Microeconomics

Evidence: the passage says the owner pays "$1,200 per month for rent and an equipment loan, no matter how many loaves she bakes." The table's Fixed cost column is $1,200 in every row, from 0 loaves to 800 loaves.

Step by step:

1. A fixed cost does not change when output changes.
2. Rent must be paid even if the bakery bakes nothing—so it is fixed.
3. Flour, paper bags, and butter are used up with each loaf or batch. The more bread she bakes, the more she spends on them. Those are variable costs (the passage's "$2 per loaf" for ingredients and packaging).

Answer: the monthly rent on the shop.

Why it matters: a business must cover its fixed costs before it can earn any profit. That is why the bakery loses $1,200 if it bakes nothing.

Tip: ask "Would I still pay this if I closed for a month but kept the business?" If yes, it is fixed. If it goes up and down with production, it is variable.

The four factors of production:

• Land — natural resources (soil, water, oil, timber).
• Labor — human work and effort (the landscapers' time and skill).
• Capital — human-made tools, machines, and buildings used to produce goods and services (trucks, mowers, computers).
• Entrepreneurship — the risk-taking and organizing that brings the other factors together (the owner who started the company).

Step by step:

1. The truck is a human-made tool.
2. It is used to produce a service (landscaping), not consumed for its own sake.
3. Human-made tools used in production = capital.

Answer: capital.

Note: in economics, capital means physical tools and equipment, not money. Money is used to buy capital.

Tip: sort with three quick questions: Is it from nature? (land) Is it human effort? (labor) Is it a human-made tool? (capital). The person taking the risk is the entrepreneur.

Data: price = $5 per loaf; the 600-loaf row shows total cost = $2,400.

Step by step:

1. Total revenue = price × quantity = $5 × 600 = $3,000.
2. Profit = total revenue − total cost = $3,000 − $2,400 = $600.

Check with per-loaf thinking: each loaf brings in $5 and costs $2 in ingredients, leaving $3 toward fixed costs. 600 loaves × $3 = $1,800. Subtract the $1,200 fixed cost: $1,800 − $1,200 = $600. ✔

Why the others are wrong: $3,000 is revenue, not profit. $1,800 forgets the fixed cost. $1,200 is a cost (the variable cost, and also the fixed cost, at 600 loaves), not profit.

Answer: $600

Tip: revenue is what comes in; profit is what is left after all costs—fixed and variable.

Evidence: the passage lists rent ($2,100), insurance ($400), and the tool lease ($500) as costs "that do not change with the number of repairs." It says each repair "uses replacement parts and cleaning supplies that cost $15 per repair." In the table, the Variable cost column grows from $0 to $3,000 as repairs rise, while Fixed cost stays at $3,000.

Step by step:

1. A variable cost rises and falls with output.
2. Rent, insurance, and the lease are paid even in a month with zero repairs, so they are fixed.
3. Parts and supplies are used up on every repair. Fifty repairs use $750 of them; 200 repairs use $3,000.

Answer: the replacement parts and cleaning supplies.

Check: look at the 0-repair row. Every cost still being paid there is fixed. Parts cost $0 at 0 repairs, so they are variable.

Tip: a quick test: "If the shop closed for a month but kept the lease, would I still pay this?" Yes means fixed; no means variable.

Data: price $40 per repair; the 200-repair row shows total cost = $6,000 ($3,000 fixed + $3,000 variable).

Step by step:

1. Total revenue = $40 × 200 = $8,000.
2. Profit = total revenue − total cost = $8,000 − $6,000 = $2,000.

Answer: $2,000.

Check: each repair brings in $40 and uses $15 of parts, leaving $25. Two hundred repairs leave 200 × $25 = $5,000 to cover the $3,000 of fixed costs, and $5,000 − $3,000 = $2,000. Both methods agree.

Why the other choices tempt people: $8,000 is revenue, not profit; $5,000 subtracts only the fixed cost; $6,000 is the total cost itself.

Tip: profit always uses total cost—fixed plus variable. Write "revenue − total cost" before you plug in numbers.

Evidence: paragraph 1: "Building a second network of underground pipes would cost hundreds of millions of dollars, so no other company has tried to compete."

Step by step:

1. The word "so" signals cause and effect: huge start-up cost → no competitors.
2. A cost that keeps new firms out of a market is called a barrier to entry. Very high barriers create a monopoly. When one firm can serve everyone more cheaply than two firms could, economists call it a natural monopoly—common for water, electricity, and gas lines.
3. The state price commission is a result of the monopoly ("Because customers have no other choice, a state commission must approve any change in water prices"), not the reason for it.
4. Water is not described as differentiated, and the passage says nothing about customers preferring one company.

Answer: The very high cost of building pipes keeps other companies from entering the market.

Tip: for "why" questions, look for signal words such as so, because, as a result. Make sure you don't pick an effect when the question asks for a cause.

Data: both prices rose 20%. Gasoline purchases fell only 4%; restaurant meal purchases fell 30%.

Step by step:

1. Inelastic demand: quantity changes by a smaller percentage than price. Gasoline: 4% < 20% → inelastic.
2. Elastic demand: quantity changes by a larger percentage than price. Restaurant meals: 30% > 20% → elastic.
3. The passage explains why: drivers "have no easy substitute for gasoline in the short run," while diners "can easily cook at home." Goods with few substitutes and that are necessities tend to have inelastic demand; goods with many substitutes or that are luxuries tend to be elastic.

Answer: Demand for gasoline is inelastic, and demand for restaurant meals is elastic.

Tip: "elastic" = stretchy = buyers respond a lot. Compare the percent change in quantity to the percent change in price: bigger → elastic, smaller → inelastic.

Data: median weekly earnings rise at every step: $708 → $899 → $992 → $1,058 → $1,493 → $1,737.

Step by step:

1. Each bar is taller than the one to its left, so median earnings rise with each higher level of education shown. ✔
2. "Every worker with a bachelor's degree earns $1,493" — no. The passage explains the median is the middle value: half earned more, half earned less.
3. "Master's degree holders earn more than three times as much as high school graduates" — $1,737 ÷ $899 ≈ 1.9, so less than twice as much.
4. "Education is the only reason earnings differ" — the graph shows a pattern (correlation), not that education is the only cause. Experience, occupation, and location also matter.

Answer: Median weekly earnings were higher at each higher level of education shown.

Labor-market link: workers with more education often have skills that are scarcer and in higher demand, so employers pay more for them.

Tip: the GED often tests whether a conclusion goes too far. A graph can show a pattern; it rarely proves a single cause.

Evidence: the table shows the change in quantity bought after the same +10% price increase: electricity −2%, sneakers −22%, heart medicine −1%, concert tickets −16%.

Step by step:

1. "Least responsive" means the smallest change in quantity when the price changed.
2. Compare the sizes of the drops: 1% < 2% < 16% < 22%.
3. The smallest drop is for prescription heart medicine (−1%).

Why it makes sense: the researchers note that households have "few substitutes … for a medicine their doctor prescribes." When there is no good substitute, buyers keep buying even when the price rises, so demand is very inelastic.

Answer: prescription heart medicine.

Check: −1% is much smaller than +10%, which confirms inelastic demand.

Tip: in elasticity tables, ignore the minus signs when you compare how much buyers reacted—look at the size of the number.

Evidence: paragraph 1: employers "posted about 900 openings for welders," while the valley "had about 1,200 working welders, and many of them were close to retirement." Paragraph 2: pay "climbed from $24 to $29 per hour," and employers began offering "signing bonuses."

Step by step:

1. The shipyard and pipelines raised the demand for welders—900 new openings.
2. The supply of welders did not grow to match; if anything, retirements were shrinking it.
3. When demand for workers rises faster than supply, employers compete for the few available workers by raising wages and offering bonuses.

Answer: demand for welders increased faster than the supply of welders.

Check: the signing bonuses are a second sign of a labor shortage—employers would not pay extra to attract workers if many were available.

Tip: wages are a price—the price of labor. Use the same supply-and-demand logic you use for goods: more demand or less supply pushes the price up.

Evidence: the graph shows food prep workers at $14.50 and registered nurses at $41.25 per hour. The table shows food prep needs "a few days of on-the-job training," while nursing needs "a two- to four-year nursing degree and a state license."

Step by step:

1. Long training and a license limit how many people are able to work as nurses, so the supply of nurses is small.
2. Hospitals and clinics still need nurses, so demand is strong.
3. Strong demand plus limited supply → a high price for that labor → high wages.
4. Almost anyone can be trained for food prep in a few days, so the supply of those workers is large and wages are lower.

Answer: the long training and license requirement keep the supply of nurses small relative to demand.

Check: the choice about hours worked fails because the graph shows hourly wages, which already adjusts for hours.

Tip: when a job needs rare skills, think "small supply." Small supply with steady demand means higher pay.

Evidence: the table shows a total cost of $100 at 0 shirts, and the passage explains that "the cost at 0 shirts is the cost of keeping the shop open for the day even if nothing is printed."

Step by step:

1. A fixed cost does not change with output.
2. When output is zero, there are no variable costs (no ink, no blank shirts), so every dollar still owed must be fixed.
3. Total cost at 0 shirts = $100 → fixed cost = $100.

Answer: $100.

Check: at 10 shirts total cost is $200. That is $100 fixed + $100 variable for the first batch, which matches the passage's "adds $100 to total cost."

Tip: when a table gives only total cost, the fixed cost is the total cost at zero output. Every other row = that fixed cost + some variable cost.

Evidence: paragraph 1: Medira "holds a government patent on the medicine until 2034, so no other company may legally make or sell a copy before then."

Step by step:

1. A barrier to entry is anything that makes it hard for new sellers to enter a market.
2. In this paragraph the barrier is legal: a patent gives the inventor the sole right to make and sell the product for a period of years.
3. The passage does not mention building costs, government price-setting, or identical products for Medira.

Answer: a patent makes it illegal for others to copy the medicine until 2034.

Check: the word "legally" in the sentence signals a legal barrier, not a cost barrier. The high startup costs belong to the airlines in paragraph 2.

Tip: common barriers to entry on the GED are huge startup costs, patents and copyrights, government licenses, and control of a key resource. Match the barrier to the exact words in the passage.

Evidence: the passage says each repair "uses replacement parts and cleaning supplies that cost $15 per repair," and that the $3,000 of rent, insurance, and lease does "not change with the number of repairs." In the table, every 50 extra repairs adds $750 to total cost.

Step by step:

1. Marginal cost = the increase in total cost from producing one more unit.
2. One more repair does not change the fixed $3,000.
3. It does add one set of parts and supplies: $15.
4. Check with the table: $750 ÷ 50 repairs = $15 per repair.

Answer: $15.

Why the others tempt: $40 is the price the customer pays; $25 is the price minus the parts (what each repair adds to profit); $30 is the average total cost at 200 repairs ($6,000 ÷ 200).

Tip: fixed costs never affect marginal cost. Marginal cost comes only from the costs that change with output.

Evidence: paragraph 3: "With help from investors, she bought new welding machines and two large cranes."

Step by step:

1. Capital = human-made tools, machines, and buildings used to produce goods and services.
2. Welding machines and cranes are built by people and used to build ships → capital.
3. The welders themselves are labor. Dana Reyes, who "risked her own savings," provides entrepreneurship. The river is a natural resource, so it counts as land.
4. The investors' money is financial capital. It is used to buy capital goods, but money itself does not weld or lift anything, so on the GED it is not the factor of production called capital.

Answer: the welding machines and cranes.

Check: ask "Could this resource be used directly to make a ship?" Machines and cranes can; a bank balance cannot.

Tip: the GED often uses money as a trap answer for "capital." Think tools and equipment, not cash.

Data: original fixed cost $1,200; price $5; variable cost $2 per loaf.

Step by step:

1. New fixed cost = $1,200 + $300 = $1,500.
2. Each loaf still contributes $5 − $2 = $3 toward fixed costs.
3. Break-even = $1,500 ÷ $3 = 500 loaves.

Check: at 500 loaves, revenue = $5 × 500 = $2,500. Total cost = $1,500 + ($2 × 500) = $1,500 + $1,000 = $2,500. Profit = $0. ✔

Why the others are wrong:

• 400 loaves was the old break-even; it ignores the rent increase.
• 100 loaves is only the extra loaves needed ($300 ÷ $3), not the total.
• 300 loaves divides $1,500 by $5, ignoring the $2 ingredient cost per loaf.

Answer: 500 loaves

Tip: a rise in fixed costs raises the break-even point but does not change the profit earned on each extra loaf. Multi-step questions reward writing each step down.

Data: restaurant meals: price +20%, quantity −30%.

Step by step (using sample numbers):

1. Before: $10 per meal × 100 meals = $1,000.
2. After: price = $10 × 1.20 = $12. Quantity = 100 × 0.70 = 70 meals.
3. New revenue = $12 × 70 = $840.
4. Change: ($840 − $1,000) ÷ $1,000 = −0.16 → revenue falls about 16%.

Shortcut: 1.20 \times 0.70 = 0.84, so revenue is 84% of what it was—a 16% drop.

Why: demand for restaurant meals is elastic. When demand is elastic, raising the price drives away so many buyers that total revenue falls. (For gasoline, inelastic demand means revenue would rise: 1.20 \times 0.96 = 1.152, about +15%.)

Answer: Revenue falls by about 16%.

Tip: a price change and a quantity change combine by multiplying (1.20 × 0.70), not by adding or ignoring one of them.

Evidence: for brand-name sneakers, the table shows price +10% and quantity bought −22%.

Step by step:

1. New price = 110% of the old price → factor 1.10.
2. New quantity = 100% − 22% = 78% of the old quantity → factor 0.78.
3. New revenue = 1.10 × 0.78 = 0.858 of the old revenue.
4. 1 − 0.858 = 0.142 → revenue falls by about 14%.

Answer: it decreases by about 14%.

Check with numbers: if the store sold 100 pairs at $100, revenue was $10,000. After the change it sells 78 pairs at $110 = $8,580. $8,580 is about 14% less than $10,000. ✔

The tempting shortcut: "+10% − 22% = −12%" gives the right direction but the wrong size, because percents of different bases cannot simply be added.

Tip: when demand is elastic, a price increase lowers total revenue. To get the exact amount, multiply the factors—never just add the percents.

Evidence: paragraph 4: the college "expects about 300 new welders to graduate each year." Employers "will keep hiring as long as the shipyard and pipelines stay busy," and the question says demand stays the same.

Step by step:

1. The program adds trained workers → the supply of welders increases.
2. Demand is unchanged by assumption.
3. With more workers competing for the same openings, employers no longer need to raise pay as fast to fill jobs. Pay increases are likely to slow down or level off.

Answer: pay is likely to rise more slowly or level off, because the supply of welders increases.

Check: this is the opposite of what caused the original wage jump (paragraphs 1–2): then demand rose while supply was tight. Adding supply reverses that pressure.

Tip: in "suppose" questions, change only one thing at a time. Training programs, immigration, and graduates change supply; new factories or projects change demand.

Data: total cost at 40 shirts = $440; at 50 shirts = $570; price = $12 per shirt.

Step by step:

1. Extra cost of the 10 extra shirts = $570 − $440 = $130, or $13 per shirt.
2. Extra revenue of the 10 extra shirts = 10 × $12 = $120, or $12 per shirt.
3. Each extra shirt costs $13 to make but brings in only $12 → profit falls.
4. Profit at 40: $480 − $440 = $40. Profit at 50: $600 − $570 = $30. Expanding lowers profit by $10.

Answer: No—the marginal cost of $13 per shirt is higher than the $12 price, so profit would fall.

Check: revenue does rise (from $480 to $600), which is why "yes, revenue rises" tempts people. But profit depends on revenue minus cost.

Tip: the marginal rule: keep producing more only while the extra revenue from each unit is at least as large as its marginal cost.

Data: price $12 per shirt; total cost from the table.

Step by step — profit for each row:

The largest profit, $40, is at 40 shirts.

Check with marginal cost: from 30 to 40 the marginal cost is $90 ÷ 10 = $9 per shirt, below the $12 price, so the batch adds profit. From 40 to 50 it is $13 per shirt, above $12, so that batch subtracts profit. Stop at 40.

Answer: 40 shirts.

Tip: the output with the most revenue (50 shirts) or the lowest marginal cost (20 to 30 shirts) is not automatically the most profitable. Profit is the gap between revenue and cost.

Evidence: paragraph 3 describes "about forty" salons, easy entry, and products that differ ("its own styles, prices, and booking app"). That is monopolistic competition: many sellers, differentiated products, easy entry.

Check each choice:

• Dozens of food trucks, each with its own menu and style → many sellers, easy to start, different products → monopolistic competition. ✔
• Hundreds of soybean growers selling identical beans at the market price → perfect competition (like the dairy farms in paragraph 4).
• The only natural gas pipeline into a town → monopoly (like Medira Labs).
• Three companies that build nearly all the country's freight railcars → oligopoly (like the two airlines).

Answer: dozens of downtown food trucks, each with its own menu and style.

Tip: two questions sort every market: How many sellers? (one, a few, many) and Are the products identical or different? Many sellers + different products = monopolistic competition.

Evidence: after a +10% price increase, electricity purchases fell 2% and concert ticket purchases fell 16%.

Step by step:

1. Electricity: new revenue factor = 1.10 × 0.98 = 1.078 → revenue rises about 8%.
2. Concert tickets: new revenue factor = 1.10 × 0.84 = 0.924 → revenue falls about 8%.
3. Only the electricity increase brings in more money.

Why: demand for electricity is inelastic (2% < 10%), so the higher price outweighs the small loss in sales. Demand for concert tickets is elastic (16% > 10%), so the lost sales outweigh the higher price.

Answer: raise the electricity price—revenue rises by about 8%.

Check: with numbers, $1,000 of electricity sales becomes $1,078; $1,000 of ticket sales becomes $924.

Tip: to raise revenue, raise the price where demand is inelastic. Raising the price of an elastic good lowers revenue.

Data: fixed cost $3,000; price $40; new variable cost $20 per repair; profit goal $1,500.

Step by step:

1. Each repair now contributes $40 − $20 = $20 toward fixed costs and profit.
2. Amount to cover = fixed cost + target profit = $3,000 + $1,500 = $4,500.
3. Repairs needed = $4,500 ÷ $20 = 225.

Check: revenue = 225 × $40 = $9,000. Total cost = $3,000 + 225 × $20 = $3,000 + $4,500 = $7,500. Profit = $9,000 − $7,500 = $1,500. ✔

Answer: 225 repairs.

Why the others tempt: 180 uses the old $15 parts cost ($4,500 ÷ $25); 150 forgets the profit goal ($3,000 ÷ $20, the new break-even point); 113 divides by the price and ignores variable cost ($4,500 ÷ $40 ≈ 113).

Tip: target quantity = (fixed cost + target profit) ÷ (price − variable cost per unit). Break-even is the same formula with a target profit of $0.

Data from the graph: registered nurse $41.25; food prep worker $14.50.

Step by step:

1. Difference = $41.25 − $14.50 = $26.75.
2. Base = the food prep wage (it follows the word "than"): $26.75 ÷ $14.50 ≈ 1.845.
3. 1.845 × 100 ≈ 184% higher.

Check: 184% higher means the nurse earns about 2.84 times as much: $14.50 × 2.84 ≈ $41.18, which is close to $41.25. ✔

Answer: about 184% higher.

Why the others tempt:

• about 65%: divides by the nurse's wage ($26.75 ÷ $41.25)—the wrong base.
• about 284%: the ratio $41.25 ÷ $14.50 ≈ 2.84 written as a percent; that is "284% of," not "284% higher."
• about 27%: the $26.75 dollar difference read as a percent.

Tip: "X% higher than" = (difference ÷ smaller value) × 100. "X% of" = (value ÷ other value) × 100. They differ by exactly 100 percentage points.