AP Micro Review

Question 1

Suppose that Habib has a weekly fixed budget and spends it all on music downloads and snacks. At his current combination of consumption, the marginal utility of the last dollar spent on music downloads is greater than the marginal utility of the last dollar spent on snacks. Has Habib maximized his utility?

A) Yes, because he has purchased the maximum possible with his limited budget.

B) Yes, because he has purchased the two goods in proportion so that he can get the maximum utility from each.

C) Yes, because changing his current consumption combination will reduce his total utility.

D) No, because he can increase his total utility by purchasing more music downloads and fewer snacks.

E) No, because he can increase his total utility by purchasing fewer music downloads and more snacks.

Answer 1

D) No, because he can increase his total utility by purchasing more music downloads and fewer snacks.

(I’m pretty sure I got this problem wrong because I didn’t read properly so READ CAREFULLY)

Question 2

If Nation X produces coffee at a higher opportunity cost than Nation Y, which of the following is true?

A) Nation X must have an absolute advantage in producing coffee.

B) Nation X must have a comparative advantage in producing coffee.

C) Nation Y must have an absolute advantage in producing coffee.

D) Nation Y must have a comparative advantage in producing coffee.

E) There is insufficient information to determine both absolute and comparative advantage.

Answer 2

D) Nation Y must have a comparative advantage in producing coffee.

(I swear I just clicked the wrong answer, am I silly?)

Question 3

Which of the following is the best example of a scarce factor of production?

A) Money

B) Food

C) Air

D) Airplanes

E) Established knowledge

Answer 3

D) Airplanes

Airplanes are capital goods used to produce transportation services; therefore, they are a factor of production. Airplanes are also scarce.

(Original answer E: Established knowledge may be a factor of production but may not be scarce because of its nonrival nature. That is, the use of established knowledge or know-how by one individual will not reduce its availability for others.)

Question 4

Which of the following would cause the supply of good
to become more elastic?

A) Greater availability of substitutes for good X

B) Increased prices of inputs required to produce good X

C) The ability to easily reallocate inputs to production of good X

D) A short time frame for making production decisions

E) More elastic demand for good

Answer 4

C) The ability to easily reallocate inputs to production of good X

(I swear I changed my answer to C the first time but okay…)

Question 5

Which of the following correctly describes the income effect associated with the law of demand?

A) If consumer income increases, there will be an upward movement along the demand curve for a normal good.

B) If consumer income increases, the demand curve will shift to the right for an inferior good.

C) If the price of a good increases, the demand for the good decreases because the demand for its substitute in consumption increases.

D) If the price of a good decreases, the demand for the good increases because the lower price increases the demand for its complement in consumption.

E) If the price of a normal good decreases, the purchasing power of a consumer’s income increases and therefore consumers will be willing and able to purchase more of the good.

Answer 5

E) If the price of a normal good decreases, the purchasing power of a consumer’s income increases and therefore consumers will be willing and able to purchase more of the good.

The price decrease of a normal good increases the purchasing power of consumer income and allows the consumer to buy more of the good.

(Am I stupid I answered A)

Question 6

A monopolistically competitive firm’s demand curve will be least elastic if

A) the number of rival firms producing very similar products increases

B) the number of rival firms producing more differentiated products increases

C) the number of rival firms producing very similar products decreases

D) the number of rival firms producing more differentiated products decreases

E) a monopolistically competitive firm’s demand curve becomes perfectly elastic

Answer 6

D) the number of rival firms producing more differentiated products decreases

The degree of elasticity depends on the number of competitors and the degree of product differentiation. Both a smaller number of rivals and more differentiated products make it more difficult for consumers to be responsive to price changes, therefore, the firm will face a less elastic demand curve.
tldr — rival firms go bye bye customers don’t have a choice but to buy from this firm

(Originally answered C: The degree of elasticity depends on the number of competitors and the degree of product differentiation. Very similar products enable consumers to be responsive to price changes, therefore, the firm will face a more elastic demand curve)

Question 7

One difference between monopolistic competition and oligopoly is that firms in monopolistic competition are assumed to

A) cooperate in setting price and output

B) act independently in setting price and output

C) be interdependent

D) face high barriers to entry

E) be price takers

Answer 7

B) act independently in setting price and output

Firms in monopolistic competition act independently in setting price and output while firms in oligopoly are interdependent in setting price and output.

(Okay so monopolistic competition firms are price setters?)

Question 8

In comparison to a firm in a perfectly competitive labor market, a firm in a monopsonistic labor market typically will hire

A) fewer workers and pay a lower wage

B) fewer workers and pay the same wage

C) the same number of workers and pay a lower wage

D) more workers and pay a lower wage

E) more workers and pay the same wage

Answer 8

A) fewer workers and pay a lower wage

The monopsonistic (single buyer) firm will equate its marginal factor cost with the marginal revenue product and set the wage on the supply curve, which lies below the marginal factor cost curve. Thus the monopsonistic firm offers a wage less than the wage set in a perfectly competitive market and hires fewer workers.

Question 9

Antitrust laws are intended to

A) prevent the entry of firms into imperfectly competitive markets

B) ensure that firms produce the allocatively efficient quantity of output

C) reduce monopoly profits

D) control monopolies and maintain a competitive market environment

E) eliminate negative externalities

Answer 9

D) control monopolies and maintain a competitive market environment

(Original answer A: Antitrust laws are intended to promote, not prevent, competition.)

Question 10

In the absence of externalities, the perfectly competitive market maximizes economic surplus when

A) the market price is above the equilibrium price

B) the market price is below the equilibrium price

C) the market is at equilibrium

D) for the last unit produced, marginal benefit exceeds marginal cost

E) the total benefit from all units produced equals the total costs of all units produced

Answer 10

A) the market price is above the equilibrium price

The competitive market in equilibrium is allocatively efficient and maximizes the total economic surplus. In the absence of externalities, the market equilibrium quantity is the same as the socially optimal quantity. At the socially optimal quantity, the marginal benefit of consuming the last unit equals the marginal cost of producing the last unit.

(Orginal answer E: In a competitive market, a unit of output will be produced as long as the marginal benefit exceeds the marginal cost of the unit. As more units are produced, the marginal benefit falls and the marginal cost increases until, for the last unit produced, marginal benefit equals the marginal cost. — It’s marginal, not total)

Question 11

An effective minimum wage policy in a competitive market will increase unemployment and increase the total earnings of labor only if the demand for labor is

A) relatively inelastic

B) relatively elastic

C) unit elastic

D) greater than the supply

E) positively related to the wage rate

Answer 11

A) relatively inelastic

(I’m not sure why I answered wrong the first time?)

Question 12

A firm uses capital and labor in its production process. The marginal product for the last unit of labor is 5, the marginal product for the last unit of capital is 10, and the wage is $10. At what cost of hiring each unit of capital would the firm be minimizing the cost of the current output?

A) $5

B) $10

C) $15

D) $20

E) $50

Answer 12

D) $20

Question 13

If the government eliminates an effective minimum wage in a competitive labor market, which of the following is true?

A) Minimum wage workers will experience no change in hourly pay.

B) Minimum wage workers will experience a decrease in hourly pay.

C) The number of people employed will decrease because people do not want to work for low wages.

D) There will be an excess demand for workers.

E) There will be an increase in the supply of workers.

Answer 13

B) Minimum wage workers will experience a decrease in hourly pay.

(Didn’t get an explanation but originally answered C: The number of people employed will actually increase until equilibrium)

Question 14

In a given year, Jennifer earns $50,000 and spends $40,000. During the same period, Steve earns $30,000 and spends $27,000. If Jennifer and Steve both must pay a 10 percent sales tax on goods purchased, the sales tax is

A) a higher percentage of income for Jennifer than for Steve

B) a higher percentage of spending for Steve than for Jennifer

C) progressive with respect to income

D) regressive with respect to income

E) proportional with respect to income

Answer 14

D) regressive with respect to income

(I’m a bit confused: Jennifer pays a lower percentage of her income in sales tax than Steve. Therefore, the sales tax is a higher percentage of income for Steve than for Jennifer, making option (B) the correct answer.

The sales tax is not progressive with respect to income (C), as progressive taxation would mean that the tax rate increases as the taxable amount increases. It is also not regressive with respect to income (D), as regressive taxation would mean that the tax rate decreases as the taxable amount increases. Finally, it is not proportional with respect to income (E), as proportional taxation would mean that the tax rate is the same regardless of the income level.)

Question 15

Which of the following will increase the demand for pizza, a normal good?

A) An increase in the cost of producing pizza

B) A decrease in the price of pizza

C) An increase in the price of a complementary product

D) An increase in consumers’ income

E) An increase in the number of restaurants selling pizza

Answer 15

D) An increase in consumers’ income

Question 16

At a perfectly competitive firm’s current output level, average total cost is $15, average variable cost is $10, and marginal cost is $8 and increasing. If the product price is $15, what should this firm do to maximize profits?

A) Increase the quantity of output produced.

B) Increase the product price.

C) Decrease the product price to increase sales.

D) Shut down immediately.

E) Continue to produce at its current output level.

Answer 16

A) Increase the quantity of output produced.

MC is still less than MR meaning they haven’t intersected yet. The firm should produce where MC=MR

Question 17

A perfectly competitive firm is producing 10 units of output and sells the product for $5 per unit. At this level of output the average total cost is $4, the average variable cost is $3 and the marginal cost is $7. What should this firm do to maximize short-run profits?

A) Increase output until price equals average total cost.

B) Increase output until price equals marginal cost.

C) Leave output unchanged because price is greater than average total cost.

D) Decrease output until price is equal to marginal cost.

E) Decrease output until price is equal to average total cost.

Answer 17

D) Decrease output until price is equal to marginal cost.

The firm is currently producing where marginal cost ($7) is greater than marginal revenue (which is equal to price, ($5). The firm can increase profit by decreasing output to where marginal cost equals price.

Question 18

The characteristic that causes firms in a perfectly competitive industry to earn zero economic profits in the long run is

A) firms are price takers

B) firms produce identical products

C) individual firms account for a small fraction of the total market

D) the industry supply curve is horizontal

E) there are no barriers to entry or exit

Answer 18

E) there are no barriers to entry or exit

The key assumption that leads to long-run adjustment in perfectly competitive markets is the assumption of no barriers to entry or exit (easy entry or exit). Depending on the market condition in the short run, firms respond by entering the market if economic profits are positive and exiting the market if economic profits are negative. The entry or exit of firms will stop when each firm earns zero economic profit. That means no firm has an incentive to leave the market or enter the market.

Question 19

Which of the following is true for a firm that uses labor as a variable input and capital as a fixed input in the short run?

A) If the marginal product of labor is negative, the average product of labor must also be negative.

B) If the marginal product of labor is rising, the average product of labor must be greater than the marginal product of labor.

C) If the average product of labor is rising, the marginal product of labor must be rising.

D) If the average product of labor is falling, the marginal product of labor must be less than the average product of labor.

E) The average product of labor can never be equal to the marginal product of labor.

Answer 19

D) If the average product of labor is falling, the marginal product of labor must be less than the average product of labor.

When the average product of labor is rising, the marginal product is above it, pulling the average up. When the marginal is below the average product, the average product is falling because the marginal product is pulling it down. The average product is at its maximum when the marginal product equals the average product. Therefore, if the average product of labor is falling, the marginal product of labor must be less than the average product of labor.

Question 20

The Lorenz curve represents the relationship between

A) the cumulative percentage of households and the cumulative percentage of income

B) income tax rates and income tax revenues

C) child labor rates and the poverty levels

D) income inequality and education level

E) market structure and the number of firms in the market

Answer 20

A) the cumulative percentage of households and the cumulative percentage of income

The Lorenz curve approach typically divides the population into 5 equal-size groups based on income from the lowest to the highest and computes the income share of each 20 percent of the population each year on a cumulative basis. Thus, the Lorenz curve provides an explicit measure of the percentage of income received by different percentages of the population.

Question 21

Which of the following must be true if at the tenth unit of output, marginal cost (MC) is $130 and average total cost (ATC) is $150?

A) ATC of producing the ninth unit is higher than $150.

B) ATC of producing the ninth unit is less than $150.

C) MC of producing the ninth unit is higher than $130.

D) The average variable cost of producing the tenth unit is higher than $150.

E) The average variable cost of producing the tenth unit is equal to $20.

Answer 21

A) ATC of producing the ninth unit is higher than $150.

(Read properly it’s asking about the NINTH unit not the eleventh)

Question 22

Assume the demand curve for a good is perfectly inelastic and the production of each unit of this good generates external costs. A profit-maximizing firm producing the good in an unregulated free market will

A) generate deadweight loss because marginal social cost is greater than marginal private cost

B) generate deadweight loss only if marginal costs are constant

C) not generate deadweight loss because the equilibrium quantity is socially optimal

D) not generate deadweight loss unless marginal costs are constant

E) not generate deadweight loss unless fixed costs are zero

Answer 22

C) not generate deadweight loss because the equilibrium quantity is socially optimal

(Original answer A: The demand curve for the good is completely vertical at the market equilibrium quantity. Even though the production of the good entails an external cost (negative externality), the equilibrium quantity produced is the same as the socially optimal quantity; therefore, there would no deadweight loss.)

Question 23

A profit-maximizing firm hires labor in a perfectly competitive market. Labor is the only variable input, and the marginal product of the last worker hired is 10 units per hour. If the hourly wage is $20, the firm’s marginal revenue

A) is $2

B) is $20

C) increases as more output is produced

D) increases first and then decreases as more output is produced

E) decreases first and then increases as more output is produced

Answer 23

A) is $2

A firm determines the profit-maximizing quantity of labor by equating the marginal revenue product of labor (MRPL) to the marginal factor cost (MFC), which is equal to the wage rate in a perfectly competitive market. MRPL equals the marginal product of the last worker times the marginal revenue. At the profit-maximizing quantity of labor, the MRPL equals the MFC, that is, (MP x MR) = MFC; thus the marginal revenue must be $20/$10=$2.

(Original answer D: The marginal revenue is constant if the firm is perfectly competitive (that is, it does not increase first and then decrease as output produced increases). If the firm is imperfectly competitive, its marginal revenue decreases as more output is produced and sold.)

Question 24

An increase in the supply of good X resulted in an increase in the price and quantity of good Y. It can be concluded that good Y is

A) an inferior good

B) a luxury good

C) a normal good

D) a substitute for good X

E) a complement for good X

Answer 24

E) a complement for good X

Question 25

A farmer grows wheat using two inputs: labor and land whose prices are constant. If she doubles her inputs, she finds that the quantity of wheat produced more than doubles. Therefore, it must be true that in her output range her long-run average total cost curve is

A) upward sloping

B) downward sloping

C) horizontal

D) vertical

E) U-Shaped

Answer 25

B) downward sloping

Question 26

Instead of being employed at a printing company at a salary of $25,000 per year, Sally starts her own printing firm. Rather than renting a building that she owns to someone else for $10,000 per year, she uses it as the location for her company. Her costs for workers, materials, advertising, and energy during her first year are $125,000. If the total revenue from her printing company is $155,000, her total economic profit is

A) -$5,000

B) $5,000

C) $20,000

D) $30,000

E) $120,000

Answer 26

A) -$5,000

(PLEASE read the question carefully)

Question 27

In which of the following situations is a good NOT scarce?

A) Consumers give up nothing to obtain more of the good.

B) Consumers can purchase as much of the good as they want at its current market price.

C) Large quantities of the good are available in the marketplace.

D) There is a surplus of the good at some positive price.

E) There is a shortage of the good at some positive price.

Answer 27

A) Consumers give up nothing to obtain more of the good.

Scarcity refers to the idea that resources are limited, and that we need to make choices about how to allocate them, these choices come with an opportunity cost. When a consumer can give up nothing (meaning no opportunity cost) to obtain more of a good, the good is not scarce.

Question 28

Which of the following helps explain why the demand curve for a normal good is downward sloping?

A) The income and substitution effects move the quantity demanded in the same direction.

B) The income effect moves the quantity demanded in the opposite direction of the substitution effect.

C) The income effect dominates the substitution effect.

D) The substitution effect dominates the income effect.

E) With an increase in income, the consumer decreases consumption of the good.

Answer 28

A) The income and substitution effects move the quantity demanded in the same direction.

Question 29

Catering, Inc., which provides catering services in a perfectly competitive market, was maximizing profits at the market price of $22 per meal. The market price has recently increased to $28 per meal. Which of the following short-run adjustments will increase profits for Catering, Inc.?

A) Increasing output until the marginal cost equals the new price

B) Increasing output until the average total cost equals the new price

C) Decreasing output because of the increase in market price

D) Increasing the wage rate paid to its workers

E) Increasing advertising to increase demand for the meals

Answer 29

A) Increasing output until the marginal cost equals the new price

(was I silly or did I just click the wrong one??)

Question 30

The absolute value of the price elasticity of demand for a good increases when

A) the good has fewer substitutes

B) the good becomes a necessity

C) consumers spend greater portion of their budget on the good

D) the price of an input used to produce the good increases

E) the good must be purchased immediately

Answer 30

C) consumers spend greater portion of their budget on the good