O Level Economics: Microeconomic Decision Makers — Practice Questions (Cambridge 2281)

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available free from your board.

Related: Microeconomic decision makers study guide and revision notes

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Section A

1. State three named influences on a household’s spending, saving and borrowing decisions. [3]

2. Distinguish between horizontal and vertical mergers, giving one example of each. [2]

3. Define productivity, and state how it differs from production. [2]

Section B

4. A firm produces 500 units of output. Its fixed costs are $2,000 and its variable costs are $3,000.

(a) Calculate the firm’s total cost, average total cost, and average variable cost. [4] (b) The firm sells all 500 units at $12 each. Calculate its total revenue and average revenue. [2]

5. A trade union negotiates a successful pay rise for its members at a large manufacturing firm.

(a) Explain one way this outcome could benefit workers. [2] (b) Explain one way this outcome could be viewed as a cost from the firm’s viewpoint. [2] (c) Suggest one factor that influences how strong the trade union’s bargaining position is likely to be. [2]

6. A worker is deciding between two job offers: one with higher pay but longer hours and less job security, and one with lower pay but greater job security and better working conditions.

(a) Identify one wage factor and one non-wage factor relevant to this decision. [2] (b) Explain why a worker might reasonably choose the lower-paid job. [2]

7. A small, family-owned bakery continues to trade successfully despite the presence of large supermarket chains selling bread more cheaply nearby. Suggest and explain one reason small firms like this can continue to exist alongside much larger competitors. [3]

8. A firm switches from a labour-intensive to a capital-intensive method of production. Explain one reason a firm might make this choice. [3]

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Answers

1. Income, the rate of interest, confidence [3].

2. A horizontal merger combines two firms at the same stage of production in the same industry, for example two car manufacturers merging [1]. A vertical merger combines two firms at different stages of production in the same industry, for example a car manufacturer merging with a tyre supplier [1].

3. Productivity is output per unit of input (for example, output per worker) [1], whereas production refers to total output itself, regardless of how many inputs were used to generate it [1].

4. (a) Total cost = fixed cost + variable cost = $2,000 + $3,000 = $5,000 [1]. Average total cost = TC ÷ output = $5,000 ÷ 500 = $10 [1–2]. Average variable cost = VC ÷ output = $3,000 ÷ 500 = $6 [1]. (b) Total revenue = price × quantity sold = $12 × 500 = $6,000 [1]. Average revenue = TR ÷ quantity sold = $6,000 ÷ 500 = $12 [1] (average revenue equals price when all units are sold at the same price).

5. (a) Workers benefit from higher pay as a direct result of the successful collective bargaining, improving their standard of living [2]. (b) From the firm’s viewpoint, the pay rise increases labour costs, which could reduce profit margins or force the firm to raise prices, potentially making it less competitive [2]. (c) Factors such as the proportion of the workforce that are union members, the importance of those workers to the firm’s production, or the strength of the wider economy at the time of negotiation could all influence the union’s bargaining position [2] (any one, correctly explained).

6. (a) Wage factor: the pay offered by each job [1]. Non-wage factor: job security or working conditions [1]. (b) A worker might value job security and better working conditions more highly than the extra pay, especially if they have other priorities such as family commitments, wellbeing, or a preference for predictable working hours over financial gain alone [2].

7. Small firms can continue to exist alongside larger competitors for reasons such as offering a more personalised service, occupying a small or specialised market niche that is not worth a large firm’s attention, or building strong local customer loyalty that a large chain cannot easily replicate [2–3]. (Lower overheads for a genuinely small-scale operation, correctly explained, would also gain credit.)

8. A firm might switch to capital-intensive production where the relative cost of capital falls compared with labour, where capital equipment can produce output more efficiently or to a higher and more consistent quality than manual labour, or where the firm needs to increase output beyond what its current workforce could produce, especially for large-scale, standardised production [2–3].

A note on exam technique for this topic

Question 4 illustrates the calculation skill the study guide flags as the most heavily tested numerical content in this topic: moving fluently between raw figures and the TC/ATC/AVC/TR/AR labels, rather than only recognising the definitions in words. Question 5 illustrates the multiple-viewpoint skill this topic also specifically tests — the same trade union outcome can be a benefit from one viewpoint (workers) and a cost from another (the firm), and a strong answer states which viewpoint it is addressing explicitly rather than describing the outcome as simply “good” or “bad” in the abstract.

This three-viewpoint habit (workers, firms, government) extends naturally to questions 7 and 8 as well: a small firm’s survival or a switch to capital-intensive production can look different depending on whose perspective — owner, employee, or consumer — a question asks about, so checking which viewpoint a question specifies before answering is worth building into revision for this topic as a whole.