E321 sample TEST2 VERSION1 Page 1 of 18

Indiana University South Bend

Judd Leighton School of Business and Economics

Econ E321 – Fall 2025

Intermediate Microeconomics
Sample Test 2 Student Number

• Name : ________________________________________

• Signature : ________________________________________

• Date :_________________________________________

Instructions

You must hand in the entire test paper without detaching the pages.

1. Time allowed: class period.

2. This is a closed-book, closed-notes test. The test is comprised of two parts. Part A requires
demonstration of solution/explanation and Part B is multiple choice.

3. Only calculators with no capacity to store text are allowed.

4. For Part A (USE PEN OR PENCIL)

• Write your answers and solutions/explanations only in the space provided. Responses
provided elsewhere will be ignored. Pen or pencil may be used.

• Answers with no solutions/explanations will not receive full credit. Answers with
unintelligible handwriting will be treated as incorrect.

5. For Part B (USE PENCIL)

• Use the scantron sheet to answer the multiple choice questions. Write your name, student
number, and date in the space provided. Shade in neatly and completely the response A, B,
C, or D, which you consider to be the best answer to the question using only #2 pencil.

• If you wish to make changes, erase neatly and completely your previous choice, and shade
in the letter that corresponds to your new answer. Unclear or ambiguous answers will be
treated as incorrect.
E321 sample TEST2 VERSION1 Page 2 of 18

Part A Questions: This part requires explanation/demonstration of solutions

= 100 − 5 p and
1) Assume that the following expressions characterize the market for gizmos: QD
QS = −100 + 15 p .

1) What is the equilibrium price? Equilibrium quantity?

• In equilibrium, we have
QD = QS
100 − 5 p =
−100 + 15 p
p* = $10

• Using either demand or supply, we get Q* = 50

QD =100 − 5 p* =100 − 5(10) = 50

QS =
−100 + 15 p* =
−100 + 15(10) =
50

dq
2) The slope of the demand curve is = −5 . What is the price elasticity of demand in equilibrium?
dp

• Recall that p* = $10 and Q* = 50

• Hence, we obtain

p dq
εD =
q dp

10
= (−5)
50

= −1

=1

3) Is demand elastic, inelastic, or unit-elastic?

• Since ε D = 1 , then demand is unit elastic.

• Recall that demand is unit elastic if ε D = 1 , elastic if ε D > 1 , and if inelastic ε D < 1 .
E321 sample TEST2 VERSION1 Page 3 of 18

4 1
2) A firm operates according to y = x1 x2 − x22 − x12 . Inputs 1 and 2 are labor and capital,
5 5
respectively. In the short run, the firm is using x2 = 10 units of capital. The marginal product
2
of labor is MP=1 10 − x1 .
5

1) What is the short run production function?

• In the short run, capital is fixed at x2 = 10 . Hence, we have

4 1
y = x1 x2 − x22 − x12
5 5

4 1
=x1 (10) − (10) 2 − x12
5 5

1
y= 10 x1 − 80 − x12
5

2) At what amount of labor does the production function reaches its peak?

• Recall that the production function reaches its peak when its slope (the marginal product
of labor) is zero. As such,
MP1 = 0

2
10 − x1 =
0
5

x1MAX = 25

3) What is the maximum output?

• The production function is

1
y= 10 x1 − 80 − x12
5
• As such,

1
=
y 10(25) − 80 − (25) 2
5

y MAX = 45
E321 sample TEST2 VERSION1 Page 4 of 18

Part B Questions: Multiple Choice

1) The market demand curve for any good is

A) independent of consumers’ demand curves for the good
B) the vertical summation of consumers’ demand curves
C) the horizontal summation of consumers’ demand curves
D) derived from the firm’s costs of production

• C) Recall that each consumer has an individual demand curve. To obtain the market demand
curve, we take the sum of the individual demands over quantities.

Questions 2 to 3 refer to the following.

The market for caviar is populated by two groups of consumers. Group 1 consumers behave
1 3
according to the demand function D=
1 35 − p . Group 2 buyers follow D
=2 120 − p .
4 2

2) If the prevailing market price is $60, what is the market demand function?
7
A) QD = 155 − p
4

4
= 155 −
B) QD p
7

1
= 35 −
C) QD p
4

= 35 − 4 p
D) QD

• A) If the price is $60, notice that both D 1 and D 2 consumers can buy.

1 3 7
• Hence, the demand is QD = D1 + D2 = (35 − p ) + (120 − p ) =155 − p . The intuition is
4 2 4
based from derivation of the market demand function.

• Step 1) We look for the choke price. Recall that this is the price which makes demand zero.

1
• The choke price for D=
1 35 − p is $140, because D 1 = 0 at that price.
4
3
• =
The choke price for D2 120 − p is $80, because D 2 = 0 at that price.
2
E321 sample TEST2 VERSION1 Page 5 of 18

• Step 2) We observe that when price is less than $80 (p < $80), both D 1 and D 2 consumers buy.
An example of this would be a price of $60. Hence, the demand is

1 3 7
QD = D1 + D2 = (35 − p ) + (120 − p ) =155 − p
4 2 4

• Step 3) We observe that when price is greater than or equal to $140 ( p ≥ $140 ), the price is
too high that no one buys. Hence, demand is

QD = 0

• Step 4) We observe that when price is $80 ≤ p < $140 , only D 1 consumers can buy. Hence,
demand is
1
QD= D= 1 35 − p
4
• Step 5) Summarizing, we have

 7
 155 − 4 p p < $80

 1
QD=  35 − p $80 ≤ p < $140
 4
0 p ≥ $140



3) What is the demand function if the prevailing price is $60?

1
A) QD= 35 − p
4
1
= 35 − p
B) QD
4
3
= 120 − p
C) QD
2
7
= 155 − p
D) QD
4
7
• = 155 −
D) Based from the demand function derived above, if p = $60, then QD p.
4
E321 sample TEST2 VERSION1 Page 6 of 18

4) Use the following two statements to answer this question.

I. The price elasticity of demand is constant along the entire length of a linear demand curve.
II. The price elasticity of demand is equal to the slope of a demand curve.

A) I and II are true

B) I is true, and II is false
C) I is false, and II is true
D) I and II are false

• D) The price elasticity of demand changes along a linear demand curve: it can be elastic,
inelastic, or unit-elastic.

• The slope, on the other hand, is constant. It always gives the same value.

• Hence, the price elasticity of demand is not the same as the slope.

5) Which of the following functions is least likely to represent a real demand curve?
= 120 − 2 p
A) QD
1
= 120 −
B) QD p
2
C) QD = 120 p −1
= 120 + 3 p
D) QD

• = 120 + 3 p , we notice that price p has a positive sign (+3p).

D) In the expression QD

• This says that quantity demanded (QD) is positively related to price (p). That is, as price
increases, quantity demanded increases. This is inconsistent with the law of demand.

• The law of demand says that there is a negative relationship between price and quantity
demanded. We expect that as price increases, quantity demanded decreases.

6) In the market for magazines, QD = 120 − 2 p and QS = 5 p . If the current price of a magazine
is $15, which of the following is true?
A) There is a surplus equal to 15
B) There is a shortage equal to 15
C) There is a surplus, equal to 75
D) There is a shortage, equal to 90
E321 sample TEST2 VERSION1 Page 7 of 18

• B) If price is p = $15, then we have a shortage of 15 magazines.

• = 120 − 2 p
QD ⇒ QD =120 − 2(15) =90

• QS = 5 p ⇒ = = 75
QS 5(15)

• Since QD > QS ⇒ we have a shortage of 90 – 75 = 15

7) The graph below shows the market for gizmos. In equilibrium, consumer surplus is _________.
Suppose that the quantity of gizmos is restricted to 50 units. In this case, total surplus ________
and deadweight loss is approximately________.
A) $65.63; decreases; $57.50
B) $65.63; increases; $115.40
C) $87.50; decreases; $78.125
D) $87.50; increases; $110.15

• C) In equilibrium, p* = $1.50 and Q* = 175

• Consumer surplus = ½ bh = ½ (175)($2.50 – $1.50) = $87.50

• Because the market underproduces, deadweight loss is introduced, which reduces total surplus.

• The deadweight loss is the triangle in red = ½bh = ½(175 – 50)($2.25 – $1) = $78.125
E321 sample TEST2 VERSION1 Page 8 of 18

8) Suppose the market supply function is QS =

−100 + 10 p . For producers to sell some positive
amount of output, they must receive a price
A) equal to $10
B) at least $10
C) no more than $10
D) greater than $10

• D) The expression says that quantity supplied is QS = 0 if price is p = $10.

• We have
QS =
−100 + 10 p

0=
−100 + 10 p

p = $10

• Hence, the price must be greater than $10 (p > $10) to incentivize producers to provide a
positive output level.
E321 sample TEST2 VERSION1 Page 9 of 18

9) The price elasticity of demand is −1.5 and the price elasticity of supply is 1.5. The fraction of
a unit tax that is borne by producers is
A) 0
B) 0.25
C) 0.5
D) 0.75

• C) According to the formula, the tax burden of producers is given by

εD 1.5
= = 0.5 or 50%
ε S + ε D 1.5 + 1.5

10) Refer to the figure below. At point A, demand is:

A) completely inelastic
B) inelastic, but not completely inelastic
C) unit elastic
D) infinitely elastic

• D) From our lecture discussion, we recall that demand is perfectly elastic at point A.

• The price elasticity of demand is infinite.

perfectly elastic: ε D = ∞
E321 sample TEST2 VERSION1 Page 10 of 18

1
11) The market demand for toothpaste is QD= 12 − p . The choke price is_________. At that
25
price, consumer surplus is_________.
A) 0; $300
B) 120; $150
C) 40; $200
D) 300; $0

• D) The choke price is the price which makes quantity demanded zero. As such, solving for
price p when quantity demanded is QD = 0, we get

1
QD= 12 − p
25

1
=
0 12 − p
25

p = $300

• At the choke price, QD = 0. Hence, intuitively, consumer surplus is $0.

Questions 12 and 13 refer to the following.

The demand and supply for the cigarette market is QD= 10 − 2 p and QS =−2 + 2 p . Suppose the
government levies an excise tax of $2 per pack on the sellers.

12) In the presence of a tax, what is the price that buyers pay? What is the price that sellers
receive?
A) The price that buyers pay is $4. The price that sellers receive is $2
B) The price that buyers pay is $2. The price that sellers receive is $4
C) The price that buyers pay is $4. The price that sellers receive is $4
D) The price that buyers pay is $2. The price that sellers receive is $2

• A) We have p B = $4 and p S = $2 obtained as follows:

• Since the tax is imposed on the sellers, we have p=

S
pB − t .

• The supply curve becomes QS TAX =−2 + 2 p S =−2 + 2( p B − t ) =−2 + 2( p B − 2) =−6 + 2 p B

• In equilibrium, QD =QS TAX ⇒ 10 − 2 p B =−6 + 2 p B ⇒ p B =$4

• As was noted, p=
S
p B − t . Hence, p S = $4 − $2 = $2
E321 sample TEST2 VERSION1 Page 11 of 18

13) Find the resulting equilibrium quantity when there is a tax. How much is the tax revenue
collected by the government?
A) The equilibrium quantity is 2. The tax revenue is $2
B) The equilibrium quantity is 4. The tax revenue is $4
C) The equilibrium quantity is 2. The tax revenue is $4
D) The equilibrium quantity is 4. The tax revenue is $2

• C) We will get QTAX = 2 as follows:

QD =
10 − 2 p B =
10 − 2(4) =2
QS TAX =−6 + 2 p B =−6 + 2(4) =2

• The tax revenue is (tax rate t )(quantity with tax QTAX ) =($2)(2) = $4

14) Use the following two statements to answer this question:

I. The production function describes what is feasible when the firm operates efficiently.
II. The production function shows the profitable method of producing a given level of output.

A) Both I and II are true

B) I is true, and II is false
C) I is false, and II is true
D) Both I and II are false

• B) By definition, the production function shows the maximum amount of output that can be
produced from a given level of input. It does not show the profitable method of production.

• It delineates the following:

• Production is efficient if it is a point on/along the production function.

• Production is inefficient if it is a point below the production function.
• Production is unfeasible or impossible if it is point above the production function.

15) If two inputs are perfect complements, the isoquant would be

A) convex
B) right-angled
C) positively sloped and linear
D) negatively sloped and linear

• B) For perfect complements, the isoquant is L- shaped or right angled in that the firm must
always operate at the kink/vertex.
E321 sample TEST2 VERSION1 Page 12 of 18

16) Which of the following statements is true?

A) The law of diminishing marginal product is a long-run concept and decreasing returns to scale
is a short-run concept
B) The law of diminishing marginal product is a short-run concept and decreasing returns to scale
is a long-run concept
C) Both the law of diminishing marginal product and decreasing returns to scale are short-run concepts
D) Both the law of diminishing marginal product and decreasing returns to scale are long-run concepts

• B) Diminishing marginal product occurs when there is a fixed input, which creates congestion.

• For instance, increasing the number of workers when the store space is fixed would lower the
marginal product of workers. When there is a fixed input, we are in the short run.

• Returns to scale occurs in the long run in that we observe both inputs increasing by the same
proportional amount. This applies to constant, increasing, and decreasing returns to scale.

17) If labor as an input is measured along the horizontal axis and capital as an input is measured
along the vertical axis, then the marginal rate of technical substitution is equal to
A) the marginal product of capital divided by the marginal product of labor
B) the marginal product of labor divided by the marginal product of capital
C) the marginal product of labor multiplied by the marginal product of capital
D) the change in labor divided by the change in capital

MP1
• B) As defined, the marginal product is MRTS = − , where input 1 is labor and input 2 is
MP2
capital.

18) Diminishing marginal rate of technical substitution is consistent with:

A) upward sloping isoquants
B) straight line isoquants
C) the slope of the isoquant decreasing in absolute value
D) the slope of the isoquant being positive

• C) By definition, diminishing marginal rate of substitution (MRS) says that the MRS (which
is the slope of the isoquant) decreases in absolute value as a firm uses more of input 1.

19) At any given point on the curve, the slope of the production function always equals
A) the ratio of the marginal product and the average product
B) the change in input divided by the change in output
C) the average product of the input
D) the marginal product of the input

• D) Graphically, the marginal product of an input is the slope of the production function.
E321 sample TEST2 VERSION1 Page 13 of 18

20) Which of the following statements best summarizes the law of diminishing marginal product?
A) In the short run, as more labor is hired, output diminishes
B) In the short run, as more labor is hired, output increases at a diminishing rate
C) In the long run, the amount of labor a firm will hire diminishes as output increases
D) As more labor is hired, the length of time that defines the short run diminishes

• B) By definition, diminishing marginal product occurs in the short run.

• What happens is that with other inputs held constant, as more and more units of labor are
employed, output still increases, but at a diminishing rate.

Questions 21 to 22 refer to the following.

3 1
A firm selling gizmos operates according to the production function y = 100 x x , for which
1
4 4
2
1 1 3 3
− −
MP1 = 75 x1 x and MP2 = 25 x x
4 4
2
4
1 2
4
.

21) What is the MRTS if the firm uses 3 units of labor and 2 units of capital? Interpret.
A) MRTS = 1. The firm is willing to give up 1 unit of capital to obtain an additional unit of labor

B) MRTS = 2. The firm is willing to give up 2 units of capital to obtain an additional unit of labor

C) MRTS = 3. The firm is willing to give up 3 units of capital to obtain an additional unit of labor

D) MRTS = 4. The firm is willing to give up 4 units of capital to obtain an additional unit of labor

• B) We have
1 1
−
4 4
MP1 75 x1 x 3x
MRTS =
− =
− 3
=
− 2 2
3
MP2 x1 −
25 x14 x 2
4

3 x2 3(2)
• Hence, the MRTS is − =
− =
−2
x1 3

• This means that the firm is willing to give up 2 units of capital to obtain an additional unit of
labor.

22) Does the firm exhibit diminishing MRTS?

A) Yes
B) No, it is actually constant
C) No, it is actually increasing
D) Cannot be determined
E321 sample TEST2 VERSION1 Page 14 of 18

• D) Yes. Diminishing MRTS means the MRTS (in absolute value) decreases as x1 increases.

3 x2 3x 3x
• We have MRTS =− ⇒− 2 = 2 .
x1 x1 x1

• With x1 being in the denominator, we find that the MRTS decreases as x1 increases.

1 4
23) The production of gizmos is modeled as y = x15 x25 . If usage of labor and capital are
quadrupled, then the output of gizmos will
A) double
B) triple
C) quadruple
D) remain the same

1 4
• C) We note that the production function exhibits constant returns to scale as + =1.
5 5

• Hence, output will also quadruple.

24) Which of the following statements is correct?

A) For a linear production function, the marginal product of input 1 is constant
B) For a Leontief production function, the firm always operates at the vertex of the isoquant
C) The marginal rate of technical substitution for perfect substitutes is constant
D) all of the above

• D) The following are valid statements:

• A linear production function is used to show inputs which are perfect substitutes of each other.
In this case, the marginal product of an input is going to be constant.

• In a Leontief production function, inputs are perfect complements of each other. The isoquant
is L-shaped, which shows that production is always at the vertex or kink.

• For perfect substitutes, the isoquant is a straight line, which indicates that the slope (MRTS) is
constant.
E321 sample TEST2 VERSION1 Page 15 of 18

25) Which of the following production functions exhibit constant returns to scale?
1 1
I. y = x13 x22
1 1
II. y = 3 x12 x22
1 1
III. =
y x +x 1
2 2
2

IV.= y 3 x1 + 2 x2
A) I and IV
B) III and IV
C) II and III
D) II and IV

• D) The following production function are constant returns to scale:

1 1 
1 1
• y = 3 x12 x22 ⇒ The exponents sum to 1 (  + =1
2 2 

• =
y 3 x1 + 2 x2 ⇒ Output doubles if we double the inputs, (2)3 x1 + (2)2 x2 = 2(3 x1 + 2 x2 ) = 2 y

Questions 26 to 28 refer to the following.

Dante is a supplier of caviar. He operates his firm according to the production

1 1 1 1 1 3
− −
function y = 4 x12 x24 . The marginal products are MP1 = 2 x1 2 x24 and MP2 = x12 x2 4 . Suppose factor
=
prices are =
w1 $50, w2 $50 and the output price is p = $100 . Suppose that x=
2 x=
2 1.

26) What is the optimization rule for profit maximization in the short run?
A) pMP1 = w1 and pMP2 = w2
B) pMP1 = w1
C) pMP1 > w1
D) pMP1 < w1

• B) In the short run, maximum profit is obtained when pMP1 = w1

27) How many units of labor should Dante employ to profit-maximize?

A) 5
B) 10
C) 16
D) 18
E321 sample TEST2 VERSION1 Page 16 of 18

• C) We have x1* = 16

• Since capital is fixed x=

2 x=
2 1 , we are in the short run.

• Dante follows pMP1 = w1 , obtaining:

pMP1 = w1

 −1 1
(100)  2 x1 2 (1) 4  = 50
 

 −1
(100)  2 x1 2  = 50
 

x1* = 16

28) What is his profit?

A) $620
B) $640
C) $750
D) $780

• C) Profit is π * = $750 , calculated as follows.

π =py − ( w1 x1 + w2 x2 )

 1 1

= ($100)  4(16) 2 (16) 4  − ( ($50)(16) + ($50)(1) )
 

π * = $750
E321 sample TEST2 VERSION1 Page 17 of 18

Questions 29 and 30 refer to the following.

1 1
1 − 12 14
Consider a firm with production function y = x x . The marginal products are MP1 =
2 4
1 2 x1 x2
2
1 12 − 34
and MP2 = =
x1 x2 . The factor prices are =
w1 $2, w2 $1 and the output price is p = $4 .
4

29) How many units of labor ( x1 ) and capital ( x2 ) should the firm employ to profit-maximize?
A) 1 unit of labor and 1 unit of capital
B) 2 units of labor and 3 units of capital
C) 6 units of labor and 4 units of capital
D) 4 units of labor and 5 units of capital

• A) The firm employs 1 unit of labor ( x1* = 1 ) and 1 unit of capital ( x2* = 1 ).

• We are in the long run, since labor and capital are variable. The firm then follows the profit-
maximization rule

pMP1 = w1

pMP2 = w2

• Hence, using the same procedure we discussed in class

pMP1 w1
=
pMP2 w2

• For which we get

1 − 1 1 
(4)  x1 2 x24 
2 =2
1 1
− 
3
1
(4)  x12 x2 4 
4 

2 x2
=2
x1

x2 = x1
E321 sample TEST2 VERSION1 Page 18 of 18

• We insert x2 = x1 into pMP1 = w1 , to get

1 − 1 1 
(4)  x1 2 x24  = 2
2 

1 − 1 1 
(4)  x1 2 x14  = 2
2 

1
−
2 x1 4
=2

x1* = 1

• Since x2 = x1 , then x=
*
2 x=
*
1 1

30) What is the optimal profit?

A) $56
B) $44
C) $2
D) $1

• D) Profit is $1, which we obtain as follows.

• Noting that output is

1 1
y = x12 x24

1 1
= (1) 2 (1) 4

y* = 1

• Profit is then
π =py − ( w1 x1 + w2 x2 )

= ($4) (1) − ( ($2)(1) + ($1)(1) )

π * = $1