AQA A-level Economics: Monopoly, monopoly power and price discrimination (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 Monopoly and monopoly power and Price discrimination sub-sections of the AQA A-level Economics specification (7136, version 1.3, 29 June 2022), numbered 3.1.5 on the AQA website. All firms, markets and figures are invented. Learn the content from the study guide and the revision notes. Course pages: AQA A-level Economics hub, printable checklist and free 10-minute diagnostics.

Questions

1. Distinguish between a price taker and a price maker. [2]

2. A firm is the only seller of a product. Its demand schedule is below. Marginal cost is a constant £20 per unit and fixed costs are £120.

Output (Q)	2	4	6	8	10
Price (£)	90	80	70	60	50

(a) Calculate marginal revenue between 6 and 8 units. [2] (b) Find the profit-maximising output, price and profit. [4] (c) Calculate price elasticity of demand at that output and comment on its value. [2]

3. Explain, with reference to a monopoly diagram, why a profit-maximising monopolist charges a price above marginal cost. [4]

4. Explain two factors that influence the degree of monopoly power a firm has. [4]

5. Two hairdressing salons, A and B, are in different towns. Both have marginal cost of £8. Salon A faces demand P = 40 − 2Q. Salon B, with many nearby rivals, faces P = 24 − Q.

(a) Find each salon’s profit-maximising output, price and mark-up over marginal cost. [3] (b) State which has greater monopoly power and explain why. [2]

6. Market demand for a product is P = 90 − 3Q. A competitive industry has constant marginal cost of £60. One firm then replaces it, with marginal cost £24 because of economies of scale.

(a) State the competitive price and output. [2] (b) Find the monopoly price and output. [2] (c) Show that the monopoly price equals (90 + MC)/2 and find the marginal cost at which the monopoly price equals the competitive price. [2] (d) Explain why consumers may not gain in practice. [2]

7. Explain why a cinema can price discriminate between adults and children, but a village shop selling tins of food cannot. [4]

8. A software seller has marginal cost of £10 per licence. Business users face P = 50 − Q₁ and students face P = 30 − Q₂. Quantities are in hundreds of licences.

(a) Write the marginal revenue function for each group. [2] (b) Find the output and price in each group if the firm price discriminates. [4] (c) Show that profit exceeds the profit from a single price of £25, at which 30 hundred licences are sold. [2] (d) Describe the effect on each group compared with the single price. [2]

9. A firm faces demand P = 84 − 4Q with marginal cost £20 and no fixed costs.

(a) Find output, price and profit if it charges one price. [3] (b) Find output and profit if it practises perfect price discrimination. [2] (c) Compare consumer surplus in the two cases. [1]

10. Evaluate whether price discrimination is in the interests of consumers. [9]

11. A firm holds a patent on a medicine with no close substitute. Evaluate whether its high monopoly power is likely to benefit or harm society. [10]

Answers

1. A price taker has no influence over price and must accept the market price, because demand for its product is perfectly elastic [1]. A price maker chooses its price, because it has market power and a downward-sloping demand curve [1]. [2] Examiner insight: Give a reason for each half, not just a label: link “price maker” to the slope of demand.

2. (a) TR at 6 units = 6 × 70 = £420 and TR at 8 units = 8 × 60 = £480 [1]. MR = (480 − 420)/2 = £30 per unit [1]. (b) The demand line is P = 100 − 5Q, so MR = 100 − 10Q [1]. Set MR = MC: 100 − 10Q = 20, so Q = 8 [1]. Price = 100 − 40 = £60 [1]. Profit = TR − TC = 480 − (120 + 20 × 8) = 480 − 280 = £200 [1]. (c) PED = (1/5) × (60/8) = 1.5 [1]. It is elastic, which is consistent with profit maximisation: MR is positive (£20) at this output, and a profit-maximiser never operates where demand is inelastic [1]. [8] Examiner insight: Show the TR and TC lines so the working shows. In part (c), link the value to MR being positive.

3. The monopolist faces a downward-sloping AR curve, so the MR curve lies below it [1]. It maximises profit at the output where MR = MC [1]. The price is read from the AR curve above that output, so price exceeds MC [1]. At this output, consumers value an extra unit above its marginal cost, but the firm does not produce it because the lower price needed would reduce profit [1]. [4] Examiner insight: Name the curve you read the price from. Stopping at “the monopolist restricts output” misses the diagram link.

4. Barriers to entry [1]: patents, high sunk costs or economies of scale stop rivals entering, so the firm keeps supernormal profit and can keep price above MC [1]. Product differentiation [1]: a distinctive product has fewer close substitutes, so demand is less price elastic and the firm can raise price with a smaller loss of sales [1]. [4] Examiner insight: Follow each factor with its effect on elasticity or profit. A bare list is thin.

5. (a) Salon A: MR = 40 − 4Q = 8, so Q = 8; P = 40 − 16 = £24; mark-up = £16 [1]. Salon B: MR = 24 − 2Q = 8, so Q = 8; P = 24 − 8 = £16; mark-up = £8 [1]. Both have the same output; the prices differ [1]. (b) Salon A has more monopoly power [1] because its mark-up (£16, or 66.7% of price) is larger, reflecting less elastic demand (PED 1.5 against 2.0) and fewer close substitutes [1]. [5] Examiner insight: “Price maker” describes both salons, so the comparison should be about the size of the gap above marginal cost and why.

6. (a) Competitive: P = MC, so 90 − 3Q = 60, Q = 10 [1] and P = £60 [1]. (b) MR = 90 − 6Q = 24, so Q = 11 [1]; P = 90 − 33 = £57 [1]. (c) MR = MC gives Q = (90 − MC)/6, so P = 90 − 3 × (90 − MC)/6 = 90 − (90 − MC)/2 = (90 + MC)/2 [1]. Setting this equal to 60 gives 90 + MC = 120, so MC = £30 [1]. (d) The saving must be large: at MC = £40 the monopoly price is £65, above £60 [1]. Even a large saving may be kept as profit unless regulation or the threat of entry forces it to be passed on [1]. [8] Examiner insight: In part (d), a worked threshold such as the £30 above is more persuasive than saying economies of scale “might” help.

7. Cinema: it can separate customers by age using proof of age or ticket type [1]; the ticket is for one showing and cannot sensibly be resold [1]; children and adults are likely to have different price elasticities of demand [1]. Village shop: goods such as tins can be bought at a low price and resold, and the shop cannot tell who belongs to which group, so the conditions fail [1]. [4] Examiner insight: Apply the conditions to the named businesses. The shop contrast needs its own reason.

8. (a) Business: MR₁ = 50 − 2Q₁ [1]. Students: MR₂ = 30 − 2Q₂ [1]. (b) Business: 50 − 2Q₁ = 10, so Q₁ = 20 [1]; P = 50 − 20 = £30 [1]. Students: 30 − 2Q₂ = 10, so Q₂ = 10 [1]; P = 30 − 10 = £20 [1]. (c) Profit = (30 − 10) × 20 + (20 − 10) × 10 = 400 + 100 = 500, so £50,000 as quantities are in hundreds [1]. At a single price of £25: (25 − 10) × 30 = 450, so £45,000, which is lower [1]. (d) Business users pay £5 (20%) more than the single price and buy 20 instead of 25 [1]. Students pay £5 (20%) less and buy 10 instead of 5 [1]. [10] Examiner insight: Give both profit figures when saying profit rises, and state units.

9. (a) MR = 84 − 8Q = 20, so Q = 8 [1]; P = 84 − 32 = £52 [1]; profit = (52 − 20) × 8 = £256 [1]. (b) Output rises to where P = MC: 84 − 4Q = 20, so Q = 16 [1]. Revenue is the area under demand, (84 + 20)/2 × 16 = 832, and cost is 20 × 16 = 320, so profit = £512 [1]. (c) Consumer surplus is ½ × (84 − 52) × 8 = £128 under a single price and zero under perfect price discrimination [1]. [6] Examiner insight: Do the calculation first, then say what the zero means: the firm takes all the surplus.

10. Price discrimination means charging different prices for the same product that are not due to cost differences [1]. Some consumers gain: the group with more elastic demand, such as students or off-peak users, pays a lower price and may gain access to a service [1]. Spare capacity can be used, which may keep a service funded [1]. Output may rise in total if a new market is served [1]. Other consumers lose: the group with less elastic demand, such as business travellers or those who must travel at peak times, pays more [1]. Consumer surplus is transferred to the producer [1]. Evaluation: whether total output rises is the key test, since discrimination that only reshuffles a fixed quantity gives consumers little overall [1]. It matters how the extra profit is used: reinvested in better service or kept as dividend [1]. A judgement, such as that it is in the interests of consumers when it widens access and funds an otherwise unviable service, but not when the higher-paying group has no alternative [1]. [9] Examiner insight: Say who gains and who loses, then weigh them. Two lists without a judgement stay descriptive.

11. A patent is a legal barrier to entry, so the firm is the only seller [1]. It sets MR = MC and charges a price above MC, with output below the competitive level [1]. Supernormal profit is earned [1]. Because price exceeds marginal cost, resources are not allocated efficiently and there is a welfare loss [1]. On the other side, the patent rewards the firm for costly research, so supernormal profit funds further development (dynamic efficiency) and encourages invention [1]. Without protection, rivals could copy the medicine, and the incentive to invest would fall [1]. Evaluation: patents last for a limited time, after which competition can lower the price [1]. Whether the profit is reinvested in research is uncertain [1]. A medicine has few substitutes and demand is probably inelastic, so power is high and patients and health budgets are exposed [1]. Overall, the benefit depends on the length of protection, reinvestment and any regulation of the price [1]. [10] Examiner insight: Apply both sides to a medicine, not to monopoly in general, and name what the outcome depends on.

Where marks are usually lost

• Taking the monopoly price off the MR curve when it belongs on the AR curve.
• Using MR = AR, or drawing MR above demand.
• Describing barriers to entry without saying how they protect profit.
• Calling every firm with a downward-sloping demand curve a monopoly, not a price maker with some power.
• Reciting the conditions for price discrimination without applying them to the business in the question.
• Saying price discrimination always benefits the firm and harms consumers, without weighing groups separately.
• Omitting units, or forgetting fixed costs.

Next steps

• Revise with the revision notes and re-read the study guide.
• Tick off the topic on the printable checklist and see the AQA A-level Economics hub.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, published by AQA. Sections used: Monopoly and monopoly power, and Price discrimination.