OxfordAQA International AS and A-level Economics: Oligopoly (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 section 3.3.3.4 (Oligopoly) of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. The content is assessed in Unit 3 (International A2). All firms and figures are invented. Related pages: study guide, revision notes, course hub, printable checklist and the free diagnostics.

Questions

1. Sales in Country M’s tile market (£ million) are: firm A 72, B 55, C 41, D 33, E 19, and many small firms 80 in total.

(a) Work out the concentration ratio for the three largest firms. [2] (b) Firms A and D merge. Work out the new ratio for the three largest firms. [2]

2. Explain two ways in which oligopolistic markets can differ from one another. [4]

3. A firm sells 500 units a week at £18. Above this price its demand is P = 28 − 0.02Q. Below it, demand is P = 38 − 0.04Q.

(a) Calculate marginal revenue at 500 units on each part of the demand curve. [2] (b) The firm’s marginal cost rises from £3 to £7. Explain the effect on price and output. [2] (c) Calculate the percentage change in revenue if the firm raises price to £20. [3] (d) State one limitation of the model. [1]

4. (a) Distinguish between tacit and overt collusion. [2] (b) Explain two reasons why a cartel may break down. [4]

5. Two firms with equal output form a cartel. Market demand is P = 150 − 3Q (Q in thousand units, P in £). Each firm’s marginal cost is £30.

(a) Calculate the cartel’s output and price. [3] (b) Calculate joint profit and profit per firm, in £ thousand. [2] (c) Firm X secretly produces 13 thousand units while Y produces 10 thousand. Show that X gains and that joint profit falls. [3]

6. Firms R and S each choose Hold or Cut price. Profits in £m (R first, S second): both Hold 15, 15; R cuts and S holds 22, 5; R holds and S cuts 5, 22; both cut 10, 10.

(a) Explain what is likely to happen if each firm acts independently. [3] (b) Explain why the best joint outcome is hard to sustain. [3]

7. A firm sells 4.0 million units and earns a margin of £3.60 a unit. An advertising campaign costs £1.8 million.

(a) Calculate the extra units needed to break even. [2] (b) Express this as a percentage of current sales. [1] (c) Calculate the net gain or loss if sales rise by 15%. [2] (d) State one way advertising might disadvantage consumers. [1]

8. A firm with average cost £16 normally sells 80 thousand units at £22. In a one-year price war it sells 100 thousand units at £14. After a rival leaves it sells 110 thousand at £23.

(a) Calculate profit in a normal year, in the war year and after the rival leaves. [3] (b) Calculate how many years it takes to recover the sacrifice. [2] (c) Distinguish predatory pricing from limit pricing. [2]

9. (a) Classify each as an innocent or strategic barrier: a high capital cost of plant; exclusive contracts with retailers; spare capacity kept to threaten price cuts. [3] (b) A firm with revenue £250 million spends £20 million on R&D. Calculate R&D as a percentage of revenue. [1] (c) A project has a 0.35 chance of success, worth £90 million, and costs £20 million. Calculate the expected net gain. [2] (d) State why R&D matters in oligopoly. [1]

10. Demand is P = 120 − 4Q (Q in thousand units, P in £) and marginal cost is £24.

(a) Calculate output, price and profit for a profit-maximising firm. [3] (b) Calculate output, price and profit for a revenue maximiser. [2] (c) Suggest one reason managers might pursue revenue. [1]

11. Evaluate whether oligopoly is likely to benefit consumers. [12]

Answers

1. (a) Largest three: 72 + 55 + 41 = 168 [1]. Total sales = 72 + 55 + 41 + 33 + 19 + 80 = 300, so ratio = 168 / 300 = 56% [1]. (b) Merged firm 72 + 33 = 105, then 105 + 55 + 41 = 201 [1]. Ratio = 201 / 300 = 67% [1]. [4] Examiner insight: Answers gain credit by showing the total and the sum of the top firms before dividing. Bare percentages leave no working to credit.

2. Number of firms or concentration: some have two or three firms, others several [1]; this changes how easily they can coordinate [1]. Ease of entry: some have high barriers, others lower [1]; this changes the threat from new rivals and firms’ pricing freedom [1]. Product differentiation is also acceptable. [4] Examiner insight: Two named dimensions are needed, each with its consequence. Stating the dimension alone leaves the examiner little to credit.

3. (a) Above: MR = 28 − 0.04 × 500 = 8 [1]. Below: MR = 38 − 0.08 × 500 = −2 [1]. (b) MC of £3 and £7 are both between −2 and 8 [1], so output stays 500 and price £18 [1]. (c) At £20, Q = (28 − 20) / 0.02 = 400 [1]. Revenue = 20 × 400 = 8,000, compared with 18 × 500 = 9,000 [1]. Change = −1,000 / 9,000 = −11.1% [1]. (d) For example, it gives no reason for the original kink price [1]. [8] Examiner insight: Use the demand curve above the kink for a price rise and show Q from it. Using the lower curve is a common slip.

4. (a) Tacit collusion is coordination without a formal agreement, for example following a leader [1]. Overt collusion is an open or formal agreement, as in a cartel [1]. (b) Each firm gains by cheating on the agreed output while others comply [1], so agreements are hard to police [1]. Differing costs or demand make a common price or quota hard to agree [1], and entrants or non-members can undercut the cartel price [1]. Legal penalties are also acceptable. [6] Examiner insight: Each reason needs its link to breakdown, not just a label. “Cheating” alone is incomplete.

5. (a) MR = 150 − 6Q [1]. Set equal to 30: Q = 20 thousand [1]. P = 150 − 60 = £90 [1]. (b) Joint profit = (90 − 30) × 20 = £1,200 thousand [1]; each firm £600 thousand [1]. (c) Q = 23, P = 150 − 69 = £81 [1]. X earns 51 × 13 = 663, above 600 [1]. Y earns 51 × 10 = 510; joint profit 1,173, below 1,200 [1]. [8] Examiner insight: Use the whole market output to find the new price. Using only X’s output gives the wrong price.

6. (a) If S holds, R gains by cutting (22 against 15) [1]. If S cuts, R still does better by cutting (10 against 5) [1]. The same is true for S, so both cut and each earns 10 [1]. (b) Both holding gives 15 each, total 30, against 20 when both cut [1]. Each firm gains from cheating (22 against 15) [1]. Neither can be sure the other will hold, so there is uncertainty and temptation [1]. [6] Examiner insight: Explain the reasoning for each rival choice; stating “they will both cut” with no comparison reads as assertion.

7. (a) Extra units = cost / margin = 1.8 / 3.6 [1] = 0.5 million [1]. (b) 0.5 / 4.0 = 12.5% [1]. (c) Extra units = 0.15 × 4.0 = 0.6 million; contribution = 0.6 × 3.6 = 2.16 [1]. Net = 2.16 − 1.8 = +£0.36 million [1]. (d) For example, costs passed on in higher prices [1]. [6] Examiner insight: State the unit (million units or £ million). Mixing units can make a correct method look wrong.

8. (a) Normal: 80 × (22 − 16) = £480 thousand [1]. War: 100 × (14 − 16) = −£200 thousand [1]. After: 110 × (23 − 16) = £770 thousand [1]. (b) Sacrifice = 480 + 200 = 680 [1]. Gain per year = 770 − 480 = 290, so payback = 680 / 290 = 2.3 years [1]. (c) Predatory pricing sets price below cost to remove a rival [1]. Limit pricing keeps price above cost but low enough that entry is unprofitable [1]. [7] Examiner insight: Compare the war year with a normal year, not with zero. The sacrifice is the profit given up.

9. (a) Capital cost: innocent [1]; exclusive contracts: strategic [1]; spare capacity: strategic [1]. (b) 20 / 250 × 100 = 8% [1]. (c) Expected value = 0.35 × 90 = 31.5 [1]; net = 31.5 − 20 = £11.5 million [1]. (d) It allows competition without price cuts and can create a lead or a barrier [1]. [7] Examiner insight: Give the reason a barrier is strategic (chosen by incumbents), not just the label.

10. (a) MR = 120 − 8Q = 24, so Q = 12 [1]; P = 120 − 48 = £72 [1]; profit = 48 × 12 = £576 thousand [1]. (b) MR = 0, so Q = 15 and P = £60 [1]; profit = 36 × 15 = £540 thousand [1]. (c) For example, managers’ pay may be linked to sales [1]. [6] Examiner insight: Set MR to zero for revenue maximisation, not to MC. Check the answer against the task’s objective.

11. Gains for consumers: scale economies can feed through into lower prices [1]; large profits can pay for R&D and new products [1]; rivalry through quality gives choice [1]; prices may be stable [1]. Costs: collusion can raise price and cut output towards the monopoly level [1]. Barriers protect profit [1]. Advertising may be wasteful and raise price [1]. Less pressure to cut costs [1]. Evaluation: the effect depends on entry conditions and contestability [1]; whether firms collude or compete [1]; whether spending is real innovation [1]; and the time period, because gains from R&D take time. A supported judgement for a stated market [1]. [12] Examiner insight: Answers tend to do better when they compare competitive and collusive cases and reach a conclusion tied to specific conditions, rather than listing both sides.

Where marks are usually lost

• Skipping the working for concentration ratios.
• Using the wrong demand segment in kinked demand questions.
• Setting MR = MC with the demand slope instead of the MR slope.
• Giving cartel profit without dividing by the number of firms.
• Comparing the price war with zero instead of with normal profit.
• Describing barriers without saying who creates them.
• Listing advantages and disadvantages with no judgement.
• Leaving out units.

Next steps

• Review the revision notes and the study guide.
• Tick off topics on the printable checklist and use the course hub.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

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