OxfordAQA International AS and A-level Economics: Market structures and firm aims (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 3.1.4.1 to 3.1.4.3 of the OxfordAQA International AS and A-level Economics specification (version 1.2; International AS from May/June 2021, International A-level from May/June 2022). Section 3.1 is International AS content; section 3.5 quantitative skills can be assessed in any unit. All firms, markets and figures are invented. See the study guide and revision notes. Course hub: OxfordAQA A-level Economics. Checklist: printable checklist. Find weak spots with the free diagnostics.

Questions

1. State two features used to tell one market structure from another. [2]

2. In Country B, five firms make 90% of the sales of packaged tea. Each sells its own brand, and building a tea-packing factory costs a very large sum. Explain, using this information, why this market is not highly competitive. [3]

3. Cobble is a small shoemaker. It sells 300 pairs a month at £60 a pair. Its fixed costs are £6,000 a month and its variable cost is £35 a pair.

(a) Calculate Cobble’s profit. [2] (b) Calculate its profit as a percentage of total revenue, to two decimal places. [2]

4. Use the Cobble data in question 3.

(a) Calculate the number of pairs Cobble must sell a month to break even at a price of £60. [2] (b) A downturn cuts the price to £32 while Cobble still sells 300 pairs. Fixed costs cannot be avoided in the short run. Show whether Cobble loses less by continuing or by stopping production. [3]

5. The market for Cobble’s type of shoe sells 5,000 pairs a month. Cobble, at 300 pairs, pursues a growth objective: it cuts its price to £48 and sells 450 pairs. Costs are as in question 3.

(a) Calculate Cobble’s market share before and after. [2] (b) State the change in its market share in percentage points. [1] (c) Calculate its profit after the change. [2]

6. Two firms in the same market face a recession. One aims to maximise profit; the other aims to survive. Explain how the different objectives may lead to different behaviour. [3]

7. In the market for a standard cooking oil in Country C, quantities are in thousands of tonnes and prices in £ per tonne. Demand is Qd = 600 − 20P and supply is Qs = 30P − 150.

(a) Find the equilibrium price and the quantity traded. [2] (b) Demand rises to Qd = 700 − 20P. Calculate the new equilibrium price and quantity. [2]

8. In the market in question 7 (before the demand rise), one farm supplies 0.3 thousand tonnes. Explain why this farm is a price taker. [4]

9. After the demand rise in question 7(b), the typical firm’s average cost is £15 a tonne.

(a) Calculate the total supernormal profit in the market, in £ thousand. [2] (b) New firms enter and supply becomes Qs = 30P − 50. Calculate the percentage change in price and in quantity, to two decimal places. [2] (c) Explain why supernormal profit disappears. [2]

10. Explain two factors that affect how competitive a market is. [4]

11. Market C has 150 sellers of an identical product, with free entry; the price is £15 and average cost is £15 a unit. Market D has three large firms, high barriers to entry, average cost of £12 a unit because of economies of scale, and a price of £16. Evaluate whether profits are likely to be lower in Market C than in Market D. [8]

12. Orchard Juice sells 4,000 units a month at £5.50. Its fixed costs are £8,000 and its variable cost is £3 a unit. The market sells 40,000 units a month. Plan B cuts the price to £4.60 and sells 6,000 units.

(a) Calculate the profit under each plan. [4] (b) State the change in market share in percentage points. [1] (c) Evaluate which plan suits (i) a firm seeking profit and (ii) a firm seeking market share. Use break-even output in your answer. [5]

Answers

1. Any two of: how many firms compete; how different the products are; how easily firms can enter. One mark for each of two features [1] [1]. [2] Examiner insight: Naming the features is what the question asks for; spend any spare time on the later questions rather than adding explanation.

2. There are only five firms, so each has influence over the market and faces few rivals [1]. Brands differ, so the product is differentiated and each firm has some control over its price [1]. The high cost of building a factory is a barrier to entry, which stops new firms competing profit away [1]. [3] Examiner insight: Tie each feature to the data given, then to the effect on competition; repeating the data without that link usually leaves a gap.

3. (a) TR = 60 × 300 = £18,000 and TC = 6,000 + (35 × 300) = £16,500 [1]. Profit = 18,000 − 16,500 = £1,500 [1]. [2] (b) 1,500 ÷ 18,000 × 100 [1] = 8.33% [1]. [2] Examiner insight: Build total cost from fixed plus variable and show it.

4. (a) Break-even quantity = fixed costs ÷ (price − variable cost) = 6,000 ÷ (60 − 35) [1] = 240 pairs [1]. [2] (b) Continuing: TR = 32 × 300 = £9,600 and TC = £16,500, so loss = £6,900 [1]. Stopping: the fixed costs of £6,000 still have to be paid, so loss = £6,000 [1]. The price of £32 is below the variable cost of £35, so each pair adds to the loss; stopping loses less [1]. [3] Examiner insight: Compare the two losses explicitly and state the decision; calculating only one of them does not answer the question.

5. (a) Before: 300 ÷ 5,000 × 100 = 6% [1]. After: 450 ÷ 5,000 × 100 = 9% [1]. [2] (b) 9 − 6 = 3 percentage points [1]. [1] (c) TR = 48 × 450 = £21,600 and TC = 6,000 + (35 × 450) = £21,750 [1]. Profit = 21,600 − 21,750 = −£150, a loss of £150 [1]. [2] Examiner insight: Label a change in share as percentage points; writing it as a percentage change is a common slip.

6. A profit-maximiser would cut costs or close unprofitable lines and keep prices high enough to earn profit [1]. A firm aiming to survive might cut prices to keep sales and accept lower or negative profit for a time, or delay investment [1]. Same conditions lead to different behaviour because the objective differs [1]. [3] Examiner insight: Give a behaviour for each objective and compare them; naming objectives without actions is descriptive only.

7. (a) 600 − 20P = 30P − 150, so 750 = 50P [1]. P = £15 and Q = 600 − 300 = 300 thousand tonnes [1]. [2] (b) 700 − 20P = 30P − 150, so 850 = 50P [1]. P = £17 and Q = 700 − 340 = 360 thousand tonnes [1]. [2] Examiner insight: Check the answer by substituting into both equations; that catches arithmetic slips cheaply.

8. Its share is 0.3 ÷ 300 × 100 = 0.1% [1]. The product is identical to rivals’ [1]. Buyers know the going price of £15 and would buy elsewhere if it asked for more [1]. So it cannot influence the price and must accept the market price [1]. [4] Examiner insight: A calculation of share is useful evidence, but the explanation must say what it implies for pricing power.

9. (a) Price £17 less average cost £15 = £2 per tonne [1]. Total = 2 × 360 = £720 thousand [1]. [2] (b) New equilibrium: 700 − 20P = 30P − 50, so 750 = 50P, P = £15 and Q = 400 [1]. Price: (15 − 17) ÷ 17 × 100 = −11.76%; quantity: (400 − 360) ÷ 360 × 100 = +11.11% [1]. [2] (c) Supernormal profit attracts new firms because there are no barriers to entry [1]. Entry increases supply and lowers the price until it equals average cost of £15, leaving no supernormal profit [1]. [2] Examiner insight: Show the cause and effect in order (profit, entry, supply, price); a list of the end result alone does not show reasoning.

10. Number of firms: more firms means more rivalry and less control over price [1], so the market is more competitive [1]. Barriers to entry: high barriers (such as high start-up costs or legal protection) keep new firms out [1], so existing firms face less competition and can keep prices above costs [1]. [4] Examiner insight: Each factor needs its effect on competition explained; two developed factors answer the question better than a bare list.

11. Profit per unit: C = 15 − 15 = £0 and D = 16 − 12 = £4 [1]. So on these figures profit is lower in C [1]. In C there are no barriers, so any supernormal profit would attract entry, supply would rise and price would fall back to cost [1]. In D barriers stop entry, so profit can last, with few rivals to force price down [1]. However, D’s cost advantage comes from economies of scale, and its price is only 1 ÷ 15 × 100 = 6.67% above C’s [1], so consumers may still gain from lower costs. D’s profit could be lower if a price war began among the three firms [1], or if the threat of new entry restrained its price [1]. Judgement: on these figures profits are likely to be lower in C because of free entry, but the gap depends on how real the barriers are and how fiercely the three firms compete [1]. [8] Examiner insight: Use the figures given, then weigh them; answers that only assert “monopolies make more profit” cannot reach a reasoned judgement.

12. (a) Plan A: TR = 5.50 × 4,000 = £22,000 and TC = 8,000 + (3 × 4,000) = £20,000 [1]; profit £2,000 [1]. Plan B: TR = 4.60 × 6,000 = £27,600 and TC = 8,000 + (3 × 6,000) = £26,000 [1]; profit £1,600 [1]. [4] (b) Share rises from 4,000 ÷ 40,000 = 10% to 6,000 ÷ 40,000 = 15%, a rise of 5 percentage points [1]. [1] (c) Break-even: A = 8,000 ÷ (5.50 − 3) = 3,200 units; B = 8,000 ÷ (4.60 − 3) = 5,000 units [1]. Margin of safety: A (4,000 − 3,200) ÷ 4,000 = 20%; B (6,000 − 5,000) ÷ 6,000 = 16.7% [1]. A profit-seeking firm prefers Plan A, since £2,000 is 20% more than £1,600 [1]. A firm seeking market share prefers Plan B, which wins 5 more percentage points of the market [1]. Judgement: Plan B has a smaller margin of safety, so a fall in demand could push it into loss sooner; a firm aiming to survive might choose A despite the share gain [1]. [5] Examiner insight: Link each plan to an objective and use the numbers as evidence; a conclusion that ignores the risk shown by break-even output is weaker.

Where marks are usually lost

• Stating that a firm in a competitive market sets its own price.
• Giving a change in market share as a percent instead of percentage points.
• Forgetting fixed costs in total cost.
• Listing features with no link to price, profit or behaviour.
• Saying a competitive market never earns supernormal profit, with no short-run and long-run split.
• Comparing plans on revenue alone.
• Evaluating without using the figures given.
• Omitting a final judgement.

Next steps

• Review the revision notes and the study guide.
• Hub: OxfordAQA A-level Economics; checklist.
• Try all free 10-minute diagnostics.
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Official syllabus

OxfordAQA International AS and A-level Economics specification (9640), version 1.2, published by OxfordAQA International Examinations. First teaching September 2020; first International AS exams May/June 2021; first International A-level exams May/June 2022.