The largest Indonesian aviation firm is a public corporation that started production in 1976. It employs a relatively high value of capital goods and has a monopoly of aircraft construction in Indonesia. It has been making parts for foreign firms for some time but is now trying to sell aircraft to other countries. This involves it competing in a market where most of the firms are public limited companies.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2016). The mark or mark type is shown in brackets.

1. [2] (a) The government (state) owns a public corporation (1). Shareholders own a public limited company (1). A public corporation is owned by the public sector whereas a public limited company is owned by the private sector (1).
2. [4] (b) Fixed costs are costs that do not change with output (1). There is a considerable value of capital equipment used in making aircraft/it is a capital intensive industry (1) loans may have to be taken out to pay for capital equipment (1) interest on loans have to be paid even if no output is made (1) the equipment may have to be rented (1) rent has to be paid even if no output is made (1). Aircraft making factories have to be very large (1) high rental costs (1) high business rates (1).
3. [6] (c) The expected demand for the product produced (1) the higher the output, the more capital goods needed (1). Advances in technology (1) new capital equipment is likely to be more productive (1). The price of the capital equipment (1) the cheaper the price, the more capital equipment that is likely to be bought (1). The rate of interest (1) firms often borrow to buy capital equipment (1). The level of profits (1) higher profits increase firms' willingness and ability to buy capital goods (1). Corporation taxes (1) lower taxes will increase firms' willingness and ability to buy capital goods (1). Government subsidies (1) these provide funds for firms to buy capital goods (1). Note. a maximum of 3 marks for a list-like approach.
4. [8] (d) Up to 5 marks for why it might: A monopoly can earn higher profits (1) some of the higher profits could be spent on research and development (1). A monopoly knows it can protect any profits it makes (1) due to high barriers to entry and exit (1) this may encourage it to produce high quality products (1). A monopoly may enjoy economies of scale (1) including R & D economy (1). Up to 5 marks for why it might not: A monopoly may lack competitive pressure to produce a good quality product (1) consumers may still buy the product even it is of a poor quality (1) as they have no choice (1). A monopoly may experience diseconomies of scale (1) management problems (1) poor industrial relations (1) may result in lower quality products (1). Note. a candidate may answer the question the other way around, i.e. why the quality may and may not be higher in a perfectly competitive market.