Cambridge A Level Economics: Long-run costs, economies of scale, revenue, profit (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 cover statements 7.5.3 to 7.5.10 of the Cambridge International AS & A Level Economics syllabus for examination in 2026, 2027 and 2028. This is topic 7, so it is A Level content only. All firms and figures are invented, and money is in currency units (cu). Read the study guide and revision notes first. The course hub and checklist cover the rest of the syllabus.

Questions

1. Define returns to scale and state whether it is a short-run or a long-run concept. [2]

2. A ceramics workshop adds identical bundles of all inputs. Output is 60, 150, 225 and 270 units with 1, 2, 3 and 4 bundles. Each bundle costs 900 cu.

(a) Calculate the percentage change in inputs and output at each step and state the returns to scale. [3] (b) Calculate long-run average cost at each scale and comment on the pattern. [3]

3. A mill’s long-run average cost per thousand metres is 8.0, 6.4, 5.6, 5.2, 5.2 and 5.6 cu at outputs of 5, 10, 15, 20, 25 and 30 thousand metres.

(a) State the minimum efficient scale. [1] (b) Calculate the percentage fall in LRAC from 5 to 20. [2] (c) Market demand is 130 thousand metres. Calculate the greatest number of firms able to reach minimum efficient scale. [2] (d) Explain what happens to average cost between 25 and 30. [2]

4. A juice maker spends 90,000 cu a year on promotion.

(a) Calculate promotion cost per unit at 30,000 units and at 90,000 units. [2] (b) Explain why this is an internal economy of scale and how it appears on an LRAC diagram. [3]

5. Many electronics assembly firms locate in one district.

(a) Explain two external economies of scale they might gain. [4] (b) A firm’s LRAC at 8,000 units is 4.40 cu. Input costs fall 5% because of the district. Calculate the new LRAC and describe the effect on the curve. [3]

6. A firm’s LRAC rises from 14.00 cu at 50,000 units to 15.40 cu at 70,000 units.

(a) Calculate the percentage rise in LRAC. [2] (b) Calculate long-run total cost at both outputs and the extra cost. [3] (c) Explain two internal causes of the rise. [4]

7. A firm faces these prices: 50, 45, 40, 35, 30, 25 and 20 cu when it sells 1 to 7 units.

(a) Calculate TR and MR at each output. [4] (b) State the output at which TR is greatest. [1] (c) Explain the link between MR and price elasticity of demand. [3]

8. A farm is a price taker at 14 cu per unit and raises sales from 300 to 420 units.

(a) Calculate TR at each output and the MR of the extra units. [3] (b) Explain why AR equals MR and describe the farm’s demand curve. [2]

9. A joinery sells 4,000 items for 76,000 cu. Explicit costs are 52,000 cu. The owner’s best alternative earns 18,000 cu a year (normal profit).

(a) Calculate accounting profit. [1] (b) Calculate supernormal profit. [2] (c) Calculate AR and ATC (including normal profit) and check (b) per unit. [2] (d) Next year TR is 66,000 cu on the same costs. State the type and size of profit. [2]

10. Demand for a firm’s product is P = 64 − 4Q.

(a) Derive TR and MR as expressions in Q. [3] (b) Find the output where MR is zero, and TR at that output. [3] (c) At Q = 6, ATC is 30 cu. Calculate supernormal profit. [2]

11. A firm doubles output from 20,000 to 40,000 units. LRAC falls from 18.00 to 14.40 cu. The price stays at 20 cu.

(a) Calculate supernormal profit before and after. [4] (b) Evaluate whether consumers will benefit from the lower cost. [6]

Answers

1. Returns to scale are the change in output [1] when all inputs rise in the same proportion; a long-run concept [1]. [2] Examiner insight: Answers that say “all inputs” and “long run” separately tend to be clearer than those that only mention bigger output.

2. (a) 1 to 2 bundles: inputs +100%, output (150 − 60)/60 = +150%, increasing [1]. 2 to 3: inputs +50%, output (225 − 150)/150 = +50%, constant [1]. 3 to 4: inputs +33.3%, output (270 − 225)/225 = +20%, decreasing [1]. (b) LRAC = 900, 1,800, 2,700 and 3,600 divided by output: 15.00, 12.00, 12.00 and 13.33 [2]. Average cost falls, stays flat, then rises, matching increasing, constant and decreasing returns [1]. [6] Examiner insight: Show each division. A pattern comment that links returns to cost direction is what shows understanding of the link.

3. (a) 20 thousand metres, the first output with the minimum LRAC [1]. (b) (5.2 − 8.0)/8.0 × 100 [1] = −35.0% [1]. (c) 130/20 = 6.5 [1], so 6 firms [1]. (d) LRAC rises from 5.2 to 5.6 cu [1], diseconomies of scale such as coordination problems [1]. [7] Examiner insight: Rounding 6.5 up to 7 is an easy slip, because a seventh firm could not reach minimum efficient scale.

4. (a) 90,000/30,000 = 3.00 cu [1]; 90,000/90,000 = 1.00 cu [1]. (b) It arises from the firm’s own growth [1], spreading a fixed promotion cost over more units [1]. The firm moves down along its LRAC curve rather than the curve shifting [1]. [5] Examiner insight: State both the cause and the movement along the curve.

5. (a) Any two, each with a reason: a pool of skilled workers [1], so recruitment and training costs fall [1]; specialist component suppliers nearby [1], so inputs are cheaper [1]. (b) 4.40 × 0.95 = 4.18 cu [1]. External economies lower costs for every firm [1], so the whole LRAC curve shifts down [1]. [7] Examiner insight: Each economy needs a cause and a cost effect. A list of names earns less.

6. (a) (15.40 − 14.00)/14.00 × 100 [1] = 10.0% [1]. (b) 50,000 × 14.00 = 700,000 cu and 70,000 × 15.40 = 1,078,000 cu [2]; extra cost 378,000 cu [1]. (c) Any two with reasons: long chains of command slow communication [1], so decisions cost more [1]; workers in a big firm feel less motivated [1], so output per worker falls [1]. [9] Examiner insight: Part (b) is easier if you keep average cost and total cost separate, and give units with each answer.

7. (a) TR = 50, 90, 120, 140, 150, 150, 140 [2]. MR = 50, 40, 30, 20, 10, 0, −10 [2]. (b) 5 or 6 units, where TR is 150 [1]. (c) While MR is positive, a price cut raises TR, so demand is elastic [1]. At MR = 0, elasticity is one [1]. When MR is negative, a price cut lowers TR, so demand is inelastic [1]. [8] Examiner insight: Calculate MR as the change in TR, never TR divided by quantity, which gives price.

8. (a) TR = 14 × 300 = 4,200 cu [1]; 14 × 420 = 5,880 cu [1]; MR = 1,680/120 = 14 cu [1]. (b) The farm sells every extra unit at the same price, so MR equals AR [1]. Its demand curve is a horizontal line at 14 cu [1]. [5] Examiner insight: A price taker’s MR needs the working: the change in TR over the change in output.

9. (a) 76,000 − 52,000 = 24,000 cu [1]. (b) 24,000 − 18,000 [1] = 6,000 cu supernormal [1]. (c) AR = 76,000/4,000 = 19.00; ATC = (52,000 + 18,000)/4,000 = 17.50 [1]; (19.00 − 17.50) × 4,000 = 6,000 cu [1]. (d) Accounting profit is 66,000 − 52,000 = 14,000 cu [1], 4,000 cu below normal profit, so subnormal profit of −4,000 cu [1]. [7] Examiner insight: Positive accounting profit can still be subnormal. Say “below normal profit” explicitly.

10. (a) TR = P × Q = 64Q − 4Q² [1]. MR has the same intercept and twice the slope [1]: MR = 64 − 8Q [1]. (b) 64 − 8Q = 0 gives Q = 8 [1]; P = 64 − 32 = 32 [1]; TR = 32 × 8 = 256 cu [1]. (c) P = 64 − 24 = 40 [1]; (40 − 30) × 6 = 60 cu [1]. [8] Examiner insight: Show that you substituted Q into the demand equation for price before using ATC.

11. (a) Before: (20 − 18) × 20,000 = 40,000 cu [2]. After: (20 − 14.40) × 40,000 = 224,000 cu [2]. (b) The LRAC fell by 20% [1]. Supernormal profit rose by 184,000 cu, so the firm gains if the price stays at 20 cu [1]. Consumers benefit only if competition pushes the price down [2], whereas a firm with market power may keep the saving [1]. A judgement: benefit depends on whether rivals or new entrants exist and the size of the market relative to minimum efficient scale [1]. [10] Examiner insight: Evaluation earns credit when it reaches a conditional judgement and not a list of points.

Where marks are usually lost

• Rounding 6.5 firms up to 7 in a minimum efficient scale question.
• Describing returns to scale without comparing percentage changes in inputs and output.
• Treating a fall in average cost as a fall in total cost.
• Showing an internal economy as a shift of the LRAC, or an external economy as a movement along it.
• Dividing TR by quantity and calling it MR.
• Calling accounting profit supernormal without deducting normal profit.
• Not stating “below normal profit” when the answer is subnormal.
• Giving a list of economies with no mechanism for lower cost per unit.

Next steps

• Review with the revision notes and the study guide.
• Visit the course hub and the checklist.
• Try all free 10-minute diagnostics.
• Ready for live teaching? Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment: statements 7.5.3 to 7.5.10.