Question 1

Suppose the price of a good increases from $$10 to 12$$, and the quantity demanded decreases from 100 units to 80 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(80-100)}{(100+80)/2} \div \frac{(12-10)}{(10+12)/2} = \frac{-20}{90} \div \frac{2}{11} = -0.22 \div 0.18 = -1.22$$

Question 2

Which of the following goods is most likely to have an inelastic demand?

Accepted Answer

Insulin for diabetics

Question 3

If the cross-price elasticity of demand between tea and coffee is $$+0.5$$, what does this indicate about the relationship between the two goods?

Accepted Answer

They are substitutes.

Question 4

A consumer allocates their budget such that $$\frac{MU_x}{P_x} = \frac{MU_y}{P_y}. $$What does this condition represent?

Accepted Answer

Utility maximization

Question 5

Refer to the first image. What does the flattening of the total utility curve as quantity increases illustrate?

Accepted Answer

The law of diminishing marginal utility

Question 6

If a 10% increase in income leads to a 20% increase in the quantity demanded for a good, what is the income elasticity of demand, and what type of good is it?

Accepted Answer

$$\frac{20\%}{10\%} = 2$$, which means it is a luxury good.

Question 7

Which cost curve in the second image continuously declines as output increases?

Accepted Answer

Average Fixed Cost (AFC)

Question 8

A firm’s marginal cost curve intersects its average total cost curve at the minimum point of the ATC. Why does this occur?

Accepted Answer

Because when marginal cost is below average total cost, ATC falls, and when MC is above ATC, ATC rises.

Question 9

If the price elasticity of supply for a product is $$0.8$$, how would you describe the supply?

Accepted Answer

Inelastic

Question 10

A firm’s total cost is $$100$$ when producing $$10$$ units, and its fixed cost is $$40. $$What is the average variable cost?

Accepted Answer

$$\frac{100-40}{10} = 6$$

Question 11

If a consumer’s marginal utility from the last dollar spent on pizza is $$8$$ and on soda is $$4$$, and the price of pizza is $$2$$ while soda is $$1$$, what should the consumer do to maximize utility?

Accepted Answer

Buy more pizza and less soda.

Question 12

Which of the following scenarios best illustrates the law of diminishing returns?

Accepted Answer

A factory hires more workers, and output increases at a decreasing rate.

Question 13

If the demand for a product is perfectly inelastic, what happens to total revenue when the price increases?

Accepted Answer

Total revenue increases.

Question 14

Suppose the price of good B increases by 10%, and the quantity demanded of good A decreases by 5%. What is the cross-price elasticity, and what does it indicate?

Accepted Answer

$$\frac{-5\%}{10\%} = -0.5$$, indicating the goods are complements.

Question 15

A firm’s marginal product of labor decreases as more workers are hired, holding capital constant. This is an example of:

Accepted Answer

Diminishing marginal returns

Question 16

If a good takes a large share of a consumer’s income, its demand is likely to be:

Accepted Answer

More elastic

Question 17

Which of the following best describes the relationship between marginal cost (MC) and average total cost (ATC) when MC is below ATC?

Accepted Answer

ATC is decreasing.

Question 18

If a firm’s total cost increases from $$200 to$$ $$250 as $$output increases from $$20 to$$ $$25$$ units, what is the marginal cost of producing the 21st to 25th units?

Accepted Answer

$$\frac{250-200}{25-20} = 10$$

Question 19

Which of the following is NOT a determinant of price elasticity of demand?

Accepted Answer

The cost of production

Question 20

If a good has an income elasticity of demand of $$-0.8$$, what type of good is it?

Accepted Answer

Inferior good

Microeconomics Study Guide: Elasticity, Utility, and Costs of Production

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