A large multinational company is considering expanding its operations into a developing country.

Mark scheme

Marking points from the official mark scheme. The mark or mark type is shown in brackets.

1. **(a) Define the term 'monopoly'. (2 marks)**
2. Level 1 (1 mark): Partial definition, e.g., 'a single seller'.
3. Level 2 (2 marks): Clear and accurate definition, e.g., 'A market structure where there is a single seller/producer of a unique product with no close substitutes, and significant barriers to entry' (1 mark for single seller/no substitutes, 1 mark for barriers to entry).
4. **(b) State two characteristics of a perfectly competitive market. (2 marks)**
5. B1 for each correct characteristic stated (e.g., 'many buyers and sellers', 'homogeneous products', 'perfect information', 'free entry and exit', 'price takers'). Max 2 marks.
6. **(c) Explain two reasons why a firm might experience economies of scale. (6 marks)**
7. Up to 2 reasons can be credited.
8. For each reason (3 marks):
9. P1 for identification of a relevant reason (e.g., 'technical economies', 'managerial economies', 'purchasing economies', 'financial economies', 'marketing economies', 'risk-bearing economies').
10. C1 for development/explanation of how the economy of scale arises (e.g., 'technical economies from using larger, more efficient machinery').
11. C1 for further development/explanation or linking to lower average costs (e.g., 'spreading fixed costs over a larger output, leading to a fall in average cost').
12. **(d) Discuss the potential benefits and drawbacks for consumers of a monopoly market structure. (10 marks)**
13. Level 1 (1–2 marks): Limited understanding of monopoly or basic identification of one benefit/drawback.
14. Level 2 (3–4 marks): Basic explanation of benefits or drawbacks, with limited analysis.
15. Level 3 (5–7 marks): Developed analysis of both benefits and drawbacks. Some attempt at evaluation or balance.
16. Level 4 (8–10 marks): Comprehensive and balanced discussion, with clear analysis of both benefits and drawbacks, and well-supported evaluation. May consider different types of monopoly or regulatory context.
17. Indicative content may include:
18. Benefits: Potential for significant R&D leading to innovation and better quality products (due to supernormal profits), economies of scale leading to lower production costs (which *could* be passed on to consumers as lower prices, though not guaranteed), potential for natural monopolies to be efficient where competition is unfeasible.
19. Drawbacks: Higher prices, lower output, reduced consumer choice, lack of innovation (due to lack of competition), allocative inefficiency, productive inefficiency, potential for exploitation of consumers.
20. Evaluation: Are benefits always realised? Depends on regulation, contestability of the market, type of monopoly. Do higher profits always lead to R&D or simply shareholder dividends? Impact on different consumer groups.