AP Microeconomics : Perfectly Competitive Output Markets

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #41 : Competition

Which of the following would NOT cause a shift in the demand curve for corn?

Possible Answers:

The price of wheat declines

A new widely read study shows that corn is healthy and should be incorporated into everyone’s diet.

The cost of fertilizer increases

The economy enters a growth phase and consumer incomes increase

Consumers anticipate a rise in the price of corn

Correct answer:

The cost of fertilizer increases

Explanation:

The rise in the cost of fertilizer represents a change in input prices, which is a determinant of supply, not demand. All other options represent determinants for demand.

Example Question #42 : Competition

The economy experiences slow growth and average incomes in the US decreases by 10%. As a result, the demand for widgets increases by 5%. Widgets are a:

Possible Answers:

Bad

Normal good

Luxury good

Inferior good

Necessary good

Correct answer:

Inferior good

Explanation:

If demand for widgets increases when incomes decrease, then the income elasticity for widgets is negative. This is because income elasticity is E = percent change in quantity/percent change in income. If E < 0 then the good is inferior.

Example Question #43 : Competition

If the increase in the price of a good increases the demand for another good, then the two goods are:

Possible Answers:

luxury goods

substitute goods

normal goods

complementary goods

giffen goods

Correct answer:

substitute goods

Explanation:

Complementary goods typically replace one another in consumption. Thus, a decrease in demand for one good will typically increase the demand of the other good.

The question states that the price of one of the goods increased, which would lead to a decrease in its demand. If the demand of the other good increases as a result, than the two goods are likely to be substitute goods.

Example Question #44 : Competition

Which of the following is a private good?

Possible Answers:

a beach

clean air

a movie theatre

fish in the ocean

a candy bar

Correct answer:

a candy bar

Explanation:

A private good is rival, which means that a person's consumption affects another person's consumption of the good, and excludable, which means that a person can prevent another person from consuming the good. Among the choices here, the only one that meets both criteria is the candy bar, which is both rival and excludable.

Example Question #45 : Competition

Sales tax is commonly labeled by economists as:

Possible Answers:

Regressive tax

Progressive tax

Proportional tax

Excise tax

None of the other answers

Correct answer:

Regressive tax

Explanation:

In terms of individual income and wealth, sales tax imposes a greater burden on the poor than the rich. One's consumption of taxable items typically does not increase as fast as one's income. Thus, lower-income individuals spend a larger portion of their income and wealth than higher-income individuals.

Example Question #41 : Perfectly Competitive Output Markets

From the point of view of economic efficiency, monopolists:

Possible Answers:

Produce too much of a good and charge too low of a price.

Produce too much of a good and charge too high of a price.

Produce too little of a good and charge too low of a price.

Produce too little of a good and charge too high of a price.

Produce the optimal amount of a good and charge the optimal price.

Correct answer:

Produce too little of a good and charge too high of a price.

Explanation:

When not restricted by government or laws, monopolists will typically try to maximize their profit by producing fewer goods and selling them at higher prices than would be the case in a perfectly competitive market. The lack of competition allows them to charge higher prices without the threat of a competing firm driving down prices.  

Example Question #42 : Perfectly Competitive Output Markets

The following question is based on this table:

Screen_shot_2014-01-30_at_10.24.12_am

What is the marginal cost of producing the fourth good?

Possible Answers:

Correct answer:

Explanation:

Marginal cost is the increase in the total cost of production to produce one additional unit. In this case, we want to determine the marginal cost of producing the fourth good. The total cost for producing three goods is 26 and the total cost for producing four goods is 29. Because total cost increases by 3, 3 is the fourth good's marginal cost.

Example Question #43 : Perfectly Competitive Output Markets

The following question is based on this table:

Screen_shot_2014-01-30_at_10.24.12_am

What production level maximizes the firm's profits?

Possible Answers:

Impossible to determine from the given information.

Correct answer:

Impossible to determine from the given information.

Explanation:

The profit maximizing quantity for the production of goods is the level at which marginal cost equals marginal revenue. This table allows us to easily determine the marginal cost of producing the nth good, but it does not give any information about the marginal revenue associated with selling th nth good (i.e. market price of the good).

Example Question #44 : Perfectly Competitive Output Markets

Hank has the choice of spending one hour watching TV and making no money, mowing the lawn for $5, or babysitting for $7. If Hank chooses to watch TV, which of the following must be true?

Possible Answers:

The benefit of watching TV is greater than its opportunity cost of $12.

Hank is indifferent between mowing the lawn and babysitting.

None of the other statements are true.

The benefit of watching TV is greater than its opportunity cost of $7.

Hank is indifferent between mowing the lawn and watching TV.

Correct answer:

The benefit of watching TV is greater than its opportunity cost of $7.

Explanation:

Opportunity cost is defined as the value of the best alternative that must be forgone in order to pursue a certain action. In this case, the best alternative to watching TV is babysitting, for which Hank would have been paid $7. Thus, the opportunity cost of watching TV is $7 for Hank.

Since he chooses to watch TV, the personal benefit associated with watching TV must be greater than $7 for Hank. 

Example Question #45 : Perfectly Competitive Output Markets

California trades strawberries in exchange for corn from Iowa. If these states are trading based on opportunity cost, what must be true?

Possible Answers:

California has a comparative advantage in producing corn, while Iowa has a comparative advantage in producing strawberries.

California has a comparative advantage in producing strawberries, while Iowa has comparative advantage in producing corn

California has an absolute advantage in producing strawberries, while Iowa has an absolute advantage in producing corn.

California has an absolute advantage in producing corn, while Iowa has an absolute advantage in producing strawberries.

California has a comparative advantage in producing strawberries, while Iowa has an absolute advantage in producing corn.

Correct answer:

California has a comparative advantage in producing strawberries, while Iowa has comparative advantage in producing corn

Explanation:

Comparative advantage refers to the ability to produce goods at a lower marginal/opportunity cost than another party. Even if one party is better than the other at the production of all goods (absolute advantage), both parties will still gain by trading with each other because of comparative advantage. Thus, in this case, California must have the comparative advantage in producing strawberries, while Iowa must have a comparative advantage in producing corn.  While the two states may or may not have absolute advantages, we have no way of knowing with the information given.  More importantly, the question states that the advantage is based on opportunity costs.  Absolute advantage has nothing to do with this.

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