AP Microeconomics : Competition

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #76 : Perfectly Competitive Output Markets

Reference this chart for the question below:

Output

Total Cost ($)

1

10

2

15

3

19

4

24

5

30

6

38

7

49

If the market is perfectly competitive, and the market price of the good is $6, how many units should this supplier produce and sell on the market?

Possible Answers:

7

5

Cannot be determined

4

3

Correct answer:

5

Explanation:

Marginal revenue equals marginal cost at $6 for the 5th unit produced. Total revenue equals total cost at both the 4th and 5th unit, but this is not the determining factor.

Example Question #77 : Perfectly Competitive Output Markets

Which of these actions most obviously produces a negative externality?

Possible Answers:

Working as a software engineer

Littering

Trashing your room

Selling your old stuff online

Farming sweet potatoes

Correct answer:

Littering

Explanation:

Trashing your room really only affects you. Only littering, which affects the general public, is clearly a negative externality.

Example Question #78 : Perfectly Competitive Output Markets

Which of the following breakdowns in the rules of perfect competition is likely to result in a market externality?

Possible Answers:

Increasing returns to scale in production

Firms sell differentiated, non-identical products

Poorly defined property rights

Many sellers, one buyer

High entry and exit barriers

Correct answer:

Poorly defined property rights

Explanation:

Among the available choices, only poorly defined property rights is likely to result in an externality. For example, poorly defined intellectual property rights could result in firms not reaping the full benefit of their research and development and therefore doing less than is socially optimal.

Example Question #79 : Perfectly Competitive Output Markets

The following are characteristics of a perfectly competitive market. Among these, which is most clearly lacking in the market for used cars?

Possible Answers:

Buyers and sellers have perfect information on the quality of the product

Large number of buyers and sellers

Well defined property rights

Lack of increasing returns to scale

Factors of production are perfectly mobile in the long run

Correct answer:

Buyers and sellers have perfect information on the quality of the product

Explanation:

Although few real-life markets meet the characteristics of perfect competition exactly, the lack of perfect (or even equal) information about the goods being traded stands out in the used car market. When dealing in used cars, the seller typically has much more information about the quality of the car than the buyer.

The other answers more or less fit the perfect competition model. There are many buyers and sellers, the property rights of the buyer and seller are well defined, there are limited returns to scale (i.e. small used car sellers have not been competed out of existence), and factors of production (labor, land) can be put to other uses.

Example Question #80 : Perfectly Competitive Output Markets

Reference this chart for the question below:

Output

Total Cost ($)

1

10

2

15

3

19

4

24

5

30

6

38

7

49

The marginal cost of producing the 7th unit of output is:

Possible Answers:

Correct answer:

Explanation:

The total cost of producing 7 units is $49. Since the total cost of producing 6 units is $38, the marginal cost of producing the 7th unit must be $11.

Example Question #81 : Competition

The law of diminishing marginal utility explains:

Possible Answers:

law of demand

law of comparative advantage

law of supply

law of inequality

the diminishing marginal product of capital

Correct answer:

the diminishing marginal product of capital

Explanation:

The law of diminishing marginal utility states that the marginal value derived from a unit decreases as its use increases. This explains the phenomenon where the use of capital (its marginal product) decreases or diminishes as its utilization increases.

Example Question #82 : Competition

Which of the following is an example of a public good?

Possible Answers:

None of the other answers

An eraser

A book

A theme park

An online blog

Correct answer:

An online blog

Explanation:

A public good is both non-rival (a person's use does not prevent another person's use) and non-rivalrous (a person cannot be excluded from using it). The only good that fits this description is the online blog. 

Example Question #83 : Competition

An industry with a small number of firms (3-5) is considered to be: 

Possible Answers:

a perfect competition

a monopoly

a duopoly

a monopolistic competition

an oligopoly

Correct answer:

an oligopoly

Explanation:

A market or industry that is dominated by a small number of firms is called an oligopoly. By contrast, monopolies are dominated by one firm, duopolies are dominated by two firms, and perfectly competitive and monopolistically competitive industries have many firms competing with one another. 

Example Question #84 : Competition

The market for pizza is currently in equilibrium. If the demand for pizza rises while its supply falls, what can you say about the price and quantity of pizza in the market?

Possible Answers:

price and quantity both decrease

quantity rises but change in price is ambiguous

price and quantity both increase

price rises, change in quantity is ambiguous

change in price and quantity is ambiguous

Correct answer:

price rises, change in quantity is ambiguous

Explanation:

An increase in the demand for pizza will increase its price and quantity, while a decrease in the supply of pizza will increase its price and decrease its quantity. Thus, the price of pizza will unambiguously increase, but the quantity can either increase or decrease, depending on which change has the greater effect on supply.

Example Question #85 : Competition

The United States trades corn in exchange for maple syrup from Canada. If these nations are taking advantage of relative opportunity costs, what must be true?

Possible Answers:

The U.S. has a comparative advantage in corn production, while Canada has a comparative advantage in maple syrup production.

The U.S. has an absolute advantage in maple syrup production, while Canada has an absolute advantage in corn production.

The U.S. has a comparative advantage in maple syrup production, while Canada has a comparative advantage in corn production.

The U.S. has an absolute advantage in corn production, while Canada has an absolute advantage in maple syrup production.

The U.S. has an absolute advantage in both the production of maple syrup and corn.

Correct answer:

The U.S. has a comparative advantage in corn production, while Canada has a comparative advantage in maple syrup production.

Explanation:

When two countries trade two goods with one another, they will trade the goods that they have a comparative advantage in producing. One nation can have an absolute advantage in the production of both goods, but each nation will still have a comparative advantage in producing one of the two goods. 

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