A Level Economics: The Price System and the Microeconomy (A Level) — Practice Questions (Cambridge 9708)

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available from your board.

Each question practises a skill tested in the June 2024 Paper 42. After each answer there is an examiner insight, a mark-scheme insight or a tip, and, where one matches, the real question to try next.

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Questions

1. A chain of bakeries opens 40 new branches. It now buys flour by the tanker-load at a lower price per kilogram, and it installs large automated ovens that bake far more loaves per hour. Define internal economies of scale and illustrate your definition with one example from the bakery chain. [3]

2. A manufacturer of solar panels estimates its long-run average cost (LRAC) at different weekly outputs: $64 per panel at 2,000 panels, $51 at 5,000 panels, $46 at 8,000 panels and $46 at 12,000 panels. Define minimum efficient scale and state the weekly output at which this firm reaches it. [3]

3. A firm in a perfectly competitive market sells its product at a price of $12. At its profit-maximising output of 500 units, its average total cost is $10. (a) Calculate the firm’s supernormal (excess) profit. (b) Explain what will happen to this supernormal profit in the long run. [4]

4. A monopolist maximises profit at an output of 2,000 units, where marginal revenue equals marginal cost. At this output the price is $15 and average cost is $11. (a) Calculate the monopolist’s supernormal profit. (b) Give one reason why a monopolist might choose not to maximise profit. [3]

5. Explain what is meant by allocative efficiency and productive efficiency, and why a perfectly competitive firm in long-run equilibrium achieves both. [4]

6. A student’s total utility from cups of tea in a day is 20 units from the first cup, 35 units from two cups, 45 units from three cups and 50 units from four cups. Calculate the marginal utility of the third cup and state the law of diminishing marginal utility. [2]

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Answers

1. Internal economies of scale are the fall in long-run average cost [1] that a firm gains as it increases its own scale of output [1]. Example: buying flour in bulk at a lower price per kilogram is a purchasing (bulk-buying) economy, or the large automated ovens are a technical economy [1].

Examiner insight (Cambridge 9708 June 2024 examiner report, Paper 42, Question 1(a)): many candidates scored full marks; the main errors were leaving out that the costs are average costs and that it is a long-run idea.

Source for the examiner insights on this page: Cambridge International AS & A Level Economics 9708 June 2024 Principal Examiner Report for Teachers, Paper 9708/42 section, paraphrased.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 1(a).

2. Minimum efficient scale is the lowest level of output at which long-run average cost stops falling (the first output at the minimum of the LRAC curve) [1]. For this firm, LRAC falls from $64 to $51 to $46, then stays at $46 [1], so the minimum efficient scale is 8,000 panels per week [1]. Beyond this, extra output brings no further fall in average cost.

Examiner insight (Cambridge 9708 June 2024 examiner report, Paper 42, Question 1(b)): very few candidates had a clear idea of what minimum efficient scale means, even though many could apply the idea to the cost data. Learn the definition as well as how to apply it.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 1(b).

3. (a) Supernormal profit = (price − ATC) × output = ($12 − $10) × 500 [1] = $1,000 [1]. (b) There are no barriers to entry, so the supernormal profit attracts new firms into the industry [1]. Market supply rises and the price falls until price equals minimum average cost, so each firm earns only normal profit in the long run [1].

Examiner insight (Cambridge 9708 June 2024 examiner report, Paper 42, Question 3): the better answers explained how the entry of new firms lowers the price and removes excess profit; some candidates showed only the starting position and never reached the long run.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 3.

4. (a) Supernormal profit = ($15 − $11) × 2,000 [1] = $8,000 [1]. (b) Any one of: it may aim to maximise sales revenue or market share instead [1]; it may keep prices lower to avoid attention from a competition regulator or to discourage new entrants; it may be a regulated natural monopoly that is only allowed a normal profit.

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 3): one of the evaluation points the mark scheme lists is that a monopolist may not exploit all the supernormal profit open to it, pursuing another aim such as sales revenue maximisation instead.

Source for the mark-scheme insights on this page: Cambridge International AS & A Level Economics 9708 June 2024 mark scheme for Paper 42 (9708/42), paraphrased. Cambridge’s 9708 past papers page publishes the Paper 41 mark scheme from this series, not the Paper 42 one.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 3.

5. Allocative efficiency occurs when price equals marginal cost (P = MC), so the value consumers place on the last unit equals the cost of the resources used to make it [1]. Productive efficiency occurs when output is produced at the minimum average cost [1]. In long-run equilibrium a perfectly competitive firm produces where MR = MC and, because it is a price-taker, P = MR, so P = MC [1]; entry and exit remove supernormal profit so that P = minimum AC as well [1].

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 2): the mark scheme ties allocative efficiency to the output where AR (price) equals MC, or MSB equals MSC, and productive efficiency to producing at the lowest average cost.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 2.

6. Marginal utility of the third cup = 45 − 35 = 10 units [1]. The law of diminishing marginal utility states that as a consumer has more units of a good, the extra satisfaction from each additional unit falls [1].

Tip: marginal utility is the change in total utility, not total utility divided by the number of units.

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Where marks are usually lost

• Defining economies of scale without saying they reduce long-run average cost.
• Confusing minimum efficient scale with the output where the firm makes most profit.
• Showing supernormal profit in perfect competition but not explaining how new entrants remove it in the long run.
• Assuming every monopolist always earns and keeps the largest possible supernormal profit.
• Mixing up allocative efficiency (P = MC) with productive efficiency (minimum AC).