This diagnostic helps you find which Unit 6 topics to revisit. Each question 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. Quantities are in thousands, so money totals are in thousands of dollars.
Question 1 (multiple choice · 6.1)
Corvel Ferries is the only ferry operator between two fictional islands. Nobody outside the market is affected by the crossings. At the number of tickets it chooses, each ticket sells for $30, and the marginal cost of carrying one more passenger is $18. Which statement is correct?
- (A) Output is efficient, because the firm is maximizing its profit and acting rationally.
- (B) The next ticket is worth more to a buyer than it costs to provide, so output is below the efficient quantity and there is deadweight loss.
- (C) Output is too high, because the price is above marginal cost.
- (D) The deadweight loss equals $12 times the number of tickets sold.
Answer and explanation
Answer: (B). With no external effects, the price measures marginal social benefit and MC measures marginal social cost. MSB ($30) > MSC ($18), so more crossings would add surplus. The firm stops because, to sell more, it must cut its price on all tickets: MR is below P.
- (A) mixes up private and social outcomes. Choosing MR = MC is rational for the firm, but society’s rule is MSB = MSC.
- (C) gets the direction backwards. P > MC means units worth more than they cost are not made.
- (D) is a rectangle over every ticket sold, partly a transfer from buyers to the firm. Deadweight loss is only the triangle between the actual and efficient quantities.
If you missed this: read “How private incentives lead to inefficient outcomes” and “Deadweight loss” in the Topic 6.1 study guide.
Question 2 (multiple choice · 6.2)
In the fictional town of Penwick, many households heat their homes with wood stoves. The smoke harms the health of about 5,000 neighbouring households, who receive nothing for it. Which statement best explains the market outcome?
- (A) Firewood is sold in a competitive market, so the equilibrium quantity is socially optimal.
- (B) The price of firewood is too high, so too little wood is burned compared with the socially optimal quantity.
- (C) The households are acting irrationally; once told about the harm, they would cut smoke to zero, which is the efficient level.
- (D) Each household weighs only its own fuel cost and benefit, so too much wood is burned; with thousands of people affected, the cost of bargaining over the smoke is too high to fix it privately.
Answer and explanation
Answer: (D). The cost falls on third parties: a negative externality. Rational agents respond to private costs. No one owns the clean air, and bargaining among thousands of people is costly.
- (A) Competition gives efficiency only when all costs are internalized. Here they are not.
- (B) reverses the direction. The price leaves out the harm, so it is too low and too much is burned.
- (C) Ignoring a cost you do not pay is rational, not irrational. Zero smoke is also rarely optimal: the efficient quantity is where MSB = MSC.
If you missed this: read “Why markets ignore external effects” in the Topic 6.2 study guide.
Question 3 (short answer · 6.2)
Farmers in the fictional Arlo Valley grow hedgerow trees and sell the timber in a competitive market. The trees also stop soil washing off neighbouring farms. This benefit to the neighbours is worth $6 per tree, and the neighbours pay nothing for it. Q is thousand trees per year and P is dollars per tree.
Demand: P = 50 − Q (no external benefit to buyers). Supply: MPC = 10 + Q.
(a) Name the type of externality. Then find the market quantity and the socially optimal quantity. (b) Calculate the deadweight loss. (c) Find the per-unit subsidy to growers that gives the optimal quantity, the price buyers pay, the amount growers receive and the cost to the government.
Answer and explanation
(a) A positive production externality: the benefit comes from growing the trees. MSC is below MPC by $6, so MSC = 4 + Q.
- Market: 50 − Q = 10 + Q, so Qm = 20 thousand trees at $30.
- Optimum: 50 − Q = 4 + Q, so Qs = 23 thousand trees, where MSB = MSC = $27.
(b) At Qm = 20, MSB = $30 and MSC = $24. DWL = ½ × (23 − 20) × (30 − 24) = $9 thousand per year.
(c) A subsidy of $6 per tree (the external benefit) shifts supply down to 4 + Q, so Q = 23 thousand. Buyers pay $27; growers receive 27 + 6 = $33. Cost = 6 × 23 = $138 thousand per year.
A common slip is to add the $6 to MPC. That treats the effect as a cost and gives the wrong direction: the market makes too little, not too much.
If you missed this: read “Positive externalities on a graph” and “Policies that correct externalities” in the Topic 6.2 study guide.
Question 4 (multiple choice · 6.3)
The government of the fictional country of Veyra broadcasts a satellite navigation signal. Anyone with a receiver can use it free of charge, and one more user does not weaken the signal for anyone else. Receivers are sold in shops. Which statement is correct?
- (A) The signal is a private good, because receivers are bought in shops.
- (B) The signal is an open-access resource, because it is free to use.
- (C) The signal is a public good, because it is non-rival and non-excludable; private firms would have little incentive to provide it, because users could free ride.
- (D) The signal is a public good, because the government provides it.
Answer and explanation
Answer: (C). One more user takes nothing from others (non-rival), and users who do not pay cannot be kept out (non-excludable). That makes it a public good, and free riding means a private firm could not collect enough revenue.
- (A) classifies the receiver, not the signal. The receiver is a private good; the signal is not.
- (B) confuses “free” with the type of good. An open-access resource is rival, so it gets overused; this signal is non-rival.
- (D) gives the right label for the wrong reason. The type depends on rivalry and excludability, not on who provides it.
If you missed this: read “Two questions about any good” and “Public goods and the free rider problem” in the Topic 6.3 study guide.
Question 5 (multiple choice · 6.4)
Halden Glass (fictional) is a monopoly with no external effects. Demand is P = 100 − Q, and MC is constant at $20 (Q in thousand units). The government gives the firm a per-unit subsidy of $8. Which is correct?
- (A) Output rises from 40 to 44 thousand, the price falls by $4, and deadweight loss falls.
- (B) Output stays at 40 thousand and the price stays at $60; only profit rises.
- (C) Output rises from 40 to 44 thousand and the price falls by the full $8.
- (D) Output rises from 40 to 44 thousand, and deadweight loss rises, because a subsidy always creates deadweight loss.
Answer and explanation
Answer: (A). MR = 100 − 2Q. Before: 100 − 2Q = 20 gives Q = 40 and P = $60. The subsidy lowers MC to $12: 100 − 2Q = 12 gives Q = 44 and P = $56. The efficient quantity (P = true MC of $20) is 80 thousand. Deadweight loss falls from ½ × 40 × 40 = $800 thousand to ½ × 36 × 36 = $648 thousand.
- (B) treats a per-unit subsidy as a lump-sum one. Only a lump-sum payment leaves MC unchanged.
- (C) With straight-line demand and constant MC, a monopoly passes on only half of a change in MC.
- (D) is true in a competitive market that starts at the efficient quantity. A monopoly starts below it, so a moderate subsidy moves it closer.
If you missed this: read “Per-unit taxes and subsidies” in the Topic 6.4 study guide.
Question 6 (short answer · 6.4)
Bottled iced tea in the fictional Marsh County is sold in a perfectly competitive market with no externalities. Q is thousand bottles per week and P is dollars per bottle.
Demand: P = 80 − 2Q. Supply: P = 20 + Q.
(a) Find the equilibrium quantity and price. (b) The county puts a $6 per-unit tax on sellers. Find the new quantity, the price buyers pay, the price sellers keep and the tax revenue. (c) Calculate the deadweight loss of the tax. (d) Which side bears more of the tax? Explain using elasticity.
Answer and explanation
(a) 80 − 2Q = 20 + Q, so Q = 20 thousand at P = $40.
(b) Supply becomes P = 26 + Q. Then 80 − 2Q = 26 + Q gives Q = 18 thousand. Buyers pay 80 − 36 = $44; sellers keep 44 − 6 = $38. Revenue = 6 × 18 = $108 thousand per week.
(c) DWL = ½ × (20 − 18) × 6 = $6 thousand per week. Check: consumer surplus falls from $400 to $324 thousand and producer surplus from $200 to $162 thousand; 324 + 162 + 108 + 6 = 600. ✓
(d) Buyers: their price rises by $4, while sellers’ net price falls by $2. At the starting point, demand is less elastic than supply (about 1 against 2), and the less elastic side bears more of a tax.
If you missed this: read “Per-unit taxes and subsidies” in the Topic 6.4 study guide, and tax incidence in the Topic 2.8 study guide.
Question 7 (short answer · 6.5)
The table shows points on the Lorenz curve of Dellmoor, a fictional country, before and after taxes and transfers.
| Poorest share of households | 20% | 40% | 60% | 80% | 100% |
|---|---|---|---|---|---|
| Before taxes and transfers: cumulative share of income | 4% | 12% | 26% | 50% | 100% |
| After taxes and transfers: cumulative share of income | 7% | 18% | 34% | 58% | 100% |
(a) What share of income do the richest 20% receive before and after? (b) Describe how the Lorenz curve moves, and say what happens to the Gini coefficient. (c) A minister says: “The poorest 20% now have 75% more income in dollars.” Can the table support this? Explain.
Answer and explanation
(a) Before: 100 − 50 = 50%. After: 100 − 58 = 42%.
(b) Every cumulative share is higher after, so the curve moves closer to the line of equality. The Gini coefficient falls: income is shared more equally after taxes and transfers.
(c) No. The poorest 20% go from 4% to 7% of income, so their share rises by 75%. A Lorenz curve shows shares, not amounts. Their dollar income depends on total income after taxes and transfers, which the table does not give.
A common slip in (a) is to read 50% or 58% as the richest group’s share. Those are the shares of the poorest 80%.
If you missed this: read “The Lorenz curve”, “The Gini coefficient” and Worked example 1 in the Topic 6.5 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 |
|---|---|---|
| 6.1 Socially Efficient and Inefficient Market Outcomes | 1 | Efficient and inefficient outcomes |
| 6.2 Externalities | 2, 3 | Externalities |
| 6.3 Public and Private Goods | 4 | Public and private goods |
| 6.4 The Effects of Government Intervention in Different Market Structures | 5, 6 | Government intervention |
| 6.5 Inequality | 7 | Inequality |
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, 3, 5 and 6 all use deadweight loss: if you missed two or more, revise Topic 6.1 before Topics 6.2 and 6.4. Questions 2 and 4 both turn on costs or benefits nobody pays for: revise external effects and free riding together.
- All correct? Go on to the mixed unit review, whose longer questions combine topics.