← Back to the Principles of Microeconomics outline The Course Maker
← Principles of Microeconomics outline
Week 8 · Midterm study guide

Midterm Exam — Study Guide

Principles of Microeconomics Free sample edition

Coverage — what the midterm covers

The midterm is cumulative over Weeks 1–7. It opens in the Week 8 module and closes at the due time your instructor sets. There is no time limit, and you get one attempt. The questions appear one at a time, and you cannot go back once you move on.

Format: 25 questions, and every question counts the same. Most of them, 20 in all, ask you to pick the one best option. Three ask you to select every option that applies, and two ask you to judge a statement true or false. Every graph a question needs is described in words, with its demand and supply rules written on one line, and every number you need is printed in the question.

What is in scope, with the number of midterm questions on each course objective:

Midterm coverage by course objective: the weeks its questions come from, its main skills, and its number of questions out of 25
Course objective Weeks its questions come from Main skills Questions
Scarcity and trade (Objective 1) 1, 2, 3, and 4 Opportunity cost; the PPF and its points; models and ceteris paribus; micro and macro; positive and normative; absolute and comparative advantage; terms of trade; gains from trade 8
Supply and demand (Objective 2) 3, 4, and 6 Movement along against shift; determinants of demand and supply; market demand; solving Qd = Qs; shortage and surplus; comparative statics 4
Elasticity (Objective 3) 5 The midpoint formula; sign and magnitude; elastic, inelastic, unit-elastic; the revenue test; income and cross-price signs; what makes demand responsive 6
Surplus and government intervention (Objective 4) 6 and 7 Willingness to pay and sell; the surplus ladder and triangles; efficient trades; ceilings and floors; deadweight loss; the tax wedge and who bears it 7

Week 5 holds the most questions of any single week, 6 of the 25, and all of them are on elasticity, so give Week 5 the most review time. By week, Week 6 has 5 questions, Weeks 1, 2, 3, and 7 have 3 each, and Week 4 has 2. Scarcity and trade carries the most questions of any objective, 8, spread over Weeks 1 to 4, because Week 1's modeling habits come back in the demand and supply weeks. By difficulty, 11 questions are easy, 10 are medium, and 4 are hard.

Week 8 adds no question to the midterm. Its review of the one graph and the one calculation each topic asks for covers the Weeks 1–7 material this guide reviews too. Its one new topic, thinking at the margin, is taught and practiced in the Week 8 chapter, practice set, and discussion, and it returns in the firm weeks; no midterm question comes from it.

Topic-by-topic review

Week 8 reviewed the first half by asking each topic for one graph and one calculation. This guide does the same. Each week below gives that graph and that calculation first, then the key idea in plain words, the course's definitions, the course example, and the mistakes students make most often with a cure for each. Every dataset below is illustrative, constructed for this course, and not real data. The deeper review for every topic is that week's chapter, lecture page, and slide deck.

Week 1 — Scarcity, opportunity cost, the PPF, and economic models

  • The graph and the calculation: the island's bowed-out frontier, fish across and coconuts up, and its slope read as an opportunity cost.
  • Key idea: you cannot have everything, so every choice gives something up. Pricing a choice means naming the best thing you gave up, including your time.
  • Definitions: scarcity is the condition in which people's wants outrun the time, money, and other resources available to meet them. A trade-off is a choice in which getting more of one thing means accepting less of something else. Opportunity cost is the value of the single best alternative given up to make a choice, counting time and forgone earnings as well as any money paid. The PPF, short for the frontier of what an economy can produce, is a graph of every combination of two goods an economy can make when it uses all of its resources fully and efficiently. An efficient point sits on the frontier, where the economy cannot make more of one good without making less of the other. An economic model is a simplified picture that keeps the few forces that matter for one question and leaves out the rest on purpose, and it is judged by whether its predictions hold up, not by whether it describes every detail. Ceteris paribus is Latin for "all else equal": every influence the model leaves out is held constant while one thing changes.
  • Micro, macro, positive, normative: microeconomics studies the choices of individual households and firms and how single markets work. Macroeconomics studies the economy as a whole: total output, the overall price level, unemployment, and money. A positive statement is a claim about what is, or what would happen, that evidence can check, at least in principle. A normative statement is a claim about what ought to be; it rests on values, so evidence alone cannot settle it.
  • Course example (Dataset C, the island frontier): the concert evening costs 60 + 4 × 15 = 120 dollars, not 60. Each extra 10 fish costs 5, then 10, 15, 20, 25, and 30 coconuts, which is 0.5 rising to 3 coconuts a fish. The point (30, 75) is on the frontier, (30, 50) is inside it with 75 − 50 = 25 coconuts' worth of work idle, and (40, 70) is outside it, since the frontier gives only 55 coconuts at 40 fish.
  • Predictable mistakes → cures: (1) Opportunity cost counted as the money price alone. Cure: add the value of the time, such as the wages you give up. (2) An inside point read as unattainable. Cure: an inside point can be reached, though it leaves resources idle or misused; only outside points are out of reach. (3) A straight-line frontier taken as the general case. Cure: rising opportunity cost bows the frontier outward; a straight line is a special case. (4) Positive read as good and normative as bad. Cure: positive means testable, and normative means value-laden.

Week 2 — Comparative advantage and the gains from trade

  • The table and the range: the opportunity-cost table, built one ratio at a time, and the range of trade rates between the two costs.
  • Key idea: the person who is faster at everything still gains by leaving some work to a partner, because what matters is what each person gives up.
  • Definitions: absolute advantage is the ability to make more of a good than another producer from the same resources. Comparative advantage is the ability to make a good at a lower opportunity cost than another producer. Specialization means concentrating time and resources on the good you make at the lowest opportunity cost and trading for the rest. The terms of trade are the rate at which one good is exchanged for another, written as units of one good per unit of the other. The mutually beneficial range is the span of rates between the two partners' opportunity costs; inside it, each partner gets the good more cheaply than it could make it alone. The gains from trade are the extra goods partners end up with, beyond what they could have had alone.
  • Ideas from their source: Adam Smith described the division of labor in 1776, and David Ricardo set out comparative advantage in 1817 with England and Portugal trading cloth and wine.
  • Course example (Dataset D, the campus food stand): a sandwich costs Amara 8 ÷ 4 = 2 smoothies and Diego 3 ÷ 3 = 1 smoothie. So Diego has the comparative advantage in sandwiches, even though Amara makes more of each good per hour. The pinned rate of 1.5 smoothies per sandwich sits inside the range of 1 to 2. After specializing and trading 10 sandwiches for 15 smoothies, Amara ends with 33 smoothies and 18 sandwiches (up from 32 and 16) and Diego with 15 and 14 (up from 12 and 12).
  • Positive and normative: the positive result is that specialization raises total output. Whether a country should choose freer trade or more trade protection is normative, because the gains spread widely while adjustment costs fall on particular workers and towns. The course presents both cases at full strength and decrees no verdict.
  • Predictable mistakes → cures: (1) Comparative advantage handed to the faster producer. Cure: compare opportunity costs, not output. (2) A ratio inverted. Cure: write the units on every ratio, such as smoothies per sandwich. (3) A rate outside the range called a gain for both. Cure: outside the range, one partner would rather make the good alone. (4) Trade read as one side winning what the other loses. Cure: the before-and-after table shows both with more of both.

Week 3 — Demand

  • The graph and the calculation: one downward-sloping line with price up the side and quantity across, and a demand rule solved at a price.
  • Key idea: when a price rises, buyers want less of the good, all else equal. A change in the good's own price slides you along the curve; a change in anything else moves the whole curve.
  • Definitions: the law of demand says that, with every other influence held fixed, a higher price lowers the quantity buyers want and a lower price raises it. Quantity demanded is the amount buyers want at one particular price; it changes only when the good's own price changes. Demand is the whole relationship between price and quantity, a full schedule or a full curve. A movement along the demand curve comes only from a change in the good's own price. A shift of the demand curve comes from a change in something else: an increase moves the curve right and a decrease moves it left. The determinants of demand are income, the prices of related goods, tastes, expectations about the future, and the number of buyers. Market demand is the total of every buyer's quantity at the same price.
  • Related goods and income: a normal good's demand rises when incomes rise. An inferior good's demand falls when incomes rise, because buyers switch to something they like better; the term says nothing about quality. Substitutes are used in place of each other, so a rise in one's price raises demand for the other. Complements are used together, so a rise in one's price lowers demand for the other.
  • Course example (Dataset A, demand side): Qd = 90 − 10P gives 50 units at 4 dollars down to 10 at 8. A fall from 6 to 5 dollars raises quantity demanded from 30 to 40 along the same curve. A rise in income for a normal good shifts demand right to Qd = 110 − 10P, 20 more units at every price; a fall shifts it left to Qd = 70 − 10P. Read as ten identical buyers who each want q = 9 − P, the market wants 10 × 5 = 50 at 4 dollars. Alfred Marshall's Principles of Economics (1890) drew demand as one blade of a pair of scissors.
  • Predictable mistakes → cures: (1) "The price fell, so demand rose." Cure: quantity demanded went up along the curve; demand did not change. (2) An inferior good read as a low-quality good. Cure: the label reports what buyers do when income rises, nothing more. (3) A rise in a complement's price read as raising demand. Cure: goods used together rise and fall together, so demand falls. (4) A shift drawn the wrong way. Cure: more wanted at every price is a shift right.

Week 4 — Supply and market equilibrium

  • The graph and the calculation: two straight lines crossing, and the solve Qd = Qs.
  • Key idea: sellers offer more at a higher price. Where what buyers want to buy matches what sellers want to sell, the price has no reason to move.
  • Definitions: the law of supply says that, with every other influence held fixed, a higher price raises the quantity sellers want to sell. Quantity supplied changes only with the good's own price; supply is the whole schedule or curve. The determinants of supply are input prices, technology, the number of sellers, sellers' expectations, the prices of other goods they could make, and taxes or subsidies on production. Market equilibrium is the state in which, at the going price, the amount buyers want to buy matches the amount sellers want to sell. A shortage opens below the equilibrium price, measured as quantity demanded minus quantity supplied; a surplus opens above it, measured as quantity supplied minus quantity demanded. Comparative statics compares the equilibrium before and after one change: name the curve, name the direction, and find the new price and quantity. In simultaneous shifts, both curves move, and one of the two results cannot be signed without numbers.
  • Course example (Datasets A and E): 90 − 10P = 10P − 30, so 20P = 120, the equilibrium price is 6 dollars, and 30 units a day change hands. At 4 dollars, 50 − 10 = 40 is a shortage; at 8 dollars, 50 − 10 = 40 is a surplus. Demand up 20 gives (7, 40); demand down 20 gives (5, 20); supply up 20 gives (5, 40); supply down 20 gives (7, 20). Both up 20 gives (6, 50): quantity rises for certain, and the price stays at 6 only because the two shifts are the same size.
  • Predictable mistakes → cures: (1) A supply increase read as raising the price. Cure: more offered at every price pushes the price down. (2) A change in an input cost drawn as a demand shift. Cure: costs belong to sellers, so supply moves. (3) Both price and quantity signed after a double shift. Cure: sign only the one both shifts agree on. (4) A surplus called a shortage above equilibrium. Cure: above the equilibrium price, units are left over.

Week 5 — Elasticity

This week carries 6 of the 25 midterm questions, so it gets the longest review.

  • The calculation and the test: the midpoint formula written out one step to a line, and the total-revenue test that reads the result.
  • Key idea: the law of demand gives the direction of buyers' response; elasticity gives its strength as a number with no units.
  • Definitions: price elasticity (E_d) measures how strongly quantity demanded responds to a change in the good's own price: the percentage change in quantity demanded divided by the percentage change in price. The midpoint formula divides each change by the average of its starting and ending values, so the result is the same whichever way the price moves. Written on one line: E_d = [(Q2 − Q1) ⁄ ((Q1 + Q2) ⁄ 2)] ÷ [(P2 − P1) ⁄ ((P1 + P2) ⁄ 2)].
  • Reading the number: keep the sign, which is negative when demand responds to the good's own price, and compare the magnitude with 1. Elastic demand has a magnitude greater than 1, so quantity changes by a larger percentage than the price. Inelastic demand has a magnitude less than 1. Unit-elastic demand has a magnitude of exactly 1, and total revenue does not change. Perfectly inelastic demand does not respond at all: its elasticity is 0 and its curve is vertical.
  • Revenue: total revenue is price times quantity. The total-revenue test says that on an elastic segment a price rise lowers revenue, on an inelastic segment it raises revenue, and on a unit-elastic segment revenue stays the same.
  • Elasticity is not slope: a straight demand line keeps one slope, yet it is elastic at high prices, inelastic at low prices, and unit-elastic in between. The reason: the same change in units is a small percentage of a big quantity and a large percentage of a small one.
  • Income and cross-price elasticity: income elasticity is the percentage change in quantity demanded divided by the percentage change in income, sign kept. It is positive for a normal good, above 1 for an income-elastic good, and negative for an inferior good. Cross-price elasticity, with its sign kept, is the percentage change in one good's quantity demanded divided by the percentage change in another good's price. It is positive for substitutes and negative for complements.
  • What makes demand more responsive: close substitutes nearby, a good buyers see as a luxury instead of a necessity, and a large share of the budget. A narrowly defined market (one brand instead of a whole category) and more time to adjust do the same. The price elasticity of supply asks the same question of sellers.
  • Course example (Dataset B, the elasticity schedule): Qd = 200 − 20P gives 160, 120, 80, and 40 at 2, 4, 6, and 8 dollars. From 4 to 6 dollars, E_d = (−40 ⁄ 100) ÷ (2 ⁄ 5) = −0.4 ÷ 0.4 = −1.0, unit-elastic. From 2 to 4 it is −0.4286, inelastic, and from 6 to 8 it is −2.3333, elastic. Revenue runs 320, 480, 480, and 320 dollars, while the slope stays −20 units per dollar. Dataset B is a separate curve from Dataset A.
  • Course example (Dataset F): with income up 40% on the midpoint convention, restaurant meals rise 50% (income elasticity 1.25, normal and income-elastic) and bus rides fall 40% (−1.0, inferior). With coffee up 40%, tea rises 40% (cross-price elasticity 1.0, substitutes) and muffins fall 50% (−1.25, complements).
  • Predictable mistakes → cures: (1) Elasticity read off the slope. Cure: compute the percentages; slope has units and elasticity does not. (2) The sign or the magnitude flipped, such as calling −1.0 "less than 1, so inelastic." Cure: read the sign and the magnitude separately. (3) The percentage computed on the starting value. Cure: divide each change by its midpoint, and the two directions agree. (4) A price rise on an elastic segment expected to raise revenue. Cure: check the elasticity first; raise the price for more revenue only where demand is inelastic. (5) Negative cross-price elasticities read as substitutes. Cure: negative means complements.

Week 6 — Consumer and producer surplus and market efficiency

  • The graph and the calculation: two triangles on the market diagram, each 1⁄2 × base × height.
  • Key idea: a buyer who would have paid more than the price walks away ahead, and so does a seller who would have taken less. Surplus adds up those gains in dollars.
  • Definitions: willingness to pay is the most a buyer would pay for one unit; on a demand curve, the curve's height above that unit shows it. Willingness to sell is the least a seller would accept, the seller's cost; on a supply curve, the curve's height shows it. Consumer surplus is each buyer's willingness to pay minus the price paid, added up; on a diagram it is the area below demand and above the price. Producer surplus is the price received minus each seller's cost, added up; on a diagram it is the area above supply and below the price. Total surplus is the two added together. The efficient number of trades makes total surplus as large as possible.
  • Efficiency and equity: allocative efficiency is an outcome in which goods are produced and traded up to the point where total surplus is as large as it can be. It is a positive property of the model. Equity is fairness in how the gains are divided, and judging it rests on values, so it is a normative question.
  • Course example (Dataset H, the used-bicycle ladder): at a price of 60, three bicycles sell. Consumer surplus is 40 + 20 + 10 = 70 dollars, producer surplus is 40 + 30 + 10 = 80 dollars, and total surplus is 150. The pairing gains run 80, 50, 20, then −20, so three trades is efficient.
  • Course example (Dataset G, the triangles on Dataset A): consumer surplus = 1⁄2 × 30 × (9 − 6) = 45 dollars a day, and producer surplus = 1⁄2 × 30 × (6 − 3) = 45. Total surplus is 90 dollars a day, the most any quantity can produce in this market.
  • Predictable mistakes → cures: (1) Consumer and producer surplus swapped. Cure: buyers' gains sit above the price and below demand. (2) The full rectangle used instead of the triangle. Cure: the rectangle 30 × 3 = 90 is twice the triangle of 45. (3) "Efficient" read as "fair." Cure: efficiency measures the size of the gain; fairness judges its split. (4) Consumer surplus confused with Week 4's surplus of unsold units. Cure: one is a gain in dollars, the other is leftover goods.

Week 7 — Price controls, taxes, and subsidies

  • The gap, the wedge, and the lost triangle: the shortage or surplus a control leaves, the gap a tax opens between the two prices, and the deadweight-loss triangle.
  • Key idea: a rule that stops a price from reaching equilibrium blocks some trades that would have helped both sides, and the value of those lost trades is the deadweight loss.
  • Definitions: a price ceiling is a legal maximum price; it binds only below the equilibrium price, and then the market has a shortage. A price floor is a legal minimum price; it binds only above the equilibrium price, and then the market has a surplus. A control that does not bind changes nothing. Deadweight loss is the total surplus that disappears when a tax, a subsidy, or a control moves the quantity traded away from the efficient quantity. A per-unit tax is a fixed dollar amount on each unit sold; collected from sellers, it shifts supply up by the tax. The tax wedge is the gap, equal to the tax, between the price buyers pay and the price sellers keep. Tax revenue is the tax times the units still traded; it is a transfer, never part of the deadweight loss. Economic incidence is how the burden is actually shared: the side that is less responsive to price bears more, whichever side writes the check. A per-unit subsidy works like a negative tax, at a cost to taxpayers.
  • Course example (Dataset I, on Dataset A): a ceiling at 4 dollars leaves a shortage of 40, lets 10 units trade, and loses 1⁄2 × 20 × (8 − 4) = 40 dollars a day. A floor at 8 dollars leaves a surplus of 40, and the loss is again 40. A 2-dollar tax on sellers moves supply to Qs = 10P − 50: buyers pay 7 dollars, sellers keep 5, and 20 units trade. Revenue is 2 × 20 = 40, and the deadweight loss is 1⁄2 × 2 × (30 − 20) = 10. Each side bears 1 dollar only because the two curves are equally steep.
  • Course example (Dataset J, who bears it): Qd = 60 − 5P and Qs = 15P − 40 meet at 5 dollars and 35 units. With a 4-dollar tax on sellers, buyers pay 8, sellers keep 4, and 20 units trade, so buyers bear 3 of the 4 dollars although sellers write the check. Revenue is 80 dollars and the deadweight loss is 30.
  • The applied debates, evenhandedly: the federal minimum wage, 7.25 dollars an hour since 2009, is a real price floor. The simple model predicts that a binding minimum lifts the wage of those who stay employed and lowers the quantity of labor employed. Economists disagree about the size of that job effect for moderate increases. Card and Krueger (1994) found no fall in fast-food jobs in New Jersey after its 1992 increase. A 2000 study by Neumark and Wascher used payroll data and reported a decline, and Card and Krueger's reply (2000) again found none. Rent control is a real price ceiling: the model predicts a shortage of rental housing. Diamond, McQuade, and Qian (2019) found that covered tenants in San Francisco were more likely to stay and that covered landlords reduced the supply of rentals. Whether either policy is worth its costs is a normative judgment, and the course leaves it to you.
  • Predictable mistakes → cures: (1) A ceiling above equilibrium called binding. Cure: a ceiling binds only below the equilibrium price. (2) A ceiling said to create a surplus. Cure: a cap below equilibrium leaves buyers wanting more, a shortage. (3) Whoever writes the check assumed to bear the whole tax. Cure: compare how responsive each side is. (4) Revenue counted as deadweight loss, or the loss computed as tax × quantity. Cure: tax × quantity is the revenue; the loss is the triangle. (5) Economists' dispute about the size of the minimum wage's job effect read as a dispute about what a binding floor does in the model. Cure: the model's prediction is settled; the size in real markets is the debate.

Representative practice

These are fresh variants, not the midterm's questions. Work each worked example yourself first, then compare your steps. Every scenario below is illustrative, invented for this guide, and not real data. Week 5 gets the most practice, because the midterm leans on it hardest.

Worked example — the price of a race weekend (Week 1)

Lucia (illustrative) enters a weekend bike race. The entry fee is 40 dollars, and the race keeps her away for 5 hours from a garden-center shift that pays 12 dollars an hour, the best other use of those hours.

  • Step 1, the money paid: 40 dollars.
  • Step 2, the time given up: 5 × 12 = 60 dollars of forgone wages.
  • Step 3, add them: 40 + 60 = 100 dollars.

Why it matters: the race costs her 100 dollars, not 40, because the wages she gives up are part of what she gives up.

Worked example — an orchard cooperative's frontier (Week 1)

An orchard cooperative (illustrative) can make jars of jam and bottles of cider each day:

An illustrative orchard frontier: bottles of cider the cooperative can make at each number of jars of jam per day
Jars of jam per day 0 10 20 30 40
Bottles of cider per day 60 55 45 25 0
  • Step 1, the cost of each 10 jars: 60 − 55 = 5, then 55 − 45 = 10, then 45 − 25 = 20, then 25 − 0 = 25 bottles.
  • Step 2, per jar: 5 ÷ 10 = 0.5, then 1, then 2, then 2.5 bottles a jar. The cost rises, so the frontier bows outward.
  • Step 3, test three points. (20, 45) is on the frontier, so it is efficient. (20, 30) is inside: 45 − 30 = 15 bottles' worth of work is idle or misused. (30, 35) is outside: at 30 jars the frontier gives 25 bottles, so it asks for 35 − 25 = 10 more than the cooperative can make today.

Why it matters: each jar costs more cider than the last, because the cooperative moves its best cider makers into jam last.

Worked example — the repair café (Week 2)

At a weekend repair café (illustrative), Farah can fix 12 lamps or 3 radios in an hour, and Kenji can fix 4 lamps or 2 radios. Each volunteers for 8 hours.

  • Step 1, absolute advantage: Farah fixes more of both (12 against 4 lamps, 3 against 2 radios).
  • Step 2, the opportunity-cost table: a radio costs Farah 12 ÷ 3 = 4 lamps and Kenji 4 ÷ 2 = 2 lamps. A lamp costs Farah 3 ÷ 12 = 1⁄4 radio and Kenji 2 ÷ 4 = 1⁄2 radio.
  • Step 3, comparative advantage: Kenji gives up less for a radio (2 lamps against 4), so he has the comparative advantage in radios. Farah gives up less for a lamp (1⁄4 radio against 1⁄2), so she has it in lamps.
  • Step 4, the range: any rate between 2 and 4 lamps per radio helps both. Take 3 lamps per radio.
  • Step 5, before trade (4 hours on each): Farah fixes 48 lamps and 12 radios; Kenji fixes 16 lamps and 8 radios. Together: 64 lamps and 20 radios.
  • Step 6, specialize: Kenji fixes only radios, 8 × 2 = 16. Farah spends 6 hours on lamps (72) and 2 on radios (6). Together: 72 lamps and 22 radios.
  • Step 7, trade 7 radios for 7 × 3 = 21 lamps: Farah ends with 72 − 21 = 51 lamps and 6 + 7 = 13 radios, up from 48 and 12. Kenji ends with 21 lamps and 16 − 7 = 9 radios, up from 16 and 8.

Why it matters: the same 16 hours now fix 8 more lamps and 2 more radios, and both volunteers end with more of both, even though Farah is faster at everything.

Worked example — ponchos at an outdoor festival (Week 3)

Demand for rain ponchos at an outdoor festival (illustrative) is Qd = 150 − 15P, in ponchos per day.

  • Movement along the curve: at 4 dollars, Qd = 150 − 60 = 90; at 6 dollars, Qd = 150 − 90 = 60. The price rose, so quantity demanded fell by 30 along the same curve.
  • A shift of the curve: a forecast of rain raises the number wanted at every price, to Qd = 180 − 15P. At 6 dollars, Qd = 180 − 90 = 90, which is 30 more than before at the same price.
  • Market demand as a sum: suppose the festival had 25 identical buyers who each want q = 8 − P. At 3 dollars each wants 8 − 3 = 5, and the market wants 25 × 5 = 125.

Why it matters: a change in the poncho's own price is a movement along the curve, a change in quantity demanded. The forecast, a change in expectations, shifts demand right.

Worked example — honey at a farmers' market (Week 4)

At a farmers' market (illustrative), the demand rule for jars of honey is Qd = 110 − 5P and the supply rule is Qs = 3P − 10, counted in jars per week at prices in dollars.

  • Step 1, solve Qd = Qs: 110 − 5P = 3P − 10, so 120 = 8P and P = 15 dollars.
  • Step 2, the quantity: Qd = 110 − 75 = 35, and Qs = 45 − 10 = 35, so 35 jars a week change hands.
  • Step 3, out of balance: at 13 dollars, buyers want 45 jars while sellers bring 29, a shortage of 16. At 17 dollars, sellers bring 41 jars while buyers want 25, a surplus of 16.
  • Step 4, demand shifts right by 8 at every price after a popular recipe goes around, to Qd = 118 − 5P. Then 118 − 5P = 3P − 10, so 128 = 8P, P = 16 dollars, and Q = 118 − 80 = 38 jars.
  • Step 5, supply shifts left by 8 at every price after the price of glass jars rises, to Qs = 3P − 18. With the original demand, 110 − 5P = 3P − 18, so 128 = 8P, P = 16 dollars, and Q = 110 − 80 = 30 jars.

Why it matters: both changes raise the price to 16 dollars, but they move the quantity in opposite directions. The rise in demand lifts it to 38 jars, while the fall in supply cuts it to 30 jars, so you name the curve before you predict the quantity.

Worked example — one demand line, three elasticities (Week 5)

A ferry company's weekend demand for bicycle spaces (illustrative) is Qd = 240 − 20P.

An illustrative demand line: quantity demanded and total revenue at six prices, in dollars and spaces per weekend
Price (dollars) 1 3 5 7 9 11
Quantity demanded 220 180 140 100 60 20
Total revenue (dollars) 220 540 700 700 540 220
  • From 1 to 3 dollars: the quantity changes by 180 − 220 = −40 around a midpoint of 200; the price changes by 2 around a midpoint of 2. E_d = (−40 ⁄ 200) ÷ (2 ⁄ 2) = −0.2 ÷ 1 = −0.2. The magnitude is below 1, so demand is inelastic here, and revenue rises from 220 to 540 dollars as the price rises.
  • From 5 to 7 dollars: the quantity changes by −40 around a midpoint of 120; the price changes by 2 around a midpoint of 6. E_d = (−40 ⁄ 120) ÷ (2 ⁄ 6), and each fraction is one third, so E_d = −1.0. Demand is unit-elastic, and revenue stays at 700 dollars.
  • From 9 to 11 dollars: the quantity changes by −40 around a midpoint of 40; the price changes by 2 around a midpoint of 10. E_d = (−40 ⁄ 40) ÷ (2 ⁄ 10) = −1.0 ÷ 0.2 = −5.0. Demand is elastic, and revenue falls from 540 to 220 dollars.
  • The slope never changed: every 2-dollar step cuts quantity by 40, so the slope is −40 ÷ 2 = −20 spaces per dollar on every segment.

Why it matters: one line with one slope has an inelastic stretch, a unit-elastic stretch, and an elastic stretch, so the revenue test needs the elasticity, not the steepness.

Worked example — income and related goods (Week 5)

A household's income (illustrative) rises from 30,000 to 50,000 dollars a year: 20,000 ÷ 40,000 = +50% on the midpoint convention.

  • Fresh-fruit boxes go from 14 to 18 a month: 4 ÷ 16 = +25%. Income elasticity = 25 ÷ 50 = 0.5. It is positive, so the boxes are a normal good, and it is below 1, so they are income-inelastic.
  • Laundromat loads go from 9 to 7 a month after the household buys a washer: −2 ÷ 8 = −25%. Income elasticity = −25 ÷ 50 = −0.5, so laundromat loads are an inferior good for this household, which says nothing about their quality.

In a town (illustrative), the price of gasoline rises from 4 to 6 dollars a gallon: 2 ÷ 5 = +40%.

  • Bike-share rides go from 45 to 75 a day: 30 ÷ 60 = +50%. Cross-price elasticity: 50 ÷ 40 = 1.25. Positive, so bike-share rides and gasoline are substitutes.
  • Car washes go from 60 to 40 a day: −20 ÷ 50 = −40%. Cross-price elasticity: −40 ÷ 40 = −1.0. Negative, so car washes and gasoline are complements.

Why it matters: for income and cross-price elasticities the sign carries the meaning, so you keep it and read it before you read the size.

Worked example — secondhand kayaks (Week 6)

In a market for secondhand kayaks (illustrative), the five buyers' values are 140, 110, 90, 70, and 40 dollars, and the five sellers' costs are 30, 50, 80, 95, and 120 dollars. Kayaks sell for 85 dollars.

  • Step 1, who trades: buyers at 140, 110, and 90 are at or above 85, and sellers at 30, 50, and 80 are at or below it, so 3 kayaks sell.
  • Step 2, consumer surplus: (140 − 85) + (110 − 85) + (90 − 85) = 55 + 25 + 5 = 85 dollars.
  • Step 3, producer surplus: (85 − 30) + (85 − 50) + (85 − 80) = 55 + 35 + 5 = 95 dollars.
  • Step 4, total surplus: 85 + 95 = 180 dollars.
  • Step 5, the efficient number: matching the top value to the cheapest seller, and so on down, gives gains of 110, 60, 10, then −25 and −80. Only the first three gain, so 3 trades is efficient, and 110 + 60 + 10 = 180.

Why it matters: the market at 85 dollars makes exactly the three trades that create value, and a fourth would destroy 25 dollars.

Worked example — two triangles with unequal slopes (Week 6)

A market (illustrative) has inverse demand P = 16 − Q ⁄ 2 for its buyers and P = 1 + Q ⁄ 4 for its sellers, in dollars per unit and units a day. Picture price on the vertical axis and quantity on the horizontal: demand falls from 16 dollars at zero units, and supply rises from 1 dollar at zero units.

  • Step 1, where they meet: 16 − Q ⁄ 2 = 1 + Q ⁄ 4, so 15 = 3Q ⁄ 4 and Q = 20 units. The price is 16 − 10 = 6 dollars.
  • Step 2, consumer surplus: the triangle below demand and above 6 dollars, 1⁄2 × 20 × (16 − 6) = 100 dollars a day.
  • Step 3, producer surplus: the triangle above supply and below 6 dollars, 1⁄2 × 20 × (6 − 1) = 50 dollars a day.
  • Step 4, total surplus: 100 + 50 = 150 dollars a day.
  • Step 5, one unit on each side of 20: a buyer values the 8th unit at 16 − 4 = 12 dollars, and it costs a seller 1 + 2 = 3, so it adds value. A buyer values the 24th unit at 16 − 12 = 4 dollars, and it costs a seller 1 + 6 = 7, so it would destroy value.

Why it matters: the two triangles need not be equal; here buyers keep 100 dollars and sellers 50, and the model measures that split without judging it.

Worked example — one-day festival passes (Week 7)

For one-day festival passes (illustrative), the demand rule is Qd = 80 − 2P and the supply rule is Qs = 3P − 20, counted in passes a day. Read as prices, demand is P = 40 − Q ⁄ 2.

  • Step 1, equilibrium: 80 − 2P = 3P − 20, so 100 = 5P and P = 20 dollars; Q = 80 − 40 = 40 passes.
  • Step 2, a ceiling at 16 dollars binds: buyers want 80 − 32 = 48 and sellers offer 48 − 20 = 28, a shortage of 20, and only 28 passes trade.
  • Step 3, the lost triangle: at 28 passes, buyers value the last pass at 40 − 14 = 26 dollars and it costs sellers 16. The deadweight loss is 1⁄2 × (40 − 28) × (26 − 16) = 1⁄2 × 12 × 10 = 60 dollars a day.
  • Step 4, controls that do nothing or the reverse: a ceiling at 22 dollars sits above 20, so it does not bind. A floor at 24 dollars binds: sellers offer 72 − 20 = 52, buyers want 80 − 48 = 32, a surplus of 20, and 32 passes trade.
  • Step 5, a 5-dollar tax collected from sellers: supply moves up by 5, to Qs = 3(P − 5) − 20 = 3P − 35. Then 80 − 2P = 3P − 35, so 115 = 5P and buyers pay 23 dollars. Sellers keep 23 − 5 = 18, and Q = 80 − 46 = 34 passes.
  • Step 6, revenue, loss, and who bears it: revenue is 5 × 34 = 170 dollars a day. The deadweight loss is 1⁄2 × 5 × (40 − 34) = 15 dollars a day. Buyers bear 23 − 20 = 3 dollars of the tax and sellers bear 20 − 18 = 2.

Why it matters: quantity demanded changes by 2 passes per dollar while quantity supplied changes by 3, so buyers are the less responsive side and bear more of the tax, although sellers hand the money to the government.

Self-check questions

Try each one, then read the check and the one-line why. Every scenario is illustrative.

  1. A friend says a free outdoor concert costs her nothing. She skips a 3-hour shift that pays 16 dollars an hour. What does it cost her? Check: 3 × 16 = 48 dollars. Why: the forgone wages are the best alternative she gives up.
  2. On the orchard frontier above, where is (10, 50)? Check: inside. Why: the frontier gives 55 bottles at 10 jars, so 5 bottles' worth of work is idle.
  3. Sort two claims: "If the town adds a second ferry, the wait at the dock will fall" and "The town ought to add a second ferry." Check: the first is positive and the second is normative. Why: the first can be tested against evidence; the second rests on a value judgment.
  4. In an hour, Ayo can plant 10 saplings or build 2 benches, and Lin can plant 6 saplings or build 3 benches. Who has the comparative advantage in benches? Check: Lin. Why: a bench costs Lin 6 ÷ 3 = 2 saplings and Ayo 10 ÷ 2 = 5.
  5. Would 6 saplings per bench work as terms of trade for those two? Check: no. Why: the range runs from 2 to 5, and at 6 Ayo would give up more saplings for a bench than building it himself costs him.
  6. Train fares rise, with every other influence held fixed. What happens in the market for intercity bus tickets? Check: demand for bus tickets shifts right. Why: trains and buses are substitutes, so a rise in one's price raises demand for the other.
  7. New solar-panel technology cuts the cost of making each panel. Name the curve, the direction, and what happens to price and quantity. Check: supply shifts right; the price falls and the quantity rises. Why: a cheaper way to make each unit is a determinant of supply.
  8. Demand and supply for a good both shift left at once. What can you sign without numbers? Check: quantity falls. Why: both shifts push quantity down, while the price change depends on which shift is bigger.
  9. On one segment, E_d = −0.6. Elastic or inelastic, and what does a price rise do to revenue there? Check: inelastic; revenue rises. Why: the magnitude, 0.6, is below 1, so quantity falls by a smaller percentage than the price rises.
  10. Two goods' cross-price elasticity, on the midpoint convention, is −0.8. What are they? Check: complements. Why: a negative sign means a rise in one's price lowers the quantity wanted of the other.
  11. On the kayak ladder, why does a fourth sale not happen? Check: the fourth buyer values a kayak at 70 dollars and the fourth seller's cost is 95. Why: that pair's gain is 70 − 95 = −25, so the trade would destroy value.
  12. A lakeside town caps boat-rental rates at 30 dollars a day, above the 24-dollar equilibrium. Does the cap bind? Check: no. Why: a ceiling binds only below the equilibrium price, so the market stays at 24 dollars.
  13. "Sellers hand the tax over, so sellers bear all of it." Correct the claim. Check: the burden depends on responsiveness. Why: the side that is less responsive to price bears more, whoever writes the check.

Check yourself — choose one. Write two or three sentences to a friend.

  • (a) Explain why a straight demand line can be elastic at one price and inelastic at another, though its slope never changes.
  • (b) Explain why a binding price ceiling lowers total surplus even though buyers who get the good pay less.

Either one rehearses an explain-why skill the midterm checks.

Watch before the exam

These eleven videos are already linked on the Weeks 1–7 readings pages, and every one has captions. Use them to review and to connect weeks, not to learn anything new. Several of them use their own numbers, add a judgment of their own, or step past an assumption the course names, so sorting those from the course's model is part of the review.

Study plan

A short countdown. Count back from the day you plan to sit the midterm. The course meets twice a week, so each step below fits around a class meeting.

  • Two weeks out: as you finish Week 6, start a one-page sheet with one line per week: the one graph and the one calculation it asks for. Add the formula you would use, such as Qd = Qs or the midpoint formula.
  • One week out: as you finish Week 7, reread the Week 5 review above and redo the two Week 5 worked examples from scratch. Week 5 holds 6 of the 25 questions.
  • At the first class meeting of Week 8: take the practice exam once, cold. Note which objectives cost you the most. Remember that it has only 2 elasticity questions, while the midterm has 6.
  • Three or four days before you sit it: reread the topic reviews for your two weakest objectives, and redo the matching worked examples without looking. Finish each one with its result in one plain sentence.
  • Two days before: run the paired exam-prep tutorial (the copy-and-paste chatbot tutor, or its no-AI route) for active recall. Tell it which areas the practice exam exposed, and ask it to drill those first.
  • The day before: retake the practice exam, explain every miss out loud, and work the self-check questions above.
  • Right before: skim the "predictable mistakes → cures" lines for all seven weeks. Then stop studying; a few slow breaths and a look at your one-page sheet are enough.

This guide is for review. The exam-prep tutorial and the practice exam are where you rehearse. Pulling ideas back out of memory, not rereading, is what makes them stick.

Exam format

Every one of the 25 questions counts the same, and the midterm checks your own understanding without AI. The questions come one at a time, and there is no going back, so settle each one before you move on. After you submit, Canvas shows your score.

Test-taking strategies for this material:

  • Name the one graph or the one calculation first. Before you look at the options, say which tool the question calls for. It may be a frontier reading, an opportunity-cost ratio, Qd = Qs, the midpoint formula for elasticity, a surplus ladder or triangle, or a control or tax on the market.
  • Shift or slide? If only the good's own price changed, you move along the curve. If anything else changed, name the curve, the direction, and where the new price and quantity land.
  • Write every step on its own line. Scratch paper is for the arithmetic: one subtraction, one midpoint, one division at a time.
  • Keep the sign, then read the size. For a price elasticity the sign is negative and the magnitude decides the label. For income and cross-price elasticities the sign itself is the answer to "what kind of good?"
  • Check the side of equilibrium. A ceiling binds only below the equilibrium price and a floor only above it, and a tax's burden follows responsiveness, not the check.
  • Watch the trap options. Most wrong options apply a named misconception to the same numbers. Look for a shift drawn for a price change, a percentage taken on the starting value, a rectangle for a triangle, or revenue counted as the lost surplus.

Built with The Course Maker · samples.thecoursemaker.com