AQA A-level Economics: Revenue, profit and technological change (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-section Production, costs and revenue (3.1.4 on the AQA website, 4.1.4 in the combined PDF): marginal, average and total revenue, profit, and technological change. Prepare with the study guide and revision notes. The course hub is AQA A-level Economics and the printable checklist tracks your progress. All firms, countries and figures are invented.

Questions

1. A firm sells 250 units for a total revenue of 4,000. (a) Calculate average revenue. [1] (b) Explain why the average revenue curve is the firm’s demand curve. [2]

2. A firm faces the demand curve P = 60 − 5Q, where Q is units sold per week. (a) Calculate total revenue when 5 units and 6 units are sold. [2] (b) Calculate the marginal revenue of the 6th unit. [1] (c) The 7th unit would sell at a price of 25 on all units. Explain why total revenue falls when it is sold. [2]

3. A farm is a price taker and sells crates of produce at 18 each. It currently sells 400 crates. (a) Calculate total revenue, average revenue and the marginal revenue of the 401st crate. [3] (b) Explain why marginal revenue equals average revenue for this farm. [1]

4. A firm’s demand curve is P = 90 − 3Q. (a) Calculate total revenue at 14, 15 and 16 units. [3] (b) Calculate the marginal revenue of the 16th unit. [1]

5. Firm H sells 3 units at 45 each. To sell a 4th unit it must cut its price to 40 on all four units. (a) Calculate the marginal revenue of the 4th unit. [2] (b) Explain why this is less than 40. [2]

6. In a year, Firm F has total revenue of 84,000 and total costs of 71,500, which include normal profit. It sells 5,000 units. (a) Calculate its profit. [1] (b) Calculate profit per unit. [1] (c) State whether it earns abnormal profit and justify your answer. [1] (d) Explain what is meant by normal profit. [2]

7. A retailer has revenue of 118,000 and pays 93,000 for rent, stock and wages. The owner could earn 28,000 in another job. (a) Calculate accounting profit. [1] (b) Calculate the profit left after counting the owner’s opportunity cost, and state whether it is above or below normal profit. [2] (c) Explain what is likely to happen in the long run and how this shows a role for profit in a market economy. [2]

8. Researchers at a university in Country B find a plant-based coating that keeps fruit fresh for longer. Two years later, a food firm sells the first coated fruit in shops. (a) Identify the invention and the innovation. [2] (b) Explain why the economy gains mainly from innovation. [2]

9. A plant has 12 workers who make 960 units a week. After adding a new machine they make 1,320 units a week. Each worker costs 600 a week and the machine costs 1,800 a week to lease. (a) Find output per worker before and after the machine, and the percentage change. [3] (b) Calculate cost per unit before (labour only) and after (labour plus lease), and the percentage fall. [3] (c) The firm sells only 960 units a week after installing the machine. Calculate the cost per unit and explain what it shows. [2]

10. Analyse how technological change may affect the structure of a market. [6]

11. Evaluate the view that creative destruction does more good than harm. [10]

Answers

1. (a) 4,000 ÷ 250 = 16 [1] (b) TR = P × Q, so AR = (P × Q) ÷ Q = P [1]. The demand curve shows the price at which each quantity is bought, so AR plotted against quantity is the same line [1]. [3] Examiner insight: A bare statement that “AR equals demand” earns little; show the step AR = TR ÷ Q = P and then link price to quantity demanded.

2. (a) At 5 units: 35 × 5 = 175 [1]. At 6 units: 30 × 6 = 180 [1]. (b) MR = 180 − 175 = 5 [1]. (c) The 7th unit adds 25 to revenue, but the price on the 6 earlier units falls by 5 each, a loss of 30 [1]. The net change is −5, so TR falls from 180 to 175 [1]. [5] Examiner insight: Work out the price for each quantity first. Using the price of the previous row for the TR calculation is a common slip.

3. (a) TR = 18 × 400 = 7,200 [1]. AR = 7,200 ÷ 400 = 18 [1]. MR of the 401st crate = 18 × 401 − 7,200 = 7,218 − 7,200 = 18 [1]. (b) The farm can sell each extra crate at the same market price, so no earlier crate loses revenue [1]. [4] Examiner insight: A price taker’s MR equals its price. Writing this for a firm with a downward-sloping demand curve is a basic error that costs the explanation.

4. (a) At 14: 48 × 14 = 672 [1]. At 15: 45 × 15 = 675 [1]. At 16: 42 × 16 = 672 [1]. (b) MR of the 16th unit = 672 − 675 = −3 [1]. [4] Examiner insight: A negative MR must keep its minus sign, which shows that TR has begun to fall.

5. (a) TR with 3 units = 135 and with 4 units = 160 [1]. MR = 160 − 135 = 25 [1]. (b) The 4th unit sells for 40 [1], but the price cut costs 5 on each of the 3 earlier units, a loss of 15, so MR = 40 − 15 = 25 [1]. [4] Examiner insight: The explanation needs the two effects, the gain from the extra unit and the loss on earlier units, with the figures.

6. (a) 84,000 − 71,500 = 12,500 [1]. (b) 12,500 ÷ 5,000 = 2.50 [1]. (c) Yes, because costs already include normal profit, so the remaining 12,500 is abnormal profit [1]. (d) Normal profit is the least return that stops the entrepreneur switching to another activity [1], equal to what they could earn in their next best use, so it is counted as a cost [1]. [5] Examiner insight: Connect your judgement on abnormal profit to the fact that costs include normal profit. Stating “yes” with no reason gains nothing.

7. (a) 118,000 − 93,000 = 25,000 [1]. (b) 25,000 − 28,000 = −3,000 [1], which is below normal profit [1]. (c) The owner earns more in the other job, so in the long run is likely to leave [1]. Profit works as a signal and discipline: resources move to activities with a higher reward [1]. [5] Examiner insight: Keep accounting profit and profit after opportunity cost separate. Treating the 28,000 as a loss rather than a cost misses the point.

8. (a) The discovery of the coating is the invention [1]. The first sale of coated fruit is the innovation [1]. (b) An invention that stays in the laboratory adds no output, jobs or choice [1]. Commercial use puts the new product or process into production and lets consumers and other firms benefit [1]. [4] Examiner insight: Do not define the terms alone. Identify each in the context given.

9. (a) Before: 960 ÷ 12 = 80 per worker [1]. After: 1,320 ÷ 12 = 110 [1]. Rise: (110 − 80) ÷ 80 = 37.5% [1]. (b) Before: 12 × 600 = 7,200, and 7,200 ÷ 960 = 7.50 [1]. After: 7,200 + 1,800 = 9,000, and 9,000 ÷ 1,320 = 6.82 [1]. Fall: (7.50 − 6.82) ÷ 7.50 = 9.1% [1]. (c) 9,000 ÷ 960 = 9.38, above 7.50 [1]. The new machine only cuts unit cost if enough output is sold to spread its fixed cost [1]. [8] Examiner insight: Include the lease in the “after” cost. Comparing labour cost only with total cost gives a misleading result.

10. Lower barriers: technology such as online selling can cut start-up costs [1], so more firms can enter and the market becomes more competitive [1]. Higher barriers: costly research and development, patents and network effects favour firms that innovate first [1], so a few firms may dominate and others struggle to enter [1]. Link: early abnormal profit can fund further research, strengthening the leader [1]. Alternatively, a new technology may replace incumbents altogether, changing which firms lead the market [1]. [6] Examiner insight: Show a chain from the technology to the barrier to the number of firms. Stating only that “markets change” is not analysis.

11. Creative destruction is the replacement of old products, methods and firms by innovations [1]. Benefits: higher productivity and lower costs can reduce prices and raise living standards [1], and new products give consumers more choice [1]. Costs: workers in declining firms lose jobs, and skills and regional industries may be lost [1], and the process can be slow to reverse for those affected [1]. Link to profit: innovators earn temporary abnormal profit, which rewards and signals, until imitators enter [1]. Evaluation: the balance depends on how quickly workers can retrain or move [1], on how strong competition is and how long patents last [1], and on whether gains and losses fall on the same people. Judgement: the gains probably outweigh losses over time, provided displaced workers are supported and monopoly profits do not last [1]. A reasoned conclusion with a condition [1]. [10] Examiner insight: Aim for a conclusion that weighs benefits against costs and says what it depends on. A list of pros and cons without a judgement stops short of evaluation.

Where marks are usually lost

• Using MR = P for a firm that faces a downward-sloping demand curve.
• Calculating TR with the wrong price for the quantity.
• Dropping the minus sign on negative marginal revenue.
• Treating the output with the highest TR as the one with the highest profit.
• Mixing up accounting profit with profit after the owner’s opportunity cost.
• Defining invention and innovation without applying them to the context.
• Comparing before and after costs without including the new fixed cost.
• Writing evaluation as a list of points with no overall judgement.

Next steps

• Review the revision notes and re-read the study guide.
• Check progress on the printable checklist and the course hub.
• 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, first teaching September 2015. Sections covered: marginal, average and total revenue; profit; technological change.