Edexcel International A Level Economics
Edexcel International A Level Economics Revenue, Costs and Profits Exam Questions
Free Edexcel International A Level Economics exam questions for Revenue, Costs and Profits, with a mark scheme for every pack. Covers total, average and marginal revenue, short-run and long-run costs, diminishing returns, economies of scale and normal and supernormal profit.
Revenue, Costs and Profits exam questions
1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
About Edexcel International A Level Economics Revenue, Costs and Profits
Revenue, costs and profits is a Unit 3 topic in Edexcel International A Level Economics that gives you the building blocks for the theory of the firm. You learn how revenue changes with output, why short-run costs are shaped by diminishing returns, and why long-run average costs fall then rise because of economies and diseconomies of scale. You also learn the conditions for normal profit, supernormal profit and losses, and when a firm should shut down. These ideas are used in every market structure diagram, so accuracy here is vital. Examiners test calculations from cost and revenue tables and the correct shape and labelling of curves.
What you need to know
- Revenue Total revenue = price x quantity. Average revenue = TR / Q = price. Marginal revenue = change in TR / change in Q. For a firm facing a downward sloping demand curve, MR falls twice as fast as AR.
- Short-run costs Fixed and variable costs; total, average and marginal costs. The law of diminishing marginal returns explains why MC and AVC eventually rise; MC cuts AC at its minimum.
- Long-run costs All factors are variable in the long run. Internal economies of scale (technical, managerial, financial, purchasing, risk-bearing) and external economies. Diseconomies of scale from poor communication and coordination. Minimum efficient scale is the lowest output where LRAC is minimised.
- Profit Normal profit is the minimum profit needed to keep a firm in the industry, where TR = TC including opportunity cost. Supernormal profit is any profit above this. Profit maximisation occurs where MC = MR.
- Shutdown conditions In the short run a firm should continue producing if price covers average variable cost. In the long run it must cover average total cost.
Common mistakes in Revenue, Costs and Profits
- Treating the law of diminishing returns as a long-run idea. It applies in the short run when at least one factor is fixed.
- Explaining the LRAC curve using diminishing returns. In the long run the shape is explained by economies and diseconomies of scale.
- Placing the MC curve so that it cuts AC away from its minimum. MC must cut AC and AVC at their lowest points.
- Confusing normal profit with zero accounting profit. Normal profit includes the opportunity cost of the entrepreneur, so the firm is covering all costs including this.
- Forgetting that a loss-making firm may keep producing in the short run. It should if price covers AVC, because it contributes to fixed costs.
Try three Revenue, Costs and Profits exam-style questions
1. A firm's total cost rises from 1,200 dollars to 1,290 dollars when output rises from 40 to 45 units. Calculate the marginal cost per unit and the average total cost at 45 units. (3 marks)
Show the mark scheme answer
MC = (1,290 - 1,200) / (45 - 40) = 90 / 5 = 18 dollars per unit; ATC = 1,290 / 45 = 28.67 dollars (to 2 decimal places).
2. Explain why a firm's short-run average cost curve is U-shaped. (4 marks)
Show the mark scheme answer
At low output AFC falls as fixed costs are spread over more units, and increasing returns lower AVC; as output rises further the law of diminishing marginal returns sets in; MC rises above AC and pulls it up; so AC falls then rises.
3. Explain two types of economies of scale a large supermarket chain may benefit from. (4 marks)
Show the mark scheme answer
Purchasing economies: bulk buying lowers unit costs; financial economies: easier and cheaper to borrow; marketing economies: advertising costs spread over more output; managerial economies: specialist managers; two types explained with context.
Revenue, Costs and Profits FAQs
What does Edexcel IAL Economics Revenue, costs and profits cover?
It covers total, average and marginal revenue, short-run and long-run costs, diminishing returns, economies and diseconomies of scale, profit and shutdown conditions.
Which unit is Revenue, costs and profits examined in?
It is part of Unit 3, Business behaviour.
Which formulas do I need for Revenue, costs and profits?
TR = P x Q, AR = TR / Q, MR = change in TR / change in Q, AC = TC / Q, MC = change in TC / change in Q, and profit = TR - TC. Profit is maximised where MC = MR.
