Edexcel IAL Economics: Efficiency, concentration ratios and perfect competition (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 3.3.3 (Market structures and contestability), items 1 to 3, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics (YEC11) specification, Issue 2, June 2018. Unit 3, Business behaviour, is labelled IA2 and is compulsory for the full International Advanced Level only. The firms, markets and figures are made up for practice.

Read the study guide first and keep the revision notes beside you. Hub: Edexcel A Level Economics. Checklist: printable checklist. Diagnostics: free 10-minute diagnostics.

Questions

1. Explain what is meant by allocative efficiency and by productive efficiency. [4]

2. Sales in the tea market of Country E (invented), in coins m: firm J 260, K 190, L 150, M 90, N 60. Ten smaller firms sell 250 between them.

(a) Calculate CR3 and CR4. [3] (b) K and M merge. Calculate the new CR3. [2] (c) Explain one possible effect of the merger on consumers. [2]

3. A firm could make 500 units at a lowest possible unit cost of 12.00 coins. Its actual unit cost is 14.40.

(a) Calculate the percentage by which actual cost exceeds the lowest possible. [2] (b) Calculate the total cost wasted. [1] (c) Identify one cause of this X-inefficiency. [1]

4. State three assumptions of perfect competition and explain why a firm in this market is a price taker. [5]

5. A perfectly competitive firm sells at 12 coins a unit. Its total cost is 40 at zero output, then 100, 150, 215, 300, 410 and 545 at 10, 20, 30, 40, 50 and 60 units.

(a) Calculate marginal cost for each 10-unit step. [2] (b) State and justify the profit-maximising output. [2] (c) Calculate the profit and state whether it is supernormal. [2]

6. A firm has total fixed cost of 90 coins. At its chosen output of 30 units, total variable cost is 240.

(a) Calculate average variable cost. [1] (b) The price is 7.50. Explain whether the firm should continue in the short run, using figures. [3] (c) Explain what changes if the price is 9. [1]

7. Market demand is Q = 3,000 - 50P. At a price of 14, 20 firms each produce 115 units. The lowest ATC of each firm is 10, at 100 units.

(a) Calculate the number of firms in long-run equilibrium. [3] (b) Explain how the industry moves to this position. [3]

8. A firm’s lowest ATC is 9.00 at 80 units. In the short run the price is 12 and the firm produces 110 units, where ATC is 10.20.

(a) Calculate its supernormal profit. [2] (b) Explain whether it is productively and allocatively efficient now. [3] (c) Explain the position in the long run. [3]

9. Explain dynamic efficiency and discuss whether perfect competition is likely to be dynamically efficient. [8]

10. Market R has four leading firms with shares of 44%, 18%, 12% and 6%. Market S has four leading firms with shares of 21%, 20%, 20% and 19%.

(a) Show that CR4 is the same in both. [2] (b) Evaluate the usefulness of concentration ratios in judging how competitive a market is. [8]

11. Assess whether perfect competition achieves an efficient allocation of resources. [12]

Answers

1. Allocative efficiency means resources are allocated to the goods consumers value most [1], which occurs where P = MC [1]. Productive efficiency means producing at the lowest possible average cost [1], at the bottom of the ATC curve where MC = ATC [1]. [4] Examiner insight: A definition earns more when paired with its condition, so write P = MC and the lowest point of ATC rather than only describing them in words.

2. (a) CR3 = (260 + 190 + 150) / 1,000 = 600 / 1,000 [1], = 60% [1]. CR4 = (600 + 90) / 1,000 = 69% [1]. (b) Merged firm sells 190 + 90 = 280, so the top three are 280, 260 and 150 [1]. CR3 = 690 / 1,000 = 69% [1]. (c) Higher concentration may give firms more market power [1], so prices could rise or choice could fall, or collusion becomes easier [1]. [7] Examiner insight: Show which firms you added. A bare percentage is hard to credit if one slip puts the wrong firms in the top three, especially after a merger changes the ranking.

3. (a) Excess = 14.40 - 12.00 = 2.40 [1]; 2.40 / 12.00 = 20% [1]. (b) 2.40 x 500 = 1,200 coins [1]. (c) Weak cost control or management, or lack of competitive pressure [1]. [4] Examiner insight: Divide by the lowest possible cost, not the actual cost. Dividing by 14.40 gives 16.7% and answers a different question.

4. Any three of: many buyers and sellers, homogeneous products, perfect information, freedom of entry and exit, profit maximisation [1] [1] [1]. Each firm supplies a negligible share, so its output cannot move the market price [1]. If it charged more, buyers with perfect information would buy an identical product elsewhere [1]. [5] Examiner insight: Naming assumptions is not enough for the explanation. Link at least one of them (many small sellers, identical product, full information) to why the firm cannot raise price.

5. (a) MC per unit: 6.0, 5.0, 6.5, 8.5, 11.0, 13.5 [1] [1]. (b) MR = price = 12. MC is 11 up to 50 units and 13.5 beyond, so output of 50 adds more to revenue than cost, and a further step does not [1] [1]. (c) TR = 600; profit = 600 - 410 = 190 [1]. ATC = 8.2, below price, so the profit is supernormal [1]. [6] Examiner insight: Justify the output by comparing MC with MR. Choosing the output with the lowest ATC, 30 units here, is a common wrong turn.

6. (a) 240 / 30 = 8 [1]. (b) Revenue = 7.50 x 30 = 225, below TVC of 240 [1]. Producing loses 90 + 240 - 225 = 105 [1], more than the 90 lost by shutting [1], so the firm should shut down. (c) At 9, revenue is 270, above TVC. The loss is 60, below 90, so it continues [1]. [5] Examiner insight: Compare price with AVC, and use numbers. Saying only that the firm makes a loss does not show whether closing would be better.

7. (a) Demand at P = 10: 3,000 - 500 = 2,500 [1]. Firms = 2,500 / 100 [1] = 25 [1]. (b) At 14, price exceeds ATC, so there is supernormal profit [1]. New firms enter, supply shifts right and price falls [1]. Entry stops at 10, where P = lowest ATC and profit is normal [1]. [6] Examiner insight: Use the long-run price, not 14, to find market demand. Give the chain in order: profit, entry, supply, price.

8. (a) (12 - 10.20) x 110 = 1.80 x 110 = 198 [1] [1]. (b) Not productively efficient: output of 110 is above 80 and ATC of 10.20 exceeds 9.00 [1] [1]. Allocatively efficient, since the firm sets MC = P = 12 [1]. (c) Entry drives the price down to 9 [1]. Output is 80 at lowest ATC, so productively efficient [1]. P = MC, so allocatively efficient [1]. [8] Examiner insight: Treat short run and long run separately. Productive efficiency fails in the short run here, so a blanket claim that perfect competition is efficient would be marked as too general.

9. Dynamic efficiency is improvement in productive and allocative efficiency over time through investment and innovation [1]. Against: long-run supernormal profit is zero, limiting funds for research [1]. Perfect information means rivals copy an innovation immediately [1], weakening the incentive to invest [1]. For: competition forces cost cutting, since firms that fail to do so make losses and exit [1]. Short-run supernormal profit can fund investment [1]. Small firms lack scale for research, and identical products give no reason to develop new ones [1]. Judgement: dynamic efficiency is less likely than static efficiency, though cost pressure keeps firms adopting known technology [1]. [8] Examiner insight: Define the term, then argue both ways and end with a reasoned conclusion. A list of assumptions without a link to investment does not answer the question.

10. (a) R: 44 + 18 + 12 + 6 = 80% [1]. S: 21 + 20 + 20 + 19 = 80% [1]. (b) Ratios give a simple way to compare markets and a high figure suggests market power [1]. Yet R and S differ: in R one firm holds 44%, more than twice any rival, so it may lead on price, while S has four near-equals who may compete or collude [1] [1]. The ratio ignores how shares are spread [1]. Results depend on market definition [1], and ignore imports and the threat of entry [1]. Basis (sales, output, employment) changes the figure [1]. Judgement: useful as a first indicator, but behaviour needs other evidence [1]. [10] Examiner insight: Use the data in the question. Pointing out that R and S share a CR4 yet differ in structure is stronger than a general list of limitations.

11. Allocative: P = MC in short and long run, so output matches what consumers value, with the outcome based on no externalities [1] [1]. Productive: only in the long run, at lowest ATC [1]. In the short run output can be above or below the lowest-ATC level [1]. Illustration: lowest ATC at 80 units, short-run output 110 [1]. Competition removes X-inefficiency, since high-cost firms make losses and exit [1]. Dynamic: little profit to invest and innovations are copied [1] [1]. Externalities mean P = MC can still be socially inefficient [1]. The assumptions are unrealistic, so the model is a benchmark [1]. Small firms may not reach minimum efficient scale [1]. Judgement: strong on static efficiency in the long run, weaker on dynamic efficiency and real-world fit [1]. [12] Examiner insight: Separate static from dynamic efficiency and short run from long run, then reach a judgement. Repeating the assumptions without linking them to efficiency earns little.

Where marks are usually lost

• Dividing by the sum of the top n firms instead of the whole market.
• Not re-ranking firms after a merger before recalculating the ratio.
• Choosing the lowest-ATC output as profit-maximising instead of MC = MR.
• Using ATC rather than AVC for the shutdown decision.
• Claiming that perfect competition is productively efficient in the short run.
• Calling long-run profit zero, rather than normal profit with no supernormal profit.
• Describing efficiency definitions without the condition (P = MC, lowest ATC).
• Evaluating with a list of weaknesses and no judgement.

Next steps

• Condense the topic with the revision notes or reread the study guide.
• Open the Edexcel A Level Economics hub and the printable checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018, published by Pearson Education Limited. Section 3.3.3, items 1 to 3.