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A-Level · Economics

ECO.MIC7 Revenue, Profit and the Profit-Maximising Level of Output

AQA 7136 · Calculators not allowed · about 90 minutes

Total Marks

Name: _______________________________ Date: ____ / ____ / ______

Answer all questions. Full sentences required for extended answers and explanation questions. No calculator allowed. Show simple working for calculations.

Multiple choice on revenue concepts for a single firm facing a given price schedule in a generic market.

(single)Select the one correct statement about revenue and profit for a firm in a generic market.(1)

(Total for Question 1 is 1 mark)

Define total revenue, as used for a firm selling goods in a market context.

(Total for Question 2 is 1 mark)

Define average revenue for a firm and explain its relationship to price in a generic selling situation.

(Total for Question 3 is 1 mark)

Define marginal revenue for a firm, using the change-in concept in a generic market context.

(Total for Question 4 is 1 mark)

Numerical revenue schedule for a generic firm. The firm faces the following price schedule: Output (units) Q = 0,1,2,3,4,5. Price per unit P = 0,10,9,8,6,3 respectively. Calculate for each output level the firm's total revenue TR, average revenue AR, and marginal revenue MR. Show workings. Context: simple arithmetic only, no calculator.

(Total for Question 5 is 5 marks)

Explain briefly the difference between normal profit and supernormal (abnormal) profit for a firm in a short-run context.

(Total for Question 6 is 2 marks)

State the profit-maximising rule for output choice for a firm using marginal cost and marginal revenue, in a generic market.

(Total for Question 7 is 2 marks)

Calculate profit or loss given a single output point. A firm at output Q = 3 sells at price P = 8 so TR = 24. Total cost at Q = 3 is GBP 15. Calculate the firm's profit and state whether it is normal, supernormal or a loss if normal profit at Q = 3 is estimated at GBP 5 included in costs.

(Total for Question 8 is 2 marks)

Diagram task: draw a generic cost and revenue diagram on price and output axes showing MC, AC, AR and MR curves, indicate the profit-maximising output where MC = MR, label the equilibrium output Q*, show the price AR at Q*, and shade the rectangle representing any supernormal profit. Context: generic firm, do not assume or label a specific market structure.

(Total for Question 9 is 5 marks)

Explain why the marginal revenue curve lies below the average revenue curve for a firm facing a downward-sloping average revenue curve in a generic market context.

(Total for Question 10 is 3 marks)

State what happens to total revenue when marginal revenue is negative, in the context of the revenue schedule of a firm.

(Total for Question 11 is 1 mark)

Explain briefly one reason why a firm might decide NOT to produce at the short-run profit-maximising output (MC = MR) even if that output would give higher profit, in a generic short-run context.

(Total for Question 12 is 1 mark)

Extended response: Analyse why a firm might not always aim to maximise profit in the short run. Context: use generic firm incentives, costs, market conditions, objectives and practical constraints; you should include diagrams, use the MC = MR idea without applying it to a specific market structure, discuss alternative objectives and constraints, and reach a supported conclusion.

(Total for Question 13 is 25 marks)

Mark scheme · ECO.MIC7 Revenue, Profit and the Profit-Maximising Level of Output

Question 1

(single) B1 option A only, total revenue = price x quantity, is correct
(single) Answer: A

Question 2

B1 a statement that total revenue is the total receipts from sales, equal to price per unit multiplied by quantity sold
Answer: Total revenue is the total receipts from sales, equal to price x quantity.

Question 3

B1 average revenue is total revenue divided by quantity and, for a firm selling each unit at the same price, equals the price
Answer: Average revenue = total revenue / quantity; when price per unit is constant AR = price.

Question 4

B1 marginal revenue is the change in total revenue from selling one more unit of output
Answer: Marginal revenue is the change in total revenue from selling one additional unit.

Question 5

M1 TR values: Q0=0, Q1=10, Q2=18, Q3=24, Q4=24, Q5=15
M1 AR values: Q1=10.0, Q2=9.0, Q3=8.0, Q4=6.0, Q5=3.0 (and Q0 undefined or 0)
M1 MR values calculated as change in TR: MR1=10, MR2=8, MR3=6, MR4=0, MR5=-9
B1 correct working shown for at least TR and MR calculations for multiple rows
B1 final table correctly presented or equivalent correct list of TR, AR, MR for each Q
Answer: TR: 0,10,18,24,24,15 for Q=0..5. AR: Q1=10, Q2=9, Q3=8, Q4=6, Q5=3. MR: MR1=10, MR2=8, MR3=6, MR4=0, MR5=-9.

Question 6

B1 normal profit defined as the minimum reward to keep resources in their current use, covering opportunity costs
B1 supernormal profit defined as any profit above normal profit, i.e. TR greater than total economic costs including opportunity costs
Answer: Normal profit is the minimum return covering opportunity costs; supernormal profit is any profit above that level, where TR exceeds all economic costs.

Question 7

B1 identifies the rule MC = MR as the condition for profit maximisation
B1 adds that the firm should produce where MR falls to equal MC and where MC is rising through MR to ensure a maximum
Answer: Produce where MC = MR and ensure MC is rising through MR so the chosen output gives a maximum profit.

Question 8

M1 profit = TR - TC = 24 - 15 = GBP 9
A1 since normal profit of GBP 5 is included in TC, economic profit = GBP 9 which exceeds normal profit, so supernormal profit of GBP 4
Answer: Accounting profit = GBP 9. Since normal profit of GBP 5 is included in costs, economic profit is GBP 4, a supernormal profit.

Question 9

B1 correct axes labelled Price (vertical) and Output (horizontal) and curves MC, AC, AR and MR present
B1 MR drawn below AR and sloping downwards where AR slopes downwards, and AR positioned above AC at Q* if supernormal profit shown
B1 MC intersects MR at the chosen profit-maximising output Q* and this point is marked
B1 price at Q* shown as height on AR curve, and AC at Q* indicated so profit area can be defined
B1 rectangle representing supernormal profit shaded between AR and AC at Q* (width = Q*, height = AR - AC)
Answer: Diagram should show MC = MR at Q*, AR above AC at Q*, and shaded rectangle between AR and AC at Q* representing supernormal profit.

Question 10

M1 selling extra units requires lowering price on all units, so the extra revenue from one more unit is less than the price at which that unit sells
A1 therefore MR is the change in TR and falls faster than AR, making MR lie below AR when AR slopes down
A1 example explanation: to sell one more unit the firm reduces price, losing some revenue on previous units, so MR < AR
Answer: Because to increase sales the firm must cut price on all units, the additional revenue from the extra unit is reduced by lost revenue on earlier units, so MR falls below AR.

Question 11

B1 total revenue falls when marginal revenue is negative
Answer: Total revenue falls when marginal revenue is negative.

Question 12

B1 one valid reason, for example capacity constraints, short-term liquidity problems, contractual obligations, regulatory limits, or managerial objectives such as revenue or market share targets
Answer: For example, the firm may lack the short-run capacity to expand to the MC = MR output, or it may face cash flow constraints that make producing at that level unfeasible.

Question 13

Level 1 (1-5): Basic statements about profit maximisation with limited analysis. May recall MC = MR and one or two simple reasons why a firm might not maximise profit, with little or no development or diagrammatic support.
Level 2 (6-10): Clear analysis of several reasons a firm might not maximise profit in the short run. Includes reference to MC = MR, some development of constraints or alternative objectives, and at least a simple diagram or example. Evaluation is limited.
Level 3 (11-15): Detailed analysis and balanced evaluation. Explains multiple reasons such as managerial objectives, capacity constraints, liquidity/cash flow problems, risk aversion, regulatory or contractual restrictions, strategic pricing, and consideration of time horizons. Uses diagrams effectively, weighs strengths and weaknesses of the profit-maximising objective, and reaches a reasoned conclusion supported by evidence or examples.
Level 4 (16-20): Comprehensive analysis with strong application and evaluation. Demonstrates deep understanding of short-run constraints, differing objectives across firms, and the interaction between cost structures and revenue. Offers nuanced diagrams, considers who benefits and who loses from maximising profit, and discusses conditions under which profit maximisation remains appropriate or not. Provides a balanced judgement with clear supporting reasoning.
Level 5 (21-25): Excellent, well-developed analysis and critical evaluation. Integrates multiple perspectives including behavioural, financial, and strategic reasons for not maximising profit short term, assesses policy and ethical implications, considers empirical or realistic examples, and synthesises these into a cogent, justified conclusion. Diagrams are correctly used and linked to argument, and limitations of the MC = MR rule are explicitly addressed.
Indicative content:
- Explain the profit-maximising rule MC = MR in the short run and how it identifies a candidate output for maximum profit.
- Capacity constraints: physical limits on production mean the firm cannot produce at MC = MR if that requires additional short-run capacity or capital.
- Liquidity and cash flow problems: even if additional units raise profit, the firm may lack working capital to fund production or purchase inputs.
- Managerial objectives and utility maximisation: managers may pursue revenue growth, sales maximisation, market share, or career concerns rather than pure profit maximisation.
- Strategic considerations: firms may sacrifice short-run profit to deter entry, sustain long-run market power, or build customer loyalty, for example through loss-leading pricing or investment in reputation.
- Risk aversion and uncertainty: when future demand or costs are uncertain, firms may choose safer, lower-profit outputs to avoid potential losses.
- Contracts and regulation: contractual obligations, minimum production quotas, or regulatory constraints may prevent operating at the MC = MR level.
- Price discrimination, dynamic pricing and multi-product firms: profit across multiple products may be maximised differently than single-product MC = MR; average revenue and marginal revenue relationships differ by context.
- Short-run versus long-run trade-offs: an output choice that maximises short-run profit may harm long-run profitability, for example by damaging brand or reducing investment in capacity.
- Ethical and stakeholder considerations: firms may limit profit-seeking for reputational reasons or to satisfy workers, customers or community expectations.
- Diagram use: a generic MC/AC/AR/MR diagram showing a profit-maximising point and how constraints shift or prevent reaching it; shading for profit and for foregone profit under constraints.
- Evaluation: weigh how common each reason is, which firms are more likely to forgo short-run profit (e.g. startups, regulated firms), and conclude whether profit maximisation is a universal guide or context-dependent.

Revenue, Profit and the Profit-Maximising Level of Output - Worksheets, Questions and Revision