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. A four-function calculator is enough.
Question 1 (multiple choice · foundation)
Which set of features best describes a monopolistically competitive market?
- (A) Many firms, differentiated products, and easy entry and exit
- (B) Many firms, identical products, and easy entry and exit
- (C) A few large firms whose decisions depend on each other, and high barriers to entry
- (D) One firm, a product with no close substitutes, and high barriers to entry
Answer and explanation
Answer: (A). Many firms and free entry are shared with perfect competition; differentiated products give each firm a downward-sloping demand curve.
- (B) describes perfect competition: identical products make each firm a price taker.
- (C) describes oligopoly (Topic 4.5).
- (D) describes monopoly (Topic 4.2).
Question 2 (multiple choice · core)
A monopolistically competitive firm is in long-run equilibrium. Which is true at its profit-maximising output?
- (A) Price equals average total cost, and price is greater than marginal cost.
- (B) Price equals marginal cost, and both equal minimum average total cost.
- (C) Price is greater than average total cost, and price is greater than marginal cost.
- (D) Price equals average total cost, and average total cost is at its minimum.
Answer and explanation
Answer: (A). Entry and exit make demand tangent to ATC, so P = ATC and economic profit is zero. The firm still produces where MR = MC, and MR is below demand, so P > MC.
- (B) is the long-run outcome of perfect competition, where demand is horizontal.
- (C) means a long-run economic profit, which free entry would remove.
- (D) puts the tangency at minimum ATC; with a downward-sloping demand curve it must be to the left of the minimum.
Question 3 (multiple choice · core)
Most hair salons in a fictional town are making economic losses. Which describes the most likely long-run adjustment?
- (A) Some salons leave the market, and demand for each remaining salon shifts right until price equals average total cost.
- (B) New salons enter the market, and demand for each salon shifts left until price equals average total cost.
- (C) Salons stay in the market, and each one’s marginal cost curve shifts down until losses disappear.
- (D) Some salons leave, and the remaining salons earn economic profits in the long run.
Answer and explanation
Answer: (A). Losses cause exit. Customers of the closed salons move to the others, so each remaining salon’s demand rises until P = ATC and economic profit is zero.
- (B) is the adjustment to economic profits, not losses.
- (C) confuses a change in demand with a change in costs; exit works through each firm’s demand.
- (D) stops the adjustment in the wrong place: once profits appear, firms would enter again until profit is zero.
Question 4 (calculation · core)
Ovenbird Pizza is one of many pizza takeaways in a fictional city. Its fixed costs are $600 per day.
| Pizzas per day | 100 | 150 | 200 | 250 | 300 |
|---|---|---|---|---|---|
| Price ($ per pizza) | 18 | 17 | 16 | 15 | 14 |
| Total cost ($) | 1,200 | 1,650 | 2,200 | 2,850 | 3,600 |
(a) Calculate total revenue and profit at each output, and identify the profit-maximising output and price. (b) Use marginal revenue and marginal cost between 150 and 200 pizzas, and between 200 and 250 pizzas, to confirm your answer. (c) Calculate ATC at the profit-maximising output. (d) Explain what will happen to Ovenbird’s demand and economic profit in the long run.
Worked solution
(a)
| Pizzas | 100 | 150 | 200 | 250 | 300 |
|---|---|---|---|---|---|
| TR ($) | 1,800 | 2,550 | 3,200 | 3,750 | 4,200 |
| Profit ($) | 600 | 900 | 1,000 | 900 | 600 |
Best output: 200 pizzas per day at $16, profit $1,000 per day.
(b) 150 → 200: MR = (3,200 − 2,550) ÷ 50 = $13 per pizza; MC = (2,200 − 1,650) ÷ 50 = $11. MR > MC, so expand. 200 → 250: MR = (3,750 − 3,200) ÷ 50 = $11; MC = (2,850 − 2,200) ÷ 50 = $13. MR < MC, so stop at 200.
(c) ATC = 2,200 ÷ 200 = $11. Check: (16 − 11) × 200 = $1,000.
(d) Economic profits attract new takeaways, and entry is easy. Ovenbird’s customers have more close substitutes, so its demand shifts left and becomes more elastic. This continues until its demand is tangent to its ATC curve, so P = ATC and economic profit is zero.
Suggested mark points (4): 1 for TR and profit with 200 pizzas at $16 and $1,000; 1 for both MR and MC comparisons; 1 for ATC = $11; 1 for entry, a leftward shift of demand and zero long-run profit.
Common error: choosing the output with the highest TR (300 pizzas). The firm maximises profit, not revenue.
Question 5 (graph · core)
Wickham Candles is one of many candle makers selling slightly different candles. It is in long-run equilibrium producing 60 candles per week. At 60 candles: price = ATC = $11 and MC = $5. Its ATC is lowest ($9) at 120 candles. Its demand curve meets its MC curve at 96 candles, where both equal $7.40.
(a) Draw a correctly labelled long-run equilibrium graph for Wickham Candles. Show demand, MR, MC and ATC, and label the price and quantity. (b) State Wickham’s economic profit. (c) On your graph, show the excess capacity, and calculate it. (d) Shade the deadweight loss and calculate it.
Model answer and suggested Marlbridge rubric
(a) Vertical axis “Price and cost ($ per candle)”, horizontal axis “Quantity (candles per week)”. Downward-sloping demand; MR below demand; U-shaped ATC; MC rising through the minimum of ATC (at 120 candles, $9). MR crosses MC at 60 candles. Demand is tangent to ATC at 60 candles and $11, on the falling part of ATC.
(b) P = ATC, so economic profit = (11 − 11) × 60 = $0.
(c) Excess capacity = 120 − 60 = 60 candles per week. Show it on the quantity axis between 60 and 120.
(d) The deadweight loss is the triangle between demand (above) and MC (below), from 60 to 96 candles: ½ × (96 − 60) × (11 − 5) = ½ × 36 × 6 = $108 per week.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes with demand, MR below demand, MC and U-shaped ATC, with MC through the minimum of ATC |
| 1 | MR = MC at 60, with demand tangent to ATC at $11 to the left of minimum ATC |
| 1 | Zero economic profit stated |
| 1 | Excess capacity of 60 candles, shown between the output and the minimum-ATC output |
| 1 | DWL correctly placed and $108 calculated |
Do not award the second point if demand crosses ATC (that would show a profit or loss) or if the tangency is drawn at minimum ATC.
Question 6 (constructed response · core)
Saffron Lane Bakery is one of many bakeries in a fictional town. At its profit-maximising output of 80 cakes per day, price is $12, ATC is $15 and AVC is $10.
(a) Calculate the bakery’s economic profit or loss. (b) Should the bakery stay open in the short run? Explain using numbers. (c) Explain how the bakery’s demand curve and profit change in the long run. (d) The owner is thinking about a $100-per-day advertising campaign. Explain how it would affect the bakery’s ATC curve, MC curve and demand curve.
Model answer and suggested Marlbridge rubric
(a) Loss = (15 − 12) × 80 = $240 per day.
(b) Fixed cost = (ATC − AVC) × Q = (15 − 10) × 80 = $400 per day. Price ($12) is above AVC ($10), so each cake covers its variable cost and adds $2 towards fixed costs ($160 per day in total). Staying open loses $240; shutting down would lose $400. Stay open in the short run.
(c) Losses lead some bakeries to leave the market in the long run. Their customers move to the remaining bakeries, so Saffron Lane’s demand shifts right (and becomes less elastic) until it is tangent to ATC: P = ATC and economic profit is zero.
(d) The campaign is a fixed cost, so ATC shifts up (by $100 ÷ Q at each quantity) and MC does not change. If the campaign works, demand shifts right and becomes less elastic, because buyers see fewer good substitutes. It is worth doing only if the extra revenue is more than the extra cost.
| Point | What earns it |
|---|---|
| 1 | Loss of $240 |
| 1 | Stays open because P > AVC, with the comparison of $240 against $400 (or $2 per cake towards fixed cost) |
| 1 | Exit shifts the firm’s demand right until P = ATC, zero profit |
| 1 | Advertising raises ATC but not MC |
| 1 | Advertising aims to shift demand right and make it less elastic |
Question 7 (explanation · stretch)
A commentator says: “Monopolistic competition is wasteful. Every firm earns zero profit, just as in perfect competition, but consumers pay more and firms have idle capacity.”
(a) Compare long-run equilibrium in perfect competition and in monopolistic competition, referring to price, marginal cost and minimum ATC. (b) Explain why the monopolistically competitive firm cannot produce at minimum ATC in the long run. (c) Evaluate the commentator’s claim, giving one point that supports it and one that challenges it.
Model answer and suggested Marlbridge rubric
(a) In both structures free entry and exit drive economic profit to zero (P = ATC). In perfect competition, P = MC = minimum ATC: the market is both allocatively and productively efficient. In monopolistic competition, P = ATC but P > MC (allocative inefficiency, so a deadweight loss) and output is below the minimum-ATC output (excess capacity), so price is above minimum ATC.
(b) The firm’s demand curve slopes down because its product is differentiated. A downward-sloping line can only touch the U-shaped ATC curve where ATC is also falling, which is to the left of the minimum. So the zero-profit output is smaller than the minimum-ATC output.
(c) Supports: each firm could make more units at a lower average cost; the market produces less than the allocatively efficient quantity, so there is a deadweight loss; and advertising adds to costs. Challenges: the higher price and excess capacity buy product variety. Consumers can choose between many slightly different products and locations, which they may value more than the extra cost. Because demand is fairly elastic, the gap between P and MC, and the deadweight loss, may be small. A reasoned conclusion can go either way.
| Point | What earns it |
|---|---|
| 1 | Both have zero long-run profit; perfect competition has P = MC = minimum ATC |
| 1 | Monopolistic competition has P > MC and output below minimum-ATC output |
| 1 | Downward-sloping demand is tangent to ATC on its falling part |
| 1 | One supporting and one challenging point (variety), with a conclusion |
How did you do?
- Q1 or Q2 wrong: re-read “A market between two extremes” and the comparison table in the study guide.
- Q3, Q4 or Q6 wrong: re-read “The short run” and “The long run”, and Worked examples 1 and 2.
- Q5 or Q7 marked down: study Figure 2 and “Why the long run is inefficient”. Make sure demand touches ATC, to the left of its minimum.
Then tick off the topic checklist.