OxfordAQA International AS and A-level Economics: Competition policy, regulation (9640) – 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 sections 3.3.3.11 and 3.3.3.12 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. Section 3.3 forms part of the extra International A2 content. All countries, firms and figures are invented. Read the study guide or the revision notes first. Course links: hub and checklist.

Questions

1. Define regulatory capture. [2]

2. A regulated water supplier in Country E has a price of 50. Inflation is 3.2% and the regulator’s efficiency factor X is 1.8.

(a) Calculate the new price under an inflation-minus-X cap. [3] (b) The next year inflation is 2.0% and X is unchanged. Calculate the price, to two decimal places. [2]

3. A rail network operator has capital employed of 320m. The regulator allows a return of 7.5% on capital.

(a) Calculate the maximum profit allowed and the excess if actual operating profit is 31m. [2] (b) Explain why this form of control may encourage over-investment. [2]

4. In a market, the six firms have shares of 28%, 22%, 18%, 14%, 10% and 8%.

(a) Calculate the four-firm concentration ratio. [1] (b) The firms with 14% and 10% merge. Calculate the new four-firm ratio. [2] (c) State and explain one factor, other than concentration, that an authority should consider. [2]

5. Explain two limitations of competition policy. [4]

6. A cartel in Country A has annual turnover of 150m. The maximum fine is 8% of turnover. Cartel members gain 9m extra profit a year for 3 years. The probability of detection is 0.4.

(a) Calculate the maximum fine. [1] (b) Calculate the expected fine and decide whether the cartel is worthwhile. [3] (c) Calculate the fine, as a percentage of turnover, needed to deter the cartel. [2] (d) Suggest one other measure to deter cartels. [2]

7. A state-owned commuter rail line makes a financial loss of 18m a year. Its external benefits (less congestion and pollution) are valued at 26m a year.

(a) Calculate the net benefit to society of keeping the line open. [2] (b) Evaluate whether the line should stay in public ownership. [6]

8. A government sells a state-owned port for 1,200m. The port earns profit of 75m a year. The government uses the proceeds to repay debt costing 3.5% a year.

(a) Calculate the sale price as a multiple of annual profit. [1] (b) Calculate the annual net effect on the government’s finances. [3] (c) Give one reason the sale might still be justified. [2]

9. After taxi services in Country G are deregulated, the average fare falls from 12.00 to 10.20, and trips rise from 40,000 to 46,000 a month.

(a) Work out the percentage change in the average taxi fare. [1] (b) Calculate the percentage change in trips. [1] (c) Calculate the price elasticity of demand. [2] (d) State one risk of deregulation. [2]

10. A privatised electricity grid in Country H is a natural monopoly. The regulator must choose between a price cap and rate-of-return control. Evaluate the choice. [9]

11. Two producers of ready-meals in Country J propose to merge. Unit cost is 40 for each firm and the price is 60. The merged firm says unit cost will fall to 35 and that 60% of the saving will be passed on.

(a) Calculate the percentage fall in unit cost. [1] (b) Calculate the price after pass-through and its percentage change. [3] (c) Evaluate whether the competition authority should block the merger. [6]

Answers

1. The regulator ends up serving the interests of the industry it oversees [1], instead of the public or consumers [1]. [2] Examiner insight: Say whose interests are served and whose are ignored; “the regulator is influenced” is too vague to separate capture from ordinary lobbying.

2. (a) Allowed change = 3.2 − 1.8 = 1.4% [1]. New price = 50 × 1.014 [1] = 50.70 [1]. [3] (b) Allowed change = 2.0 − 1.8 = 0.2% [1]. Price = 50.70 × 1.002 = 50.80 [1]. [2] Examiner insight: Show the allowed rate before the new price, so the reader can see you applied inflation minus X, not inflation alone.

3. (a) Allowed profit = 320 × 0.075 = 24m [1]. Excess = 31 − 24 = 7m [1]. [2] (b) Allowed profit rises with capital employed [1], so the operator gains by raising capital beyond what is needed, with little reward for cutting costs [1]. [2] Examiner insight: Link the mechanism (allowed profit tied to capital) to the behaviour (over-investment); naming the term alone does not explain it.

4. (a) 28 + 22 + 18 + 14 = 82% [1]. [1] (b) New shares: 28, 24, 22, 18, 8 [1]. Four-firm ratio = 28 + 24 + 22 + 18 = 92% [1]. [2] (c) Any one: ease of entry [1], with a reason such as that new rivals would restrain price [1]. Others: likely cost savings, foreign competition, buyer power. [2] Examiner insight: Concentration is only a screen; answers that stop at the ratio miss the evaluation the question points towards.

5. Any two, each with development. Limitation 1: regulators have incomplete information [1], so they may block a beneficial merger or miss a harmful one [1]. Limitation 2: policy has costs, such as running the authority, legal fees and delays [1], which may exceed the benefit in small cases [1]. Others: loss of economies of scale; firms relocating; difficulty proving intent. [4] Examiner insight: A limitation gains little unless you explain the consequence; “it is expensive” needs a reason why that matters.

6. (a) Fine = 0.08 × 150 = 12m [1]. [1] (b) Total gain = 9 × 3 = 27m [1]. Expected fine = 0.4 × 12 = 4.8m [1]. Since 4.8m is below 27m, the cartel is worthwhile for members [1]. [3] (c) Fine needed = 27 / 0.4 = 67.5m [1], which is 67.5 / 150 = 45% of turnover [1]. [2] (d) Any one: a leniency scheme [1] that raises the chance of detection by rewarding the first member to report [1]. Also damages claims or personal penalties. [2] Examiner insight: Compare expected fine with total gain, not with one year’s gain; the periods must match.

7. (a) Net benefit = 26 − 18 [1] = 8m a year [1]. [2] (b) For keeping public: net social benefit is positive at 8m [1]; private firms ignore the external benefits and would close the line [1]. Against: the 18m loss falls on taxpayers [1]; weak cost incentive may mean the loss is larger than needed [1]. Evaluation: the external benefits are estimates and may be wrong [1]; a better answer might be a subsidy to a private operator under a competitive tender, which keeps the benefit and a cost incentive [1]. [6] Examiner insight: A conclusion that weighs the 8m figure against its uncertainty reads as judgement; a list of pros and cons does not.

8. (a) 1,200 / 75 = 16 [1]. [1] (b) Interest saved = 0.035 × 1,200 = 42m [1]. Profit given up = 75m [1]. Net effect = 42 − 75 = −33m a year [1]. [3] (c) Any one: efficiency gains under private ownership [1] that raise output or quality or lower cost beyond the 33m loss [1]. Also new investment or competition. [2] Examiner insight: Say whether government finances improve or worsen and by how much; a number with no interpretation leaves the point unmade.

9. (a) (10.20 − 12.00) / 12.00 = −15% [1]. [1] (b) (46,000 − 40,000) / 40,000 = +15% [1]. [1] (c) PED = +15 / −15 [1] = −1.0 [1]. [2] (d) Any one: lower safety or quality [1] because there is less oversight, so consumers may be harmed [1]. [2] Examiner insight: Keep the sign of the elasticity and say what it means (unit elastic); a magnitude only is incomplete.

10. Price cap: allowed rise is inflation minus X [1]; the firm keeps savings, so it has a cost-cutting incentive [1]. Risk: if X is too tight the firm may cut quality or investment [1]; setting X needs information the regulator lacks [1]. Rate of return: limits profit to a return on capital [1]; it suits a long-lived network because it gives investors stable returns [1]; but it rewards over-investment and gives a weak cost incentive [1]. Both are exposed to capture, since the regulator depends on the firm’s data [1]. Judgement: for example the cap is better for efficiency if the regulator has good cost information and can monitor quality; rate-of-return control is better if heavy investment is needed and capture risk is managed [1]. [9] Examiner insight: Strong answers weigh one tool against the other under stated conditions; describing each in turn, without comparing, limits how far the argument can go.

11. (a) (35 − 40) / 40 = −12.5% [1]. [1] (b) Saving = 5 per unit; passed on = 0.6 × 5 = 3 [1]. New price = 60 − 3 = 57 [1]. Change = (57 − 60) / 60 = −5% [1]. [3] (c) For allowing: unit cost falls 12.5% and price falls 5% if the promise holds [1]; lower costs from scale [1]. Against: the saving is a claim and pass-through is not guaranteed [1]; the merger reduces rivals and may raise concentration [1]. Evaluation: conditions such as binding commitments on price or asset sales [1]; the decision depends on entry barriers and rivals, and the cost of a wrong decision [1]. [6] Examiner insight: Use the figures in the question: stating that 40% of the saving is kept as profit shows application.

Where marks are usually lost

• Using inflation alone, or X alone, as the allowed price change.
• Comparing an expected fine with a single year’s gain.
• Defining capture in terms of corruption only; the idea is a drift of regulatory interest towards the industry.
• Stating a number without its unit or sign (m, %, minus).
• Listing advantages and disadvantages of privatisation without a verdict.
• Ignoring that a state monopoly can become a private monopoly.
• Percentage changes taken on the new value, not the original.
• Forgetting that remedies and tools each carry their own costs.

Next steps

• Review with the revision notes and the study guide.
• Tick off outcomes on the checklist and browse the course hub.
• Take one of the free diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640) Specification, version 1.2, OxfordAQA. First teaching September 2020; International AS exams from May/June 2021; International A-level exams from May/June 2022.