Paper 2 Practice: Firms and Decisions

Original topic practice

The firms and markets are fictional. This is a two-question topic set, not a complete Paper 2.

Question 1: Growth before profit

A young grocery-delivery firm sets low prices and spends heavily on promotion to expand sales and market share, even though this reduces current profit.

(a) Explain how the output of a sales-revenue-maximising firm may differ from that of a profit-maximising firm. [10]

(b) Discuss whether pursuing growth and market share rather than current profit is likely to improve the firm’s long-run performance. [15]

Question 2: Concentration in regional air travel

Two large airlines account for most flights between several nearby cities. They benefit from scale and network economies, but passengers complain about high fares and limited choice.

(a) Explain how barriers to entry and economies of scale can give the airlines market power. [10]

(b) Discuss whether stronger competition policy is the best way to improve economic efficiency in this market. [15]

Outlines: Paper 2 Firms and Decisions — Outlines.