AP Microeconomics : Perfectly Competitive Output Markets

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #11 : Perfectly Competitive Output Markets

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:

Complementary goods

Public goods

Normal goods

Inferior goods

Substitute 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 : Perfectly Competitive Markets

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

Possible Answers:

Music books and artwork

Paper and pencils

Video games and game consoles

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 #12 : Perfectly Competitive Output Markets

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 substitute good decreases

Price of a complementary 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 #13 : Perfectly Competitive Output Markets

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:

Consumer income falls

Production costs for tea falls

Production costs for coffee fall

Production costs for tea increases

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 #14 : Perfectly Competitive Output Markets

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

Possible Answers:

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

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

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 #15 : Perfectly Competitive Output Markets

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

Possible Answers:

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

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

The good is always priced at zero (free)

It is a special case of positive externality

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.

Example Question #16 : Perfectly Competitive Output Markets

One characteristic of a public good is non-excludability. Which of the following is an example of a non-excludable good?

Possible Answers:

None of the other answers

BOTH clean air and fish stocks

Satellite television

Fish stocks

Clean air

Correct answer:

BOTH clean air and fish stocks

Explanation:

It is impossible to prevent people from enjoying clean air (assuming the air is clean, of course). Fish stocks are a common resource accessible to all (although there may be some attempts to limit access by government).

You can be excluded from satellite TV if you don't pay for the service.

Example Question #17 : Perfectly Competitive Output Markets

One characteristic of a public good is non-rivalry. Which of the following goods are NOT non-rivalrous?

Possible Answers:

A poetry reading

Law enforcement

The freeway network during the morning commute

A movie theater at 11am on a Wednesday

Correct answer:

The freeway network during the morning commute

Explanation:

This is an interesting case of a good that is non-rivalrous up to a point. In the middle of the night one additional car on the highway makes no difference to others already on the road. At the morning rush hour, even one car adds delay to a surprising number of drivers upstream.

You can enjoy a poetry reading or the benefits of law enforcement without diminishing the quality for others. The movie theater is the opposite case of the highway. It can definitely be rivalrous at peak times but on Wednesday mornings the theater is likely mostly empty and one additional person makes no difference.

Example Question #18 : Perfectly Competitive Output Markets

Which of the following best meets the criteria for a public good?

Possible Answers:

A fillet of salmon

A membership to a discount warehouse store

A live street performance

A concert at an arena

Correct answer:

A live street performance

Explanation:

A performance on a public street is both non-excludable and non-rivalrous. A concert in an arena and the discount warehouse store are excludable - you would have to pay to enjoy the benefits. A fillet of salmon is a private good - you would have to pay and by consuming it you would leave less (or none) for the next person.

Example Question #19 : Perfectly Competitive Output Markets

Consumer income increases at the same time apple growers have pulled in an unexpectedly large harvest? Assuming apples are a normal good and perfect competition, what is the effect on price and quantity in the apple market?

Possible Answers:

Cannot determine either price or quantity from information given

Price increases, Quantity increases

Price indeterminate, Quantity increases

Price decreases, Quantity increases

Price indeterminate, Quantity decreases

Correct answer:

Price indeterminate, Quantity increases

Explanation:

A rise in consumer income would shift the demand curve for apples out while a large harvest would shift the supply curve out. This would unambiguously increase the quantity traded. The price would depend on the relative amount of the shifts and the slopes of the supply and demand curves.

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