- E—Know the four scarce economic resources.
- D—A concave PPF exhibits the law of increas-
ing costs. As more of a good is produced,
opportunity costs rise. This is because resources
are not perfectly substitutable between the pro-
duction of different goods. - E—Demand is more elastic if there are more
substitute goods. A monopolist has no close
substitutes so is likely the least elastic demand. - A—Nation A has comparative advantage in
crab production, and Nation B has comparative
advantage in cake production. Nation A special-
izes in crabs and Nation B specializes in cakes,
so avoid any option suggesting the opposite.
Choice A is the only one that allows both to
consume beyond the PPF. - B—Nations that invest in research and technol-
ogy expect the PPF to expand; the key to eco-
nomic growth. - B—Rational decision makers consume right up
to the point where the MB of the next cookie is
exactly equal to the MC of the next cookie. - B—Tea is a coffee substitute. Higher tea prices
increase coffee demand. - C—Leftward demand shifts coupled with right-
ward supply shifts put downward pressure on
prices. - B—Price ceilings are legal maximum prices set
below the equilibrium price. A shortage results. - A—The more narrowly a good is defined, the
more elastic demand. - C—Private property is fundamental to the free
market economy. - E—The supply curve is more elastic as more
time elapses. - D—If the demand curve is more inelastic (more
vertical), a greater burden of an excise tax falls
upon consumers and less upon producers. - C—The opportunity cost of starting a small
store is the salary given up in the next best alter-
native for the entrepreneur’s skills. - A—A price floor is a legal minimum price set
above the equilibrium price. Higher coffee
prices decrease the demand for complementary
goods like coffee machines. - E—P¥MPL=MRPL.
- B—At the second worker, wage =MRPL.
- E—In perfect competition, short-run profits
may be positive or negative, or normal, but
long-run profits are always normal. - D—This is the equilibrium price.
- C—When the price falls and quantity
demanded rises, consumer spending on the
good (P¥Q) can change in two directions. If
Ed>0, a percent decrease in price increases
quantity demanded by a greater percent,
increasing spending on the good. - D—PS is the area under the price and above
supply. - A—Substitution and income effects explain the
law of demand. - D—Using the utility maximizing rule, set
MUc/$1 = MUs/$4. There are three options
where the MUcis four times the MUs, and only
one of those options uses exactly $20 of daily
income. - A—The Gini coefficient measures income
inequality. The closer it gets to one, the more
unequal the income distribution. One explana-
tion for inequality is more market power in
product and input markets. This redistributes
CS to monopoly producers and/or employers. - B—Quickly look at the graph to eliminate
some possibilities. With dollars on the yaxis,
this curve cannot represent TPL(output on the
yaxis) or total utility (utility on the yaxis). The
other key is that this curve has a value of zero
dollars at an output of zero. TC =TFC at zero
output and short-run economic losses equal
TFC at zero output. - C—If the price of eggs rises, demand for bacon
falls if they are complementary; Exy<0. - D—Labor is a variable cost so there is no change
in TFC, but an increase in TVC and TC.
AP Microeconomics Practice Exam 2 ‹ 199› Answers and Explanations