This diagnostic helps you find which Unit 3 topics to revisit. Each question tests one topic, so a wrong answer points to the study guide you need.
These are original Marlbridge practice questions, not past exam questions. The diagnostic is not calibrated against real exam results and gives no predicted score.
Allow about 30 minutes and write down every answer before opening any answer box. A four-function calculator is enough. All firms and data are fictional.
Question 1 (multiple choice · 3.1)
Quarry Lane Pottery has one kiln (fixed) and hires potters:
| Potters | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Total product (mugs per hour) | 0 | 4 | 10 | 18 | 28 | 36 |
The pottery hires its 5th potter. Which statement is correct?
- (A) Total product falls, because marginal product has fallen.
- (B) Diminishing marginal returns begin with the 5th potter, so average product falls.
- (C) Diminishing marginal returns begin with the 5th potter, yet total product and average product both still rise.
- (D) Diminishing marginal returns have not begun, because total product is still rising.
Answer and explanation
Answer: (C). MPs are 4, 6, 8, 10 and 8, so MP first falls with the 5th potter. MP is still positive, so TP rises. The 5th potter’s MP of 8 is above the average of 7, so AP rises to 7.2.
- (A) TP falls only when MP is negative.
- (B) AP falls only when MP is below AP, not whenever MP falls.
- (D) Diminishing returns are about the extra output, not the total.
If you missed this: read “How marginal product changes: three stages” in the Topic 3.1 study guide.
Question 2 (multiple choice · 3.2)
A bakery pays each worker $96 a day; labour is its only variable input. Hiring a 3rd worker raises output from 50 to 74 loaves a day. What is the marginal cost of each loaf the 3rd worker adds?
- (A) $1.30
- (B) $4.00
- (C) $3.89
- (D) $0.25
Answer and explanation
Answer: (B). MP = 74 − 50 = 24 loaves. MC = wage ÷ MP = 96 ÷ 24 = $4.00.
- (A) divides the wage by total product.
- (C) is AVC with 3 workers: (3 × 96) ÷ 74.
- (D) flips the ratio: MP ÷ wage.
If you missed this: read “Why the cost curves have their shapes” (MC = w ÷ MP) in the Topic 3.2 study guide.
Question 3 (short answer · 3.2)
Tamsin Textiles pays $120 a day for its loom lease (fixed). Its total variable cost is:
| Output (rolls per day) | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| TVC ($) | 45 | 80 | 105 | 136 | 180 | 245 |
(a) Calculate the MC of the 5th roll, and AVC and ATC at 5 rolls. (b) At what output is AVC lowest, and at what output is ATC lowest? Explain why ATC’s lowest point is at the larger output. (c) The firm’s insurance rises by $30 a day, whatever it produces. What happens to the MC of the 5th roll and to ATC at 5 rolls?
Answer and explanation
(a) MC = 180 − 136 = $44. AVC = 180 ÷ 5 = $36.00. ATC = (120 + 180) ÷ 5 = $60.00.
(b) AVC is lowest at 4 rolls ($34.00); ATC at 5 rolls ($60.00). AFC is still falling (40, 30, 24), so ATC keeps falling while MC is below it: the 5th roll’s MC ($44) is below $64, but the 6th roll’s ($65) is above $60.
(c) Insurance is a fixed cost. MC is unchanged at $44. ATC rises to (150 + 180) ÷ 5 = $66.00.
If you missed this: read “The seven cost measures” and “What shifts the cost curves” in the Topic 3.2 study guide.
Question 4 (multiple choice · 3.3)
A furniture maker doubles every input it uses. Input prices do not change, so its long-run total cost doubles. Its output rises by 150%. What happens to its long-run average total cost?
- (A) It stays the same: constant returns to scale, because all inputs doubled.
- (B) It rises, because total cost doubled: diseconomies of scale.
- (C) It rises by about 33%: decreasing returns to scale.
- (D) It falls by 20%: increasing returns to scale, so economies of scale.
Answer and explanation
Answer: (D). Output is now 2.5 times as large, so new LRATC = 2 ÷ 2.5 = 0.8 of the old level: a 20% fall.
- (A) Equal input growth is the test; the answer depends on output.
- (B) looks at total cost, not cost per unit.
- (C) reads “rises by 150%” as “1.5 times”: 2 ÷ 1.5 ≈ 1.33.
If you missed this: read “Returns to scale: when every input grows” and “From returns to scale to long-run costs” in the Topic 3.3 study guide.
Question 5 (multiple choice · 3.4)
Rhea’s courier business had revenue of $90,000 last year. She paid $45,000 for fuel, insurance and a helper, and $1,200 interest on a bank loan. She uses her own van (it could be rented out for $3,000 a year) and gave up a $30,000 salary. What are her accounting and economic profits?
- (A) $43,800 and $10,800
- (B) $45,000 and $10,800
- (C) $43,800 and $13,800
- (D) $10,800 and $43,800
Answer and explanation
Answer: (A). Explicit costs = 45,000 + 1,200 = $46,200, so accounting profit = $43,800. Implicit costs = 30,000 + 3,000 = $33,000, so economic profit = $10,800.
- (B) treats loan interest, paid to a bank, as implicit.
- (C) forgets the rent she gives up by using her own van.
- (D) swaps them; economic profit is never the larger.
If you missed this: read “The implicit costs of running a firm” in the Topic 3.4 study guide.
Question 6 (multiple choice · 3.5)
A firm sells at a market price of $17 and cannot change it.
| Output | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| Total cost ($) | 24 | 34 | 40 | 48 | 60 | 76 | 98 |
Which output maximizes profit, and what is the profit?
- (A) 4 units; $8
- (B) 5 units; $9
- (C) 2 units; −$6
- (D) 6 units; $4
Answer and explanation
Answer: (B). MC is $10, $6, $8, $12, $16 and $22. Units 1 to 5 have MC below MR = $17; the 6th costs $22. Profit = 85 − 76 = $9.
- (A) maximizes profit per unit ($2); the 5th unit still adds $1.
- (C) stops where MC is lowest.
- (D) maximizes revenue; the 6th unit costs $5 more than it earns.
If you missed this: read “Marginal revenue and marginal cost” and Worked example 1 in the Topic 3.5 study guide.
Question 7 (multiple choice · 3.6)
At its best output, a firm makes an economic loss of $500 a week. Its total fixed cost is $800 a week. Which conclusion is correct?
- (A) Stay in the market in the long run: the loss is smaller than the fixed cost.
- (B) Shut down in the short run: any loss means the price is too low.
- (C) Shut down in the short run: the price must be below average total cost.
- (D) Keep producing in the short run: revenue covers variable cost and $300 of fixed cost.
Answer and explanation
Answer: (D). Shutting down would lose the full $800. Producing loses $500, so TR − TVC = $300 pays part of the fixed cost (P > AVC).
- (A) mixes up time periods: in the long run nothing is fixed, so an expected loss means exit.
- (B) and (C) use the wrong test. P below ATC means a loss, not a shutdown; the short-run test is P against AVC.
If you missed this: read “The short-run decision: produce or shut down” in the Topic 3.6 study guide.
Question 8 (short answer · 3.6)
Winterpeak Ski Hire pays $6,000 a month in fixed lease and insurance costs until its lease ends. At its best output:
| Month type | Total revenue ($) | Total variable cost ($) |
|---|---|---|
| Off-season | 4,500 | 5,200 |
| Peak season | 30,000 | 14,000 |
(a) Should Winterpeak open or close in an off-season month? Give the monthly result of each choice. (b) Find its result in a peak month if it opens. (c) A year has 5 peak and 7 off-season months, and Winterpeak follows your advice. The owner could earn $15,000 a year elsewhere. Should she renew the lease? Explain.
Answer and explanation
(a) Close. Open: 4,500 − 5,200 − 6,000 = −$6,700. Closed: −$6,000. TR < TVC.
(b) 30,000 − 14,000 − 6,000 = +$10,000.
(c) Accounting profit = 5 × 10,000 − 7 × 6,000 = $8,000. Economic profit = 8,000 − 15,000 = −$7,000. When the lease ends, every cost becomes avoidable, so if this continues she should not renew (exit), despite the accounting profit.
If you missed this: read Worked example 2 and “The long-run decision: enter or exit” in the Topic 3.6 study guide.
Question 9 (multiple choice · 3.7)
A constant-cost, perfectly competitive industry starts in long-run equilibrium. Then market demand increases. Before any new firm can enter, which statement is correct?
- (A) The price stays at minimum ATC, because the industry has constant costs.
- (B) The price rises and firms earn economic profit, but each firm’s output is unchanged because it is a price taker.
- (C) The price rises; each firm raises output along MC, earns economic profit and produces beyond minimum ATC.
- (D) Each firm’s demand curve now slopes downward, so MR is below price.
Answer and explanation
Answer: (C). Each firm’s P = MR line moves up and meets MC at a larger output, where P is above ATC and beyond the efficient scale.
- (A) describes the long run, after entry.
- (B) A price taker still chooses output where MC = P.
- (D) Each firm’s demand stays horizontal, at the new price.
If you missed this: read “From short run to long run: entry and exit” in the Topic 3.7 study guide.
Question 10 (short answer · 3.7)
A perfectly competitive, constant-cost market has 200 identical firms and a price of $12. Each firm produces 600 units, where MC = $12, ATC = $14.50 and AVC = $9.00. Minimum ATC is $14.00, at 700 units. At $14, buyers want 105,000 units.
(a) Calculate the typical firm’s economic profit or loss. (b) Should it keep producing in the short run? Support your answer with numbers. (c) Describe the long-run adjustment, and find the long-run price, each firm’s output and the number of firms.
Answer and explanation
(a) (P − ATC) × q = (12 − 14.50) × 600 = −$1,500.
(b) Yes. P ($12) > AVC ($9). TFC = (14.50 − 9.00) × 600 = $3,300, so shutting down would lose $3,300, while producing loses only $1,500.
(c) Losses lead some firms to exit; supply shifts left until the price equals minimum ATC, $14. Each remaining firm produces 700 units at zero economic profit. Firms = 105,000 ÷ 700 = 150, so 50 exit. Market output falls (from 120,000), but each remaining firm produces more.
If you missed this: read “How a price taker chooses output” and “Long-run equilibrium and efficiency” in the Topic 3.7 study guide.
Your next step
Count a short-answer question as wrong if any part was wrong.
| Topic | Question(s) | If you missed it, read |
|---|---|---|
| 3.1 The Production Function | 1 | The production function |
| 3.2 Short-Run Production Costs | 2, 3 | Short-run costs |
| 3.3 Long-Run Production Costs | 4 | Long-run costs |
| 3.4 Types of Profit | 5 | Types of profit |
| 3.5 Profit Maximization | 6 | Profit maximization |
| 3.6 Short-Run and Long-Run Decisions | 7, 8 | Shutdown, entry and exit |
| 3.7 Perfect Competition | 9, 10 | Perfect competition |
How to use your result
- Start with the topics you missed. Read the sections named in the answer, then do that topic’s practice questions. One question is a small sample.
- Look for patterns. Questions 1 to 3 link production and cost: if you missed two, revise Topic 3.1 before 3.2. Questions 3, 7 and 8 turn on fixed costs, which never change MC or the shutdown decision. Questions 5 and 8 need implicit costs.
- All correct? Go on to the mixed unit review, whose longer questions combine topics.
- Retake it after a week of revision.