I know it is just a test, but as a teacher myself I have to say that I absolutely hate this approach to testing. It might make some sense to use this method, such as inspiring students to get stronger or letting them know their own weaknesses. But I feel like this method may make or break the students. It is alright for our MC because he is strong (and he is not really a kid inside). But for weaker kids, instead of inspiring them I am afraid the test is going to traumatize them. The goal of the school is to learn. Sure, the kids should at least have some basic skills before applying (like before you go to primary school you should at least know your alphabet), but they ultimately come to school to learn more, so they are likely not going to be super skilled or something.
Perhaps I am just too soft. I do like skilled kids, as they sometimes make teaching easier (only sometimes because some skilled kids thinks they are too good to listen), but I absolutely love determined kids regardless of their level. It makes teaching worthwhile.
Well, I guess this is one way to make sure that your elite school will only have elite kids coming in.
TL; DR version: Insulting kids for testing is never a good testing method.