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# AP Microeconomics Practice Exam 1

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By — McGraw-Hill Professional
Updated on Mar 7, 2011

Below is a practice exam for AP Microeconomics exam.  There are two sections in this practice exam.  Section I has 60 multiple choice questions.  Section II has 3 free response questions.  For a thorough review of the concepts in this practice exam, refer to the information center on AP Microeconomics/Macroeconomics Notes.

### Multiple-Choice Questions

Time—1 hour and 10 minutes

60 questions

For the multiple-choice questions that follow, select the best answer.

1. At the birthday party of your best friend, you see Skylar help himself to a second piece of cake. For this individual, it must be the case that
1. the marginal benefit of the second piece of cake is less than the marginal cost.
2. the total benefit received from eating cake is falling.
3. the ratio of marginal benefit over marginal cost is less than one.
4. the marginal benefit of the second piece of cake is greater than the marginal cost.
5. Skylar is irrationally consuming too much cake.
2. Nancy has the choice to spend one hour studying for an exam, mowing the lawn for one hour at a wage of \$6, or babysitting her niece for one hour at a wage of \$8. If we know that Nancy has chosen to study for the exam, which of the following is true?
1. The benefit received from studying is greater than the opportunity cost of \$8.
2. The opportunity cost of studying is \$14, which is less than the benefit received from studying.
3. Nancy is indifferent between studying and mowing the lawn.
4. Nancy's behavior is irrational since babysitting was clearly superior to all other options.
5. Nancy is indifferent between babysitting and mowing the lawn.
3. Suppose the market for roses is currently in equilibrium. If the supply of roses falls, while at the same time the demand for roses rises, what can you say about the price and quantity of roses in the market?
1. Price and quantity both rise.
2. Price rises, but the change in quantity is ambiguous.
3. Price and quantity both fall.
4. Quantity rises, but the change in price is ambiguous.
5. Neither price nor quantity change as these shifts offset one another.
4. The United States is trading salmon to Peru in exchange for anchovies. If these nations are trading based upon relative opportunity costs, what must be the case?
1. The United States has comparative advantage in anchovy production and Peru has comparative advantage in salmon production.
2. The United States has comparative advantage in salmon production and Peru has comparative advantage in anchovy production.
3. The United States has absolute advantage in anchovy production and Peru has absolute advantage in salmon production.
4. The United States has absolute advantage in salmon production and Peru has absolute advantage in anchovy production.
5. The United States has comparative advantage in salmon production and Peru has absolute advantage in anchovy production.
5. Which of the following is the best example of a public good?
1. Private violin lessons
2. The volunteer fire department in your community
3. A ticket for admission to a museum
4. A bag of potato chips
5. A history textbook
6. Which of the following statements are true of a capitalist market economy?
1. Economic resources are publicly owned.
2. Freedom of enterprise is critical.
3. The price system allocates resources in the most efficient way.
1. I only
2. II only
3. III only
4. I and II only
5. II and III only
7. Questions 7–9 refer to the graph below.

8. Assuming no government involvement in this market, if the current price were at the level of 0A, we would expect
1. a surplus in the market to be eliminated by rising prices.
2. a shortage in the market to be eliminated by falling prices.
3. a surplus in the market to be eliminated by falling prices.
4. a shortage in the market to be eliminated by rising prices.
5. a decrease in quantity supplied and an increase in quantity demanded as the price rises.
9. If the market is initially in equilibrium, which of the following would create a new equilibrium at point H?
1. A decrease in consumer income if this good is normal.
2. An increase in the price of a substitute for this good.
3. A decrease in the cost of a production input for this good.
4. An increase in the number of consumers of this good.
5. An increase in consumer income if this good is normal.
10. If the price were to rise from 0B to 0C,
1. dollars spent on this good would increase if demand for the good were price elastic.
2. dollars spent on this good would decrease if demand for the good were price inelastic.
3. dollars spent on this good would increase if demand for the good were price inelastic.
4. dollars spent on this good would increase if demand for the good were unitary price elastic.
5. dollars spent on this good would decrease if demand for the good were unitary price elastic.
11. Every day Molly spends her lunch money consuming apples, at \$1 each, and oranges, at \$2 each. At her current level of consumption, Molly's marginal utility of apples is 12 and her marginal utility of oranges is 18. If she has already spent all of her lunch money, how should Molly change her consumption decision to maximize utility?
1. She should make no changes; she is consuming the utility maximizing combination of apples and oranges.
2. She should increase her apple consumption and decrease her orange consumption until the marginal utility per dollar is equal for both.
3. She should decrease her apple consumption and increase her orange consumption until the marginal utility per dollar is equal for both.
4. She should increase her apple consumption and decrease her orange consumption until the marginal utility is equal for both.
5. She should decrease her apple consumption and increase her orange consumption until the marginal utility is equal for both.
12. When the production or consumption of a good creates a positive externality, it is deemed a market failure because at the market quantity
1. the marginal social benefit exceeds the marginal social cost.
2. the marginal social cost exceeds the marginal social benefit.
3. society produces too much of the good.
4. the private benefits from consuming the good exceed the social benefits.
5. a surplus of the good always exists without government intervention.
13. Which of the following would best complete a short definition of economics? "Economics is the study of …"
1. how unlimited resources are allocated between scarce wants.
2. how money is circulated through the economy.
3. how corporations maximize the share price of their stock.
4. how nations trade goods and services in a global marketplace.
5. how scarce resources are allocated to satisfy unlimited wants.
14. Suppose the price elasticity of demand for cigarettes is less than one. When an excise tax is imposed on cigarette production, it changes the price, quantity, and consumer spending in which of the following ways?
15. Which of the following is true of a price floor?
1. The price floor shifts the demand curve to the left.
2. An effective floor creates a shortage of the good.
3. The price floor shifts the supply curve of the good to the right.
4. To be an effective floor, it must be set above the equilibrium price.
5. The government sets the price floor to assist consumers who are exploited at the equilibrium price.
16. You are told that the income elasticity for CDs is + 1.5. This means that
1. a 10 percent increase in income produces a 15 percent increase in consumption of CDs. CDs are a normal luxury good.
2. a 10 percent increase in income produces a 15 percent increase in consumption of CDs. CDs are an inferior good.
3. a 10 percent increase in income produces a 15 percent decrease in consumption of CDs. CDs are an inferior good.
4. a 10 percent increase in the price of CDs produces a 15 percent decrease in consumption of CDs. CDs are a price elastic good.
5. a 10 percent increase in the price of CDs produces a 15 percent decrease in consumption of CDs. CDs are a price inelastic good.
17. Which of the following causes the supply curve of paper to shift to the left?
1. Paper producers expect lower paper prices in the months ahead.
2. The price of pencils, a complement to paper, increases.
3. Improvements in the technology used to produce paper.
4. Household income falls.
5. Environmental concerns reduce the yearly amount of timber that can be harvested.
18. Using the diagram above, which of the following might have caused the outward movement of the production possibility frontier?
1. A decrease in the availability of fertile farmland.
2. A plague of destructive grasshoppers.
3. An increase in the productivity of the labor force.
4. A severe and long-lasting drought.
5. A decline in the rate of technological improvements.
19. Suppose the county government sends each parent a coupon that can be used to subsidize the cost of sending each child to daycare. What would you expect to occur in the market for daycare services?
1. The demand for daycare falls, lowering the price.
2. The demand for daycare rises, increasing the price.
3. The supply of daycare rises, lowering the price.
4. The supply of daycare falls, increasing the price.
5. A permanent shortage of daycare services exists.
20. Monopoly dead weight loss is the result of
1. setting the price above marginal cost.
2. setting the price above average total cost.
3. monopoly output being greater than the competitive output.
4. long-run normal profits.
5. marginal revenue equaling marginal cost.
21. The market for Cincinnati Reds baseball tickets is currently in equilibrium. Which of the following events would most likely increase the consumer surplus received by Reds fans?
1. The Reds offer discounted parking for all home games.
2. The Reds increase hot dog prices to reflect a higher cost of buns.
3. The city of Cincinnati is undertaking a huge highway construction project that strands fans in pregame traffic jams for hours.
4. The Reds must increase ticket prices to afford the most talented players.
5. Fans must pay a steep service charge in order to purchase tickets online or over the phone.
22. If Matt's total utility from consuming bratwurst increased at a constant rate, no matter how many bratwurst Matt consumed, what would Matt's demand curve for bratwurst look like?
1. Vertical
2. Horizontal
3. Downward sloping
4. Upward sloping
5. First upward, but eventually downward sloping
23. When a firm is earning a normal profit from the production of a good, it is true that
1. total revenues from production are equal to explicit costs.
2. explicit costs are equal to implicit costs.
3. total revenues from production are equal to implicit costs.
4. total revenues from production are equal to the sum of explicit and implicit costs.
5. implicit costs are greater than explicit costs.
24. You are told that the cross-price elasticity between goods X and Y is +2.0. This means that
1. goods X and Y are normal goods.
2. goods X and Y are inferior goods.
3. goods X and Y are complementary goods.
4. goods X and Y are substitute goods.
5. good X is twice as elastic as good Y.
25. Which of the following is an example of a longrun adjustment for the owners of a small café?
1. The owners switch from whole wheat to sourdough bread.
2. The owners hire several part-time workers to cover the dinner shifts.
3. The owners work overtime on a busy weekend.
4. The owners install more energy-efficient light bulbs in all of the light fixtures.
5. The owners buy the office next door and this doubles the customer seating.
26. If total product of labor is rising at an increasing rate,
1. marginal product of labor is rising.
2. marginal product of labor is at its minimum.
3. marginal product of labor is at its maximum.
4. marginal cost is rising.
5. average product of labor is at its minimum.
27. The demand curve for a perfectly competitive firm's product is
1. downward sloping and equal to the market demand curve.
2. perfectly elastic.
3. perfectly inelastic.
4. "kinked" at the going market price.
5. the same as the firm's marginal cost curve.
28. Which of the following is true in the long run in perfect competition?
1. P = MR = MC = ATC
2. P = MR = MC > ATC
3. P > MR = MC = ATC
4. P = MR > MC = ATC
5. P > MR = MC > ATC
29. If the market price is above the perfectly competitive firm's average total cost curve, we expect that in the long run,
1. the industry contracts as firms exit the market.
2. the industry expands as firms exit the market.
3. the industry contracts as firms enter the market.
4. the industry expands as firms enter the market.
5. the government seeks to regulate the market to insure efficient outcomes.
30. If a market is organized by a cartel, we can expect
1. normal profits for all cartel firms.
2. an incentive for cartel firms to cheat on the cartel agreement.
3. profit maximization by individual firms in the cartel.
4. allocative efficiency.
5. perfectly competitive prices.
31. Jason cleans swimming pools in a perfectly competitive local market. A profit-maximizer, he can charge \$10 per pool to clean 9 pools per day, incurring total variable costs of \$80 and total fixed costs of \$20. Which of the following is true?
1. Jason should shut down in the short run, with economic losses of \$20.
2. Jason should shut down in the short run, with economic losses of \$10.
3. Jason should clean 9 pools per day, with economic losses of \$20.
4. Jason should clean 9 pools per day, with economic losses of \$10.
5. Jason should clean 9 pools per day, with economic profits of \$10.
32. Which of the following might explain how a price decrease might cause a decrease in quantity demanded and an upward sloping demand curve?
1. The good is inferior and the income effect is stronger than the substitution effect.
2. The good is normal and the income effect is stronger than the substitution effect.
3. The good is normal and the income effect is weaker than the substitution effect.
4. The good is inferior and a luxury.
5. The good is highly subsidized, creating a large increase in marginal utility per dollar.
33. For the perfectly competitive firm, the profit maximizing decision to shut down is made when the price
1. falls below minimum average total cost.
2. is greater than minimum average variable cost, but lower than minimum average total cost.
3. falls below minimum average variable cost.
4. is equal to minimum average total cost.
5. is equal to average fixed cost.
34. Declining populations of tuna in the Atlantic Ocean have likely had which of the following impacts on the wages of tuna fishermen, the employment of tuna fishermen, and real estate prices in New England fishing towns?
35. Which of the following is true of monopoly markets?
1. Dead weight loss exists in the short run, but not in the long run.
2. A homogenous product allows for long-run entry of competing firms.
3. Collusion between close rivals creates pricing above marginal cost.
4. Barriers to entry allow for the power to set prices above marginal cost.
5. Allocative efficiency is guaranteed because marginal revenue equals marginal cost.
36. Questions 35–36 refer to the graph below.

37. If this firm were a profit-maximizing monopolist, the price and output would be which of the following?
1. 0a and Q1
2. 0c and Q1
3. 0e and Q1
4. 0e and Q2
5. 0f and Q1
38. Dead weight loss is equal to which of the following areas?
1. abcd
2. cdfg
3. 0abQ1
4. Q1Q2gh
5. bdgh
39. Two competing firms are deciding whether to enter a new market or maintain the status quo. Use the following profit matrix to respond to question 37.

40. If these firms do not collude, the outcome will be
1. Both firms maintain the status quo.
2. Both firms enter the market.
3. Firm X enters the market and Firm Y maintains the status quo.
4. Firm Y enters the market and Firm X maintains the status quo.
5. Both firms alternate between entering the market and maintaining the status quo.
41. When the marginal product of labor is equal to the average product of labor,
1. marginal product of labor is at its maximum.
2. marginal cost of production is at its minimum.
3. marginal cost is equal to minimum average variable cost.
4. average total cost is at its minimum.
5. total product of labor is at its maximum.
42. Questions 39–41 refer to the graph below.

43. The area 0abQ is equal to
1. total cost.
2. total variable cost.
3. total fixed cost.
4. marginal cost.
5. average product of labor.
44. The curve labeled 1 represents which of the following?
1. Marginal cost
2. Marginal product of labor
3. Average total cost
4. Average variable cost
5. Average fixed cost
45. If this firm was operating in a perfectly competitive market, and the price was equal to 0g, economic profit would be equal to which of the following areas?
1. abcd
2. cdgh
3. cdef
4. efgh
5. abgh
46. Which is true of monopolistic competition?
1. Firms earn long-run economic profits.
2. P = MR = MC = ATC.
3. Firms spend money to differentiate and advertise their products.
4. In the long run the market is allocatively efficient.
5. Excess capacity is eliminated in the long run.
47. If firms are entering an industry that is monopolistically competitive, we would expect
1. the demand for existing firms to shift rightward.
2. the market price of the product to increase.
3. the demand for existing firms to become more inelastic.
4. economic profits to rise for all firms.
5. the demand for existing firms to shift leftward.
48. Monopolistic competition is said to be productively inefficient because
1. the long-run price is above minimum average total cost.
2. long-run profits are positive.
3. firms engage in collusive behavior.
4. there exist no barriers to entry.
5. there exist diseconomies of scale.
49. One of the reasons that the government discourages and regulates monopolies is that
1. producer surplus is lost and consumer surplus is gained.
2. monopoly prices insure productive efficiency, but cost society allocative efficiency.
3. monopoly firms do not engage in significant research and development.
4. consumer surplus is lost with higher prices and lower levels of output.
5. lower prices and higher levels of output create dead weight loss.
50. What is one reason why the government discourages collusion between large firms in the same industry?
1. Collusive output levels tend to increase, driving the price above competitive levels.
2. Consumer surplus falls as the price is driven downward.
3. Collusive output levels tend to decrease, driving the price down to competitive levels.
4. Joint profit maximization drives profits downward, forcing colluding firms to exit the industry.
5. Joint profit maximization costs society consumer surplus as the price rises above competitive levels.
51. In a competitive labor market for housepainters, which of the following would increase the demand for housepainters?
1. An effective minimum wage imposed on this labor market.
2. An increase in the price of gallons of paint.
3. An increase in the construction of new houses.
4. An increase in the price of mechanical painters so long as the output effect exceeds the substitution effect.
5. An increase in home mortgage interest rates.
52. If a monopsony labor market suddenly were transformed into a perfectly competitive labor market, how would the wage and employment change?
1. Both would increase.
2. Both would decrease.
3. The wage would remain constant, but employment would increase.
4. The wage would fall, but employment would increase.
5. The wage would rise, but employment would decrease.
53. Which of the following is most likely to be true in the long run for a monopoly firm?
1. P = MR = MC = ATC
2. P = MR = MC > ATC
3. P > MR = MC = ATC
4. P = MR > MC = ATC
5. P > ATC > MR = MC
54. Questions 50–51 refer to the table below, which describes employment and production of a firm.

55. The marginal revenue product of the fourth unit of labor is equal to
1. \$19
2. \$16
3. \$8
4. \$20
5. \$2
56. If the wage paid to all units of labor is \$20, how many units of labor are employed?
1. 1
2. 2
3. 3
4. 4
5. 5
57. An industry described as an oligopoly would most likely have
1. normal profits in the long run.
2. no opportunities for collusive behavior.
3. significant barriers to entry.
4. price-taking behavior.
5. one firm with no close rivals.
58. A minimum wage in the market for fast food workers is likely to produce
1. an increase in the demand for fast food workers.
2. a decrease in the supply of fast food workers.
3. a shortage of fast food workers.
4. a lower price of fast food products.
5. a surplus of fast food workers.
59. In order to hire the least-cost combination of labor and capital, the firm must do which of the following?
1. Find the combination of labor and capital where the marginal product of labor is equal to the marginal product of capital.
2. Find the combination of labor and capital where the ratio of the marginal product of labor to the marginal product of capital is equal to one.
3. Find the combination of labor and capital where the marginal product of labor divided by the price of labor is equal to the marginal product of capital divided by the price of capital.
4. Find the combination of labor and capital where the price of labor is equal to the price of capital.
5. Find the combination of labor and capital where the marginal revenue product of labor is equal to the marginal revenue product of capital.
60. More college students are graduating with BA degrees in economics. Given this trend, we would expect the wage of BA economists, the employment of BA economists, and the demand for economics textbooks to change in which of the following ways?
61. Which of the following is the best example of a negative externality and the appropriate plan for eliminating it?
1. Air pollution from a factory blows downwind and harms children in a small community. Tax the citizens of the community.
2. Your neighbor plants a fragrant blooming cherry tree in her front yard. Give a tree subsidy to your neighbor.
3. The waste from a hog farm pollutes a neighbor's drinking water. Give a subsidy to the hog farmer.
4. A cigarette smoker suffers multiple health problems from using tobacco. Tax the cigarettes that he is smoking.
5. Air pollution from a power plant is blowing downwind and harming the trees in your community. Tax the production of electricity.
62. A perfectly competitive employer hires labor up to the point where
1. wage = marginal factor cost.
2. wage = marginal product of labor.
3. wage = marginal revenue.
4. wage = marginal revenue product of labor.
5. wage = price of the good produced by the labor.
63. The sales tax that you pay at the grocery store is commonly labeled a
1. progressive tax.
2. regressive tax.
3. proportional tax.
4. excise tax.
5. tax bracket.
64. Which of the following is the best example of the free-rider effect?
1. You and a friend take a road trip to Florida in your friend's car. You pay for the gas.
2. In exchange for tutoring your friend in economics, she helps you with your geometry assignment.
3. You have ordered a big college football game on pay-per-view and several of your buddies show up unannounced to watch it at your place.
4. You buy your date dinner, but your date insists on leaving a tip for the server.
5. A local Girl Scout troop is giving a "free" carwash. You give them a \$5 donation.
65. Question 60 refers to the graph below.

66. If the market for this good was in equilibrium at Q2, but the socially optimal output was Q1, the government could best remedy this —— of resources by legislating a ——on ——of the good.
1. underallocation, per unit tax, consumers
2. overallocation, per unit subsidy, consumers
3. underallocation, per unit tax, producers
4. overallocation, per unit subsidy, producers
5. overallocation, per unit tax, producers

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