AP Microeconomics Practice Exam 2

SECTION I

Multiple-Choice Questions
Time—1 hour and 10 minutes
60 questions

For the multiple-choice questions that follow, select the best answer and fill
in the appropriate letter on the answer sheet.

1. Land, labor, capital and entrepreneurial talent are often referred to as

(A) production possibilities.
(B) goods and services.
(C) unlimited human wants.
(D) opportunity costs.
(E) scarce economic resources.

2. The law of increasing costs is useful in describing

(A) a demand curve.
(B) a marginal benefit curve.
(C) a linear production possibility frontier.
(D) a concave production possibility frontier.
(E) a total fixed costs curve.

3. Which of the following is likely to have a demand curve that is the

least elastic?
(A) Demand for the perfectly competitive firm’s output
(B) Demand for the oligopoly firm’s output with a homogenous
product
(C) Demand for the oligopoly firm’s output with a differentiated
product
(D) Demand for the monopolistically competitive firm’s output
 (E) Demand for the monopoly firm’s output

4. The figure above shows the production possibility frontiers (PPFs) for
two nations that produce crabs and cakes. If these nations specialize
and trade based on the principle of comparative advantage, which of
the following trade agreements benefit both nations?
(A) Nation A trades three crabs to Nation B in exchange for two cakes.
 (B) Nation A trades three cakes to Nation B in exchange for three
crabs.
(C) Nation A trades one cake to Nation B in exchange for two crabs.
(D) Nation A trades one crab to Nation B in exchange for two cakes.
(E) Nation A trades four crabs to Nation B in exchange for six cakes.

5. Which of the following scenarios would increase a nation’s production

possibility frontier (PPF)?
(A) The nation’s system of higher education slowly declines in quality.
(B) The nation invests in research and development of new technology.
(C) The nation’s infant mortality rate increases.
(D) Environmental pollution severely damages the health of the
population.
(E) Mineral reserves are exhausted.

6. A rational consumer who is eating Girl Scout cookies stops eating

when
(A) the total benefit equals the total cost of eating cookies.
(B) the marginal benefit equals the marginal cost of the next cookie.
(C) the marginal cost of eating cookies is maximized.
(D) the marginal benefit of eating cookies is minimized.
(E) the price of the cookie equals the total benefit of the next cookie.

7. A competitive market for coffee, a normal good, is currently in

equilibrium. Which of the following would most likely result in an
increase in the demand for coffee?
(A) Consumer income falls.
(B) The price of tea rises.
(C) The wage of coffee plantation workers falls.
(D) Technology in the harvesting of coffee beans improves.
(E) The price of coffee brewing machines rises.

8. Which of the following certainly lowers the equilibrium price of a

good exchanged in a competitive market?
(A) The demand curve shifts to the right.
 (B) The supply curve shifts to the left.
(C) The demand curve shifts to the left, and the supply curve shifts to
the right.
(D) The demand curve shifts to the right, and the supply curve shifts to
the left.
(E) Both the demand and supply curves shift to the left.

9. An effective price ceiling in the market for good X likely results in

(A) a persistent surplus of good X.
(B) a persistent shortage of good X.
(C) an increase in the demand for good Y, a substitute for good X.
(D) a decrease in the demand for good Z, a complement with good X.
(E) a rightward shift in the supply curve of good X.

10. Which of the following goods is likely to have the most elastic demand
curve?
(A) Demand for white Ford minivans
(B) Demand for automobiles
(C) Demand for Ford automobiles
(D) Demand for American-made automobiles
(E) Demand for a Ford minivan

11. Which of the following is a fundamental aspect of the free market

system?
(A) A high degree of government involvement.
(B) Public ownership of resources.
(C) Private property.
(D) Central planners set wages and prices.
(E) Employers consult government agencies for guidance in hiring
workers with appropriate job skills.

12. The elasticity of supply is typically greater when

(A) producers have fewer alternative goods to produce.
(B) producers have less time to respond to price changes.
(C) producers are operating near the limits of their production.
 (D) producers have less access to raw materials necessary for
production.
(E) producers have more time to respond to price changes.

13. Good X is exchanged in a competitive market. Which of the following

is true if an excise tax is now imposed on the production of good X?
(A) If the demand curve is perfectly elastic, the price rises by the
amount of the tax.
(B) The consumer’s burden of the tax rises as the demand curve is
more elastic.
(C) Consumer surplus rises as a result of the tax.
(D) The consumer’s burden of the tax rises as the demand curve is less
elastic.
(E) If the demand curve is perfectly inelastic, the price does not rise as
a result of the tax.

14. Which of the following is an implicit cost for the owner of a small
store in your hometown?
(A) The wage that is paid to the assistant manager
(B) The cost of purchasing canned goods from a wholesale food
distributor
(C) The value placed on the owner’s skills in an alternative career
(D) The cost of cooling the refrigerated meat display
(E) The price of placing an advertisement in the local newspaper

15. Suppose a price floor is installed in the market for coffee. One result of
this policy would be
(A) a decrease in the demand for coffee-brewing machines.
(B) a persistent shortage of coffee in the market.
(C) an increase in consumer surplus due to lower coffee prices.
(D) an increase in the demand for coffee.
(E) a decrease in the profits for the owners of coffee plantations.

Questions 16 to 17 refer to the table below, which describes employment

and production of a firm that hires labor and produces output in competitive
markets. The competitive price of the product is $.50.

16. Which unit of labor has marginal revenue product equal to $1.50?
(A) 1st
(B) 2nd
(C) 3rd
(D) 4th
(E) 5th

17. If the wage paid to all units of labor is $4.50, how many units of labor
are hired?
(A) 1
(B) 2
(C) 3
(D) 4
(E) 5

18. Which of the following is true of the perfectly competitive firm in the
short run?
(A) The firm earns a normal profit.
(B) The firm shuts down if the price falls below average total cost.
 (C) The firm earns positive economic profit.
(D) The firm maximizes profit by producing where the price equals
marginal revenue.
(E) The firm may earn positive, negative, or normal profits.

Questions 19 to 21 refer to the figure below.

19. If the current price is 0B, we would expect

(A) a surplus in the market to be eliminated by rising prices.
(B) a shortage in the market to be eliminated by falling prices.
(C) a surplus in the market to be eliminated by falling prices.
(D) quantity demanded to be equal to quantity supplied as the market
is in equilibrium.
(E) a shortage in the market to be eliminated by rising prices.

20. If the price were to fall from 0C to 0A, which of the following would
be true?
 (A) Dollars spent on this good would increase if demand for the good
were price inelastic.
(B) Dollars spent on this good would decrease if demand for the good
were price elastic.
(C) Dollars spent on this good would increase if demand for the good
were price elastic.
(D) Dollars spent on this good would increase if demand for the good
were unitary price elastic.
(E) Dollars spent on this good would decrease if demand for the good
were unitary price elastic.

21. If the market is in equilibrium, which of the following areas

corresponds to producer surplus?
(A) BGD
(B) 0AHJ
(C) 0DGK
(D) 0BG
(E) 0BGK

22. The downward-sloping demand curve is partially explained by which

of the following?
(A) Substitution effects and income effects
(B) The law of increasing marginal costs
(C) The principle of comparative advantage
(D) The law of diminishing marginal returns to production
(E) The least-cost principle

23. Dorothy has daily income of $20, each cup of coffee costs Pc = $1, and
each scone costs Ps = $4. The table below provides us with Dorothy’s
marginal utility (MU) received in the consumption of each good. As a
utility-maximizing consumer, which combination of coffee and scones
should Dorothy consume each day?
 (A) 2 coffee and 2 scones
(B) 5 coffee and 6 scones
(C) 3 coffee and 2 scones
(D) 4 coffee and 4 scones
(E) 4 coffee and 16 scones

24. You are told that the Gini coefficient of income inequality has risen
from .35 to .85. Which of the following is a likely cause of this
change?
(A) Market power in the factor and output markets has increased.
(B) Labor market discrimination has been eliminated.
(C) The distribution of wealth and property has become more
equitable.
(D) The vast majority of adults have achieved at least a college degree.
(E) The tax system has become even more progressive.
25. The figure above best represents which of the following functions?
(A) Total product of labor
(B) Total revenue
(C) Total cost
(D) Total utility
(E) Total short-run economic profits

26. If it is true that bacon and eggs are complementary goods, then
(A) the income elasticity of bacon is positive and the income elasticity
for eggs is negative.
(B) the price elasticity for eggs is greater than the price elasticity for
bacon.
(C) the cross-price elasticity between bacon and eggs is negative.
(D) the income elasticity of bacon is negative and the income elasticity
for eggs is positive.
(E) the cross-price elasticity between bacon and eggs is positive.

27. A firm employs variable amounts of labor to a fixed amount of capital

to produce output. If the daily wage paid to labor increases, how does
 this affect the firm’s costs?

28. Diminishing marginal returns to short-run production begin when

(A) the average product of labor begins to fall.
(B) the total product of labor begins to fall.
(C) marginal product of labor becomes negative.
(D) average variable cost begins to rise.
(E) marginal product of labor begins to fall.

29. Which of the following is a characteristic of perfect competition?

(A) Firms produce a homogeneous product.
(B) Barriers to entry exist.
(C) Firms are price-setting profit maximizers.
(D) The government regulates the price so that deadweight loss is
eliminated.
(E) Long-run positive profits are available.
30. The table above shows how hiring increasing amounts of labor to a
fixed amount of capital affects the hourly output of Eli’s lemonade
stand. Based on this table of production data, which of the following
can be said?
(A) Diminishing marginal returns begins with the first worker hired.
(B) Marginal cost begins to rise at the sixth worker hired.
(C) Total product is maximized at the third worker hired.
(D) Average product begins to decline with the first worker hired.
(E) Diminishing marginal returns begins with the fourth worker hired.
31. The figure above shows the long-run average cost curve of a
competitive firm. Which of the following choices best describes
Region B in the diagram?
(A) Economies of scale
(B) Diseconomies of scale
(C) Constant returns to scale
(D) Diminishing returns to scale
(E) Increasing returns to scale

32. The market for good X is currently in equilibrium. Which of the

following choices would not cause both a decrease in the equilibrium
price of good X and a decrease in the equilibrium quantity of good X?
(A) A decrease in consumer income and good X is a normal good.
(B) An increase in consumer income and good X is an inferior good.
(C) An increase in the price of good Y, a complement for good X.
(D) A decrease in the price of good Y, a substitute for good X.
(E) An increase in the number of consumers in the market for good X.

Questions 33 to 34 refer to the figure below, which shows cost curves for a
competitive firm.
33. If average variable cost at a quantity of 10 is $25, what is the value of
$Y in the figure above?
(A) $250
(B) $25
(C) $35
(D) $1,000
(E) $350

34. At a quantity of 10, what is the value of $(Y - X)?

(A) $100
(B) $25
(C) $10
(D) $35
(E) $350

35. The demand for labor falls if

(A) labor productivity falls.
 (B) the price of the good produced by labor rises.
(C) the price of a complementary input falls.
(D) demand for the good produced by labor rises.
(E) a minimum wage is removed from the labor market.

Questions 36 to 37 refer to the graph below.

36. The curve labeled 4 represents which of the following?

(A) Marginal cost
(B) Marginal product of labor
(C) Average total cost
(D) Average fixed cost
(E) Average variable cost

37. Where is the shutdown point for this perfectly competitive firm?
(A) Any price below curve 4
(B) Any price below 0c
(C) Any price below curve 3
 (D) Any price below curve 2
(E) Any quantity less than Q

38. If a market for a good is producing a negative externality,

(A) at the market output the marginal costs to society exceed the
private marginal costs of production.
(B) at the market output the marginal benefits to society exceed the
private marginal costs of production.
(C) at the market output the marginal costs to society exceed the total
benefits to society.
(D) at the market output the private marginal costs of production
exceed the marginal costs to society.
(E) at the market output the marginal benefits to society exceed the
marginal costs to society.

39. Which of the following is a characteristic of a monopoly market?

(A) Firms produce a homogeneous product.
(B) Barriers to entry exist.
(C) Firms are price-taking profit maximizers.
(D) Deadweight loss is eliminated through entry of competing firms in
the long run.
(E) In the long run the firm earns normal profits.

40. A monopolist may be able to maintain long-run positive profit due to

(A) deadweight loss.
(B) economies of scale in production.
(C) a price that is set equal to average total cost.
(D) perfectly elastic demand for the product.
(E) entry of new firms that keep the price high.

Questions 41 and 42 refer to the graph below.

41. If this firm were a profit-maximizing monopolist, the price, output, and
profit would be

42. Consumer surplus in the monopolist market is equal to the area

(A) abce.
(B) abcf.
(C) P5cd.
(D) 0Q1aP1.
 (E) P1P5ca.

43. The top six firms in an oligopolistic industry have market shares of
25%, 25%, 15%, 10%, 6%, and 3%. Many smaller firms split the rest
of the market. What is the value of the four-firm concentration ratio?
(A) 65%
(B) 54%
(C) 75%
(D) 34%
(E) 50%

44. Which of the following statements is true of a consumer’s utility-

maximizing behavior?
(A) As consumption of good X increases, total utility increases at an
increasing rate.
(B) The consumer should stop consuming good X when marginal
utility is maximized.
(C) The consumer has maximized utility between two goods X and Y
when the quantities of the two goods are equalized.
(D) Utility maximization occurs when the marginal utilities per dollar
for goods X and Y are equalized.
(E) As consumption of good X increases, the marginal utility per dollar
spent on good X also increases.

45. Oligopoly has at times been the subject of government antitrust

regulation. Which of the following is a reason for this government
regulation?
(A) Price is approximately equal to marginal cost.
(B) Price is approximately equal to average total cost.
(C) Deadweight loss lessens over time.
(D) Consumer surplus is lost as market power increases.
(E) Market efficiency is maximized.

46. The production of chicken often results in offending odors that are
picked up by the wind and blown over rural communities. This is an
 example of a ______ externality, the result of which are spillover
______ and an _______ of resources to chicken production.
(A) negative, costs, underallocation
(B) negative, benefits, overallocation
(C) negative, benefits, underallocation
(D) positive, costs, overallocation
(E) negative, costs, overallocation

47. Which of the following choices is true of both perfectly competitive

firms and monopolistically competitive firms?
(A) Barriers to entry
(B) Homogenous products
(C) Normal profits in the long run
(D) Excess capacity
(E) Price-setting behavior

48. The monopolistically competitive price is above marginal revenue

because
(A) firms have differentiated products.
(B) firms are price takers.
(C) firms produce a homogenous product.
(D) the market is allocatively efficient.
(E) profits are normal in the long run.

49. Deadweight loss in industries with market power is a result of

(A) profit-maximizing output occurs where price equals marginal
revenue.
(B) profit-maximizing output occurs where price exceeds marginal
cost.
(C) profit-maximizing output occurs where price equals marginal cost.
(D) profit-maximizing output occurs where price exceeds average total
cost.
(E) profit-maximizing output occurs where price equals average total
cost.
50. If the government wishes to regulate a natural monopoly so that it
earns a normal profit, it sets
(A) Price = Marginal cost.
(B) Marginal revenue = Marginal cost.
(C) Price = Average total cost.
(D) Price = Marginal revenue.
(E) Marginal revenue = Average total cost.

51. Which of the following would improve the efficiency of a monopoly

market?
(A) The government regulates the monopolist to produce the output
where marginal revenue equals marginal cost.
(B) The government provides additional legal barriers to entry.
(C) The government subsidizes the monopolist so that they achieve
even greater economies of scale.
(D) The government eliminates trade barriers on potential foreign
producers.
(E) The government regulates the monopolist to produce the output
where monopoly profits are maximized.

52. Which of the following increases the demand for interstate truck
drivers?
(A) An increase in the wage of truck drivers
(B) An increase in the supply of truck drivers
(C) An increase in the price of diesel fuel, which is used to power
semitrucks
(D) A decrease in the demand for interstate shipping
(E) A decrease in the price of semitrucks

53. A monopsony employer hires labor up to the point where

(A) wage = marginal factor cost.
(B) marginal factor cost = marginal product of labor.
(C) marginal factor cost = marginal revenue product of labor.
(D) wage = marginal revenue product of labor.
(E) wage = price of the good produced by the labor.
54. The price of labor is $5 and the price of capital is $10 per unit. Using
the table below, what is the least-cost combination of labor and capital
that should be hired to produce 18 units of output?

(A) 1 Labor and 2 Capital

(B) 4 Labor and 8 Capital
(C) 2 Labor and 1 Capital
(D) 5 Labor and 5 Capital
(E) 3 Labor and 2 Capital

55. A cartel is often the result of

(A) perfectly competitive firms that agree to produce a homogenous
product.
(B) oligopoly competitors that agree to restrict output to maximize
joint profits.
(C) a monopoly that has been regulated by the government.
(D) a natural monopoly that has evolved into a perfectly competitive
industry.
(E) monopolistically competitive firms that have agreed to earn normal
profits in the long run.

56. Suppose the state requires hairdressers and manicurists to pass a series
of exams to be certified cosmetologists. How does this policy change
 the supply of cosmetologists, the equilibrium wage, and the price of a
manicure?

57. The local market for bankers is currently in equilibrium. Which of the
following increases the local wage paid to bankers?
(A) Internet banking at home is becoming more popular.
(B) More college students are majoring in finance and economics,
majors that make them attractive as bank employees.
(C) The price of banking software, a complementary resource to
bankers, rises.
(D) Several banks in the local market merge and consolidate many
operations.
(E) The price of automatic teller machines, a substitute for bankers,
decreases and the output effect is greater than the substitution
effect.

58. The U.S. government collects tax revenue, buys military equipment
from many private firms, and uses this equipment to provide national
defense to all Americans. This is a good example of
(A) a natural monopoly.
(B) an excise tax on military equipment.
(C) a regressive tax.
(D) a public good.
(E) deadweight loss.
59. Which of the following scenarios is the best example of a positive
externality?
(A) Your neighbor has a swimming pool and throws loud late-night
parties.
(B) Your neighbor has a swimming pool and allows you free access.
(C) Your neighbor has a swimming pool and the powerful chlorine
odor blows into your open dining room window.
(D) Your neighbor has a swimming pool and allows you to use it in
exchange for letting his kids use your swing.
(E) Your neighbor has a swimming pool that is conducive for the
breeding of mosquitoes.

60. Because of the free-rider effect, the private marketplace tends to

(A) provide the allocatively efficient amount of a public good.
(B) produce too much of a public good, requiring the government to
intervene and tax the production of it.
(C) produce a public good in the amount where the marginal benefit to
society equals the marginal cost to society.
(D) produce too little of the public good, requiring the government to
intervene and provide it for all.
(E) produce too little of the public good, requiring the government to
intervene and ban it.

Answers and Explanations

1. E—Know the four scarce economic resources.

2. D—A concave PPF exhibits the law of increasing costs. As more of a

good is produced, opportunity costs rise. This is because resources are
not perfectly substitutable between the production of different goods.

3. E—Demand is more elastic if there are more substitute goods. A

monopolist has no close substitutes so is likely the least elastic
demand.
1. The graph below shows a firm that has monopolized the market for
gadgets.

(A) Using the values in the graph, identify the following:

i. The profit-maximizing quantity
ii. The price of a gadget when the monopolist has maximized
profit
iii. The allocatively efficient output
(B) Using the values in the graph, calculate the following and show
your work:
i. Monopoly profit
ii. Consumer surplus
(C) Suppose the government levies a lump-sum tax on the monopolist.
i. Will output increase, decrease, or stay the same? Explain.
 ii. Will deadweight loss increase, decrease, or stay the same?
Explain.
iii. Will profit increase, decrease, or stay the same?

2. Assume the following about the market for gizmos:

• Gizmos are sold in a competitive market.
• Gizmos have no close substitute.
• The demand for gizmos is price inelastic but not perfectly inelastic.

Suppose now that the government imposes a per-unit excise tax on

producers of gizmos.
(A) Using a correctly labeled graph, show the impact of the excise tax
on each of the following in the gizmos market:
i. The change to price and quantity, after the tax
ii. The area of tax revenue collected by the government
iii. Deadweight loss from the tax
(B) Given that demand for gizmos is price inelastic, will consumer
spending on gizmos increase, decrease, or remain constant after the
tax is imposed? Explain.

3. Two rival firms operate in an oligopoly and, once a year, choose an

advertising strategy. The firms can choose between an expensive
television and radio advertising campaign (costly ads) or an
inexpensive direct-mail advertising campaign (cheap ads). Television
and radio cost more but reach more potential customers. Each firm
decides their advertising strategy independently on January 1, 2019,
and, once chosen, cannot alter the decision until January 1, 2020. The
table below summarizes the profits each firm would earn given their
own, and their rival’s, strategy. Use this matrix to answer the following
questions.
 (A) Suppose Firm 1 chooses Costly Ads and Firm 2 chooses Cheap
Ads Identify the profit for Firm 1.
(B) It is now January 1, 2019, and each firm must independently make
the advertising strategy decision. Is there a dominant strategy for
Firm 2 in this game? Explain.
(C) If each firm chooses the advertising strategy independently without
collusion, what is the outcome of this game?
(D) Is the outcome of this game an example of a “prisoner’s
dilemma”? Explain your answer.

Free-Response Grading Rubric

Note: Based on my experience, these point allocations roughly approximate
the weighting on similar questions on the AP examinations. Be aware that
every year the point allocations differ and partial credit is awarded
differently.

Question 1 (10 points)

Part (A): 3 points

i. One point is earned for identifying 6 as the profit maximizing output.
ii. One point is earned for identifying $80 as the price.