OxfordAQA A-level Economics: Monopoly, price discrimination and contestability (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.

Ten questions on sections 3.3.3.5 to 3.3.3.7 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2: monopoly and monopoly power, price discrimination and contestable markets. The specification treats section 3.3 as extra International A2 content; the first International AS exams were in May/June 2021 and the first International A-level exams in May/June 2022. Every firm and figure is invented. Teaching sits in the study guide and revision notes. See also the subject hub, the checklist and the free diagnostics.

Questions

1. Explain two factors that influence the monopoly power of a firm. [4]

2. A sole toll-bridge operator in Country E faces demand P = 200 − 8Q, where Q is in thousand crossings and P is the toll. Average cost equals marginal cost at 56.

(a) Derive the marginal revenue equation. [1] (b) Find the profit-maximising output and toll. [3] (c) Calculate the supernormal profit. [2] (d) Calculate price elasticity of demand at this point. [2] (e) State the output and toll in a competitive market with the same costs, and compare. [2]

3. A gas pipeline in Country F has total cost TC = 800 + 5Q.

(a) Explain what is meant by a natural monopoly. [2] (b) Market demand is 40 units. Calculate average cost if one firm supplies it, and if two equal firms share it. [3]

4. Evaluate whether a monopoly is always against the interests of consumers. [8]

5. A swimming pool charges adults and students different entry prices for the same session. Explain four conditions needed for this price discrimination to work. [4]

6. A zoo has marginal cost of 24 per visitor. Weekend demand is P = 108 − 6Q and weekday demand is P = 48 − 2Q (Q in hundreds of visitors).

(a) Find the profit-maximising price and quantity at the weekend. [2] (b) Find the profit-maximising price and quantity on weekdays. [2] (c) Calculate total profit. [2] (d) Calculate PED at each point and explain which market pays the higher price. [3]

7. A bike-hire scheme sold 500 hires at a single charge of 20 (300 to office workers, 200 to tourists). It then charged office workers 26 and tourists 14, selling 270 and 290 hires.

(a) Calculate the percentage change in total revenue. [3] (b) Calculate PED for each group. [2] (c) Explain why revenue rose. [2]

8. Explain how sunk costs affect the contestability of a market. [4]

9. A freight depot sells 70 loads a month at 18, with average cost of 13. An entrant could charge 16 and take all the trade for 4 months before the depot responds.

(a) Calculate the incumbent’s monthly supernormal profit. [1] (b) Calculate the entrant’s profit over 4 months. [2] (c) Find the net gain if sunk costs are 250, and if they are 1,000. [2] (d) State which case deters entry. [1]

10. “Because the market for flights on a single route is contestable, a dominant airline’s high market share is no cause for concern.” Discuss. [10]

Answers

1. Barriers to entry: legal protection or large economies of scale keep rivals out [1], so supernormal profit lasts and the firm keeps control of price [1]. Product differentiation or advertising: a branded product with few close substitutes has a lower PED [1], so a price rise loses fewer sales [1]. [4] Examiner insight: Tie each factor to pricing power. Naming a factor without saying how it changes the firm’s control of price usually leaves the explanation incomplete.

2. (a) MR = 200 − 16Q [1]. (b) MR = MC: 200 − 16Q = 56 [1]. Q = 9 [1]. P = 200 − 8 × 9 = 128 [1]. (c) Profit = (128 − 56) × 9 [1] = 648 [1]. (d) PED = −(1/8) × 128/9 [1] = −1.78 [1]. (e) Competitive: P = MC = 56, Q = 18 [1]. The monopolist charges more than double the toll and sells half the output [1]. [10] Examiner insight: Show the substitution that gives the price. Reading the toll from the MR equation is an easy slip; the price comes from demand.

3. (a) A market where long-run average cost is still falling when output reaches market demand [1], so one firm can supply at lower unit cost than several [1]. (b) One firm: AC = 800/40 + 5 = 25 [1]. Two firms with 20 each: AC = 800/20 + 5 = 45 [1], which is 80% higher because the fixed cost is paid twice [1]. [5] Examiner insight: Linking the result to the duplicated fixed cost shows why one firm is cheapest. Bare figures say less.

4. Against: price above marginal cost and lower output than competition [1], for example 128 against 56 in question 2 [1]; allocative inefficiency and a welfare loss [1]. For: economies of scale can lower average cost [1]; in a natural monopoly one firm is cheapest [1]; supernormal profit can fund innovation [1]. Evaluation: consumers only gain if savings are passed on, which needs rivals or a credible threat of entry [1]; so monopoly is not always against consumers, but is more likely to be where barriers are strong and the good is essential [1]. [8] Examiner insight: Evaluation reads best when tied to a condition (pass-through, barriers, type of good) and ends in a judgement, rather than restating both lists.

5. The pool needs market power so that it can set price [1]. It must be able to separate adults from students, for example by checking student cards [1]. Students must not be able to resell entry to adults, which is arbitrage [1]. The groups need different PEDs, or there is no extra profit [1]. [4] Examiner insight: Apply each condition to the pool. Four bare terms with no explanation tend to read as thin.

6. (a) Weekend: MR = 108 − 12Q = 24 [1]; Q = 7, P = 66 [1]. (b) Weekday: MR = 48 − 4Q = 24, so Q = 6 [1]; P = 36 [1]. (c) Profit = (66 − 24) × 7 + (36 − 24) × 6 = 294 + 72 [1] = 366 [1]. (d) Weekend PED = −(1/6) × 66/7 = −1.57 [1]; weekday PED = −(1/2) × 36/6 = −3 [1]. Weekend demand is less elastic, so it pays the higher price [1]. [9] Examiner insight: Apply MR = MC separately in each market. Using one combined MR curve is a different method and gives different answers.

7. (a) Revenue before = 20 × 500 = 10,000 [1]. After = 26 × 270 + 14 × 290 = 7,020 + 4,060 = 11,080 [1]. Change = +10.8% [1]. (b) Office workers: −10% ÷ +30% = −0.33 [1]. Tourists: +45% ÷ −30% = −1.5 [1]. (c) Office-worker demand is inelastic, so the higher charge raised revenue (6,000 to 7,020) [1]. Tourist demand is elastic, so the lower charge also raised revenue (4,000 to 4,060) [1]. [7] Examiner insight: Work out each percentage change before dividing, and keep the sign on PED, interpreting it rather than just quoting it.

8. Sunk costs cannot be recovered on leaving [1]. High sunk costs make entry risky [1], because an entrant loses them if the incumbent reacts [1]. That weakens hit-and-run entry and makes the market less contestable [1]. [4] Examiner insight: Keep sunk costs distinct from fixed costs. Equipment that can be sold on exit does not hurt contestability.

9. (a) (18 − 13) × 70 = 350 [1]. (b) (16 − 13) × 70 = 210 a month [1]; over 4 months = 840 [1]. (c) 840 − 250 = 590 [1]; 840 − 1,000 = −160 [1]. (d) Sunk costs of 1,000 deter entry [1]. [6] Examiner insight: Deduct sunk costs once from the total earned, not from every month.

10. For: if entry and exit are cheap, the airline must hold price near average cost to deter entrants [1]; hit-and-run entry is possible when sunk costs are low [1]; so a high share gives little pricing power and profit stays normal [1]. Against: contestability depends on real barriers, such as scarce airport slots or large marketing sunk costs [1]; the incumbent can react with price cuts or loyalty schemes, so entry may not pay [1]; few markets are fully contestable [1]; a share figure alone says little about behaviour, so prices persistently above cost would count as evidence against contestability [1]; the airline may also be large because it is efficient, which could benefit passengers [1]. Judgement: the concern is smaller where sunk costs are low and entry is credible, and larger where barriers exist [1], so the claim holds only on conditions that need evidence, such as past entry and price levels [1]. [10] Examiner insight: Naming the evidence that would settle the question (entry history, sunk costs, price against cost) tends to strengthen a conclusion more than a general opinion.

Where marks are usually lost

• Taking the monopoly price from MR rather than demand.
• Using the wrong slope for MR, which is twice as steep as a linear demand curve.
• Leaving out units or the sign in PED and revenue answers.
• Listing price discrimination conditions with no application.
• Forgetting that discrimination needs MR = MC in each segment separately.
• Treating sunk costs as fixed costs.
• Equating contestable with many firms.
• Evaluating by repeating the lists with no judgement.

Next steps

• Go back over the study guide and revision notes.
• Tick off the checklist and visit the subject hub.
• Try the free diagnostics, each about ten minutes long.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, published by OxfordAQA: sections 3.3.3.5, 3.3.3.6 and 3.3.3.7.