OxfordAQA International AS and A-level Economics: Competitive market structures (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.

The questions test sections 3.3.3.1 to 3.3.3.3 of the OxfordAQA International AS and A-level Economics specification (9640), version 1.2. Section 3.3 is the extra International A2 content. All markets, firms and figures are invented. Read the study guide first, and use the revision notes for recall. Course pages: hub, checklist and the free 10-minute diagnostics.

Questions

1. Three invented markets are described. Market A: 900 farms sell identical maize and anyone can start growing. Market B: 35 salons each offer a different style, and new salons open easily. Market C: one firm runs the only pipeline in a region, and entry is blocked. Name the market structure each is closest to and give one reason for each. [3]

2. A small farm sells identical eggs in a market where the price is 18 a box. It sells 70 boxes. (a) Calculate total revenue. [1] (b) State marginal revenue. [1] (c) Explain why the farm would not raise its price to 19. [2]

3. Fixed cost for a price-taking firm is 60. Total variable cost for 1 to 7 units is 20, 34, 45, 58, 75, 96 and 123. (a) At a price of 26, find the profit-maximising output and the profit. [3] (b) At a price of 12, explain what the firm should do. [3]

4. A perfectly competitive market has 40 identical firms. The price is 30 and each firm produces 15 units at an average cost of 26. Minimum average cost is 24, at an output of 12. Market demand is Qd = 1,200 − 20P. (a) Calculate supernormal profit per firm and for all firms. [2] (b) Find the long-run price and the number of firms, and the number of entrants. [3]

5. Studio Z is a yoga studio in a market with many differentiated rivals. TC = 90 + 4q + 0.1q², so MC = 4 + 0.2q. Short-run demand is P = 16 − 0.15q, so MR = 16 − 0.30q. (a) Find the profit-maximising output. [2] (b) Calculate the price and profit. [2] (c) After entry, demand becomes P = 13 − 0.125q, so MR = 13 − 0.25q. Find the output, price and profit. [3] (d) Average cost is lowest, at 10, when output is 30. Explain two ways in which the long-run position is inefficient. [2]

6. Explain two ways in which non-price competition may benefit consumers in monopolistic competition, and one way in which it may strengthen a firm’s market power. [6]

7. Explain why the price elasticity of demand for one firm’s product differs between perfect competition and monopolistic competition. [4]

8. Evaluate the view that a perfectly competitive market allocates resources efficiently. [9]

9. Studio Z (question 5) spends 18 a week on advertising, so TC = 108 + 4q + 0.1q². Demand shifts to P = 14.8 − 0.125q, so MR = 14.8 − 0.25q. (a) Calculate Studio Z’s output, price and profit. [6] (b) Rivals copy, and demand returns to P = 13 − 0.125q. At an output of 20, calculate profit. [2] (c) Evaluate whether non-price competition benefits consumers. [4]

10. A bakery in a monopolistically competitive market raises the price of a loaf from 4.00 to 4.40. Weekly sales fall from 250 to 200. Calculate the price elasticity of demand, and state what happens to total revenue. [4]

11. A firm that is a wage taker pays 40 a day and sells at a price of 5. The five workers it might hire add 12, 10, 9, 7 and 5 units. Calculate how many workers it hires, and explain why. [4]

Answers

1. A: perfect competition, because there are many sellers of an identical product with free entry [1]. B: monopolistic competition, because there are many firms with differentiated products and easy entry [1]. C: pure monopoly, because there is one seller and entry is blocked [1]. [3] Examiner insight: A structure named without a feature from the data gives your reasoning nothing to stand on, so tie each label to a stated fact.

2. (a) TR = 70 × 18 = 1,260 [1]. (b) MR = 18, because each extra box sells at the same price [1]. (c) The product is identical, so buyers would switch to rivals at 18 [1]. Demand at 19 would be zero, so revenue would fall to nothing [1]. [4] Examiner insight: Say that demand is perfectly elastic at the market price. “Demand falls” alone does not show the reason.

3. (a) MC for the units is 20, 14, 11, 13, 17, 21 and 27 [1]. MC of the sixth unit is 21, at most 26, and MC of the seventh is 27, above 26, so output is 6 [1]. TR = 156 and TC = 60 + 96 = 156, so profit is zero [1]. (b) Minimum AVC is 14.5, at 4 units [1]. Price is below it, so revenue does not cover variable cost [1]. The firm should shut down, losing 60 (fixed cost) rather than at least 68 by producing 1 unit [1]. [6] Examiner insight: Show the comparison of price with AVC and the two losses side by side. A decision stated without them is hard to credit.

4. (a) Profit per firm = (30 − 26) × 15 = 60 [1]. For all firms: 60 × 40 = 2,400 [1]. (b) Long-run price equals minimum AC = 24 [1]. Qd = 1,200 − 480 = 720 [1]. Firms = 720 ÷ 12 = 60, so 20 entered [1]. [5] Examiner insight: Check the starting position first: 40 × 15 = 600 equals demand at 30, which confirms the data are consistent before you build on them.

5. (a) Set MR = MC: 16 − 0.30q = 4 + 0.2q [1]. q = 12 ÷ 0.5 = 24 [1]. (b) P = 16 − 3.6 = 12.40 [1]. TR = 297.60, TC = 90 + 96 + 57.60 = 243.60, profit = 54 [1]. (c) 13 − 0.25q = 4 + 0.2q, so q = 20 [1]. P = 13 − 2.5 = 10.50 [1]. TC = 90 + 80 + 40 = 210 = TR, so profit is zero [1]. (d) Price (10.50) is above MC (8.00), so it is not allocatively efficient [1]. Output of 20 is below the 30 at which AC is lowest, so there is excess capacity of 10 and unit cost is above its minimum: not productively efficient [1]. [9] Examiner insight: Show the line MR = MC before solving. Give price from the demand curve, not from MC.

6. Benefit 1: advertising or labelling gives buyers information about products and prices [1], which helps them compare and choose [1]. Benefit 2: firms improve quality or design to win customers [1], so buyers gain better products or more variety [1]. Market power: brand loyalty makes demand less elastic [1], so a price rise loses fewer customers [1]. [6] Examiner insight: Each point works best as a claim followed by its consequence for buyers or for the firm. A list of types of advertising does not do this.

7. In perfect competition, products are identical and the firm is a price taker [1]. Its demand is horizontal and perfectly elastic at the market price [1]. In monopolistic competition, products are differentiated and some customers are loyal [1]. Demand slopes down and is elastic but not perfectly so, because close substitutes exist [1]. [4] Examiner insight: Name the cause (identical or differentiated products) as well as the shape of the curve.

8. Allocative efficiency needs P = MC [1]. In the long run, output is at minimum AC, so there is also productive efficiency [1]. This depends on its assumptions: many firms, free entry, identical products, perfect knowledge and no externalities [1]. If there is pollution, private MC is below social MC, so P = MC gives too much output [1]. If minimum efficient scale is large, many tiny firms cannot reach minimum AC [1]. Normal profit in the long run leaves little for research, so dynamic efficiency may be weaker [1]. Identical products give no variety [1]. Efficiency also says nothing about fair distribution of income [1]. Judgement: the model is a benchmark showing how far real markets depart from efficiency, but the proposition holds only if its assumptions hold [1]. [9] Examiner insight: “Assess critically” invites you to test the assumptions. A reasoned judgement at the end is stronger than a repeated list.

9. (a) Set MR = MC: 14.8 − 0.25q = 4 + 0.2q [1]. q = 10.8 ÷ 0.45 = 24 [1]. P = 14.8 − 3.00 = 11.80 [1]. TR = 283.20 [1]. TC = 108 + 96 + 57.60 = 261.60 [1]. Profit = 21.60 [1]. (b) TR = 20 × 10.50 = 210 [1]. TC = 108 + 80 + 40 = 228, so there is a loss of 18 [1]. (c) It can benefit consumers through information, quality and variety [1]. But it raised fixed cost by 18, and once copied it left the studio with a loss [1]. The outcome depends on whether the spending informs or only persuades, and on whether prices rise or firms exit [1]. Judgement: it benefits consumers when it adds quality or information, but less so when it is a defensive cost [1]. [12] Examiner insight: Use the figures in your evaluation. Quote the loss of 18 rather than saying “costs rise”.

10. %ΔP = (4.40 − 4.00) ÷ 4.00 × 100 = +10% [1]. %ΔQ = (200 − 250) ÷ 250 × 100 = −20% [1]. PED = −20 ÷ 10 = −2.0 [1]. Demand is elastic, as expected when close substitutes exist, so TR falls from 1,000 to 880 [1]. [4] Examiner insight: Divide by the starting values, and keep the sign. State what elastic demand means for revenue.

11. MRP = marginal product × 5, which gives 60, 50, 45, 35 and 25 [1]. Hire while MRP is at least the wage of 40 [1]. The third worker adds 45, but the fourth adds only 35, so it hires 3 [1]. A wage taker can hire as many workers as it wants at 40, so the wage does not change as it hires [1]. [4] Examiner insight: Show MRP for each worker. A bare answer of 3 leaves your method unclear.

Where marks are usually lost

• Drawing a sloping demand curve for a perfectly competitive firm.
• Shutting down whenever price is below average cost, without checking AVC.
• Reading price from the MR curve in monopolistic competition instead of from demand.
• Missing excess capacity in the long-run diagram.
• Quoting efficiency without its assumptions.
• Taking percentage changes against the new figure, not the starting one.
• Describing non-price competition as only good, or only bad, for buyers.
• Forgetting that advertising is a fixed cost in profit calculations.

Next steps

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

Official syllabus

Source: the OxfordAQA International AS and A-level Economics specification (9640), version 1.2, sections 3.3.3.1 to 3.3.3.3 and quantitative skills in 3.5.