AP MICROECONOMICS Scoring Guide
Mid-term Test 2
1. Which of the following is true for a monopoly but NOT for a perfectly competitive firm?
(A) The firm maximizes profit by equating marginal cost to marginal revenue.
(B) The firm's demand curve is the same as its average revenue curve.
(C) At the profit-maximizing output level, price is less than marginal revenue.
(D) The firm faces a downward-sloping demand curve.
(E) The firm earns zero economic profit in the long run.
2. An industry consists of 100 small firms, and the largest firm accounts for only 2 percent of sales. Brand names are
considered a signal of quality. The industry described is best classified as
(A) monopoly
(B) perfectly competitive
(C) monopolistically competitive
(D) oligopolistic
(E) monopsonistic
3. Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
(A) Price is greater than marginal cost, and marginal revenue is equal to average total cost.
(B) Price is greater than marginal revenue, and marginal cost is equal to average total cost.
(C) Price is greater than marginal revenue, and marginal cost is greater than average total cost.
(D) Marginal revenue is equal to marginal cost, and price is equal to average total cost.
(E) Marginal revenue is greater than marginal cost, and price is equal to average total cost.
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Mid-term Test 2
4.
and are two competing firms that are considering which project to develop. will develop either
Project Alpha or Project Beta. will develop either Project or Project . The payoff matrix provided shows
the payoffs for each combination of strategies, and both players ( and ) have complete information. The
first value in each cell represents the payoff for , and the second value represents the payoff for . Each
firm independently and simultaneously chooses its strategy.
Which of the following conclusions is supported by the information in the payoff matrix?
(A) There is no combination of project choices that results in a Nash equilibrium.
(B) There are multiple combinations of project choices that result in Nash equilibria.
(C) has a dominant strategy, but does not.
(D) has a dominant strategy, but does not.
(E) Neither firm has a dominant strategy.
Answer C
Correct. has a dominant strategy to pursue Project Beta, as the payoffs to that strategy, regardless
of actions taken by , are higher than if it pursues Project Alpha. does not have a dominant
strategy, as its payoff to Project X or Project Y is contingent on the strategy pursued by .
5. Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm
occurs when which of the following is true?
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Mid-term Test 2
(A) Price equals average total cost.
(B) Price is greater than marginal cost.
(C) Price equals marginal revenue.
(D) Price is less than marginal benefit.
(E) Price is less than marginal revenue.
Answer B
Correct. Allocative efficiency requires that price equals marginal cost and profit maximization requires
that marginal revenue equals marginal cost. Since price is greater than marginal revenue and therefore
marginal cost at the profit-maximizing quantity in imperfectly competitive markets, such markets do not
achieve allocative efficiency.
6. A monopolist’s demand curve is necessarily
(A) the same as the market demand curve
(B) the same as its marginal revenue curve
(C) upward sloping
(D) perfectly elastic
(E) perfectly inelastic
7. Compared to a perfectly competitive industry with the same demand and cost curves, a monopoly’s price and output
will be which of the following?
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Mid-term Test 2
Price Output
(A)
The same Higher
Price Output
(B)
Higher The same
Price Output
(C)
Higher Lower
Price Output
(D)
Lower The same
Price Output
(E)
Lower Higher
8. Which of the following is true of the marginal revenue curve for a monopolistically competitive firm?
(A) It is the same as the demand curve because there are many firms in the market.
(B) It is the same as the demand curve because marginal revenue is always equal to price.
(C) It is upward sloping because total revenue increases as the quantity sold increases.
It lies below the demand curve because the firm must lower its price for all units in order to increase
(D)
sales.
(E) It lies below the demand curve because marginal revenue increases when price decreases.
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Mid-term Test 2
Answer D
Correct. A monopolistically competitive firm faces a downward sloping demand curve. For the firm to
sell more units of output, it must lower its price on all units. Thus, the extra revenue gained from selling
the last unit, or the marginal revenue, will be less than the price charged (from the demand curve) and the
marginal revenue curve will always lie below the demand curve.
9.
What are the profit- and revenue-maximizing quantities for the monopolist whose revenue and cost conditions are
described by the graph above?
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Mid-term Test 2
Profit-Maximizing Revenue-Maximizing
(A)
Profit-Maximizing Revenue-Maximizing
(B)
Profit-Maximizing Revenue-Maximizing
(C)
Profit-Maximizing Revenue-Maximizing
(D)
Profit-Maximizing Revenue-Maximizing
(E)
10. Pickleco, a pickle-producing firm, hires labor and capital in perfectly competitive factor markets. The firm is
minimizing its costs at the current production level. The marginal product of labor is units and the marginal
product of capital is units. If the rental price of capital is , what is the wage Pickleco is paying its workers?
(A)
(B)
(C)
(D)
(E)
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Mid-term Test 2
Answer D
Correct. The cost-minimizing combination of inputs is realized when the marginal product per dollar
spent of each input is equal, that is . This least-cost hiring rule can be used
to calculate the wage that Pickelco will pay to its workers as .
11. When labor supply in a competitive labor market increases, the equilibrium wage rate and employment will change
in which of the following ways?
Wage Rate Employment
(A)
Increase Increase
Wage Rate Employment
(B)
Increase Decrease
Wage Rate Employment
(C)
Decrease Increase
Wage Rate Employment
(D)
Decrease Decrease
Wage Rate Employment
(E)
Decrease No change
12. An individual's labor supply curve is derived from that person's preferences about the trade-off between income and
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Mid-term Test 2
(A) work
(B) wealth
(C) nominal wages
(D) productivity
(E) leisure
13. If a firm employs only labor and capital in its production process, which of the following best describes the optimal
combination of inputs for the firm in the long run?
The marginal product per dollar spent on labor is equal to the marginal product per dollar spent on
(A)
capital.
(B) The marginal product of labor is equal to the marginal product of capital.
(C) The total product of labor is equal to the total product of capital.
(D) The marginal product of labor and capital are both zero.
(E) All marginal products are equal to all average products.
is a typical profit-maximizing firm in a perfectly competitive market that produces and sells widgets at $5 each.
hires labor in a perfectly competitive labor market. The table shows ZBA’s production function for widgets.
Number of Workers Total Output Hour
1 3
2 7
3 12
4 14
5 15
14. What is the marginal revenue product of the third worker?
(A) $5
(B) $12
(C) $25
(D) $36
(E) $60
Answer C
Correct. The marginal revenue product of labor is calculated as the change in total revenue the change in
number of workers hired or the product of the marginal physical product and the marginal revenue. As
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Mid-term Test 2
the number of workers hired increases from 2 workers to 3 workers, total revenue increases by $25,
marginal physical product of 5 multiplied by the marginal revenue of $5.
15.
FishNets hires workers from the labor market depicted in the provided graph. The government imposes a binding
minimum wage in the labor market. What is the binding minimum wage that would cause FishNets to hire the same
number of workers as a perfectly competitive labor market?
(A) $24
(B) $32
(C) $40
(D) $48
(E) $64
Answer B
Correct. A perfectly competitive market equilibrium occurs at the intersection of the supply curve of
labor and the demand curve for labor (the marginal revenue product of labor). The equilibrium quantity
of labor is 60 workers and the equilibrium wage is $32. Thus, setting a binding wage rate at $32 would
require FishNets to hire 60 workers.
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Mid-term Test 2
The following questions refer to the diagram below, which shows the cost and revenue conditions of a monopolist.
16. If the monopolist produces the allocatively efficient level of output rather than the profit-maximizing level of
output, consumer surplus will
(A) decrease by the area P5JKP4
(B) decrease by the area P5JMP2
(C) increase by the area P5JGP1
(D) increase by the area P5JKP4
(E) increase by the area P5JMP2
17. If firms in a perfectly competitive industry have been dumping toxic waste free of charge into a river, government
action to ensure a more efficient use of resources would have which of the following effects on the industry’s output
and product price?
Page 10 of 24 AP Microeconomics
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Mid-term Test 2
Output Price
(A)
Decrease Decrease
Output Price
(B)
Decrease Increase
Output Price
(C)
Increase Decrease
Output Price
(D)
Increase Increase
Output Price
(E)
Increase No change
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Mid-term Test 2
18.
Based on the information in the Lorenz curve above, which of the following is true?
(A) People in Country X make more money than people in Country Z.
(B) Income is more equally distributed in Country X than in Country Z.
(C) The top 20 percent of households in Country X received 60 percent of the total income.
(D) The top 20 percent of households in Country Z received 40 percent of the total income.
(E) The average income in Country X is higher than the average income in Country Z.
19. In a perfectly competitive labor market, an increase in an effective minimum wage will result in
(A) an increase in the supply of workers
(B) a decrease in the supply of workers
(C) a decrease in the demand for workers
(D) more workers being hired
(E) fewer workers being hired
20. If a per-unit tax is imposed on a monopolist, how will the monopolist’s marginal cost curve, output, and the price
paid by consumers be affected?
Page 12 of 24 AP Microeconomics
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Mid-term Test 2
Marginal Cost Output Price
(A)
Shift down Increase Decrease
Marginal Cost Output Price
(B)
Shift Down Decrease Decrease
Marginal Cost Output Price
(C)
No shift Decrease Decrease
Marginal Cost Output Price
(D)
Shift Up Decrease Increase
Marginal Cost Output Price
(E)
Shift up Increase Increase
21. Which of the following government actions can correct the inefficiency caused by the existence of a monopoly?
(A) Granting a per-unit subsidy on the monopolist’s output
(B) Granting an annual lump-sum subsidy to the monopolist
(C) Imposing a per-unit tax on the monopolist’s output
(D) Imposing a price floor on the monopolist
(E) Limiting the monopolist's production through regulation
22. Which of the following is true when there are negative externalities associated with the production of a good?
(A) The market will adjust automatically to equate marginal social costs and marginal social benefits.
Marginal social costs will exceed marginal private costs unless businesses are forced to internalize the
(B)
external costs.
(C) Marginal private costs will exceed marginal social costs, but the government can correct the problem.
(D) Producers should be subsidized so that they will produce more of the good.
(E) Consumers should be subsidized so that they will consume more of the good.
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Mid-term Test 2
23. Robots and workers are substitutes in production and are both variable inputs. Both robots and workers are hired in
perfectly competitive factor markets. If the daily rental price of robots increases, which of the following will most
likely happen to wages paid to workers and the number of workers employed in the short run?
Wages Number of Workers Employed
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase
E No change No change
(A) A
(B) B
(C) C
(D) D
(E) E
Answer D
Correct. If the factors of production are variable, firms will substitute for the relatively cheaper factor if
the price of one of the factors increases. In this case, the price of robots increased, incentivizing the firm
to increase its demand for workers in the short run. This increase in demand for workers will increase the
wage rate and increase the number of workers employed in the short run.
24. The government of Annapolita has determined that the country’s power company, an unregulated natural
monopolist, should be required to produce the allocatively efficient quantity of electricity. Which of the following
actions will achieve the government’s goal?
The government imposes a per-unit tax on each unit of output the monopoly produces and imposes a
(A)
lump-sum tax on the monopolist to eliminate any remaining profit.
The government sets the price at the point where demand and average total cost curves intersect and
(B)
provides a lump-sum subsidy to the monopolist equal to the monopolist’s normal profit.
The government sets the price at the point where demand and average total cost curves intersect and
(C)
imposes a lump-sum tax on the monopolist to eliminate the monopolist’s normal profit.
The government sets the price at the point where demand and marginal cost curves intersect and imposes
(D)
a lump-sum tax on the monopolist to eliminate the monopolist’s normal profit.
The government sets the price at the point where demand and marginal cost curves intersect and
(E)
provides a lump-sum subsidy to the monopolist to earn normal profit.
Page 14 of 24 AP Microeconomics
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Mid-term Test 2
Answer E
Correct. Since firms operating as a natural monopoly have falling average total cost over the relevant
range of output, their marginal cost will be below average total cost over this range as well. If the
government sets a price equal to marginal cost for such a firm to achieve allocative efficiency, the firm
will incur economic losses (since price is less than average total cost at the allocatively efficient
quantity); therefore, the government must provide a lump-sum subsidy in this case to allow the firm to
earn normal profit.
25. Prosper Company is a profit-maximizing monopoly producing toy cubes. Prosper Company is currently earning
positive economic profit. Which of the following combinations of events will definitely cause Prosper Company’s
profit to increase?
(A) A decrease in demand for toy cubes and a decrease in fixed costs to produce toy cubes
(B) A decrease in demand for toy cubes and an increase in fixed costs to produce toy cubes
(C) A decrease in demand for toy cubes and a decrease in variable costs to produce toy cubes
(D) An increase in demand for toy cubes and an increase in government subsidies to produce toy cubes
(E) An increase in demand for toy cubes and an increase in fixed costs to produce toy cubes
Answer D
Correct. An increase in demand will increase both price and quantity of units sold (increasing total
revenue). An increase in government subsidies will lower total costs for Prosper Company. This
combination of an increase in total revenue and a decrease in total costs will cause Prosper Company’s
profits to increase.
26. In order for a firm to engage in price discrimi- nation, it must be
(A) able to separate consumers into different groups based on demand elasticities
(B) producing in the inelastic portion of its demand curve to raise its price and increase total revenue
(C) a price taker
(D) experiencing economies of scale in the relevant range of production
(E) experiencing constant marginal cost
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Mid-term Test 2
The following two questions refer to the cost and revenue conditions of a monopolistically competitive firm shown in the
graph below.
marginal cost, average total cost, average variable cost, and marginal revenue.
27. Which of the following will the firm do in the long run if market conditions do not change?
(A) It will increase output to and lower price to to minimize losses.
(B) It will increase output to and raise price to to earn zero economic profit.
(C) It will produce and set price equal to marginal revenue.
(D) It will exit the industry.
(E) It will build a larger plant to achieve decreasing returns to scale.
Answer D
Correct. In the graph provided, marginal revenue equals marginal cost at and the price is on the
demand curve at . However, at the profit-maximizing price is less than both the and the
. Therefore, the firm will minimize its losses by shutting down in the short run and exiting the
market in the long run if conditions do not change.
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Mid-term Test 2
28. Which of the following is most likely to make a country’s income distribution more equal?
(A) Establishing a national sales tax on food and clothing
(B) Establishing a progressive income tax system
(C) Eliminating excise taxes on luxury goods
(D) Proportionally decreasing the tax rate for all income groups
(E) Reducing the subsidy to education
29. Suppose that people who work in the paint industry face a great risk of developing an incurable disease. A medical
breakthrough that eliminates the risk will most likely cause which of the following shifts in the supply and demand
curves for workers in the paint industry?
Supply Curve Demand Curve
(A)
Shift right No shift
Supply Curve Demand Curve
(B)
Shift left No shift
Supply Curve Demand Curve
(C)
Shift right Shift left
Supply Curve Demand Curve
(D)
Shift left Shift right
Supply Curve Demand Curve
(E)
No Shift Shift left
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Mid-term Test 2
30. A profit-maximizing firm will continue to hire workers until the
(A) marginal factor cost of labor is equal to the marginal revenue product of labor
(B) marginal factor cost of labor is equal to the price of the good produced using labor
(C) marginal product of labor is equal to the marginal revenue product of labor
(D) marginal product of labor is equal to the marginal factor cost of labor
(E) marginal product of labor is equal to the price of labor
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Mid-term Test 2
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,”
you must show how you arrived at your final answer.
The provided graph shows the marginal private cost (MPC) curve, the marginal social cost (MSC) curve, the marginal
private benefit (MPB) curve, and the marginal social benefit (MSB) curve in the market for smoke alarms.
(a) Does the graph show a negative consumption externality or a positive consumption externality? Explain.
(b) Identify the socially optimal quantity of smoke alarms.
(c) What is the dollar value of the marginal externality?
(d) Calculate the deadweight loss in the market for smoke alarms at the market equilibrium. Show your work.
(e) The government wants the socially optimal quantity of smoke alarms to be produced and consumed. Would the
government implement a per-unit tax on producers, a lump-sum subsidy to producers, a per-unit subsidy to consumers, or
a lump-sum tax on consumers? Explain.
31. Respond to all parts of the question.
Part A
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
AP Microeconomics Page 19 of 24
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Mid-term Test 2
0 1
The response accurately includes the criterion below.
States that there is a positive consumption externality and explains that the curve lies above the
curve.
Part B
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
0 1
The response accurately includes the criterion below.
Identifies the socially optimal quantity as 39 smoke alarms.
Part C
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
0 1
The response accurately includes the criterion below.
States that the dollar value of the marginal externality is $6.
Part D
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
The response must show appropriate work in order to receive the point.
0 1
Page 20 of 24 AP Microeconomics
Scoring Guide
Mid-term Test 2
The response accurately includes the criterion below.
Calculates the deadweight loss as $27 and shows the work.
Part E
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
0 1
The response accurately includes the criterion below.
States that the government would provide a per-unit subsidy to consumers and explains that the demand
for smoke alarms will increase (shifting curve to the right) thereby increasing the equilibrium
quantity to the socially optimal quantity.
AP Microeconomics Page 21 of 24
Scoring Guide
Mid-term Test 2
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate,"
you must show how you arrived at your final answer.
Gigantic Pharmaceutical Corporation has a patent on a prescription drug, making it the only manufacturer of that
prescription drug. Gigantic is currently earning a positive economic profit.
(a) Draw a correctly labeled graph for Gigantic and show each of the following.
(i) The profit-maximizing quantity, labeled
(ii) The profit-maximizing price, labeled
(iii) The average total cost curve, labeled
(iv) The area representing the consumer surplus, shaded completely
(b) Suppose the demand for the prescription drug increases, and Gigantic hires its warehouse workers in a perfectly
competitive labor market.
(i) What will happen to Gigantic’s demand for warehouse workers? Explain.
(ii) What will happen to the wage rate Gigantic pays its warehouse workers and the number of warehouse workers it
hires?
(c) After Gigantic’s patent expires, another firm enters the prescription drug market and produces an identical drug that
sells for a lower price.
(i) What will happen to Gigantic’s producer surplus?
(ii) What will happen to the consumer surplus in this prescription drug market? Explain.
32. Respond to all parts of the question.
Part A
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
0 1 2 3 4 5
The response accurately includes all five of the following
A correctly labeled graph of the monopoly showing downward-sloping demand ( ) and marginal
revenue ( ) curves with the curve below the demand curve.
Page 22 of 24 AP Microeconomics
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Mid-term Test 2
The profit-maximizing quantity, labeled , where
The profit-maximizing price, labeled , from the demand curve at , and above the average total
cost ( ) curve.
The marginal cost ( ) curve rising and passing through the minimum point of the curve.
The area representing the consumer surplus, completely shaded.
Solution
Part B
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
0 1 2
The response does both of the following.
States that Gigantic’s demand for warehouse workers will increase and explains that the increase in the
demand for the product raises the product price and the marginal revenue product of labor.
States that the wage rate Gigantic pays to its warehouse workers will not change and the number of
workers hired will increase.
Part C
Select a point value to view scoring criteria, solutions, and/or examples and to score the response.
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Mid-term Test 2
0 1 2
The response does both of the following.
States that Gigantic’s producer surplus will decrease.
States that the consumer surplus will increase and explains that because of the increased competition, the
price will decrease, and the quantity will increase.
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