5 Steps to a 5 AP Microeconomics, 2014-2015 Edition
- B—Cartels are illegal collusive agreements to
lower output, raise the price, and maximize
joint profits. Each member has an incentive to
cheat by producing a little more.
- D—TR >TVC, so Jason does not shut down.
Subtracting all costs from TR, he is losing $10
per day.
- A—Income and substitution effects work in
opposite directions for inferior goods. A lower
price prompts a substitution effect, increasing
quantity demanded of the good. A lower price
increases purchasing power, and for an inferior
good, it decreases consumption. If the income
effect outweighs the substitution effect, we can
see an upward-sloping demand curve.
- C—This is the shutdown point.
- B—Decreased labor demand lowers wage and
employment. Lower incomes and higher unem-
ployment decrease real estate prices.
- D—Barriers to entry are the key to monopoly
pricing power.
- E—Find the output where MR =MC and the
price is found vertically at the demand curve.
- E—DWL is the area above MC and below the
demand curve, between the monopoly output
and the perfectly competitive output.
- B—Entering is a dominant strategy for both firms.
- C—MC and AVC are inverses of MPLand APL.
Because MPL=APLat the maximum of APL,
MC =AVC at the minimum of AVC.
- C—Familiarity with cost curves identifies curve 4 as
AFC. The area of this rectangle is Q¥AFC =TFC.
- A—Quickly recognize this as MC.
- D—The profit rectangle is the quantity multiplied
by the vertical distance between price and ATC.
- C—With product differentiation, monopolisti-
cally competitive firms spend money to pro-
mote their product as different from the others.
- E—Entry of new firms takes market share from
existing firms, so demand curves begin to shift
to the left.
- A—Profits are normal and P=ATC, but unlike
perfect competition, P >minimum ATC, so the
industry is not productively efficient.
45. D—Lost CS is a big reason why government
keeps an eye on the monopoly power of firms.
46. E—Colluding members of an oligopoly act as a
monopolist, restraining competition, restricting
output, and increasing the price.
47. C—This is the idea of derived demand.
48. A—Monopsony lowers both wage and employ-
ment when compared to the competitive labor
market.
49. E—Like the competitive firm, the monopolist
produces where MR =MC, but the P >ATC,
which is most likely even further above MR =MC.
50. B—MRP =MP ¥P. Calculate MP by looking
at the difference in TP as one more unit of labor
is hired.
51. C—Labor is hired to the point where W =MRP,
so quickly find the point in the table where MP
=10, which when multiplied by P=$2 gives
you MRP =$20.
52. C—This is a main identifier of oligopoly.
53. E—Minimum wages are price floors in a labor
market. A surplus results.
54. C—This choice describes the least-cost rule for
hiring inputs.
55. A—Increased labor supply lowers the wage,
increases employment, and increases demand
for goods that are “tools of the trade.”
56. E—The appropriate fix to a negative externality
is to tax either the producers or the consumers
of electricity. The health problems of the smoker
are not a negative externality, as the smoker is
not a third party. The nonsmoking spouse of the
smoker whose health is impaired would be a
negative externality.
57. D—This describes the choice that is made by
employers in competitive labor markets.
58. B—Sales taxes are typical examples of regressive
taxes.
59. C—Free riders receive the benefit of a public
good without contributing to its production.
60. E—If equilibrium output exceeds the socially
desirable output, resources are overallocated to
production of this good. This negative external-
ity can be fixed with a tax on producers or some-
times on consumers.
AP Microeconomics Practice Exam 1 ‹ 179
