S5 Economics Practice Paper: Production Costs, Firm Decisions And Market Structure (12 Questions, 100 Marks, 75 Minutes)

S5 Economics Practice Paper: Production Costs, Firm Decisions and Market Structure (12 Questions, 100 Marks, 75 Minutes)

2026-11-10

S5 Economics: Costs, Firm Decisions and Market Structure

S5 Economics paper: 12 questions, 100 marks, 75 minutes, on costs, economies of scale, profit maximisation, shut-down decisions, competition versus monopoly and price discrimination.

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Paper details　Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12

Instructions: This paper has three sections, A, B and C. Answer all questions. Total marks: 100. Time allowed: 75 minutes.

Show the formula and the values substituted. Give money answers to two decimal places with units.

Separate fixed cost from variable cost, and use MR = MC to explain market equilibrium.

Spend about 20 minutes on Section A, 30 minutes on Section B and the last 25 minutes on Section C.

Section A Production Costs, Diminishing Returns and Economies of Scale (4 questions, 28 marks)

Answer all questions and show the working and the units for cost items.

#	Question	Answer and marking notes
1	A firm has short-run fixed cost of 120 dollars and total variable cost of 0, 60, 100, 150 and 220 dollars for outputs 0 to 4 units. (a) List the total cost at each output. (b) Find the marginal cost of the third unit. (c) Find average total cost, average variable cost and average fixed cost at 4 units.	Answer: (a) Total cost = fixed cost + total variable cost: 120, 180, 220, 270 and 340 dollars. (b) Marginal cost of the third unit = 270 – 220 = 50 dollars. (c) At 4 units: average total cost = 340 / 4 = 85 dollars; average variable cost = 220 / 4 = 55 dollars; average fixed cost = 120 / 4 = 30 dollars.
2	A workshop has one variable factor, labour. The marginal product of the first four workers is 30, 25, 18 and 9 units. (a) Find total product. (b) From which worker does marginal returns start to diminish? (c) Explain the cause using the fixed factor.	Answer: (a) Total product is 30, 55, 73 and 82 units. (b) Marginal product falls from 30 to 25 for the second worker, so diminishing marginal returns begin with the second worker. (c) The fixed factor, such as plant and machinery, cannot be increased in the short run, so each extra worker has less capital to work with and adds less output.
3	A firm long-run average cost is 40 dollars at 100 units, 28 dollars at 400 units and 34 dollars at 700 units. (a) State the output range with economies of scale. (b) Find the minimum efficient scale. (c) Give two causes of economies of scale.	Answer: (a) Between 100 and 400 units average cost falls from 40 to 28 dollars, so this range has economies of scale. (b) The minimum efficient scale is 400 units, where long-run average cost is lowest at 28 dollars. (c) Causes include bulk buying discounts, finer division of labour and spreading the cost of large machines over more output.
4	(a) Distinguish the short run from the long run. (b) Explain why fixed cost exists only in the short run. (c) Explain how a firm decides to keep producing at a loss in the short run.	Answer: (a) In the short run at least one factor is fixed and the firm can only vary the variable factors; in the long run all factors can be varied. (b) Fixed cost comes from factors that cannot be changed in the short run, such as rent and machinery, and is still paid when output is zero; in the long run the firm can exit or expand so every cost is variable. (c) As long as price exceeds average variable cost, revenue covers variable cost and part of fixed cost, so the loss from producing is smaller than the loss from shutting down.

Section B Revenue, Profit Maximisation and the Shut-down Decision (4 questions, 32 marks)

For profit maximisation, state the condition MR = MC and show the substitution.

#	Question	Answer and marking notes
5	The demand curve for a good is P = 80 – 2Q. (a) Write the total revenue and marginal revenue functions. (b) Find the output and price that maximise total revenue. (c) Find average revenue and marginal revenue at 10 units.	Answer: (a) Total revenue TR = 80Q – 2Q squared; marginal revenue MR = 80 – 4Q. (b) Setting MR = 0 gives 80 – 4Q = 0, so Q = 20 units and P = 40 dollars, with maximum revenue of 800 dollars. (c) At 10 units, average revenue = 80 – 20 = 60 dollars and marginal revenue = 80 – 40 = 40 dollars.
6	A perfectly competitive firm has total cost TC = Q squared + 4Q + 36 and the market price is 24 dollars. (a) Find the profit-maximising output. (b) Find the profit. (c) Find average variable cost at that output and say whether the firm should keep producing.	Answer: (a) Under perfect competition P = MC: 2Q + 4 = 24, so Q = 10 units. (b) Total cost = 100 + 40 + 36 = 176 dollars and total revenue = 240 dollars, so profit = 64 dollars. (c) Average variable cost = 10 + 4 = 14 dollars, below the price of 24 dollars, so revenue covers variable cost and part of fixed cost and the firm should keep producing.
7	A firm faces demand P = 60 – Q and total cost TC = 10Q + 200. (a) Write marginal revenue and marginal cost. (b) Find the profit-maximising output and price. (c) Find total revenue, total cost and profit.	Answer: (a) MR = 60 – 2Q and MC = 10 dollars. (b) Setting MR = MC: 60 – 2Q = 10 gives Q = 25 units and P = 60 – 25 = 35 dollars. (c) Total revenue = 35 x 25 = 875 dollars; total cost = 10 x 25 + 200 = 450 dollars; profit = 425 dollars.
8	A firm produces 10 units, sells at 15 dollars, has average variable cost of 18 dollars and average total cost of 25 dollars. (a) Find fixed cost. (b) Find the current loss. (c) Compare shutting down with continuing and advise the firm.	Answer: (a) Total cost = 25 x 10 = 250 dollars, total variable cost = 18 x 10 = 180 dollars, so fixed cost = 70 dollars. (b) Total revenue = 150 dollars and the loss is 250 – 150 = 100 dollars. (c) Shutting down gives a loss equal to fixed cost of 70 dollars, which is smaller than 100 dollars, so the firm should shut down in the short run.

Section C Market Structure, Monopoly Efficiency and Price Discrimination (4 questions, 40 marks)

For market structure questions use figures or a diagram to explain equilibrium, efficiency and welfare loss.

#	Question	Answer and marking notes
9	Compare perfect competition and monopoly: (a) give two market features of each. (b) Explain the difference in long-run profit. (c) Explain the difference in allocative efficiency.	Answer: (a) Perfect competition: many small firms selling a homogeneous product, free entry and exit, and each firm is a price taker. Monopoly: a single seller, no close substitute, barriers to entry, and the firm is a price maker. (b) A competitive firm produces at the minimum average cost and earns zero economic profit in the long run, while a monopolist can keep positive economic profit. (c) Competition gives P = MC and allocative efficiency, while a monopolist charges above marginal cost and restricts output, so resources are misallocated.
10	A monopolist faces demand P = 100 – Q and a constant marginal cost of 20 dollars. (a) Find the competitive output and price. (b) Find the monopoly output and price. (c) Calculate the deadweight loss and explain its source.	Answer: (a) Competition: P = MC gives 100 – Q = 20, so Q = 80 units and P = 20 dollars. (b) Monopoly: MR = 100 – 2Q = 20 gives Q = 40 units and P = 60 dollars. (c) Deadweight loss = 0.5 x (80 – 40) x (60 – 20) = 800 dollars, because output is below the efficient level and trades worth more to buyers than their marginal cost do not take place.
11	A market has only two firms that agree to form a cartel, each producing half the output at the same high price. (a) State the aim of the cartel. (b) Explain why each member has an incentive to raise output. (c) Explain why cartels are hard to sustain.	Answer: (a) A cartel restricts output and raises price so that joint profit equals the monopoly profit. (b) If the other members keep to the agreement, one member can raise output and take extra sales at the high price, so its profit rises. (c) Members do not trust each other and cannot easily monitor each other output, so cheating pushes the price down; new entrants and demand swings also break the agreement.
12	A monopolist sells the same good in two markets: demand in market A is P = 100 – 2Q and in market B is P = 60 – 4Q, with marginal cost of 20 dollars in both. (a) Find the profit-maximising price and output in each market. (b) Use elasticity to explain the price difference. (c) State the three conditions for price discrimination.	Answer: (a) Market A: MR = 100 – 4Q = 20 gives Q = 20 units and P = 60 dollars; market B: MR = 60 – 8Q = 20 gives Q = 5 units and P = 40 dollars. (b) At these points the absolute price elasticity of demand is 1.5 in market A and 2.0 in market B, so the less elastic market can be charged the higher price. (c) The three conditions are that the markets can be separated, that the good cannot be resold between markets, and that the markets have different demand elasticities.

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