WGU D089 Principles of Economics Exam – Complete Exam-Style
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Domain 1: Microeconomic Fundamentals
Question 1
A local coffee shop notices that when they raise the price of a latte from $4.00 to $5.00,
the quantity demanded falls from 200 cups per day to 150 cups per day. Using the
midpoint formula, what is the price elasticity of demand for lattes?
A. 0.71 (inelastic)
B. 1.00 (unit elastic)
C. 1.14 (elastic)
D. 1.29 (elastic)
Correct Answer: D
Rationale: Using the midpoint formula: % change in quantity demanded = (150 − 200) /
((150 + 200)/2) = −50/175 = −28.57%. % change in price = ($5.00 − $4.00) / (($5.00 +
$4.00)/2) = $1.00/$4.50 = 22.22%. Price elasticity of demand = |−28.57% / 22.22%| =
1.29. Since the elasticity is greater than 1, demand is elastic, meaning consumers are
relatively responsive to price changes for this product.
Question 2
The market for electric vehicles is currently in equilibrium. Which of the following events
would cause a decrease in equilibrium price and an increase in equilibrium quantity?
,A. A technological breakthrough reduces battery production costs
B. The government imposes a tax on gasoline-powered cars
C. Consumer incomes fall and electric vehicles are normal goods
D. A major battery factory closes due to supply chain issues
Correct Answer: A
Rationale: A decrease in production costs shifts the supply curve to the right. With
demand unchanged, this results in a lower equilibrium price and a higher equilibrium
quantity. Option B would increase demand for EVs (shift right), raising both price and
quantity. Option C would decrease demand (shift left), lowering both price and quantity.
Option D would decrease supply (shift left), raising price and lowering quantity.
Question 3
Consider a perfectly competitive market for wheat. In the long run, if existing firms are
earning positive economic profits, what will happen to market price and the number of
firms?
A. Price will rise; number of firms will decrease
B. Price will fall; number of firms will increase
C. Price will remain unchanged; number of firms will increase
D. Price will fall; number of firms will decrease
Correct Answer: B
Rationale: In perfect competition, positive economic profits attract new firms to enter
the market. This increases market supply, shifting the supply curve rightward and
,driving down the market price. Entry continues until economic profits are eliminated and
firms earn only normal profits (zero economic profit) in long-run equilibrium.
Question 4
A monopolist faces a downward-sloping demand curve and produces where marginal
revenue equals marginal cost. Compared to a perfectly competitive market with the
same cost structure, the monopolist will:
A. Charge a lower price and produce a larger quantity
B. Charge a higher price and produce a smaller quantity
C. Charge the same price but produce less output
D. Charge a higher price but produce the same quantity
Correct Answer: B
Rationale: A monopolist maximizes profit where MR = MC. Because the monopolist
faces the entire market demand curve, marginal revenue is less than price (MR < P).
This results in a higher price and lower quantity compared to perfect competition, where
P = MC. The monopolist restricts output to raise price and capture more profit, creating
deadweight loss.
Question 5
The cross-price elasticity of demand between goods X and Y is −2.5. Which statement
is correct?
A. X and Y are substitutes; when the price of Y rises, demand for X falls
B. X and Y are complements; when the price of Y rises, demand for X falls
, C. X and Y are substitutes; when the price of Y rises, demand for X rises
D. X and Y are complements; when the price of Y rises, demand for X rises
Correct Answer: B
Rationale: A negative cross-price elasticity indicates that the goods are complements.
When the price of good Y increases, consumers buy less of Y and therefore also less of
good X (since they are used together). Substitutes have positive cross-price elasticities.
Question 6
A firm in a monopolistically competitive market sells differentiated products. In the long
run, the firm will:
A. Earn positive economic profits due to product differentiation
B. Earn zero economic profit because of free entry and exit
C. Produce at minimum average total cost like a perfectly competitive firm
D. Face a perfectly elastic demand curve
Correct Answer: B
Rationale: Monopolistic competition features free entry and exit. If firms earn short-run
economic profits, new firms enter, reducing demand for each existing firm's product
until economic profits fall to zero. In long-run equilibrium, P = ATC but P > MC, and firms
do not produce at minimum ATC (excess capacity exists). The demand curve is
downward-sloping, not perfectly elastic.
Question 7
The law of diminishing marginal returns states that:
Questions with Detailed Rationales | 100% Verified – Pass
Guaranteed – A+ Graded
Domain 1: Microeconomic Fundamentals
Question 1
A local coffee shop notices that when they raise the price of a latte from $4.00 to $5.00,
the quantity demanded falls from 200 cups per day to 150 cups per day. Using the
midpoint formula, what is the price elasticity of demand for lattes?
A. 0.71 (inelastic)
B. 1.00 (unit elastic)
C. 1.14 (elastic)
D. 1.29 (elastic)
Correct Answer: D
Rationale: Using the midpoint formula: % change in quantity demanded = (150 − 200) /
((150 + 200)/2) = −50/175 = −28.57%. % change in price = ($5.00 − $4.00) / (($5.00 +
$4.00)/2) = $1.00/$4.50 = 22.22%. Price elasticity of demand = |−28.57% / 22.22%| =
1.29. Since the elasticity is greater than 1, demand is elastic, meaning consumers are
relatively responsive to price changes for this product.
Question 2
The market for electric vehicles is currently in equilibrium. Which of the following events
would cause a decrease in equilibrium price and an increase in equilibrium quantity?
,A. A technological breakthrough reduces battery production costs
B. The government imposes a tax on gasoline-powered cars
C. Consumer incomes fall and electric vehicles are normal goods
D. A major battery factory closes due to supply chain issues
Correct Answer: A
Rationale: A decrease in production costs shifts the supply curve to the right. With
demand unchanged, this results in a lower equilibrium price and a higher equilibrium
quantity. Option B would increase demand for EVs (shift right), raising both price and
quantity. Option C would decrease demand (shift left), lowering both price and quantity.
Option D would decrease supply (shift left), raising price and lowering quantity.
Question 3
Consider a perfectly competitive market for wheat. In the long run, if existing firms are
earning positive economic profits, what will happen to market price and the number of
firms?
A. Price will rise; number of firms will decrease
B. Price will fall; number of firms will increase
C. Price will remain unchanged; number of firms will increase
D. Price will fall; number of firms will decrease
Correct Answer: B
Rationale: In perfect competition, positive economic profits attract new firms to enter
the market. This increases market supply, shifting the supply curve rightward and
,driving down the market price. Entry continues until economic profits are eliminated and
firms earn only normal profits (zero economic profit) in long-run equilibrium.
Question 4
A monopolist faces a downward-sloping demand curve and produces where marginal
revenue equals marginal cost. Compared to a perfectly competitive market with the
same cost structure, the monopolist will:
A. Charge a lower price and produce a larger quantity
B. Charge a higher price and produce a smaller quantity
C. Charge the same price but produce less output
D. Charge a higher price but produce the same quantity
Correct Answer: B
Rationale: A monopolist maximizes profit where MR = MC. Because the monopolist
faces the entire market demand curve, marginal revenue is less than price (MR < P).
This results in a higher price and lower quantity compared to perfect competition, where
P = MC. The monopolist restricts output to raise price and capture more profit, creating
deadweight loss.
Question 5
The cross-price elasticity of demand between goods X and Y is −2.5. Which statement
is correct?
A. X and Y are substitutes; when the price of Y rises, demand for X falls
B. X and Y are complements; when the price of Y rises, demand for X falls
, C. X and Y are substitutes; when the price of Y rises, demand for X rises
D. X and Y are complements; when the price of Y rises, demand for X rises
Correct Answer: B
Rationale: A negative cross-price elasticity indicates that the goods are complements.
When the price of good Y increases, consumers buy less of Y and therefore also less of
good X (since they are used together). Substitutes have positive cross-price elasticities.
Question 6
A firm in a monopolistically competitive market sells differentiated products. In the long
run, the firm will:
A. Earn positive economic profits due to product differentiation
B. Earn zero economic profit because of free entry and exit
C. Produce at minimum average total cost like a perfectly competitive firm
D. Face a perfectly elastic demand curve
Correct Answer: B
Rationale: Monopolistic competition features free entry and exit. If firms earn short-run
economic profits, new firms enter, reducing demand for each existing firm's product
until economic profits fall to zero. In long-run equilibrium, P = ATC but P > MC, and firms
do not produce at minimum ATC (excess capacity exists). The demand curve is
downward-sloping, not perfectly elastic.
Question 7
The law of diminishing marginal returns states that:
