AQA A-level Economics: Perfect competition and monopolistic competition (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 cover the Perfect competition and Monopolistic competition sub-sections of AQA A-level Economics (7136), specification version 1.3, 29 June 2022 (3.1.5.3 and 3.1.5.4 on the AQA website). All data are invented and illustrative. Read the study guide first if you need the theory, and check the course hub and checklist. The free diagnostics are also useful.

Questions

1. Explain why a firm in a perfectly competitive market is a price taker. [3]

2. A firm in Country D (illustrative) is a price taker facing a market price of £15. Its total costs are: 0 units £30; 1 unit £42; 2 units £52; 3 units £60; 4 units £69; 5 units £81; 6 units £97; 7 units £119. Fixed cost is £30.

(a) Find the profit-maximising output and the profit or loss. [4] (b) Should the firm stay open in the short run? Justify your answer. [1]

3. Demand rises in a perfectly competitive market. Explain, with reference to the firm and the market diagrams, what happens in the short run and the long run. [6]

4. In a competitive market 80 identical firms each supply 15 units at a long-run price of £22. Demand rises, and at £22 the quantity demanded becomes 1,920 units. Calculate the original market output and the number of firms in the new long-run equilibrium. [3]

5. Explain how (a) freedom of entry and exit and (b) perfect knowledge affect the behaviour of firms in a perfectly competitive market. [4]

6. In the market for a cleaning chemical in Country E (illustrative), demand is P = 90 − 0.05Q and private supply is P = 15 + 0.025Q. Production causes pollution costing £6 per unit. The market is perfectly competitive.

(a) Find the market equilibrium quantity and price. [2] (b) Find the socially optimal quantity and the overproduction. [3] (c) Explain what this shows about the efficiency of perfect competition. [1]

7. Assess critically the proposition that perfectly competitive markets lead to an efficient allocation of resources. [8]

8. A florist in a monopolistically competitive market has demand P = 82 − q and total cost TC = 450 + 10q + 0.5q², so MC = 10 + q. Calculate its profit-maximising output, price and supernormal profit. [4]

9. Later, entrants cause the florist’s demand to become P = 55 − 0.625q. Its lowest AC is at 30 units. Explain and show what happens in the long run. [6]

10. A small bakery (illustrative) sells 400 loaves a month at £25 with variable cost £15 per loaf. It spends £500 a month on a loyalty scheme and sales rise to 460 loaves.

(a) Calculate the change in monthly profit. [3] (b) Explain why the gain may not last. [2]

11. Explain how perfect competition in a labour market can act as a yardstick for judging a town where one employer hires most workers. [4]

Answers

1. The firm is one of very many producers, each small relative to the market [1]. Its output cannot change the market price [1], and with identical products buyers would go elsewhere if it charged more, so it accepts the going price [1]. [3] Examiner insight: Naming the assumption and then linking it to the firm’s inability to influence price usually gains more than listing assumptions alone.

2. (a) MC for units 1 to 7 is 12, 10, 8, 9, 12, 16, 22 [1]. MC rises through MR = £15 between 5 units (12) and 6 units (16), so output is 5 units [1]. TR = 15 × 5 = £75 and TC = £81 [1]. Result: loss of £6 [1]. (b) VC at 5 units is 81 − 30 = 51, so AVC = £10.20, below the price of £15, and the loss of £6 is less than fixed cost of £30. The firm stays open [1]. [5] Examiner insight: Show the MC column or the comparison of MC with price; a bare output figure leaves nothing to credit if it is wrong.

3. Short run: the market price rises as demand shifts right [1]. The firm’s horizontal demand curve moves up, and output rises along MC to the new MC = MR point [1]. Price is above AC, so supernormal profit [1]. Long run: profit attracts entry as there are no barriers [1]. Market supply shifts right and price falls back to the lowest point of AC [1]. The firm returns to normal profit but the industry is larger [1]. [6] Examiner insight: A clear chain from profit to entry to supply to price, tied to both diagrams, shows the reasoning the question asks for.

4. Original output = 80 × 15 = 1,200 units [1]. New firms = 1,920 ÷ 15 = 128 [1], so 128 − 80 = 48 entrants [1]. [3] Examiner insight: State what your number means (firms in total or entrants); an unlabelled 128 or 48 can be read either way.

5. (a) Free entry and exit means supernormal profit attracts new firms and losses cause exit [1], so profit returns to normal in the long run [1]. (b) Perfect knowledge means buyers know all prices, so a firm charging more loses its sales [1], and rivals can copy techniques at once, so no firm keeps a cost advantage [1]. [4] Examiner insight: Each assumption needs its consequence stated for firm behaviour, not just a definition.

6. (a) 90 − 0.05Q = 15 + 0.025Q gives 75 = 0.075Q, so Q = 1,000 [1], P = £40 [1]. (b) MSC = 21 + 0.025Q [1]. 90 − 0.05Q = 21 + 0.025Q gives Q = 920 [1]. Overproduction = 1,000 − 920 = 80 units [1]. (c) At 1,000 units MSC is £46 but the value to buyers is £40, so resources are misallocated even though the market is perfectly competitive [1]. [6] Examiner insight: Build the social curve by adding the external cost to the supply equation, then say what the comparison means.

7. The proposition: P = MC in the long run and output at lowest AC, so resources go to their best use [1]. It depends on assumptions such as no externalities [1]. Negative externalities make MSC exceed MPC, so overproduction [1]. Public goods and merit goods would not be provided correctly [1]. Real buyers lack perfect knowledge [1]. Where economies of scale are large, tiny firms cannot reach the lowest cost [1]. Only normal profit leaves little for research, so dynamic efficiency may suffer [1]. Judgement: the proposition is a useful benchmark where spillovers are small, but it fails where the assumptions fail, and fairness is not addressed at all [1]. [8] Examiner insight: Weigh the points and reach a judgement about when the proposition holds; a list of limitations without a conclusion tends to stay descriptive.

8. MR = 82 − 2q [1]. MC = MR: 10 + q = 82 − 2q, so q = 24 [1]. P = 82 − 24 = £58 [1]. TR = 1,392; TC = 450 + 240 + 288 = 978; profit = £414 [1]. [4] Examiner insight: Derive MR from the demand equation yourself; using the demand slope for MR gives the wrong output.

9. Supernormal profit attracts entrants with close substitutes [1]. Each firm’s demand shifts left and becomes more elastic [1]. MR = 55 − 1.25q; MC = MR gives 10 + q = 55 − 1.25q, so q = 20 [1]. P = 55 − 12.5 = £42.50. AC = 450/20 + 10 + 10 = £42.50, so profit is normal (zero) [1]. The lowest AC is at 30, so excess capacity is 10 units [1]. MC at 20 is £30, so P exceeds MC by £12.50, which is allocative inefficiency [1]. [6] Examiner insight: Show the tangency check (P equals AC) and then comment on the inefficiency, not only on the profit.

10. (a) Extra loaves = 60 [1]. Extra contribution = 60 × (25 − 15) = £600 [1]. Net change = 600 − 500 = +£100 a month [1]. (b) Rivals can copy a loyalty scheme, so demand shifts back [1], and the £500 cost remains, so profit returns towards normal [1]. [5] Examiner insight: Use contribution per unit; subtracting the full cost per loaf from price mixes in unchanged fixed costs.

11. In the competitive model there are many employers and many identical workers, so each firm takes the wage set by the market [1]. Real wages and employment in the town can be compared with this benchmark [1]. A dominant employer can hold pay below the competitive level [1]. The benchmark shows what is lost but does not say it is achievable [1]. [4] Examiner insight: Apply the yardstick to the town given; a general account of perfect competition does not use the context.

Where marks are usually lost

• Drawing the competitive firm’s demand curve as downward sloping.
• Using demand slope as the MR slope instead of doubling it.
• Giving an output without showing the MC and MR comparison.
• Calling any loss a reason to close immediately.
• Defining efficiency but not assessing the proposition.
• Placing the long-run monopolistically competitive firm at the lowest AC.
• Leaving units off money answers, and not saying whether a number is firms or entrants.
• Describing non-price competition with no cost or judgement.

Next steps

• Revise with the revision notes.
• Re-read the study guide.
• More practice: microeconomics practice.
• Go to the course hub and the checklist.
• Take 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, AQA, for first teaching from September 2015.