AP Microeconomics Unit 4 Practice Test Multiple Choice Questions

AP Microeconomics Unit 4 Practice Test Multiple Choice Questions 1. For a non-price discriminating monopoly, the marginal revenue is a. negative when the firm is maximizing profit b. increasing at a constant rate c. equal to the price d. greater than the price e. less than the price Answer: e

http://www.youtube.com/watch?v=rtwJOu0KWDk

A non-price discriminating monopoly faces a downward sloping demand curve since they need to lower price to sell additional units. When they lower the price for all units, including the ones they could have sold at a higher price, the marginal revenue is less than the price people are willing to pay. The demand curve is always above the MR.

2. Monopolies are able to make economic profit in the long run because a. they can price discriminate b. they have barriers to entry c. they have inelastic demand curves d. the demand curve is greater than the MR e. the marginal cost curve is upward sloping Answer: b Barriers to entry prevent other firms from entering the market. This is the source of a monopoly's power and means that it can earn economic profit in the long run.

3. Assume a monopolist is currently producing in the elastic range of their demand curve. To maximize total revenue, the monopoly should a. decrease their output

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b. c. d. e.

Answer: c

produce where the MR is negative produce where the MR is zero produce where the demand curve intersects the MC produce at the minimum point of the ATC curve http://www.youtube.com/watch?v=-xafrtzpW98

When MR hits zero the total revenue is maximized. To the left of that quantity is the elastic range and to the right of that quantity is the inelastic range. *To make this more challenging you could have two answers, one says "increase production until MR = 0" and the other "decrease production until MR = 0". this tests whether or not they know where the elastic range of the demand curve is relative to the point where MR = 0.

4. If the monopoly above is maximizing profit, which of the following is true?

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a. b. c. d. e.

Total revenue is $960 Total cost is $600 They are producing in the inelastic range of the demand curve Firms will enter in the long run Profit is $200

Answer: e This monopoly will produce where MR=MC (10 units) and charge $100. The total revenue is $1000. The total cost is $800. The profit is $200. 10 units is in the elastic range because MR is positive and firms cannot enter because of high barriers to entry

5. Use the points to identify the consumer surplus and dead-weight loss for the monopoly. a. b. c. d. e.

Answer: a

CS ABE ABE ABE ACF ADG

DWL BCJ BDJ CDJ BCJ BDJ

http://www.youtube.com/watch?v=WqUDIG5QP-w

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Consumer surplus is the difference between what consumers are willing to pay (demand) and the price (Point E). Dead-weight loss shows the amount of inefficiency in the market. The socially optimal quantity is where the MC hits the demand, but the monopoly is producing less so they can maximize profit. DWL is the total surplus that is lost when the monopoly underproduces.

6. A perfectly competitive industry is different from a monopoly in that a. monopolies produce a greater quantity b. monopolies maximize profit where MC exceeds MR c. monopolies have U-shaped average total cost curves d. perfect competition produces the allocatively efficient quantity e. perfect competition results in a higher price Answer: d Monopolies do not produce the allocatively efficient (or socially optimal) quantity, but perfect competition does. Monopolies charge a higher price and produce less output causing dead-weight loss.

7. If the government regulates a natural monopoly by setting a price ceiling where the MC equals the demand then a. the monopoly will break even and make no economic profit b. the monopoly will produce the socially optimal quantity c. consumer surplus will decrease d. the monopoly will make more profit e. the monopoly will produce the productively efficient quantity Answer: b

http://www.youtube.com/watch?v=zGrMO3fjZpY

The monopoly will produce the socially optimal quantity because the marginal cost to society will equal the marginal benefit. The monopoly breaks even where P=ATC, CS will increase at Qso, and productively efficient output occurs where ATC in minimized.

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8. If a non-price discriminating monopoly could suddenly start price discriminating and charge each consumer exactly what they are willing to pay, all of the following would occur EXCEPT: a. The demand would equal the MR b. The monopoly would earn more profit c. The consumer surplus would be zero d. There would be no dead-weight loss e. The monopoly would charge all consumers higher prices Answer: e

http://www.youtube.com/watch?v=OE9ER8oOj28

They would charge some people more and some people less, depending on what that consumer was willing to pay. The graph for a price discriminating monopoly shows that D=MR, profit is bigger, quantity is bigger, and there is no consumer surplus.

There is no DWL since the allocatively efficient level of output is attained.

9. Assume a profit maximizing monopoly was subject to a lump sum tax. Which of the following will occur? a. Price and quantity will stay the same b. Price will increase and quantity will decrease c. Price will increase but quantity will stay the same d. The consumer surplus would get smaller e. The monopoly would produce the socially optimal quantity Answer: a

http://www.youtube.com/watch?v=0uRvmBOaSUk

A lump sum tax only effect a firm's fixed costs so it doesn't change the marginal costs. Since MC, MR, or demand do not change, the price and quantity will stay the same. The ATC will shift upward, but this does not affect the profit maximizing price or quantity.

10. Which of the following best characterizes monopolistic competition? a. Large number of firms with identical products b. Large number of firms with high barriers to entry c. Small number of firms and efficiency d. Unique products and strategic pricing e. Low barriers to entry and differentiated products Answer: e Monopolistic competition is a market structure with a large number of firms selling differentiated products with low barriers to entry.

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11. Which of the following is true for monopolistically competitive firms in long run equilibrium? a. Price equals ATC b. Price equals MC c. They are productively efficient d. Firms will eventually leave the industry since they are making no economic profit e. Firms are maximizing total revenue Answer: a

http://www.youtube.com/watch?v=a2HWaXrPdMo

Monopolistically competitive firms make no economic profit in the long run. ATC is tangent to the demand curve at the profit maximizing quantity and equal to the price.

12. Which of the following is correct regarding the four market structures? a. Perfectly competitive firms and monopolies are price takers b. Monopolies and monopolistically competitive firms have high barriers to entry c. Game theory is used in all market structures to determine the price firms should set d. Monopolies and monopolistically competitive firms are price makers e. All market structures produce where the price equals the marginal cost Answer: d All imperfectly competitive firms are price makers. C is incorrect because perfectly competitive firms do not use game theory.

13. Which of the following must be true if a market is dominated by four large firms that sell similar products and use non-price competition? a. The firms are interdependent b. The firms are efficient c. The market is an oligopoly that will be regulated by the government d. The market is monopolistically competitive e. The market is perfectly competitive Answer: a The firms are interdependent because they must factor in the decisions of their competitors. The market is an oligopoly but it doesn’t necessarily need to be regulated by the government.

14. Which of the following describes the situation where competitors collude and agree to set prices?

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a. b. c. d. e.

Collusive competition Excess capacity Cartel model Kinked demand curve model Game theory

Answer: c A cartel is a colluding oligopoly.

15. The game theory matrix shows the profit for two firms deciding whether to price high or price low.

Firm 1 is the blue numbers on the left. Which of the following is correct? a. Firm 1's dominant strategy is to price low b. Firm 1's dominant strategy is to price high c. Firm 2's dominant strategy is to price high d. Firm 2's dominant strategy is to price low e. Both firms do not have a dominant strategy Answer: b

http://www.youtube.com/watch?v=pRjcjXIWTao

Firm 1 should always price high and has no incentive to price low. Firm 2 does not have a dominate strategy. If both firms have this information and choose simultaneously, Firm 1 will price high and Firm 2 will price low.

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