💡 Exam Tips — Microeconomics

Common traps, technique, and what examiners actually look for

Exam Technique

For MCQ questions

Draw the diagram first — supply/demand, cost curves, or a payoff matrix. 20 seconds of drawing often makes the answer obvious.
Substitute numbers — don't reason abstractly if you can plug in the given values
Watch the wording — "excess supply" vs "excess demand", "short run" vs "long run", "individual" vs "market" demand
Eliminate — usually one or two options are clearly wrong; then compare the remaining two carefully

For calculations

Formula → substitute → solve — always write the formula first
Label your answer — "Q = 30 units", "P = $45" — examiners check units
Check equilibrium — if you've found P* and Q*, verify they satisfy both equations

For short answers

State the concept clearly first ("A negative externality occurs when...")
Then apply it specifically to the question ("...in this case, the steel plant imposes...")
A concrete numerical example (even made up) often strengthens an answer

Common Exam Traps 🚨

Trap 1: Excess supply vs excess demand sign convention

"At P = $17, Q_D = 12 and Q_S = 24. The excess demand is +12."

❌ Wrong sign. Q_S > Q_D → excess supply = +12 (surplus). Excess demand = Q_D − Q_S = 12 − 24 = −12 (a negative number indicates a shortage only if you write excess demand; writing "excess supply = +12" is cleaner).

Tip: Always check whether price is above or below equilibrium. P > P* → surplus. P < P* → shortage.

Trap 2: WTP for the marginal unit vs total WTP

"MB = 150 − 2q. The consumer's total WTP for 10 units is $130."

❌ Wrong. MB = $130 is the WTP for the 10th unit only (the marginal unit). Total WTP = area under MB from 0 to 10 = ½ × 10 × (150 + 130) = $1,400. The exam often asks for both — read the question carefully.

Trap 3: Horizontal summation — forgetting the kink

"Market demand is found by adding the two individual demand equations together."

❌ Partially wrong. You add the quantities (not the price equations) after inverting to Q = f(P). But the market demand has a kink at the price where one consumer drops out. Above that price, only one consumer is in the market (use their individual demand). Below that price, both are in the market (use the summed curve). A single equation doesn't capture this.

Trap 4: Normal profit vs zero economic profit

"Zero economic profit means the firm is barely surviving and will exit."

❌ Wrong. Zero economic profit means the firm earns exactly its opportunity cost — a normal return on investment. This includes a fair return to the owner's capital and time. Accounting profit is positive. The firm is happy to stay — this is the long-run equilibrium of perfect competition.

Trap 5: Tax burden and elasticity

"Sellers pay the tax, so sellers bear the full burden."

❌ Wrong. Tax incidence depends on relative elasticities, not who writes the cheque. The more inelastic side bears more of the burden. If consumers have inelastic demand (petrol, cigarettes), they bear most of the tax even if producers technically pay it to the government.

Trap 6: Monopoly profit is not the deadweight loss

"The monopolist's $500 profit is a deadweight loss to society."

❌ Wrong. The profit rectangle is a transfer from consumers to the monopolist — it doesn't disappear, it just goes to the firm. The deadweight loss is the triangle of units not produced where WTP > MC. These represent genuinely lost surplus that nobody gets.

Trap 7: Shutdown vs exit

"If P < ATC, the firm should immediately shut down."

❌ Incomplete. In the short run, the firm should shut down only if P < AVC (doesn't cover variable costs). If AVC < P < ATC, the firm is making a loss but covers its variable costs and contributes toward fixed costs — it's better off producing than shutting down (fixed costs are sunk). In the long run, P < ATC means exit (all costs are variable in the LR).

Trap 8: PED along a linear demand curve

"The price elasticity of a straight-line demand curve is constant."

❌ Wrong. Along a linear (straight-line) demand curve, elasticity varies continuously: - High price / low quantity → elastic (|PED| > 1) - Midpoint → unit elastic (|PED| = 1) - Low price / high quantity → inelastic (|PED| < 1)

Only a constant-elasticity demand curve (like Q = AP^ε) has the same elasticity at every point.

What the USYD ECON1001 Exam Emphasises

Based on tutorial questions and IST style:

Supply and demand equilibrium calculations — substituting a price, finding shortage/surplus, equilibrium P and Q
Consumer surplus — MB curve, WTP for a specific unit, CS triangle calculations
Elasticity — PED calculation, who bears a tax, TR test
Horizontal demand summation — invert, sum, invert back; kink at choke price
Cost curves — MC, ATC, AVC relationships; shutdown condition
Profit maximisation — MR = MC; calculating profit as (P − ATC) × Q
Monopoly — MR = a − 2bQ; Q*, P*, profit, DWL
Externalities — overproduction, Pigouvian tax correction

Quick Revision Checklist

Before the exam, make sure you can:

[ ] Solve for equilibrium P and Q from two linear equations
[ ] Calculate excess supply/demand at a non-equilibrium price
[ ] Find a consumer's WTP for the nth unit using MB = f(q)
[ ] Calculate consumer surplus (triangle or from MB function)
[ ] Sum two individual demand curves to get market demand (including the kink)
[ ] Calculate PED and identify elastic vs inelastic
[ ] Determine who bears a tax based on relative elasticities
[ ] Find profit-maximising output (MR = MC) for a monopolist
[ ] Calculate monopoly profit and deadweight loss
[ ] Explain why negative externalities cause overproduction

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