Microeconomics: cram pack

Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.

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1Formulas and methods

Price elasticity of demand

Price elasticity (midpoint)
E = (ΔQ/Q̄)/(ΔP/P̄)
Elastic / inelastic
|E| > 1 elastic, |E| < 1 inelastic
Revenue
TR = P·Q

2Practice problems

1.Price elasticity of demandMedium
QPD5 000€15Q2​P2​ (−15%)ΔR = ?

A product sells 5 000 units per month at €15. Its price elasticity of demand is −0.6. The firm changes the price by −15%. Assuming %ΔQ = E·%ΔP, by how much ΔR does monthly revenue change?

P1 = €15Q1 = 5 000E = −0.6%ΔP = −15%
ΔR = €
2.Price elasticity of demandHard
QPD1400€12.00

The (inverse) demand for a product is P = 40 − 0.02Q, with P in euros. Find the price elasticity of demand E when 1 400 units are sold.

P = 40 − 0.02QQ = 1 400
E =
3.Economics conceptsMedium

Nominal GDP grew by 5% and the GDP deflator rose by 2%. Real GDP grew by approximately:

  1. A7%
  2. B2.5%
  3. C3%
  4. D10%
4.Economics conceptsHard

The Marshall–Lerner condition states that a currency depreciation improves the trade balance if:

  1. AInterest rates rise at the same time
  2. BThe sum of the price elasticities of demand for exports and imports exceeds 1
  3. CThe country has a budget surplus
  4. DExports and imports have zero price elasticity

3Solutions

1.Price elasticity of demand

Answer: ΔR = −5513 €

Price elasticity of demand measures how strongly the quantity demanded reacts to price: E = (% change in quantity)/(% change in price). It is negative for normal goods. |E| > 1 is elastic (revenue falls when price rises), |E| < 1 is inelastic.

New price and quantity

P2 = 15·0.85 = €12.75
Q2 = 5 000·1.09 = 5450

Change in revenue

ΔR = 12.75·5450 − 15·5 000 = 69 487.50 − 75 000 = −€5 512.50

Answer

ΔR = −€5 512.50

|E| < 1: demand is inelastic.

2.Price elasticity of demand

Answer: E = −0.4286

Price elasticity of demand measures how strongly the quantity demanded reacts to price: E = (% change in quantity)/(% change in price). It is negative for normal goods. |E| > 1 is elastic (revenue falls when price rises), |E| < 1 is inelastic.

Price at this quantity

P = 40 − 0.02·1 400 = €12.00

Point elasticity

dQ/dP = −1/0.02 = −50
E = −50·12/1 400 = −0.4286

Answer

E = −0.4286

|E| < 1: demand is inelastic.

3.Economics concepts

Answer: C · 3%

Why this is the answer

Subtracting the rise in prices from nominal growth gives real growth of roughly 5% − 2% = 3%.

Answer

C · 3%
4.Economics concepts

Answer: B · The sum of the price elasticities of demand for exports and imports exceeds 1

Why this is the answer

If export and import demand are elastic enough (absolute values summing to more than 1), volume effects outweigh the higher import prices and the balance improves.

Answer

B · The sum of the price elasticities of demand for exports and imports exceeds 1

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