OxfordAQA International AS and A-level Economics: Returns, scale and cost curves (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 3.3.2.1 to 3.3.2.3 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. Section 3.3 is the extra International A2 content. All firms, countries and data are invented.

Related pages: study guide, revision notes, the course hub, the printable checklist and the free diagnostics.

Questions

1. Distinguish between average product and marginal product. [3]

2. A print shop in Country C adds operators to a fixed set of printers. Output is pages an hour.

Operators	1	2	3	4	5	6
Total product	30	70	120	150	165	168

(a) Calculate the marginal product of the fourth operator and the average product with four operators. [2] (b) After which operator do diminishing returns begin? Explain. [2] (c) Explain why average product falls when the fourth operator is hired. [2]

3. A firm has fixed costs of 240. Its total cost is 600 at 30 units, 720 at 40 units and 930 at 50 units.

(a) Calculate average variable cost and average total cost at 30 units. [2] (b) Calculate marginal cost over the range 40 to 50 units. [1] (c) Average total cost is 18.0 at 40 units and 18.6 at 50 units. Use your answer to (b) to explain this change. [3] (d) Fixed costs rise to 300. Calculate the new average total cost at 40 units and state the effect on marginal cost. [2]

4. A bottling plant in Country D uses sets of inputs, each costing 300 a day, with constant input prices. One set makes 80 bottles, two sets make 200 and three sets make 270.

(a) Calculate the percentage change in output when sets rise from 1 to 2 and from 2 to 3. [2] (b) State the type of returns to scale in each case. [2] (c) Calculate long-run average cost with 1, 2 and 3 sets. [2] (d) Explain why this is not an example of the law of diminishing returns. [2]

5. A bakery can use method A (6 workers, 1 oven) or method B (2 workers, 4 ovens) for a daily batch. An oven costs 70 a day.

(a) Find the cheaper method when the wage is 45 a day. [2] (b) Find the cheaper method when the wage is 60 a day. [2] (c) Find the daily wage that would make the two methods equally costly. [2]

6. Five workers on a wage of 48 a day make 60 units. Training raises their output to 75 units.

(a) Calculate average variable cost before and after training. [2] (b) Calculate the percentage change. [1] (c) The wage then rises by 10%. Calculate the new average variable cost and compare it with the original. [2]

7. Short-run average cost (cost per unit) for three plants:

Output	200	400	600	1,000
Plant X	5.40	7.05	9.20	13.80
Plant Y	6.30	4.85	4.90	5.90
Plant Z	13.04	7.28	5.52	4.40

(a) State the long-run average cost and the plant used at each output. [3] (b) Explain why the long-run average cost curve is never above a short-run average cost curve. [2]

8. A long-run average cost schedule (thousands of units): output 20 costs 12.0 a unit; 40 costs 8.0; 60 costs 6.5; 80 costs 6.0; 100 costs 5.8; 120 costs 5.8; 160 costs 5.8.

(a) Identify the output at which the minimum efficient scale is reached. [1] (b) By what percentage is unit cost at output 40 higher than at the minimum efficient scale? [2] (c) Market demand is 450. How many firms could the market support if each produced at the minimum efficient scale? [2] (d) Explain how the minimum efficient scale creates a barrier to entry. [2]

9. Explain why a firm’s long-run average cost curve may be L-shaped. [4]

10. “Once diminishing returns set in, a firm should stop hiring workers.” Evaluate this view. [9]

11. Assess whether a high minimum efficient scale is likely to produce a concentrated industry. [8]

Answers

1. Average product is total product divided by the number of units of the variable input. [1] Marginal product is the extra output from one more unit of that input. [1] When marginal product is above average product the average rises, and when it is below, the average falls. [1] [3] Examiner insight: Define both terms, then add the link between them; two bare definitions leave out the relationship.

2. (a) MP = 150 - 120 = 30. [1] AP = 150 ÷ 4 = 37.5. [1] [2] (b) After the third operator. [1] Marginal product peaks at 50 for the third operator, then falls to 30, 15 and 3. [1] [2] (c) The fourth operator adds 30 pages, below the previous average of 40 (120 ÷ 3). [1] A marginal value below the average pulls the average down, to 37.5. [1] [2] Examiner insight: Diminishing returns begin where marginal product starts to fall, not where total product stops rising; quote the figures.

3. (a) VC = 600 - 240 = 360, so AVC = 360 ÷ 30 = 12. [1] ATC = 600 ÷ 30 = 20. [1] [2] (b) MC = (930 - 720) ÷ 10 = 21. [1] [1] (c) MC of 21 is above the average of 18.0. [1] Each extra unit costs more than the average, so it pulls average cost up [1] to 18.6; this happens because diminishing returns raise the cost of extra units. [1] [3] (d) TC at 40 = 720 + 60 = 780, so ATC = 780 ÷ 40 = 19.5. [1] Marginal cost is unchanged, because fixed costs do not vary with output. [1] [2] Examiner insight: Show the subtraction and division, and in (c) compare marginal cost with the average instead of restating that the average rose.

4. (a) 1 to 2 sets: (200 - 80) ÷ 80 = +150%. [1] 2 to 3 sets: (270 - 200) ÷ 200 = +35%. [1] [2] (b) Inputs rise 100%, output 150%: increasing returns to scale. [1] Inputs rise 50%, output 35%: decreasing returns to scale. [1] [2] (c) LRAC = 300 ÷ 80 = 3.75, [1] then 600 ÷ 200 = 3.00 and 900 ÷ 270 = 3.33. [1] [2] (d) The law of diminishing returns applies when at least one input is fixed and only one is varied. [1] Here every input changes together, so this is a long-run returns-to-scale effect. [1] [2] Examiner insight: Compare the percentage change in output with that in inputs at each step; raw output figures alone do not show the type of returns.

5. (a) A = 6(45) + 70 = 340. [1] B = 2(45) + 280 = 370; A is cheaper. [1] [2] (b) A = 6(60) + 70 = 430. [1] B = 2(60) + 280 = 400; B is cheaper. [1] [2] (c) 6w + 70 = 2w + 280. [1] 4w = 210, so w = 52.5. [1] [2] Examiner insight: State which method is cheaper, not only the costs; the choice is the economic conclusion.

6. (a) VC = 5 × 48 = 240. Before: 240 ÷ 60 = 4.00. [1] After: 240 ÷ 75 = 3.20. [1] [2] (b) (3.20 - 4.00) ÷ 4.00 = -20%. [1] [1] (c) New wage 52.8, VC = 264, AVC = 264 ÷ 75 = 3.52. [1] This is 12% below the original 4.00, so the productivity gain outweighs the pay rise. [1] [2] Examiner insight: Give the sign of a percentage change and say what it means for unit costs.

7. (a) 200: 5.40 (X); 400: 4.85 (Y). [1] 600: 4.90 (Y). [1] 1,000: 4.40 (Z). [1] [3] (b) In the long run the firm can pick the plant with the lowest cost for each output. [1] So LRAC can only equal or be below any one plant’s SRAC at a given output. [1] [2] Examiner insight: Read the lowest figure in each column and name the plant used.

8. (a) 100 thousand units. [1] [1] (b) (8.0 - 5.8) ÷ 5.8 [1] = 37.9%. [1] [2] (c) 450 ÷ 100 = 4.5. [1] So at most 4 firms. [1] [2] (d) A new entrant must produce about 100 thousand units to match established costs. [1] Smaller entrants face higher unit costs and need large finance and sales to compete. [1] [2] Examiner insight: Say “at most 4” and not “4.5 firms”; a number of firms must be whole, and the reasoning should refer to the market size.

9. At low output, LRAC falls because of increasing returns to scale, such as specialist equipment. [1] At larger output, a firm can copy an efficient plant instead of enlarging it. [1] Management can reuse the same methods, so diseconomies are small. [1] LRAC therefore flattens instead of rising sharply, giving an L shape. [1] [4] Examiner insight: Each point should be a link in a chain (cause, effect on cost, effect on the curve) rather than a list of terms.

10. Diminishing returns mean marginal product falls, not that it is zero or negative. [1] Marginal cost rises, but output still grows. [1] A firm gains from hiring another worker while the extra revenue exceeds marginal cost. [1] Example: a wage of 60 and marginal product of 10 units gives marginal cost of 6 a unit. [1] Total product only falls once marginal product is negative, so stopping early gives up output. [1] Evaluation: it depends on the price, which fixes extra revenue per unit. [1] In the long run, adding capital can lift marginal product again. [1] Training or technology can raise the product curve. [1] Judgement: the view is wrong as a general rule; a firm should stop where the extra cost of a unit exceeds the extra revenue. [1] [9] Examiner insight: Define the term, apply a figure, then reach a judgement with a condition; a flat “true” or “false” leaves the evaluation thin.

11. MES is the lowest output at which LRAC is minimised. [1] If MES is large compared with demand, few firms can operate at the lowest cost. [1] Example: MES of 100 and demand of 450 allows at most 4 such firms. [1] Smaller firms have higher unit costs, so they are undercut and leave or never enter. [1] The cost gap is a barrier to entry, which supports concentration. [1] Limits: the market may grow, raising the number of efficient firms. [1] Niche products or leased capacity can let small firms survive. [1] Judgement: a high MES makes concentration likely, but the outcome depends on market size relative to MES. [1] [8] Examiner insight: Always compare MES with market demand; MES alone does not decide industry structure.

Where marks are usually lost

• Dividing a cost by the number of workers when the question wants cost per unit of output.
• Confusing marginal product with average product, and marginal cost with average cost.
• Saying diminishing returns means total output falls.
• Using returns to scale for a case where one input is fixed.
• Giving a percentage change without the sign, or using the wrong base year.
• Giving a judgement with no condition or reason.

Next steps

• Read the revision notes and the study guide.
• Visit the course hub and the printable checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, sections 3.3.2.1, 3.3.2.2 and 3.3.2.3 and section 3.5. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022. Published by OxfordAQA.