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 markets and data are fictional. A four-function calculator is enough.
Question 1 (multiple choice · foundation)
The socially efficient quantity of a good is the quantity at which
- (A) the marginal social benefit of the last unit equals its marginal social cost.
- (B) the marginal social benefit of the last unit is as large as possible.
- (C) consumer surplus is as large as possible.
- (D) the firms in the market earn the largest total revenue.
Answer and explanation
Answer: (A). Every unit with MSB > MSC adds to total surplus, so society should produce up to the point where MSB = MSC. That is where total surplus is greatest.
- (B) MSB is highest for the first unit, so this would mean producing almost nothing.
- (C) looks only at buyers. Consumer surplus could be raised by forcing the price down, which would lower total surplus.
- (D) looks only at sellers’ revenue and ignores costs and buyers’ benefits.
Question 2 (multiple choice · core)
In which market is the equilibrium quantity most likely to be socially efficient?
- (A) A perfectly competitive market for bread, in which nobody outside the market is affected by buying or making bread.
- (B) A market for tap water served by a single supplier that sets its price above marginal cost.
- (C) A perfectly competitive market for fireworks, whose noise disturbs neighbours who do not buy them.
- (D) A perfectly competitive market for flu vaccinations, which also protect people who are not vaccinated.
Answer and explanation
Answer: (A). Competition makes P = MC, and with no outside effects demand = MSB and supply = MSC, so the equilibrium is where MSB = MSC.
- (B) A single supplier with P > MC produces too little: market power.
- (C) Buyers ignore the cost to neighbours (a negative externality), so too many fireworks are bought, even though the market is competitive.
- (D) Buyers ignore the benefit to others (a positive externality), so too few vaccinations are bought.
Question 3 (multiple choice · core)
In the fictional market for garden chairs in Pellham, MSB = 80 − 2Q and MSC = 20 + Q, where Q is in thousands of chairs per year and values are in dollars per chair. A grant to producers raises output to 26 thousand chairs. What is the deadweight loss?
- (A) $54 thousand
- (B) $108 thousand
- (C) $18 thousand
- (D) Zero, because buyers get more chairs
Answer and explanation
Answer: (A). MSB = MSC gives 80 − 2Q = 20 + Q, so Q* = 20. At Q = 26, MSB = 80 − 52 = $28 and MSC = 20 + 26 = $46. DWL = ½ × (26 − 20) × (46 − 28) = ½ × 6 × 18 = $54 thousand.
- (B) forgets the ½: it is the rectangle, not the triangle.
- (C) is the gap between MSC and MSB for the last chair only, not the area over all 6 thousand extra chairs.
- (D) ignores that every chair beyond 20 thousand costs more to make than it is worth to buyers.
Question 4 (calculation · core)
A fictional craft centre runs pottery workshops. Nobody outside the market is affected. The table shows the MSB and MSC of each workshop per month.
| Workshop | 1st | 2nd | 3rd | 4th | 5th | 6th |
|---|---|---|---|---|---|---|
| MSB ($) | 95 | 85 | 75 | 65 | 55 | 45 |
| MSC ($) | 25 | 35 | 45 | 55 | 65 | 75 |
(a) Find the socially efficient number of workshops and the maximum total surplus. (b) Find the DWL if 2 workshops are run, and if 6 are run. (c) Comment on your answers to (b).
Worked solution
(a) MSB − MSC for each workshop: 70, 50, 30, 10, −10, −30. The 4th still adds $10; the 5th would lose $10. Efficient quantity = 4 workshops. Maximum total surplus = 70 + 50 + 30 + 10 = $160 per month.
(b) At 2 workshops the 3rd and 4th are missing: DWL = 30 + 10 = $40. At 6, the 5th and 6th are run at a loss to society: DWL = 10 + 30 = $40.
(c) Producing too little and too much both lose surplus. Here, being 2 below and 2 above the efficient quantity happen to cost the same, because the gaps between MSB and MSC grow by the same amount on each side.
Suggested mark points (4): 1 for 4 workshops (with MSB ≥ MSC reasoning); 1 for $160; 1 for each DWL of $40 (both needed); 1 for stating that both under- and overproduction create DWL.
Common error: choosing 5 workshops because MSB and MSC “cross” between the 4th and 5th. Check each unit: the 5th has MSC > MSB.
Question 5 (graph · core)
(a) Draw a correctly labelled graph of a market in which nobody outside the market is affected. Show MSB, MSC and the efficient quantity Q*. (b) The only seller in the market produces Q₁ < Q* and charges price P₁. Show Q₁ and P₁, and shade the deadweight loss. (c) Using marginal reasoning, explain why total surplus is lower at Q₁ than at Q*. (d) Explain why the seller chooses Q₁ even though society would gain from more output.
Model answer and suggested Marlbridge rubric
(a) Vertical axis: “Price, benefit or cost ($ per unit)”. Horizontal axis: “Quantity”. A downward-sloping line labelled D = MSB and an upward-sloping line labelled S = MSC (or MC = MSC). Mark Q* where they cross.
(b) Mark Q₁ to the left of Q*. P₁ is read from the MSB (demand) curve above Q₁. Shade the triangle between MSB (above) and MSC (below), from Q₁ to Q*, pointing to the crossing point.
(c) For every unit between Q₁ and Q*, MSB is above MSC: buyers value it more than it costs society to make. Those units are not produced, so their net gain is lost. The lost total is the shaded area.
(d) The seller has market power. To sell more it must lower its price on all units, so its marginal revenue is below price. It produces where MR = MC, which is at Q₁, where P₁ > MC. This is rational for the seller, because it maximises profit, but inefficient for society.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes, MSB and MSC, with Q* at their intersection |
| 1 | Q₁ < Q*, P₁ read from MSB, and DWL triangle shaded between Q₁ and Q* |
| 1 | Units between Q₁ and Q* have MSB > MSC, so their gain is lost |
| 1 | Seller produces where MR = MC with P > MC: privately rational, socially inefficient |
Do not award the second point if the DWL triangle is shaded to the right of Q*.
Question 6 (constructed response · core)
For each fictional situation, (a) name the source of inefficiency and (b) say whether the market produces too much or too little compared with the efficient quantity.
- Only two ferry companies sail between the islands of Tarn and Mellow, and they keep fares well above marginal cost.
- A paint factory’s fumes damage crops on nearby farms. The factory pays nothing for the damage.
- Sellers of used e-scooters know whether the battery is worn out; buyers cannot check.
- Every shop on a street would gain from a shared security camera system, but each shop waits for the others to pay for it.
(c) Explain, using private marginal benefit and private marginal cost, why the paint factory in situation 2 is acting rationally.
Model answer and suggested Marlbridge rubric
| Situation | Source | Direction |
|---|---|---|
| 1 | oligopoly (market power) | too little |
| 2 | negative externality in production | too much |
| 3 | asymmetric information | too little |
| 4 | public good / free riding | too little |
(c) The factory chooses output where its private marginal benefit (the price it receives, or marginal revenue) equals its private marginal cost. The damage to crops is a cost to the farmers, not to the factory, so it does not enter the factory’s decision. MSC is above the factory’s MPC, so the factory produces units whose MSC exceeds their MSB.
| Point | What earns it |
|---|---|
| 1 | Situation 1: oligopoly or market power, too little |
| 1 | Situation 2: negative externality, too much |
| 1 | Situation 3: asymmetric information, too little |
| 1 | Situation 4: public good or free riding, too little |
| 1 | (c) factory equates private MB and private MC and ignores the cost to farmers |
Accept “market power” or “imperfect competition” for situation 1.
Question 7 (explanation · stretch)
In Tolmere, a fictional country, three firms supply home internet connections and coordinate their prices. Q is in thousands of connections per year and values are in dollars per connection per year.
MSB = 120 − Q MSC = 30 + 0.5Q
The firms supply 45 thousand connections.
(a) Find the efficient quantity and the DWL at 45 thousand. (b) Policy A: a regulator forces output up to the efficient quantity, at a running cost of $120 thousand per year. Policy B: the government licenses a new entrant, which raises output to 55 thousand, at a cost of $60 thousand per year. Calculate the net gain of each policy. (c) Recommend a policy and explain why the best policy does not have to remove all the DWL.
Model answer and suggested Marlbridge rubric
(a) 120 − Q = 30 + 0.5Q gives 1.5Q = 90, so Q* = 60 thousand. At 45: MSB = 75 and MSC = 52.5. DWL = ½ × (60 − 45) × (75 − 52.5) = ½ × 15 × 22.5 = $168.75 thousand.
(b)
- Policy A removes all $168.75 thousand of DWL. Net gain = 168.75 − 120 = $48.75 thousand.
- Policy B: at 55, MSB = 65 and MSC = 57.5, so the remaining DWL = ½ × (60 − 55) × (65 − 57.5) = ½ × 5 × 7.5 = $18.75 thousand. Surplus restored = 168.75 − 18.75 = $150 thousand. Net gain = 150 − 60 = $90 thousand.
(c) Choose Policy B: its net gain ($90 thousand) is larger. The last units towards Q* add little surplus, because MSB and MSC are close together there. Removing the final $18.75 thousand of DWL would cost a further $60 thousand of running cost under Policy A, which is more than it gains. Cost-benefit analysis compares the gain with the cost, not just the size of the DWL.
| Point | What earns it |
|---|---|
| 1 | Q* = 60 thousand |
| 1 | DWL = $168.75 thousand at 45 thousand |
| 1 | Policy A net gain $48.75 thousand |
| 1 | Policy B: remaining DWL $18.75 thousand and net gain $90 thousand |
| 1 | Recommends B because the net gain is larger, explaining that the last units add little surplus relative to the extra cost |
Allow follow-through in (b) and (c) from an incorrect DWL in (a).
How did you do?
- Q1 or Q2 wrong: re-read “What ‘socially efficient’ means” and “Why a perfectly competitive market gets it right” in the study guide.
- Q3 or Q4 wrong: re-read “Deadweight loss” and both worked examples. Check the ½ and the side of Q*.
- Q5 or Q6 incomplete: re-read “How private incentives lead to inefficient outcomes” and Figure 2.
- Q7 wrong: re-read “Fixing inefficiency” and Worked example 2(c).
Then tick off the topic checklist.