OxfordAQA International AS and A-level Economics: Dynamics, efficiency, surplus (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 3.3.3.8 to 3.3.3.10 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2: competitive dynamics, efficiency, and consumer and producer surplus. The specification places section 3.3 in the extra International A2 content. Every firm, country and figure is invented.

Links: the study guide, the revision notes, the OxfordAQA A-level Economics hub, the printable checklist and the free diagnostics.

Questions

1. Distinguish between static efficiency and dynamic efficiency. [4]

2. In the market for a good in Country A, demand is P = 90 - 3Q and the marginal cost of supply is MC = 18 + 3Q (Q in thousands of units, P in currency units, so surplus is in thousands).

(a) Find the competitive output and price, and calculate consumer surplus and producer surplus. [4] (b) A single firm takes over the whole market and has the same MC. Find the output and price that maximise its profit. [3] (c) Calculate the deadweight loss and the fall in consumer surplus. [3]

3. A small economy imports a good at the world price of 40. Domestic demand is P = 100 - 5Q and domestic supply is P = 10 + 5Q. The government imposes a tariff of 10 per unit. Calculate the change in consumer surplus, the change in producer surplus, the tariff revenue and the deadweight loss. [6]

4. A seller has constant MC = 12 and two groups of buyers. Group A has demand P = 56 - 2Q and Group B has P = 32 - 2Q.

(a) Find the price and quantity in each group if the seller charges each group a separate profit-maximising price. [2] (b) Find the price and total quantity if one price must be charged to both groups. [2] (c) Compare profit, consumer surplus and total surplus in the two cases. [4]

5. A firm has total cost TC = 500 + 4Q + 0.05Q², so MC = 4 + 0.1Q.

(a) Work out the output that minimises average total cost, and the minimum cost per unit. [3] (b) Is the firm productively efficient at an output of 80? [2] (c) At 100 units the firm’s actual average total cost is 16. Calculate the cost of its X-inefficiency and express the excess as a percentage of the minimum. [2]

6. A firm’s unit cost is 20. It invests in research so that unit cost falls by 5% a year, on 30,000 units a year.

(a) Calculate its unit cost after four years. [2] (b) Calculate its annual cost saving in the fourth year compared with the original cost. [2] (c) Explain two reasons why the investment might not make the firm dynamically efficient. [2]

7. Firm P is the only seller of a product. It sells 20,000 units at 25 with a unit cost of 15. Firm Q enters with a unit cost of 12. The price falls to 20, Firm P sells 12,000 units and Firm Q sells 14,000.

(a) Calculate Firm P’s profit before and after entry. [2] (b) Calculate the percentage change in Firm P’s profit. [1] (c) Calculate the percentage changes in price and in market output. [1] (d) Explain how this illustrates creative destruction. [2]

8. Market A: price 18, marginal cost 15, R&D spending 2 million, sales 150 million. Market B: price 16, marginal cost 14, R&D spending 6 million, sales 120 million.

(a) Calculate the price-cost margin as a percentage of price in each market. [2] (b) Calculate R&D spending as a percentage of sales in each market. [1] (c) Use the figures to compare the two markets for allocative and dynamic efficiency. [2] (d) State one limitation of these indicators. [1]

9. Using the market in question 2, a firm practises perfect price discrimination. Find output, consumer surplus, producer surplus and deadweight loss, and give one criticism. [5]

10. Evaluate whether the tariff in question 3 improves the welfare of the small economy. [8]

11. Return to question 2. Innovation lowers the firm’s marginal cost to MC = 9 + 3Q.

(a) Calculate the profit-maximising monopoly output and price, and the total surplus. [5] (b) The competitive market on the old costs gave total surplus of 432. Evaluate whether monopoly can be better for society than competition. [5]

Answers

1. Static efficiency judges one moment, with technology and resources given [1], judged by productive efficiency (lowest ATC) and allocative efficiency (P = MC) [1]. Dynamic efficiency is efficiency over time [1], through R&D, investment in human and non-human capital and technological change that lowers costs or improves products [1]. Examiner insight: A distinction needs both sides. Defining one term well and the other vaguely is hard to reward fully.

2. (a) 90 - 3Q = 18 + 3Q, so Q = 12 [1]. P = 90 - 36 = 54 [1]. CS = half x 12 x (90 - 54) = 216 [1]. PS = half x 12 x (54 - 18) = 216 [1]. (b) MR = 90 - 6Q [1]. 90 - 6Q = 18 + 3Q, so Q = 8 [1]. P = 90 - 24 = 66 [1]. (c) MC at 8 = 42 [1]. DWL = half x (12 - 8) x (66 - 42) = 48 [1]. CS falls from 216 to half x 8 x 24 = 96, a fall of 120 [1]. Examiner insight: Show each triangle as half x base x height with the numbers, so your working is easy to follow and check.

3. At P = 40: demand 12, supply 6 [1]. At P = 50: demand 10, supply 8 [1]. Loss of CS = half x (12 + 10) x 10 = 110 [1]. Gain in PS = half x (6 + 8) x 10 = 70 [1]. Revenue = 10 x (10 - 8) = 20 [1]. DWL = half x 2 x 10 + half x 2 x 10 = 20 (check: 70 + 20 + 20 = 110) [1]. Examiner insight: Check that the CS loss equals PS gain plus revenue plus DWL. If not, an area is wrong.

4. (a) Group A: 56 - 4Q = 12, so Q = 11 and P = 34 [1]. Group B: 32 - 4Q = 12, so Q = 5 and P = 22 [1]. (b) Market demand is Q = 44 - P, so P = 44 - Q and MR = 44 - 2Q [1]. MR = 12 gives Q = 16 and P = 28 [1]. (c) Profit: discrimination 11 x 22 + 5 x 10 = 292; one price 16 x 16 = 256 [1]. CS: discrimination half x 11 x 22 + half x 5 x 10 = 146; one price half x 14 x 28 + half x 2 x 4 = 200 [1]. Total surplus: 438 against 456 [1]. Profit rises, consumers lose, and total surplus falls by 18: total quantity is 16 either way, but it is split unevenly between groups (valued at different prices) [1]. Examiner insight: Say whether total welfare rises or falls and why, not only that the firm gains.

5. (a) ATC = 500/Q + 4 + 0.05Q. Set MC = ATC: 500/Q = 0.05Q, so Q² = 10,000 and Q = 100 [1]. ATC = 5 + 4 + 5 = 14 [1]. MC = 4 + 10 = 14, matching [1]. (b) ATC at 80 = 6.25 + 4 + 4 = 14.25 [1]. This is above the minimum of 14, so no: output is too low to spread the fixed cost [1]. (c) Excess = 16 - 14 = 2 per unit, so 2 x 100 = 200 [1]. 2/14 = 14.3% above the minimum [1]. Examiner insight: Productive efficiency is the lowest average cost, not the lowest marginal cost.

6. (a) 20 x 0.95⁴ [1] = 16.29 [1]. (b) Saving per unit = 20 - 16.29 [1]; times 30,000 = about 111,296 (using the unrounded cost) [1]. (c) The spending might be larger than the savings, so the firm gains nothing net [1]. Rivals may copy the innovation, or the firm’s R&D may fail to produce a usable product or process [1]. Examiner insight: Two reasons need two different points; rewording one earns little extra.

7. (a) Before: (25 - 15) x 20,000 = 200,000 [1]. After: (20 - 15) x 12,000 = 60,000 [1]. (b) (60,000 - 200,000)/200,000 = -70% [1]. (c) Price falls 20% and output rises from 20,000 to 26,000, which is 30% [1]. (d) The incumbent’s large profit signalled a reward to a new firm [1], which entered with a cheaper process; the incumbent’s profit fell as consumers gained lower prices and more output [1]. Examiner insight: Link the data to the concept: say why entry happened, not only that profit fell.

8. (a) A: 3/18 = 16.7%. B: 2/16 = 12.5% [1] [1]. (b) A: 2/150 = 1.3%. B: 6/120 = 5.0% [1]. (c) Market B has a lower margin, so price is closer to marginal cost and it is nearer allocative efficiency [1]. Its higher R&D share suggests more dynamic efficiency [1]. (d) Any one: R&D spending does not guarantee success; margins do not show productive efficiency [1]. Examiner insight: Say that indicators suggest efficiency. They do not prove it, so cautious wording is safer.

9. Output 12, where the last buyer pays 54 = MC [1]. CS = 0 [1]. PS = half x 12 x (90 - 18) = 432 [1]. DWL = 0 [1]. Criticism: all the gain goes to the firm, and the firm must know each buyer’s willingness to pay [1]. Examiner insight: Allocative efficiency and fairness are different. Say that the deadweight loss disappears yet consumers are worse off.

10. The tariff cuts CS by 110 but raises PS by 70 and revenue by 20, a net loss of 20 [1]. This net loss is the DWL from extra higher-cost home production and lost consumption [1]. Consumers lose and producers and the government gain, so the effect depends on whose welfare counts [1]. The revenue can fund spending that benefits society [1]. A small economy cannot lower the world price, so there is no terms-of-trade gain [1]. An infant industry may need time to grow, though protected firms may lose the pressure to cut costs [1]. Retaliation could reduce welfare further [1]. Overall the static effect is a net loss, so a tariff needs dynamic or non-economic justification [1]. Examiner insight: Use the calculated figures in the argument and reach a clear conclusion, rather than listing points.

11. (a) MR = 90 - 6Q = 9 + 3Q [1]. Q = 9 [1], P = 90 - 27 = 63 [1]. MC at 9 = 36. CS = half x 9 x 27 = 121.5 [1]. PS = 9 x 27 + half x 9 x 27 = 364.5, so total surplus = 486 [1]. (b) Total surplus of 486 is above 432 [1], because the cost cut raises the surplus available [1]. A competitive market on the new cost would still give more (546.75) [1]. Gains require the innovation to happen, and a monopoly may do less R&D without a threat of entry [1]. Dynamic gains can outweigh static loss when innovation is large, but this depends on the firm passing on benefits and on the threat of entry [1]. Examiner insight: Compare like with like, and say what the comparison depends on.

Where marks are usually lost

• Using the wrong height in a surplus triangle.
• Reading the monopoly price from MR instead of from demand.
• Locating productive efficiency at the lowest MC.
• Counting tariff revenue as a loss to society.
• Forgetting the second DWL triangle in a tariff diagram.
• Calling perfect discrimination fair because the deadweight loss disappears.
• Judging monopoly on static grounds only.

Next steps

• Recap with the revision notes and the study guide.
• Use the course hub, the checklist and the free diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.3.3.8 to 3.3.3.10. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022. Published by OxfordAQA.