AP Microeconomics Full-length practice exam 2 — Free with Answer Explanations

Question 1

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 2

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 3

A competitive firm's short-run supply curve is best represented by:

A.The entire MC curve above the minimum ATC.B.The portion of the MC curve above the minimum AVC.C.The ATC curve above the minimum ATC.D.The MC curve below the minimum AVC, where the firm is most efficient.

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 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 6

The concept of scarcity in economics refers to the condition in which:

Question 7

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 8

Trade between two parties occurs voluntarily only when:

Question 9

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 10

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 11

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 12

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 13

A monopolist faces the demand schedule below. What is the marginal revenue of the 3rd unit?

Quantity	Price
1	$10∣∣2∣$ 8
3	$6∣∣4∣$ 4

A.$6B.$2C.$18D.

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Question 14

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 15

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 16

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

Question 17

Which of the following is a barrier to entry that enables a monopoly to earn long-run economic profit?

A.Economies of scale that allow existing firms to produce at lower cost than potential entrants.B.A large number of competing firms producing identical products.C.Perfect information for all consumers about available substitutes.D.Free entry by new firms attracted by positive economic profits.

Question 18

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 19

Which of the following best describes a public good?

A.A good produced by the government and provided free of charge.B.A good that is non-rival in consumption and non-excludable.C.A good with high positive externalities that benefit all members of society.D.A good provided by a regulated monopoly to ensure fair access.

Question 20

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 21

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 22

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 23

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 24

If the price elasticity of demand for insulin is $∣ E_{d} ∣ = 0.2$ , which of the following best describes this demand?

A.Elastic, because consumers are very responsive to price changes.B.Inelastic, because consumers are relatively unresponsive to price changes.C.Unit elastic, because the percentage change in price equals the percentage change in quantity.D.Perfectly elastic, because insulin is a life-saving drug.

Question 25

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 26

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

Question 27

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 28

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.

Question 29

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 30

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 31

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 32

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

Question 33

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 34

According to the Coase theorem, externalities can be corrected through private bargaining when:

A.The government enforces a Pigouvian tax equal to the marginal external cost.B.Property rights are clearly defined and transaction costs are low.C.The number of affected parties is large and diverse.D.The externality is positive rather than negative.

Question 35

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 36

Second-degree price discrimination (quantity discounts) differs from third-degree price discrimination primarily because:

A.Second-degree discrimination targets individual consumers; third-degree targets market segments.B.Second-degree discrimination uses quantity blocks that allow consumers to self-select; third-degree separates consumers into identifiable groups.C.Third-degree discrimination requires lower prices in all markets, while second-degree requires higher prices.D.Second-degree discrimination eliminates all deadweight loss; third-degree does not.

Question 37

A firm currently produces where $MC = \$ 8 $an d$ MR = $12$ . To maximize profit, the firm should:

A.Decrease output to raise price.B.Increase output until

M R = M C

.C.Keep output constant because the gap between MR and MC is already profitable.D.Shut down because MC exceeds AVC.

Question 38

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

Question 39

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

A.Constant opportunity costs for each additional unit of a good produced.B.The law of increasing opportunity costs due to resource specialization.C.Diminishing marginal utility of consumption rather than production constraints.D.Economies of scale in producing both goods simultaneously.

Question 40

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 41

An economy currently operates inside its production possibilities curve (PPC). This situation most likely indicates that the economy is experiencing:

Question 42

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

Question 43

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 44

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 45

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 46

A price floor set above the equilibrium wage in the labor market will most likely result in:

A.A shortage of workers, as employment exceeds the number of workers willing to work.B.A surplus of labor (unemployment), as quantity supplied exceeds quantity demanded.C.No impact if firms hire all workers who apply at the higher wage.D.A decrease in the quantity of labor supplied because workers prefer leisure at higher wages.

Question 47

In an oligopoly where firms collude to form a cartel, what is the most likely long-run outcome?

A.The cartel remains stable because all firms benefit equally from cooperation.B.The cartel breaks down as individual firms have incentives to cheat by producing above quota.C.The cartel converts the market into a perfectly competitive equilibrium over time.D.Prices fall to marginal cost immediately because cartel agreements are illegal.

Question 48

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 49

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 50

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 51

A monopolist's deadweight loss is best represented graphically by:

A.The rectangle between the monopoly price and the competitive price, times the monopoly quantity.B.The triangle between the demand curve, the MC curve, and the monopoly quantity.C.The area below the MC curve and above the equilibrium price.D.The entire area between the demand curve and the MC curve at all output levels.

Question 52

A natural monopoly exists when:

A.A single firm controls a key natural resource needed to produce the good.B.A single firm can serve the entire market at a lower average cost than two or more firms could.C.Government grants an exclusive license to one firm to operate in a market.D.A firm's average total cost is minimized at a quantity larger than market demand.

Question 53

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 54

The concept of scarcity in economics refers to the condition in which:

A.Only low-income individuals cannot afford the goods they want.B.Resources are insufficient to satisfy all human wants simultaneously.C.Goods are physically rare or difficult to find in nature.D.A country lacks the technology to produce enough goods for its population.

Question 55

A factory upstream from a river discharges pollution that harms downstream fisheries without paying compensation. This is an example of:

A.A positive externality, because the factory creates jobs in the region.B.A negative externality, because third parties (fishers) bear costs not reflected in the market price.C.A public goods problem, because clean water is non-excludable.D.A government failure, because regulators have not prevented the pollution.

Question 56

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 57

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 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

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 60

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.