Multiple Choice: Core Models and Decision Traps
The multiple-choice section rewards precision with vocabulary and graphs. You must command scarcity and opportunity cost, the production possibilities curve (efficient vs. inefficient vs. unattainable points, and what shifts it), and comparative advantage using opportunity-cost ratios rather than absolute output. Know the mechanics of supply and demand: determinants (shifters) versus movements along a curve, and how simultaneous shifts leave either price or quantity indeterminate. For elasticity, distinguish price elasticity of demand from income and cross-price elasticity, and connect elasticity to total revenue: if demand is elastic, a price cut raises revenue. Consumer and producer surplus, deadweight loss, and the effect of a binding price ceiling (shortage) or price floor (surplus) are frequent targets.
For the firm, separate accounting from economic profit, know the shapes and relationships of marginal and average cost, and apply the profit-maximizing rule MR = MC under perfect competition, monopoly, and monopolistic competition. Factor markets hinge on MRP = MRC. Market failure questions test externalities (social versus private cost/benefit, the direction of deadweight loss) and public goods (nonrival, nonexcludable, free-rider problem).
Traps to watch
- A change in price moves along the curve; a change in a determinant shifts it.
- In a monopoly, price exceeds marginal revenue because the firm must lower price on all units.
- A lump-sum tax does not change marginal cost, so it does not change output in the short run.
Rule of thumb
When a question asks who should specialize, compare opportunity costs directly: the lower-cost producer specializes, even if the other producer is absolutely better at everything.