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, places and data are fictional. Only the four operations and ½ × base × height are needed, so a four-function calculator is enough.
Question 1 (multiple choice · foundation)
Rellan Rail (fictional) is the only train operator on a route and maximises profit. The government introduces a licence fee of $2 million per year, paid whatever the number of passengers. Compared with before the fee, which is correct?
- (A) The fare and the number of passengers stay the same, and profit falls by $2 million.
- (B) The fare rises and the number of passengers falls, because marginal cost rises.
- (C) The fare rises by $2 million divided by the number of passengers.
- (D) The number of passengers rises, because the firm wants to spread the fee over more passengers.
Answer and explanation
Answer: (A). The fee is a lump-sum tax: it raises fixed cost, not MC or MR. MR = MC at the same quantity, so only profit changes.
- (B) treats a lump-sum tax as a per-unit tax. Only a tax that grows with output shifts MC.
- (C) confuses ATC with price. ATC rises, but the fare is set by MR = MC and demand.
- (D) is the “spreading the overhead” error. The firm chooses output by MR = MC, which has not changed.
Question 2 (multiple choice · core)
In a perfectly competitive market, demand is relatively inelastic and supply is relatively elastic. The government places a $5 per-unit tax on sellers. Which outcome is most likely?
- (A) The price buyers pay rises by most of the $5, and the quantity traded falls by a small amount.
- (B) The net price sellers keep falls by most of the $5, and the price buyers pay hardly changes.
- (C) The quantity traded does not change, so there is no deadweight loss.
- (D) The price buyers pay rises by more than $5.
Answer and explanation
Answer: (A). The side of the market that is less elastic bears more of a tax. Buyers are less responsive, so most of the tax shows up in the price they pay. Because demand is inelastic, quantity falls only a little.
- (B) reverses the rule: sellers would bear most of the tax only if supply were the less elastic side.
- (C) would be true only if demand or supply were perfectly inelastic. Here quantity falls a little, so there is some deadweight loss.
- (D) is impossible in a competitive market: the buyers’ price and the sellers’ net price must differ by exactly $5, and the sellers’ price cannot rise.
Question 3 (multiple choice · core)
Oberon Cable (fictional) is a monopoly with a straight-line demand curve and constant marginal cost. The government places a $4 per-unit tax on each subscription. Which is correct?
- (A) Output falls, the price rises by $2, and deadweight loss increases.
- (B) Output stays the same and the price rises by $4.
- (C) Output stays the same and only profit falls, because a monopoly sets its own price.
- (D) Output falls and deadweight loss decreases, because the tax reduces the firm’s market power.
Answer and explanation
Answer: (A). The tax shifts MC up by $4, so MR = MC at a lower output, and the firm charges a higher price. With straight-line demand and constant MC, the price rises by half the tax: $2. The monopoly already produced too little, so producing even less widens the deadweight loss.
- (B) ignores the shift in MC, which must lower output.
- (C) describes a lump-sum tax, not a per-unit tax.
- (D) gets the direction wrong. The tax does nothing to market power, and lower output moves the firm further from the efficient quantity.
Question 4 (multiple choice · core)
The two largest of three supermarket chains in Eastvale (fictional) plan to merge. The competition authority blocks the merger. What is the main economic aim of this antitrust action?
- (A) To keep the market more competitive, so that prices stay closer to marginal cost and output stays higher
- (B) To raise government tax revenue from the supermarkets
- (C) To let the merged firm gain economies of scale and cut its prices
- (D) To make sure every supermarket earns zero accounting profit
Answer and explanation
Answer: (A). More rivals mean prices closer to MC, more output and less deadweight loss.
- (B) confuses antitrust with taxation.
- (C) is an argument for allowing the merger, not for blocking it.
- (D) is not an aim of policy: even competitive firms earn positive accounting profit.
Question 5 (calculation · core)
Fenwick Mills (fictional) is the only employer in a town. L is hundreds of workers and W is the wage in $ per hour.
- Labour supply: W = 4 + 0.5L, so the marginal resource cost is MRC = 4 + L.
- Marginal revenue product: MRP = 22 − 0.5L.
(a) Find the number of workers Fenwick hires and the wage it pays without a minimum wage. (b) The government sets a minimum wage of $13. Find the new employment and wage. (c) Instead, the minimum wage is set at $16. Find employment and the number of people who want to work but cannot find a job at the mill. (d) Explain why a $13 minimum wage would have no effect if this labour market were perfectly competitive, with the same supply and MRP.
Worked solution and suggested Marlbridge rubric
(a) MRC = MRP: 4 + L = 22 − 0.5L, so 1.5L = 18 and L = 12 hundred workers. The wage comes from the supply curve: W = 4 + 0.5 × 12 = $10. (MRP at L = 12 is $16, well above the wage.)
(b) At $13, MRC equals $13 for every worker up to the number willing to work at $13: 13 = 4 + 0.5L gives L = 18. MRP at L = 18 is 22 − 9 = $13, so hiring the 18th hundred is just worthwhile. Employment = 18 hundred at $13. Both the wage and employment rise.
(c) At $16, Fenwick hires until MRP = 16: 22 − 0.5L = 16, so L = 12 hundred. Workers willing to work at $16: 16 = 4 + 0.5L, so L = 24. Unemployed: 24 − 12 = 12 hundred. Employment is back to the monopsony level, but now with a surplus of labour.
(d) In a competitive market, supply meets MRP: 4 + 0.5L = 22 − 0.5L gives L = 18 and W = $13. A $13 minimum is not binding. Any minimum above $13 would cut employment below 18 hundred.
| Point | What earns it |
|---|---|
| 1 | L = 12 hundred from MRC = MRP, and W = $10 from the supply curve |
| 1 | L = 18 hundred at $13, with a reason (MRC = minimum wage) |
| 1 | L = 12 hundred at $16 from MRP = 16 |
| 1 | 12 hundred unemployed (24 − 12) |
| 1 | Competitive wage is $13, so the minimum is not binding |
Common error: reading the monopsony wage from MRP ($16). The firm pays only what the supply curve requires.
Question 6 (graph and calculation · core)
Kelvedon Power (fictional) is a natural monopoly. Demand is P = 70 − Q, so MR = 70 − 2Q (Q in thousand households, P in $ per month). MC is constant at $10. Fixed cost is $500 thousand per month, so ATC = 10 + 500 ÷ Q.
(a) Draw a correctly labelled graph showing demand, MR, MC and ATC. Label the unregulated outcome U, the fair-return outcome F and the socially optimal outcome S. (b) Calculate the unregulated quantity, price and profit. (c) Calculate the fair-return quantity and price, and show that economic profit is zero. (d) Calculate the socially optimal quantity and the firm’s profit or loss there. State the kind of subsidy needed and explain why. (e) A politician proposes splitting Kelvedon into two firms, each serving 25 thousand households. Using ATC, explain why this is a poor idea.
Model answer and suggested Marlbridge rubric
(a) Label both axes with units. Demand from $70 to 70 thousand; MR from $70 to 35 thousand; MC flat at $10; ATC falling across all of demand and above MC. U on demand above MR = MC; F where demand meets ATC; S where demand meets MC.
(b) MR = MC: 70 − 2Q = 10, so Q = 30, P = 70 − 30 = $40. ATC = 10 + 500 ÷ 30 ≈ $26.67. Profit = 40 × 30 − (10 × 30 + 500) = 1,200 − 800 = $400 thousand.
(c) P = ATC at Q = 50: P = 70 − 50 = $20; ATC = 10 + 500 ÷ 50 = $20. P = ATC, so economic profit = $0.
(d) P = MC: 70 − Q = 10, so Q = 60, P = $10. ATC = 10 + 500 ÷ 60 ≈ $18.33. Loss = total cost − revenue = (10 × 60 + 500) − 10 × 60 = $500 thousand, the whole fixed cost. The government must pay a lump-sum subsidy of $500 thousand. A per-unit subsidy would lower MC and change output away from 60; a lump-sum payment covers the loss without changing MC.
(e) Each firm would pay the fixed cost. Serving 25 thousand households, each firm’s ATC = 10 + 500 ÷ 25 = $30, against $20 for one firm serving 50 thousand. Splitting a natural monopoly throws away economies of scale.
| Point | What earns it |
|---|---|
| 1 | Graph: labelled axes; MR below demand; MC flat; ATC falling and above MC; U, F and S correctly placed |
| 1 | Q = 30, P = $40, profit $400 thousand |
| 1 | Q = 50, P = $20 = ATC, zero profit |
| 1 | Q = 60, loss $500 thousand, lump-sum subsidy with a reason |
| 1 | ATC $30 for each smaller firm compared with $20, linked to duplicated fixed cost |
Question 7 (calculation and explanation · stretch)
Vantor Pharma (fictional) holds a patent on a medicine. Demand is P = 90 − 2Q, so MR = 90 − 4Q, and MC = Q (Q in thousand packs per month, P in $ per pack).
(a) Find the unregulated quantity and price, and the deadweight loss. (b) The government caps the price at $30. Find output and deadweight loss. (c) The cap is set at $24 instead. Find output, the shortage and the deadweight loss. (d) The cap is set at $15 instead. Find output and explain why this cap is worse than no cap. (e) Suppose instead the medicine were sold in a perfectly competitive market with the same demand, where supply is the MC curve. Compare the effect of a $24 cap there with your answer to (c).
Worked solution and suggested Marlbridge rubric
(a) MR = MC: 90 − 4Q = Q, so Q = 18, P = 90 − 36 = $54. Efficient output: 90 − 2Q = Q, so Q = 30 at P = $30. Deadweight loss = ½ × (30 − 18) × (54 − 18) = $216 thousand.
(b) Up to 30 thousand packs, each pack sells at $30, so MR = $30. The firm produces where MC = 30: Q = 30. Buyers want (90 − 30) ÷ 2 = 30, so there is no shortage. Deadweight loss = $0.
(c) MC = 24 gives Q = 24. Buyers want (90 − 24) ÷ 2 = 33, so the shortage is 9 thousand packs. At Q = 24 the demand price is 90 − 48 = $42. Deadweight loss = ½ × (30 − 24) × (42 − 24) = $54 thousand, still better than $216 thousand.
(d) MC = 15 gives Q = 15, below the unregulated 18. Deadweight loss = ½ × (30 − 15) × (60 − 15) = $337.50 thousand. The cap is below MC at the unregulated output ($18), so the firm cuts output, and buyers want 37.5 thousand.
(e) The competitive market starts at the efficient point: Q = 30, P = $30. A $24 cap cuts the quantity supplied to 24, a fall of 6 thousand, and creates a 9 thousand shortage. For Vantor, the same cap raised output from 18 to 24. The same cap moves the competitive market away from efficiency and the monopoly towards it.
| Point | What earns it |
|---|---|
| 1 | Q = 18, P = $54, deadweight loss $216 thousand |
| 1 | Cap $30: Q = 30 with the reason (MR = cap up to demand) and zero deadweight loss |
| 1 | Cap $24: Q = 24, shortage 9 thousand, deadweight loss $54 thousand |
| 1 | Cap $15: Q = 15 < 18, explained by the cap being below MC at the unregulated output |
| 1 | Competitive comparison: output falls from 30 to 24 there, but rises from 18 to 24 for the monopoly |
How did you do?
- Q1 or Q3 wrong: re-read “Per-unit taxes and subsidies”, “Lump-sum taxes and subsidies” and Worked example 2 in the study guide.
- Q2 wrong: revisit tax incidence and elasticity in the Topic 2.8 study guide.
- Q4 or Q6 wrong: re-read “Regulating a natural monopoly”, “Antitrust policy”, Figure 2 and Worked example 1.
- Q5 or Q7 wrong: re-read “Price controls in different market structures”, Figure 1 and Worked example 3.
Then tick off the topic checklist.