MBA 522: Managerial Economics exam
with verified answers and rationale
updated 2026 graded A+
Demand, Supply, and Market Equilibrium
1. The law of demand states that, ceteris paribus:
A) As price increases, quantity demanded increases.
B) As price increases, quantity demanded decreases.
C) As price increases, demand increases.
D) As price increases, demand decreases.
Answer: B
Rationale: The law of demand describes the inverse relationship between price and quantity
demanded. Options C and D refer to shifts in the demand curve (changes in demand), not
movements along the curve (changes in quantity demanded).
2. If the price of a product increases by 10% and total revenue decreases by 5%, demand is:
A) Inelastic
B) Unit elastic
C) Elastic
D) Perfectly inelastic
Answer: C
Rationale: When demand is elastic, the percentage change in quantity demanded is greater than the
percentage change in price. Therefore, a price increase leads to a drop in total revenue.
3. A negative cross-price elasticity of demand indicates that the two goods are:
A) Substitutes
B) Complements
C) Inferior goods
D) Normal goods
Answer: B
,Rationale: Complements are goods used together. If the price of good A rises, the demand for good
B falls, resulting in a negative cross-price elasticity. Substitutes have a positive cross-price elasticity.
4. An income elasticity of demand of -0.7 indicates that the good is a(n):
A) Normal good
B) Luxury good
C) Inferior good
D) Substitute good
Answer: C
Rationale: Inferior goods have a negative income elasticity of demand. As consumer income rises,
the demand for the good falls.
5. A price ceiling set below the equilibrium price will result in:
A) A surplus
B) A shortage
C) No change in the market
D) An increase in supply
Answer: B
Rationale: A price ceiling is a maximum legal price. If set below equilibrium, the quantity demanded
exceeds the quantity supplied, creating a shortage.
6. Consumer surplus is defined as:
A) The difference between the highest price a consumer is willing to pay and the actual price paid.
B) The difference between the lowest price a producer is willing to accept and the actual price
received.
C) The total revenue minus total cost.
D) The area below the supply curve and above the market price.
Answer: A
Rationale: Consumer surplus measures the economic benefit to consumers by paying less than their
maximum willingness to pay. Option B describes producer surplus.
7. If the demand for a good is perfectly inelastic, the demand curve is:
A) Horizontal
, B) Downward sloping at a 45-degree angle
C) Vertical
D) Upward sloping
Answer: C
Rationale: Perfectly inelastic demand means quantity demanded does not change regardless of
price. Graphically, this is represented by a vertical line.
8. Which of the following will cause a movement along the supply curve for automobiles?
A) A decrease in the cost of steel
B) An increase in the price of automobiles
C) An improvement in automobile manufacturing technology
D) An increase in wages for auto workers
Answer: B
Rationale: A movement along the supply curve (change in quantity supplied) is caused only by a
change in the price of the good itself. Options A, C, and D are determinants of supply that shift the
entire curve.
9. The burden of a tax falls more heavily on the producers when:
A) Demand is elastic and supply is inelastic.
B) Demand is inelastic and supply is elastic.
C) Both demand and supply are unit elastic.
D) Demand is perfectly inelastic.
Answer: A
Rationale: The less elastic side of the market bears more of the tax burden. If supply is inelastic,
producers cannot easily reduce production when the tax is imposed, so they absorb more of the tax.
10. If the price of a good rises from $10 to $12 and quantity demanded falls from 100 to 80, the price
elasticity of demand (using the midpoint formula) is:
A) 0.5
B) 1.0
C) 2.0
D) 2.2
Answer: D
with verified answers and rationale
updated 2026 graded A+
Demand, Supply, and Market Equilibrium
1. The law of demand states that, ceteris paribus:
A) As price increases, quantity demanded increases.
B) As price increases, quantity demanded decreases.
C) As price increases, demand increases.
D) As price increases, demand decreases.
Answer: B
Rationale: The law of demand describes the inverse relationship between price and quantity
demanded. Options C and D refer to shifts in the demand curve (changes in demand), not
movements along the curve (changes in quantity demanded).
2. If the price of a product increases by 10% and total revenue decreases by 5%, demand is:
A) Inelastic
B) Unit elastic
C) Elastic
D) Perfectly inelastic
Answer: C
Rationale: When demand is elastic, the percentage change in quantity demanded is greater than the
percentage change in price. Therefore, a price increase leads to a drop in total revenue.
3. A negative cross-price elasticity of demand indicates that the two goods are:
A) Substitutes
B) Complements
C) Inferior goods
D) Normal goods
Answer: B
,Rationale: Complements are goods used together. If the price of good A rises, the demand for good
B falls, resulting in a negative cross-price elasticity. Substitutes have a positive cross-price elasticity.
4. An income elasticity of demand of -0.7 indicates that the good is a(n):
A) Normal good
B) Luxury good
C) Inferior good
D) Substitute good
Answer: C
Rationale: Inferior goods have a negative income elasticity of demand. As consumer income rises,
the demand for the good falls.
5. A price ceiling set below the equilibrium price will result in:
A) A surplus
B) A shortage
C) No change in the market
D) An increase in supply
Answer: B
Rationale: A price ceiling is a maximum legal price. If set below equilibrium, the quantity demanded
exceeds the quantity supplied, creating a shortage.
6. Consumer surplus is defined as:
A) The difference between the highest price a consumer is willing to pay and the actual price paid.
B) The difference between the lowest price a producer is willing to accept and the actual price
received.
C) The total revenue minus total cost.
D) The area below the supply curve and above the market price.
Answer: A
Rationale: Consumer surplus measures the economic benefit to consumers by paying less than their
maximum willingness to pay. Option B describes producer surplus.
7. If the demand for a good is perfectly inelastic, the demand curve is:
A) Horizontal
, B) Downward sloping at a 45-degree angle
C) Vertical
D) Upward sloping
Answer: C
Rationale: Perfectly inelastic demand means quantity demanded does not change regardless of
price. Graphically, this is represented by a vertical line.
8. Which of the following will cause a movement along the supply curve for automobiles?
A) A decrease in the cost of steel
B) An increase in the price of automobiles
C) An improvement in automobile manufacturing technology
D) An increase in wages for auto workers
Answer: B
Rationale: A movement along the supply curve (change in quantity supplied) is caused only by a
change in the price of the good itself. Options A, C, and D are determinants of supply that shift the
entire curve.
9. The burden of a tax falls more heavily on the producers when:
A) Demand is elastic and supply is inelastic.
B) Demand is inelastic and supply is elastic.
C) Both demand and supply are unit elastic.
D) Demand is perfectly inelastic.
Answer: A
Rationale: The less elastic side of the market bears more of the tax burden. If supply is inelastic,
producers cannot easily reduce production when the tax is imposed, so they absorb more of the tax.
10. If the price of a good rises from $10 to $12 and quantity demanded falls from 100 to 80, the price
elasticity of demand (using the midpoint formula) is:
A) 0.5
B) 1.0
C) 2.0
D) 2.2
Answer: D
