- C.A perfectly competitive firm will hire labor until the maximum marginal product of labor is achieved.
Hours of Labor Cost of Labor Units of Output Revenue Marginal Profit1 $10 5 $25 $152 $20 7 $35 $153 $30 10 $50 $204 $40 11 $55 $155 $50 13 $65 $15The firm will produce 10 units of output at 3 hours of labor. After which point there is diminishing marginal
product; it would not be rational for a firm to produce beyond that point.- D. A consumer’s consumption is optimized when PX/ PY= MUX/MUY. This is the point at which the consumer’s
budget constraint and indifference curve is tangent. Choices A, B, C, and E can all be eliminated. - A.In order to maintain allocative efficiency there must be no deadweight loss in the market. Therefore, the price
and output is determined by supply and demand. In the short-run, competitive industries do produce a profit;
therefore, the correct answer is choice A. Choices B and C measure the responsiveness of quantity demanded
relative to one of its determinants. If supply and demand determines the price, then the firm is a price taker,
eliminating choice D. Answer E is incorrect because price equals average total cost for a market to allocate
efficiently. - E.A Nash equilibrium is a situation in which all the players involved with one another pick the strategy that
would best suit their needs given what the other players have chosen. Choice A reflects a dominant strategy in
which the player chooses their best strategy regardless of the other players’ actions. In a Nash equilibrium the
player chooses their most desirable strategy, eliminating choice B. Maximizing the utility of another player does
not concern the actors involved, eliminating choice C. It does not have to be the case that the least desirable
strategy is chosen, therefore choice D is eliminated. - A.The U-shaped average total cost curve can be explained by the average fixed cost and the average variable
cost. Average fixed cost declines as output increases because it is being spread over a larger number of units.
Average variable costs increase as output does because of diminishing marginal products, eliminating B. Answer
C does not explain the shape of the curve. Average total cost is the sumof average fixed cost and average variable
cost, eliminating choice D. Since A explains the shape of the curve, choice E can be ignored. - B.Country 1 has the comparative advantage in producing plastic because the amount of plastic they have to give
up in order to produce one more unit of metal is lower than Country 2. Therefore, they should import metal and
export plastic. - B.In order for the firm to maximize profits it needs to increase quantity supplied; this will cause the firm to
move up the marginal cost curve to a point where profits can be maximized. - C.The definition of a negative externality is external cost.
- D. Elasticity means when there is an increase in price; the quantity demanded decreases significantly.
- D. If the demand is price inelastic, the demand curve is a vertical line, meaning the quantity demanded is
constant at any price. Because the quantity purchased is constant, an increase in price will raise a producer’s
revenue. - B.The question is not asking about the demand curve, so we can eliminate choices A, D, and E. The answer is
not C because it violates the laws of supply. The answer is B because a higher price gives producers an incentive
to produce a larger quantity.
Part IV: AP Macroeconomics & Microeconomics Tests