AQA A-level Economics: Costs and economies and diseconomies of scale (7136) – Practice Questions

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 – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), A-level sub-sections Costs of production and Economies and diseconomies of scale (3.1.4.4 and 3.1.4.5 on the AQA website, 4.1.4.4 and 4.1.4.5 in the combined PDF). Prepare with the study guide and revision notes. Hub: AQA A-level Economics; tracker: printable checklist. All firms and figures are invented.

Questions

1. (a) Distinguish between a fixed cost and a variable cost, using a cafe as your example. [2] (b) Explain why marginal cost usually falls and then rises as a firm increases output in the short run. [3]

2. A courier firm’s total cost (TC) for different outputs of deliveries (hundreds) is: 0 = 50; 1 = 110; 2 = 150; 3 = 180; 4 = 215; 5 = 270; 6 = 350. (a) State the fixed cost. [1] (b) Calculate average variable cost at output 5. [2] (c) Calculate the marginal cost of the sixth hundred. [1] (d) Calculate average cost at output 6, to one decimal place. [2]

3. A firm’s average cost at 5 units is 20. (a) The sixth unit costs 8 to make. Calculate the new average cost. [2] (b) Explain what this shows about the relationship between marginal cost and average cost. [2]

4. A garage services 400 cars a year. Its annual licence fee, a fixed cost, rises by 1,200. (a) Calculate the change in average cost. [2] (b) Explain why marginal cost and average variable cost are unchanged. [2]

5. A box-making firm produces 600 boxes a day. Method A uses 9 workers and 1 press. Method B uses 4 workers and 2 presses. A press costs 180 a day. (a) The daily wage is 65. Calculate the cost per box of each method and state which is cheaper. [3] (b) The wage falls to 30. Repeat the calculation. [2] (c) Explain one reason why the firm may not switch method immediately. [1]

6. A worker is paid 84 a day and produces 42 units. (a) Calculate unit labour cost. [1] (b) After training, output per worker is 56 and pay is 98. Calculate the new unit labour cost. [1] (c) Explain whether the firm’s costs have improved. [2]

7. For each case, state whether it is an internal or external economy or diseconomy of scale. (i) A firm secures a discount on flour for ordering in bulk. (ii) A local college trains skilled workers for all firms in an industrial cluster. (iii) Managers in a very large firm struggle to coordinate departments. (iv) Congestion in the cluster raises delivery times and costs for every firm. (v) A larger firm borrows at a lower interest rate. [5]

8. A firm employs 6 workers at 50 a day and 3 machines at 120 a day, producing 220 units. It doubles every input and produces 480 units. (a) Calculate total cost and average cost before and after. [3] (b) State the returns to scale and the effect on average cost. [2] (c) Explain one reason why increasing returns might not lower average cost. [1]

9. An industry’s long-run average cost (LRAC) is, for output in thousands: 5 = 14.0; 10 = 10.5; 15 = 8.4; 20 = 7.0; 25 = 6.2; 30 = 6.2; 35 = 6.2; 40 = 6.2. (a) State the minimum efficient scale. [1] (b) Market demand is 150,000 units. Calculate the maximum number of firms at that scale. [2] (c) A new entrant expects to sell 10,000 units. Calculate its cost disadvantage per unit, in money and as a percentage of the lowest LRAC, to one decimal place. [2] (d) Explain how minimum efficient scale affects barriers to entry. [3]

10. Explain two reasons why a large firm may suffer internal diseconomies of scale, and one reason why its LRAC might be L-shaped rather than U-shaped. [6]

11. In industry Z, LRAC is flat beyond minimum efficient scale, which is 40% of the market. Firm P produces at that scale at a cost of 6.2 per unit. Firm S, in an industrial cluster with external economies, has a cost of 7.4 per unit. Evaluate whether P’s economies of scale give it a lasting advantage over S. [9]

Answers

1. (a) A fixed cost does not change with output in the short run, for example rent [1]. A variable cost changes with output, for example coffee beans [1]. [2] (b) At low output extra workers allow specialisation and better use of fixed equipment, so extra output costs less [1]. Eventually the fixed factor is crowded and diminishing returns set in [1], so each extra unit needs more input and marginal cost rises [1]. [3] Examiner insight: Name the fixed factor and link diminishing returns to the cost of the extra unit, not just to total output.

2. (a) Fixed cost is TC at zero output: 50 [1]. [1] (b) VC = 270 minus 50 = 220 [1]; AVC = 220 / 5 = 44 [1]. [2] (c) MC = 350 minus 270 = 80 [1]. [1] (d) AC = 350 / 6 [1] = 58.3 [1]. [2] Examiner insight: Show the formula and the substitution so your method is clear even if the arithmetic slips.

3. (a) Total cost = 5 × 20 = 100 [1]. New average = (100 + 8) / 6 = 18 [1]. [2] (b) When MC is below AC, AC falls [1]. When MC is above AC (a sixth unit at 32 gives 22), AC rises, so MC cuts AC at its minimum [1]. [2] Examiner insight: Use numbers in this explanation; a claim about averages with no figures is hard to distinguish from a guess.

4. (a) 1,200 / 400 [1] = 3 per car increase [1]. [2] (b) MC is the cost of one extra car and the licence fee does not vary with output [1]. AVC contains only variable costs, so it excludes the fee [1]. [2] Examiner insight: State which curves move and which do not; AC and AFC rise by the same amount.

5. (a) A: 9 × 65 + 180 = 765, so 1.275 per box [1]. B: 4 × 65 + 2 × 180 = 620, so 1.03 per box [1]. B is cheaper [1]. [3] (b) A: 9 × 30 + 180 = 450 (0.75 per box); B: 4 × 30 + 360 = 480 (0.80) [1]. A is now cheaper [1]. [2] (c) Presses are fixed in the short run, so replacing equipment takes time and may involve retraining [1]. [1] Examiner insight: Comparing totals is not enough on its own; finish with a clear statement of the cheaper method.

6. (a) 84 / 42 = 2.00 [1]. [1] (b) 98 / 56 = 1.75 [1]. [1] (c) Unit labour cost fell by 12.5% [1] because output per worker rose by one third while pay rose by one sixth, so productivity outpaced pay [1]. [2] Examiner insight: A pay rise alone does not show higher costs; compare it with productivity.

7. (i) Internal economy [1]. (ii) External economy [1]. (iii) Internal diseconomy [1]. (iv) External diseconomy [1]. (v) Internal economy (financial) [1]. [5] Examiner insight: Ask who gains or loses: the single firm (internal) or all firms in the area (external).

8. (a) Before: 6 × 50 + 3 × 120 = 660, AC = 660 / 220 = 3.00 [1]. After: 1,320, AC = 1,320 / 480 = 2.75 [1]. Both totals correct [1]. [3] (b) Inputs doubled but output rose 2.18 times: increasing returns [1]. AC fell by 8.3%, an economy of scale [1]. [2] (c) If buying more raises input prices (for example wages of 58 and machines at 140 give 1,536 / 480 = 3.20), AC could rise despite increasing returns [1]. [1] Examiner insight: Keep returns to scale (output) and economies of scale (unit cost) as separate ideas in your wording.

9. (a) 25,000 units [1]. [1] (b) 150,000 / 25,000 [1] = 6 firms [1]. [2] (c) 10.5 minus 6.2 = 4.3 per unit [1]; 4.3 / 6.2 = 69.4% [1]. [2] (d) Entrants selling below MES have higher unit costs [1]. Incumbents can cut price to a level at which the entrant makes a loss [1]. A high MES relative to the market means entry needs large, risky, sunk start-up spending and leaves room for few firms [1]. [3] Examiner insight: Compare MES with market size; MES alone says nothing about barriers.

10. Communication slows because decisions pass through many layers [1], so responses are late and costs rise [1]. Workers feel remote from decisions, so motivation and effort fall [1], raising unit costs [1]. LRAC may be L-shaped if technology, delegation or multiple plants offset these problems, so unit cost stays flat [1] and larger output brings no penalty [1]. [6] Examiner insight: Each reason needs a link to unit cost, not just a description of the problem.

11. Economies of scale lower long-run average cost as output rises [1]. S’s cost is 19.4% above P’s (7.4 against 6.2) [1]. P could set a price of 7.0, earning 0.8 a unit while S loses 0.4 a unit [1]. With MES at 40% of the market, only two firms can reach efficient scale, so entry is hard [1]. Against this: LRAC is flat beyond MES, so growth past that scale adds no cost advantage [1]. S’s external economies, such as shared suppliers and skilled labour, can narrow the gap [1]. S may serve a niche where price matters less [1]. P may later face diseconomies if it expands [1]. Judgement: the advantage is real but is lasting only if S cannot reduce costs or differentiate, which depends on the size of the gap and on time [1]. [9] Examiner insight: Use the figures given, then weigh the advantage against the counter-arguments and reach a supported conclusion.

Where marks are usually lost

• Skipping the working on cost tables, so one slip removes the whole answer.
• Writing “costs fall” without saying whether total, average or marginal.
• Treating a change in output as a shift of a cost curve.
• Mixing up internal and external economies.
• Giving a reason for economies of scale with no link to unit cost.
• Using returns to scale and economies of scale as if they were the same idea.
• Discussing MES without comparing it with market size.
• Evaluation that lists points but reaches no judgement.

Next steps

• Review with the revision notes and re-read the study guide.
• Check the course hub and the printable checklist.
• Take the free 10-minute diagnostics to find weak spots.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA, for first teaching from September 2015: A-level sub-sections Costs of production and Economies and diseconomies of scale.