ECON 528 MIDTERM EXAM | QUESTIONS
1-100 AND ANSWERS | 2026/2027
UPDATED | DETAILED RATIONALES
INTRODUCTION
ECON 528 is an advanced economics course in which success typically requires more
than memorizing definitions or formulas. A strong midterm preparation strategy
requires students to interpret economic models, identify relevant assumptions,
perform quantitative reasoning, and apply theoretical concepts to realistic policy and
market scenarios. This practice bank is designed for students preparing for an ECON
528 midterm and emphasizes higher-order reasoning rather than simple recall. The
questions integrate microeconomic analysis, macroeconomic reasoning, market
structure, welfare analysis, strategic behavior, information economics, labor
economics, and quantitative interpretation. Each question contains four alternatives
with one best answer, followed by a rationale explaining the underlying economic
logic and why the alternatives are less appropriate. Students should attempt each
question independently before reviewing the answer and rationale. Particular attention
should be paid to the assumptions behind each model, because changing an
assumption can change the correct conclusion. The bank is intended as a rigorous
study resource for identifying conceptual weaknesses, practicing application, and
developing the analytical habits needed for a demanding economics examination.
CORE DOMAINS TESTED
1.
Consumer and Producer Theory — Utility maximization, cost minimization,
marginal analysis, and optimization.
2.
3.
Elasticity and Market Equilibrium — Demand, supply, incidence,
responsiveness, and comparative statics.
4.
5.
Market Structure — Perfect competition, monopoly, monopolistic
competition, and oligopoly.
6.
7.
1
,Game Theory — Strategic interaction, Nash equilibrium, dominant strategies,
and repeated games.
8.
9.
Welfare Economics — Consumer surplus, producer surplus, efficiency,
taxation, and deadweight loss.
10.
11.
Externalities and Public Economics — Corrective taxation, subsidies, public
goods, and common resources.
12.
13.
Information Economics — Moral hazard, adverse selection, signaling, and
screening.
14.
15.
Labor and Human Capital — Wage determination, productivity, labor
supply, and discrimination.
16.
17.
Macroeconomic Analysis — GDP, inflation, unemployment, aggregate
demand, and stabilization policy.
18.
19.
Monetary and Fiscal Policy — Interest rates, money supply, government
spending, taxation, and crowding out.
20.
21.
International Economics — Comparative advantage, exchange rates, trade
policy, and capital flows.
22.
23.
2
, Econometrics and Empirical Reasoning — Identification, omitted-variable
bias, statistical inference, and causal interpretation.
24.
QUESTIONS 1–100
QUESTION 1
A consumer has utility U=x0.5y0.5U=x^{0.5}y^{0.5}, income of $120, and prices
P_x=$4 and P_y=$2. Which bundle maximizes utility?
A. (10, 20)
B. (15, 30)
C. (20, 20)
D. (30, 0)
Answer: B
Rationale: For Cobb-Douglas utility with equal exponents, the consumer spends half
of income on each good. Thus $60 is allocated to each good. The optimal quantities
are x=60/4=15x=60/4=15 and y=60/2=30y=60/2=30. A and C do not satisfy the equal
expenditure shares implied by the utility function. D places all income on one good
and therefore cannot maximize utility when both goods enter positively into utility.
QUESTION 2
A firm's production function is Q=K0.5L0.5Q=K^{0.5}L^{0.5}. If both capital and
labor are doubled, output will:
A. Increase by 50%
B. Double
C. Increase by 100%
D. Quadruple
Answer: C
Rationale: The production function exhibits constant returns to scale because the
exponents sum to one. Multiplying both inputs by 2 multiplies output by
20.5+0.5=22^{0.5+0.5}=2. Therefore output doubles, which is a 100% increase. A
understates the increase, while B incorrectly describes the percentage increase rather
than the new output relative to the original. D would correspond to a doubling of
inputs under increasing returns with degree two.
3
, QUESTION 3
A competitive firm currently produces where price is $80, marginal cost is $80, and
average total cost is $95. In the short run, the firm should:
A. Shut down immediately
B. Raise price to $95
C. Continue producing because price exceeds average variable cost
D. Exit the industry immediately
Answer: C
Rationale: A competitive firm's short-run shutdown decision depends on whether
price covers average variable cost, not average total cost. Although the firm is
earning a loss because P<ATCP<ATC, it should continue operating if P≥AVCP\geq
AVC, because operating contributes toward fixed costs. A and D confuse short-run
shutdown with long-run exit. B is impossible for a price-taking firm.
QUESTION 4
Suppose demand for a product is highly price elastic. If the firm raises its price
slightly, total revenue will most likely:
A. Increase substantially
B. Remain unchanged
C. Decrease
D. Increase only if marginal cost rises
Answer: C
Rationale: When demand is elastic, the percentage decrease in quantity demanded
exceeds the percentage increase in price. Therefore total revenue falls when price
rises. A is the opposite of the elasticity implication. B applies more closely to unit
elasticity. D is irrelevant because the relationship between price elasticity and total
revenue does not depend on marginal cost.
QUESTION 5
A government imposes a per-unit tax on sellers of a good. If demand is perfectly
inelastic, the economic incidence of the tax will fall primarily on:
A. Sellers
B. Foreign producers
C. Consumers
D. The government
4
1-100 AND ANSWERS | 2026/2027
UPDATED | DETAILED RATIONALES
INTRODUCTION
ECON 528 is an advanced economics course in which success typically requires more
than memorizing definitions or formulas. A strong midterm preparation strategy
requires students to interpret economic models, identify relevant assumptions,
perform quantitative reasoning, and apply theoretical concepts to realistic policy and
market scenarios. This practice bank is designed for students preparing for an ECON
528 midterm and emphasizes higher-order reasoning rather than simple recall. The
questions integrate microeconomic analysis, macroeconomic reasoning, market
structure, welfare analysis, strategic behavior, information economics, labor
economics, and quantitative interpretation. Each question contains four alternatives
with one best answer, followed by a rationale explaining the underlying economic
logic and why the alternatives are less appropriate. Students should attempt each
question independently before reviewing the answer and rationale. Particular attention
should be paid to the assumptions behind each model, because changing an
assumption can change the correct conclusion. The bank is intended as a rigorous
study resource for identifying conceptual weaknesses, practicing application, and
developing the analytical habits needed for a demanding economics examination.
CORE DOMAINS TESTED
1.
Consumer and Producer Theory — Utility maximization, cost minimization,
marginal analysis, and optimization.
2.
3.
Elasticity and Market Equilibrium — Demand, supply, incidence,
responsiveness, and comparative statics.
4.
5.
Market Structure — Perfect competition, monopoly, monopolistic
competition, and oligopoly.
6.
7.
1
,Game Theory — Strategic interaction, Nash equilibrium, dominant strategies,
and repeated games.
8.
9.
Welfare Economics — Consumer surplus, producer surplus, efficiency,
taxation, and deadweight loss.
10.
11.
Externalities and Public Economics — Corrective taxation, subsidies, public
goods, and common resources.
12.
13.
Information Economics — Moral hazard, adverse selection, signaling, and
screening.
14.
15.
Labor and Human Capital — Wage determination, productivity, labor
supply, and discrimination.
16.
17.
Macroeconomic Analysis — GDP, inflation, unemployment, aggregate
demand, and stabilization policy.
18.
19.
Monetary and Fiscal Policy — Interest rates, money supply, government
spending, taxation, and crowding out.
20.
21.
International Economics — Comparative advantage, exchange rates, trade
policy, and capital flows.
22.
23.
2
, Econometrics and Empirical Reasoning — Identification, omitted-variable
bias, statistical inference, and causal interpretation.
24.
QUESTIONS 1–100
QUESTION 1
A consumer has utility U=x0.5y0.5U=x^{0.5}y^{0.5}, income of $120, and prices
P_x=$4 and P_y=$2. Which bundle maximizes utility?
A. (10, 20)
B. (15, 30)
C. (20, 20)
D. (30, 0)
Answer: B
Rationale: For Cobb-Douglas utility with equal exponents, the consumer spends half
of income on each good. Thus $60 is allocated to each good. The optimal quantities
are x=60/4=15x=60/4=15 and y=60/2=30y=60/2=30. A and C do not satisfy the equal
expenditure shares implied by the utility function. D places all income on one good
and therefore cannot maximize utility when both goods enter positively into utility.
QUESTION 2
A firm's production function is Q=K0.5L0.5Q=K^{0.5}L^{0.5}. If both capital and
labor are doubled, output will:
A. Increase by 50%
B. Double
C. Increase by 100%
D. Quadruple
Answer: C
Rationale: The production function exhibits constant returns to scale because the
exponents sum to one. Multiplying both inputs by 2 multiplies output by
20.5+0.5=22^{0.5+0.5}=2. Therefore output doubles, which is a 100% increase. A
understates the increase, while B incorrectly describes the percentage increase rather
than the new output relative to the original. D would correspond to a doubling of
inputs under increasing returns with degree two.
3
, QUESTION 3
A competitive firm currently produces where price is $80, marginal cost is $80, and
average total cost is $95. In the short run, the firm should:
A. Shut down immediately
B. Raise price to $95
C. Continue producing because price exceeds average variable cost
D. Exit the industry immediately
Answer: C
Rationale: A competitive firm's short-run shutdown decision depends on whether
price covers average variable cost, not average total cost. Although the firm is
earning a loss because P<ATCP<ATC, it should continue operating if P≥AVCP\geq
AVC, because operating contributes toward fixed costs. A and D confuse short-run
shutdown with long-run exit. B is impossible for a price-taking firm.
QUESTION 4
Suppose demand for a product is highly price elastic. If the firm raises its price
slightly, total revenue will most likely:
A. Increase substantially
B. Remain unchanged
C. Decrease
D. Increase only if marginal cost rises
Answer: C
Rationale: When demand is elastic, the percentage decrease in quantity demanded
exceeds the percentage increase in price. Therefore total revenue falls when price
rises. A is the opposite of the elasticity implication. B applies more closely to unit
elasticity. D is irrelevant because the relationship between price elasticity and total
revenue does not depend on marginal cost.
QUESTION 5
A government imposes a per-unit tax on sellers of a good. If demand is perfectly
inelastic, the economic incidence of the tax will fall primarily on:
A. Sellers
B. Foreign producers
C. Consumers
D. The government
4
