Pearson Edexcel International Advanced Level Economics: Competition policy (YEC11) – 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 section 3.3.5 Government intervention, item 1 (product markets), of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018. This is Unit 3 content, labelled IA2, so it belongs to the full International Advanced Level only. All figures are invented; currency units are “cu”.

Links: study guide, revision notes, Edexcel economics hub, printable checklist and free 10-minute diagnostics.

Questions

1. Explain why a firm with market power may cause allocative inefficiency. [3]

2. In Country B the water price cap rises each year by inflation minus an efficiency factor. Last year the price was 60 cu, inflation is 5% and the factor is 2.5%. Calculate the new price cap and the change in the real price. [3]

3. A rail firm has capital of 8,000 cu and profit of 1,200 cu. The regulator allows a return of 9%, and the firm sells 240 units. Calculate the actual return, the excess profit and the price cut per unit that removes it. State one weakness of profit regulation. [5]

4. Two competing bakeries in Country C merge. Demand is P = 80 - Q and marginal cost is 30 cu before the merger (competitive output). After it, the single firm has marginal cost 24 cu. (a) Calculate consumer surplus before and after. [3] (b) Calculate profit and total surplus after the merger. [2] (c) Assess whether the authority should allow the merger. [3]

5. A start-up in a concentrated market has sunk costs of 150 cu and annual profit of 25 cu. The government offers a grant of 40% of sunk costs. Calculate the payback period before and after the grant, and explain how this may affect an incumbent’s pricing. [5]

6. A council’s in-house cost is 200 cu. Bids: X 190 cu (quality score 60), Y 176 cu (quality 80), Z 150 cu (quality 40). The score is 50% price and 50% quality, where the price score is the lowest bid divided by the bid, times 100. Calculate each weighted score, name the winner and calculate the saving against in-house. [4]

7. Country D imports a good at a world price of 72 cu with a 25% tariff. The tariff is removed. Price elasticity of demand is -0.8. Calculate the new price, the percentage fall in price and the percentage change in quantity demanded. State one effect on domestic firms. [4]

8. An assembler needs 2,000 components. Imports cost 12 cu and local supply costs 15 cu. A rule requires 25% to be local. Calculate the extra cost in cu and percent, the sales gained by local suppliers and one evaluation point. [5]

9. A dairy processor buys milk from farmers. Farmers’ supply is P = 6 + 0.2Q and the processor’s marginal revenue product is 36 - 0.1Q. (a) Find the competitive price and quantity. [2] (b) The processor is a monopsonist with marginal cost of buying 6 + 0.4Q. Find its quantity and price, and the gap between price and marginal revenue product. [3] (c) The state sets a minimum price of 22 cu. Find the quantity and explain the effect. [2] (d) State one limit to this policy. [1]

10. Demand for a regulated firm’s output is P = 60 - Q, marginal cost is 6 cu and its true fixed cost is 405 cu. The regulator sets price equal to average cost. (a) Find the price and output when the true fixed cost is used. [2] (b) The firm reports fixed costs of 440 cu. Find the price and output. [2] (c) Calculate the firm’s excess profit at the reported price. [1] (d) Name the limit to intervention shown. [1]

11. A cartel would gain 600 cu from fixing prices. The probability of detection is 0.25 and the fine is 1,800 cu. Calculate the expected fine, state whether it deters, and find the fine or detection probability needed. Name the limit shown. [5]

12. The state-owned rail operator in Country E is the only supplier. Assess the case for privatising it. [10]

Answers

1. The firm restricts output to raise price [1]. Price is then above marginal cost [1]. Consumers value extra units above the cost of making them, so output is too low [1]. [3] Examiner insight: Naming the condition (price above marginal cost) as well as the result tends to make the chain complete.

2. New cap = 60 x (1 + 0.05 - 0.025) = 61.5 cu [1]. Real change = 1.025/1.05 - 1 = about -2.4% [1]. Prices rise 2.5% against inflation of 5%, so the real price falls [1]. [3] Examiner insight: Using the net rate (2.5%) on the old price is the method; applying 5% and subtracting 2.5 cu is a common slip.

3. Return = 1,200/8,000 = 15% [1]. Permitted profit = 720, so excess = 480 cu [1]. Price cut = 480/240 = 2 cu per unit [1]. Weakness: the firm may overstate capital or costs [1], so the true excess is hidden [1]. [5] Examiner insight: Show the permitted profit as a separate line so each step can be seen.

4. (a) Before: competitive Q = 50, P = 30; consumer surplus = 0.5 x 50 x 50 = 1,250 [1]. After: 80 - 2Q = 24, so Q = 28 and P = 52 [1]. Consumer surplus = 0.5 x 28 x 28 = 392 [1]. [3] (b) Profit = (52 - 24) x 28 = 784 [1]. Total surplus = 392 + 784 = 1,176, below 1,250 [1]. [2] (c) The price rises by about 73% (30 to 52), and consumers lose 858 [1]. Total surplus falls 74 even with the cost saving [1]. The authority should block it, or allow it only with conditions, unless the cost saving proves larger than assumed [1]. [3] Examiner insight: Basing the verdict on the numbers you have calculated tends to read stronger than a general view about mergers.

5. Payback before = 150/25 = 6 years [1]. Grant = 60 cu, so sunk costs fall to 90 [1]. Payback after = 90/25 = 3.6 years [1]. Entry is cheaper and a rival is more likely to enter [1]. The incumbent may cut price or hold it down to deter entry [1]. [5] Examiner insight: Linking lower sunk cost to the threat of entry shows the idea of contestability, not just the arithmetic.

6. Price scores: X 78.9, Y 85.2, Z 100 [1]. Weighted: X 0.5 x 78.9 + 0.5 x 60 = 69.5; Y 82.6; Z 70.0 [1]. Winner: Y [1]. Saving = 200 - 176 = 24 cu (12%) [1]. [4] Examiner insight: Stating the winner explicitly, with the highest score, tends to be rewarded; a list of scores alone leaves it open.

7. New price = 72 cu [1]. Fall = 18/90 = 20% [1]. Quantity change = -0.8 x -20% = +16% [1]. Domestic firms face cheaper imports, so sales and profit fall unless they cut costs [1]. [4] Examiner insight: The percentage fall is measured from the old price (90), not the new one.

8. Cost = 1,500 x 12 + 500 x 15 = 25,500 [1]. All imports cost 24,000, so extra = 1,500 cu [1], which is 6.25% [1]. Local sales = 500 x 15 = 7,500 cu [1]. Evaluation: it protects local jobs but raises costs, which may raise prices or invite retaliation [1]. [5] Examiner insight: Each step is a separate figure here; a single final number without the 25,500 offers little to credit.

9. (a) 6 + 0.2Q = 36 - 0.1Q, so Q = 100 and P = 26 cu [1][1]. [2] (b) 6 + 0.4Q = 36 - 0.1Q gives Q = 60 [1]. Price = 6 + 0.2 x 60 = 18 cu [1]. Marginal revenue product = 30, so the gap is 12 cu [1]. [3] (c) Supply at 22 cu is (22 - 6)/0.2 = 80 [1]. The processor values the 80th unit at 28, above 22, so it buys 80. Price and quantity rise above the monopsony outcome (18, 60) [1]. [2] (d) It needs enforcement, or the price may be set above the competitive level and cut demand [1]. [1] Examiner insight: Compare the new outcome with the monopsony result, not only with the competitive one.

10. (a) 60 - Q = 6 + 405/Q gives Q squared - 54Q + 405 = 0, so Q = 45 and P = 15 cu [1][1]. [2] (b) Q squared - 54Q + 440 = 0, so Q = 44 [1] and P = 16 cu [1]. [2] (c) True average cost at 44 is 6 + 405/44 = 15.2, so excess profit = 440 - 405 = 35 cu [1]. [1] (d) Asymmetric information (an information gap) [1]. [1] Examiner insight: Naming the limit and tying it to the reported figure is stronger than the label alone.

11. Expected fine = 0.25 x 1,800 = 450 cu [1]. It is below the gain of 600, so it does not deter [1]. The fine must exceed 600/0.25 = 2,400 cu [1], or detection must exceed 600/1,800 = 33.3% [1]. The limit is inadequate resources (too few investigators) [1]. [5] Examiner insight: Comparing the expected cost with the gain is the test; the fine alone does not show deterrence.

12. Private owners seek profit, which may cut costs and raise productive efficiency [1]. Sale proceeds could fund other spending, though income from the firm is lost [1]. Competition may rise if the firm is broken up or others may enter [1]. Quality and investment may improve through managers’ incentives [1]. But a sole supplier becomes a private monopoly with market power [1], so price may rise [1]. A natural monopoly cannot easily be split, so regulation is needed [1]. Regulation faces capture and information gaps [1]. Judgement: privatisation is justified only if competition is introduced or tight price and quality rules are enforceable [1]. The balance depends on regulator strength and on whether costs fall [1]. [10] Examiner insight: A judgement stating the condition that decides the outcome tends to separate a developed answer from a list of points.

Where marks are usually lost

• Dividing by the new price when finding a percentage change.
• Using the gross inflation rate instead of the net rate in a price cap.
• Calculating consumer surplus but never comparing it with total surplus.
• Forgetting that a cap at marginal cost leaves a natural monopoly with a loss.
• Describing tendering as price only, with no mention of quality.
• Naming a limit to intervention without applying it to the case.
• Giving a one-sided answer to an assess question.

Next steps

• Review the revision notes and the study guide.
• Check coverage on the printable checklist and the Edexcel economics hub.
• Take one of our free 10-minute diagnostics.
• Book a free trial class through the trial page.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), Specification, Issue 2, June 2018, Pearson Education Limited. This page covers section 3.3.5 item 1 of Unit 3.