Week 8 · Study guide

Midterm Study Guide · Weeks 1–7 (Objectives 1–4)

Principles of Microeconomics · ECON 1 Fall 2026 · Prof. Kessler Fictional sample

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
This is a student-facing review page. Work through it before you run the Exam-Prep Tutorial and take the Practice Exam. (This guide points to both — it does not repeat them.)

Integrity note. Every practice item on this page is a fresh variant — a new scenario and wording — with a vetted answer. None of these are the live midterm questions. Working them builds the skill the midterm tests, honestly.

What the midterm covers (read this first)


Exam	Midterm — cumulative, Weeks 1–7, Objectives 1–4
Format	20 items, 100 points (5 each). Mixed item types: mostly multiple-choice (single answer), plus a few matching items (one-to-one), true/false, and one multiple-answer (select all that apply). Scenario-based — most items give you a described market situation and ask you to classify, compute, or predict. AI is not permitted on the midterm.
Coverage (where the points are)	Obj 1 ≈ 3 items (scarcity, PPF, positive/normative) · Obj 2 ≈ 3 items (comparative advantage, terms of trade) · Obj 3 ≈ 6 items (demand/supply, equilibrium, comparative statics) · Obj 4 ≈ 8 items (elasticity, surplus, government intervention — the biggest slice). Study Objectives 3 and 4 hardest.
Weight	The midterm is 20% of your course grade.
When it opens / where	Opens in the Week 8 module (the review-and-exam week); window opens at module start and is due 6 days later; one attempt. No weekly quiz, assignment, or workshop in Week 8 — the midterm replaces them. Discussion 8 (the midterm debrief) still runs.
What to bring	A solid grasp of four arithmetic moves: (1) opportunity-cost ratio from a PPF; (2) equilibrium solve (set Qd = Qs, solve for P then Q); (3) midpoint elasticity formula; (4) triangle formula for CS/PS and DWL. Make them automatic.

Objective 1 — Scarcity, Opportunity Cost & the PPF (Weeks 1–2) · ≈3 items

(A) Key ideas, plain language

Economics begins with one hard fact: resources are scarce — limited relative to unlimited wants — so every person and society must choose. The opportunity cost of a choice is the value of the next-best alternative you give up. The PPF makes this graphical: any point on the frontier is efficient, inside is inefficient (idle resources), and outside is unattainable. The PPF's slope equals the opportunity cost. A bowed-out PPF reflects increasing opportunity cost as resources are pulled from one use to another. Finally, distinguish positive economics (testable claims about what IS) from normative economics (value judgments about what OUGHT TO BE).

(B) Definitions, terms, procedures

Scarcity: limited resources, unlimited wants → every choice has a cost.
Opportunity cost: the value of the next-best alternative foregone. Only the best forgone alternative — not the sum of all.
PPF (production possibilities frontier): shows the maximum combinations of two goods producible with given resources and technology. Slope = −(max of good on horizontal axis) ÷ (max of good on vertical axis) = opportunity cost of the vertical-axis good in terms of the horizontal.
Efficient (on the PPF) vs. inefficient (inside) vs. unattainable (outside).
Bowed-out shape: increasing opportunity cost because resources are not equally suited to both uses.
Positive vs. normative: positive = testable ("a $15 min wage reduces teen employment"); normative = value judgment ("the min wage should be raised"). The test: can data settle it? If yes → positive.

(C) Predictable mistakes → cures

❌ "A point inside the PPF is unattainable." → ✅ Inside = attainable but inefficient (idle resources). Outside = unattainable.
❌ "Positive = a good statement; normative = a biased statement." → ✅ Positive = testable by data; normative = value judgment. Neither is inherently better.
❌ Flipping the opportunity-cost ratio. → ✅ OC of cloth = (max wheat) ÷ (max cloth) — always the OTHER good ÷ THIS good.

(D) Review in the module

Week 1 → Lecture Outline, Slides (Deck 1), Lecture Tutorial 1, Workshop 1. Week 2 → Lecture Outline, Slides (Deck 2) for the PPF extension.

Objective 2 — Comparative Advantage & Gains from Trade (Week 2) · ≈3 items

(A) Key ideas, plain language

Trade makes everyone richer even when one country is better at producing everything — because the gains from trade come from differences in opportunity costs, not differences in productivity. Each producer should specialize in the good where their opportunity cost is lower (comparative advantage). The price at which they exchange must lie between the two countries' opportunity costs for both to benefit.

(B) Definitions, terms, procedures

Absolute advantage: can produce more of a good with the same resources. (Not the basis for trade!)
Comparative advantage: produces a good at a lower opportunity cost than the other producer → this drives specialization.
Computing opportunity costs from a table: OC of good X for Country A = (max of other good for A) ÷ (max of X for A).
Terms of trade (ToT): the price at which goods exchange. ToT must be strictly between the two countries' opportunity costs for BOTH to gain.
Gains from trade: with specialization at comparative advantage, both sides can consume outside their individual PPFs.

(C) Predictable mistakes → cures

❌ "The country with absolute advantage in everything has no reason to trade." → ✅ As long as opportunity costs differ, both gain. Comparative advantage, not absolute, drives trade.
❌ "Comparative advantage belongs to the country that produces more." → ✅ CA belongs to the country with the lower opportunity cost — which may produce less in absolute terms.
❌ Naming a ToT outside the valid range. → ✅ ToT must be strictly BETWEEN the two OCs: between B's OC and A's OC.

(D) Review in the module

Week 2 → Lecture Outline, Slides (Deck 2), Lecture Tutorial 2, Workshop 2.

Objective 3 — Demand, Supply & Market Equilibrium; Comparative Statics (Weeks 3–4) · ≈6 items

(A) Key ideas, plain language

Markets coordinate millions of individual decisions through the price system. The law of demand (price up → Qd down) and the law of supply (price up → Qs up) generate a curve for each side of the market. Equilibrium is where Qd = Qs. When conditions change, one or both curves shift, and comparative statics predicts the new equilibrium. The single most important trap: a change in the good's own price is a movement along the curve, never a shift.

(B) Definitions, terms, procedures

Demand shifters: income (normal/inferior), prices of substitutes (same direction) and complements (opposite), tastes, expectations, number of buyers.
Supply shifters: input prices (inverse), technology (same), taxes/subsidies, number of sellers, expectations, weather (agriculture).
Movement along vs. shift: own price changes → movement along; everything else → shift.
Equilibrium: set Qd = Qs algebraically; solve for P, substitute to find Q.
Shortage (Qd > Qs) when price is BELOW equilibrium; surplus (Qs > Qd) when price is ABOVE equilibrium.
Comparative statics (the four rules): ↑D → P↑Q↑; ↓D → P↓Q↓; ↑S → P↓Q↑; ↓S → P↑Q↓. If both curves shift the same direction, one of P or Q is indeterminate.

(C) Predictable mistakes → cures

❌ "A price change shifts the demand curve." → ✅ Own-price change = movement along. A determinant shifts the curve.
❌ "A supply shock (e.g., input prices rise) affects demand too." → ✅ Input prices are a supply determinant — only the supply curve shifts. Demand is unchanged.
❌ "If both curves shift, I can always determine both P and Q." → ✅ If both shift in the same direction, one of P or Q is indeterminate.

(D) Review in the module

Week 3 → Lecture Outline, Slides (Deck 3), Lecture Tutorial 3, Workshop 3 (demand). Week 4 → Lecture Outline, Slides (Deck 4), Lecture Tutorial 4, Workshop 4 (equilibrium).

Objective 4 — Elasticity, Surplus & Government Intervention (Weeks 5–7) · ≈8 items — STUDY HARDEST

(A) Key ideas, plain language

Elasticity measures how responsive quantity is to a price change — it is the central tool for predicting who wins and loses when prices change or governments intervene. Consumer and producer surplus measure the gains from trade in dollar terms, and any government intervention (price control or tax) creates deadweight loss by eliminating some mutually beneficial trades.

(B) Definitions, terms, procedures

Elasticity (Week 5):
- PED (midpoint formula): %ΔQd ÷ %ΔP, where %Δ = (new − old) ÷ ((new + old)/2). |PED| > 1 = elastic; < 1 = inelastic; = 1 = unit elastic.
- TR test: inelastic → P and TR move together; elastic → P and TR move opposite.
- Elasticity ≠ slope. A steeper demand curve is not necessarily more inelastic.
- YED: positive = normal good (> 1 = luxury); negative = inferior good.
- XED: positive = substitutes; negative = complements.
- More elastic when: more substitutes available, longer time horizon, greater budget share, luxury good.

Surplus & efficiency (Week 6):
- CS = ½ × Q × (demand intercept − P) for a linear demand curve.
- PS = ½ × Q × (P − supply intercept) for a linear supply curve.
- Total surplus = CS + PS, maximized at the competitive equilibrium (allocative efficiency).

Government intervention (Week 7):
- Binding price ceiling (below eq) → shortage (Qd > Qs).
- Binding price floor (above eq) → surplus (Qs > Qd). Non-binding controls have no effect.
- Per-unit tax: wedge Pb − Ps = tax. Pb rises above P; Ps falls below P.
- Tax incidence: the more inelastic side bears more of the burden. Independent of who legally pays.
- Tax revenue = tax × Q_new.
- DWL = ½ × tax × ΔQ (the triangle of lost surplus). Pre-verified: $4 tax on W7 market → DWL = ½ × 4 × (16 − 12) = $8.

(C) Predictable mistakes → cures

❌ "The legal payer of the tax bears all the burden." → ✅ Incidence depends on elasticities — the more inelastic side bears more.
❌ "DWL = tax × Q_new" (confusing DWL with tax revenue). → ✅ DWL = ½ × tax × ΔQ; tax revenue = tax × Q_new.
❌ "Any price ceiling causes a shortage." → ✅ Only a binding ceiling (BELOW equilibrium) does.
❌ Confusing CS and PS triangle placement. → ✅ CS is under demand, above price; PS is above supply, below price.
❌ "Elasticity = slope." → ✅ Elasticity uses percentages (midpoint formula); slope uses raw units — they are numerically different.

(D) Review in the module

Week 5 → Lecture Outline, Slides (Deck 5), Lecture Tutorial 5, Workshop 5 (elasticity). Week 6 → Lecture Outline, Slides (Deck 6), Lecture Tutorial 6, Workshop 6 (surplus). Week 7 → Lecture Outline, Slides (Deck 7), Lecture Tutorial 7, Workshop 7 (tax wedge).

Representative Practice (all fresh — vetted answers)

None of these are live midterm items. New scenarios, new wording. Each answer is vetted; the one-line why names the idea it tests. Cover the answers, work each one, then check.

Objective 1 practice

Worked example — PPF and opportunity cost.
A country can produce 24 laptops or 8 printers per day (straight-line PPF).
- (a) What is the opportunity cost of 1 printer? Of 1 laptop?
- (b) A production point of (12 laptops, 3 printers) requires how many resource-hours and is it efficient?

Answer. (a) OC of 1 printer = 24 ÷ 8 = 3 laptops. OC of 1 laptop = 8 ÷ 24 = 1/3 printer. (b) Verify: if max laptops = 24 and max printers = 8, then the PPF equation is laptops/24 + printers/8 = 1. At (12, 3): 12/24 + 3/8 = 0.5 + 0.375 = 0.875 < 1 → inside the PPF → attainable but inefficient (resources idle). Why: interior points are attainable; only points ON the frontier are efficient.

Self-check (Obj 1).
1. True/false: a production combination outside a country's PPF is inefficient but attainable. → False — outside = unattainable.
2. "The unemployment rate rose by 2 percentage points last year" — positive or normative? → Positive (testable by data).
3. "We ought to bring the unemployment rate down to 3%" — positive or normative? → Normative (a value judgment).
4. If max output is 40 shoes or 8 hats, what is the opportunity cost of 1 hat? → 5 shoes.

Objective 2 practice

Worked example — Comparative advantage and terms of trade.
Nation A: 1 worker-day → 16 corn OR 4 soybeans. Nation B: 1 worker-day → 9 corn OR 3 soybeans.
- (a) Compute each nation's OC of soybeans and of corn.
- (b) Who has CA in what? Who has absolute advantage in what?
- (c) What is the valid range for the terms of trade (corn per soybean)?

Answer. (a) A: OC of 1 soybean = 16/4 = 4 corn; OC of 1 corn = 4/16 = 0.25 soybeans. B: OC of 1 soybean = 9/3 = 3 corn; OC of 1 corn = 3/9 = 1/3 soybeans. (b) B has CA in soybeans (3 corn < 4 corn per soybean); A has CA in corn (0.25 soybeans < 1/3 soybean per corn). A has absolute advantage in both (16 > 9 corn; 4 > 3 soybeans). (c) Valid ToT: between 3 and 4 corn per soybean. E.g., 3.5 corn per soybean benefits both. Why: ToT must be strictly between the two OCs.

Self-check (Obj 2).
1. Country X has absolute advantage in both wheat and steel. Should it trade? → Yes — as long as opportunity costs differ, both sides gain.
2. The terms of trade must be what relative to the two countries' opportunity costs? → Strictly between both OCs.

Objective 3 practice

Worked example — Equilibrium and comparative statics.
Market: Qd = 60 − 2P, Qs = −12 + 4P.
- (a) Find P and Q.
- (b) A new technology lowers production cost, shifting supply to Qs = 6 + 4P. Find the new equilibrium.
- (c) At the original equilibrium price from (a), is there a shortage or surplus in (b)'s market?

Answer. (a) 60 − 2P = −12 + 4P → 72 = 6P → P* = 12. Q = 60 − 24 = 36. Check: Qs = −12 + 48 = 36 ✓. (b) New Qs = 6 + 4P. Set 60 − 2P = 6 + 4P → 54 = 6P → new P = 9, Q = 42. (c) At old P = 12 with new supply: Qd = 60 − 24 = 36; Qs = 6 + 48 = 54. Qs > Qd → surplus of 18 units. Why: technology improvement shifts supply right → P falls, Q rises; at the old price a surplus emerges.

Self-check (Obj 3).
1. Classify each: (a) "income rises and demand for bus rides falls" — which direction does demand shift? → Leftward (bus rides are inferior). (b) "price of butter rises and demand for bread falls" — is butter a substitute or complement for bread? → Complement (falling demand with rising complement price → negative XED).
2. True/false: if supply and demand both increase (shift right), we can determine that both price and quantity rise. → False — Q definitely rises; P is indeterminate.

Objective 4 practice

Worked example 1 — Elasticity with the midpoint formula.
Price rises from $6 to $10; Qd falls from 90 to 70.
- (a) Compute PED via the midpoint formula.
- (b) Is demand elastic or inelastic? Apply the TR test to confirm.

Answer. (a) %ΔQd = (70 − 90) / ((70 + 90)/2) = −20 / 80 = −0.25. %ΔP = (10 − 6) / ((10 + 6)/2) = 4 / 8 = 0.50. PED = −0.25 / 0.50 = −0.50. |PED| = 0.50. (b) |PED| = 0.50 < 1 → inelastic. TR check: was $6 × 90 = $540; now $10 × 70 = $700. TR rose as P rose → confirms inelastic ✓. Why: inelastic demand means buyers are relatively unresponsive; revenue rises with price.

Worked example 2 — Consumer and producer surplus.
Market: Demand P = 30 − 2Q, Supply P = 6 + 2Q. Find eq, CS, and PS.
- Set 30 − 2Q = 6 + 2Q → 24 = 4Q → Q = 6, P = 18.
- CS = ½ × 6 × (30 − 18) = ½ × 6 × 12 = $36.
- PS = ½ × 6 × (18 − 6) = ½ × 6 × 12 = $36. Total surplus = $72.
Why: CS is the triangle below demand and above P; PS is the triangle above supply and below P; both use ½ × base × height.

Worked example 3 — Tax incidence and DWL.
Same market from Worked example 2 above. Now impose a $4/unit tax on sellers. New supply: P = (6 + 4) + 2Q = 10 + 2Q.
- Set 30 − 2Q = 10 + 2Q → 20 = 4Q → new Q = 5.
- Pb = 30 − 2(5) = $20. Ps = 20 − 4 = $16. Check: Pb − Ps = $4 ✓.
- Buyer burden = 20 − 18 = $2. Seller burden = 18 − 16 = $2. Fifty-fifty (equal slopes).
- Tax revenue = 4 × 5 = $20. DWL = ½ × 4 × (6 − 5) = $2.
Why: equal slopes → 50/50 split; DWL = ½ × tax × ΔQ.

Self-check (Obj 4).
1. True/false: a steeper demand curve always implies more inelastic demand. → False — elasticity depends on the percentage changes, not the slope in raw units.
2. If XED between two goods is negative, what does that tell you? → They are complements (higher price of one reduces demand for the other).
3. True/false: the economic burden of a tax falls entirely on whoever legally writes the check. → False — incidence depends on relative elasticities.
4. A binding price floor creates a shortage or a surplus? → Surplus (Qs > Qd above equilibrium).

Study Plan — a Dated Countdown

Built for the Week 8 midterm. Adjust to your section's exact exam day; the rhythm matters more than the exact dates.

When	Do this (≈45–75 min)
~7 days out (Week 7, after class)	Read this guide's Objectives 1 & 2 sections. Work the Obj 1 and 2 practice. Build your one-page concept sheet (opportunity-cost ratio rule, comparative advantage decision, the four comparative-statics rules, the movement-vs.-shift distinction).
~5 days out	Read Objectives 3 & 4 carefully (≈14 of 20 items). Work the Obj 3 practice — solve the fresh equilibrium, apply the comparative-statics rules.
~3 days out	Work all of the Obj 4 practice (elasticity formula, TR test, surplus triangles, tax wedge / DWL). Then run the paired Exam-Prep Tutorial (N) in an approved chatbot — it diagnoses weak spots and drills them.
~2 days out	Take the Practice Exam (O) under timed, closed-note conditions. Score it; list every concept you missed.
~1 day out	Re-teach only the topics you missed on the practice exam (use this guide's mistake-cures). Re-do those specific self-checks. Sleep — memory consolidates overnight.
Exam day	Skim your one-page concept sheet and the four arithmetic moves. Arrive early. Read each item twice and answer the question actually asked. AI is not permitted — bring your understanding.

Two paired tools — use both:
- Exam-Prep Tutorial (N) — paste the prompt into an approved chatbot; it diagnoses, re-teaches, and drills you adaptively. Best for active recall and shoring up weak spots.
- Practice Exam (O) — a full, fresh, mirror-format run. Best for pacing and a final readiness check.

How the Midterm Is Graded + Test-Taking Strategy

How it's graded.
- 100 points across 20 items, 5 points each. Coverage tilts toward Objectives 3 and 4 (elasticity, surplus, government intervention), which carry the most items.
- The midterm is 20% of your course grade. It replaces Week 8's quiz, assignment, and workshop. One attempt; AI not permitted.

Honest test-taking strategies for this material.
1. Translate each scenario into its concept first. Underline cue words — comparative advantage, comparative statics, binding ceiling, tax incidence, DWL — then match to the rule.
2. For opportunity cost and comparative advantage, always compute both sides. Write out the ratio for each country before answering — don't try to see it by inspection.
3. For equilibrium, set Qd = Qs and solve, then substitute. Check that Qd = Qs at your P before moving on.
4. For elasticity, use the midpoint formula all the way through. %ΔQ = change ÷ average; %ΔP = change ÷ average; divide. Confirm with the TR test.
5. For surplus triangles, draw them. CS: triangle with base Q and height (demand intercept − P). PS: triangle with base Q and height (P − supply intercept). Then ½ × base × height.
6. For DWL, use ½ × tax × ΔQ — NOT tax × Q_new (that's tax revenue). Two different things.
7. For price controls: binding = the control actually constrains the market (ceiling BELOW eq; floor ABOVE eq). Non-binding = no effect.
8. Watch the incidence trap: who legally pays the tax does NOT determine who economically bears it. Incidence depends on elasticities.
9. Do easy items first, flag hard ones, budget time — 20 items at 5 pts each means a few minutes per item max.
10. On "select all that apply," judge each option independently* — the false one is usually a classic misconception in disguise.

Canvas placement block

canvas_object   = Page
title           = "Midterm Study Guide — Weeks 1–7 (Objectives 1–4)"
module          = "Week 8 — Midterm Review & Exam"
grading_type    = not_graded
available_from  = 2026-10-17    # posts before the Week 8 exam window opens
published       = true
provenance      = "~ Prof. Kessler's edition · Fall 2026 · built with thecoursemaker.com"

Term-update note: each term's $39 update regenerates fresh practice variants from the same scope — the live midterm is never reproduced here.

The per-term $39 update (fresh assessment variants, re-paced to your next calendar) referenced above is on the roadmap — coming soon. Today's download is yours to keep, but it doesn't refresh itself.

~ Prof. Kessler's edition · Fall 2026 · built with thecoursemaker.com