Economics

1. 1.

   Explain the difference between productive and allocative efficiency for a firm.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Low unit cost concerns how output is made. Price equal to marginal cost concerns whether the last unit's consumer valuation matches the resources used; one condition need not guarantee the other.

   Marking points

   • Productive efficiency means producing at minimum attainable average cost.
   • Allocative efficiency occurs where price equals marginal cost under the usual no-externality assumptions.

   Examiner tip: Do not equate 'efficient' with 'profitable'.

2. 2.

   Fictional case: Kero produces 50 units at price 18. Fixed cost is 200 and variable cost is 500 currency units. Calculate total cost, average cost and profit.

   [3 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Add both cost categories before finding unit cost. Revenue is price times quantity, so subtract 700 from 900 rather than subtracting cost from the selling price alone.

   Marking points

   • Total cost = 200 + 500 = 700.
   • Average cost = 700/50 = 14 per unit.
   • Profit = 50 * 18 - 700 = 200 currency units.

   Examiner tip: Average cost includes fixed cost per unit.

3. 3.

   Fictional case: a large bakery installs specialised ovens and negotiates bulk flour discounts, but its managers become slow to coordinate. Analyse two economies of scale and one diseconomy in this case.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Link each organisational change to unit cost. Expansion does not guarantee lower average cost: technical and purchasing gains can coexist with managerial diseconomies.

   Marking points

   • Specialised ovens can spread indivisible capital costs over greater output.
   • Bulk discounts lower input cost per unit through purchasing economies.
   • Slow coordination can cause delays and raise average costs.
   • Net unit-cost effects depend on whether savings exceed coordination losses.

   Examiner tip: Explain average-cost effects, not simply that total spending rises.

4. 4.

   Fictional firm faces P = 60 - Q and total cost TC = 100 + 20Q. With MR = 60 - 2Q and MC = 20, calculate profit-maximising output, price and profit; explain why using P = MC would be wrong for this firm's objective.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Solve the supplied marginal condition first, then read the price from demand. Profit uses total revenue less total cost, including the fixed 100. Selling more requires a lower price on all units, explaining MR below P.

   Marking points

   • MR = MC gives 60 - 2Q = 20, so Q = 20.
   • P = 60 - 20 = 40.
   • Profit = 40 * 20 - (100 + 20 * 20) = 300.
   • With downward-sloping demand MR differs from price; P = MC targets allocative efficiency, not maximum profit here.

   Examiner tip: Read price from demand, not from the MR equation.

5. 5.

   Fictional case: two bus operators propose merging, promising shared depots but leaving only one operator on local routes. Evaluate whether the merger benefits passengers.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Cost savings are plausible but do not establish consumer gains. If entry is difficult, require measurable service commitments or fare oversight; easy entry would constrain the merged firm differently.

   Marking points

   • Indicative: shared depots can reduce duplicated fixed costs.
   • Lower costs benefit passengers only if passed into fares or service quality.
   • Lost competition can raise fares or reduce frequency.
   • A justified judgement considers entry barriers and enforceable fare or service conditions.

   Examiner tip: Distinguish gains to the merged firm's profit from gains to passengers.

6. 6.

   Fictional case: one digital platform dominates bookings, yet new entrants can lease software cheaply. Users value its large existing network and cannot transfer reviews. Evaluate whether cheap software makes this market contestable.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Contestability requires credible competitive entry, not just the ability to launch a website. Review portability and multi-homing may matter more than coding expense when the incumbent's network attracts both sides.

   Marking points

   • Indicative: low software entry cost reduces one barrier.
   • Network effects make a small entrant less useful despite similar technology.
   • Non-transferable reviews create switching costs and may require sunk marketing expenditure.
   • A justified conclusion weighs credible entry and exit, not software cost alone.

   Examiner tip: Identify a sunk or switching barrier even where physical capital is cheap.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.