AP Microeconomics Full-length practice exam 1 — Free with Answer Explanations

Question 1

The long-run supply curve in a constant-cost perfectly competitive industry is:

A.Upward sloping, because more output always requires higher costs.B.Perfectly horizontal (elastic) at the minimum long-run ATC.C.Perfectly vertical (inelastic) because production capacity is fixed in the long run.D.Downward sloping, because economies of scale lower costs as the industry grows.

Question 2

A firm decides to keep operating a machine that cost $50, 000 tw oy e a r s a g o, e v e n t h o ug han e w er ma c hin e w o u l d p r o d u ceo u tp u t m or ec h e a pl y . F r o man eco n o mi cs t an d p o in t, t h e$ 50,000 is:

A.A variable cost that should factor into the decision to upgrade.B.An opportunity cost that must be deducted from future revenue.C.A sunk cost that should not influence the upgrade decision.D.A fixed cost that reduces the firm's profit by $50,000 each year.

Question 3

Which of the following correctly describes a firm's marginal cost curve in relation to its production function?

A.MC rises continuously from the first unit because inputs always cost more as output expands.B.MC is the mirror image of the marginal product curve; when MP rises, MC falls.C.MC equals average variable cost at all output levels.D.MC is unrelated to the marginal product of labor because costs and production are separate decisions.

Question 4

Country Alpha can produce 6 tons of wheat per labor-hour or 3 tons of steel per labor-hour. Country Beta can produce 4 tons of wheat per labor-hour or 4 tons of steel per labor-hour. Which statement is correct?

Question 5

A 10% increase in the price of a good leads to a 10% decrease in quantity demanded. What is the price elasticity of demand, and what happens to total revenue?

A.

∣ E_{d} ∣ = 1

; total revenue remains unchanged.B.

∣ E_{d} ∣ = 1

; total revenue increases because price rose.C.

∣ E_{d} ∣ = 2

; total revenue decreases because demand is elastic.D.

∣ E_{d} ∣ = 0.5

; total revenue increases because demand is inelastic.

Question 6

A monopolistically competitive firm in long-run equilibrium operates with excess capacity because:

A.It faces a perfectly elastic demand curve and must accept the market price.B.It produces at a quantity less than the minimum efficient scale (minimum ATC).C.It produces where price equals marginal cost, fully exhausting potential gains from trade.D.It is forced by government regulation to maintain a reserve production capacity.

Question 7

Which statement accurately distinguishes explicit costs from implicit costs?

A.Explicit costs are variable; implicit costs are fixed.B.Explicit costs involve direct money payments; implicit costs are opportunity costs of owned resources.C.Explicit costs are included in economic profit calculations but implicit costs are not.D.Implicit costs are always larger than explicit costs for any firm.

Question 8

A negative externality in production causes the market to produce more than the socially optimal quantity because:

A.The market supply curve is set below the social marginal cost curve, leading to artificially low prices.B.Demand is artificially high because consumers do not bear the external costs.C.The government subsidizes the externality-producing firm to maximize tax revenue.D.Marginal social cost equals marginal social benefit at the market equilibrium.

Question 9

When incomes in a city rise and the price of apartments increases but the quantity rented stays the same, what most likely occurred?

A.Both supply and demand shifted left by equal amounts.B.Demand increased (shifted right) while supply also increased (shifted right) by the same amount.C.Demand increased (shifted right) while supply decreased (shifted left) by an equal amount.D.Only supply decreased, causing price to rise and quantity to fall.

Question 10

In perfect competition, which of the following best characterizes average fixed cost (AFC) as output increases?

A.AFC rises as more units share the overhead cost.B.AFC is constant because fixed costs do not change with output.C.AFC declines continuously and approaches zero as output increases.D.AFC eventually rises because fixed costs become more burdensome at high output.

Question 11

If the marginal benefit of consuming a good is greater than its marginal cost, a rational individual should:

A.Stop consuming the good because costs are about to exceed benefits.B.Consume more of the good until marginal benefit equals marginal cost.C.Consume less of the good to reduce total cost.D.Ignore marginal costs and maximize total benefit instead.

Question 12

A firm decides to keep operating a machine that cost $50, 000 tw oy e a r s a g o, e v e n t h o ug han e w er ma c hin e w o u l d p r o d u ceo u tp u t m or ec h e a pl y . F r o man eco n o mi cs t an d p o in t, t h e$ 50,000 is:

Question 13

Which of the following events would cause an outward (rightward) shift of an economy's PPC?

Question 14

Which of the following would shift the labor supply curve for nurses to the right?

A.An increase in nurses' wages due to rising hospital revenues.B.A government subsidy for nursing education that lowers training costs.C.An increase in the wages paid to physical therapists, an occupation with similar training requirements.D.A decrease in the overall population of working-age adults.

Question 15

Consumer surplus in a competitive market is best defined as:

A.The total amount consumers spend on a good.B.The difference between the maximum price consumers are willing to pay and the price they actually pay.C.The profit earned by consumers from reselling goods at higher prices.D.The revenue a seller receives above the minimum acceptable price.

Question 16

When a $\$ 1$ per unit excise tax is imposed in a market where demand is perfectly inelastic, who bears the full burden of the tax?

A.Producers bear the full burden because they must lower the price to maintain sales.B.Consumers bear the full burden because the quantity demanded does not change with price.C.The burden is split equally between consumers and producers.D.The government bears the burden because tax revenue reduces consumer income.

Question 17

When the price of coffee rises by 10% and the quantity of tea demanded increases by 15%, the cross-price elasticity of demand for tea with respect to coffee is approximately:

A.

- 1.5

, indicating that coffee and tea are complements.B.

+ 1.5

, indicating that coffee and tea are substitutes.C.

+ 0.67

, indicating that coffee and tea are substitutes.D.

0

, indicating that coffee and tea are unrelated goods.

Question 18

Which of the following best describes the economic rationale for government subsidies for elementary education?

A.Education is a private good, and subsidies prevent overproduction by competitive firms.B.Education generates positive externalities (better-informed citizens, lower crime, economic growth) that private markets underprovide.C.Education is a pure public good because knowledge is non-rival and non-excludable.D.Government must provide education because private firms could never earn a profit providing it.

Question 19

Which of the following markets would most likely have the most price-elastic demand?

A.Prescription heart medication with no generic alternative.B.Gasoline for commuters with no public transit option.C.A specific brand of luxury wristwatch.D.Table salt purchased for cooking.

Question 20

In a perfectly competitive factor market, a firm can hire as many workers as it wants at the market wage. This means the firm's labor supply curve is:

A.Upward sloping because the firm must pay more to attract additional workers.B.Perfectly elastic (horizontal) at the market wage.C.Perfectly inelastic (vertical) because the firm requires a fixed number of workers.D.Downward sloping because higher wages discourage workers from seeking employment.

Question 21

In which market structure do firms produce differentiated products, face a downward-sloping demand curve, and earn zero economic profit in the long run?

A.Perfect competitionB.MonopolyC.Monopolistic competitionD.Oligopoly

Question 22

In a competitive market for gasoline, which of the following would cause the equilibrium price to rise and equilibrium quantity to fall?

A.An increase in consumer incomes, assuming gasoline is a normal good.B.A decrease in the price of crude oil, a key input.C.A new environmental regulation that raises refining costs.D.An increase in the number of sellers in the gasoline market.

Question 23

Compared to the competitive outcome, a profit-maximizing monopolist produces at a quantity where:

A.

P = M C

, achieving allocative efficiency.B.Output is lower and price is higher, creating deadweight loss.C.Output is higher and price is lower because monopolists have economies of scale.D.Price equals average total cost, ensuring zero economic profit.

Question 24

Trade between two parties occurs voluntarily only when:

A.One party has absolute advantage in producing every traded good.B.Both parties believe they will be better off from the exchange.C.The terms of trade equal the opportunity cost of the less productive party.D.A government regulator approves the exchange to ensure fairness.

Question 25

In game theory, a dominant strategy is best described as:

A.The strategy that maximizes a player's payoff only when the opponent cooperates.B.The best strategy for a player regardless of what the other player does.C.The strategy that leads to the highest combined payoff for both players.D.A strategy adopted by the larger firm in an oligopoly to lead the market.

Question 26

Trade between two parties occurs voluntarily only when:

Question 27

Which of the following is the best example of a marginal decision?

A.A firm decides whether to enter a new industry.B.A government sets a national budget for the next fiscal year.C.A student decides whether to study one additional hour for a test.D.A country chooses between a market economy and a command economy.

Question 28

A perfectly competitive firm has $P = \$ 15 $,$ ATC = $18$ , and $AVC = \$ 12$ at the profit-maximizing quantity. What is the firm's economic situation?

A.The firm earns a positive economic profit and will expand output.B.The firm incurs a loss but should continue to produce in the short run.C.The firm incurs a loss and should immediately shut down.D.The firm earns zero economic profit (break-even point).

Question 29

When a new technology significantly raises the marginal product of all workers in an industry, the most likely effect on that labor market is:

A.The labor supply curve shifts right, increasing employment and reducing wages.B.The labor demand curve shifts right, increasing both wages and employment.C.The labor demand curve shifts left as firms need fewer workers to produce the same output.D.The equilibrium wage falls because each worker is now producing the same output more cheaply.

Question 30

Which of the following events would cause an outward (rightward) shift of an economy's PPC?

A.An increase in the unemployment rate.B.A reduction in consumer spending during a recession.C.An improvement in the education level of the labor force.D.A reallocation of workers from manufacturing to services.

Question 31

If the government imposes an excise tax on a good with relatively elastic demand and inelastic supply, the larger share of the tax burden will be borne by:

A.Consumers, because they have less ability to respond to price changes.B.Producers, because their inelastic supply limits their ability to reduce output in response to the tax.C.The government, because an excise tax reduces total surplus in the economy.D.Neither side, because the market reaches a new equilibrium with no welfare loss.

Question 32

A linear PPC has endpoints at (0, 80) for Good Y and (40, 0) for Good X. What is the opportunity cost of producing one additional unit of Good X?

A.

\frac{1}{2}

unit of Good YB.2 units of Good YC.40 units of Good YD.80 units of Good Y

Question 33

When a good generates a positive externality, the free market will tend to:

A.Overproduce the good because producers earn extra profits from the social benefit.B.Underproduce the good because private demand understates the true social value.C.Produce the socially optimal quantity because price signals fully reflect social benefits.D.Automatically correct the underprovision through voluntary agreements between beneficiaries.

Question 34

A deadweight loss (DWL) in a market arises whenever:

A.Equilibrium price is higher than the minimum price consumers are willing to pay.B.Quantity traded falls below or rises above the socially optimal (competitive equilibrium) quantity.C.Total consumer surplus exceeds total producer surplus.D.The government collects tax revenue from market transactions.

Question 35

Compared to a competitive labor market, a monopsonist will:

A.Hire more workers at a higher wage.B.Hire fewer workers at a lower wage.C.Hire the same number of workers but at a lower wage.D.Hire fewer workers at the same wage as the competitive outcome.

Question 36

In a competitive factor market, the equilibrium wage is determined by:

A.The minimum wage legislation set by the government.B.The intersection of labor supply and labor demand curves.C.The wage at which firms maximize their total wage bill.D.The average productivity of all workers in the economy.

Question 37

In the short run, a perfectly competitive firm should continue to produce rather than shut down as long as:

A.Price is greater than average total cost.B.Price is greater than or equal to average variable cost.C.Price is greater than or equal to average fixed cost.D.Total revenue is greater than or equal to total cost.

Question 38

The table below shows a firm's total output as labor inputs increase, with capital fixed. Which of the following describes the law of diminishing marginal returns?

Workers	Total Output
0	0
1	10
2	22
3	30
4	36
5	40

A.Marginal product is positive for all workers listed.B.Marginal product begins to decline after the 2nd worker.C.Marginal product is constant at 8 units per worker throughout.D.Total output falls after the 4th worker is hired.

Question 39

Which of the following is the best example of a marginal decision?

Question 40

Country Alpha can produce 6 tons of wheat per labor-hour or 3 tons of steel per labor-hour. Country Beta can produce 4 tons of wheat per labor-hour or 4 tons of steel per labor-hour. Which statement is correct?

A.Alpha has comparative advantage in wheat; Beta has comparative advantage in steel.B.Alpha has comparative advantage in steel; Beta has comparative advantage in wheat.C.Alpha has absolute and comparative advantage in both goods.D.No gains from trade are possible because Beta has equal productivity in both goods.

Question 41

A minimum wage set above a monopsony's profit-maximizing wage can potentially:

A.Decrease employment because higher wages always reduce the quantity of labor demanded.B.Increase both employment and wages simultaneously.C.Have no effect because the monopsonist sets wages independently of government policy.D.Cause the monopsonist to exit the market due to unsustainable labor costs.

Question 42

A concave (bowed-out) PPC, as opposed to a linear one, reflects which economic principle?

Question 43

A student can produce either 10 essays or 20 problem sets per week, while a tutor can produce either 30 essays or 45 problem sets per week. Which of the following correctly identifies the comparative advantage of each person?

Question 44

In the long run, perfectly competitive industries tend toward an equilibrium at which each firm:

A.Earns maximum economic profit through price leadership.B.Earns zero economic profit, with

P = M R = M C = A T C

.C.Earns zero accounting profit because all costs are variable in the long run.D.Shuts down because competition drives price below variable costs.

Question 45

Which of the following would increase the demand for labor in the market for construction workers?

A.An increase in the wage rate paid to construction workers.B.A decrease in the price of new homes in the housing market.C.An increase in demand for new housing construction.D.An increase in the productivity of new construction machinery, substituting for workers.

Question 46

A firm sells output in a competitive market at a price of $\$ 5$ per unit. The marginal product of the 4th worker is 20 units. What is the marginal revenue product (MRP) of the 4th worker?

A.$4B.$20C.$100D.$25

Question 47

Two firms are deciding whether to advertise. The payoff matrix (Firm A profit, Firm B profit) is:

	B Advertises	B Doesn't Advertise
A Advertises	(4, 4)	(10, 2)
A Doesn't Advertise	(2, 10)	(8, 8)

What is the Nash equilibrium outcome?

A.Both firms advertise, each earning a profit of 4.B.Neither firm advertises, each earning a profit of 8.C.Only Firm A advertises, earning a profit of 10.D.Firm A does not advertise; Firm B advertises — the Pareto-optimal outcome.

Question 48

A monopolist practicing perfect price discrimination (1st-degree price discrimination) compared to a single-price monopolist would:

A.Produce less output and earn less profit.B.Produce the same output but charge different prices to different consumers.C.Eliminate deadweight loss by expanding output to the competitive level.D.Reduce producer surplus because charging different prices costs more to administer.

Question 49

A price ceiling set below the equilibrium price will most likely result in:

A.A surplus because the controlled price is below equilibrium.B.A shortage because quantity demanded exceeds quantity supplied at the ceiling price.C.No change in quantity traded because sellers can negotiate around the ceiling.D.A surplus because suppliers produce extra output to compensate for the lower price.

Question 50

A student can produce either 10 essays or 20 problem sets per week, while a tutor can produce either 30 essays or 45 problem sets per week. Which of the following correctly identifies the comparative advantage of each person?

A.The student has a comparative advantage in essays; the tutor has a comparative advantage in problem sets.B.The tutor has a comparative advantage in both essays and problem sets.C.The student has a comparative advantage in problem sets; the tutor has a comparative advantage in essays.D.Neither person has a comparative advantage because the tutor is better at everything.

Question 51

A firm's total fixed cost is $200 an d i t s t o t a l v a r iab l ecos t a t 10 u ni t so f o u tp u t i s$ 300. What is the average total cost (ATC) at 10 units?

A.$20B.$30C.$50D.$500

Question 52

A Pigouvian tax is designed to correct a negative externality by:

A.Raising the private marginal cost to equal the social marginal cost.B.Subsidizing affected third parties to compensate them for the harm received.C.Eliminating all production of the good causing the externality.D.Lowering the price of the good so that more consumers can afford it.

Question 53

The free-rider problem in public goods markets means that:

A.Private firms overprovide the good to attract paying customers.B.Individuals have no incentive to reveal their true willingness to pay, leading to underprovision.C.Wealthier individuals pay for the good and provide it free to everyone else.D.Public goods are consumed more rapidly than private goods, depleting them faster.

Question 54

When a new technology improves the production of consumer goods but not capital goods, what happens to the PPC?

A.The PPC shifts outward uniformly along both axes.B.The PPC rotates outward along the consumer goods axis only.C.The PPC shifts inward, reflecting that resources now have an alternative use.D.The PPC becomes linear because the opportunity cost is now constant.

Question 55

The Gini coefficient is a measure of income inequality that ranges from 0 to 1. A Gini coefficient closer to 1 indicates:

A.Perfect equality, where every household earns the same income.B.Greater income inequality, with income concentrated among fewer households.C.Rapid economic growth, as high earners generate more productivity and investment.D.Low unemployment, because more people are earning income in the economy.

Question 56

Producer surplus can be defined as:

A.Total revenue minus total explicit costs of production.B.The amount producers receive above the minimum they would accept for each unit sold.C.The quantity supplied minus the quantity demanded at the market price.D.The difference between the maximum price consumers pay and the equilibrium price.

Question 57

A profit-maximizing firm in a competitive labor market will hire workers up to the point where:

A.The marginal product of labor equals zero.B.The wage equals the marginal revenue product of labor.C.Total labor cost is minimized.D.Average revenue product equals the wage.

Question 58

When a firm has market power in both its output market (monopoly) and input market (monopsony), how does this affect labor hired compared to the competitive benchmark?

A.The firm hires more workers than the competitive benchmark because it can price its output higher.B.The firm hires fewer workers than the competitive benchmark due to market power on both sides.C.Employment is unchanged because the monopoly output effect and monopsony input effect cancel each other.D.The firm pays a wage above the competitive rate to attract workers away from other industries.

Question 59

If the income elasticity of demand for a good is $- 0.8$ , the good is classified as:

A.A normal good with elastic demand.B.A luxury good because the elasticity is less than 1 in absolute value.C.An inferior good, because demand falls as income rises.D.A necessity, because the elasticity is less than 1.

Question 60

As output increases, what is the relationship between marginal cost (MC) and average variable cost (AVC)?

A.MC is always above AVC.B.MC equals AVC at every output level.C.When MC is below AVC, AVC is falling; when MC is above AVC, AVC is rising.D.AVC falls whenever output increases, regardless of the level of MC.