Consider whether a firm's marginal cost and average variable cost are significant when a firm wishes to maximise profits.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. [12] Analysis of role of mc with mr as maximum profit point. AVC significant if sub-normal profits are being made.
2. L4 for a sound explanation and a clear understanding of the principles involved for both mc and avc. 9–12
3. L3 for a competent comment but with limited elaboration probably concentrating on mc but with brief reference to avc 7–8
4. L2 for a correct but brief reference to both aspects or fuller reference to one aspect and no comment on the other. 5–6
5. L1 for an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4
6. [13] Meaning of prisoner's dilemma. Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions and anticipate the likely response of a rival to any given change in their price, or non-price activity. They need to devise possible options based on how they think rivals might react. Oligopolists have to make strategic decisions, such as -whether to compete/collude with rivals, raise/lower/keep price constant. Introduce new strategy or follow others.
7. L4 for a sound explanation with good illustrations and a clear understanding and discussion of the principles involved of both 9–13
8. L3 for a competent comment on either the dilemma but with limited development of the application to oligopoly, or vice versa. 7–8
9. L2 for an undeveloped comment on the dilemma with only a brief application to oligopoly. 5–6
10. L1 for an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4