Use this review after studying all five topics or taking the Unit 4 diagnostic. Then try the seven questions without notes.
Big ideas of the unit
- Market power means a downward-sloping demand curve. To sell more, a single-price firm cuts the price on every unit, so MR lies below demand in all three structures. (Topic 4.1)
- Same rule, different result. Every firm produces where MR = MC. Because MR is below price, output stops where P > MC, leaving a deadweight loss.
- Barriers to entry decide the long run. High fixed costs, legal barriers and control of a key resource let profit last; without them, entry competes it away.
- A monopoly is the whole market. Find Qm where MR = MC, read Pm from demand and compare it with ATC. Compared with competition, part of consumer surplus becomes profit and the rest is lost. (Topic 4.2)
- Price discrimination removes the single-price limit. The less elastic group pays more. With perfect price discrimination, MR equals demand, output rises to where P = MC and deadweight loss disappears, but so does consumer surplus. (Topic 4.3)
- Monopolistic competition mixes market power with free entry. In the long run demand is tangent to ATC: P = ATC > MC, with excess capacity. (Topic 4.4)
- Oligopolists are interdependent, so we model them as games. Collusion pays, but each firm gains by cheating (a prisoner’s dilemma), so outcomes usually lie between monopoly and perfect competition. (Topic 4.5)
Key relationships and methods
| Idea | Rule or method | Topic |
|---|---|---|
| Marginal revenue (single price) | new price − (price cut × units sold before); MR > 0 means elastic | 4.1 |
| Output, price, profit | MR = MC; price from demand; profit = (P − ATC) × Q | 4.2 |
| Deadweight loss | triangle between demand and MC, from Qm to the efficient quantity | 4.2 |
| Perfect price discrimination | MR = demand; Q where P = MC; CS = 0; DWL = 0 | 4.3 |
| Long-run monopolistic competition | demand tangent to ATC; excess capacity = minimum-ATC output − Q | 4.4 |
| Nash equilibrium | neither player gains by changing alone; compare one player’s payoffs at a time | 4.5 |
| Incentive to change a strategy | must exceed the largest gap across the other player’s actions | 4.5 |
These are original Marlbridge practice questions, not past exam questions. The rubrics are a suggested Marlbridge rubric, not official scoring. All firms and data are fictional; a four-function calculator is enough.
Question 1 (multiple choice · mixed)
Which statement is true of both a monopoly and a monopolistically competitive firm in long-run equilibrium?
- (A) Price is greater than marginal cost at the chosen output, so there is a deadweight loss.
- (B) Economic profit is zero, because price equals average total cost.
- (C) Barriers to entry let the firm keep an economic profit.
- (D) The firm produces at the lowest point of its average total cost curve.
Answer and explanation
Answer: (A). Both firms face a downward-sloping demand curve, so MR is below price, and producing where MR = MC leaves P > MC.
- (B) is true only of monopolistic competition, where free entry drives profit to zero.
- (C) is true only of monopoly. Monopolistic competition has low barriers.
- (D) is true of neither; only perfect competition reaches minimum ATC in the long run.
Question 2 (multiple choice · mixed)
A monopoly has constant marginal cost and charges every buyer one price. Which change would lead it to produce the allocatively efficient quantity?
- (A) A rise in its fixed costs
- (B) Charging two groups with different price elasticities different prices
- (C) Learning each buyer’s maximum willingness to pay and charging each buyer exactly that amount
- (D) An advertising campaign that makes its demand less elastic
Answer and explanation
Answer: (C). With perfect price discrimination, the firm cuts the price only for the extra buyer, so MR equals demand. It produces where demand meets MC: the efficient quantity.
- (A) Fixed costs change neither MR nor MC, so output stays the same.
- (B) Group pricing still has MR below demand in each group, so P > MC remains.
- (D) Less elastic demand widens the gap between price and MC.
Question 3 (multiple choice · mixed)
The bakeries in a fictional town each sell slightly different bread, and all earn economic profits. A new law lets only the existing bakeries hold a licence. What is the most likely long-run result?
- (A) Each bakery’s demand shifts left until price equals average total cost.
- (B) Each bakery keeps earning economic profit, and price stays above marginal cost.
- (C) Each bakery becomes a price taker, because the law fixes the number of firms.
- (D) Each bakery produces at minimum average total cost, because it no longer needs to advertise.
Answer and explanation
Answer: (B). The licence is a legal barrier to entry. Without entry, no bakery’s demand shifts left, so profit can last, and P > MC remains.
- (A) is the adjustment with free entry, which the law removes.
- (C) Products are still differentiated, so each demand curve still slopes down.
- (D) With downward-sloping demand, profit-maximising output is not at minimum ATC.
Question 4 (constructed response · mixed)
Tolland Glassworks holds a patent on a heat-proof glass panel. Each panel is bought by a different buyer, and the price shown is the most that buyer will pay. Marginal cost is constant at $22 per panel, and fixed cost is $40 per day.
| Panels per day | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
|---|---|---|---|---|---|---|---|---|---|
| Price ($) | 52 | 48 | 44 | 40 | 36 | 32 | 28 | 24 | 20 |
(a) Calculate total and marginal revenue. Use a quantity effect and a price effect to explain why the 4th panel’s MR is below its price. (b) Charging one price to all buyers, find Tolland’s profit-maximising output, price and daily profit. (c) Find the allocatively efficient output, and consumer surplus and deadweight loss at the single price. (d) Tolland learns to charge every buyer their maximum. Find its output, profit, consumer surplus and deadweight loss, and show that the rise in profit equals CS + DWL from (c).
Worked solution and suggested Marlbridge rubric
(a)
| Panels | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
|---|---|---|---|---|---|---|---|---|
| TR ($) | 52 | 96 | 132 | 160 | 180 | 192 | 196 | 192 |
| MR ($) | 52 | 44 | 36 | 28 | 20 | 12 | 4 | −4 |
Selling a 4th panel cuts the price from $44 to $40: quantity effect +$40, price effect 3 × −$4 = −$12, so MR = $28 < $40.
(b) MR ≥ MC up to the 4th panel (28 > 22); the 5th has MR $20 < $22. So 4 panels at $40 (price from the demand row). Profit = 160 − (4 × 22) − 40 = $32 per day (ATC $32).
(c) Efficient output: every panel worth at least MC, so 8 panels (the 9th is worth only $20).
- CS = (52 − 40) + (48 − 40) + (44 − 40) + 0 = $24.
- DWL = surplus lost on panels 5 to 8 = 14 + 10 + 6 + 2 = $32.
(d) MR now equals each buyer’s price, so Tolland sells while price ≥ MC: 8 panels. Revenue = 52 + 48 + … + 24 = $304. Profit = 304 − 176 − 40 = $88. CS = $0; DWL = $0. Profit rises by 88 − 32 = $56 = CS $24 + DWL $32: the old consumer surplus plus the surplus that was lost.
| Point | What earns it |
|---|---|
| 1 | TR and MR rows correct |
| 1 | Quantity effect +40 and price effect −12 give MR 28 < P |
| 1 | 4 panels at $40 (price from demand) and profit $32 |
| 1 | Efficient output 8, CS $24 and DWL $32 |
| 1 | Perfect price discrimination: 8 panels, profit $88, CS and DWL zero |
| 1 | Rise of $56 shown equal to CS + DWL |
Total: 6 points.
Question 5 (constructed response · mixed)
Arlo Pharma holds a patent on a migraine drug. Bramble Noodles is one of many noodle bars in a city, each with a different menu. Both earn economic profit this year.
(a) Explain why Bramble’s economic profit will disappear in the long run, but Arlo’s may not. (b) In long-run equilibrium Bramble sells 100 bowls a day, where P = ATC = $7 and MC = $4. Its ATC is lowest ($6) at 200 bowls, and its demand meets MC at 160 bowls ($5.20). Describe a correctly labelled long-run graph. (c) Calculate Bramble’s excess capacity and deadweight loss.
Worked solution and suggested Marlbridge rubric
(a) Entry is easy, so profit attracts new noodle bars and Bramble’s demand shifts left until P = ATC. Arlo’s patent is a legal barrier: rivals cannot sell the drug, so profit can last.
(b) Axes “Price and cost ($)” and “Bowls per day”. Downward-sloping demand; MR below it; U-shaped ATC with minimum at (200, $6); MC rising through it. MR crosses MC at 100 bowls. Demand touches ATC at (100, $7), on the falling part of ATC, without crossing it.
(c) Excess capacity = 200 − 100 = 100 bowls a day. DWL = triangle between demand and MC from 100 to 160 bowls: ½ × (160 − 100) × (7 − 4) = $90 per day.
| Point | What earns it |
|---|---|
| 1 | Bramble: entry shifts its demand left until P = ATC |
| 1 | Arlo: patent blocks entry, so profit can last |
| 1 | Graph: labelled axes, demand, MR below demand, ATC and MC through minimum ATC |
| 1 | Graph: MR = MC at 100, demand tangent to ATC at $7, left of minimum ATC |
| 1 | Excess capacity 100 bowls and DWL $90 with working |
Total: 5 points.
Question 6 (constructed response · mixed)
Only two firms, Kestrel (row) and Lomond (column), sell builders’ sand in a fictional region. Market demand is Q = 100 − 2P (Q in thousand tonnes per week, P in $ per tonne). Each firm’s MC = ATC = $10. Each firm chooses a high price ($30) or a low price ($24). The cheaper firm wins every buyer; at equal prices the firms split sales equally.
(a) Show that $30 is the monopoly price. (MR = 50 − Q.) (b) Calculate the weekly profits ($ thousand) and build the payoff matrix. (c) Find each firm’s dominant strategy and the Nash equilibrium. Explain why this is a prisoner’s dilemma. (d) A fine F would be charged on any firm that sets the low price. Calculate the value F must exceed for “high” to become Kestrel’s dominant strategy. (e) Compare the equilibrium with monopoly and perfect competition, and calculate its deadweight loss.
Worked solution and suggested Marlbridge rubric
(a) Inverse demand: P = 50 − Q/2. MR = MC: 50 − Q = 10, so Q = 40 and P = 50 − 20 = $30.
(b) Profit = (P − 10) × own sales.
- Both high: 40 sold, 20 each: 20 × 20 = 400 each.
- Both low: 52 sold, 26 each: 14 × 26 = 364 each.
- One low: it sells all 52: 14 × 52 = 728; the other earns 0.
| Kestrel ↓ / Lomond → | High ($30) | Low ($24) |
|---|---|---|
| High ($30) | (400, 400) | (0, 728) |
| Low ($24) | (728, 0) | (364, 364) |
(c) Kestrel: low 728 > high 400 if Lomond goes high; low 364 > high 0 if Lomond goes low. Low is dominant, and by symmetry for Lomond too. Nash equilibrium: (Low, Low), 364 each. Both would earn 400 at (High, High), but each gains by undercutting: a prisoner’s dilemma.
(d) High must beat low in both columns:
- If Lomond goes high: 400 > 728 − F, so F > 328.
- If Lomond goes low: 0 > 364 − F, so F > 364.
F must exceed $364 thousand per week.
(e) Monopoly: $30 and 40. Competition: P = MC = $10 and Q = 80. The equilibrium ($24, 52) lies between them, but P > MC, so it is allocatively inefficient. DWL = ½ × (80 − 52) × (24 − 10) = $196 thousand per week.
| Point | What earns it |
|---|---|
| 1 | MR = MC gives Q = 40 and P = $30 |
| 1 | All four cells of the matrix correct |
| 1 | Low dominant for both with comparisons, Nash (Low, Low) |
| 1 | Prisoner’s dilemma: both better off at (High, High) |
| 1 | F > 364, using both columns and the larger gap |
| 1 | Equilibrium between monopoly and competition, with P > MC as inefficient |
| 1 | DWL $196 thousand |
Total: 7 points.
Question 7 (constructed response · mixed)
Fenwick Cuts is one of many hair salons in a fictional city, each with its own style. It charges everyone $30 and has a constant marginal cost of $12 per haircut. A survey shows:
| Group | Price change | Haircuts per week |
|---|---|---|
| Adults | $30 → $36 | 100 → 90 |
| Students | $20 → $24 | 60 → 40 |
At $30, students buy 10 haircuts a week.
(a) Explain why Fenwick is able to price discriminate between adults and students. (b) Use the midpoint method to calculate each group’s price elasticity of demand. State which group should pay more. (c) Compare Fenwick’s weekly revenue minus variable cost when everyone pays $30 with charging adults $36 and students $20. (d) Explain whether price discrimination lets Fenwick keep an economic profit in the long run.
Worked solution and suggested Marlbridge rubric
(a) Fenwick has some market power (its style is differentiated), can tell the groups apart (student cards), and a haircut cannot be resold.
(b) Adults: %ΔQ = 10 ÷ 95; %ΔP = 6 ÷ 33. Elasticity = 0.58 (inelastic). Students: %ΔQ = 20 ÷ 50 = 40%; %ΔP = 4 ÷ 22. Elasticity = 2.2 (elastic). Adults have less elastic demand, so they should pay more.
(c) At $30: 100 + 10 = 110 haircuts; (30 − 12) × 110 = $1,980. With two prices: (36 − 12) × 90 + (20 − 12) × 60 = 2,160 + 480 = $2,640, which is $660 more.
(d) No. Barriers to entry are low, so any extra profit attracts new salons; Fenwick’s demand shifts left until P = ATC and economic profit is zero.
| Point | What earns it |
|---|---|
| 1 | Market power, separating groups and no resale |
| 1 | Elasticities 0.58 and 2.2 |
| 1 | Adults (less elastic) pay more |
| 1 | $1,980 against $2,640, a gain of $660 |
| 1 | Entry shifts demand left until zero economic profit |
Total: 5 points.
How did you do?
Questions 1 to 3 are worth 1 point each and Questions 4 to 7 are worth 6, 5, 7 and 5: 26 in all.
- MR below demand and P > MC (Q1, Q4, Q6): the Topic 4.1 checklist.
- Monopoly output, profit and surplus areas (Q1, Q2, Q4, Q5, Q6): the Topic 4.2 checklist.
- Price discrimination (Q2, Q4, Q7): the Topic 4.3 checklist.
- Entry, tangency and excess capacity (Q1, Q3, Q5, Q7): the Topic 4.4 checklist.
- Payoff matrices and incentives (Q6): the Topic 4.5 checklist.
Not taken the Unit 4 diagnostic yet? It shows which single topic to revisit first.