OCR A Level Economics: Economies of scale, revenue and profit (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 follow the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. They cover long run costs, revenue and profit in Component 1, Microeconomics. The specification labels no content as AS or Extension. Every firm, market and figure is invented and illustrative.

Read the study guide and the revision notes first. See the OCR Economics hub, the printable checklist and the free diagnostics. Elasticity has its own guide.

Questions

1. Explain what is meant by internal economies of scale and external economies of scale, and give one example of each. [4]

2. A firm’s long run total cost is £84,000 at 12,000 units and £120,000 at 20,000 units.

(a) Calculate long run average cost at each output. [2] (b) Work out the percentage change in average cost and say what it shows. [2]

3. A fictional quarry has the long run average costs below.

Output (thousand tonnes)	5	10	15	20	25	30
LRAC (£ per tonne)	9.50	8.00	7.00	6.40	6.40	6.80

(a) State the minimum efficient scale. [1] (b) The market buys 140 thousand tonnes. Calculate how many firms could operate at that scale. [2] (c) Calculate how far above the minimum a firm producing 10 thousand tonnes has its average cost. [2]

4. Explain the relationship between short run average cost and long run average cost. [4]

5. A firm faces the demand curve P = 120 − 4Q, where P is price in pounds and Q is units sold. Calculate total revenue, average revenue and marginal revenue for the third unit, then explain why marginal revenue is below average revenue. [4]

6. For the firm in question 5:

(a) Calculate PED at a price of £80. [2] (b) Calculate the effect on total revenue of cutting price from £80 to £70, and explain the result. [2] (c) Find the output at which total revenue is highest and state PED there. [2]

7. A small print shop (illustrative) has revenue of £96,000 and explicit costs of £61,000. The owner could earn £28,000 elsewhere and has £50,000 of savings in the business that could earn 5%.

(a) Calculate accounting profit. [1] (b) Calculate economic profit. [2] (c) Explain whether the shop earns supernormal profit. [2]

8. Three firms are described below.

Firm	Output	AR (£)	AC (£)
P	250	14.00	11.00
R	600	6.50	6.50
S	180	9.00	12.50

(a) For each firm, work out revenue, cost and the resulting profit or loss. [3] (b) Identify which firm earns normal profit and which makes a loss, with reasons. [2]

9. A firm faces P = 100 − 2Q and has total cost TC = 80 + 10Q + Q². Show that profit is maximised at 15 units, find the price and the maximum profit, and check against the neighbouring outputs. [7]

10. Demand for the firm in question 9 falls to P = 40 − 2Q. Calculate its output and loss if it minimises its loss, and explain whether it should keep producing. [5]

11. Evaluate the view that economies of scale always benefit consumers. [10]

Answers

1. Internal economies are falls in long run average cost that result from the firm itself growing larger [1], for example bulk-buying discounts or a larger machine [1]. External economies are falls in costs that result from the whole industry growing, so that every firm gains [1], for example a pool of skilled labour or specialist suppliers locating nearby [1]. [4] Examiner insight: A definition earns its credit by saying where the cost saving comes from, the firm or the industry. Naming an example without that distinction does not show the difference.

2. (a) 84,000/12,000 = £7.00 [1]; 120,000/20,000 = £6.00 [1] (b) (6.00 − 7.00)/7.00 × 100 = −14.3% [1]. Output rose 66.7% but total cost only 42.9%, so average cost fell: economies of scale [1]. Examiner insight: Divide by the original value, not the new one, and state the sign. A fall described as a positive percentage is easy to misread.

3. (a) The smallest output at which LRAC reaches its minimum of £6.40 is 20 thousand tonnes [1] (b) 140/20 [1] = 7 firms [1] (c) (8.00 − 6.40)/6.40 × 100 [1] = 25% above the minimum [1] Examiner insight: Both 20 and 25 give £6.40, but MES is the first output reaching it. Choosing 25 is a common slip.

4. Each plant size has its own SRAC, because at least one factor is fixed [1]. The LRAC shows the lowest cost of each output when the firm can choose the best plant [1]. It is the envelope of the SRAC curves, touching each and never lying above any [1]. Its downward slope reflects economies of scale and its upward slope diseconomies, whereas the SRAC curves’ shape comes from the fixed factor [1]. [4] Examiner insight: A diagram description naming both curves and the touching points adds precision, but the written explanation must still say why the LRAC lies below.

5. At 3 units, P = 120 − 12 = £108, so AR = £108 [1]. TR = 3 × 108 = £324 [1]. TR at 2 units = 2 × 112 = 224, so MR = 324 − 224 = £100 [1]. MR is below AR because to sell the extra unit the firm must cut the price on all earlier units too, losing revenue on them [1]. [4] Examiner insight: Calculate MR as a change in TR. Reading the price off the demand curve gives AR instead.

6. (a) At P = 80, Q = (120 − 80)/4 = 10 [1]. PED = −(1/4) × (80/10) = −2 [1] (b) At 70, Q = 12.5. TR rises from 800 to 875 [1] because demand is elastic, so the percentage rise in quantity exceeds the fall in price [1]. (c) MR = 120 − 8Q = 0 gives Q = 15 [1]. P = 60, so PED = −(1/4) × (60/15) = −1 [1] Examiner insight: Link the sign of the revenue change to the elasticity. A TR figure with no reference to PED answers only half the question.

7. (a) 96,000 − 61,000 = £35,000 [1] (b) Implicit costs = 28,000 + 0.05 × 50,000 = £30,500 [1]. Economic profit = 35,000 − 30,500 = £4,500 [1] (c) Yes [1]: economic profit is positive, so the shop earns £4,500 above the normal profit that covers the owner’s forgone earnings [1]. [5] Examiner insight: Say that normal profit is already inside the implicit costs. A statement that the owner is simply well paid misses the idea.

8. (a) P: TR = 250 × 14 = £3,500, TC = 250 × 11 = £2,750, profit +£750 [1]. R: TR = TC = £3,900, profit £0 [1]. S: TR = 180 × 9 = £1,620, TC = 180 × 12.50 = £2,250, loss £630 [1] (b) R earns normal profit because AR equals AC, which includes normal profit [1]. S makes a loss because AR is below AC and it earns less than the owner could elsewhere [1]. [5] Examiner insight: Quote the comparison, for example AR below AC, as part of the reasoning. A label with no link to the figures reads as a guess.

9. MR = 100 − 4Q [1]; MC = 10 + 2Q [1]. Setting equal: 100 − 4Q = 10 + 2Q gives 6Q = 90, so Q = 15 [1]. Price = 100 − 30 = £70 [1]. TR = 1,050 and TC = 80 + 150 + 225 = 455 [1], so profit = £595 [1]. At 14 units profit is 1,008 − 416 = 592 and at 16 units it is 1,088 − 496 = 592, both lower [1]. [7] Examiner insight: Read price from the demand curve at the chosen output. A price taken from the MC curve is a frequent error.

10. MR = 40 − 4Q [1]. Setting 40 − 4Q = 10 + 2Q gives Q = 5 and P = £30 [1]. TR = 150 and TC = 80 + 50 + 25 = 155, so the loss is £5 [1]. AVC = 10 + 5 = £15, below the price of £30 [1], so revenue covers all variable cost and part of fixed cost. Closing would lose the full fixed cost of £80, so the firm should keep producing [1]. [5] Examiner insight: A loss alone does not justify closure in the short run. Compare price with AVC, or the loss with the fixed cost.

11. Economies of scale are falls in LRAC as output rises, for example from technical or purchasing sources [1]. Lower costs allow lower prices [1], and in a competitive market rivals with similar costs force price cuts, so consumers gain [1]. External economies lower costs for all firms in an industry, which also spreads the benefit [1]. However, if the minimum efficient scale is large relative to the market, few firms survive [1], and a dominant firm with a cost advantage can keep the saving as supernormal profit [1]. Its cost advantage also acts as a barrier to entry, which can reduce choice and allow higher prices [1]. At very large outputs, diseconomies can reverse the gain [1]. The benefit may also come late, after large investment [1]. Overall, consumers gain only when competition passes the saving on, so the view is true only in some markets [1]. [10] Examiner insight: Each point works best as a chain from cause to effect on consumers. Finish with a judgement tied to market structure; a summary of earlier points adds little.

Where marks are usually lost

• Calculating percentage change from the new value instead of the old.
• Giving MR as the price, or reading AR off the wrong curve.
• Describing economies of scale without saying whether they are internal or external.
• Stating MES with no link to market size.
• Calling accounting profit supernormal profit.
• Forgetting to subtract implicit costs.
• Taking the profit-maximising price from the MC curve.
• Calling every loss a reason to close without comparing price with AVC.

Next steps

• Revise with the revision notes.
• Reread the study guide.
• Return to the OCR Economics hub and the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021.