Pearson Edexcel International Advanced Level Economics: Monopoly and monopsony (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, item 6 (Monopoly) and item 7 (Monopsony), of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018. The specification labels Unit 3 as an IAL compulsory unit, so this is IA2 content. All firms and figures are invented. Teaching is in the study guide and the revision notes. See also the Edexcel economics hub, the checklist and the free 10-minute diagnostics.

Questions

1. State two assumptions of monopoly. [2]

2. Explain two barriers to entry that could protect a monopolist. [4]

3. A sole ferry operator on an island (invented) faces demand P = 150 − 5Q, where Q is thousands of trips and P is in currency units (cu). Its marginal cost is constant at 30 cu and its total fixed cost is 200 (thousand cu).

(a) Derive the marginal revenue function. [2] (b) Calculate the profit-maximising output and price. [3] (c) Calculate the profit. [2] (d) Calculate the deadweight loss compared with the output where P = MC. [3]

4. A water network (invented) has total cost TC = 600 + 5Q and faces demand P = 65 − Q.

(a) Calculate the profit-maximising output and price. [3] (b) Calculate the output and price if a regulator imposes P = average cost. Give answers to 1 decimal place. [3] (c) Explain why a regulator may not set P = MC. [2]

5. Explain the conditions necessary for a firm to practise third-degree price discrimination. [4]

6. A cinema (invented) has constant marginal cost of 4 cu per ticket. Adult demand is P = 40 − 2Q and child demand is P = 24 − 2Q (Q in hundreds of tickets).

(a) Calculate the profit-maximising price and quantity in each market. [4] (b) Calculate total profit. [1] (c) Calculate profit if the cinema must charge one price to everyone, and state the gain from discrimination. [3]

7. Using your answers to question 6, evaluate whether third-degree price discrimination benefits consumers. [6]

8. Evaluate whether monopoly is always against the interests of consumers. [8]

9. Explain two assumptions and two conditions needed for a monopsony to operate. [4]

10. A mining company is the only employer in a remote town (invented). Labour supply is W = 4 + 0.25L and marginal revenue product is MRP = 40 − 0.25L, where W is the hourly wage in cu and L is the number of workers.

(a) Derive the marginal cost of labour. [2] (b) Calculate the monopsony employment and wage. [3] (c) Calculate employment and wage in a competitive labour market. [2] (d) A minimum wage of 20 cu is introduced. Calculate employment. [2]

11. Evaluate the costs and benefits of the monopsony in question 10 for the firm, consumers and employees. [8]

Answers

1. One seller in the market [1]. High barriers to entry (or no close substitutes, or price maker) [1]. [2] Examiner insight: A bare “it is big” gains nothing. Answers tend to gain credit for precise features such as “single seller” and “barriers to entry”.

2. Economies of scale: a rival entering small would face higher unit costs [1] [1]. Patents or licences: the law stops rivals selling the product [1] [1]. (Other barriers with a reason, for example branding or sunk costs, are equally creditworthy.) [4] Examiner insight: Naming a barrier earns less than explaining why it blocks entry; add the “so” link each time.

3. (a) TR = 150Q − 5Q² [1]. MR = 150 − 10Q [1]. [2] (b) MR = MC: 150 − 10Q = 30 [1]. Q = 12 (thousand) [1]. P = 150 − 60 = 90 cu [1]. [3] (c) TR = 90 × 12 = 1,080, and TC = 200 + 30 × 12 = 560 [1]. Profit = 520 (thousand cu) [1]. [2] (d) P = MC: 150 − 5Q = 30 gives Q = 24 [1]. DWL = ½ × (24 − 12) × (90 − 30) [1] = 360 (thousand cu) [1]. [3] Examiner insight: A common slip is reading the price off MC. Showing “P from demand” in the working makes the logic visible.

4. (a) MR = 65 − 2Q [1]. 65 − 2Q = 5 gives Q = 30 [1]. P = 65 − 30 = 35 [1]. [3] (b) 65 − Q = 600/Q + 5 [1]. Q² − 60Q + 600 = 0 [1]. Q = 30 + √300 = 47.3, P = 17.7 [1]. [3] (c) At P = MC = 5, output is 60 [1], and the firm makes a loss equal to its fixed cost of 600, so it would need a subsidy [1]. [2] Examiner insight: In (b) the quadratic has two roots. Choosing the larger and saying why (more output at a lower price) tends to gain credit.

5. The firm needs market power, so it can set a price [1]. It must be able to separate the markets, for example by age or time [1]. Resale must be prevented, otherwise buyers in the cheap market resell to the dear one [1]. The groups must have different price elasticities of demand, otherwise the profit-maximising price is the same [1]. [4] Examiner insight: Strong answers tie each condition to a reason it matters. Listing four items with no explanation tends to stay at the lower end.

6. (a) Adults: MR = 40 − 4Q = 4, so Q = 9 [1], P = 22 [1]. Children: 24 − 4Q = 4, so Q = 5 [1], P = 14 [1]. [4] (b) 9 × 18 + 5 × 10 = 162 + 50 = 212 [1]. [1] (c) Combined demand Q = (40 − P)/2 + (24 − P)/2 = 32 − P, so P = 32 − Q [1]. MR = 32 − 2Q = 4 gives Q = 14, P = 18 [1]. Profit = 14 × 14 = 196, so the gain is 16 [1]. [3] Examiner insight: Answers earn most when MR = MC is solved separately in each market. Applying one price to both and calling it discrimination gains little.

7. Children pay 14 instead of 18 and buy 5 hundred instead of 3 [1]. Adults pay 22 instead of 18 and buy 9 hundred instead of 11 [1]. Children’s surplus rises and adults’ falls [1]. Total consumer surplus falls from 130 to 106 [1]. Profit rises by 16, so total surplus falls by 8 [1]. Judgement: consumers as a group are worse off here, though child consumers gain [1]. In other markets the answer could change if discrimination opens a market that a single price would exclude. [6] Examiner insight: Judgement tends to gain credit when it is tied to a stated reason, for example “worse off in total because the loss to adults is larger”.

8. Against: higher price and lower output than under competition [1]. Price exceeds MC, so allocative inefficiency and a deadweight loss [1]. Lack of rivals may mean X-inefficiency and productive inefficiency [1]. For: scale economies could cut costs enough to lower the price [1]. Supernormal profit can fund research, aiding dynamic efficiency [1]. But protection from rivals may remove pressure to innovate [1]. Evaluation: it depends on the size of the cost savings, on regulation and on how high the barriers are [1]. Judgement: monopoly is not always against consumers, but it is likely to be where barriers are legal rather than cost-based and regulation is weak [1]. [8] Examiner insight: “Always” in the question invites a counter-example. Answers tend to gain credit when they give one specific condition under which consumers gain.

9. Assumptions: a single or dominant buyer [1]; the buyer is a price or wage maker facing an upward-sloping supply curve [1]. Conditions: workers (or suppliers) are immobile, so they cannot easily move [1]; few alternative employers or weak unions [1]. [4] Examiner insight: Keep assumptions (what the model says) separate from conditions (what keeps it in place); mixing them tends to lose a mark.

10. (a) Total labour cost = WL = 4L + 0.25L² [1]. MCL = 4 + 0.5L [1]. [2] (b) MCL = MRP: 4 + 0.5L = 40 − 0.25L [1]. L = 48 [1]. Wage from supply = 4 + 12 = 16 cu [1]. [3] (c) S = MRP: 4 + 0.25L = 40 − 0.25L [1]. L = 72, W = 22 cu [1]. [2] (d) At 20, labour supplied = 64 and labour demanded = 80 [1]. Employment = 64, up from 48 [1]. [2] Examiner insight: Taking the wage from MCL (28) rather than the supply curve is the usual error; say “read down to supply”.

11. Firm: lower wage (16 against 22) cuts costs and raises profit [1]. But low pay may cause turnover and low effort [1]. Consumers: lower costs may mean lower prices, if the firm faces competition in the product market [1]. If the firm is also a monopolist, there may be no pass-through [1]. Employees: wage 16 against 22 and 48 jobs against 72 [1] [1]. Offset: without the mine there may be no jobs at all, and it may train staff [1]. Judgement: costs fall mainly on workers, and the benefits depend on pass-through and on whether the employer is essential to the town [1]. [8] Examiner insight: Naming all three groups is expected. Answers tend to gain credit when each group gets a cost and a benefit supported by the figures.

Where marks are usually lost

• Taking the price from the MC or MR curve instead of going up to demand.
• Using the wrong MR for a linear demand curve.
• Forgetting that fixed costs must be subtracted to get profit.
• Describing barriers to entry without explaining why they deter rivals.
• Applying one price to both markets in a price discrimination question.
• Reading the monopsony wage from the MCL curve.
• Calling monopoly “bad” or “good” with no condition or reason.
• Giving evaluation that is only a restatement of the points above.

Next steps

• Re-read the study guide for any question you missed.
• Revise with the revision notes.
• Check the Edexcel economics hub and the printable checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Source: Pearson Education Limited, Edexcel International Advanced Subsidiary/Advanced Level in Economics (specification, Issue 2, June 2018; first teaching September 2018), section 3.3.3 Market structures and contestability, items 6 and 7.