AP Microeconomics : Perfectly Competitive Output Markets

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #54 : Competition

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

Possible Answers:

A lighthouse

A book

None of the other answers

A house

Satellite TV

Correct answer:

A lighthouse

Explanation:

A public good is non-rival, which means that one person's consumption of the good does not affect another person's consumption of the same good.  Public goods are also non-excludable, which means that one person cannot prevent another from consuming the good. Among the choices here, the only answer that meets the criteria is the lighthouse, which is both non-rival and non-excludable.

Example Question #55 : Competition

If the United States trades computers in exchange for cars from Germany, what must be true?

Possible Answers:

The United States has comparative advantage in producing computers and Germany has comparative advantage in producing cars 

The United States has comparative advantage in producing cars and Germany has comparative advantage in producing computers 

None of the other answers

The United States has absolute advantage in producing computers and Germany has comparative absolute in producing cars 

The United States has absolute advantage in producing cars and Germany has absolute advantage in producing computers 

Correct answer:

The United States has comparative advantage in producing computers and Germany has comparative advantage in producing cars 

Explanation:

Comparative advantage refers to the ability of a party to produce a particular good at a lower opportunity cost than another party. When trading, countries will always gain by trading the good in which they have comparative advantage in producing. Since the US is trading computers for cars from Germany, the US must have comparative advantage in computer production while Germany has comparative advantage in car production. 

Example Question #56 : Competition

An increase in the demand of a good will increase equilibrium price to a greater extent: 

Possible Answers:

if the good is a luxury good

if the good is a normal good

if the good's supply curve is more elastic

if the good's supply curve is less elastic

if the good is a giffen good

Correct answer:

if the good's supply curve is more elastic

Explanation:

Elasticity is a measurement used in economics to show the responsiveness of the quantity supplied of a good to a change in its price. Thus, a more elastic supply curve would cause a greater change in price as the quantity demanded increases.

Example Question #57 : Competition

A leftward shift in the supply curve of computers could be explained by:

Possible Answers:

An increase in population

An increase in wages for workers who manufacture computers

A decrease in the price of monitors used to manufacture computers.

An increase in the price of computers 

An improvement in the technology used for manufacturing computers

Correct answer:

An increase in wages for workers who manufacture computers

Explanation:

The only factor that would cause a leftward shift of the supply curve of computers is the increase in wages for workers who manufacture computers. The other choices would result in a rightward shift of the supply curve. 

Example Question #58 : Competition

The difference between the price that a person would be willing to pay for a cupcake and the actual market price of a cupcake is a measure of his/her:

Possible Answers:

marginal cost

total surplus

marginal revenue

producer surplus

consumer surplus

Correct answer:

consumer surplus

Explanation:

The difference between a consumer's willingness to pay and the actual market price of a product quantifies the consumer surplus associated with that product. It occurs when the consumer is willing to pay more for a product than its current market price. For example, if a consumer is willing to pay $3 for a cupcake, but its market price is $2, then the consumer surplus for him/her is $1. 

Example Question #61 : Competition

Which of the following is a source of monopoly power?

Possible Answers:

Antitrust laws

Free markets

Perfect competition

Demand elasticity

Barriers to entry

Correct answer:

Barriers to entry

Explanation:

Monopolies often arise because of barriers to entry, which helps prevent firms from entering the market. Barriers to entry can enable one firm to dominate the market without the threat of competition from other firms. 

Example Question #62 : Competition

Use the following table to answer this question:


Screen_shot_2014-03-25_at_5.02.03_pm

What is the average total cost if the firm decides to produce 5 units?

Possible Answers:

None of the other answers

$

$

$

$

Correct answer:

$

Explanation:

Average total cost is the sum of the average fixed cost and average variable cost of producing a good. For the fifth good, the average fixed cost would be $40 while the average variable cost would be $120, which gives you a sum of $160.

Example Question #63 : Competition

Use the following table to answer this question:

Screen_shot_2014-03-25_at_5.02.03_pm

If the market price of the good is $125, how many goods will the firm produce to maximize its profits?

Possible Answers:

Correct answer:

Explanation:

The firm will continue to produce until marginal cost equals marginal revenue. In this case, the market price of the good is the firm's marginal revenue, since that is the amount it receives for selling each good. Thus, the firm will continue to produce the good as long as its marginal cost is lower than $125.

Example Question #64 : Competition

If the price of movie tickets drops from $10 to $9, and then the quantitiy demanded increases from 50 to 60, the demand for movie tickets is:

Possible Answers:

perfectly elastic

elastic

perfectly inelastic

unit elastic

inelastic

Correct answer:

elastic

Explanation:

Price elasticity of demand is the measure of the responsiveness of the quantity demanded of a good to the change in its price. Elasticity is calculated by the percentage change in quantity demanded divided by the percentage change in price. In this case, the price elasticity demand of movie tickets is 2 (20% change in quantity demanded divided by 10% change in price). If a good's elasticity is greater than 1, it is considered elastic.

Example Question #65 : Competition

Use the following table to answer this question:

Screen_shot_2014-03-25_at_5.02.03_pm

If the firm decides to produce 10 goods, what would be its average fixed cost?

Possible Answers:

$

$

$

$

$

Correct answer:

$

Explanation:

From the information provided, we know that the total fixed cost of production is $200. The average fixed cost can be calculated by dividing the total fixed cost of production by the number of goods produced. In the case of 10 goods produced, the average fixed cost would be $200 (Total fixed cost) divided by 10 (Number of goods produced), which is $20.

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