ECON 528 Midterm Questions & Answers | 100%
Correct Solution | Advanced Economics Study
Guide
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══════════════════ Question 1: If the price elasticity of demand for good X is -2.5, a 10%
decrease in price will lead to: A) A 25% decrease in quantity demanded B) A 25% increase in quantity
demanded C) A 2.5% increase in quantity demanded D) A 4% increase in quantity demanded Correct
Answer: B) A 25% increase in quantity demanded Explanation: Price elasticity of demand = % change
in quantity demanded / % change in price. With elasticity of -2.5 and 10% price decrease: -2.5 = %ΔQ /
(-10%), so %ΔQ = 25% increase. The negative sign shows inverse relationship, but magnitude gives us
the 25% increase.
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────────────────── Question 2: A consumer spends all their income on goods X and Y. The
marginal utility of X is 20 and the price of X is $4. The marginal utility of Y is 30 and the price of Y is
$6. To maximize utility, the consumer should: A) Buy more X and less Y B) Buy more Y and less X C)
Maintain current consumption levels D) Stop consuming both goods Correct Answer: C) Maintain
current consumption levels Explanation: At optimal consumption, MUx/Px = MUy/Py. Here, 20/4 = 5
and 30/6 = 5, so the ratios are equal. The consumer is already maximizing utility and should maintain
current consumption levels.
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────────────────── Question 3: The cross-price elasticity of demand between goods A and
B is 1.5. This indicates that: A) A and B are complements B) A and B are substitutes C) A and B are
unrelated D) A and B are inferior goods Correct Answer: B) A and B are substitutes Explanation:
Positive cross-price elasticity indicates that as the price of one good increases, demand for the other
good increases. This is the definition of substitute goods. Complements would have negative
cross-price elasticity.
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────────────────── Question 4: In managerial economics, the difference between
accounting profit and economic profit is that economic profit: A) Includes only explicit costs B)
Excludes all costs C) Includes both explicit and implicit costs D) Is always higher than accounting
profit Correct Answer: C) Includes both explicit and implicit costs Explanation: Economic profit
considers both explicit costs (actual payments) and implicit costs (opportunity costs of resources
owned by the firm), while accounting profit only includes explicit costs. This makes economic profit a
more comprehensive measure of profitability.
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────────────────── Question 5: A firm's demand function is Q = 100 - 2P + 0.5I, where Q is
quantity, P is price, and I is income. If price increases by $1 and income increases by $10, the change
in quantity demanded will be: A) -2 units B) +3 units C) -1.5 units D) +2.5 units Correct Answer: B) +3
units Explanation: ΔQ = -2(ΔP) + 0.5(ΔI) = -2(1) + 0.5(10) = -2 + 5 = +3 units. The price increase
, reduces demand by 2 units, but the income increase raises demand by 5 units, resulting in a net
increase of 3 units.
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────────────────── Question 6: The income elasticity of demand for luxury goods is
typically: A) Negative B) Between 0 and 1 C) Greater than 1 D) Equal to zero Correct Answer: C)
Greater than 1 Explanation: Luxury goods have income elasticity > 1, meaning demand increases
proportionally more than income increases. As consumers become wealthier, they spend a larger
percentage of their income on luxury items like expensive cars, jewelry, and designer clothing.
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────────────────── Question 7: A manager estimates that the advertising elasticity of
demand for their product is 0.3. If they increase advertising expenditure by 20%, the expected
increase in quantity demanded is: A) 6% B) 15% C) 60% D) 0.6% Correct Answer: A) 6% Explanation:
Advertising elasticity = % change in quantity / % change in advertising. So % change in quantity = 0.3
× 20% = 6%. This means for every 1% increase in advertising, demand increases by 0.3%.
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────────────────── Question 8: When a firm practices price discrimination, it charges
different prices to different customers based on: A) Production costs B) Consumer willingness to pay
C) Geographic location only D) Time of purchase only Correct Answer: B) Consumer willingness to
pay Explanation: Price discrimination involves charging different prices based on consumers'
different valuations of the same product (willingness to pay). This allows the firm to capture more
consumer surplus and increase profits.
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══════════════════ PRODUCTION THEORY & COST ANALYSIS (Questions 9-15)
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══════════════════ Question 9: A production function exhibits diminishing marginal returns
when: A) Total output begins to decrease B) Each additional unit of input adds less to total output
than the previous unit C) Average product begins to decrease D) Marginal product becomes negative
Correct Answer: B) Each additional unit of input adds less to total output than the previous unit
Explanation: Diminishing marginal returns occur when adding more units of a variable input to fixed
inputs results in smaller increases in total output. The marginal product is still positive but declining.
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────────────────── Question 10: In the short run, if the marginal product of labor is greater
than the average product of labor, then: A) Average product is increasing B) Average product is
decreasing C) Total product is decreasing D) Marginal cost is increasing Correct Answer: A) Average
product is increasing Explanation: When marginal product exceeds average product, the average
product curve is rising. This is because the additional output from the last worker is pulling up the
overall average, similar to how a test score above your average raises your overall grade average.
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────────────────── Question 11: A firm's total cost function is TC = 100 + 10Q + 2Q². The
marginal cost when Q = 5 is: A) $20 B) $30 C) $40 D) $50 Correct Answer: B) $30 Explanation:
Marginal cost = dTC/dQ = 10 + 4Q. At Q = 5, MC = 10 + 4(5) = 10 + 20 = $30. Marginal cost represents
the cost of producing one additional unit.
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────────────────── Question 12: Economies of scale exist when: A) Long-run average cost
Correct Solution | Advanced Economics Study
Guide
══════════════════════════════════════════════════════════════
══════════════════ Question 1: If the price elasticity of demand for good X is -2.5, a 10%
decrease in price will lead to: A) A 25% decrease in quantity demanded B) A 25% increase in quantity
demanded C) A 2.5% increase in quantity demanded D) A 4% increase in quantity demanded Correct
Answer: B) A 25% increase in quantity demanded Explanation: Price elasticity of demand = % change
in quantity demanded / % change in price. With elasticity of -2.5 and 10% price decrease: -2.5 = %ΔQ /
(-10%), so %ΔQ = 25% increase. The negative sign shows inverse relationship, but magnitude gives us
the 25% increase.
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────────────────── Question 2: A consumer spends all their income on goods X and Y. The
marginal utility of X is 20 and the price of X is $4. The marginal utility of Y is 30 and the price of Y is
$6. To maximize utility, the consumer should: A) Buy more X and less Y B) Buy more Y and less X C)
Maintain current consumption levels D) Stop consuming both goods Correct Answer: C) Maintain
current consumption levels Explanation: At optimal consumption, MUx/Px = MUy/Py. Here, 20/4 = 5
and 30/6 = 5, so the ratios are equal. The consumer is already maximizing utility and should maintain
current consumption levels.
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────────────────── Question 3: The cross-price elasticity of demand between goods A and
B is 1.5. This indicates that: A) A and B are complements B) A and B are substitutes C) A and B are
unrelated D) A and B are inferior goods Correct Answer: B) A and B are substitutes Explanation:
Positive cross-price elasticity indicates that as the price of one good increases, demand for the other
good increases. This is the definition of substitute goods. Complements would have negative
cross-price elasticity.
──────────────────────────────────────────────────────────────
────────────────── Question 4: In managerial economics, the difference between
accounting profit and economic profit is that economic profit: A) Includes only explicit costs B)
Excludes all costs C) Includes both explicit and implicit costs D) Is always higher than accounting
profit Correct Answer: C) Includes both explicit and implicit costs Explanation: Economic profit
considers both explicit costs (actual payments) and implicit costs (opportunity costs of resources
owned by the firm), while accounting profit only includes explicit costs. This makes economic profit a
more comprehensive measure of profitability.
──────────────────────────────────────────────────────────────
────────────────── Question 5: A firm's demand function is Q = 100 - 2P + 0.5I, where Q is
quantity, P is price, and I is income. If price increases by $1 and income increases by $10, the change
in quantity demanded will be: A) -2 units B) +3 units C) -1.5 units D) +2.5 units Correct Answer: B) +3
units Explanation: ΔQ = -2(ΔP) + 0.5(ΔI) = -2(1) + 0.5(10) = -2 + 5 = +3 units. The price increase
, reduces demand by 2 units, but the income increase raises demand by 5 units, resulting in a net
increase of 3 units.
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────────────────── Question 6: The income elasticity of demand for luxury goods is
typically: A) Negative B) Between 0 and 1 C) Greater than 1 D) Equal to zero Correct Answer: C)
Greater than 1 Explanation: Luxury goods have income elasticity > 1, meaning demand increases
proportionally more than income increases. As consumers become wealthier, they spend a larger
percentage of their income on luxury items like expensive cars, jewelry, and designer clothing.
──────────────────────────────────────────────────────────────
────────────────── Question 7: A manager estimates that the advertising elasticity of
demand for their product is 0.3. If they increase advertising expenditure by 20%, the expected
increase in quantity demanded is: A) 6% B) 15% C) 60% D) 0.6% Correct Answer: A) 6% Explanation:
Advertising elasticity = % change in quantity / % change in advertising. So % change in quantity = 0.3
× 20% = 6%. This means for every 1% increase in advertising, demand increases by 0.3%.
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────────────────── Question 8: When a firm practices price discrimination, it charges
different prices to different customers based on: A) Production costs B) Consumer willingness to pay
C) Geographic location only D) Time of purchase only Correct Answer: B) Consumer willingness to
pay Explanation: Price discrimination involves charging different prices based on consumers'
different valuations of the same product (willingness to pay). This allows the firm to capture more
consumer surplus and increase profits.
══════════════════════════════════════════════════════════════
══════════════════ PRODUCTION THEORY & COST ANALYSIS (Questions 9-15)
══════════════════════════════════════════════════════════════
══════════════════ Question 9: A production function exhibits diminishing marginal returns
when: A) Total output begins to decrease B) Each additional unit of input adds less to total output
than the previous unit C) Average product begins to decrease D) Marginal product becomes negative
Correct Answer: B) Each additional unit of input adds less to total output than the previous unit
Explanation: Diminishing marginal returns occur when adding more units of a variable input to fixed
inputs results in smaller increases in total output. The marginal product is still positive but declining.
──────────────────────────────────────────────────────────────
────────────────── Question 10: In the short run, if the marginal product of labor is greater
than the average product of labor, then: A) Average product is increasing B) Average product is
decreasing C) Total product is decreasing D) Marginal cost is increasing Correct Answer: A) Average
product is increasing Explanation: When marginal product exceeds average product, the average
product curve is rising. This is because the additional output from the last worker is pulling up the
overall average, similar to how a test score above your average raises your overall grade average.
──────────────────────────────────────────────────────────────
────────────────── Question 11: A firm's total cost function is TC = 100 + 10Q + 2Q². The
marginal cost when Q = 5 is: A) $20 B) $30 C) $40 D) $50 Correct Answer: B) $30 Explanation:
Marginal cost = dTC/dQ = 10 + 4Q. At Q = 5, MC = 10 + 4(5) = 10 + 20 = $30. Marginal cost represents
the cost of producing one additional unit.
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────────────────── Question 12: Economies of scale exist when: A) Long-run average cost
