Cambridge International AS and A Level Economics: Growth and survival of firms (9708) – 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 test outcomes 7.7.1 to 7.7.5 in the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. The syllabus treats topics 7 to 11 as A Level content, so AS papers do not test this unit. Every firm and number is fictional, with money measured in cu (currency units). Revise first with the study guide and revision notes. See the course hub, the checklist and the free diagnostics.

Questions

1. State two reasons why a small firm may choose to remain small. [2]

2. A tailoring workshop has these long-run total costs: 300 suits cost 18,000 cu, 1,200 suits cost 48,000 cu and 3,000 suits cost 150,000 cu.

(a) Calculate the average cost at each output. [3] (b) State the output with the lowest average cost and what happens to average cost beyond it. [2]

3. Identify the type of integration in each case.

(i) A coffee roaster buys a chain of cafes. [1] (ii) A toy maker merges with another toy maker. [1] (iii) A bus operator takes over a software company. [1]

4. Market shares in Country C are 30%, 25%, 15%, 10%, 8%, 7% and 5%.

(a) Calculate the three-firm and four-firm concentration ratios. [2] (b) The firms with 15% and 10% merge. Recalculate both ratios. [2]

5. A furniture maker buys 80,000 kg of timber a year at 2.50 cu a kg. It considers building a sawmill that would produce timber at 2.15 cu a kg, with extra fixed costs of 20,000 cu a year.

(a) Calculate the annual saving on timber. [2] (b) Calculate the net gain after the fixed cost. [1] (c) Calculate the minimum annual timber use at which the sawmill breaks even. [2]

6. A firm’s quarterly profits (thousand cu) from product X are 40, −10, 30, −20. Product Y, in an unrelated industry, gives −5, 35, −10, 30.

(a) Calculate the annual profit and the highest-minus-lowest quarter for X, Y and the two combined. [3] (b) Explain why a conglomerate firm may have steadier profit. [2]

7. Explain three conditions that make a cartel effective. [6]

8. Market demand is P = 78 − Q, where Q is thousands of units and P is in cu. Marginal cost is a constant 30 cu. Three firms form a cartel that acts as a monopolist and shares output equally.

(a) Calculate the cartel’s output, price, total profit and each firm’s profit. [4] (b) One firm raises output to 16 while the other two keep to their quotas. Calculate the new price and each firm’s profit. [3] (c) Explain what (b) shows about the stability of cartels. [3]

9. Explain why the principal-agent problem arises in a company and outline two ways to reduce it. [6]

10. A firm faces P = 120 − Q (Q in thousands, P in cu) with constant marginal cost of 40 cu.

(a) Calculate the profit-maximising output, price and profit (thousand cu). [3] (b) Managers choose to maximise revenue. Calculate output, price, revenue and profit. [3] (c) Managers are paid 2% of revenue. Calculate the managers’ gain and the shareholders’ loss from the change in (b). [2]

11. Evaluate whether a horizontal merger between two of the largest firms in a market benefits consumers. [12]

Answers

1. Any two from: the market is small or local; the product is niche or personal; the owner wants control; finance is hard to raise; diseconomies set in early. One mark for each of two reasons [1] [1]. [2] Examiner insight: Give two distinct reasons. Restating one reason in different words wastes space that a second reason would use.

2. (a) 18,000 ÷ 300 = 60 cu [1]; 48,000 ÷ 1,200 = 40 cu [1]; 150,000 ÷ 3,000 = 50 cu [1]. [3] (b) Lowest at 1,200 suits (40 cu) [1]. Beyond it average cost rises (50 cu at 3,000), so diseconomies of scale operate [1]. [2] Examiner insight: Show the division for each output, and name diseconomies of scale instead of just saying “costs rise”.

3. (i) Forward vertical [1]. (ii) Horizontal [1]. (iii) Conglomerate [1]. [3] Examiner insight: Say forward or backward for vertical integration. “Vertical” alone is incomplete.

4. (a) Three-firm: 30 + 25 + 15 = 70% [1]. Four-firm: 70 + 10 = 80% [1]. [2] (b) The merged firm has 25%. Shares are 30, 25, 25, 8, 7, 5. Three-firm = 80%; four-firm = 30 + 25 + 25 + 8 = 88% [1] [1]. [2] Examiner insight: Re-rank the shares after the merger, because the largest firms may change.

5. (a) Current cost 80,000 × 2.50 = 200,000 cu [1]. Own sawmill 80,000 × 2.15 = 172,000, so saving 28,000 cu [1]. [2] (b) 28,000 − 20,000 = 8,000 cu a year [1]. [1] (c) Saving per kg = 0.35 cu [1]. Break-even volume = 20,000 ÷ 0.35 = about 57,143 kg [1]. [2] Examiner insight: A fixed cost must be set against the saving, so say whether the answer is a gain or a loss.

6. (a) X: total 40, range 40 − (−20) = 60 [1]. Y: total 50, range 35 − (−10) = 45 [1]. Combined 35, 25, 20, 10, total 90, range 35 − 10 = 25 [1]. [3] (b) The two products have profits that peak in different quarters [1], so a bad quarter in one is offset by the other and total profit is steadier [1]. [2] Examiner insight: Refer to the actual figures, and note that the argument depends on the products not facing the same shocks.

7. Any three conditions, each with a reason. Few firms [1], so agreement and monitoring are easier [1]. High barriers to entry [1], so new rivals cannot undercut the high price [1]. Easy detection of cheating [1], so members stay within quotas [1]. [6] Examiner insight: Link each condition to why it makes agreement or policing easier. A bare list of conditions is thin.

8. (a) MR = 78 − 2Q = 30, so Q = 24 [1]. P = 78 − 24 = 54 [1]. Profit = (54 − 30) × 24 = 576 thousand cu [1]. Each firm: 8 units, 192 [1]. [4] (b) Total Q = 16 + 8 + 8 = 32, so P = 46 [1]. Cheater: (46 − 30) × 16 = 256 [1]. Each other firm: (46 − 30) × 8 = 128 [1]. [3] (c) The cheater gains (256 against 192) while the others lose (128 against 192) [1]. Every member has the same incentive [1], so if all cheat the price falls towards the competitive level and the cartel breaks down [1]. [3] Examiner insight: Use the figures from (b) to support the point, and state the incentive for every member, not just one.

9. Shareholders (principals) own the firm but managers (agents) run it [1]. Their objectives differ: shareholders want profit and share price, managers may want salary, status or security [1]. Owners cannot observe everything managers do (asymmetric information) [1]. Solution one: pay linked to profit or share options [1], which makes managers’ reward depend on shareholder outcomes [1]. Solution two: audits, independent directors or a takeover threat [1], which monitor or discipline managers. [6] Examiner insight: Identify who is principal and who is agent, and explain how each solution aligns the two sets of objectives.

10. (a) MR = 120 − 2Q = 40, so Q = 40 [1]. P = 80 [1]. Profit = (80 − 40) × 40 = 1,600 [1]. [3] (b) MR = 0, so Q = 60 and P = 60 [1]. Revenue = 3,600 [1]. Profit = (60 − 40) × 60 = 1,200 [1]. [3] (c) Managers gain 2% × (3,600 − 3,200) = 8 thousand cu [1]. Shareholders lose 1,600 − 1,200 = 400 thousand cu [1]. [2] Examiner insight: Original revenue is 80 × 40 = 3,200, so use it as the base for the change in revenue.

11. Analysis: a merger can cut average cost through economies of scale, such as shared head office or bulk buying [1]. If savings are passed on, price falls [1]. Greater scale could fund research, which may improve quality [1]. A merger also removes a rival, so market share and concentration rise [1], which gives more power to raise price [1]. Less competition may reduce choice and cut incentives to control costs [1]. Evaluation: the outcome depends on whether the savings exceed the loss of competition [1]. It depends on barriers to entry, because a contestable market may still discipline the merged firm [1]. It also depends on the size of the merged share [1], on whether regulators intervene [1], and on whether the merger works in practice, since diseconomies of scale and culture clashes can raise costs [1]. Judgement: consumers are likely to gain where entry is easy and costs fall, and lose where the merged firm dominates a market with high barriers to entry [1]. [12] Examiner insight: Reach a reasoned judgement tied to conditions, and consider more than one affected group instead of listing points on one side only.

Where marks are usually lost

• Writing “vertical” without saying forward or backward.
• Forgetting to re-rank market shares after a merger.
• Ignoring fixed costs when judging integration.
• Describing cartel conditions without linking them to effectiveness.
• Treating a cartel as stable and missing the incentive to cheat.
• Mixing up principal and agent.
• Saying a merger always lowers costs or always raises prices.
• Ending an evaluation answer by repeating points without choosing a side.

Next steps

• Review the revision notes and the study guide.
• Return to the course hub and the printable checklist.
• For wider microeconomics, work through the price system practice set.
• Take one of the free 10-minute diagnostics, which are all free.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, section 7.7 (Cambridge University Press & Assessment).