OxfordAQA A-level Economics: Monopoly, monopoly power and the competitive market process (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 3.1.4.4 (Monopoly and monopoly power) and 3.1.4.5 (The competitive market process) of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. Section 3.1 is International AS content, which is also part of the International A-level. All data are invented and illustrative.

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

Questions

1. Distinguish between a pure monopoly and a firm with monopoly power. [3]

2. In Country B’s flour market (invented), annual sales in million dollars are: Firm W 48, Firm X 36, Firm Y 30, Firm Z 24, and all other firms together 62.

(a) Calculate the three-firm concentration ratio. [2] (b) The four-firm ratio is 69%. State what this suggests about the market and one limitation of the figure. [2]

3. Explain two barriers to entry that could give a firm monopoly power. [4]

4. Demand in a market is P = 90 - 3Q, where P is price in dollars and Q is output in units. Each unit costs 30 dollars to make. Competitive firms charge a price equal to unit cost.

(a) State the competitive price and output. [2] (b) A monopolist raises the price to 60 dollars. Calculate its output and the percentage fall in output compared with the competitive level. [2] (c) Calculate the monopolist’s profit and explain why profit is higher even though fewer units are sold. [2]

5. Explain how advertising and product differentiation might increase a firm’s monopoly power. [4]

6. In Country B’s flour market the four-firm concentration ratio was 69%. A year later the four largest firms sell 165 million dollars out of a market total of 220 million dollars. Calculate the change in percentage points and as a relative percentage, and comment briefly. [3]

7. A market needs 40,000 units a year. A single firm producing 40,000 units has long-run average cost (LRAC) of 8 dollars. Four equal firms producing 10,000 units each have LRAC of 14 dollars.

(a) Calculate the total cost of supplying the market under each arrangement and the saving from single-firm supply. [3] (b) Explain whether buyers gain if the single firm charges 12 dollars, and what happens if it charges 16 dollars. [2]

8. Explain one way in which monopoly power might lead to more invention and innovation, and one reason why it might not. [4]

9. A small ice-cream maker cuts its unit cost from 3.20 dollars to 2.88 dollars and its price from 5.00 dollars to 4.75 dollars. Calculate the percentage fall in cost, the percentage fall in price and the share of the cost saving passed on. Comment on who gains. [4]

10. Explain how vigorous competition between large firms can benefit consumers in ways other than lower prices, and why consumers may be exploited where monopoly power exists. [6]

11. Firm K supplies 82% of home broadband subscriptions in Country D (invented). Entry requires a costly physical network. Over three years the price index for Firm K’s service rose from 100 to 108, while the general price index rose from 100 to 112. Firm K’s unit cost fell 15% because of its scale, and typical speeds doubled.

Evaluate whether Firm K’s market position harms consumers. [10]

Answers

1. A pure monopoly is the one firm that supplies the whole market, with no close alternative for buyers. [1] A firm with monopoly power is able to influence price or earn higher profit because competition is limited, even though rivals exist. [1] Pure monopoly is rare, while many firms have some monopoly power, for example a firm holding 40% of a market with a strong brand. [1] [3] Examiner insight: For “distinguish”, answers tend to do better when they state what separates the two ideas, such as sole supplier versus influence over price, rather than defining each in isolation.

2. (a) CR3 = (48 + 36 + 30)/200 [1] = 114/200 = 57% [1]. The total is 48 + 36 + 30 + 24 + 62 = 200. (b) A CR4 of 69% suggests a concentrated market in which four firms hold most sales and may have market power. [1] A limitation: it says nothing about barriers to entry, how closely the firms compete, or how the market is defined. [1] [4] Examiner insight: Show the total as well as the ratio. The denominator includes the “all other firms” figure, and leaving it out is a common slip.

3. Any two developed barriers, 2 marks each. For example: high start-up costs, such as building a factory or network, [1] mean a new entrant risks a large loss, so rivals are deterred and the incumbent keeps its share and profit. [1] A patent or licence [1] legally blocks rivals from selling the same product, so the holder can charge more without losing customers to new firms. [1] Other valid barriers: strong brands, control of key inputs, economies of scale. [4] Examiner insight: Naming a barrier is only a start. Developing it by linking it to monopoly power, such as fewer rivals or the ability to keep price high, is what makes the answer complete.

4. (a) Competitive price = unit cost = 30 dollars. [1] Output = (90 - 30)/3 = 20 units. [1] (b) Output at 60 dollars = (90 - 60)/3 = 10 units. [1] Fall = 10/20 = 50%. [1] (c) Profit = (60 - 30) x 10 = 300 dollars. [1] The profit per unit is higher (30 dollars compared with zero), and costs fall because fewer units are made, so the extra margin outweighs the lost sales. [1] [6] Examiner insight: Show how output is read from the demand equation before quoting it. Explaining the profit result in terms of margin per unit makes the answer more than a calculation.

5. Advertising can build brand loyalty, [1] so demand becomes less sensitive to price and the firm can raise price with fewer lost sales; it also raises the cost of entry, because a new firm must spend heavily to match it. [1] Product differentiation makes the product seem different from rivals’, [1] so the firm has its own, less elastic, demand curve and some customers stay when price rises. [1] [4] Examiner insight: Linking each factor to demand becoming less price elastic keeps the chain of reasoning complete. A short remark that advertising can also inform buyers and so increase competition adds balance.

6. New CR4 = 165/220 = 75%. [1] Change = 75 - 69 = 6 percentage points; relative change = 6/69 = 8.7%. [1] Comment: concentration has risen, so the largest firms hold a bigger share, which may increase market power, though the ratio alone does not show how they behave. [1] [3] Examiner insight: Label the unit of change. Writing “6” with no unit, or “8.7 percentage points”, mixes up two different ideas.

7. (a) One firm: 40,000 x 8 = 320,000 dollars. [1] Four firms: 4 x 10,000 x 14 = 560,000 dollars. [1] Saving = 240,000 dollars. [1] (b) At 12 dollars buyers pay less than the 14 dollars at which the small firms would need to sell, so buyers gain from the economies of scale. [1] At 16 dollars buyers pay more than the small-firm cost, so the saving becomes profit and consumers lose. [1] [5] Examiner insight: A saving in cost is only half of the argument. Comparing the monopolist’s price with the cost under the alternative market shows whether the saving reaches buyers.

8. Monopoly profits can fund research and development, [1] and a patent lets the firm keep the reward from a new product, which encourages risk-taking. [1] Against this, a firm with little competition faces little pressure to improve its products, [1] so it may enjoy its profits without investing, and extra innovation is only a possibility. [1] [4] Examiner insight: Pairing a benefit with a reasoned reason it might fail is how a four-mark answer on a “possible benefit” tends to stay balanced.

9. Cost fall = 0.32/3.20 = 10%. [1] Price fall = 0.25/5.00 = 5%. [1] Share passed on = 0.25/0.32 = 78.1%. [1] Both sides gain: buyers pay 5% less, and the margin per unit rises from 1.80 to 1.87 dollars. [1] [4] Examiner insight: State what each percentage is a percentage of (the old cost, the old price). Dividing by the wrong base is a typical way to lose marks.

10. Large rivals compete by improving products, [1] cutting costs [1] and improving service, such as faster delivery, [1] so consumers get better quality, more choice and better treatment. Where monopoly power exists, there is less pressure to do any of this, [1] so price may be above the competitive level and output lower, [1] which can misallocate resources and exploit consumers. [1] [6] Examiner insight: Specific, named forms of non-price competition score better than “quality” repeated in different words.

11. Real price: 108/112 x 100 = 96.4. [1] Firm K’s price has fallen about 3.6% in real terms. [1] Harm: with 82% of the market and high entry barriers, Firm K faces little competition, so price could be above the competitive level and consumer surplus lower. [1] Resources may be misallocated if output is restricted. [1] Benefits: unit cost fell 15% through economies of scale, [1] and doubled speeds suggest innovation. [1] Evaluation: the fall in the real price suggests some saving reaches consumers, but we do not know what price rivals would charge. [1] The size of the barrier matters, because a costly network deters entry, but a regulator or threat of new technology could limit the firm. [1] Judgement: on this evidence, consumers seem to gain, with real price down and quality up, so harm is not proven. [1] More data on profit margins and customer choice would test this. [1] [10] Examiner insight: Use the figures, as the real-price calculation does, to support the argument. Evaluation gains credit when it reaches a justified judgement and names the evidence that would change it.

Where marks are usually lost

• Calling any firm with a large share a pure monopoly.
• Leaving out the “other firms” total when calculating a concentration ratio.
• Writing percentage points and per cent as if they were interchangeable.
• Giving a calculation without the working or without units.
• Listing factors that affect monopoly power but not linking them to price elasticity.
• Stating that monopoly profit rises with price, without considering the fall in output and costs.
• Describing benefits of monopoly with no discussion of whether they reach consumers.
• Finishing an evaluation by repeating the points without choosing a side.

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 3.1.4.4 and 3.1.4.5. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022. Published by OxfordAQA.