These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All firms and data are fictional. Only multiplication and subtraction are needed, so a four-function calculator is enough. In every question, the firm charges the same price to all buyers.
Question 1 (multiple choice · foundation)
Which of the following is an example of a monopsony?
- (A) The only airline allowed to fly a route between two islands
- (B) Three large firms that make almost all of a country’s cement
- (C) A single hospital that employs nearly every nurse in an isolated region
- (D) Hundreds of farms selling identical oranges at the market price
Answer and explanation
Answer: (C). A monopsony is a market with a single buyer. Here the buyer is the hospital, and the factor it buys is nurses’ labour.
- (A) is a single seller of a product: a monopoly, not a monopsony.
- (B) describes a few large sellers: an oligopoly in a product market.
- (D) describes many price-taking sellers of an identical product: perfect competition.
Question 2 (multiple choice · core)
A firm faces a downward-sloping demand curve. Why is the marginal revenue from selling one more unit less than the price of that unit?
- (A) The marginal cost of the extra unit is higher than the cost of earlier units.
- (B) Buyers pay less for the extra unit than for earlier units, but the earlier units keep their old price.
- (C) Total revenue always falls when a firm sells more.
- (D) To sell the extra unit, the firm must lower the price on all the units it sells.
Answer and explanation
Answer: (D). The extra unit adds its price (the quantity effect), but the price cut also reduces revenue on every unit sold before (the price effect). MR is the difference, so it is below price.
- (A) confuses revenue with cost. MR depends only on the demand curve.
- (B) describes price discrimination, not a single-price firm. If earlier units kept their price, MR would equal the new price.
- (C) is false: total revenue rises while MR is positive (the elastic part of demand).
Question 3 (multiple choice · core)
At the output a firm has chosen, the price is $18 and the marginal cost is $11. Which statement must be true?
- (A) The firm is earning a positive economic profit.
- (B) Output is below the allocatively efficient level, because one more unit is worth more to some buyer than it costs to make.
- (C) The firm could raise its profit by increasing output until price equals marginal cost.
- (D) The firm is a price taker in a perfectly competitive market.
Answer and explanation
Answer: (B). P > MC means the marginal buyer values the good at about $18, while making one more costs $11. Society would gain about $7 from that unit, so output is too low.
- (A) confuses P > MC with P > ATC. Profit depends on average total cost, which is not given.
- (C) ignores the price effect. Selling more means cutting the price on all units, so MR is below price and extra output can lower profit.
- (D) is the opposite: a price taker produces where P = MC.
Question 4 (calculation · core)
Vellan Ferry (fictional) is the only ferry to a small island. Its daily demand schedule for return tickets is:
| Tickets (hundreds per day) | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| Price ($ per ticket) | 42 | 38 | 34 | 30 | 26 | 22 | 18 |
(a) Calculate total revenue (in $ hundreds per day) and marginal revenue (in $ per ticket) for each quantity. (b) Using a quantity effect and a price effect, show why the MR of the 4th hundred tickets is $18 per ticket, not $30. (c) Vellan raises its price from $22 to $26. What happens to total revenue, and what does this tell you about demand over this range?
Worked solution
(a) TR = price × quantity. Because quantity is in hundreds, TR is in $ hundreds, and the change in TR per extra hundred tickets gives MR per ticket.
| Tickets (hundreds) | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| TR ($ hundreds) | 42 | 76 | 102 | 120 | 130 | 132 | 126 |
| MR ($ per ticket) | 42 | 34 | 26 | 18 | 10 | 2 | −6 |
(b) To sell 4 hundred instead of 3 hundred, the price falls from $34 to $30.
- Quantity effect: the extra hundred tickets earn $30 each: +30.
- Price effect: the first 3 hundred tickets each lose $4: 3 × 4 = −12.
- MR = 30 − 12 = $18 per ticket (or $1,800 for the extra hundred tickets).
(c) TR falls from 132 to 130 ($13,200 to $13,000 per day). Price and TR moved in opposite directions, so demand is elastic over this range. This matches the table: MR between 5 and 6 hundred tickets is positive ($2).
Suggested mark points (3): 1 for the full TR and MR rows; 1 for the price effect (−12) and quantity effect (+30) giving 18; 1 for TR falling and demand elastic.
Common error: writing the MR of the 4th hundred tickets as $30, the price. That is only the quantity effect.
Question 5 (constructed response · core)
For each fictional case, identify the main barrier to entry.
(a) Halvern Water owns the only pipe network in a city. A rival would need to dig up every street to lay its own pipes. (b) Pellam Software holds the copyright on an accounting program used by most firms in its country. (c) Ostrava Gems owns nearly all the mines of a rare blue gemstone. (d) Explain why barriers to entry are needed for a firm in an imperfectly competitive market to keep earning economic profit in the long run.
Model answer and suggested Marlbridge rubric
(a) High fixed (start-up) costs. A rival must spend a vast sum on pipes before it can sell any water.
(b) Legal barrier. Copyright stops others from selling copies of the program.
(c) Exclusive ownership of a key resource. Rivals cannot get the gemstones.
(d) Economic profit is a signal that attracts new firms. If firms can enter, supply rises (or each firm’s demand falls) and the price is pushed down until economic profit is zero, as in perfect competition. A barrier to entry stops or slows this entry, so the existing firm keeps its market power and its profit.
| Point | What earns it |
|---|---|
| 1 | Correct barrier for all of (a), (b) and (c) |
| 1 | Profit attracts entry, and entry lowers price or each firm’s demand |
| 1 | Barrier blocks entry, so profit can last |
Question 6 (graph · core)
(a) Draw a correctly labelled graph showing the demand and marginal revenue curves facing a perfectly competitive firm when the market price is $8. (b) On a separate, correctly labelled graph, draw the demand and marginal revenue curves facing an imperfectly competitive firm. Assume the demand curve is a straight line. (c) Explain why the two graphs differ.
Model answer and suggested Marlbridge rubric
(a) Vertical axis “Price ($)” or “Price, revenue ($)”; horizontal axis “Quantity”. One horizontal line at $8 labelled D = MR = P (also accept “D = MR = AR = P”).
(b) Same axis labels. A downward-sloping straight line labelled D. A second straight line labelled MR that starts at the same point on the price axis and lies below D, falling twice as steeply so it meets the quantity axis halfway between the origin and where D meets it.
(c) The perfectly competitive firm is a price taker: it can sell any amount at $8, so each extra unit adds exactly $8 to revenue. The imperfectly competitive firm must lower its price to sell more, and the lower price applies to all its units, so each extra unit adds less than its price. That is why MR lies below demand.
| Point | What earns it |
|---|---|
| 1 | Graph (a): labelled axes and a horizontal line at $8 labelled D = MR (= P) |
| 1 | Graph (b): downward-sloping D with MR below it, sharing the price intercept |
| 1 | Explanation: price taker sells all units at one price, so MR = P |
| 1 | Explanation: price cut on all units, so MR < P |
Do not award the second point if MR is drawn parallel to D or above it.
Question 7 (explanation · stretch)
Glenard has one cinema (fictional). It charges $14 a ticket and sells 300 tickets a night. Seats are rarely full, and each extra viewer costs the cinema about $2 (cleaning and staff time). Market research shows that if the price for everyone were $6, the cinema would sell 500 tickets a night.
(a) Compare price and marginal cost at the current output and explain what this means for efficiency. (b) Calculate the change in the cinema’s nightly profit if it cut the price to $6 for everyone. (Treat other costs as fixed.) (c) Use your answers to explain why a profit-maximising firm in an imperfectly competitive market leaves some mutually beneficial trades unmade. (d) Describe one way the cinema’s market is similar to perfect competition, and one limitation of calling it a monopoly.
Model answer and suggested Marlbridge rubric
(a) P = $14 and MC = $2, so P > MC. Some people value a ticket at more than $2 (the cost of letting them in) but less than $14, so they stay home. Output is below the allocatively efficient level, and the value of those lost trades is a deadweight loss.
(b) Revenue minus the $2 per-viewer cost:
- At $14: 300 × 14 − 300 × 2 = 4,200 − 600 = $3,600.
- At $6: 500 × 6 − 500 × 2 = 3,000 − 1,000 = $2,000.
- Change: −$1,600 per night.
(Using MR: the extra 200 viewers bring in 200 × 6 = $1,200, but the 300 existing viewers pay $8 less each, a loss of $2,400; MR of the block is −$1,200, and the extra cost is 200 × 2 = $400.)
(c) The 200 extra viewers each value a ticket at $6 or more, and each costs only $2, so letting them in would create at least 200 × 4 = $800 of extra value for society. But to reach them the cinema must cut the price for its 300 existing customers too. That price effect makes the trade unprofitable, so it does not happen. Price stays above marginal cost.
(d) Similar: the cinema still maximises profit by comparing extra revenue with extra cost, just like a price taker. Limitation: whether it is a “monopoly” depends on how you define the market. Viewers can stream films at home or travel to another town, so the cinema has close substitutes and its market power is limited.
| Point | What earns it |
|---|---|
| 1 | P > MC stated with numbers and linked to output being too low (inefficient) |
| 1 | Profit change of −$1,600 with working |
| 1 | Gains to society from extra viewers, but the price cut on existing customers makes it unprofitable |
| 1 | One valid similarity and one valid limitation |
Accept any well-argued limitation, for example that real markets fall between the four models.
How did you do?
- Q1 or Q5 wrong: re-read “The four market structures” and “Barriers to entry” in the study guide.
- Q2, Q4 or Q6 wrong: re-read “Why a firm must cut its price to sell more”, Figure 2 and Worked example 1.
- Q3 or Q7 incomplete: re-read “Price above marginal cost” and Worked example 2.
Then tick off the topic checklist.