60.

If the market for this good was in equilibrium at Q2 but the socially
optimal output was Q1, the government could best remedy this —— of
resources by legislating a —— on —— of the good.
(A) underallocation, per-unit tax, consumers
(B) overallocation, per-unit subsidy, consumers
(C) underallocation, per-unit tax, producers
(D) overallocation, per-unit subsidy, producers
(E) overallocation, per-unit tax, producers

Answers and Explanations

1. D—You have to assume that Skylar evaluated the marginal benefits
and marginal costs of the second piece of cake and decided that he
should consume it.

2. A—The opportunity cost is the value of the most attractive alternative

(in this case, the babysitting wage).
 3. B—If demand increases and supply decreases, the price definitely
rises. The quantity is ambiguous and depends upon which effect is
stronger. Draw these shifting curves in the margin of your exam book.

4. B—Trading nations specialize in the good in which they have lower

opportunity costs. A nation trades this good to the other in exchange
for the good for which it does not have comparative advantage.

5. B—Public goods like police and fire protection are received by all
citizens, even if they do not pay.

6. E—The citizens privately own resources in capitalist systems.

7. D—Prices below equilibrium create shortages, but they do not last.

8. C—A rightward shift in supply would move the market to point H and
lower input prices would do just that.

9. C—If Ed < 1, a given percent increase in the price outweighs the

percent decrease in quantity demanded, thus increasing total dollars
spent on the good.

10. B—The utility maximizing rule requires that MU/P is equal for both
goods. Now the MU/P is greater for apples than for oranges. Melanie
consumes more apples and fewer oranges, which lowers MU of apples
and increases the MU of oranges.

11. A—Market equilibrium occurs where marginal private benefit equals

marginal cost to society. With a positive externality, the MSB > MPB
at the market quantity.

12. E—This is the definition of economics!

13. D—Excise taxes shift a supply curve leftward, increase price, and
decrease quantity. If Ed < 1, cigarette consumers spend more on
cigarettes.
14. D—Price floors are legal minimum prices so they are set above
equilibrium. A surplus results.

15. A—When EI > 0, it is a normal good. When EI > 1, it is a luxury good.

16. E—Restricting the supply of a raw material to paper would increase

the price of the production input and decrease the supply of paper.

17. C—Economic growth is the result of better, or more economic,

resources or more technological progress. A more productive labor
force increases the PPF for both goods.

18. B—A subsidy given to consumers acts as an increase in income.

Demand for daycare rises, raising the price of daycare.

19. A—If P = MC, the market is allocatively efficient and there is no

deadweight loss. If the monopoly P > MC, DWL emerges.

20. A—Anything that effectively lowers the price of attending the Reds
game increases CS.

21. B—Downward-sloping demand is the result of diminishing marginal

utility. This consumer’s MU is constant, so the demand curve for
bratwurst is horizontal.

22. D—Normal profits are also thought of as breakeven economic profits.

23. D—If Exy > 0, goods are substitutes.

24. E—Long-run adjustments change the production capacity of a firm.

25. A—MPL tells you how TPL is changing when more labor is hired. If
more labor is increasing TPL at a faster and faster rate, MPL is rising.

26. B—Perfectly competitive firms are price takers, so demand for each
firm’s product is horizontal: Ed = ∞.
27. A—A defining outcome of long-run equilibrium in perfect
competition.

28. D—If P > ATC, positive short-run economic profits exist. Long-run
entry expands the market.

29. B—Cartels are illegal collusive agreements to lower output, raise the
price, and maximize joint profits. Each member has an incentive to
cheat by producing a little more.

30. D—TR > TVC, so Jason does not shut down. Subtracting all costs
from TR, he is losing $10 per day.

31. A—Income and substitution effects work in opposite directions for

inferior goods. A lower price prompts a substitution effect, increasing
quantity demanded of the good. A lower price increases purchasing
power, and for an inferior good, it decreases consumption. If the
income effect outweighs the substitution effect, we can see an upward-
sloping demand curve.

32. C—This is the shutdown point.

33. B—Decreased labor demand lowers wage and employment. Lower

incomes and higher unemployment decrease real estate prices.

34. D—Barriers to entry are the key to monopoly pricing power.

35. E—Find the output where MR = MC and the price is found vertically
at the demand curve.

36. E—DWL is the area above MC and below the demand curve, between
the monopoly output and the perfectly competitive output.

37. B—Entering is a dominant strategy for both firms.

38. C—MC and AVC are inverses of MPL and APL. Because MPL = APL
at the maximum of APL, MC = AVC at the minimum of AVC.
39. C—Familiarity with cost curves identifies curve 4 as AFC. The area of
this rectangle is Q × AFC = TFC.

40. A—Quickly recognize this as MC.

41. D—The profit rectangle is the quantity multiplied by the vertical

distance between price and ATC.

42. C—With product differentiation, monopolistically competitive firms

spend money to promote their product as different from the others.

43. E—Entry of new firms takes market share from existing firms, so
demand curves begin to shift to the left.

44. A—Profits are normal and P = ATC, but unlike perfect competition, P
> minimum ATC, so the industry is not productively efficient.

45. D—Lost CS is a big reason why government keeps an eye on the

monopoly power of firms.

46. E—Colluding members of an oligopoly act as a monopolist,

restraining competition, restricting output, and increasing the price.

47. C—This is the idea of derived demand.

48. A—Monopsony lowers both wage and employment when compared to

the competitive labor market.

49. E—Like the competitive firm, the monopolist produces where MR =

MC, but P > ATC, which is most likely even further above MR = MC.

50. B—MRP = MP × P. Calculate MP by looking at the difference in TP

as one more unit of labor is hired.

51. C—Labor is hired to the point where W = MRP, so quickly find the
point in the table where MP = 10, which when multiplied by P = $2
gives you MRP = $20.

52. C—This is a main identifier of oligopoly.

53. E—Minimum wages are price floors in a labor market. A surplus
results.

54. C—This choice describes the least-cost rule for hiring inputs.

55. A—Increased labor supply lowers the wage, increases employment,

and increases demand for goods that are “tools of the trade.”

56. E—The appropriate fix to a negative externality is to tax either the

producers or the consumers of electricity.

57. D—This describes the choice that is made by employers in

competitive labor markets.

58. B—Sales taxes are typical examples of regressive taxes.

59. C—Free riders receive the benefit of a public good without

contributing to its production.

60. E—If equilibrium output exceeds the socially desirable output,

resources are overallocated to production of this good. This negative
externality can be fixed with a tax on producers or sometimes on
consumers.
 i. All else equal, how does this change in lemonade demand
affect Eli’s demand for labor? Explain.
ii. Will Eli’s employment of labor increase, decrease, or stay the
same?

3. Assume that the market for pork is perfectly competitive, but the
production of pork on hog farms generates pollution that seeps into the
ground and can pollute the local well-water supply.
(A) In a correctly labeled graph, illustrate the market for pork and
identify:
i. The market equilibrium price and quantity of pork, labeled Pmkt
and Qmkt, respectively.
ii. The socially optimal price and quantity of pork, labeled Pe and
Qe, respectively.
(B) Assuming that local residents do not enjoy having polluted
drinking water, in your graph in part (A), show each of the
following.
i. The marginal social cost curve, labeled MSC
ii. The marginal social benefit curve, labeled MSB
iii. The deadweight loss, if any, shaded completely
(C) Suppose the government grants a subsidy to pork consumers equal
to the marginal external cost of the polluted water. Will this
increase, decrease, or have no effect on the deadweight loss?
Explain.

Free-Response Grading Rubric

Note: Based on my experience, these point allocations roughly approximate
the weighting on similar questions on the AP examinations. I have also tried
to provide you with notations on where points would likely be deducted for
responses that were not acceptable enough for full credit. However, be
aware that every year the point allocations change and partial credit is
awarded differently.

Question 1 (10 points)

Part (A): 4 points
These points are graphing points.
• One point is earned for drawing a correctly labeled graph of the soybean
market with Pmkt and Qmkt. The market demand curve must be
downward sloping and the market supply curve must be upward sloping.
• One point is earned for showing a horizontal demand curve on the firm’s
graph extended from the market equilibrium price, Pmkt.
• One point is earned for identifying the firm’s profit-maximizing quantity,
Qb, at marginal cost equal to marginal revenue.
• One point is earned for showing the firm’s average total cost (ATC)
curve and marginal cost (MC) passing through the minimum point of
ATC, and P < ATC and P > AVC, at Qb.
You cannot have a downward-sloping MR curve here.

TIP 1: On graphing problems, you can lose a point for not indicating which
variables lie on each graphical axis. In this case, it would be as simple as a
$ and a Q.
TIP 2: When asked to identify equilibrium price and quantity, make it clear
to the reader that you know where these are found. The preferred way to do
this is to use dashed lines from the intersection to the axes. You should also
use the labeling given to you in the prompt. If you are told to label the
market output Qm and the firm’s output Qf, you are wise to play along.

TIP 3: Draw your graphs large enough for you to clearly identify the area of
profit/loss. If your graph is the size of a postage stamp, it becomes more
difficult for you to identify all relevant parts. It is also very tough for the
reader to find all of the points.

When completing graphs, label everything and indicate direction of

change and you will lose fewer points.

Part (B): 2 points

i. One point is earned for stating that the number of firms will decrease.
One point is earned for explaining that because of short-run losses,
firms will begin to exit the soybean market.

Part (C): 4 points

• One point is earned for drawing a correctly labeled graph of the
monopoly showing downward-sloping demand (D) and marginal revenue
(MR) curves with the MR curve below the demand curve.
• One point is earned for showing the profit-maximizing quantity, labeled
QM, where MR = MC.
• One point is earned for both showing the profit-maximizing price,
labeled PM, from the demand curve at QM, and above the average total
cost (ATC) curve.
• One point is earned for shading the correct area of economic profit.
Note: I’ve also shaded the areas of consumer surplus and deadweight loss,
which were not required in this practice problem. Because a more thorough
analysis of monopoly has been asked on recent exams, be sure that you can
identify monopoly profit, deadweight loss, and consumer surplus.
Question: So I’ve messed up the monopoly quantity; have I lost all points in
part (C)?
Answer: Again, maybe not, but the rest of your response must be consistent
with the incorrectly labeled output. In the figure below I have tried to
replicate one possible incorrectly identified output, but consistent price and
profit.
An Alternative Scoring for Part (C).
This graph shows output where demand intersects MC, not where MR =
MC. This response cannot be given the point for a correct level of output.
However, you would likely get a point for a correctly drawn monopoly
figure, a price Pm that is consistent with the Qm in this figure, and a profit
area that is also consistent with Qm and Pm.

Question 2 (5 points)

Part (A): 1 point

One point is earned for stating that Labor = 1, Lemons = 4
TIP: Quickly write down the marginal products and highlight the options
that satisfy the least-cost condition that states that the ratio of the
(MPL/MPK) must be equal to the ratio of the input prices (w/r). With the
price of labor being $6 and the price of lemons $2, find those ratios that are
3:1 and ignore all other possibilities.

Part (B): 2 points

i. One point is earned for calculating Output = 39 (12 from 1 labor and 27
from 4 lemons)
ii. One point is earned for calculating Total revenue = $1 × 39 = $39
- Total cost = $6 × 1 + $2 × 4 = $14
Economic profit = $25
If you do not show your work, you will not earn these points.
Note: If you happened to pick an incorrect combination of labor and
lemons in part (A), it may be possible to receive both points in part (B) if
you find the consistent level of output and profit.

Part (C): 2 points

• One point is earned for stating that Eli’s demand for labor will increase
and for the explanation that the increase in the price of lemonade
increases the marginal revenue product of labor (MRPL = P × MPL)
• One point is earned for stating that Eli’s employment of labor will
increase.

Question 3 (5 points)

Part (A) 1 point

One point is earned for drawing a correctly labeled supply and demand
graph with PMkt and Qmkt labeled.

Part (B) 3 points

• One point is earned for drawing the MSC curve above the MPC, or
supply curve.
• One point is earned for labeling the demand curve MSB.
• One point is earned for shading the correct area of the deadweight loss.

Part (C) 1 point

One point is earned for stating that the subsidy would increase the
deadweight loss and for the explanation that a subsidy will increase the
quantity of pork exchanged in the market. Since the market already
produces more than the socially optimal quantity of pork, a subsidy will
only worsen this over-allocation of resources.

Scoring and Interpretation

AP Microeconomics Practice Exam 1

Multiple-Choice Questions:
Number of correct answers: _____
Number of incorrect answers: _____
Number of blank answers: _____
Did you complete this part of the test in the allotted time? Yes/No

Free-Response Questions:
1. _____/10
2. _____/5
3. _____/5

Did you complete this part of the test in the allotted time? Yes/No

Calculate Your Score:

Multiple-Choice Questions:

Free-Response Questions:

Add the raw scores from the multiple-choice and free-response sections to
obtain your total raw score for the practice exam. Use the table below to
determine your grade, remembering these are rough estimates using
questions that are not actually from AP exams, so do not read too much into
this conversion from raw score to AP score.