OxfordAQA International AS and A-level Economics: Objectives and growth of firms (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 3.3.1.3 and 3.3.1.4 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2 (extra International A2 content). Every firm and figure is invented. Revise with the study guide and revision notes; see also the course hub and checklist.

Questions

1. Explain what is meant by satisficing. [3]

2. A cheese dairy in Country H has demand P = 80 − 2Q and total cost TC = 120 + 8Q + Q², where Q is tonnes a week and money is in £.

(a) Find the output, price and profit when the dairy maximises profit. [4] (b) Find output, price and profit if the dairy maximises sales revenue instead. [3] (c) Explain one reason why managers might prefer the output in (b). [2]

3. A tailor in Country J has fixed costs of £600 a week and variable costs of £25 per garment, and makes 80 garments a week.

(a) At a price of £30, show whether the tailor should keep producing in the short run. [3] (b) At a price of £20, show what the tailor should do. [2] (c) Calculate the lowest price at which the tailor stays in business in the long run. [1]

4. Explain two reasons why ownership is separated from control in large firms. [4]

5. A company’s managers receive a bonus of 3% of revenue. Plan X gives revenue of £8.0m and profit of £1.5m. Plan Y gives revenue of £9.5m and profit of £0.9m.

(a) Calculate the bonus under each plan. [2] (b) Explain why the bonus may conflict with shareholders’ interests, and suggest one change. [4]

6. A state water authority in Country K faces demand P = 20 − 0.01Q, marginal cost of £4 per unit and fixed costs of £4,800.

(a) Find the output, price and profit when the authority maximises profit. [4] (b) The authority must break even. Show that output of 1,200 units at £8 achieves this. [2] (c) Calculate the subsidy needed if price equals marginal cost. [2]

7. In a market worth £600m, Firm M sells £90m and Firm N sells £66m. M makes 9m units at a total cost of £63m, and N makes 6m units at a total cost of £42m.

(a) Calculate their combined market share after a merger. [2] (b) The merger removes £6m of costs. Calculate the percentage fall in average cost per unit. [3]

8. A target firm has 30m shares at £1.80. A bidder offers a 25% premium. Calculate the total price, the premium paid in £m, and the years of £4.5m annual savings needed to recover the premium. [4]

9. A coffee roaster buys 300,000 kg of beans a year at £5.00 a kg. The importer’s margin is £1.00 a kg. Buying the importer would add £0.30 a kg of running cost.

(a) Name the type of integration. [1] (b) Calculate the yearly saving. [2] (c) Explain one risk of this integration. [2]

10. Firm S earns profits (£m) of 8, 2, 9, 3 over four years. Firm T earns 3, 8, 2, 7.

(a) Calculate the combined profit each year and the range for S, T and the combined firm. [3] (b) Explain why a conglomerate merger might be chosen even with no cost savings. [2]

11. Evaluate whether a large listed company is likely to pursue profit maximisation. [10]

Answers

1. Satisficing means aiming for a satisfactory outcome, not the maximum [1]. The decision maker sets a target, such as a minimum profit that keeps shareholders content [1]. Once it is met, effort goes to other aims, such as market share or a quieter life [1]. [3] Examiner insight: A definition scores better with a short example of a target than with a bare statement.

2. (a) MR = 80 − 4Q and MC = 8 + 2Q [1]. Set equal: 72 = 6Q, so Q = 12 [1]. P = 80 − 24 = £56 [1]. TR = 672, TC = 120 + 96 + 144 = 360, so profit = £312 [1]. (b) MR = 0, so Q = 20 [1]. P = 40 and TR = £800 [1]. TC = 120 + 160 + 400 = 680, so profit = £120 [1]. (c) Revenue is £128 higher than in (a) [1]. If pay or status depends on size and sales, managers gain although profit is £192 lower [1]. Examiner insight: Show the MR equation before solving; an answer with only the final output gives the reader nothing to follow if the arithmetic slips.

3. (a) TR = 30 × 80 = £2,400 and variable cost = £2,000 [1]. Contribution £400 pays part of the £600 fixed cost, so the loss is £200 [1]. Shutting down loses £600, so it keeps producing [1]. (b) TR = £1,600 is below variable cost £2,000, so the loss is £1,000 [1]. That exceeds £600, so it should shut down [1]. (c) 600 ÷ 80 + 25 = £32.50 [1]. Examiner insight: Compare the loss from producing with the loss from shutting; stating only “revenue is below total cost” misses the short-run test.

4. Growth needs more capital than a few owners can provide, so shares are sold to many investors [1], which spreads ownership and passes day-to-day decisions to others [1]. Large firms need specialist managers with technical skill [1]. Limited liability makes it easier to attract many small investors, none of whom can control the firm alone [1]. [4] Examiner insight: Give reasons for the divorce, not its consequences; a second reason that only restates the first gains little.

5. (a) X: 0.03 × 8.0m = £240,000 [1]. Y: 0.03 × 9.5m = £285,000 [1]. (b) Managers gain £45,000 by choosing Y [1], but profit falls by £0.6m, so shareholders lose [1]. Managers know more about the firm than owners, so the choice is hard to monitor [1]. Link the bonus to profit or share price, or award share options [1]. Examiner insight: Use both plans’ figures to show the conflict; a general statement about managers’ motives is weaker than a comparison of £45,000 with £0.6m.

6. (a) MR = 20 − 0.02Q; set equal to 4 [1]. Q = 800 [1]. P = 20 − 8 = £12 [1]. TR = 9,600, TC = 4,800 + 3,200 = 8,000, so profit = £1,600 [1]. (b) TR = 8 × 1,200 = £9,600 [1]. TC = 4,800 + 4 × 1,200 = £9,600, so profit is zero [1]. (c) P = 4 gives Q = 1,600 [1]. TR = 6,400 and TC = 11,200, so subsidy = £4,800 [1]. Examiner insight: Check that your break-even price lies on the demand curve; testing it against the demand curve shows you understand the objective.

7. (a) M: 90 ÷ 600 = 15% and N: 66 ÷ 600 = 11% [1]. Combined 26% [1]. (b) Costs are 63 + 42 = £105m for 15m units, so £7.00 each [1]. After the saving: 99 ÷ 15 = £6.60 [1]. Fall = 0.40 ÷ 7.00 = 5.7% [1]. Examiner insight: A percentage change needs the original value as the base; dividing by the new figure gives a different answer.

8. Offer price = 1.80 × 1.25 = £2.25 [1]. Total price = 30m × 2.25 = £67.5m [1]. Premium = 30m × 0.45 = £13.5m [1]. 13.5 ÷ 4.5 = 3 years [1]. Examiner insight: State what the payback ignores, such as integration costs; a short comment on that gains credit that the number alone cannot.

9. (a) Vertical (backward) integration [1]. (b) Net saving per kg = 1.00 − 0.30 = £0.70 [1]. 0.70 × 300,000 = £210,000 [1]. (c) The roaster may be tied to an inefficient supplier [1], or lose flexibility to buy cheaper beans elsewhere [1]. Examiner insight: Name the type precisely: “vertical” with direction beats “integration” alone.

10. (a) Combined: 11, 10, 11, 10 [1]. Ranges: S 9 − 2 = 7, T 8 − 2 = 6 [1], combined 11 − 10 = 1 [1]. (b) Profits move in opposite directions, so the combined firm is less exposed to downturns in one market [1]. Stable profit helps survival and lowers the firm’s risk to lenders [1]. Examiner insight: Put the ranges next to each other; the stability is clear only when compared.

11. Traditional theory assumes MR = MC and profit maximisation because owners want returns and firms must earn normal profit to survive [1]. In a large listed firm ownership is separate from control [1], so managers may pursue sales, growth or status, giving a principal-agent problem [1]. Shareholders can respond with profit-linked pay, share options, independent directors and the threat of takeover [2]. Competitive pressure also makes slack costly, which pushes towards profit [1]. Information is limited, so managers may satisfice, reaching a target without maximising [1]. Short-run revenue or market-share aims may support later profit, so objectives differ by time period [1]. Judgement: the answer depends on market power, how widely shares are spread and how well controls work [1]; with strong competition and good controls profit becomes the dominant aim, while a dominant firm with weak shareholder oversight is more likely to satisfice [1]. [10] Examiner insight: Evaluation gains credit when it names conditions and reaches a supported conclusion; a list of arguments for and against with no verdict is weaker.

Where marks are usually lost

• Stating MR = MC but not calculating MR from the demand equation.
• Mixing up profit-maximising and revenue-maximising outputs.
• Shutting a firm down because it makes a loss, when revenue covers variable cost.
• Ignoring that normal profit is included in costs.
• Describing a merger as horizontal when the firms are at different stages.
• Calculating a percentage change from the wrong base.
• Giving the benefits of growth with no costs.
• Evaluating with a list and no judgement.

Next steps

• Re-read the revision notes and the study guide.
• Visit the course hub and the checklist.
• Take one of the free 10-minute diagnostics.
• Ready for help? Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), version 1.2, sections 3.3.1.3 and 3.3.1.4. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022. Published by OxfordAQA.