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Revenue, Costs and Profits — Exam Questions & Model Answers

Section 3.3.2 — worked exam questions with mark schemes, model answers and examiner commentary.

Economics · WEC13 · Unit 3 · 3.3.2

2 written questions · 12 marks

Time estimates come from one constant per paper — Economics Unit 3 is 2 hours · 80 marks — not from a per-question guess.

This page examines 0 of 34 requirements in 3.3.2 Revenue, Costs and Profits0.0%

Counted over the 2 written questions on this page and nothing else — not the whole question bank, and not the revision notes, which are measured separately and are much better covered. 2 of them carry no spec tag yet, so this number is a floor, not an estimate.

34 requirements in 3.3.2 that no question on this page examines
  • ECON-3.3.2-1a-1 total revenue
  • ECON-3.3.2-1a-2 average revenue
  • ECON-3.3.2-1a-3 marginal revenue.
  • ECON-3.3.2-1b Price elasticity of demand and its relationship to revenue concepts, including calculations.
  • ECON-3.3.2-2a Derivation of short-run cost curves from the assumption of diminishing marginal productivity.
  • ECON-3.3.2-2b The law of diminishing returns.
  • ECON-3.3.2-2c-1 total cost
  • ECON-3.3.2-2c-2 total fixed cost
  • ECON-3.3.2-2c-3 total variable cost
  • ECON-3.3.2-2c-4 average (total) cost
  • ECON-3.3.2-2c-5 average fixed cost
  • ECON-3.3.2-2c-6 average variable cost
  • ECON-3.3.2-2c-7 marginal cost.
  • ECON-3.3.2-2d-1 marginal product and marginal costs
  • ECON-3.3.2-2d-2 average products and average cost
  • ECON-3.3.2-2d-3 total product and total cost
  • ECON-3.3.2-2d-4 short-run and long-run costs.
  • ECON-3.3.2-3a The relationship between long-run cost curves and economies/diseconomies of scale.
  • ECON-3.3.2-3b Minimum efficient scale.
  • ECON-3.3.2-3c Distinction between internal/external economies of scale.
  • ECON-3.3.2-3d-1 financial
  • ECON-3.3.2-3d-2 technical
  • ECON-3.3.2-3d-3 managerial
  • ECON-3.3.2-3d-4 marketing
  • ECON-3.3.2-3d-5 purchasing
  • ECON-3.3.2-3d-6 risk bearing.
  • ECON-3.3.2-3e-1 availability of skilled labour
  • ECON-3.3.2-3e-2 access to transport links
  • ECON-3.3.2-3e-3 sharing knowledge.
  • ECON-3.3.2-3f-1 communication problems
  • ECON-3.3.2-3f-2 coordination problems
  • ECON-3.3.2-3f-3 X-inefficiency.
  • ECON-3.3.2-4a The distinction between normal profit, supernormal profit and losses.
  • ECON-3.3.2-4b Short-run and long-run shutdown points.

Exam questions

Every question here carries a tariff that exists in IAL Economics. Open the mark scheme before the model answer and you will see what the examiner is paid to look for.

  1. Examine8 marksAO1 · AO2 · AO3 · AO412 min

    Examine why a profit-maximising firm produces where MC = MR.

    Mark scheme
    Examine (8)
    Appendix 6: Requires knowledge, understanding, application, analysis and evaluation. Requires an explanation which includes a chain of reasoning, and diagrams where appropriate. Focuses on depth rather than breadth. Any relevant data provided needs to be interpreted. There should be a brief assessment of the arguments/factors/evidence.
    Level 1 — 1–2 marks
    Isolated knowledge and understanding. No application to the context and no chain of reasoning.
    Level 2 — 3–4 marks
    Knowledge applied to the context. A chain of reasoning is begun but not carried through; any data given is described rather than interpreted.
    Level 3 — 5–6 marks
    A developed chain of reasoning in context, with a diagram where one is appropriate. Depth rather than breadth; data interpreted. Assessment is implied rather than made.
    Level 4 — 7–8 marks
    A developed chain of reasoning in context AND a brief assessment of the arguments, factors or evidence — the clause that separates Examine from Analyse.
    Indicative content
    Knowledge: definitions of MC, MR, profit maximisation. Application: what happens when MC < MR and MC > MR. Analysis: logical chain explaining why MC = MR is optimal.
    Model answer — 5–6 / 8
    What the marks in the margin meanKKnowledgeAnAnalysis chain

    Para 1

    Marginal cost (MC) is the additional cost of producing one more unit, while marginal revenue (MR) is the additional revenue from selling one more unit. K Profit maximisation is the output where the difference between total revenue and total cost is greatest. K

    Para 2

    If a firm is producing at an output where MC < MR, the additional unit adds more to revenue than to cost — so profit increases if the firm produces more. An The firm should therefore expand output. Conversely, if MC > MR, the last unit produced costs more than it earns — the firm is losing money on that unit and should reduce output. An

    Para 3

    The only output level where the firm has no incentive to change is where MC = MR. An At this point, the last unit produced adds exactly as much to revenue as it costs — any further expansion would reduce profit, and any contraction would leave potential profit uncaptured. An This rule applies across all market structures: a perfectly competitive firm, a monopolist, or an oligopolist all maximise profit where MC = MR — the difference is only in the shape of their revenue curves. An
    Examiner commentary
    The logic is exact and complete: below MC = MR expand, above it contract, at it neither, and the rule holds across market structures because only the shape of the revenue curve changes. A diagram with the profit area shaded would earn the diagram credit. It is Level 3 because no assessment is made. A Level 4 needs one: firms rarely know their marginal curves, and many pursue sales, growth or market share instead, so MC = MR is the benchmark rather than the behaviour.
    Why this loses marks — a mid-band attempt at the same question

    Not a real script, and not written for this panel. It is 2 of 3 paragraphs of the model answer above, with “Para 3” removed. Nothing is rewritten. Open the model answer above and the difference is exactly the paragraphs named here.

    What the marks in the margin meanKKnowledgeAnAnalysis chain

    Para 1

    Marginal cost (MC) is the additional cost of producing one more unit, while marginal revenue (MR) is the additional revenue from selling one more unit. K Profit maximisation is the output where the difference between total revenue and total cost is greatest. K

    Para 2

    If a firm is producing at an output where MC < MR, the additional unit adds more to revenue than to cost — so profit increases if the firm produces more. An The firm should therefore expand output. Conversely, if MC > MR, the last unit produced costs more than it earns — the firm is losing money on that unit and should reduce output. An

    The band this attempt cannot reach

    Level 4 — 7–8 marks
    A developed chain of reasoning in context AND a brief assessment of the arguments, factors or evidence — the clause that separates Examine from Analyse.

    Where it tops out instead

    Level 3 — 5–6 marks
    A developed chain of reasoning in context, with a diagram where one is appropriate. Depth rather than breadth; data interpreted. Assessment is implied rather than made.

    No mark is put on this attempt. The full answer above is marked 5–6 / 8 by its own commentary; what a truncated version scores depends on the script, and inventing a number for it would be the kind of false precision this page exists to avoid.

  2. Explain4 marksAO1 · AO26 min

    Explain the difference between normal and supernormal profit.

    Mark scheme
    1–2 marks
    Definition of normal profit (minimum to keep firm in industry, AR = AC)
    3–4 marks
    Definition of supernormal profit (above normal, AR > AC) with implication
    Model answer — 4 / 4
    What the marks in the margin meanKKnowledge/DefinitionAApplication
    Normal profit is the minimum level of profit needed to keep a firm in the industry — it covers all costs including the opportunity cost of the entrepreneur's time and capital. K It is earned when average revenue (AR) equals average cost (AC). If profit falls below normal, the firm would be better off leaving the industry and deploying its resources elsewhere. A

    Supernormal (abnormal) profit is any profit above the normal level — earned when AR > AC. K In perfect competition, supernormal profit attracts new entrants who compete it away. In monopoly, barriers to entry protect supernormal profit in the long run. A
    Examiner commentary
    Clear definitions with the AR = AC / AR > AC conditions correctly stated. The key insight — that normal profit includes opportunity cost — is essential. Linking to market structures (competition vs monopoly) shows broader understanding.

Now try one yourself

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