Revenue and Profit: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
The table below shows the output, average total cost and average revenue for a firm. Units of output Average total cost (£) Average revenue (£) 10 15 26 11 14 24 12 13 23 13 12 21 At which one of the following levels of output will the firm maximise its profits?
Answer: C.
To maximise profit, a firm must look for the output level where the difference between its total revenue and total costs is at its greatest. Profit is maximised when the gap between Average Revenue (AR) and Average Total Cost (ATC) is multiplied by the number of units to create the largest total surplus. At 12 units, the AR is £23 and the ATC is £13, giving a profit per unit of £10. Total profit is £120 (12 units × £10).
Options A, B, and D are incorrect because they result in lower total profits. At 10 units, profit is £110 (10 × [26-15]). At 11 units, profit is £110 (11 × [24-14]). At 13 units, profit is £117 (13 × [21-12]). Since £120 is the highest figure, 12 units is the correct level for profit maximisation.
Options A, B, and D are incorrect because they result in lower total profits. At 10 units, profit is £110 (10 × [26-15]). At 11 units, profit is £110 (11 × [24-14]). At 13 units, profit is £117 (13 × [21-12]). Since £120 is the highest figure, 12 units is the correct level for profit maximisation.
Question 2
Figure 4 shows the short-run average costs (AC), marginal costs (MC), average revenue (AR) and marginal revenue (MR) curves for a typical firm in a monopolistically competitive market. Figure 4 In the long run, market forces are most likely to cause the firm's revenue curves to
Answer: A.
The correct answer is A. In a monopolistically competitive market, firms can make supernormal profits in the short run. However, the absence of high barriers to entry means these profits attract new firms to the market. As new firms enter, the demand for the existing firm’s product falls, causing the Average Revenue (AR) curve to shift to the left. Furthermore, because there are more substitutes available, the firm’s demand becomes more price-sensitive, which makes the AR curve flatter.
Options B and D are incorrect because the entry of new firms increases competition and product differentiation, which makes demand more elastic (flatter), not less elastic (steeper). Options C and D are incorrect because the entry of new firms reduces, rather than increases, the individual firm’s market share, causing the demand curve to shift leftward toward the Average Cost curve, eventually eliminating supernormal profits in the long run.
Options B and D are incorrect because the entry of new firms increases competition and product differentiation, which makes demand more elastic (flatter), not less elastic (steeper). Options C and D are incorrect because the entry of new firms reduces, rather than increases, the individual firm’s market share, causing the demand curve to shift leftward toward the Average Cost curve, eventually eliminating supernormal profits in the long run.
Question 3
The diagram below shows the average revenue and marginal revenue (AR and MR) curves, and the average cost and marginal cost (AC and MC) curves, for the only firm in an industry. If the market is highly contestable, in the long run, the firm is most likely to set its price at
Answer: B.
In a highly contestable market the threat of entry forces even a sole supplier to price as if rivals were present, so supernormal profit is competed away and price settles where average revenue equals average cost, normal profit. The profit-maximising monopoly price is higher; contestability is what stops the firm charging it.
Question 4
Table 7 shows how the number of workers employed by a profit-maximising firm affects its total output per hour and the price it is able to charge. 1 worker: 3 units at £5.00. 2 workers: 7 units at £4.50. 3 workers: 15 units at £4.20. 4 workers: 20 units at £4.10. 5 workers: 24 units at £4.00. The firm pays its workers £18 per hour. It has no other variable costs and its fixed costs are £3 per hour. How many workers will the firm employ?
Answer: C.
Build the revenue column first, because the price falls as output rises and that is what makes this harder than it looks. One worker makes 3 units at £5.00, so total revenue is £15.00. Two workers make 7 at £4.50, giving £31.50. Three make 15 at £4.20, giving £63.00. Four make 20 at £4.10, giving £82.00. Five make 24 at £4.00, giving £96.00. Now take the differences to get what each extra worker actually ADDS: £15.00, then £16.50, then £31.50, then £19.00, then £14.00. A profit-maximising firm hires while that addition is at least the wage of £18. The fourth worker clears it, adding £19.00, but the fifth does not, adding only £14.00, so the firm stops at four. Checking with total profit says the same thing: after paying £18 a worker and the £3 fixed cost, profit runs −£6.00, −£7.50, +£6.00, +£7.00, +£3.00, peaking at four workers. The fixed cost of £3 is a distraction: it is the same whatever the firm does, so it cannot change where the maximum sits.
Question 5
Figure 5 shows the average revenue ( AR ), marginal revenue ( MR ) and marginal cost ( MC ) curves for an industry which was perfectly competitive but is now a monopoly. The cost and revenue curves remain unchanged. Figure 5 Which of the following areas shows the total deadweight loss of consumer and producer surplus resulting from the structure of the industry changing from perfect competition to monopoly?
Answer: C.
The correct answer is C because deadweight loss represents the net welfare loss to society caused by a monopoly. In perfect competition, output occurs where Price equals Marginal Cost (P=MC), which is socially optimal. When an industry becomes a monopoly, the firm restricts output to where Marginal Revenue equals Marginal Cost (MR=MC) and raises the price. This reduction in output creates a triangular area of lost consumer and producer surplus that is not captured by anyone. Areas 5 and 6 represent the lost surplus from this restricted quantity, capturing the total reduction in welfare.
Options A, B, and D are incorrect because they refer to areas representing either producer surplus gains or simple transfers from consumers to the monopolist. These areas redistribute existing wealth rather than representing the total "leakage" of welfare loss that defines the deadweight burden.
Options A, B, and D are incorrect because they refer to areas representing either producer surplus gains or simple transfers from consumers to the monopolist. These areas redistribute existing wealth rather than representing the total "leakage" of welfare loss that defines the deadweight burden.
What this practice covers
These questions are drawn from past AQA A-Level papers. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on revenue and profit, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Saying normal profit means zero profit. It is zero economic profit but a positive accounting return, and it is a cost.
- Drawing MR anywhere other than twice the gradient, cutting the axis halfway along AR.
- Forgetting that in perfect competition AR = MR = price.
- Confusing revenue maximisation (MR = 0) with sales maximisation (AR = ATC).
- Giving the shut-down point as ATC rather than AVC in the short run.
- Stating MC = MR without the marginal reasoning behind it.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Revenue and Profit revision notes.