OxfordAQA A-level Economics: Costs of production, economies of scale, revenue and profit (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.

Aimed at the OxfordAQA International AS and A-level Economics specification (9640), version 1.2, these questions cover sections 3.1.3.3 to 3.1.3.5: costs of production, economies and diseconomies of scale, and average revenue, total revenue and profit. Section 3.1 is International AS content and forms part of the full International A-level. Firms and figures are made up. Part (d) of question 9 is an A2 skill (marginal values).

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Questions

1. A launderette has fixed costs of 450 a week. At 300 loads a week its average variable cost is 2.50. Calculate average fixed cost, total cost and average cost. [4]

2. Explain the difference between fixed costs and variable costs, using a print shop as an example. [4]

3. A print shop has fixed costs of 200 a week. At 40 units its variable costs are 280.

(a) Calculate average fixed cost, average variable cost and average cost at 40 units. [3] (b) The rent rises so that fixed costs become 300. Calculate the new average cost at 40 units, the percentage change in average cost (to 1 d.p.), and state the effect on average variable cost. [3]

4. Explain what separates the short run from the long run, and state what determines the shape of the long-run average cost curve. [3]

5. A tile maker’s long-run average cost (LRAC) per tile is below. Output is in hundreds of tiles a week.

Output	50	100	150	200	250	300	350	400
LRAC	14.0	11.2	9.8	9.0	9.0	9.0	9.9	11.2

(a) By what percentage does LRAC change as output goes from 50 to 100? [2] (b) State the minimum efficient scale. [1] (c) Output rises from 300 to 400. Calculate the percentage rise in output and in LRAC, and give one possible cause. [3]

6. Classify each as an internal or an external economy of scale, giving a reason. (i) A firm orders in bulk and gets a lower price per unit. (ii) A specialist hardware supplier opens beside a cluster of furniture makers, cutting delivery costs for all. (iii) A large firm borrows at a lower interest rate than a small one. (iv) A local college starts a course in the skills that the industry needs. [4]

7. Explain two reasons why a firm may suffer diseconomies of scale. [4]

8. A flower stall sells 90 bunches a day at 12 each. After a price cut to 10 it sells 110 bunches.

(a) Work out total revenue at the two prices. [2] (b) Calculate the percentage change in total revenue (to 1 d.p.). [1] (c) State the average revenue at the lower price. [1]

9. A hat stall faces the demand and cost data below (fixed costs are included in total cost).

Hats	20	30	40	50
Price	30	27	24	21
Total cost	550	670	790	950

(a) Calculate total revenue at each output. [2] (b) Calculate profit at each output and state which output gives the most profit. [2] (c) At the most profitable output, calculate profit per unit and check it against your answer to (b). [1] (d) (A2 skill) Calculate the marginal revenue and marginal cost per hat between 40 and 50 hats. [2]

10. A firm sells 60 units at a price of 18.

(a) Calculate average revenue and total revenue. [2] (b) Explain why a firm’s average revenue curve and its demand curve are the same line. Then calculate total revenue at 60 units if demand rises so that the price at every quantity is 2 higher. [2]

11. A furniture maker plans to double the size of its workshop. Evaluate whether this will lower its average costs. [10]

Answers

1. AFC = 450 ÷ 300 = 1.50 [1]. VC = 2.50 × 300 = 750 [1]. TC = 450 + 750 = 1,200 [1]. AC = 1,200 ÷ 300 = 4.00 [1] (check: 1.50 + 2.50). [4] Examiner insight: Writing each formula before substituting makes your method easy to follow, and the AFC + AVC check catches slips.

2. Fixed costs stay the same whatever the output while the short run lasts [1], for example the rent or lease of the print shop’s premises or printer [1]. Variable costs change as output changes [1], for example paper and ink, which rise with the number of jobs printed [1]. [4] Examiner insight: A definition earns less when it has no example, and an example earns less when the link to output is missing.

3. (a) AFC = 200 ÷ 40 = 5.0 [1]. AVC = 280 ÷ 40 = 7.0 [1]. AC = 5.0 + 7.0 = 12.0 [1]. (b) New TC = 300 + 280 = 580, so AC = 580 ÷ 40 = 14.5 [1]. Change = (14.5 − 12.0) ÷ 12.0 × 100 = +20.8% [1]. AVC is unchanged at 7.0 because variable costs did not change [1]. [6] Examiner insight: Percentage changes are divided by the original value, not the new one, and answers should state whether the change is a rise or a fall.

4. In the short run one or more inputs are locked in [1]. In the long run every input can be varied [1]. The shape of the LRAC curve is determined by economies and diseconomies of scale [1]. [3] Examiner insight: Describe what can and cannot be changed rather than giving months or years, because the two periods are not set lengths of time.

5. (a) (11.2 − 14.0) ÷ 14.0 × 100 [1] = −20.0% [1]. (b) LRAC is lowest at 9.0, first reached at 200 (hundred tiles) [1]. (c) Output: (400 − 300) ÷ 300 = +33.3% [1]. LRAC: (11.2 − 9.0) ÷ 9.0 = +24.4% [1]. Cause, for example: communication and co-ordination problems in a larger organisation raise cost per tile [1]. [6] Examiner insight: Give a cause that explains why unit costs rise, not just the label “diseconomies of scale”. MES is output, so include units.

6. (i) Internal, because the firm’s own larger orders earn the discount [1]. (ii) External, because the supplier arrived because of the cluster and every firm gains [1]. (iii) Internal (financial), because it depends on the firm’s own size [1]. (iv) External, because the whole industry benefits from the trained workers [1]. [4] Examiner insight: The test that works is whether the growth is of the firm or of the industry or area; a reason that uses it is more convincing than a bare label.

7. Any two developed reasons: Co-ordination and communication: more layers of management slow decisions [1], so mistakes and delays raise cost per unit [1]. Worker motivation: staff in a very large firm feel remote from its aims [1], so effort falls and output per worker falls, raising unit cost [1]. (Other valid: loss of control, duplication.) [4] Examiner insight: A cause is only developed once you show what it does to cost per unit; two causes with no consequence are each half-finished.

8. (a) TR at 12 = 12 × 90 = 1,080 [1]. TR at 10 = 10 × 110 = 1,100 [1]. (b) (1,100 − 1,080) ÷ 1,080 × 100 = +1.9% [1]. (c) AR = 1,100 ÷ 110 = 10 [1]. [4] Examiner insight: TR rising does not show profit rising; any extension should mention what happens to total costs when 20 more bunches are sold.

9. (a) TR = price × quantity [1]: 600, 810, 960, 1,050 [1]. (b) Profit = TR − TC: 600 − 550 = 50; 810 − 670 = 140; 960 − 790 = 170; 1,050 − 950 = 100 [1]. Highest profit is 170, at 40 hats [1]. (c) AC = 790 ÷ 40 = 19.75; profit per unit = 24 − 19.75 = 4.25 [1]; and 4.25 × 40 = 170, which matches. (d) MR = (1,050 − 960) ÷ 10 = 9 [1]. MC = (950 − 790) ÷ 10 = 16 [1]. [7] Examiner insight: Setting out TR and TC for each row before subtracting means one slip does not hide the rest of your method.

10. (a) AR = price = 18 [1]. TR = 18 × 60 = 1,080 [1]. (b) At each price consumers buy the quantity demanded, so plotting AR (price) against quantity traces the demand curve [1]. New price 20, so TR = 20 × 60 = 1,200 [1]. [4] Examiner insight: Make clear that AR equals price only when one price is charged to all buyers.

11. Knowledge and analysis: Doubling the workshop is a long-run change, so it can bring economies of scale [1]. Technical: larger machines or a longer production line cut cost per unit [1]. Purchasing: bigger timber orders earn a lower price per unit, so AC falls [1]. Managerial or financial economies may also apply, for example specialist managers or cheaper loans [1]. But a larger workshop may bring diseconomies, such as poorer communication [1], which could raise AC [1]. Evaluation: the outcome depends on whether the firm is already near its minimum efficient scale [1]. It depends on whether demand is high enough to use the extra capacity, otherwise AC is higher [1]. Building costs and delays come first, so any fall in AC may take time [1]. Judgement: AC is likely to fall if the firm is currently small and demand is growing, but not if it is already at MES [1]. [10] Examiner insight: A conclusion that names the conditions under which the answer changes is stronger than a list of points; apply each point to the furniture maker.

Where marks are usually lost

• Dividing by the wrong output, or not subtracting fixed cost to find variable cost.
• Dividing a percentage change by the final value instead of the starting value.
• Leaving out the minus sign for a loss or a fall.
• Explaining the short-run U-shape with economies of scale.
• Labelling internal and external economies without a reason.
• Naming a diseconomy without saying why unit cost rises.
• Treating higher revenue as higher profit.
• Giving the minimum efficient scale as a cost instead of an output.

Next steps

• Re-read the study guide, then the revision notes.
• Tick off the checklist and visit the course hub.
• Try the free 10-minute diagnostics.
• Ready for more help? Book a free trial class.

Official syllabus

Source document: the OxfordAQA specification for International AS and A-level Economics (9640), version 1.2: sections 3.1.3.3 to 3.1.3.5 and quantitative skills in 3.5.