later doubles every input. Its daily input cost rises from $6,000 to $12,000 and output rises from 1,500 to 4,500 posters a day. Input prices do not change. Calculate average cost before and after, and identify the returns to scale. (c) Give one reason for economies of scale and one reason for diseconomies of scale that could apply to a printing firm.
Model answer and suggested Marlbridge rubric
(a) The manager is wrong. The presses were fixed, so this was a short-run change: adding one variable input (labour) to a fixed input (capital). Rising average cost in that case comes from diminishing marginal returns: each extra worker adds less output because they share the same presses. Diseconomies of scale are a long-run idea that needs all inputs, including the number of presses, to increase.
(b) Before: 6,000 ÷ 1,500 = $4.00 per poster. After: 12,000 ÷ 4,500 = $2.67 per poster (to 2 d.p.). Inputs doubled (× 2) but output tripled (× 3), so there are increasing returns to scale, and average cost fell to two-thirds of its old level: economies of scale.
(c) Economies (any one): a large firm can buy a fast, expensive press and spread its cost over many posters; workers can specialise in design, printing or finishing; it can buy paper and ink in bulk at lower prices. Diseconomies (any one): with many sites and shifts, managers may struggle to coordinate orders; communication between sales and production slows; it is harder to monitor quality and effort.
| Point | What earns it |
|---|---|
| 1 | Claim rejected: this is short run with a fixed input, so it is diminishing marginal returns |
| 1 | Diseconomies of scale need all inputs to change (long run) |
| 1 | $4.00 and $2.67, with increasing returns to scale |
| 1 | One valid cause of economies and one of diseconomies, linked to printing |
How did you do?
- Q1 or Q7(a) wrong: re-read “Short run and long run” and the paragraph on diminishing marginal returns in “The shape of the LRATC curve” in the study guide.
- Q2 or Q7(b) wrong: re-read “Returns to scale: when every input grows” and compare percentage changes.
- Q3, Q4 or Q5 marked down: work through Worked example 1 and Figure 2 again. Remember the MES is the start of the flat range.
- Q6 incomplete: re-read “Minimum efficient scale and market structure” and Worked example 2.
Then tick off the topic checklist.