AP Microeconomics : Perfectly Competitive Output Markets
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Example Questions
Example Question #71 : Perfectly Competitive Output Markets
Energy can be generated using either coal or natural gas as an input. If the supply of coal is interrupted, what are the most likely effects on the price and quantity of natural gas traded on the open market? Assume a perfectly competitive market with no government policy intervention.
No change
Price decreases, Quantity decreases
Price decreases, Quantity increases
Price increases, Quantity increases
Price increases, Quantity decreases
Price increases, Quantity increases
Coal and natural gas are substitutes for each other based on the description given in the question. Therefore, an interruption in the supply of coal will lead to an increase in the demand for natural gas. This will increase both the price and quantity of natural gas.
Example Question #72 : Perfectly Competitive Output Markets
Iron ore is an important input in steelmaking. If the cost of iron ore increases, what are the likely effects on the equilibrium price and quantity in the market for steel? Assume a perfectly competitive market.
Price increases, Quantity decreases
No effect
Price decreases, Quantity decreases
Price increases, Quantity increases
Price decreases, Quantity increases
Price increases, Quantity decreases
An increase in the cost of iron ore will make steel production more expensive.
Because production costs increase, steelmakers will be less willing to produce steel at any given price. Therefore, the market price of steel will increase, and less steel will be traded on the market.
Example Question #73 : Perfectly Competitive Output Markets
Which of the following scenarios will result in an increase in the market price for iron ore?
The completion of a rail network allows iron ore producers to significantly reduce the cost of transporting the product to market.
The wages paid to workers extracting iron ore increase, and at the same time a construction boom increases the demand for iron.
A significant new deposit of iron ore is discovered.
The cost of other building materials, such as lumber and concrete, falls.
The wages paid to workers extracting iron ore fall as a depressed construction market reduces the demand for iron.
The wages paid to workers extracting iron ore increase, and at the same time a construction boom increases the demand for iron.
We need to choose the scenario that results in a higher equilibrium price. This will result from an increase in demand and a decrease in supply. Only one answer choice matches this scenario. The other choices create a lower equilibrium price or an ambiguous change.
Example Question #72 : Competition
Which of the following is NOT a characteristic of a perfectly competitive market?
The quality and characteristics of a good or service do not vary between different suppliers.
Entry barriers limit the number of new firms that can enter the market.
Buyers and sellers do not incur transactions costs when trading on the market.
Firms sell at a price point such that marginal cost equals marginal revenue.
Buyers and sellers have perfect information on the quality of the good or service exchanged.
Entry barriers limit the number of new firms that can enter the market.
Perfectly competitive markets are characterized by their LACK of entry and exit barriers, which makes it easy for firms to enter or leave the market as conditions change.
Example Question #74 : Perfectly Competitive Output Markets
Which of these actions most obviously produces a positive externality?
Planting an herb garden in your private backyard
Cutting to the front of the line at the movies
Remodeling your kitchen
Parking rusty, old cars on your front lawn
Keeping your yard clean and maintained
Keeping your yard clean and maintained
Keeping your yard clean and maintained is a positive quality that residents and visitors in your neighborhood will also benefit from. Some of the other answers are also positive, but they only have a private benefits, not public ones.
Example Question #81 : Competition
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?
Cannot be determined
3
5
7
4
5
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 #82 : Competition
Which of these actions most obviously produces a negative externality?
Selling your old stuff online
Trashing your room
Farming sweet potatoes
Littering
Working as a software engineer
Littering
Trashing your room really only affects you. Only littering, which affects the general public, is clearly a negative externality.
Example Question #83 : Competition
Which of the following breakdowns in the rules of perfect competition is likely to result in a market externality?
Increasing returns to scale in production
Poorly defined property rights
High entry and exit barriers
Firms sell differentiated, non-identical products
Many sellers, one buyer
Poorly defined property rights
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 #84 : Competition
The following are characteristics of a perfectly competitive market. Among these, which is most clearly lacking in the market for used cars?
Well defined property rights
Lack of increasing returns to scale
Large number of buyers and sellers
Factors of production are perfectly mobile in the long run
Buyers and sellers have perfect information on the quality of the product
Buyers and sellers have perfect information on the quality of the product
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 #85 : Competition
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:
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.
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