OCR A Level Economics: Business objectives and the principal-agent problem (H460) – 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 the “Business objectives” topic of the OCR A Level in Economics (H460) specification, version 3.0 (June 2026), first assessment in 2021. The mark totals are our own. Every firm and number here is made up. Explanations are in the study guide and the revision notes. Course pages: OCR Economics hub and the checklist.

Questions 2 to 4, 6 and 10 use Firm Beta, a made-up producer. Output (Q) is in thousand units, price is £(80 − 4Q), and money values are £ thousand.

Q	Price	TR	TC	Profit
2	72	144	88	56
3	68	204	124	80
4	64	256	168	88
5	60	300	220	80
6	56	336	280	56
7	52	364	348	16
8	48	384	424	−40
10	40	400	600	−200

Questions

1. Define profit maximisation and state the condition that identifies the profit-maximising output. [3]

2. Use the Firm Beta table.

(a) Calculate profit at an output of 5 thousand units, showing your working. [2] (b) State the profit-maximising output and the profit earned there. [2]

3. Firm Beta wants to maximise sales revenue but its shareholders insist on a profit of at least £50 thousand.

(a) State the output chosen and the total revenue it earns. [2] (b) Explain why Firm Beta could not sustain unconstrained revenue maximisation. [2]

4. Firm Beta aims to maximise sales volume while earning at least normal profit. State the output and price, and justify why a larger output is ruled out. Use whole thousands of units. [4]

5. A firm has capital of £4.0 million and makes a profit of £0.9 million. It retains 70% of profit to invest.

(a) Calculate the percentage growth in its capital. [3] (b) Explain one factor that could limit this growth strategy. [2]

6. Firm Beta is run by an owner who satisfices, accepting any profit of at least £75 thousand.

(a) State the outputs that meet this target. [2] (b) Explain why the owner may choose the lowest of them. [2]

7. Explain what is meant by the principal-agent problem. [5]

8. A manager is paid a bonus of 2% of profit. Two plans give these profits over four years (£ million): plan A 5.0, 4.5, 3.5, 3.0; plan B 4.0, 4.5, 5.0, 5.5.

(a) Which plan does the manager choose if the bonus uses only year-one profit? Give the bonus in each case. [2] (b) State how much more total profit plan B earns over four years. [1] (c) Find the bonus under each plan if it is based on the four-year average profit. [2] (d) Evaluate one limitation of using the four-year average. [2]

9. A firm switches to recycled packaging, adding £45,000 a year to costs. Each unit sold earns a contribution of £5. Current annual profit is £600,000.

(a) Calculate the extra units that must be sold to cover the cost. [2] (b) Express the cost as a percentage of current profit. [2] (c) Explain one way this CSR action might not reduce long-run profit. [2]

10. Firm Beta is taken over by a social enterprise that sets the lowest price possible while covering all costs. Use whole thousands of units.

(a) State the output and price, and compare them with the profit-maximising price. [3] (b) Evaluate one cost to the enterprise of this objective. [3]

11. Evaluate the view that profit maximisation is the most relevant objective for businesses. [10]

12. A family-owned joinery workshop and a large listed construction company operate in the same region. Evaluate the factors that might explain why their objectives differ. [10]

Answers

1. Profit maximisation is choosing the output that gives the greatest gap between total revenue and total cost [1]. The rule is MR = MC [1], reached with MC rising through MR from underneath [1]. [3] Examiner insight: “Making the most money” alone is vague, so a definition earns more when the MR = MC rule is written out.

2. (a) Profit = TR − TC [1] = 300 − 220 = £80 thousand [1]. [2] (b) The highest profit in the table is at an output of 4 thousand units [1], where profit is £88 thousand [1]. [2] Examiner insight: Show the subtraction, and keep the unit (£ thousand) with the final figure.

3. (a) Outputs with profit of at least 50 are 2 to 6, and the highest revenue among them is at 6 thousand units [1], with TR = £336 thousand [1]. [2] (b) Revenue peaks at 10 thousand units (£400 thousand) [1], but TC is £600 thousand, a loss of £200 thousand that cannot be sustained [1]. [2] Examiner insight: Quote values from the schedule in the explanation; a vague remark about “too many costs” is weaker.

4. Profit must be at least zero [1]. At 7 thousand units profit is £16 thousand, so this is affordable [1], and the price is 80 − 28 = £52 [1]. At 8 thousand units profit is −£40 thousand, so the firm cannot cover its costs [1]. [4] Examiner insight: Answers earn credit for identifying the constraint (costs covered) as well as the output.

5. (a) Retained profit = 0.7 × 0.9 = £0.63 million [1]. Growth = 0.63 ÷ 4.0 [1] = 15.75% [1]. [3] (b) Shareholders may want dividends, so retention is limited [1], and lower payouts or poor profit may raise the risk of a takeover [1]. [2] Examiner insight: Name the constraint and say how it restricts growth. A bare mention such as “finance” does not explain anything.

6. (a) Profits of 80, 88 and 80 meet the target at outputs of 3, 4 and 5 thousand units [1]. Output 2 (56) and output 6 (56) fall short [1]. [2] (b) The owner needs no more than a satisfactory profit [1], so may prefer the smallest output of 3 thousand units because it needs fewer staff and less effort for similar profit [1]. [2] Examiner insight: Tie the answer to the idea that a satisficer stops searching once the target is met.

7. A principal hires an agent to act on their behalf, such as shareholders and managers [1]. The two have different objectives, for example profit for shareholders but pay or status for managers [1]. The agent knows more than the principal, which is asymmetric information [1]. Monitoring is costly and imperfect, so the agent can act in their own interest [1]. This may lead to lower profit, wasteful spending or poor risk choices [1]. [5] Examiner insight: Explain why the problem arises (divergent aims and unequal information), not only that managers “do not always do what they are told”.

8. (a) Year one: plan A gives 2% × 5.0 = £100,000 and plan B gives 2% × 4.0 = £80,000 [1], so the manager chooses plan A [1]. [2] (b) Plan A totals 16.0 and plan B totals 19.0, so B earns £3.0 million more [1]. [1] (c) Averages are 4.0 for A and 4.75 for B [1]. Bonuses are £80,000 for A and £95,000 for B [1]. [2] (d) One limitation: the manager still has little reason to care about profit beyond year four [1], or the manager may delay costs to inflate the profit in the averaged years [1]. [2] Examiner insight: A limitation earns more when the reason is developed, so say what the manager can do and why it hurts shareholders.

9. (a) Units = 45,000 ÷ 5 [1] = 9,000 units [1]. [2] (b) 45,000 ÷ 600,000 × 100 [1] = 7.5% [1]. [2] (c) Customers may favour the firm and buy more, raising sales [1], or the brand may be protected against bad publicity, preserving future profit [1]. [2] Examiner insight: An unsupported “CSR is good for the brand” is thin. Link the action to a mechanism that affects revenue or costs.

10. (a) Break-even (profit at least zero) allows up to 7 thousand units [1] at a price of £52 [1], compared with £64 at the profit-maximising output of 4 thousand units [1]. [3] (b) Profit falls from £88 thousand to £16 thousand [1], leaving far less to reinvest or to cover shocks [1]. The judgement depends on whether the benefit to buyers outweighs the lost funds, and on whether donors or grants can fill the gap [1]. [3] Examiner insight: A one-sided list of costs leaves the question unanswered, so reach a short judgement.

11. In favour: profit pays owners and funds investment [1]; survival in competitive markets needs profit [1]; it is clear and measurable, and a usable benchmark [1]. Against: firms rarely know MC and MR exactly [1]; ownership and control are separate in large firms, so managers pursue other aims [1]; stakeholders and CSR matter [1]; short-run maximum may harm long-run profit [1]. Application to a firm in the question [1]. Judgement: relevant as a long-run constraint and benchmark, less so as a full description for large or social firms [1], justified by a stated factor such as ownership or competition [1]. [10] Examiner insight: Both sides plus a conclusion that names what the answer depends on tend to read as evaluation, whereas two lists with no verdict read as description.

12. Ownership: the owner of the workshop controls decisions and may satisfice or value lifestyle and local standing [1]; the listed company faces shareholders and may prioritise profit and share value [1]. Control: the large company has a principal-agent problem, so managers may pursue revenue, growth or utility [1], and incentives matter [1]. Competition: strong competition pushes both toward profit and efficiency [1]. Finance: the workshop has limited funds, so survival may dominate [1]; the larger firm can fund growth [1]. Stakeholders: a visible large firm faces more pressure for CSR [1]. Judgement: ownership and control are probably the most important, because they decide whose aims count [1], though competition can override the preferences of either [1]. [10] Examiner insight: Compare the two firms directly, point by point, rather than describing each separately.

Where marks are usually lost

• Stating the objective but not the rule or the figures that show it.
• Mixing up revenue maximisation (MR = 0) with profit maximisation (MR = MC).
• Forgetting the profit floor when asked about sales volume.
• Omitting units such as £ thousand or percentage signs.
• Defining the principal-agent problem without the information gap.
• Listing solutions with no cost or side effect.
• Treating CSR as only a cost.
• Ending 10-mark answers without a judgement and a reason for it.

Next steps

• Re-read the study guide for any weak area.
• Use the revision notes for a final recap.
• Review the OCR Economics hub and the checklist.
• Check other topics with the free 10-minute diagnostics.
• Want a teacher to go through these with you? Book a free trial class.

Official syllabus

The source document is the OCR A Level in Economics (H460) specification, version 3.0 (June 2026), first assessment in 2021, published by OCR.