AP Microeconomics Final Exam – Answer
Key
Total Questions: 60 | Multiple Choice Format
Section 1: Fundamental Concepts & Elasticity
1. Which of the following is always true of a binding price ceiling imposed in a competitive
market?
(A) Quantity supplied will exceed quantity demanded.
(B) A shortage will occur at the controlled price.
(C) Producers' total revenue will necessarily increase.
(D) The government collects more tax revenue.
(E) Deadweight loss is eliminated.
Answer: (B) A binding price ceiling is set below equilibrium price, creating a shortage.
2. If the demand for a product is price inelastic, a decrease in price will
(A) increase total revenue.
(B) decrease total revenue.
(C) leave total revenue unchanged.
(D) shift the demand curve rightward.
(E) shift the demand curve leftward.
Answer: (B) When demand is inelastic, quantity demanded doesn't rise much when price
falls, so total revenue (P × Q) decreases.
3. The law of diminishing marginal utility implies that
(A) total utility must become negative as more of a good is consumed.
(B) marginal utility eventually decreases as additional units are consumed.
(C) marginal utility is constant at all consumption levels.
(D) total utility decreases whenever marginal utility is positive.
(E) demand curves must be perfectly inelastic.
Answer: (B) Diminishing marginal utility means each additional unit provides less
additional satisfaction than the previous one.
4. Suppose a consumer's income doubles and the quantity of a good demanded more than
doubles. For this good, the income elasticity of demand is
(A) negative.
(B) zero.
(C) between 0 and 1.
(D) equal to 1.
(E) greater than 1.
, Answer: (E) Income elasticity = % change in quantity / % change in income. If quantity
more than doubles when income doubles, the elasticity exceeds 1 (superior good).
5. A perfectly competitive firm is a price taker because
(A) it advertises heavily.
(B) it sells a differentiated product.
(C) it faces a horizontal demand curve at the market price.
(D) it has significant market power.
(E) there are high barriers to entry.
Answer: (C) In perfect competition, each firm is so small that it faces a perfectly elastic
(horizontal) demand curve at the market price.
Section 2: Perfect Competition & Production
6. Allocative efficiency in a perfectly competitive market occurs when
(A) price equals marginal cost.
(B) price equals average fixed cost.
(C) marginal revenue equals average total cost.
(D) average variable cost is minimized.
(E) marginal cost equals average total cost.
Answer: (A) Allocative efficiency means P = MC, so price reflects the marginal social benefit
and cost.
7. Which of the following is true in the long run for a perfectly competitive industry in
equilibrium?
(A) Firms earn positive economic profits.
(B) Firms earn zero economic profits.
(C) Firms earn negative economic profits.
(D) Price is less than average total cost.
(E) Price exceeds marginal cost.
Answer: (B) Long-run equilibrium in perfect competition: Free entry/exit drives P = ATC, so
economic profit = 0.
8. If a firm is experiencing economies of scale, then as it increases output,
(A) long-run average total cost decreases.
(B) long-run average total cost increases.
(C) marginal cost increases.
(D) average fixed cost increases.
(E) average variable cost remains constant.
Answer: (A) Economies of scale mean LRATC is declining as output increases.
9. A natural monopoly is characterized by
(A) many small firms with identical products.
(B) downward-sloping long-run average total cost over the relevant range of output.
(C) constant returns to scale throughout.
Key
Total Questions: 60 | Multiple Choice Format
Section 1: Fundamental Concepts & Elasticity
1. Which of the following is always true of a binding price ceiling imposed in a competitive
market?
(A) Quantity supplied will exceed quantity demanded.
(B) A shortage will occur at the controlled price.
(C) Producers' total revenue will necessarily increase.
(D) The government collects more tax revenue.
(E) Deadweight loss is eliminated.
Answer: (B) A binding price ceiling is set below equilibrium price, creating a shortage.
2. If the demand for a product is price inelastic, a decrease in price will
(A) increase total revenue.
(B) decrease total revenue.
(C) leave total revenue unchanged.
(D) shift the demand curve rightward.
(E) shift the demand curve leftward.
Answer: (B) When demand is inelastic, quantity demanded doesn't rise much when price
falls, so total revenue (P × Q) decreases.
3. The law of diminishing marginal utility implies that
(A) total utility must become negative as more of a good is consumed.
(B) marginal utility eventually decreases as additional units are consumed.
(C) marginal utility is constant at all consumption levels.
(D) total utility decreases whenever marginal utility is positive.
(E) demand curves must be perfectly inelastic.
Answer: (B) Diminishing marginal utility means each additional unit provides less
additional satisfaction than the previous one.
4. Suppose a consumer's income doubles and the quantity of a good demanded more than
doubles. For this good, the income elasticity of demand is
(A) negative.
(B) zero.
(C) between 0 and 1.
(D) equal to 1.
(E) greater than 1.
, Answer: (E) Income elasticity = % change in quantity / % change in income. If quantity
more than doubles when income doubles, the elasticity exceeds 1 (superior good).
5. A perfectly competitive firm is a price taker because
(A) it advertises heavily.
(B) it sells a differentiated product.
(C) it faces a horizontal demand curve at the market price.
(D) it has significant market power.
(E) there are high barriers to entry.
Answer: (C) In perfect competition, each firm is so small that it faces a perfectly elastic
(horizontal) demand curve at the market price.
Section 2: Perfect Competition & Production
6. Allocative efficiency in a perfectly competitive market occurs when
(A) price equals marginal cost.
(B) price equals average fixed cost.
(C) marginal revenue equals average total cost.
(D) average variable cost is minimized.
(E) marginal cost equals average total cost.
Answer: (A) Allocative efficiency means P = MC, so price reflects the marginal social benefit
and cost.
7. Which of the following is true in the long run for a perfectly competitive industry in
equilibrium?
(A) Firms earn positive economic profits.
(B) Firms earn zero economic profits.
(C) Firms earn negative economic profits.
(D) Price is less than average total cost.
(E) Price exceeds marginal cost.
Answer: (B) Long-run equilibrium in perfect competition: Free entry/exit drives P = ATC, so
economic profit = 0.
8. If a firm is experiencing economies of scale, then as it increases output,
(A) long-run average total cost decreases.
(B) long-run average total cost increases.
(C) marginal cost increases.
(D) average fixed cost increases.
(E) average variable cost remains constant.
Answer: (A) Economies of scale mean LRATC is declining as output increases.
9. A natural monopoly is characterized by
(A) many small firms with identical products.
(B) downward-sloping long-run average total cost over the relevant range of output.
(C) constant returns to scale throughout.
