This diagnostic helps you find which Unit 5 topics to revisit. Each of its eight 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, places and data are fictional. Every employer pays the same wage to all the workers it hires.
Question 1 (multiple choice · 5.1)
Which statement about factor markets is correct?
- (A) Firms sell labour services to households, and households pay firms wages.
- (B) The quantity of labour demanded rises as the wage rises, because better-paid workers are more productive.
- (C) A firm’s demand for workers depends on how productive they are, but not on the price of the output they make.
- (D) Households sell the services of labour, capital and land, and the payment for the use of capital is interest.
Answer and explanation
Answer: (D). Households sell factor services and firms buy them. Labour earns wages, capital interest and land rent.
- (A) uses product-market roles. In a factor market the roles are reversed.
- (B) gets the slope wrong. Quantity demanded falls as the wage rises, because MRP falls as more workers are hired.
- (C) forgets derived demand. The output price turns each worker’s extra output into revenue, so it matters as much as productivity.
If you missed this: read “Two kinds of market”, “Factors and their prices” and “Derived demand” in the Topic 5.1 study guide.
Question 2 (short answer · 5.1)
Windle Pottery hires potters at a market wage. Its daily data are:
| Potters | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Mugs per day | 0 | 25 | 45 | 60 | 70 | 75 |
| Total revenue ($) | 0 | 150 | 270 | 360 | 420 | 450 |
| Total cost ($) | 210 | 285 | 360 | 435 | 510 | 585 |
(a) Calculate the marginal revenue product (MRP) of each potter. (b) Calculate the marginal resource cost (MRC) of each potter. What wage does Windle pay, and why does the $210 not affect MRC? (c) Use the data to show that Windle sells its mugs in a perfectly competitive market.
Answer and explanation
(a) MRP = change in total revenue: $150, $120, $90, $60, $30.
(b) MRC = change in total cost: $75 for every potter, so the wage is $75 a day. The $210 is a fixed cost: it is paid with zero potters and does not change when one more is hired.
(c) Price = TR ÷ Q = $6 at every output (150 ÷ 25, 270 ÷ 45, …), and MR = ΔTR ÷ ΔQ = $6 too (150 ÷ 25, 120 ÷ 20, …). MR = P, so Windle is a price taker and MRP = MP × P (3rd potter: 15 × $6 = $90).
A common slip in (b) is 435 ÷ 3 = $145, an average that includes the fixed cost.
If you missed this: read “Marginal revenue product”, “Marginal resource cost” and Worked example 1 in the Topic 5.1 study guide.
Question 3 (multiple choice · 5.2)
In the fictional country of Kelmar, the world price of tea rises sharply. At the same time, new factory jobs open in Kelmar’s cities, and many tea pickers could do them. Other things constant, what happens in Kelmar’s market for tea pickers?
- (A) The wage rises and employment rises.
- (B) The wage rises; the change in employment is indeterminate.
- (C) Employment rises; the change in the wage is indeterminate.
- (D) The wage falls; the change in employment is indeterminate.
Answer and explanation
Answer: (B). A higher tea price raises each picker’s MRP (MP × P), so labour demand increases. The factory jobs are a better alternative option, so labour supply decreases. Both shifts push the wage up. Demand pushes employment up and supply pushes it down, so without the sizes of the shifts, employment is indeterminate.
- (A) treats only the demand shift.
- (C) is the pattern when both demand and supply increase.
- (D) gets the supply shift backwards: better alternatives draw workers away.
If you missed this: read “What shifts labour demand”, “What shifts labour supply” and “Two shifts at once” in the Topic 5.2 study guide.
Question 4 (multiple choice · 5.2)
Which event would shift the supply curve of nurses in the fictional region of Orrack to the left?
- (A) Hospitals raise the wage they pay nurses.
- (B) People in Orrack buy less private health care, so hospitals earn less per patient.
- (C) A large group of nurses reaches retirement age, and few young people are entering the job.
- (D) A new law makes night shifts shorter and safer.
Answer and explanation
Answer: (C). A change in the age distribution leaves fewer people able and willing to work as nurses at every wage, so supply decreases.
- (A) is a change in the wage itself: a movement along the supply curve.
- (B) lowers nurses’ MRP, so it shifts demand left, not supply.
- (D) improves working conditions, which shifts supply to the right.
If you missed this: read “Movements and shifts” and “What shifts labour supply” in the Topic 5.2 study guide.
Question 5 (multiple choice · 5.3)
Ravelle Ice Cream is the only ice-cream maker on an island, so it must lower its price to sell more tubs. It hires workers from a large, perfectly competitive labour market at $60 a day.
| Workers | 0 | 1 | 2 | 3 | 4 |
|---|---|---|---|---|---|
| Tubs per day | 0 | 12 | 20 | 24 | 26 |
| Price per tub ($) | 30 | 24 | 20 | 18 | 17 |
How many workers maximise Ravelle’s profit?
- (A) 1
- (B) 2
- (C) 3
- (D) 4
Answer and explanation
Answer: (B). Total revenue is $288, $400, $432 and $442, so MRP = ΔTR = $288, $112, $32, $10. As a wage taker, Ravelle has MRC = $60. The 2nd worker’s MRP is above $60; the 3rd’s is below.
- (A) stops too early: the 2nd worker still adds $52 to profit.
- (C) uses the value of the marginal product. The 3rd worker’s VMP is 4 × $18 = $72, but selling 4 more tubs means cutting the price by $2 on the first 20, a loss of $40. MRP is only $32.
- (D) maximises total revenue, not profit: the 4th worker adds $10 but costs $60.
If you missed this: read “MRP and VMP: when the output market matters” and Worked example 2 in the Topic 5.3 study guide.
Question 6 (multiple choice · 5.3)
A firm hires workers at $20 a day and rents machines at $50 a day, both in perfectly competitive markets. It sells its output in a perfectly competitive market and is using its profit-maximising combination of inputs. The last worker hired has a marginal product of 8 units. What are the marginal product of the last machine and the price of the output?
- (A) 20 units; $2.50
- (B) 3.2 units; $2.50
- (C) 20 units; $160
- (D) 8 units; $2.50
Answer and explanation
Answer: (A). At the profit-maximising combination the least-cost rule also holds: MP_L ÷ W = MP_K ÷ r, so 8 ÷ 20 = MP_K ÷ 50 and MP_K = 20 units. The profit-maximising rule gives MRP_L = W, so 8 × P = $20 and P = $2.50. Check: MRP_K = 20 × $2.50 = $50 = r.
- (B) turns one ratio upside down (8 × 20 ÷ 50 = 3.2).
- (C) multiplies the wage by MP instead of dividing.
- (D) sets the marginal products equal, ignoring that the inputs have different prices.
If you missed this: read “Using more than one input” and Worked example 3 in the Topic 5.3 study guide.
Question 7 (multiple choice · 5.4)
Which labour market is a monopsony, and how does the employer’s marginal resource cost (MRC) compare with the wage?
- (A) A city with hundreds of cafés hiring baristas at the going wage; MRC equals the wage.
- (B) A town with one electricity company that sells to every household; MRC is above the wage.
- (C) A remote mining town where one company employs almost every worker and moving away is costly; MRC equals the wage.
- (D) A remote mining town where one company employs almost every worker and moving away is costly; MRC is above the wage.
Answer and explanation
Answer: (D). A monopsony is a single (or dominant) buyer of labour whose workers have few alternatives. To hire one more worker it must raise everyone’s wage, so MRC is above the wage.
- (A) is a perfectly competitive labour market, not a monopsony.
- (B) describes a single seller: a monopoly in an output market.
- (C) names the right market but gives the wage taker’s MRC.
If you missed this: read “What a monopsony is” and “Why MRC is above the wage” in the Topic 5.4 study guide.
Question 8 (short answer · 5.4)
Ardlow Cannery is the only employer on a small island. The table shows the wage needed to attract each number of workers, and MRP (dollars per shift).
| Workers | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Wage needed ($) | 40 | 48 | 56 | 64 | 72 | 80 |
| MRP ($) | 140 | 128 | 116 | 104 | 92 | 80 |
(a) Show that the MRC of the 4th worker is $88, using the wage plus the raises given to existing workers. (b) How many workers does Ardlow hire, and what wage does it pay? (c) The 5th worker would accept $72 and has an MRP of $92. Explain why Ardlow does not hire them. (d) State the employment and wage a competitive labour market would reach.
Answer and explanation
(a) The 4th worker is paid $64, and the 3 existing workers each get a raise from $56 to $64: 64 + 3 × 8 = $88. Check with total labour cost: 4 × 64 − 3 × 56 = 256 − 168 = $88.
(b) MRC for workers 1 to 6 is $40, $56, $72, $88, $104 and $120. MRP is above MRC up to the 4th worker ($104 > $88) and below it for the 5th ($92 < $104). Ardlow hires 4 workers and pays the supply wage for 4: $64 per shift. The last worker’s MRP is $40 above the wage.
(c) Hiring the 5th worker means raising all four existing workers by $8 as well. MRC = 72 + 4 × 8 = $104, which is more than the MRP of $92, so profit would fall by $12 per shift.
(d) Where the wage equals MRP: 6 workers at $80 per shift. The monopsony hires fewer workers and pays a lower wage.
A common slip in (b) is giving $88 as the wage. The wage comes from the supply schedule.
If you missed this: read “The hiring rule: MRC = MRP, then read the wage from supply” and Worked example 1 in the Topic 5.4 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 |
|---|---|---|
| 5.1 Introduction to Factor Markets | 1, 2 | Introduction to factor markets |
| 5.2 Changes in Factor Demand and Factor Supply | 3, 4 | Changes in factor demand and supply |
| 5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets | 5, 6 | Perfectly competitive factor markets |
| 5.4 Monopsonistic Markets | 7, 8 | Monopsonistic markets |
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 2, 5 and 8 all need a change in revenue or cost, never a level or an average: if you missed two, revise Topic 5.1 before Topics 5.3 and 5.4. Questions 3 and 4 start with one decision: wage change, demand shift or supply shift?
- All correct? Go on to the mixed unit review, whose longer questions combine topics.
- Retake it after a week of revision.