Free practice final
Microeconomics practice final (free, with answers)
A typical intro microeconomics final asks you to use supply and demand, elasticity, consumer and producer surplus, cost curves and the main market structures, often with short calculations from equations or tables. Try each question on your own before you open the answer, then read the explanation to see why it is right.
Topics
- Supply and Demand
- Elasticity
- Consumer and Producer Surplus
- Taxes and Price Controls
- Production and Costs
- Perfect Competition
- Monopoly
- Game Theory and Oligopoly
- Externalities
15 questions
Try each one before you open its answer.
1. Coffee and cream are complements. If the price of coffee rises sharply, what happens in the market for cream, all else equal?
- A The demand curve for cream shifts left, so the equilibrium price and quantity of cream both fall
- B The quantity of cream demanded falls, but the demand curve for cream does not move
- C The supply curve of cream shifts left, so its price rises and its quantity falls
- D The demand curve for cream shifts right, so its price and quantity both rise
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Answer: A. The demand curve for cream shifts left, so the equilibrium price and quantity of cream both fall
A higher coffee price means people buy less coffee, so they want less cream at every cream price: the demand for cream shifts left. With supply unchanged, cream's price and quantity both fall. Only a change in cream's own price would cause a movement along its demand curve.
2. In a market, quantity demanded is Qd = 120 − 4P and quantity supplied is Qs = 2P − 30, where P is the price in dollars. Find the equilibrium price and quantity.
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Answer: P = $25 and Q = 20 units
Set Qd = Qs: 120 − 4P = 2P − 30, so 150 = 6P and P = 25. Then Qd = 120 − 100 = 20 and Qs = 50 − 30 = 20, which confirms the quantity.
3. When a theater raises its ticket price from $8 to $12, the number of tickets it sells per night falls from 110 to 90. Using the midpoint method, what is the absolute value of the price elasticity of demand, and what happens to total revenue?
- A About 0.36, and total revenue rises
- B 2.0, and total revenue falls
- C 0.5, and total revenue rises
- D 0.5, and total revenue falls
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Answer: C. 0.5, and total revenue rises
With the midpoint method, quantity changes by 20 ÷ 100 = 20% and price by 4 ÷ 10 = 40%, so the absolute elasticity is 20% ÷ 40% = 0.5. Demand is inelastic, so the price increase raises revenue from $8 × 110 = $880 to $12 × 90 = $1,080.
4. When average household income rises by 10%, the quantity of instant noodles bought falls by 4%, with prices unchanged. What is the income elasticity of demand, and what kind of good are instant noodles for these households?
- A 0.4; a normal good
- B 2.5; a luxury good
- C −2.5; an inferior good
- D −0.4; an inferior good
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Answer: D. −0.4; an inferior good
Income elasticity is the percent change in quantity divided by the percent change in income: −4% ÷ 10% = −0.4. A negative income elasticity means people buy less of the good as their income rises, which is what makes it an inferior good.
5. Demand is P = 60 − 2Q and supply is P = 12 + Q, with P in dollars. How large is consumer surplus at the market equilibrium?
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Answer: $256
Setting 60 − 2Q = 12 + Q gives Q = 16 and P = $28. Consumer surplus is the triangle between the demand curve and the price: ½ × 16 × (60 − 28) = $256.
6. Demand is P = 60 − 2Q and supply is P = 12 + Q, with P in dollars. The government puts a $6 per-unit tax on sellers. What is the deadweight loss of the tax?
- A $12
- B $6
- C $84
- D $90
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Answer: B. $6
The tax shifts supply up to P = 18 + Q, so 60 − 2Q = 18 + Q gives Q = 14, down from 16 without the tax. The deadweight loss is the triangle ½ × $6 × (16 − 14) = $6. The $84 is tax revenue ($6 × 14), which is a transfer to the government rather than a loss.
7. A city caps monthly rent at $1,200 for apartments whose market-clearing rent is $1,600. Compared with the free market, what is the most likely result?
- A A surplus of apartments, because landlords want to rent out more units at the lower price
- B No change, because a price ceiling set below the equilibrium price is not binding
- C A shortage, because quantity demanded rises and quantity supplied falls at the capped rent
- D More apartments rented than before, because more renters can afford them
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Answer: C. A shortage, because quantity demanded rises and quantity supplied falls at the capped rent
A price ceiling below the equilibrium price is binding. At the capped rent more people want apartments and landlords offer fewer, so quantity demanded exceeds quantity supplied, and the number actually rented falls to the smaller quantity supplied.
8. A firm's total cost at outputs of 0, 1, 2, 3, 4 and 5 units is $100, $130, $150, $180, $220 and $280. At what output is average total cost lowest, and what is it there?
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Answer: 4 units, where ATC = $55
ATC = TC ÷ Q, which gives $130, $75, $60, $55 and $56 for 1 through 5 units, so the minimum is $55 at 4 units. The marginal cost of the 5th unit is $60, above $55, which is why ATC starts rising after 4 units.
9. Why does the marginal cost curve cross the average total cost curve at the lowest point of ATC?
- A Because fixed cost equals zero at that output level
- B Because when marginal cost is below average total cost it pulls the average down, and when it is above it pulls the average up
- C Because a firm always maximizes profit at the output where ATC is lowest
- D Because marginal cost equals average variable cost at every output level
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Answer: B. Because when marginal cost is below average total cost it pulls the average down, and when it is above it pulls the average up
An average falls when the next unit costs less than the current average and rises when it costs more. So ATC is falling while MC is below it and rising once MC is above it, which puts the crossing at the bottom of ATC.
10. A perfectly competitive firm faces a market price of $10. At the output where price equals marginal cost, its average total cost is $12 and its average variable cost is $8. What should the firm do in the short run?
- A Shut down, because it is earning an economic loss
- B Raise its price to $12 so that it covers average total cost
- C Cut output until average total cost falls to $10
- D Keep producing, because price covers average variable cost, so its loss is smaller than its fixed cost
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Answer: D. Keep producing, because price covers average variable cost, so its loss is smaller than its fixed cost
Producing loses $2 per unit, while shutting down would lose the whole fixed cost, which is $4 per unit at that output (ATC − AVC). Because price is above AVC, producing loses less than shutting down. A competitive firm is a price taker, so it cannot simply raise its price.
11. In a perfectly competitive, constant-cost industry, every firm has the same cost curves, with minimum average total cost of $15 reached at 50 units of output. Market demand is Qd = 9,000 − 200P. In long-run equilibrium, how many firms are in the industry?
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Answer: 120 firms
Entry and exit push the long-run price to minimum ATC, so P = $15. Market quantity is 9,000 − 200 × 15 = 6,000 units, and with each firm producing 50 units there are 6,000 ÷ 50 = 120 firms.
12. A monopolist faces demand P = 100 − 2Q and has a constant marginal cost of $20. What quantity and price maximize its profit?
- A Q = 20 and P = $60
- B Q = 40 and P = $20
- C Q = 20 and P = $20
- D Q = 30 and P = $40
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Answer: A. Q = 20 and P = $60
With linear demand P = 100 − 2Q, marginal revenue is MR = 100 − 4Q. Setting MR = MC gives 100 − 4Q = 20, so Q = 20, and the monopolist charges the highest price buyers will pay for 20 units: P = 100 − 40 = $60.
13. A monopolist that had been charging a single price finds a way to charge each customer exactly that customer's maximum willingness to pay (perfect price discrimination). Compared with the single-price outcome, what happens?
- A Output falls and deadweight loss gets larger
- B Output stays the same, but consumer surplus rises
- C Output rises to the efficient level, where the last unit's price equals marginal cost; deadweight loss disappears and consumer surplus falls to zero
- D Output rises, and consumer surplus and producer surplus both increase
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Answer: C. Output rises to the efficient level, where the last unit's price equals marginal cost; deadweight loss disappears and consumer surplus falls to zero
Selling one more unit no longer means cutting the price for everyone else, so the monopolist sells to every buyer willing to pay at least marginal cost, which is the efficient quantity. It captures all of that surplus as profit, so there is no deadweight loss and no consumer surplus.
14. Two rival firms each choose a High or a Low price. Their profits in millions of dollars, listed as (Firm A, Firm B), are: both High (10, 10); A High and B Low (2, 14); A Low and B High (14, 2); both Low (5, 5). What is the Nash equilibrium?
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Answer: Both firms choose Low, earning $5 million each.
Low is a dominant strategy for each firm: against a rival choosing High it earns 14 instead of 10, and against Low it earns 5 instead of 2. So both choose Low even though both would earn more at (High, High), the classic prisoners' dilemma.
15. A factory's pollution imposes a constant $10 external cost on its neighbors for each unit it produces. Demand is P = 100 − Q and private supply (marginal private cost) is P = 20 + Q, with P in dollars. What is the socially efficient quantity, and what policy would bring the market to it?
- A 35 units, reached with a $10 per-unit tax on the good
- B 40 units, the market outcome, so no policy is needed
- C 45 units, reached with a $10 per-unit subsidy
- D 35 units, reached with a $5 per-unit tax on the good
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Answer: A. 35 units, reached with a $10 per-unit tax on the good
Marginal social cost is the private cost plus the external cost, P = 30 + Q, and setting 100 − Q = 30 + Q gives Q = 35, below the market outcome of 40. A per-unit tax equal to the $10 external cost makes producers face the full social cost, so the market then produces 35.