Ap Micro Homework Test Bank

AP MICROECONOMICS Test Booklet
Chapter 4 market structure
1. An industry consists of 100 small firms, and the largest firm accounts for only 2 percent of sales. Brand names are
considered a signal of quality. The industry described is best classified as
(A) monopoly
(B) perfectly competitive
(C) monopolistically competitive
(D) oligopolistic
(E) monopsonistic
The following questions refer to the graph below showing cost curves for a perfectly competitive firm.
2. If the market price is $10, how many widgets should this profit-maximizing firm produce?
(A) 3,000
(B) 6,000
(C) 12,000
(D) 16,000
(E) 21,000
3. At market price $6, the profit-maximizing rate of output will result in
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(A) economic profits

(B) economic losses
(C) normal profits
(D) profits that are less than normal
(E) profits that are greater than normal
4. When two firms interact in an oligopolistic market, which of the following statements is true?
(A) If one firm has a dominant strategy, then the other firm does not have a dominant strategy.
(B) If one firm has a dominant strategy, then the other firm also has a dominant strategy.
(C) Both firms must have dominant strategies.
(D) If one firm has a dominant strategy, then there is no Nash equilibrium.
(E) If both firms have dominant strategies, then there is a Nash equilibrium.
5. Which of the following is true of both monopolistically competitive and perfectly competitive firms in long-run
equilibrium?
(A) Marginal revenue equals average total cost.
(B) Marginal cost equals average total cost.
(C) Price equals average total cost.
(D) Price is greater than marginal cost.
(E) Production occurs at minimum average total cost.
6. If the three largest widget producers control 85 percent of the total widget market, then these producers are
operating in
(A) an oligopoly
(B) monopolistic competition
(C) perfect competition
(D) a monopoly
(E) a cartel
7. A monopolistically competitive firm advertises in order to

(A) shift the demand curve for its product to the left.
(B) make the demand for its product less price elastic
(C) make its product more similar to its competitors'
(D) increase its positive externalities
(E) reduce the industry's barriers to entry
8. In monopolistic competition, a goal of advertising is to
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(A) reduce a firm’s short-run average total cost

(B) minimize a firm’s long-run average total cost
(C) make a firm’s demand curve more elastic
(D) make a firm’s demand curve less elastic
(E) shift a firm’s demand curve to the left
9. The price of an airline ticket is typically lower if a traveler buys the ticket several weeks before the flight’s
departure date rather than on the day of departure. This pricing strategy is based on the assumption that
(A) travelers are not aware of how airline prices change across time
(B) travelers do not have alternative modes of transportation
(C) travelers will pay any price to travel as the departure date approaches
(D) the marginal cost of the last few seats on an airplane is higher than that for the first few seats
(E) travelers’ demand becomes less elastic as the departure date approaches
10. The allocatively efficient level of output is produced in any market structure when
(A) firms are experiencing economies of scale
(B) marginal revenue is equal to zero
(C) long-run economic profit is equal to zero
(D) price is equal to marginal cost
(E) average variable cost is at a minimum
11. Assume that Alpha and Beta are the only sellers of a product and they do not cooperate. Each firm has to decide
whether to raise the product price. The payoff matrix below gives the profits, in dollars, associated with each pair of
pricing strategies. The first entry in each cell shows the profits to Alpha, and the second, the profits to Beta.
Assuming both firms know the information in the matrix, which of the following correctly describes the dominant
strategy of each firm?
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Alpha Beta
(A)
Do not raise price Do not raise price
Alpha Beta
(B)
Do not raise price Raise price
Alpha Beta
(C)
Raise price No dominant strategy
Alpha Beta
(D)
Raise price Do not raise price
Alpha Beta
(E)
No dominant Strategy Raise price
12. A monopolistically competitive profit-maximizing firm is currently producing and selling 2,000 units of output. At
this output level, marginal revenue is $9, average revenue is $10, and the average variable cost is $8. The product
price is
(A) $8
(B) $9
(C) $10
(D) greater than $10
(E) less than $8
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The question refers to the following diagram of a natural monopolist.
13. The firm shown in the diagram above qualifies as a natural monopoly because
(A) the demand curve is downward sloping
(B) the demand curve lies above the marginal revenue curve
(C) the average total cost is decreasing in the relevant range of market demand
(D) the firm can maximize profit with any output level it chooses
(E) marginal revenue is positive at the profit-maximizing output level
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The following two questions refer to the cost and revenue conditions of a monopolistically competitive firm shown in the
graph below.
marginal cost, average total cost, average variable cost, and marginal revenue.
14. The firm’s profit-maximizing output in the short run is

(A) zero, because
(B) , because
(C) , because
(D) , because
(E) impossible to determine
15. Which of the following is more likely to occur when there are high barriers to entry in an industry?
(A) The firm(s) in the industry earn economic profits in the long run.
(B) The industry will be characterized by diseconomies of scale.
(C) The firm(s) in the industry are price takers.
(D) The firm(s) in the industry will charge a price equal to average total cost.
(E) The firm(s) will charge a price on the inelastic portion of the demand curve.
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16. Assume a perfectly competitive firm is currently producing units of output. Its marginal cost is and rising at
that output quantity. Its average variable cost is and its average fixed cost is . If the product’s price is ,
which of the following will the firm do in the short run to maximize its profit?
(A) Shut down
(B) Produce, but less than units of output
(C) Produce more than units of output
(D) Continue to produce at exactly units of output
(E) Increase its price above
17. Which of the following is a source of monopoly power?

(A) Scarcity
(B) Elasticity of demand
(C) Barriers to entry
(D) Low profits
(E) Free markets
18. Assume that a monopolistically competitive firm is currently maximizing profit with an output of 100 units and a
price of $50. Which of the following is true?
(A) Total revenue is maximized when the firm produces 100 units of output.
(B) Marginal revenue equals $50 when the firm produces 100 units of output.
(C) Marginal cost is greater than marginal revenue when the firm produces 150 units of output.
(D) Marginal cost is minimized when the firm produces 100 units of output.
(E) Average total cost is minimized when the firm produces 100 units of output.
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19. Suppose that the two biggest producers of gold, Bmine and Gmine, form a cartel to set price. However, each has the
option to cheat or to not cheat on the agreement. The table below shows the payoffs from these strategies, with the
first entry in each cell representing the payoff to Bmine and the second representing the payoff to Gmine.
Which of the following correctly describes the dominant strategy of each firm?
(A) Neither Gmine nor Bmine has a dominant strategy.
(B) Gmine's dominant strategy is to not cheat; Bmine does not have a dominant strategy.
(C) Gmine's dominant strategy is to cheat; Bmine does not have a dominant strategy.
(D) Gmine's dominant strategy is to cheat; Bmine's dominant strategy is to not cheat.
(E) Gmine's dominant strategy is to not cheat; Bmine's dominant strategy is to cheat.
20. A perfectly competitive firm, earning economic profits, produces and sells 100 units of output at a price of $20 per
unit. If its marginal cost of increasing output to a rate of 101 units is $18, which of the following statements is
correct?
(A) The total revenue from selling 101 units is the same as the total revenue from selling 100 units
(B) The total profit from selling 101 units is $2 greater than the total profit from selling 100 units.
(C) The total cost of producing 101 units is $2 greater than the total cost of producing 100 units.
(D) To sell 101 units, the firm must reduce its price below $20.
(E) To sell 101 units, the firm must raise its price above $20.
21. A profit-maximizing, perfectly competitive firm is currently in long-run equilibrium. It is earning $15,000 of total
revenue from a sale of 1,000 units. Its total fixed cost of production is $2,500. Which of the following can correctly
be inferred from the information provided?
(A) Its marginal cost is $12.50, and its average total cost is $12.50.
(B) Its marginal cost is $12.50, and its average variable cost is $12.50.
(C) Its marginal cost is $15.00, and its average total cost is $12.50.
(D) Its marginal cost is $15.00, and its average variable cost is $12.50.
(E) Its marginal cost is $15.00, and its average fixed cost is $12.50.
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22. Reff Corp is a firm with total revenue of $1,000, marginal cost of $5, and average variable cost of $4. Both the
output and the input markets are perfectly competitive, and Reff Corp is currently in long-run equilibrium. Reff
Corp’s output and total fixed cost of production must be equal to which of the following?
Output Fixed Cost

(A)
250 $800
Output Fixed Cost

(B)
250 $400
Output Fixed Cost

(C)
200 $200
Output Fixed Cost

(D)
200 $400
Output Fixed Cost

(E)
200 $800
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23.
Based on the cost and output data in the table above, a perfectly competitive firm will shut down if price falls below
(A) $30
(B) $20
(C) $18
(D) $16
(E) $15
24. Which of the following best describes firms in an industry if all the firms are in a cartel?
(A) They produce the allocatively efficient quantity.
(B) They face a perfectly elastic demand curve.
(C) They have identical cost curves.
(D) They coordinate their production decisions.
(E) They agree to remove barriers to entry.
25. Which of the following is true for a price-discriminating firm?

(A) The firm charges different prices to different consumers for the same product.
(B) The firm charges different prices for different products.
(C) The firm pays more per unit of labor than it pays per unit of capital.
(D) The firm pays more per unit of capital than it pays per unit of labor.
(E) The firm sells different quantities to its consumers but charges each of them the same price.
26. A cartel is difficult to maintain for which of the following reasons?
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(A) Consumers substitute away from the good when the price increases.
(B) Individual cartel members are tempted to cheat on the agreement.
Although the total gain to cartel members is positive, all members lose when everyone sticks to the
(C)
agreement.
(D) Some firms will reduce output in an effort to lower costs of production.
(E) Oligopolistic behavior is generally predictable.
27. If the only two firms in an industry successfully collude to maximize their joint profit, the price for the product will
be
(A) equal to the marginal cost of production
(B) equal to the average total cost of production
(C) above the marginal cost of production
(D) above the monopoly price
(E) below the average variable cost of production
28. A collusive agreement to fix prices among firms in an oligopolistic industry is most likely to be broken under which
of the following conditions?
(A) It is easy for new firms to enter into the industry.
(B) All of the firms have identical costs.
(C) The number of firms is few.
(D) Firms’ sales are widely reported.
(E) The market demand is stable.
29. There are four firms in an oligopolistic industry. The four firms agree to collude and act like a monopoly. If one of
the firms violates the agreement and charges a lower price or sells a larger quantity than what was agreed to, what
will happen in the short run?
(A) The firm that cheats will earn higher profits, and industry profits will be lower.
(B) The firm that cheats will earn higher profits, and industry profits will be higher.
(C) The firm that cheats will earn lower profits, and industry profits will be lower.
(D) The firm that cheats will earn lower profits, and industry profits will be higher.
(E) The firms that do not cheat will earn higher profits.
30. Collusion, price leadership, and price wars are usually observed in which of the following market structures?
(A) Perfect competition
(B) Monopolistic competition
(C) Oligopoly
(D) Monopoly
(E) Natural monopoly
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31. In the short run in perfect competition, the industry's demand curve and a firm's demand curve have which of the
following slopes?
Industry's Demand Curve Firm's Demand Curve

(A)
Horizontal Downward sloping

(B)
Horizontal Horizontal

(C)
Downward sloping Horizontal

(D)
Downward sloping Downward sloping

(E)
Vertical Horizontal
32. Compared with a perfectly competitive market,a single-price monopoly with the same market demand and cost
curves will
(A) increase output and price
(B) increase output and decrease price
(C) decrease output and price
(D) decrease output and increase price
(E) produce the same level of output and increase price
33. Assume that all firms in a perfectly competitive market currently earn positive economic profits. What will happen
in the long run if all firms face constant returns to scale in production?
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(A) The price of the product will increase.

(B) Firms will exit the industry.
(C) The quantity produced by each existing firm will decrease.
(D) Average total cost of production will increase.
(E) Nothing will change.
Assume that the market is a profit-maximizing monopoly.
34.
Which of the following areas shows the consumer surplus?
(A)
(B)
(C)
(D)
(E)
35. The project funding decisions made by two interdependent research companies, Creative and Genezyz, resulted in a
profit of million for Creative and a profit of million for Genezyz. Which of the following is required for this
combination of project choices to be a Nash equilibrium?
(A) Genezyz charges a lower price to its customers than Creative does.
(B) Neither firm has a dominant strategy.
(C) Neither firm could earn higher profits by unilaterally changing its project choice.
(D) Creative could earn a higher profit if it chose a different project when Genezyz chose its initial project.
(E) The combined profits of the two firms are maximized at the current combination of project choices.
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36. Daily Tools is a typical firm in a monopolistically competitive market that produces tool kits for everyday use.
Which of the following explains why Daily Tools is inefficient in long-run equilibrium?
(A) The entry of more efficient firms is blocked.
(B) The firm produces the quantity at which marginal cost equals average total cost.
(C) The firm does not produce the quantity that results in minimum average total cost.
(D) The firm does not produce the quantity that minimizes total cost.
(E) The firm’s customers value the last unit of output at less than its cost.
37. Which of the following is true for a perfectly competitive, decreasing-cost industry?
(A) The price of inputs will decrease as the number of firms in the industry decreases.
(B) The long-run market supply curve will be downward sloping.
(C) Firms earn positive economic profit in the long run.
(D) Firms do not have a shutdown condition.
(E) There are no economies of scale.
38. Assume a decreasing-cost perfectly competitive industry. Which of the following statements is true?
(A) Firms will earn economic profits in long-run equilibrium.
The short-run market supply curve is upward sloping; the long-run supply curve is horizontal or perfectly
(B)
elastic.
(C) As industry output expands, there are fewer firms producing in the long run.
(D) As industry output contracts, each firm’s long-run average total cost curve shifts upward.
(E) Input prices rise as the industry produces more output.
39. In a market with two firms, a firm that has a dominant strategy will do which of the following?
(A) Maintain that strategy independent of the strategies chosen by its competitor.
(B) Adjust its strategies based on the strategies chosen by its competitor.
(C) Make the first move, and wait to see whether its competitor responds to the move.
(D) Keep its competitor guessing about its next move.
(E) Collude with its competitor to reduce uncertainty.
40. If a firm engages in perfect price discrimination, it charges

(A) each customer the highest price the customer is willing to pay
(B) each customer the average cost of the product
(C) each customer the lowest price the customer is willing to pay
(D) different prices to customers based on how old they are
(E) different prices to customers based on how many units of output they buy
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41. Firm XYZ produces and sells corn in a perfectly competitive market and hires its workers in a perfectly competitive
labor market. Which of the following best describes the demand curve for XYZ's corn and XYZ's demand curve for
labor?
Demand for XYZ's Corn XYZ's Labor Demand

(A)
Horizontal Horizontal

(B)
Horizontal Downward sloping

(C)
Horizontal Vertical

(D)
Downward sloping Downward sloping

(E)
Downward sloping Horizontal
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Refer to the following diagram and assume a perfectly competitive market structure.
42. At the price 0A, economic profits are

(A) ABJG
(B) ABKH
(C) ABLI
(D) ACMG
(E) C0FM
43.
The payoff matrix above shows the profits associated with the strategic decisions of two oligopoly firms, Bright
Company and Sparkle Company. The first entries in each cell show the profits to Bright and the second the profits
to Sparkle. What are the dominant strategies for Bright and Sparkle, respectively?
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Bright Sparkle
(A)
Strategy 1 Strategy 1
Bright Sparkle
(B)
Bright Sparkle
(C)
Bright Sparkle
(D)
Strategy 2 No dominant strategy
Bright Sparkle
(E)
No dominant strategy Strategy 1
Beta
Price High Price Low
Price High
Alpha
Price Low
The payoff matrix above shows the profits of two firms, Alpha and Beta, that compete against each other. Each firm must
decide to set a high or low price. The first numeric entry shows Alpha’s profits; the second entry shows Beta’s profits.
Each firm is aware of the information in this payoff matrix.
44. Given that each firm is aware of the information in the payoff matrix, which of the following is true?
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(A) Neither Alpha nor Beta has a dominant strategy.

(B) Both Alpha and Beta have a dominant strategy to price high.
(C) Both Alpha and Beta have a dominant strategy to price low.
(D) Alpha has a dominant strategy to price low, whereas Beta has a dominant strategy to price high.
(E) Alpha has a dominant strategy to price high, whereas Beta has no dominant strategy.
45. A player’s dominant strategy is

(A) independent of the other player’s choice
(B) dependent on the other player’s choice
(C) the strategy that results in the maximum combined payoff for both players
(D) the strategy that always delivers the other player’s best outcome of the game
(E) the strategy that always delivers the other player’s worst outcome of the game
46.
Town Herald
Do Not Change Subscription Increase Subscription
Price Price
Do Not Change Subscription
Daily Price
Voice
Increase Subscription Price
The two major newspapers in a city, Daily Voice and Town Herald, are considering whether to raise the
subscription price. The first entries in the matrix above show the profits to Daily Voice, and the second entries show
the profits to Town Herald. Which of the following is consistent with the above payoff matrix?
(A) Do Not Change Subscription Price is a dominant strategy for Daily Voice.
(B) Do Not Change Subscription Price is a dominant strategy for Town Herald.
(C) Increase Subscription Price is a dominant strategy for Daily Voice.
(D) Increase Subscription Price is a dominant strategy for Town Herald.
(E) There are no dominant strategies in the above payoff matrix.
47. Donuts for Dollars is a typical profit-maximizing firm in a perfectly competitive market that is earning positive
economic profit in the short run. Which of the following statements must be true?
(A) Price must be less than average total cost in the short run, and firms will exit the market in the long run.
(B) Price must be less than average total cost in the short run, and firms will earn normal profit in the long run.
(C) Price must equal average total cost in the short run, and firms will enter the market in the long run.
(D) Price must be greater than average total cost in the short run, and firms will exit the market in the long run.
Price must be greater than average total cost in the short run, and firms will earn normal profit in the long
(E)
run.
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48. Downtown Tech Company and Uptown Tech Company compete in the gaming console market. Downtown Tech
Company is deciding whether to charge a high price or a low price for its product. Uptown Tech Company is
deciding whether to invest in research and development or advertising. Each company’s profit depends on the
actions taken by the other firm, which are listed in the payoff matrix provided. The first entry in the matrix is
Downtown Tech Company’s profit, and the second is Uptown Tech Company’s profit. Each firm independently and
simultaneously selects an action. Each firm knows all of the information about the payoffs associated with the
strategies each firm can choose.
Uptown Tech Company

Research and Development Advertising
High Price
Downtown Tech Company
Low Price
The Nash equilibrium to this game, if one exists, is which of the following?
(A) High Price, Research and Development
(B) Low Price, Advertising
(C) High Price, Advertising
(D) Low Price, Research and Development
(E) None of the strategy pairs represents a Nash equilibrium.
49. E Soda and R Soda are the only two firms in the soft-drink industry. The companies cannot cooperate. Each firm
can follow a high-price strategy or a low-price strategy for pricing its product. In the payoff matrix below, the first
entry in each cell shows the profits to E Soda and the second entry shows the profits to R Soda.
Given the information in the payoff matrix, it can be concluded that
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(A) neither E Soda nor R Soda has a dominant strategy

(B) E Soda has a dominant strategy but R Soda does not
(C) R Soda has a dominant strategy but E Soda does not
(D) both firms will choose the high-price strategy
(E) both firms will choose the low-price strategy
50. Which of the following are characteristics of a perfectly competitive industry?
I. New firms can enter the industry easily.
II. There is no product differentiation.
III. The industry's demand curve is perfectly elastic.
IV. The supply curve of an individual firm in the industry is perfectly elastic.
(A) I and II only
(B) I and III only
(C) II and IV only
(D) I, II, and IV only
(E) I, III, and IV only
51. A typical firm in a perfectly competitive constant-cost industry is operating with an economic loss in the short run.
When the industry returns to long-run equilibrium, what will happen to the number of firms in the industry, the
market price, and the typical firm’s quantity?
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Number of Firms Market Price Firm’s Quantity

(A)
Decrease Increase Increase

(B)
Decrease Decrease Increase

(C)
Decrease Increase Decrease

(D)
Increase Increase Decrease

(E)
Increase Decrease Decrease
52. Which of the following can give a firm market power?

(A) Having access to common information
(B) Producing a standardized or homogeneous product
(C) Lacking barriers to entry or exit
(D) Having a large number of competitors in the market
(E) Having economies of scale in production over the range of market output
53. Assume that olive oil is produced in a constant- cost, perfectly competitive industry, which is currently in long-run
equilibrium. If the current price of olive oil is $5 per quart and the demand for olive oil increases, then the price of
olive oil will change in which of the following ways in the short run and long run?
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Short Run Long Run

(A)
Be more than $5 Be more than $5
Short Run Long Run

(B)
Be more than $5 Be equal to $5
Short Run Long Run

(C)
Be equal to $5 Be equal to $5
Short Run Long Run

(D)
Be less than $5 Be less than $5
Short Run Long Run

(E)
Be less than $5 Be equal to $5
54. In the absence of barriers to entry, a typical firm is currently in long-run equilibrium. Assume there is an increase in
the market demand for the good that the firm is producing. Which of the following will happen in the long run?
(A) New firms will enter the market.
(B) The market supply will decrease, but the quantity supplied will increase.
(C) The firm will earn positive economic profit.
(D) The firm’s price will be greater than its average revenue.
(E) The firm will continue to produce the same quantity of output.
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55.
Evergreen and Nature View are bidding for a landscaping contract. The payoff matrix above shows what each
firm’s total weekly profits from all its operations will be for each combination of bids. The first entry in each cell
shows Evergreen’s profit, and the second entry in each cell shows Nature View’s profit. A Nash equilibrium results
under which of the following conditions?
(A) When Evergreen bids low, no matter what Nature View’s bid is
(B) When both firms bid high and when both firms bid low
(C) When Evergreen bids high and Nature View bids low
(D) When both firms bid low
(E) When both firms bid high
Question refer to the table below.
The two firms in an industry are deciding whether to advertise. The profit to each firm depends on the other firm’s
decision. The first entries in the matrix below indicate the profit earned, in millions of dollars, by Firm A; and the second
entries indicate the profits earned, in millions of dollars, by Firm B.
56. The combination where Firm A advertises and Firm B does not advertise is Nash equilibrium because
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(A) it is best for each firm given what the other firm has chosen
(B) the total industry profits are maximized
(C) Firm A has an incentive to change its strategy and chooses not to advertise
(D) It is the best outcome for Firm B regardless of what firm A does
(E) advertising is always the best strategy for Firm A
57. Based on the payoff matrix, which of the following is correct?

(A) Firm A always gets a smaller share of the industry profits.
(B) Firm A’s dominant strategy is to advertise.
(C) Firm B’s dominant strategy is not to advertise.
(D) The dominant strategy for both firms is not to advertise.
(E) Neither firm has a dominant strategy.
58. One difference between oligopolies and monopolistically competitive markets is that
(A) there is no deadweight loss in monopolistically competitive markets, but there is in oligopolies
(B) the products sold in monopolistically competitive markets are identical
(C) oligopolies have fewer barriers to entry
(D) firms maximize profits in monopolistically competitive markets but not in oligopolies
(E) there are fewer firms in oligopolistic markets than in monopolistically competitive ones
The following questions refer to the monopoly graph below, where MC = marginal cost, ATC = average total cost,
D = demand, and MR = marginal revenue.
59. If the monopolist could engage in perfect price discrimination, the monopolist’s total output and the price charged
for the last unit of output sold would be
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(A) Q1 and P1
(B) Q1 and P2
(C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2
60. The profit-maximizing combination of output and price for a single-price monopoly is
(A) Q1 and P1
(B) Q1 and P2
(C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2
61.
The graph above shows the cost curves for May’s Fruit Farm, where is marginal cost, is average total
cost, and is average variable cost. May’s short-run supply curve includes which of the following points?
(A)
(B)
(C)
(D)
(E)
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The following questions are based on the following matrix.
The payoff matrix below gives the profits associated with the strategic choices of two firms in an oligopolistic industry.
The first entry in each cell is the profit to Firm A and the second to Firm B.
62. If the two firms collude, Firm A’s and Firm B’s profits would be which of the following?
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Firm A Firm B
(A)
$150 $ 50
Firm A Firm B
(B)
$100 $100
Firm A Firm B
(C)
$100 $150
Firm A Firm B
(D)
$ 50 $100
Firm A Firm B
(E)
$ 50 $ 50
63. If each firm simultaneously chooses its pricing strategy without collusion, Firm A’s and Firm B’s profits would be
which of the following?
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Firm A’s Profit Firm B’s Profit

(A)
$150 $ 50

(B)
$100 $100

(C)
$100 $150

(D)
$ 50 $100

(E)
$ 50 $ 50
64. Which of the following is true for a perfectly competitive firm in long-run equilibrium?
(A) It earns positive economic profit.
(B) It is allocatively efficient.
(C) It experiences economic losses.
(D) It is productively inefficient.
(E) It maximizes revenues.
65. If there are many firms in an industry and each firm’s product is indistinguishable from the products of all other
firms, the individual firm’s demand curve will be
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(A) upward sloping and different for each firm

(B) downward sloping and different for each firm
(C) downward sloping and identical for every firm
(D) horizontal and different for each firm
(E) horizontal and identical for every firm
66. Which of the following is true of a firm in a perfectly competitive industry?

(A) It faces a perfectly elastic demand curve.
(B) It faces a downward-sloping demand curve.
(C) It will increase its total revenue if it increases the selling price of its product.
(D) Its cost could be greatly reduced if it did not have to advertise its product.
(E) It sets the price of its product at the level at which profits are maximized or losses are minimized.
Question is based on the following graph, which shows a firm’s marginal cost (MC), average total cost (ATC), and
average variable cost (AVC).
67. In the short run, the firm will

(A) shut down if the price falls below P3
(B) continue to produce as long as the price is greater than P1
(C) continue to produce as long as the price is greater than P2
(D) earn economic profits as long as the price is greater than P2
(E) cover its fixed cost as long as the price is less than P3
68. The firm’s short-run supply curve is which of the following?
Test Booklet
(A) The AVC curve above P1

(B) The AVC curve above P2
(C) The ATC curve above P3
(D) The MC curve above P2
(E) The MC curve above P3
69. Assume that a profit-maximizing, perfectly competitive firm has economic losses in the short run. If the firm
continues to produce and sell its goods, then which of the following must be true?
(A) The firm is covering all of its fixed and variable costs of production.
(B) The firm is covering all of its fixed costs but not all of its variable costs of production.
(C) The firm is covering all of its variable costs but not all of its fixed costs of production.
(D) The firm is covering all of its implicit costs but not all of its explicit costs.
(E) The firm must have raised the price of its goods in order to minimize its losses.
70. Suppose that price in a perfectly competitive industry decreases and it is now below minimum average total cost but
remains above minimum average variable cost. Which of the following will occur in the short run?
(A) New firms will enter the industry.
(B) Firms will increase output so that marginal revenue equals the new price.
(C) Firms will produce the output at which average total cost is at a minimum.
(D) Firms will produce the output at which marginal cost equals the new price.
(E) Firms will not produce at all, since they will be unable to cover all their costs.
71. A perfectly competitive firm is producing units of output and sells the product for per unit. At this level of
output the average total cost is , the average variable cost is and the marginal cost is . What should this
firm do to maximize short-run profits?
(A) Increase output until price equals average total cost.
(B) Increase output until price equals marginal cost.
(C) Leave output unchanged because price is greater than average total cost.
(D) Decrease output until price is equal to marginal cost.
(E) Decrease output until price is equal to average total cost.
72. Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost
equals average total cost at $15, and marginal revenue equals marginal cost at $12. On the basis of this information,
the firm should
(A) close down in the short run
(B) operate in the short run, even though it will sustain a loss
(C) operate in the short run, because it will make an economic profit of $3 per unit
(D) operate in the long run, because it will make an economic profit of $3 per unit
(E) operate in the short run, but decrease output to decrease its cost
Test Booklet
The following problems refer to the graph below for a representative firm in a perfectly competitive, constant-cost
industry, which shows the firm’s marginal cost (MC), average total cost (ATC), and average variable cost (AVC).
73. In the short run, the firm will realize an economic loss but will continue to produce if the price is
(A) below P1
(B) between P1 and P2
(C) below P2
(D) between P2 and P3
(E) between P3 and P4
74. When a perfectly competitive firm sells additional units of output, its total revenue will
(A) remain constant
(B) increase rapidly at first, then decline
(C) increase at a decreasing rate
(D) increasing at an increasing rate
(E) increasing at a constant rate
75. A single-price monopolist’s marginal revenue is

(A) equal to its price
(B) less than its price
(C) greater than its price
(D) negative when it maximizes revenues
(E) zero when it maximizes profit
Test Booklet
76. In which of the following market structures do firms recognize their mutual interdependence?
(A) Oligopoly
(B) Monopoly
(C) Perfect competition
(D) Unregulated natural monopoly
(E) Monopsony
77. Which of the following is a characteristic of firms in a perfectly competitive industry?

(A) Engaging in collusive behavior
(B) Facing significant barriers to entry
(C) Setting the market price
(D) Producing identical products
(E) Earning positive long-run economic profit
78. If SteveR Incorporated is a monopolistic producer of diamonds, the firm’s demand curve is downward sloping
because
(A) the number of diamonds SteveR Incorporated offers for sale affects the price of diamonds
(B) marginal revenue is negative throughout the range of the demand curve
(C) marginal revenue is positive throughout the range of the demand curve
(D) the diamond industry consists of a few firms selling similar diamonds
(E) the demand for diamonds is inelastic
79. If the four largest firms in a market produce 88 percent of total industry output, the market is
(A) perfectly competitive
(B) a pure monopoly
(C) a natural monopoly
(D) an oligopoly
(E) a monopsony
80. One characteristic of perfectly competitive markets is that individual firms

(A) engage in product differentiation
(B) are free to enter or exit an industry in the long run
(C) earn positive economic profits in the long run
(D) advertise to increase market share
(E) face a downward-sloping demand curve
81. The reason that firms in perfect competition earn zero economic profit in the long run is that
Test Booklet
(A) firms are small

(B) there are a large number of sellers
(C) firms cannot advertise
(D) there are no barriers to entry or exit
(E) the commodities produced are relatively inexpensive
82. Which of the following will most likely lead to zero economic profits?
(A) Price floors
(B) Price discrimination
(C) External costs
(D) Free entry and exit of firms
(E) External benefits
83. The following table shows the profits associated with the pricing strategies of two oligopolistic firms, Agronomia
and Farmingdale. Each firm has two possible strategies: to charge a low price or a high price. The first entry in each
cell shows the profits to Agronomia and the second the profits to Farmingdale.
If the two firms do not cooperate, as a result of the firms’ pricing decisions the profits of each firm will be which of
the following?
Test Booklet
Agronomia's Profit Farmingdale's Profit

(A)
$50 $100

(B)
$150 $150

(C)
$300 $50

(D)
$100 $100

(E)
$300 $300
84. The use of game theory to explain strategic behavior among firms is most associated with which of the following
market structures?
(C) Oligopoly
(D) Monopoly
(E) Monopsony
85. Game theory is a useful model to explain the behavior of firms in a market when the firms are
Test Booklet
(A) independent of one another

(B) price takers
(C) regulated by government
(D) altruistic
(E) interdependent
86. Game theory is used to explain

(A) why firms price discriminate
(B) how monopolies evolve into oligopolies
(C) strategic behavior of firms in oligopoly
(D) profit maximization in monopoly
(E) price leadership of monopolistic competition
87. Game theory is most useful in describing outcomes in markets where

(A) firms are price takers
(B) there is only one producer
(C) there are many small producers
(D) products are identical for all firms
(E) there are interdependent firms
88. Game theory is most commonly used for analyzing the pricing behavior of firms in which market structure?
(C) Oligopoly
(D) Monopoly
(E) Monopsony
89. Which of the following situations best fits with the description of a firm in a perfectly competitive market?
GaryNote constantly offers discounts to steal customers from EricNote, which retaliates by offering price
(A)
cuts.
GaryNote has many competitors in the market, and each firm differentiates its product to gain customer
(B)
loyalty.
GaryNote can hire as many workers as it wants at the market wage, but it must decrease its price to sell more
(C)
output.
GaryNote sets its own price for its output, but because of market competition, it earns zero economic profit in
(D)
the long run.
GaryNote can sell as many units of output as it wants at the market price but will lose all its customers if it
(E)
charges a higher price.
Test Booklet
The following questions refer to the diagram below, which shows the cost and revenue conditions of a monopolist.
90. If the monopolist chooses to maximize total revenue rather than total profit, it will choose which combination of
price and output?
Test Booklet
Price Output
(A)
P1 Q5
Price Output
(B)
P2 Q4
Price Output
(C)
P3 Q3
Price Output
(D)
P4 Q4
Price Output
(E)
P5 Q5
91.
The diagram above shows a perfectly competitive firm's short-run cost curves. If the price of the output increases
from $8 to $10, the profit-maximizing firm will
Test Booklet
(A) continue producing 15 units because average total cost is a minimum

(B) continue producing 15 units because average total cost is equal to marginal cost
(C) increase output to 20 units because this is the output at which price equals average total cost
(D) increase output to 18 units because this is the output at which price equals marginal cost
(E) decrease output to 10 units because this is the output at which average variable cost is at a minimum
92. A well-known fast-food franchise substantially increases the price of its hamburgers, and loses only some of its
customers. Which of the following best explains why the franchise has not lost all of its customers
(A) Its hamburgers are a perfect substitute for other types of fast food.
(B) Its hamburgers are differentiated.
(C) The demand for its hamburgers is perfectly elastic.
(D) The other competitive fast-food restaurants decrease the price for their hamburgers.
(E) The barriers to entry are very low for entrepreneurs trying to enter the fast-food business.
93. Which of the following best describes a perfectly competitive market?

(A) Many small firms producing differentiated products and facing significant barriers to entry
(B) Many small firms producing a homogeneous product and facing significant barriers to entry
(C) Many small firms producing a homogeneous product and facing no significant barriers to entry
(D) A single large firm producing a unique product and facing significant barriers to entry
(E) A few large firms producing a differentiated product and facing no significant barriers to entry
94.
Quantity Price ($) Total Cost ($)
1 10 11
2 8 14
3 7 18
4 5 25
5 3 34
The table provided shows price and cost data for Howell’s Toy Hoops, a typical profit-maximizing firm that sells its
toys in a monopolistically competitive market. At the profit-maximizing quantity, the economic profit for Howell’s
Toy Hoops is
(A) -$19
(B) -$5
(C) -$1
(D) $2
(E) $3
Test Booklet
95.
Which of the following segments of the marginal cost curve lies entirely on the firm’s short-run supply curve?
(A) TUV
(B) STU
(C) RSTU
(D) RSTUV
(E) RS
96.
The graph above shows the total revenue and total cost curves for a firm in which type of market structure and what
is the profit-maximizing quantity?
Test Booklet
Market Structure Quantity

(A)
Monopoly Q2
(B)
Monopoly Q3

(C)
Perfect Competition Q1

(D)

(E)
Test Booklet
97.
In the diagram above, the deadweight loss from a profit-maximizing monopolist is represented by area
(A) FGK
(B) FHI
(C) IJK
(D) GHIK
(E) 0HIQ
The following questions are based on the graph below, which shows the cost and revenue curves of a monopoly
firm.
98. The economic profit of the profit-maximizing monopolist is given by the area
Test Booklet
(A) RSJI
(B) R0Q1I
(C) RULI
(D) RVNI
(E) U0Q4M
The following questions refer to the graph of a profit- maximizing firm below.
99. The firm’s economic profit is equal to

(A) area 0P3 JQ1
(B) area 0P2 KQ1
(C) area P2 P3 JK
(D) area P1 P3 JL
(E) zero
100. The firm’s total revenue is equal to

(A) area P1P2KL
(B) area P1P3JL
(C) area 0P3JQ1
(D) area 0P2KQ1
(E) area JLM

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AP MICROECONOMICS Test Booklet

Chapter 4 market structure

3. At market price $6, the profit-maximizing rate of output will result in

Chapter 4 market structure

(A) economic profits

7. A monopolistically competitive firm advertises in order to

8. In monopolistic competition, a goal of advertising is to

Chapter 4 market structure

(A) reduce a firm’s short-run average total cost

Chapter 4 market structure

Chapter 4 market structure

The question refers to the following diagram of a natural monopolist.

Chapter 4 market structure

14. The firm’s profit-maximizing output in the short run is

Chapter 4 market structure

17. Which of the following is a source of monopoly power?

Chapter 4 market structure

Chapter 4 market structure

Output Fixed Cost

Output Fixed Cost

Output Fixed Cost

Output Fixed Cost

Output Fixed Cost

Chapter 4 market structure

25. Which of the following is true for a price-discriminating firm?

26. A cartel is difficult to maintain for which of the following reasons?

Chapter 4 market structure

Chapter 4 market structure

Industry's Demand Curve Firm's Demand Curve

Industry's Demand Curve Firm's Demand Curve

Industry's Demand Curve Firm's Demand Curve

Industry's Demand Curve Firm's Demand Curve

Industry's Demand Curve Firm's Demand Curve

Chapter 4 market structure

(A) The price of the product will increase.

Assume that the market is a profit-maximizing monopoly.

Chapter 4 market structure

40. If a firm engages in perfect price discrimination, it charges

Chapter 4 market structure

Demand for XYZ's Corn XYZ's Labor Demand

Demand for XYZ's Corn XYZ's Labor Demand

Demand for XYZ's Corn XYZ's Labor Demand

Demand for XYZ's Corn XYZ's Labor Demand

Demand for XYZ's Corn XYZ's Labor Demand

Chapter 4 market structure

42. At the price 0A, economic profits are

Chapter 4 market structure

Chapter 4 market structure

(A) Neither Alpha nor Beta has a dominant strategy.

45. A player’s dominant strategy is

Chapter 4 market structure

Uptown Tech Company

Given the information in the payoff matrix, it can be concluded that

Chapter 4 market structure

(A) neither E Soda nor R Soda has a dominant strategy

50. Which of the following are characteristics of a perfectly competitive industry?

I. New firms can enter the industry easily.

II. There is no product differentiation.

III. The industry's demand curve is perfectly elastic.

Chapter 4 market structure

Number of Firms Market Price Firm’s Quantity

Number of Firms Market Price Firm’s Quantity

Number of Firms Market Price Firm’s Quantity