This diagnostic helps you find which Unit 4 topics to revisit. Each of its seven questions is tied to one topic, so a wrong answer points you 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 work without notes. Write down every answer before you open any answer box. A four-function calculator is enough. All firms and data are fictional. In every payoff matrix, cells show (row player’s payoff, column player’s payoff).
Question 1 (multiple choice · 4.1)
Corbel Kites sells 20 kites a day at $15 each and charges every buyer the same price. To sell a 21st kite, it must cut the price to $14.50 for all buyers. What is the marginal revenue of the 21st kite, and what does it show about demand over this range?
- (A) $14.50; demand is elastic
- (B) $14.00; demand is elastic
- (C) $4.50; demand is elastic
- (D) $4.50; demand is inelastic
Answer and explanation
Answer: (C). Total revenue rises from 20 × $15 = $300 to 21 × $14.50 = $304.50, so MR = $4.50. In parts: the extra kite brings in $14.50 (quantity effect), and the first 20 kites each lose $0.50, a total of −$10 (price effect). MR is positive, so a price cut raises total revenue: demand is elastic here.
- (A) counts only the quantity effect, as if Corbel were a price taker.
- (B) takes the $0.50 cut off one kite instead of all 20.
- (D) gets MR right, but MR below price does not mean inelastic demand. Demand is inelastic only where MR is negative.
If you missed this: read “Why a firm must cut its price to sell more” and Worked example 1 in the Topic 4.1 study guide.
Question 2 (multiple choice · 4.2)
At its current output, a single-price monopoly charges $20. Its marginal revenue is $8 and its marginal cost is $12. To raise its profit, the monopoly should:
- (A) produce less and charge a higher price
- (B) produce more and charge a lower price, because price is above marginal cost
- (C) keep output the same and raise its price
- (D) keep output and price the same, because price is above both MR and MC
Answer and explanation
Answer: (A). The last unit adds $8 to revenue but $12 to cost, so it lowers profit by $4. The firm should cut output until MR = MC. With less output, it can charge a higher price on the demand curve.
- (B) uses the efficiency test (P compared with MC). A monopoly compares MR with MC.
- (C) A monopoly cannot raise its price without selling less: the price must be on the demand curve.
- (D) Price above MC is normal for a monopoly, but MR < MC means the output is too high for maximum profit.
If you missed this: read “How a monopoly chooses its output” in the Topic 4.2 study guide.
Question 3 (short answer · 4.2)
Halvorn Optics holds a patent on a lens coating. Its demand is P = 100 − 2Q, so MR = 100 − 4Q, and its marginal cost is MC = 10 + Q (Q in thousand units per month, P and MC in $ per unit).
(a) Find the profit-maximising quantity and price, and the marginal cost at that quantity. (b) At that quantity, ATC is $50. Calculate the monthly profit. (c) Find the allocatively efficient quantity. Calculate consumer surplus and the deadweight loss under the monopoly.
Answer and explanation
All money values are in $ thousand per month.
(a) MR = MC: 100 − 4Q = 10 + Q, so 90 = 5Q and Q = 18 thousand units. Price from demand: 100 − 2 × 18 = $64. MC at 18 is 10 + 18 = $28, so P > MC.
(b) Profit = (P − ATC) × Q = (64 − 50) × 18 = 252.
(c) Efficient quantity where demand meets MC: 100 − 2Q = 10 + Q, so Q = 30 (at P = $40).
- Consumer surplus = ½ × 18 × (100 − 64) = 324.
- Deadweight loss = ½ × (64 − 28) × (30 − 18) = ½ × 36 × 12 = 216.
Common slips: reading the price from MC ($28) or from MR; using MC at the efficient quantity ($40) as the bottom of the deadweight-loss triangle. The triangle’s vertical side runs from demand ($64) down to MC ($28) at Qm.
If you missed this: read “Reading a monopoly graph” and Worked example 2 in the Topic 4.2 study guide.
Question 4 (multiple choice · 4.3)
Which of the following is an example of price discrimination?
- (A) A courier charges $40 to take a parcel to an offshore island and $12 to take the same parcel across the city, because the island trip costs it $28 more.
- (B) The only ice rink in a city charges $5 to skaters who show a student card and $15 to other skaters for the same session.
- (C) A wheat farmer in a perfectly competitive market charges a large bakery $1 a tonne above the market price, because the bakery buys every week.
- (D) A hotel charges $180 a night for a sea-view suite and $90 for a standard room.
Answer and explanation
Answer: (B). It is the same product sold at different prices, and the difference is not due to cost. The rink has market power, it can tell the groups apart (the card), and the ticket cannot be resold to a non-student at the door.
- (A) The price gap matches the cost gap, so it simply passes on a higher cost.
- (C) A price taker cannot do this: the bakery would buy from another farm at the market price.
- (D) A suite and a standard room are different products.
If you missed this: read “What price discrimination is” and “The three conditions” in the Topic 4.3 study guide.
Question 5 (short answer · 4.4)
Lantern Lane Kitchen is one of many restaurants in a fictional town, each with a different menu. At its profit-maximising output of 400 meals a week, its price is $14, its ATC is $11 and its MC is $8.
(a) Calculate its weekly economic profit. (b) Explain how its demand curve and profit change in the long run. (c) In long-run equilibrium it sells 300 meals at a price of $12, where MC is $7. Its ATC is lowest ($9) at 700 meals. State its economic profit, calculate its excess capacity, and name the two ways this outcome is inefficient.
Answer and explanation
(a) Profit = (14 − 11) × 400 = $1,200 per week.
(b) Economic profit attracts new restaurants, and entry is easy. Lantern Lane’s customers now have more close substitutes, so its demand curve shifts left and becomes more elastic. Entry continues until demand is tangent to ATC: P = ATC and economic profit is zero.
(c) At long-run equilibrium P = ATC = $12, so economic profit is zero. Excess capacity = 700 − 300 = 400 meals a week.
- Not productively efficient: output is below the minimum-ATC output, so each meal costs $12 rather than $9 to make.
- Not allocatively efficient: P ($12) > MC ($7), so some meals worth more to buyers than they cost are not made: a deadweight loss.
A common slip in (b) is to say the market supply curve shifts while the firm’s demand stays the same. In this model, entry shifts each firm’s own demand curve left.
If you missed this: read “The long run: zero economic profit” and “Why the long run is inefficient” in the Topic 4.4 study guide.
Question 6 (multiple choice · 4.5)
Two phone makers, Ostrel (row) and Pavik (column), each choose charger standard X or Y. Yearly profits in $ million:
| Ostrel ↓ / Pavik → | Standard X | Standard Y |
|---|---|---|
| Standard X | (50, 40) | (10, 15) |
| Standard Y | (12, 8) | (35, 45) |
Which statement is correct?
- (A) (X, X) is the only Nash equilibrium, because it gives the highest total profit.
- (B) There is no Nash equilibrium, because neither firm has a dominant strategy.
- (C) (Y, Y) is the only Nash equilibrium, because Pavik earns its highest profit there.
- (D) Both (X, X) and (Y, Y) are Nash equilibria.
Answer and explanation
Answer: (D). Ostrel’s best response to X is X (50 > 12) and to Y is Y (35 > 10). Pavik’s best response to X is X (40 > 15) and to Y is Y (45 > 8). In (X, X) and in (Y, Y), neither firm can gain by switching alone. Each firm does best by matching the other, so neither has a dominant strategy.
- (A) uses the total payoff. A Nash equilibrium asks whether either player gains by changing alone; at (Y, Y), neither does.
- (B) A game can have a Nash equilibrium, or two, without any dominant strategy.
- (C) A player’s single highest payoff does not decide the equilibrium. (X, X) is also stable.
If you missed this: read “The language of game theory” and “A method that always works” in the Topic 4.5 study guide.
Question 7 (short answer · 4.5)
Two gyms in a fictional town, Ripley (row) and Sato (column), each choose heavy or modest advertising. Monthly profits in $ thousand:
| Ripley ↓ / Sato → | Heavy | Modest |
|---|---|---|
| Heavy | (30, 26) | (48, 18) |
| Modest | (22, 40) | (38, 34) |
(a) Find each gym’s dominant strategy, if any, and the Nash equilibrium. (b) Explain why this game is a prisoner’s dilemma. (c) A sponsor offers Sato a payment S each month whenever Sato advertises modestly. Calculate the value S must exceed for “modest” to become Sato’s dominant strategy, and find the new Nash equilibrium.
Answer and explanation
(a) Ripley: if Sato goes heavy, heavy 30 > modest 22; if Sato goes modest, heavy 48 > modest 38. Heavy is dominant. Sato: if Ripley goes heavy, heavy 26 > modest 18; if Ripley goes modest, heavy 40 > modest 34. Heavy is dominant. Nash equilibrium: (Heavy, Heavy) with (30, 26).
(b) Both gyms would earn more at (Modest, Modest), with (38, 34), but each gym’s dominant strategy is to advertise heavily, so they end up at (30, 26).
(c) Modest must beat heavy in both rows:
- If Ripley goes heavy: 18 + S > 26, so S > 8.
- If Ripley goes modest: 34 + S > 40, so S > 6.
S must exceed $8 thousand a month (the larger gap). Ripley’s payoffs do not change, so Ripley still advertises heavily, and Sato’s best response is modest. The new Nash equilibrium is (Heavy, Modest). With S = 10, for example, the payoffs there are (48, 28).
A common slip is answering S > 6. With S = 7, Sato would still go heavy whenever Ripley does (26 > 25).
If you missed this: read Worked example 1(c) and Worked example 2(c) in the Topic 4.5 study guide.
Your next step
Count a short-answer question as wrong if any part was wrong. Then find your misses below.
| Topic | Question(s) | If you missed it, read |
|---|---|---|
| 4.1 Introduction to Imperfectly Competitive Markets | 1 | Imperfectly competitive markets |
| 4.2 Monopoly | 2, 3 | Monopoly |
| 4.3 Price Discrimination | 4 | Price discrimination |
| 4.4 Monopolistic Competition | 5 | Monopolistic competition |
| 4.5 Oligopoly and Game Theory | 6, 7 | Oligopoly and game theory |
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: treat a miss as a signal to check.
- Look for patterns. Questions 1 to 3 and 5 all rest on one idea: MR lies below demand, so the firm stops where P > MC. If you missed two or more of them, revise Topic 4.1 before Topics 4.2 and 4.4. Questions 6 and 7 both need one player’s payoffs compared at a time.
- All correct? Go on to the mixed unit review, whose longer questions combine topics.
- Retake it after a week of revision.