Cambridge A Level Economics: Firm performance under competition and monopoly (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 part of section 7.6.4 of the Cambridge International AS & A Level Economics syllabus for examination in 2026, 2027 and 2028. The syllabus places this at A Level, so it is not examined at AS. 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 supernormal profit and explain what is meant by normal profit. [3]

2. A perfectly competitive firm sells at a market price of 25 cu. Explain why its average revenue equals its marginal revenue, and describe the shape of its total revenue curve. [3]

3. A monopolist faces the demand curve P = 84 − 3Q.

(a) Find the marginal revenue function from total revenue. [2] (b) Calculate the output at which total revenue is greatest. [1] (c) Calculate price elasticity of demand at that output. [2]

4. A perfectly competitive firm has total fixed costs of 60 cu. It sells 10 units at 14 cu with an average variable cost of 11 cu.

(a) Calculate its total revenue, total variable cost and loss. [3] (b) Explain whether it should continue to produce in the short run. [2]

5. A competitive firm has TVC = Q³ − 12Q² + 50Q, so MC = 3Q² − 24Q + 50 and AVC reaches its lowest value at Q = 6.

(a) Calculate the short-run shutdown price. [2] (b) Calculate the quantity supplied at 50 cu. [2] (c) State the supply of 25 identical firms at 50 cu. [1] (d) Explain why the firm supplies nothing at 10 cu. [2]

6. Explain why supernormal profit cannot last in the long run in perfect competition. [4]

7. Thirty identical firms each have TFC = 50 cu and TVC = Q³ − 8Q² + 25Q. Market demand has fallen to Qd = 250 − 10P, and the price is 12 cu. Each firm produces 13/3 units.

(a) Show that the market is in short-run equilibrium. [1] (b) Calculate each firm’s loss. [2] (c) Minimum long-run average cost is 20 cu at Q = 5. Calculate the long-run price and number of firms. [3]

8. A monopolist faces P = 94 − 5Q and has TC = 200 + 10Q + Q², so MC = 10 + 2Q.

(a) Find the output and price at which the monopolist maximises profit. [3] (b) Calculate supernormal profit. [2] (c) Calculate the deadweight loss compared with the allocatively efficient output. [3] (d) Output of 7 gives ATC of about 45.57 cu, while minimum ATC is about 38.28 cu. Explain what this shows. [2]

9. A firm in monopolistic competition faces P = 34 − 2Q and has TC = 192 + 4Q + Q². In the long run, demand settles at P = 52 − 2Q.

(a) Calculate its short-run output, price and loss. [3] (b) Explain with figures why it continues to produce in the short run. [2] (c) Show that profit is zero when demand is P = 52 − 2Q. [3] (d) Explain why the firm is neither allocatively nor productively efficient there. [2]

10. A firm sells 50 units at 30 cu with ATC of 26 cu. The lowest cost achievable is 21 cu.

(a) Calculate supernormal profit. [2] (b) Calculate the cost of X-inefficiency. [2] (c) Explain why X-inefficiency is more likely in monopoly than in perfect competition. [3]

11. Evaluate whether perfect competition is more efficient than monopolistic competition in the long run. [8]

Answers

1. Supernormal profit is profit above normal profit, where total revenue exceeds total cost [1]. Normal profit is the minimum reward needed to keep the owner in the industry [1], earned when total revenue equals total cost, so it is counted as a cost [1]. [3] Examiner insight: A definition earns credit when it links profit to revenue and cost; writing that normal profit is “zero profit” without the opportunity cost idea is incomplete.

2. The firm is a price taker, so it can sell any quantity at 25 cu [1]. Each extra unit adds 25 cu, so MR = AR = 25 [1]. Total revenue is a straight line through the origin, rising by 25 per unit [1]. [3] Examiner insight: State the reason (price taker) as well as the result; the equality alone is a statement, not an explanation.

3. (a) TR = 84Q − 3Q² [1], so MR = 84 − 6Q [1]. (b) MR = 0 gives Q = 14 [1]. (c) At Q = 14, P = 42 [1]. PED = (1/3) × (42/14) = 1 [1]. [5] Examiner insight: Differentiate TR, not P; an MR that starts at 84 but falls at the same rate as demand is a common slip.

4. (a) TR = 14 × 10 = 140 [1]. TVC = 11 × 10 = 110 [1]. Loss = 140 − (60 + 110) = 30 [1]. (b) Revenue exceeds variable cost by 30, which contributes to fixed costs [1]. Closing would lose all 60, so continue [1]. [5] Examiner insight: The decision needs a comparison of the two losses or of price and AVC; stating the loss alone does not justify the conclusion.

5. (a) Shutdown price is minimum AVC [1]. AVC at Q = 6 is 36 − 72 + 50 = 14 cu [1]. (b) 3Q² − 24Q + 50 = 50 [1], so Q = 8 on the rising part of MC [1]. (c) 25 × 8 = 200 [1]. (d) At 10 cu, price is below minimum AVC of 14 [1], so each unit loses money and closing loses less [1]. [7] Examiner insight: Say that supply follows MC only above minimum AVC; many answers describe the whole MC curve.

6. Supernormal profit attracts new firms because entry is free [1]. Industry supply shifts right [1], so market price falls [1]. Entry continues until price equals minimum ATC, where profit is normal [1]. [4] Examiner insight: A chain needs each link; jumping from “profit” to “price falls” without entry earns less credit.

7. (a) Qd = 250 − 120 = 130, and 30 × 13/3 = 130 [1]. (b) TR = 12 × 13/3 = 52, TVC ≈ 39.48 [1]. Loss = 50 + 39.48 − 52 ≈ 37.48 [1]. (c) Exit continues until P = 20 [1]. Qd = 250 − 200 = 50 [1]. Firms = 50 ÷ 5 = 10 [1]. [6] Examiner insight: Convert market quantity into firms using the long-run output per firm; the price alone does not give the number of firms.

8. (a) MR = 94 − 10Q [1]. 94 − 10Q = 10 + 2Q gives Q = 7 [1]. P = 59 [1]. (b) TR = 413 [1]. TC = 200 + 70 + 49 = 319, so profit = 94 [1]. (c) P = MC: 94 − 5Q = 10 + 2Q gives Q = 12 [1]. MC at Q = 7 is 24, so the gap is 35 [1]. DWL = 0.5 × 35 × 5 = 87.5 [1]. (d) The firm produces where ATC is above its minimum, so it is not productively efficient [1]. The gap shows a monopolist can restrict output and sit above the lowest cost without wasting inputs [1]. [10] Examiner insight: Read price from demand at the monopoly output; using MC as the price removes most of the marks.

9. (a) MR = 34 − 4Q = 4 + 2Q gives Q = 5 [1]. P = 24 [1]. TR = 120, TC = 192 + 20 + 25 = 237, loss = 117 [1]. (b) AVC = 4 + 5 = 9, below price 24 [1]. Closing loses 192 of fixed costs, more than 117 [1]. (c) MR = 52 − 4Q = 4 + 2Q gives Q = 8, P = 36 [1]. ATC = 192/8 + 4 + 8 = 36 [1]. TR = TC, so profit = 0 [1]. (d) P = 36 > MC = 20, so allocatively inefficient [1]. Output 8 is below the 13.86 at minimum ATC, so it has excess capacity [1]. [10] Examiner insight: “Show that” needs MR, MC, output, price and ATC all written down.

10. (a) (30 − 26) × 50 = 200 [2]. (b) (26 − 21) × 50 = 250 [2]. (c) Monopoly profit is protected by barriers, so waste can continue [1]. In perfect competition, a firm with higher costs makes losses and exits [1]. Rivals also set a price that exposes poor cost control [1]. [7] Examiner insight: Compare both structures in the same sentence; describing only the monopolist leaves the question half answered.

11. In the long run, perfect competition has P = MC = minimum ATC at Q = 5, so it is both allocatively and productively efficient [1][1]. Monopolistic competition has normal profit but P above MC [1], and output below the minimum-ATC level, so excess capacity [1]. However, monopolistic competition offers variety and consumers may value it [1]. Product differentiation also encourages innovation [1]. Few markets meet every condition of perfect competition, such as identical products [1]. A judgement: perfect competition is more efficient in cost terms, but the gain is smaller if variety is valued [1]. [8] Examiner insight: Evaluation earns credit when it weighs both sides and reaches a conclusion; listing benefits of variety without a judgement stays descriptive.

Where marks are usually lost

• Reading the monopoly price from MC.
• Using ATC instead of AVC for shutdown decisions.
• Giving a loss without comparing it with the loss from closing.
• Forgetting that supply stops below minimum AVC.
• Stating efficiency verdicts without separating short run and long run.
• Writing “show that” answers without every step.
• Skipping the entry or exit link in long-run explanations.
• Evaluation with no judgement.

Next steps

• Review the revision notes and the study guide.
• Open the course hub and the checklist.
• Take all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, Cambridge University Press & Assessment, section 7.6.4 (part).