Cambridge O Level Economics: Firms, growth, mergers and economies of scale (2281) – 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.

The questions below test topic 3.5, Firms, from the Cambridge O Level Economics 2281 syllabus for examination in 2026 (version 2). All firms and figures are invented. Read the study guide and revision notes first if you need to. See the course hub, the printable checklist and the free diagnostics.

Questions

1. Classify each firm as primary, secondary or tertiary: a copper mine, a car assembly plant and a private hospital. [3]

2. Firm M has 25 employees and turnover of 4,000,000. Firm N has 250 employees and turnover of 30,000,000. (a) State two measures of the relative size of a firm. [2] (b) Calculate turnover per employee for each firm and state which firm is larger by turnover. [3] (c) Explain why a firm may be large on one measure and small on another. [1]

3. Explain two reasons why a small bookbinding workshop might stay in business even though large printing companies exist. [4]

4. A small cafe sells meals at 12 each. Ingredients cost 5 per meal and fixed costs are 7,000 a month. (a) Calculate the number of meals needed to break even. [2] (b) Calculate monthly profit when 1,150 meals are sold. [2] (c) Demand falls by 20%. Calculate the new profit or loss and explain what this shows about small firms. [3]

5. A firm sold 7.5 million units in a market of 50 million units. A year later it sold 8.4 million units in a market of 70 million units. (a) Calculate its market share in each year. [2] (b) Calculate the growth rate of its sales and of the market. [2] (c) Explain why sales rose but market share fell. [2]

6. Distinguish between internal and external growth of a firm, giving one example of each. [4]

7. Identify the type of merger in each case. (a) Two cinema chains join. [1] (b) A sugar refiner buys a plantation. [1] (c) A telecoms firm buys a chain of bakeries. [1] (d) State one advantage of the type of merger in (c). [1]

8. Four ferry operators share a market: A has 28%, B has 17%, C has 35% and D has 20%. A and B merge. (a) Calculate the share of the merged firm. [1] (b) State whether it becomes the largest operator in the market. [1] (c) Explain one advantage and one disadvantage of this merger for consumers. [4]

9. A juice company buys 600 tonnes of fruit a year at 210 per tonne. It buys the orchard that supplies it. The orchard grows fruit at a cost of 170 per tonne. (a) State the type of merger. [1] (b) Calculate the annual saving on fruit costs. [3] (c) Evaluate whether the merger will benefit the juice company. [4]

10. A brick factory has the following costs (illustrative).

Output	Total cost
2,000	14,000
4,000	24,000
6,000	33,000
8,000	44,000
10,000	60,000
12,000	78,000

(a) Calculate average cost at 2,000, 10,000 and 12,000 bricks. [3] (b) State the range of output with the lowest average cost. [1] (c) Calculate the percentage fall in average cost from 2,000 to 6,000 bricks. [2] (d) Describe what happens beyond 8,000 bricks and give two possible causes. [3]

11. (a) For each statement, say whether it is an internal or external economy of scale and name its type. (i) A large firm gets a lower rate of interest on a loan. (ii) A local college trains workers for every firm in the area. (iii) A large firm spreads advertising costs over many units. [3] (b) Explain one external diseconomy of scale. [3]

12. Two large airlines in Country B plan to merge. Evaluate whether the merger would benefit the economy. [10]

Answers

1. Copper mine: primary [1]. Car assembly plant: secondary [1]. Private hospital: tertiary [1]. [3] Examiner insight: Classify by the firm’s main activity, not by the product’s end use. A one-word sector for each firm is all that is asked for, so do not add long explanations.

2. (a) Any two of: number of employees, turnover, output, capital employed, market share [1] [1]. (b) M: 4,000,000 / 25 = 160,000 [1]. N: 30,000,000 / 250 = 120,000 [1]. N has the larger turnover [1]. (c) Measures differ: for example a machine-based firm can have few staff but high turnover [1]. [6] Examiner insight: Show the division before the answer, and label which firm each figure belongs to. State the measure whenever you call a firm large.

3. Reason 1 stated, for example customers want repairs or one-off hand-finished work [1], developed: a large mass-production firm cannot supply this cheaply, so the workshop keeps those customers even at higher prices [1]. Reason 2 stated, for example the local market is small [1], developed: there are too few buyers for a large firm to cover its costs, so only a small business serves them [1]. [4] Examiner insight: A reason alone is a start. Add a “because” that links the reason to customers or costs, and give two different reasons rather than one reason twice.

4. (a) Contribution = 12 - 5 = 7 per meal [1]. Break-even = 7,000 / 7 = 1,000 meals [1]. (b) Profit = 1,150 x 7 - 7,000 [1] = 1,050 [1]. (c) New meals = 1,150 x 0.8 = 920 [1]. Profit = 920 x 7 - 7,000 = -560, a loss of 560 [1]. A modest fall in demand turns profit into loss, because fixed costs must still be paid and small firms have few reserves [1]. [7] Examiner insight: In a calculation chain, set out each stage on its own line so your reasoning is easy to follow. Say what the loss means for a small firm in context.

5. (a) Year 1: 7.5 / 50 x 100 = 15% [1]. Year 2: 8.4 / 70 x 100 = 12% [1]. (b) Sales: (8.4 / 7.5 - 1) x 100 = 12% [1]. Market: (70 / 50 - 1) x 100 = 40% [1]. (c) The market grew faster than the firm’s sales [1], so the firm’s slice of the market became smaller even though it sold more [1]. [6] Examiner insight: Compare shares or growth rates, not raw sales, when asked about market share. Use the two growth figures you calculated as the evidence in your explanation.

6. Internal growth is growth from within the firm using its own resources [1], for example increasing market share or opening a new branch [1]. External growth is growth by joining with another firm [1], for example a merger or takeover [1]. [4] Examiner insight: A distinction needs both sides described. An example on its own, with no definition, is a weaker answer than a definition plus an example.

7. (a) Horizontal [1]. (b) Vertical (backward) [1]. (c) Conglomerate [1]. (d) Spreads risk, because a fall in demand in one industry may be offset by another [1]. [4] Examiner insight: Test same industry first, then stage of production. For part (b) add “backward” to “vertical” to show you know the direction.

8. (a) 28 + 17 = 45% [1]. (b) Yes, because 45% is greater than C’s 35% [1]. (c) Advantage: shared costs and larger scale may lower the average cost of crossings [1], and if savings pass on, fares could fall [1]. Disadvantage: with one fewer rival, the merged firm has more power over price [1], so fares could rise or choice could fall [1]. [6] Examiner insight: Make the advantage and the disadvantage both about consumers, as the question asks. A statement about profit for owners does not answer it.

9. (a) Vertical (backward) [1]. (b) Cost before = 600 x 210 = 126,000 [1]. Cost after = 600 x 170 = 102,000 [1]. Saving = 24,000 [1]. (c) Benefits: secure supply and control of quality [1], plus the 24,000 saving [1]. Limits: the saving ignores the price paid for the orchard and any management difficulty [1]. Judgement: it is likely to help if the purchase cost is recovered over a reasonable time and managers can run an orchard [1]. [8] Examiner insight: An evaluation needs a judgement with a reason, not only a list of pros and cons. Use the figure from part (b) in your answer.

10. (a) 2,000: 14,000 / 2,000 = 7.00 [1]. 10,000: 60,000 / 10,000 = 6.00 [1]. 12,000: 78,000 / 12,000 = 6.50 [1]. (b) 6,000 to 8,000 bricks, where average cost is 5.50 [1]. (c) At 6,000: 33,000 / 6,000 = 5.50 [1]. Fall = (7.00 - 5.50) / 7.00 x 100 = 21.4% [1]. (d) Average cost rises beyond 8,000, so there are diseconomies of scale [1]. Two causes: poor communication in a large workforce [1] and weaker coordination or lower morale [1]. [9] Examiner insight: Work out average cost for every output you need, and use the lowest figure to answer the range question. Name the effect before the causes.

11. (a) (i) Internal, financial [1]. (ii) External, a pool of trained labour [1]. (iii) Internal, marketing [1]. (b) Name one, for example congestion or higher rents in a crowded industrial area [1]. As more firms locate there, demand for space and roads rises [1], so each firm’s costs increase whatever its own size [1]. [6] Examiner insight: Test whether the gain comes from the firm’s own size or from the industry as a whole. In part (b) show the chain from cause to higher costs.

12. Advantages: economies of scale in buying, maintenance and administration lower average cost [1], which may allow lower fares [1]. A larger firm may invest in more modern equipment [1]. Disadvantages: less competition gives the merged airline more control over price, so fares could rise [1]. Workers may lose jobs where roles are duplicated [1]. The firm could suffer diseconomies of scale if it becomes hard to manage [1]. Evaluation: the outcome depends on how many rival airlines remain [1], how easily new airlines can enter [1], and whether cost savings are passed to passengers [1]. Judgement with reason, for example that the merger is more likely to benefit the economy if rivals remain and entry is easy, but may harm it if the merged firm dominates the market [1]. [10] Examiner insight: Write in connected paragraphs: advantage, disadvantage, then a conclusion that answers “benefit the economy”. Mention both consumers and workers, not only the firm.

Where marks are usually lost

• Naming a sector or merger type without applying the test (main activity, or same industry and stage).
• Giving a reason for small firms to exist with no link to customers or costs.
• Forgetting fixed costs when finding break-even or profit.
• Comparing raw sales instead of market shares or growth rates.
• Leaving out units, labels or percentage signs.
• Describing a merger’s benefits without mentioning who benefits or loses.
• Treating economies of scale as automatic and ignoring diseconomies.
• Finishing an evaluation question without a reasoned conclusion.

Next steps

• Review the revision notes and the study guide.
• Go to the course hub and the printable checklist.
• Take the free 10-minute diagnostics to find your weak topics.
• Book a free trial class.

Official syllabus

Cambridge O Level Economics 2281, syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International). Section 3.5, Firms.