Section 1

Introductory Microeconomics (Econ 101) Final Examination - Cheatsheet

STUDY GUIDE

🎓 Introductory Microeconomics (Econ 101) - Study Guide

📋 Course Structure


code
📚 Introductory Microeconomics (Econ 101)
├── 📖 Chapter 1: Foundations of Economic Decision Making
│   ├── 🔹 Opportunity Cost and Economic Rent
│   └── 🔹 Absolute and Comparative Advantage
├── 📖 Chapter 2: Supply, Demand, and Market Dynamics
│   ├── 🔹 Price Elasticity of Demand and Supply
│   ├── 🔹 Market Equilibrium and Simultaneous Shifts
│   └── 🔹 Government Intervention: Price Controls and Taxes
├── 📖 Chapter 3: Theory of the Consumer
│   ├── 🔹 Utility Maximization and Budget Constraints
│   ├── 🔹 Income and Substitution Effects
│   └── 🔹 Consumer Surplus
├── 📖 Chapter 4: Firm Production, Costs, and Perfect Competition
│   ├── 🔹 Production Costs and Profit Calculation
│   └── 🔹 Perfect Competition in the Short Run and Long Run
├── 📖 Chapter 5: Monopoly and Price Discrimination
│   ├── 🔹 Simple Monopoly Profit Maximization
│   └── 🔹 Efficiency and Price Discrimination
└── 📖 Chapter 6: Monopolistic Competition, Oligopoly, and Game Theory
    ├── 🔹 Monopolistic Competition
    ├── 🔹 Oligopoly Models and Strategic Variable
    └── 🔹 Game Theory and Nash Equilibrium

Section 2

📖 Chapter 1: Foundations of Economic Decision Making

What this chapter covers: This chapter introduces fundamental microeconomic principles related to decision-making under scarcity. It emphasizes opportunity cost, absolute advantage, and comparative advantage as drivers of trade and specialization. The goal is to understand how evaluating trade-offs leads to efficient resource allocation and mutually beneficial exchange.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Opportunity Cost	Value of next best alternative foregone	Evaluating choices, resource allocation	Ensure all relevant costs (explicit & implicit) are included
Absolute Advantage	Ability to produce a good using fewer resources	Determining who is most efficient at producing a good	Compare input requirements for each producer
Comparative Advantage	Ability to produce a good at a lower opportunity cost	Determining specialization and trade patterns	Calculate opportunity costs for each good and producer
Economic Rent	Payment above what's required to keep a resource in its current use	Analyzing factor payments, resource allocation	Check if payment exceeds the minimum required to retain the resource

🛠️ Problem Types

Type A: Calculating Opportunity Cost

Setup: "When you encounter scenarios involving choosing between multiple alternatives with different costs and benefits."

Method: "Identify all explicit and implicit costs associated with each alternative. Calculate the net benefit of each option by subtracting total costs from total benefits. The opportunity cost of choosing one option is the net benefit of the next best alternative foregone."

Example: "You have a free ticket to a concert worth $0, but you could sell it for$ 450. The opportunity cost of attending the concert includes the $450 you could have earned."

Type B: Determining Comparative Advantage

Setup: "If presented with production data for two individuals or countries producing two different goods."

Method: "Calculate the opportunity cost of producing each good for each individual/country. The individual/country with the lower opportunity cost for a particular good has the comparative advantage in producing that good."

Example: "Christine takes 2 hours to rake leaves and 1 hour to wash windows. Gerrit takes 4 hours to rake leaves and 3 hours to wash windows. Christine's opportunity cost of raking leaves is 2 windows, while Gerrit's is 4/3 windows. Gerrit has the comparative advantage in raking leaves."

🧮 Solved Example

Problem: Ima Baker can earn $15,000 per year working in a factory or farm her own land. Her farming expenses are$ 5,000. What is the minimum she must earn from farming to justify it?

Given: Factory wage = $15,000 Farming expenses =$ 5,000

Steps:

Identify the opportunity cost: Ima's opportunity cost of farming is the $15,000 she could earn in the factory.
Calculate total economic cost: Total economic cost of farming is $15,000 (opportunity cost) +$ 5,000 (expenses) = $20,000.
Determine minimum revenue: Ima must earn at least $20,000 from farming to justify her decision.

"

✅
Answer: Ima must earn at least $20,000 from farming.

⚠️ Common Mistakes

❌ Mistake 1: Ignoring Implicit Costs

✅ How to avoid: Always consider the value of resources owned by the decision-maker (e.g., owner's time, use of owned land).

❌ Mistake 2: Confusing Absolute and Comparative Advantage

✅ How to avoid: Focus on opportunity costs when determining comparative advantage, not just production efficiency.

🦁 Erik's Tip

When calculating opportunity cost, always think "What am I giving up?" Include both explicit monetary costs AND the value of the next best alternative.

📖 Chapter 2: Supply, Demand, and Market Dynamics

What this chapter covers: This chapter explores the fundamental model of supply and demand, focusing on determinants, simultaneous shifts, and price elasticity. It also examines government interventions like price floors, price ceilings, and payroll taxes, analyzing their effects on market equilibrium and welfare.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Price Elasticity of Demand	$\frac{\% \Delta Q^D}{\% \Delta P}$	Measuring responsiveness of quantity demanded to price changes	Check if value is > 1 (elastic), < 1 (inelastic), or = 1 (unit elastic)
Cross-Price Elasticity of Demand	$\frac{\% \Delta Q^D_A}{\% \Delta P_B}$	Determining if goods are substitutes (positive) or complements (negative)	Sign indicates relationship: positive = substitutes, negative = complements
Market Equilibrium	$Q^D = Q^S$	Finding the price and quantity where supply and demand intersect	Graphically, the intersection of supply and demand curves
Price Floor	Legal minimum price	Analyzing effects of minimum wages, agricultural price supports	Binding only if set above equilibrium price
Price Ceiling	Legal maximum price	Analyzing effects of rent control, price gouging laws	Binding only if set below equilibrium price

🛠️ Problem Types

Type A: Calculating Price Elasticity

Setup: "When given percentage changes in price and quantity demanded or supplied."

Final Answer

Method: "Use the midpoint formula:

\frac{(Q_2 - Q_1)/[(Q_2 + Q_1)/2]}{(P_2 - P_1)/[(P_2 + P_1)/2]}

. Interpret the result: elastic, inelastic, or unit elastic."

Example: "If the price of gasoline increases by 10% and the quantity demanded decreases by 2%, the price elasticity of demand is -0.2 (inelastic)."

Type B: Analyzing Simultaneous Shifts in Supply and Demand

Setup: "If presented with scenarios where both supply and demand curves shift simultaneously."

Method: "Determine the direction of each shift. Analyze the unambiguous and ambiguous effects on equilibrium price and quantity. For example, an increase in demand and a decrease in supply will unambiguously increase price, but the effect on quantity is uncertain."

Example: "A popular culture trend increases demand for limes, while a frost decreases the supply. The price of limes will unambiguously increase, but the effect on quantity is uncertain."

🧮 Solved Example

Problem: Market demand is $Q^D = 100 - 2P$ and supply is $Q^S = 3P$ . A price floor of $30 is imposed. What is the market outcome?

Given: $Q^D = 100 - 2P$ $Q^S = 3P$ Price floor = $30

Steps:

Calculate quantity demanded at the price floor: $Q^D = 100 - 2(30) = 40$ .
Calculate quantity supplied at the price floor: $Q^S = 3(30) = 90$ .
Determine the market outcome: Since $Q^S > Q^D$ , there is excess supply (surplus) of $90 - 40 = 50$ units.

"

✅
Answer: Excess supply (surplus) of 50 units.

⚠️ Common Mistakes

❌ Mistake 1: Confusing Elasticity and Slope

✅ How to avoid: Remember that elasticity is unit-free, while slope depends on the units of measurement.

❌ Mistake 2: Incorrectly Identifying Binding Price Controls

✅ How to avoid: A price floor is binding only if it's above the equilibrium price; a price ceiling is binding only if it's below the equilibrium price.

🦁 Erik's Tip

When analyzing simultaneous shifts, draw the supply and demand curves and shift them accordingly. This visual representation will help you determine the unambiguous and ambiguous effects on price and quantity.

📖 Chapter 3: Theory of the Consumer

What this chapter covers: This chapter explores consumer decision-making to maximize utility. It covers budget constraints, indifference curves, the Marginal Rate of Substitution (MRS), deriving demand curves through income and substitution effects, and measuring consumer welfare using consumer surplus.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Budget Constraint	$P_X \cdot X + P_Y \cdot Y = I$	Representing affordable consumption bundles	Ensure all spending is within income (I)
Indifference Curve	Curve showing combinations of goods yielding the same utility	Representing consumer preferences	Higher curves represent higher utility levels
Marginal Rate of Substitution (MRS)	$-\frac{\Delta Y}{\Delta X} = \frac{MU_X}{MU_Y}$	Measuring willingness to trade one good for another	MRS equals the slope of the indifference curve
Consumer Surplus	Willingness to pay - Actual price	Measuring consumer welfare	Area below demand curve and above market price

🛠️ Problem Types

Type A: Utility Maximization

Setup: "When given a utility function, prices of goods, and consumer income."

Method: "Set up the Lagrangian or use the tangency condition: $MRS = \frac{P_X}{P_Y}$ . Solve for the optimal quantities of each good that maximize utility subject to the budget constraint."

Example: "Given $P_X = P_Y = 5$ and an indifference curve map, determine the optimal bundle where the budget line is tangent to the highest attainable indifference curve."

Type B: Income and Substitution Effects

Setup: "When the price of a good changes, analyze the impact on quantity demanded."

Method: "Decompose the total effect into substitution and income effects. The substitution effect always moves opposite to the price change. The income effect depends on whether the good is normal or inferior."

Example: "If the price of a normal good increases, the substitution effect will decrease quantity demanded, and the income effect will also decrease quantity demanded."

🧮 Solved Example

Problem: A consumer has a linear demand curve for a free broadcast with an intercept at $10 and quantity at 20 million. Calculate the total consumer surplus.

Given: Demand curve intercept = $10 Quantity = 20 million

Steps:

Identify the shape of the demand curve: The demand curve is linear.
Calculate the area of the consumer surplus triangle: Consumer surplus = $\frac{1}{2} \cdot \text{base} \cdot \text{height} = \frac{1}{2} \cdot 20,000,000 \cdot 10 = 100,000,000$ .

"

✅
Answer: Total consumer surplus is $100 million.

⚠️ Common Mistakes

❌ Mistake 1: Incorrectly Calculating MRS

✅ How to avoid: Ensure you are taking the ratio of marginal utilities correctly ( $MU_X/MU_Y$ ).

❌ Mistake 2: Misidentifying Income and Substitution Effects

✅ How to avoid: Remember that the substitution effect always moves opposite to the price change, while the income effect depends on the type of good (normal or inferior).

🦁 Erik's Tip

When analyzing income and substitution effects, draw a graph showing the initial budget line, the new budget line after the price change, and the hypothetical budget line to isolate the substitution effect.

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Introductory Microeconomics (Econ 101) Final Examination - Cheatsheet

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Introductory Microeconomics (Econ 101) Final Examination - Cheatsheet

🎓 Introductory Microeconomics (Econ 101) - Study Guide

📋 Course Structure

📖 Chapter 1: Foundations of Economic Decision Making

🔑 Essential Concepts & Formulas

🛠️ Problem Types

🧮 Solved Example

⚠️ Common Mistakes

🦁 Erik's Tip

📖 Chapter 2: Supply, Demand, and Market Dynamics

🔑 Essential Concepts & Formulas

🛠️ Problem Types

🧮 Solved Example

⚠️ Common Mistakes

🦁 Erik's Tip

📖 Chapter 3: Theory of the Consumer

🔑 Essential Concepts & Formulas

🛠️ Problem Types

🧮 Solved Example

⚠️ Common Mistakes

🦁 Erik's Tip

5 more sections