AP Microeconomics : AP Microeconomics

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #1 : Perfectly Competitive Output Markets

A natural monopoly arises when which of the following characteristics of a perfectly competitive market are not met?

Possible Answers:

Well-defined property rights

Perfect information

Firms sell where marginal revenue equals marginal cost

Non-increasing returns to scale

Correct answer:

Non-increasing returns to scale

Explanation:

A natural monopoly is defined by an industry where production is most efficient (i.e. lowest long-run average cost) when it is concentrated in a single firm. This implies increasing returns to scale, which is not characteristic of perfect competition. In other words, the natural monopolist will have a significant cost advantage over smaller competitors that try to enter the market.

Example Question #1 : Perfectly Competitive Output Markets

A natural monopoly differs from a traditional monopoly in what way?

Possible Answers:

High barriers to entry

Maximizes profits

Positive economic profit in the long-run

Can set price by determining quantity of good to be sold

Lower average costs than same market with many firms

Correct answer:

Lower average costs than same market with many firms

Explanation:

A natural monopoly is very similar to and experiences the same inefficiencies as a traditional monopoly. The difference is that these inefficiencies cannot be corrected by increasing competition, as a single seller can produce more efficiently than many sellers in a market that is a natural monopoly.

Example Question #1 : Perfectly Competitive Output Markets

Assume that each of the following producers operates as a monopolist. Which one is most likely NOT a natural monopoly?

Possible Answers:

A producer of a patented drug

A telecommunications provider

A regional provider of electricity

A railway network

Correct answer:

A producer of a patented drug

Explanation:

The electric company, railway, and telecoms operator are all examples of industries with very high fixed costs where the lowest average cost could only be achieved at a high level output, which discourages competition and is characteristic of natural monopoly.

The drug-maker operates as a monopoly due to the legal barrier (patent) that prevents entry into the market (for that specific drug). Therefore, it is NOT a natural monopoly.

Example Question #1 : Perfectly Competitive Output Markets

Assuming the markets for pencils and erasers are perfectly competitive, what is the expected effect on the market for pencils if there is a sudden shortage in the rubber needed to produce erasers?

Possible Answers:

Price increases, Quantity decreases

Price increases, Quantity increases

Cannot determine from information given.

Price decreases, Quantity decreases

Price decreases, Quantity increases

Correct answer:

Price decreases, Quantity decreases

Explanation:

As pencils and erasers are used together they can be considered complementary goods. You can use a supply and demand graph for each market to track the following steps:

  • The shortage in rubber shifts the supply curve in the eraser market inward
  • As a result, the price of erasers increases
  • Since pencils and erasers go together, a higher price for erasers means people demand fewer pencils at any given price.
  • This results in an inward shift of the demand curve in the pencil market.
  • As a result, both the price and quantity of pencils being sold goes down.

Example Question #41 : Ap Microeconomics

A price increase for Good A results in a decrease in the demand for Good B. Based on this information, Goods A and B are most likely...

Possible Answers:

Normal goods

Public goods

Substitute goods

Complementary goods

Inferior goods

Correct answer:

Complementary goods

Explanation:

Complementary goods are defined by a negative cross elasticity of demand, which means simply that demand for one good increases when the price of another decreases (and vice versa).  A price increase for Good A resulting in a decrease in demand for Good B fits this definition.

The goods are thus not substitutes. They could potentially be one of the other types of goods but you don't have enough information in the question to make that determination.

Example Question #11 : Competition

Which of the following pairs of goods are most likely NOT complementary goods?

Possible Answers:

Video games and game consoles

Paper and pencils

Music books and artwork

Shoes and laces

Correct answer:

Music books and artwork

Explanation:

Some, or even many, people may love both music and art, but that does not suggest that music books and artwork are regularly purchased together. The other examples are goods that clearly work better together.

Example Question #43 : Ap Microeconomics

Which of the following would result in an increase in both the equilibrium price and quantity for a normal good?

Possible Answers:

A new subsidy for production of the good comes into effect

Price of a complementary good decreases

Price of a substitute good decreases

The government sets a price floor above the current market price

Correct answer:

Price of a complementary good decreases

Explanation:

A decrease in the price of a complementary good would result in an outward shift in the demand curve, which is the only shift which would result in increased price and quantity of a given good.

A decrease in the price of substitute good would result in an inward shift of the demand curve. A subsidy for production would affect the supply curve. A price floor above the current equilibrium would necessarily affect the price, but not the quantity traded.

Example Question #44 : Ap Microeconomics

Coffee and tea can be considered substitutes for many consumers. Which of the following would result in an increased market price for coffee?

Possible Answers:

Production costs for coffee fall

Production costs for tea increases

Production costs for tea falls

Consumer income falls

Correct answer:

Production costs for tea increases

Explanation:

An increase in production costs for tea results in an inward shift in the supply curve in the tea market. As a result, the market price of tea increases.

As tea becomes more expensive, consumers will prefer to consume more coffee at any given price. This is an outward shift in the demand curve that will result in a higher market price for coffee.

Example Question #45 : Ap Microeconomics

Which of the following examples of external costs/benefits might lead to a monopoly?

Possible Answers:

A person getting on the freeway at rush hour increases delay for all drivers behind them

Keeping your house and yard clean and maintained increases home values for those around you

Bees raised for their honey help to pollinate surrounding crops

An individual who buys a particular software package increases the usefulness of that software for all other existing users

Correct answer:

An individual who buys a particular software package increases the usefulness of that software for all other existing users

Explanation:

The correct answer is an example of a "network externality." The software might be a video chat service or spreadsheet software and the more people who use it the more value it has for others who use the same format. If it reaches a so-called "tipping point" it may lead to one firm dominating the market.

Example Question #46 : Ap Microeconomics

Which of the following is NOT a characteristic of a public good?

Possible Answers:

It is a special case of positive externality

The good is always priced at zero (free)

It is difficult or impossible to exclude people from consuming the good

One person consuming the good does not diminish the benefit for others

Correct answer:

The good is always priced at zero (free)

Explanation:

A public good is non-exclusive and non-rivalrous and thus provides external benefits that others can enjoy without paying. However, this does not mean that it cannot be sold at a price above zero. It is just that whoever produces such a good does so knowing some consumers will benefit without paying.

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