Edexcel IAL Economics: Revenue and short-run costs (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 3.3.2 items 1 and 2 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics (YEC11) specification, Issue 2, June 2018. Unit 3, Business behaviour, is International A2 content and an IAL compulsory unit, not part of the IAS. All firms, countries and figures are invented; cu means currency units.

Links: study guide, revision notes, Edexcel A Level Economics hub and the printable checklist.

Questions

1. A firm sells 40 units at 12 cu each. It cuts the price to 11 cu and sells 50 units. Calculate total revenue at each price and the marginal revenue per unit of the extra 10 units sold. [3]

2. A juice bar raises the price of a smoothie from 25 cu to 28 cu. Weekly sales fall from 400 to 340. Calculate the price elasticity of demand, state whether demand is elastic or inelastic, and show the effect on total revenue. [5]

3. A firm faces this demand schedule.

Q	3	4	5	6	7	8	9	10
P (cu)	26	24	22	20	18	16	14	12

(a) Calculate TR for each output, and MR for outputs 4 to 10. [4] (b) State the output at which TR is highest. [1] (c) At that output, each 1 cu fall in price raises quantity demanded by 0.5 units. Calculate PED. [1]

4. Explain why marginal revenue is below average revenue for a firm facing a downward-sloping demand curve. [4]

5. A small embroidery shop has total fixed costs of 240 cu. Its total variable costs are:

Q	1	2	3	4	5	6
TVC (cu)	100	170	220	290	390	540

(a) For an output of 5, calculate TC, AFC, AVC and ATC. [4] (b) Calculate the marginal cost of the fifth unit. [1] (c) Using the table, explain why ATC is still falling between outputs of 4 and 5 even though AVC is rising. [3]

6. Explain why the marginal cost curve of a firm falls at first and then rises in the short run. [4]

7. Explain why the marginal cost curve cuts the average variable cost curve at its lowest point. [4]

8. Distinguish between the short run and the long run, and explain one way costs differ between them. [4]

9. A chair-making firm has one workshop (fixed). It pays each worker 180 cu a week. Total product (chairs per week) is:

Workers	1	2	3	4	5	6
TP	12	30	54	70	80	84

(a) Calculate MP and AP for the fourth worker. [2] (b) Identify the worker at which diminishing returns begin, with a reason. [2] (c) Calculate MC and AVC for an output of 70 chairs. [2] (d) Explain why MC rises after the third worker. [2]

10. A firm sells 600 units a week at 20 cu. It plans to cut the price to 18 cu. Its manager expects PED of -0.8. A market researcher says PED is -1.5. Extra units cost 11 cu each to make. (a) Calculate the new quantity and total revenue if PED is -0.8. [3] (b) Calculate the new quantity and total revenue if PED is -1.5. [2] (c) Evaluate whether the price cut is worthwhile. [4]

Answers

1. TR at 12 cu = 40 x 12 = 480 cu [1]. TR at 11 cu = 50 x 11 = 550 cu [1]. MR = (550 - 480) / 10 = 7 cu per unit [1]. [3] Examiner insight: MR is a change in revenue divided by a change in output. Dividing 550 by 50 gives AR, not MR, and answers that stop there lose the final step.

2. %change P = 3/25 x 100 = +12% [1]. %change Q = -60/400 x 100 = -15% [1]. PED = -15 / 12 = -1.25 [1]. Size above 1, so elastic [1]. TR falls from 25 x 400 = 10,000 cu to 28 x 340 = 9,520 cu, a fall of 480 cu [1]. [5] Examiner insight: Show both percentage changes, then link your verdict to revenue. A bare number for PED with no comment on TR leaves the question half answered.

3. (a) TR: 78, 96, 110, 120, 126, 128, 126, 120 for Q = 3 to 10 [2]. MR for Q = 4 to 10: 18, 14, 10, 6, 2, -2, -6 [2]. (b) Q = 8, where TR = 128 cu; MR is still +2 at 8 and is negative from 9 [1]. (c) Slope: 1 cu fall gives 0.5 more units, so dQ/dP = -0.5. PED = -0.5 x 16 / 8 = -1.0 (unitary) [1]. [6] Examiner insight: Cross-check a table with the pattern that MR is positive while TR rises. If your MR column and TR column disagree, one of them has an arithmetic slip.

4. To sell an extra unit the firm must lower the price [1]. The price cut applies to all units sold, not just the new one [1]. MR is the price of the extra unit minus the revenue lost on earlier units that now sell for less [1]. AR equals price, so MR is below AR at every output where the firm has to cut price (for a price taker the two are equal) [1]. [4] Examiner insight: A chain from “price cut applies to every unit” to “MR below AR” earns more credit than a statement that the MR curve “lies below” the AR curve.

5. (a) TVC at 5 = 390, so TC = 240 + 390 = 630 cu [1]. AFC = 240/5 = 48 cu [1]. AVC = 390/5 = 78 cu [1]. ATC = 630/5 = 126 cu (= 48 + 78) [1]. (b) MC = 390 - 290 = 100 cu [1]. (c) AVC rises from 72.5 to 78, a rise of 5.5 cu [1]. AFC falls from 60 to 48, a fall of 12 cu [1]. The fall in AFC is larger, so ATC (132.5 falling to 126) still falls [1]. [8] Examiner insight: Use the table figures in explanation parts. Quoting the AFC and AVC changes shows why ATC falls, which a general statement does not.

6. At low output extra workers specialise and make better use of the fixed capital, so MP rises [1]. Each extra unit needs fewer extra workers, so MC falls [1]. Later the fixed factor is crowded, diminishing returns set in and MP falls [1]. With a constant wage, each extra unit needs more labour, so MC rises [1]. [4] Examiner insight: Name the fixed factor and connect MP to MC. A description of the U shape without the cause is a statement, not an explanation.

7. If MC is below AVC, the extra unit costs less than the average, so AVC falls [1]. If MC is above AVC, the extra unit costs more than the average, so AVC rises [1]. AVC therefore stops falling and starts rising where MC equals AVC [1]. That is the lowest point of AVC, so MC crosses it there [1]. [4] Examiner insight: Say which way AVC moves on each side of the crossing. A student who only writes “MC cuts AVC at its minimum” has restated the question.

8. In the short run at least one factor is fixed [1]. In the long run all factors can be varied [1]. In the short run, a firm has fixed costs that do not change with output [1]. In the long run, there are no fixed costs because the firm can change plant size, so all costs are variable [1]. [4] Examiner insight: Define both periods by what can be varied, not by a length of time such as a year. Time periods differ between industries.

9. (a) MP = 70 - 54 = 16 chairs [1]. AP = 70/4 = 17.5 chairs [1]. (b) The fourth worker [1], because MP falls from 24 (third worker) to 16 (fourth worker) [1]. (c) MC = 180/16 = 11.25 cu [1]. TVC = 4 x 180 = 720, so AVC = 720/70 = 10.29 cu [1]. (d) From the fourth worker MP falls [1]. Each worker costs 180 cu but adds fewer chairs, so the cost of each extra chair rises [1]. [8] Examiner insight: In (b), a reason is needed, not just the worker number. Be careful to say MP falls, not TP: TP is still rising.

10. (a) Price cut = 2/20 = 10% [1]. Quantity rises by 8% to 648 units [1]. TR = 648 x 18 = 11,664 cu, below the old 12,000 cu [1]. (b) Quantity rises by 15% to 690 [1]. TR = 690 x 18 = 12,420 cu, a rise of 420 cu [1]. (c) If demand is inelastic (-0.8), TR falls, so the cut fails on revenue [1]. If demand is elastic (-1.5), TR rises by 420 cu, but the 90 extra units cost 990 cu to make, more than the gain in revenue [1]. So the decision depends on the PED estimate, and the researcher’s figure is itself uncertain [1]. A firm in diminishing returns may find extra units cost more than 11 cu, and a longer time period may make demand more elastic [1]. [9] Examiner insight: Keep your judgement tied to the figures you calculated. Say which result is more likely and why, rather than ending with “it depends”.

Where marks are usually lost

• Calculating percentage change on the new value rather than the original.
• Giving PED a number but no verdict (elastic or inelastic) and no effect on revenue.
• Dividing TR by Q and calling it MR.
• Including fixed cost in marginal cost.
• Writing “total output falls” when only marginal product falls.
• Explaining the U shape of MC without linking it to MP.
• Defining short run and long run by calendar time instead of fixed and variable factors.
• Stating that ATC and AVC reach their minimum at the same output.

Next steps

• Revisit the revision notes and the study guide.
• Check the Edexcel A Level Economics hub and the checklist.
• Take the free 10-minute diagnostics for all topics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), specification Issue 2, June 2018, section 3.3.2 items 1 and 2, published by Pearson Education Limited.