Unit 4 - Question Paper Jan 2004-1

8/19/2019 Unit 4 - Question Paper Jan 2004-1

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Examiner’s use only

Team Leader’s use only

Paper Reference(s)

6354

Edexcel GCEEconomics

Advanced

Unit 4 – Industrial Economics

Monday 26 January 2004 – Afternoon

Time: 1 hour 15 minutes

Materials required for examination Items included with question papers

Answer book (AB8) Nil

Centre No.

Candidate No.

Paper Reference (complete below)Surname Initial(s)

Signature

Turn over

Question Leave Number Blank

Section

A

11

12

Total

Instructions to CandidatesIn the boxes above, write your centre number and candidate number, your surname, initial(s) andsignature.The paper reference is shown at the top of this page. Check that you have the correct question paper and write the paper reference for which you have been entered.Answer ALL questions in Section A in the spaces provided in this question paper.• For each question there are five suggested answers: A, B, C,D or E.• When you have selected your answer to the question, write the chosen letter in the box provided.• You can only offer one answer to each question.• After making your selection you should offer an explanation of why you have made that choice

Your explanation may include a diagram.

Answer ONE question from Section B in the answer book provided.Additional answer sheets may be used.

Information for CandidatesThere are 16 pages in this question paper. All blank pages are indicated.The total mark for this paper is 80. The marks for the various parts of questions are shown in round

brackets: e.g. (2).

Advice to CandidatesYou are advised to divide your time equally between Section A and Section B.You must ensure that your answers to parts of questions are clearly numbered.You will be assessed on your ability to organise and present information, ideas, descriptions andarguments clearly and logically, taking into account your use of grammar, punctuation and spelling.

Printer’s Log. No.

P17538B

This publication may only be reproduced in accordance with Edexcel copyright policy. Edexcel Foundation is a registered charity. ©2004 Edexcel

W850/S6354/57570 8/8/8/3/

*P17538A*P 1 7 5 3 8 BP 1 7 5 3 8 B

*P17538B*


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SECTION A

Answer ALL questions in this Section.

You are advised to spend approximately 35 minutes on this Section.

You are encouraged to use a diagram in your explanation where appropriate.

1. The following chart shows percentage market shares in the mobile phone market in 2001.

Which of the following statements is true for this market?

A The market is nearly perfectly competitive because each firm has nearly equal market

share.

B The market is characterised by monopolistic competition because each firm produces

mobile phones with different characteristics.

C The market has a high concentration ratio.

D The market is perfectly contestable.

E Tacit collusion is unlikely in this industry.

Answer

(1)

Explanation

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(3)

(Total 4 marks)

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Orange

28%

BT Cellnet

26%

Vodafone

24%

One-to-One

22%

Q1

Orange28%

One-to-One22%

BT Cellnet26%

Vodaphone24%


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2. An advantage of using the RPI minus X method of regulating a privatised monopoly is that

it allows the firm to

A raise prices by less than mortgage interest payments

B keep supernormal profit achieved by additional efficiency improvements

C raise the prices of goods the firm does not export

D make only normal profit

E do no more than break-even.

Answer

(1)

Explanation

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(3)

(Total 4 marks)

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Q2


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3. Which of the following characteristics will hold for a firm in long run equilibrium under

monopolistic competition?

Efficiency Profit

A Allocatively efficient Normal

B Allocatively inefficient Supernormal

C Productively efficient Normal

D Productively efficient Supernormal

E Productively inefficient Normal

Answer

(1)Explanation

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(3)

(Total 4 marks)

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Q3


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4. The diagram below shows a firm producing at output Q1.

Which of the following applies to such a firm?

Market Structure Profit

A Perfect Competition Normal

B Perfect Competition Supernormal

C Monopoly Normal

D Monopolistic Competition Normal

E Monopolistic Competition Supernormal

Answer

(1)

Explanation

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(3)

(Total 4 marks)

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Q4

Q1 OutputO

AR=MR

£MC

AC


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5. A profit-maximising monopolist experiences an increase in demand. If the firm faces

constant average costs, this will lead to

A lower output and lower supernormal profit

B higher output and lower supernormal profit

C lower output and higher supernormal profit

D higher output and higher supernormal profit

E output and supernormal profit remain unchanged.

Answer

(1)

Explanation

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(3)

(Total 4 marks)

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Q5


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6. In which of the following is the practice of price discrimination least likely to be possible?

A Sales of milk in supermarkets.

B Airline travel.

C Railway travel.

D Surgical operations paid for outside the NHS.

E Sales of cars in European countries.

Answer

(1)

Explanation

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(3)

(Total 4 marks)

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Q6


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7. A firm producing hand-built sports cars faces the following costs:

The data illustrate that

A if marginal costs are rising they must be above average costs

B average costs are equal to marginal cost at the minimum of marginal cost

C if marginal costs are rising they may be below average costs

D for this firm, marginal cost is falling over the indicated range of output

E for this firm, average costs are rising over the indicated range of output.

Answer

(1)

Explanation

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(3)

(Total 4 marks)

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Q7

Total Output of Cars Total Costs

100 £800,000

101 £806,000

102 £813,000


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8. The 1998 Competition Act gives the Office of Fair Trading the power to fine firms up to 10%

of annual turnover if they abuse a dominant market position. Which of the following actions

by the directors of a company would be against the public interest and therefore be likely to

attract such a fine?

A The pursuit of socially responsible objectives.

B The adoption of allocatively efficient pricing policies.

C Causing unemployment by closing a factory as a cost-cutting measure.

D Focusing on increasing sales in the European market.

E Forming price fixing agreements with other firms.

Answer

(1)Explanation

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(3)

(Total 4 marks)

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Q8


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9. A monopoly decides to switch from an objective of revenue maximisation to one of profit

maximisation. Which one of the following will result from such a change of objective?

Price Output

A Higher Higher

B Higher Lower

C Lower Higher

D Lower Lower

E Higher Unchanged

Answer

(1)Explanation

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(3)

(Total 4 marks)

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Q9


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10. Many consumers buy chocolate confectionery on impulse. Effective branding to make

products instantly recognisable is therefore essential. This suggests that chocolate

confectionery markets are likely to be characterised by

A low levels of contestability

B low levels of market concentration

C low levels of advertising

D high levels of ‘hit and run’ entry into the market

E high levels of failure of established products.

Answer

(1)

Explanation

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(3)

(Total 4 marks)

TOTAL FOR SECTION A: 40 MARKS

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Q10


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SECTION B

Answer EITHER Question 11 or Question 12.

You are advised to spend approximately 35 minutes on this Section.

Question 11.

The UK Ice-Cream Industry

James Lambert has always been a risk taker. If his latest and biggest gamble pays off,Richmond Foods, the ice-cream company he runs, could overtake Wall’s as the UK’s marketleader in sales terms in the £1bn a year sector in a few years’ time.

In October 2001 Richmond paid nearly £10m to buy Nestlé’s ice-cream brands in the UK.Richmond’s move was a bold one. The Nestlé business was losing more than Richmond wasmaking. But recent figures show that the deal appears to be paying off, with analystsforecasting profits of £8m for the current year.

The strategy behind the acquisition involved closing Nestlé’s factory in Telford and moving production to Richmond’s expanded and state-of-the-art plant in Leeming Bar, NorthYorkshire. This required considerable capital expenditure but gave Richmond significanteconomies of scale – the Leeming Bar factory is now the largest ice-cream plant by volumein Europe.

The Nestlé deal gives Richmond a wealth of brand names. As well as well-known ice-cream brands such as Fab, Zoom, Mivvi and Orange Maid, it allows Richmond to develop ice-creams based on Nestlé’s confectionery brands. Richmond pays Nestlé a percentage of itssales for the use of the brand.

In return Richmond benefits from the huge marketing budget Nestlé puts behind itsconfectionery brands. This can run into tens of millions of pounds for one new productlaunch. Children can already enjoy Smarties pop-up ice-creams, Rowntree’s fruit pastillelollies and tubs of Rolo ice-cream.

Mr. Lambert is confident that with new products providing organic growth, and the production efficiencies coming through, Richmond can achieve his goal of overtaking Wall’s.

(Source: adapted from The Financial Times, 13th August 2002)

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The Impulse Ice-Cream Market Before

Richmond's Acquisition of Nestlé's

brands

0

10

20

30

40

50

60

70

Birds Eye

Wall's

Mars Nestlé Others

% M

a r k e t S a l e s

5

10

15

20

The impulse Ice-Cream Market before

Richmond’s acquisition of Nestlé’s

brands

Figure 1


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(a) (i) With reference to the passage, identify the type of integration involved in

Richmond Foods’ acquisition of Nestlé’s ice-cream brands.

(4)

(ii) Evaluate this method of growth for Richmond Foods.

(6)

(b) Explain why Richmond Foods might experience lower average costs by concentrating

production at the Leeming Bar plant.

(6)

(c) With reference to Figure 1:

(i) identify the market structure of the impulse ice-cream market, justifying your

answer.

(4)

(ii) assess the likelihood of price competition in this industry.(10)

(d) Assess the significance of barriers to entry to potential new firms in this industry.

(10)

(Total 40 marks)

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Q11


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Question 12.

Competition Commission ruling on the provision of food services on trains

In early 2002, Compass Group plc acquired Rail Gourmet UK, a supplier of food services ontrains. This was referred to the Competition Commission for investigation.

Food services on trains involve getting food and drink on to trains and then selling it tocustomers, either as restaurant meals or as buffet and trolley services. Train operatingcompanies negotiate food contracts with on-train service providers individually. Since the

privatisation of the railways, Rail Gourmet UK had achieved about 80% of the market. At thetime of the acquisition, Compass had only 3% of the market: a small contract with Scotrailand the supply of on-board catering services to Eurostar.

The inquiry focused on whether the acquisition would create any barriers to entry for acompetitor wishing to provide on-train food services. It found that there had been a number of new entrants to provide trolley services on trains in recent years. This is significant giventhe potentially adverse consequences for efficiency of the local monopoly enjoyed by on-trainfood providers. However, the enquiry found less evidence of competition to provide buffetand restaurant-car services.

Compass Group controls about 62% of the supply of food on railway stations under a varietyof brand names. However, the product ranges for on-train and on-station food only overlap toa limited extent and the enquiry considered that this was unlikely to be detrimental tocompetition.

The Competition Commission concluded that the acquisition by Compass Group of RailGourmet does not operate against the public interest.

(Source: adapted from www.competition-commission.org.uk )

(a) (i) With reference to the passage, explain why the acquisition of Rail Gourmet

UK by Compass Group was eligible for referral to the Competition Commission.

(4)

(ii) Examine two possible motives for Compass Group’s acquisition of Rail

Gourmet UK.

(8)

(b) There have been a number of new entrants to provide trolley services on trains but not

to provide restaurant-car and buffet services. Examine two possible reasons for this.

(10)

(c) Illustrating your answer from the passage or from other material, explain the role of the

‘public interest’ criterion in UK merger investigations.

(8)

(d) Illustrating your answer with a diagram, assess the likely effect on two kinds of

economic efficiency of the local monopoly enjoyed by on-train food providers (line 12).

(10)

(Total 40 marks)

TOTAL FOR SECTION B: 40 MARKS

END

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Q12

5

10

15

20


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Unit 4 - Question Paper Jan 2004-1