OCR A Level Economics: Perfect competition and monopolistic competition (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 perfect competition, monopolistic competition, and barriers to entry and exit, in Component 1, Microeconomics. The specification labels no content as AS or Extension. Every figure is invented and illustrative. Where a question asks for a diagram, describe it in words and label the axes, curves and equilibrium.

Teaching pages: the study guide, the revision notes, the OCR Economics hub and the printable checklist.

Questions

1. State two characteristics of a perfectly competitive market. [2]

2. A price-taking honey stall faces a market price of 14 per jar. Total cost (TC) for 0 to 5 jars is 30, 44, 56, 66, 78 and 94. TC for 6 and 7 jars is 116 and 146.

(a) Find the output that minimises its loss, and state the loss. [3] (b) Explain whether it should continue in the short run. [1]

3. Explain, with the aid of a diagram, why an individual firm in perfect competition is a price taker. [4]

4. A price-taking firm produces 5 units at price 9. At that output average cost (AC) is 11 and average variable cost (AVC) is 7.

(a) Calculate its loss. [2] (b) Advise the firm at price 9, and then at a price of 6, where its best output is 4 units, AC is 11.5 and AVC is 6.5. [3]

5. In a market for reusable bottles, 30 identical firms each produce 8 units at a price of 52, with AC of 44. Market demand is Qd = 864 − 12P. In the long run, price settles at 40 and each firm produces 6 units at an AC of 40.

(a) Calculate each firm’s short-run profit. [2] (b) Show that the market clears at a price of 52. [1] (c) Calculate the long-run number of firms and the number of entrants. [3]

6. A perfectly competitive firm in long-run equilibrium produces 9 units, with P = MC = AC = 22. Explain, with the aid of a diagram, why it is allocatively and productively efficient. [4]

7. Explain two barriers to entry and one barrier to exit. [6]

8. A monopolistically competitive café has TC = 24 + 6q + 0.5q², so MC = 6 + q. Its demand is P = 30 − q.

(a) Find its short-run price, output and profit. [4] (b) After entry, demand becomes P = 18 − q. Find the long-run price, output and profit. [3] (c) Its AC is lowest at about 6.9 units. Explain two ways in which the long-run outcome is inefficient. [2]

9. Using a diagram, assess how useful perfect competition theory is. [8]

10. Using a diagram, assess the advantages and disadvantages of monopolistic competition. [8]

Answers

1. Any two from: many buyers and sellers [1]; identical (homogeneous) products [1]; perfect knowledge; free entry and exit; profit-maximising firms. [2] Examiner insight: A list of two correct characteristics is enough here. Give two distinct ideas rather than one idea in two wordings.

2. (a) The firm produces while MC is at or below the price of 14. MC for the 1st to 7th jar is 14, 12, 10, 12, 16, 22 and 30, so it produces 4 jars [1]. TR = 14 × 4 = 56 and TC = 78 [1], so the loss is 22. [1] (b) AVC = (78 − 30) ÷ 4 = 12, below the price of 14, and the loss of 22 is less than fixed cost of 30, so it continues. [1] [4] Examiner insight: Show the MC values you compared with price, and state the fixed cost. A conclusion to continue gains support when you compare price with AVC, not merely when you note that a loss exists.

3. The market price is set where market demand meets market supply. [1] The firm is one of many sellers of an identical product, so its output is tiny relative to the market. [1] Above the market price it would sell nothing, as buyers go to rivals, and below it would lose revenue for no gain. [1] Its demand curve is horizontal at the market price, so AR = MR = P and demand is perfectly elastic. [1] [4] Examiner insight: Draw two linked diagrams: market on the left, firm on the right. Naming the axes and the horizontal curve gains credit more reliably than a lengthy description of the characteristics.

4. (a) Loss per unit = 11 − 9 = 2 [1], so total loss = 2 × 5 = 10. [1] (b) At price 9, AVC of 7 is below price, so each unit covers variable cost, fixed cost is 4 × 5 = 20, and the loss of 10 is below that. Continue. [1] At price 6 with AVC of 6.5, price is below AVC. Producing loses (11.5 − 6) × 4 = 22, while closing loses fixed cost of (11.5 − 6.5) × 4 = 20, so shut down. [2] [5] Examiner insight: The deciding comparison is price against AVC, so state both numbers. Comparing price with AC is a common slip.

5. (a) Profit per firm = (52 − 44) × 8 = 64. [2] (b) Qd = 864 − 12 × 52 = 240, and 30 firms × 8 = 240. [1] (c) Qd at 40 = 864 − 480 = 384 [1], firms = 384 ÷ 6 = 64 [1], so entrants = 64 − 30 = 34. [1] [6] Examiner insight: Show demand at both prices and divide by output per firm. Writing out each step makes your reasoning visible, whereas a bare figure hides it.

6. P = MC means the last unit’s price (its marginal benefit to buyers) equals the marginal cost of making it, so resources are allocated efficiently. [1] The firm sets MC = MR and MR = P, so this holds. [1] P = AC = 22 at the lowest point of AC, because MC cuts AC at its minimum, so output is at minimum average cost. [1] This is reached in the long run because entry and exit remove supernormal profit and loss. [1] [4] Examiner insight: Name the condition and then tie it to the diagram: P = MC for allocative efficiency, and MC cutting AC at its lowest point for productive efficiency.

7. Barrier to entry 1: economies of scale [1]. An entrant producing little has higher unit costs than an established large firm, so it cannot price competitively. [1] Barrier to entry 2: a patent or licence [1]. It legally stops rivals from selling the product, so supernormal profit can last. [1] Barrier to exit: sunk costs, or specialised equipment with a low resale value [1]. The firm cannot recover the spend, so it may keep operating at a loss. [1] [6] Examiner insight: Each barrier gains credit when you say how it blocks entry or exit. A named barrier alone is only a list.

8. (a) MR = 30 − 2q. Set MC = MR: 6 + q = 30 − 2q, so q = 8. [1] P = 30 − 8 = 22. [1] TR = 176 and TC = 24 + 48 + 32 = 104. [1] Profit = 72. [1] (b) MR = 18 − 2q. 6 + q = 18 − 2q gives q = 4. [1] P = 14, AC = 24 ÷ 4 + 6 + 2 = 14. [1] Profit = 0. [1] (c) P = 14 exceeds MC = 10, so it is not allocatively efficient. [1] Output of 4 is below 6.9, so there is excess capacity and AC is above its minimum. [1] [9] Examiner insight: Use MR, not price, to find output, and then read price from demand. Substituting into the demand curve before setting MC = MR is a common mistake.

9. For: it is a benchmark, because other structures are compared with its P = MC and minimum AC outcome. [1] It shows how entry removes supernormal profit. [1] It helps explain price-taking in markets for standardised goods. [1] Against: assumptions such as identical products and perfect knowledge are unrealistic. [1] Large minimum efficient scale may leave room for few firms. [1] If profit is only normal, funds for innovation may be scarce, which can weaken dynamic efficiency. [1] P = MC ignores external costs and benefits. [1] Judgement: it works better as a yardstick than as a description, and its value depends on the question being asked. [1] [8] Examiner insight: A diagram of the firm in long-run equilibrium supports the answer. A final judgement that says why one side outweighs the other is stronger than a restatement of the two lists.

10. For: variety and choice that consumers value. [1] Competition keeps profit near normal in the long run. [1] Low barriers let new firms in. [1] Firms have an incentive to improve quality. [1] Against: P exceeds MC, so output is below the allocatively efficient level. [1] Excess capacity means AC is above its minimum. [1] Advertising and differentiation add costs. [1] Judgement: the inefficiency is small if demand is very elastic, and the variety may be worth more to consumers than the lost efficiency. [1] [8] Examiner insight: Refer to the tangency diagram, with demand touching AC to the left of its lowest point. State whether the differences between products are real, as that affects the judgement.

Where marks are usually lost

• A sloping line used for the perfectly competitive firm’s demand curve, when it should be flat.
• Finding output where MC = AC instead of MC = MR.
• Judging shut-down by the size of the loss instead of price against AVC.
• Reading price from MR instead of from the demand curve in monopolistic competition.
• Calling the long-run monopolistically competitive firm productively efficient.
• Describing entry without saying that price or demand changes, and why.
• Naming a barrier without explaining how it works.
• Evaluation with no judgement or no link back to the question.

Next steps

• Review the revision notes and the study guide.
• Visit the OCR Economics hub and the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021, Component 1 Microeconomics, topic on market structures.