Microeconomics Exam 1 Study Guide: Supply & Demand, Consumer Choice, and Production Theory

Exam Overview

Format and Structure

• Format: 18 questions (mostly multi-part), online with proctored browser.

• Time/Location: Proctored computer lab, 1:20–2:00 PM, September 25, 2025.

• Tools: Calculator, blank scratch paper, pen/pencil (no written materials).

• Content: Based on Problem Sets 1–3, with similar question types.

• Topic Distribution: Evenly split among supply/demand, consumer theory, and production theory.

• iClicker Connection: Many questions adapted from interactive classroom sessions.

Chapter Coverage & Focus Areas

Chapters 2–3: Supply and Demand

• Key Concepts: Market equilibrium, shifts vs. movements, comparative statics.

• Mathematical Skills: Solving for equilibrium price/quantity, calculating effects of taxes/subsidies.

• Interactive Connection: Forecasting Market Outcomes, Minivan Market Analysis, Stadium Ticket Pricing Simulator.

Chapter 4: Consumer Choice (Selective)

• Covered: Utility maximization, indifference curves, budget constraints.

• Omitted: Optimal bundles/convex sections, food stamps, behavioral economics.

• Mathematical Skills: MRS calculations, corner solutions vs. interior solutions.

• Interactive Connection: Consumer Choice Explorer, Calculus of Utility Maximization, Following the Clues: Revealed Preference in Action.

Chapters 6–7: Production and Costs (Selective)

• Covered: Production functions, cost minimization, short-run vs. long-run costs.

• Omitted: Chapter 6 - productivity/technical change; Chapter 7 - learning curves, multi-product costs.

• Mathematical Skills: Marginal products, isoquants, returns to scale analysis.

• Interactive Connection: Short-Run Production and Cost Curves, Cost-Minimizing Input Mix, Returns to Scale & Long-Run Cost Analysis.

Core Mathematical Techniques to Master

Supply & Demand Mechanics

• Setting Qd = Qs: To find equilibrium.

• Linear Demand/Supply: $Q_d = a - bP$, $Q_s = c + dP$ format.

• Tax Analysis: Consumer price Pc, producer price Pp, with $Pc = Pp + \text{tax}$.

• Practice Strategy: Master the algebra first, then verify with graphs.

Consumer Optimization via Tangency

• Key Insight: Optimal choice where indifference curve is tangent to budget line.

• Tangency Condition: Slope of indifference curve = Slope of budget line.

• Mathematical Setup: $\frac{MU_X}{MU_Y} = \frac{P_X}{P_Y}$ (slopes are equal).

• Two-Equation System:

  • $\frac{MU_X}{MU_Y} = \frac{P_X}{P_Y}$ (tangency condition)

  • $P_X Q_X + P_Y Q_Y = I$ (budget constraint)

Demand Curve Derivation

• Method: Fix $P_Y$ and $I$, vary $P_X$, trace out optimal $Q_X$ values.

• Cobb-Douglas Demand: $Q_X = \alpha I / P_X$ (rectangular hyperbola).

• Perfect Substitutes: Corner solutions, kinked demand curves.

• Income and Price Elasticities: Connect to utility function parameters.

• Spending Shares: $\alpha I$ spent on X, $(1-\alpha)I$ spent on Y.

Income & Substitution Effects (Graphical Method)

• Total Effect = Income Effect + Substitution Effect

• Graphical Decomposition:

  1. Original optimum at initial prices.

  2. Change price, find new optimum (total effect).

  3. Separate into substitution and income components using intermediate budget line.

• Signs: Substitution effect always opposes price change.

• Practice Strategy: Master the three-step graphical decomposition.

Production Theory and Cost Minimization

• Production Function: $Q = f(K, L)$, often $Q = K^{\alpha}L^{\beta}$

• Marginal Products: $MPL = \partial Q / \partial L$, $MPK = \partial Q / \partial K$

• MRTS: $-MPL/MPK$ (slope of isoquant)

• Cost Minimization: $MPL/w = MPK/r$ (equal marginal product per dollar)

• Returns to Scale: How does changing all inputs by a given proportion change output?

• Average vs. Marginal Cost: Relationship depends on whether TC is increasing/decreasing.

Corner Solutions vs. Interior Solutions

• Interior Test: Check if $MU_X/P_X = MU_Y/P_Y$ at positive consumption levels.

• Corner Test: Compare $MU_X/P_X$ or $MU_Y/P_Y$ at boundary points ($Q_X=0$ or $Q_Y=0$).

• Perfect Substitutes: Often yield corner solutions unless prices are exactly right.

• Recognition Pattern: If $MRS =$ price ratio at interior point, check corners.

Returns to Scale Analysis

• Mathematical Test: For $Q = f(K, L)$, check $f(tK, tL)$ vs. $tQ$.

• Cobb-Douglas Rule: $Q = K^{\alpha}L^{\beta}$ has returns to scale $= \alpha + \beta$

  • $\alpha + \beta > 1$: Increasing returns to scale

  • $\alpha + \beta = 1$: Constant returns to scale

  • $\alpha + \beta < 1$: Decreasing returns to scale

• Cost Curve Implications: Returns to scale determines long-run average cost shape.

Problem-Solving Strategies

For Supply & Demand Questions

1. Always start with a graph—even for algebraic problems.

2. Identify the shift: Demand shifters vs. supply shifters.

3. Predict direction first: Price up/down? Quantity up/down?

4. Then calculate: Use algebra to find exact values.

5. Check reasonableness: Does your answer make economic sense?

For Production/Cost Questions

1. Identify the production function: Cobb-Douglas $Q = K^{\alpha}L^{\beta}$ is most common.

2. Calculate marginal products: $MPL = \partial Q/\partial L$, $MPK = \partial Q/\partial K$

3. Check returns to scale: For Cobb-Douglas, sum the exponents $(\alpha + \beta)$

4. Apply cost minimization: Set $MPL/w = MPK/r$ for optimal input mix

5. Connect to cost curves: Use relationships between TC, AC, MC

6. Short-run vs. long-run: Remember which inputs are fixed vs. variable

Graphing Essentials

Must-Know Graph Types

• Supply & Demand: Market equilibrium, shifts, tax wedges

• Indifference Curves: Different shapes for different preferences

• Budget Lines: Slope = $-P_X/P_Y$, shifts with income changes

• Production Functions: Isoquants, expansion paths

• Cost Curves: U-shaped AC/MC, relationship between short-run and long-run

Common Graphing Mistakes to Avoid

• Confusing shifts with movements along curves

• Wrong direction for income/substitution effect arrows

• Forgetting that MC passes through minimum of AC

Interactive Study Recommendations

High-Priority Review Sessions

1. Forecasting Market Outcomes: Practice at all three difficulty levels

2. Consumer Choice Explorer: Master the phase-by-phase classroom mode

3. Calculus of Utility Maximization: Work through all 6 mathematical steps

4. Short-Run Production and Cost Curves: Understand TC, AC, MC relationships

Targeted Skill Building

• Different Utility, Different Demand Curves: Connect utility shapes to demand curves

• Returns to Scale & Long-Run Cost Analysis: Scaling effects on production

• Following the Clues: Revealed Preference in Action: Consistency conditions

Study Session Plan

• Session 1: Supply & demand with taxes/subsidies (Forecasting Market Outcomes)

• Session 2: Consumer choice optimization (Consumer Choice Explorer, Calculus of Utility Maximization)

• Session 3: Demand curve derivation (Different Utility, Different Demand Curves)

• Session 4: Income/substitution effects (Analyze Income and Substitution Effects)

• Session 5: Production theory (Short-Run Production and Cost Curves, Cost-Minimizing Input Mix)

Pearson MyLab Resources

Recommended Study Tools

• Study Plan: Focus on chapters 2–7 (excluding omitted sections)

• Practice Tests: Take multiple attempts to see question variations

• Help Me Solve This: Step-by-step guidance for similar problems

• MyLab Study Strategy:

  1. Start with Study Plan: Let it identify your weak areas

  2. Do Practice Tests: Under timed conditions to simulate exam

  3. Focus on Multi-Part Questions: These mirror your exam format most closely

  4. Use Graphing Practice: Essential for visual learners and graph-heavy exam questions

Useful Appendices for Mathematical Review

• Appendix 4A: Utility and Indifference Curves – reinforces the calculus approach

• Appendix 6C: Cobb-Douglas Production Functions – specific functional forms

• Appendix 7A: Minimum of the Average Cost Curve – proves why $MC = AC$ at minimum

Final Exam Preparation Tips

The Night Before

• Review your Whiteboard notes: These contain specific derivations

• Do one final practice problem from each major area

• Organize your open-book materials: Tab important formulas and graphs

• Get good sleep: Mathematical reasoning requires a clear mind

Day of Exam

• Bring scratch paper and multiple pens/pencils

• Start with problems you’re most confident about

• For multi-part questions: Answer what you can, partial credit is available

During the Exam

• Read each question completely before starting to solve

• Draw graphs when helpful: Visual aid for your own understanding

• Check units and reasonableness: Does a negative price make sense?

• Use the calculator effectively: Don’t make arithmetic errors on easy parts

Success Indicators

• Set up and solve two-equation systems for consumer optimization (tangency + budget)

• Derive demand curves from utility maximization without looking at notes

• Perform complete income and substitution effect analysis graphically

• Calculate returns to scale from production function exponents and interpret economically

• Solve tax incidence problems showing consumer price, producer price, and deadweight loss

• Explain why tangency represents optimal choice using both math and economics

• Work fluidly between different utility function types (Cobb-Douglas, perfect substitutes, etc.)

• Connect mathematical slopes (MRS, budget line) to economic trade-offs

Red Flags – More Study Needed if:

• You confuse movements along curves with shifts of entire curves

• You can’t connect the mathematical optimization to the economic intuition

• You struggle to interpret what an elasticity value means economically