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Unit 3

3.9 MC Answers and Review

6 min read•december 12, 2021

AP Microeconomics 🤑

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Answers and Review for Multiple Choice Practice on Production, Cost, and the Perfect Competition Model

⛔STOP ⛔ Before you look at the answers, make sure you gave this practice quiz a try so you can assess your understanding of the concepts covered in Unit 3. Click here for the practice questions: AP Micro Unit 3 Multiple Choice Questions.

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Facts about the test: The AP Microeconomics exam has 70 multiple choice questions and you will be given 1 hour to complete the section. That means it should take you around 8 minutes to complete 10 questions.

*The following questions were not written by College Board and, although they cover information outlined in the AP Microeconomics Course and Exam Description, the formatting on the exam may be different.

1. All of the following are examples of fixed costs EXCEPT

A. CEO contracted salary

B. Insurance

C. Raw materials

D. Rent

Explanation: Fixed costs do not change regardless of whether or not the business produces or not. Fixed cost are the same month to month and must be paid!

📄 Read Unit 3.2 Short-Run Production Costs

2. What are the characteristics of total product (TP) and marginal product (MP) during diminishing marginal returns?

A. TP is increasing, MP is decreasing

B. TP is decreasing and MP is increasing

C. TP is stays the same, MP is increasing.

D. TP is decreasing and MP stays the same

Explanation: This the second stage in the production graph (Outputs and inputs). This is the stage where TP will reach its maximum and MP will descend to 0.

📄 Read Unit 3.1: The Production Function

3. The long-run in microeconomics refers to

A. a concept that is too far out in the distant future that it should not be considered.

B. a period of time when the wages are "sticky" and will not change.

C. a period of time around three months.

D. a period when all resources/factors are variable and the market can react.

Explanation: The long-run is a period of time that is long enough that the market can react and all costs are variable and none are fixed.

📄 Read Unit 3.3: Long-Run Production Costs

4. Why do economies of scale occur?

A. Total production is decreasing at the same time.

B. Because of the law of diminishing marginal utility.

C. People who produce more will use specialization and mass production techniques.

D. The cost of production per unit increases with mass production techniques.

Explanation: Increasing production means owners will start buying in bulk and be able to afford more efficient mass production capital which will bring down the per unit cost of the product to a point.

📄 Read Unit 3.4: Types of Profit

5. The long run average total cost curve looks like

A. the short run average total cost curve

B. a marginal cost curve.

C. the demand curve.

D. a perfectly elastic supply curve.

Explanation: The upward pointing semi circle of the LRATC is very similar looking to the short-run ATC. You can say the LRATC is a collection of SRATCs.

📄 Read Unit 3.3: Long-Run Production Costs

6. Why is accounting profit different from economic profit?

A. Accounting profit does not include implicit costs.

B. Economic profit will never equal zero.

C. Accounting profit does not include explicit costs.

D. Economic profit does not include opportunity cost.

Explanation: Economic profit= Total Revenue- (implicit and explicit costs). Accounting profit =Total Revenue- explicit costs. Since economic profit includes opportunity costs, zero economic profit usually means there is still an accounting profit being made (AKA People are making take-home money).

📄 Read Unit 3.4: Types of Profit

7. What is the profit maximizing rule?

A. MR=MC

B. MC=Min AVC

C. MC=P

D. MC=Min ATC

Explanation: The quantity of units produced at the spot where MC intersects with the MR curve may not be the place with the largest revenue but it will yield the greatest amount of profit.

📄 Read Unit 3.5: Profit Maximization

8. All of the following are characteristics of perfect competition EXCEPT

A. Low barriers to entry

B. Price makers

C. Many small firms

D. Identical products

Explanation: Because firms are dependent on the market setting a price, the firms are PRICE TAKERS. The market has many, many sellers, identical products, and has low barriers to enter and exit the market.

📄 Read Unit 3.7: Perfect Competition

9. The demand curve for the individual firm in a perfectly competitive market is

A. unable to be determined with this information.

B. perfectly elastic.

C. perfectly inelastic.

D. elastic.

Explanation: In perfect competition, the demand curve for the individual firm is perfectly elastic because the price is set by the market. Thus, quantity and individual costs will not change the price.

📄 Read Unit 3.7: Perfect Competition

10. If the average total cost per unit of product X is $5 at 5 units and the total revenue at 5 units is $50, what is the profit made per unit?

A. $0 profit

B. $5 profit

C. $10 profit

D. $15 profit

Explanation: This gives us the ATC at $5. ATC times Q equals TC. TC is $5 times 5 = $25. Total revenue is $50. Profit= TR ($50)-TC (25). Total profit is $25, BUT this is asking for PER Unit! So $25 (total profit)/ 5(Q)= $5 profit per unit.

📄 Read Unit 3.5: Profit Maximization

11. Which rule is associated with price dipping below AVC in a perfectly competitive system.

A. shut down rule

B. profit maximization rule

C. loss minimization rule

D. Law of diminishing marginal returns

Explanation: The shutdown rule refers to a situation where the market price drops below the AVC point. This means that the firm would lose less money if it stopped producing, because the cost of production is more than the fixed costs at non-production.

📄 Read Unit 3.7: Perfect Competition

12. Should the firm in a perfectly competitive market continue to produce if its AVC is $4, its ATC is $8, and its AR is $5? Is the firm making a loss or a profit?

A. Yes, loss.

B. Yes, profit.

C. No, loss.

D. Unable to determine with the given information.

Explanation: In a perfectly competitive market, AR=MR=D=P. So $5 AR = $5 P. $5> $4 AVC, so the firm should continue to produce. However, the ATC is $8 which means at $5P the firm is losing $3 with every unit produced. Thus, it is operating at a loss.

📄 Read Unit 3.7: Perfect Competition

13. The firm's marginal cost curve about the AVC in a perfectly competitive market structure behaves like a

A. long-run aggregate supply curve.

B. demand curve.

C. total product curve.

D. supply curve

Explanation: Above the AVC curve, the upward sweeping MC behaves like a supply curve.

📄 Read Unit 3.7: Perfect Competition

14. The government imposes a per-unit tax on a good in a perfectly competitive market. Which of the following is most likely to happen?

A. No change will occur.

B. ATC, AVC, and MC will shift

C. ATC and AFC will shift. AVC and MC will stay the same.

D. AVC will stay the same, but MC and ATC will shift.

Explanation: Since this is a per unit tax, there is a consistent tax placed on every unit produced. This first shifts the supply curve (MC), and in turn will shift the AVC and thus the ATC.

📄 Read Unit 3.7: Perfect Competition

15. If a lump sum tax is placed on the production of a product, which of the following will happen?

A. No change will occur.

B. The MC and AVC will shift and change the ATC, but the AFC will remain the same.

C. The AFC and the ATC will increase but MC and AVC will stay the same.

D. The AFC, ATC, and MC will shift, but AVC will remain the same.

📄 Read Unit 2.8: The Effects of Government Intervention in Markets

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