AP Micro
Unit 3: Exam
Name: ______________________________
Score: ______________________________
MC: (2pts)
__ 1. Which of the following is not a requirement for an
industry to be perfectly competitive?
A. firms are price takers
B. products made by different firms are identical
C. no firm controls a large part of the market
D. the total market is very small
E. there is easy entry into and exit from the market in the long
run
__ 2. Say that a perfectly competitive firm is operating at a
quantity where marginal revenue is greater than marginal cost.
To increase profits, the firm should
A. increase production
B. decrease production
C. increase price
D. decrease price
E. do nothing
Use the following data for questions 3-5.
A firm in a perfectly competitive market has the following
costs:
Q
FC
VC
0
5
0
1
5
2
2
5
5
3
5
9
4
5
14
__ 3. If the market price is $4, what output will this firm
produce?
A. 1
B. 2
C. 3
D. 4
E. the firm should shut down
__ 4. What is the firm’s total profit or loss when it produces
that quantity?
A. $8
B. $3
C. $1
D. -$1
E. -$2
__ 5. Which of the following is/are true in the situation above?
I. P=MR
II. P>ATC
III. P>AVC
A. II only
B. III only
C. II and III only
D. I and III only
E. I, II and III
__ 6. When average total cost is below marginal cost,
A. Marginal cost is decreasing.
B. Average total cost is at its low point.
C. Average variable cost is at its low point.
D. Average total cost is increasing.
E. Average total cost is decreasing.
__ 7. The part of an ATC curve that is falling is due to
A. the spreading effect
B. economies of scale
C. decreasing variable cost
D. diminishing marginal productivity
E. decreasing marginal cost
__ 8. Which best explains why a perfectly competitive firm will
continue to operate at a loss (as long as price is above the
shutdown point) in the short run?
A. it is hoping to wait until the price increases
B. it is hoping to decrease its costs in the long run
C. it will lose less than its fixed cost by operating at a loss
D. it will make profits eventually in the long run
E. it will lose less than its total cost by operating at a loss
Use the graph below to complete #9-11.
__ 9. In the accompanying figure, if the price is P1, then the
firm:
A. will earn a profit of (ba) x Q1
B. will earn a profit of (ac) x Q1
C. will produce in the short run but lose money
D. will produce Q2 units of output
E. will shut down rather than produce in the short run
__ 10. If the market price is P2,
A. firms will profit in the short run, causing more firms to enter in
the long run and decreasing the market price
B. firms will profit in the short run, causing firms to exit in the
long run and decreasing the market price
C. firms will profit in the short run, causing more firms to enter in
the long run and increasing the market price
D. firms will lose money in the short run, causing more firms to
enter in the long run and decreasing the market price
E. firms will lose money in the short run, causing firms to exit in
the long run and increasing the market price
__ 11. The long-run equilibrium price in this industry will be
A. P1
B. P2
C. somewhere between P1 and P2
D. higher than P2
E. lower than P1
__ 12. The short-run supply curve for a perfectly competitive
firm is its:
A. demand curve above its marginal revenue curve
B. marginal revenue curve to the right of its marginal cost
curve
C. marginal cost curve above its average total cost curve
D. marginal cost curve above its average cost curve
E. average total cost curve below its marginal cost curve
__ 13. If firms in a perfectly competitive industry are losing
money, we can expect in the long run:
Firms
Supply
Market Price
A.
enter
increase
increase
B.
enter
increase
decrease
C.
exit
increase
decrease
D.
exit
decrease
increase
E.
exit
decrease
decrease
__ 14. A perfectly competitive firm will not sell its product at a
price below the market price because
A. it is legally prohibited from doing so
B. it would sell more than it could handle if it dropped its price
C. it would not be able to sell as much at a lower price
D. it can sell all it wants at the market price
E. it will be seen as a sign of lower quality by consumers
__ 15. True statements about theory of the firm in the short run
and long run include which of the following?
I. All input costs are fixed in the short run.
II. All input costs are variable in the long run.
III. At least one input price is fixed in the short run.
A. I only
B. II only
C. III only
D. I and II only
E. II and III only
__ 16. Which of the following statements about a firm’s
production function are true/
I. When total product is at its maximum, marginal
product is zero.
II. When total product rises, marginal product is
rising.
III. When marginal product is greater than average
product, average product is rising.
IV. When marginal product is less than average
product, average product is falling.
A. I and II only
B. II and III only
C. II and IV only
D. I, III and IV only
E. I, II, III, and IV
__ 17. For a perfectly competitive firm, if the market price is $8
then
A. MR is greater than $8
B. MR is less than $8
C. MR is equal to $8
D. AR is greater than $8
E. AR is less than $8
__ 18. A firm’s short-run marginal cost curve will eventually
increase because of
A. more efficient production.
B. economies of scale.
C. diseconomies of scale.
D. diminishing marginal returns.
E. increasing marginal returns.
__ 19. Assume that in the short run at the profit-maximizing
output, the price is lower than AVC. The perfectly competitive
firm should
A. increase its price.
B. decrease its price.
C. increase its output.
D. decrease its output.
E. shut down.
__ 20. Assume that a perfectly competitive firm is operating
where marginal revenue is greater than marginal costs. To
increase profits, the firm should
A. increase production.
B. decrease production.
C. increase price.
D. decrease price.
E. do nothing.
__ 21. Which of the following represents the correct
relationship between the demand curve for a perfectly
competitive industry and the demand curve for a perfectly
competitive firm?
PC Industry Demand
PC Firm Demand
A.Downward slope to the right
Downward slope to the right
B. Downward slope to the right
Perfectly elastic
C. Perfectly elastic
Downward slope to the right
D. Perfectly elastic
Perfectly elastic
E. Perfectly inelastic
Perfectly elastic
__ 22. On the graph above, the onset of diminishing marginal
returns occurs beyond
A. Point A
B. Point B
C. Point C
D. Point D
E. Point E
Use the graph below to answer #23.
__ 23. According to the graph above, if the firm is producing
any quantity greater than Q2, the firm is experiencing
A. economies of scale
B. minimum efficient scale
C. diseconomies of scale
D. constant returns
E. increasing returns
Use the graph below to answer questions 24, 25, and 26
__ 24. If the firm is in short-run equilibrium at a price of P4, a
perfectly competitive firm will maximize profits by producing
at which of the following levels of output?
A. Q
B. Q1
C. Q2
D. Q3
E. Q4
__ 25. At which price will this perfectly competitive firm make
an economic profit?
A. P
B. P1
C. P2
D. P3
E. P4
__ 26. Which price-quantity combination represents long-run
equilibrium for this perfectly competitive firm?
A. Point A
B. Point B
C. Point C
D. Point D
E. Point E
__ 28. According to the graphs above, in which of the following
ways are the industry supply and the equilibrium price most
likely to change in the long run?
Industry Supply
Equilibrium Price
A.
Decrease
Decrease
B.
Decrease
Increase
C.
Increase
Decrease
D.
Increase
Increase
E.
Not change
Decrease
Use the graph below to answer questions 29 and 30.
__ 27. According to the graph above, if the firm is producing at
Q, the firm is
A. losing money because the firm is operating at the shutdown
price
B. losing money because the price does not cover average fixed
cost
C. making profits because the price above average variable
cost
D. making normal profits because the price just covers average
total cost
E. making normal profits because the price is above average
variable cost
Use the graph below to answer #28.
__ 29. If price is P2, the firm will
A. produce Q units and earn an normal profit
B. produce Q units and earn an economic profit
C. produce Q2 units and earn an economic profit
D. produce Q3 units and earn an economic profit
E. shut down
__ 30. If price is P1, the firm will
A. produce Q units and earn an economic profit
B. produce Q1 units and earn an economic profit
C. produce Q1 units and earn a normal profit
D. produce Q2 units and earn an economic profit
E. shut down
FRQ:
(10 Points)
1. Assume Joslyn Farm is a profit-maximizing firm in the perfectly competitive corn industry, which is in long-run equilibrium.
A. Draw a correctly labeled, side-by-side graphs for the corn industry and Joslyn Farm. Show and label each of the following:
i. industry price and output
ii. Joslyn Farm’s price and output
B. Suppose the government offers a per-unit subsidy to corn farmers. On your graphs from part A, show the effects of the subsidy on
each of the following in the short run:
i. Joslyn Farm’s output. Explain the effect.
ii. the area of profit or loss for Joslyn Farm. Explain the effect.
C. Explain how the industry will return to long-run equilibrium and why this effect occurs in perfectly competitive markets.
(6 Points)
2. Assume SamKat, Inc., sells lemonade at a county fair, surrounded by dozens of other food stands selling the very same lemonade.
A. In what type of market structure is SamKat operating?
B. If SamKat increases its product price above the industry equilibrium price, what will happen to its total revenue? Explain.
C. Assume the cost of lemons increases for all lemonade stands in the industry.
i. Explain the effect of the cost increase on SamKat’s output.
ii. Explain the effect on SamKat’s short-run profit or loss.
iii. Under what conditions will SamKat continue to produce in the short run?
(9 Points)
3. The table below indicates the short-run costs for Cherryl’s Cupcakes, a profit maximizing firm in a perfectly competitive industry in
long-run equilibrium.
Output Produced
Total Cost
0
20
1 box
30
2 boxes
35
3 boxes
38
4 boxes
44
5 boxes
51
6 boxes
60
7 boxes
70
8 boxes
90
A. Calculate the MC of producing the second box of cupcakes.
B. Calculate the ATC of producing 4 boxes of cupcakes
C. Cherryl’s Cupcakes receives a price of $10 per box of cupcakes. Indicate how many boxes of cupcakes the firm should sell to
maximize profit. Explain how you reached that conclusion.
D. If cupcakes are a normal good and consumer incomes decrease, explain:
i. the effect on the cupcake industry
ii. the effect on the price Cherryl’s Cupcakes will receive for its product.
iii. the effect on the quantity of cupcakes produced by Cherryl’s Cupcakes.
iv. the short-run economic profit or loss incurred by Cherryl’s Cupcakes.
v. the industry’s long-run adjustment.
Bonus: (3 points) Correctly draw and label the situation in question 3 part D.