AP Microeconomics Exam

SECTION I: Multiple Choice 2016

DO NOT OPEN THIS BOOKLET UNTIL YOU ARE TOLD TO DO SO.
Instructions
At a Glance
Section I of this exam contains 60 multiple-choice questions. Fill in only the circles for
Total Time numbers 1 through 60 on your answer sheet.
1 hour, 10 minutes
Number of Questions Indicate all of your answers to the multiple-choice questions on the answer sheet. No
60 credit will be given for anything written in this exam booklet, but you may use the booklet
Percent of Total Score for notes or scratch work. After you have decided which of the suggested answers is best,
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the ones you have not answered if you have time. It is not expected that everyone will
know the answers to all of the multiple-choice questions.
Your total score on the multiple-choice section is based only on the number of questions
answered correctly. Points are not deducted for incorrect answers or unanswered
questions.

Form I
Form Code 4MBP4-S

34
The inclusion of source material in this exam is not intended as an
endorsement by the College Board or ETS of the content, ideas, or
values expressed in the material. The material has been selected by
the economics faculty who serve on the AP Microeconomics
Development Committee. In their judgment, the material printed
here reflects various aspects of the course of study on which this
exam is based and is therefore appropriate to use to measure the
skills and knowledge of this course.

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 MICROECONOMICS
Section I
Time—70 minutes
60 Questions

Directions: Each of the questions or incomplete statements below is followed by five suggested answers or
completions. Select the one that is best in each case and then fill in the corresponding circle on the answer sheet.

1. Two alternative production possibility frontiers 2. If an effective rent ceiling is eliminated, which of
for apples and wheat are shown in the figures the following is most likely to occur in the rental
below. housing market?
(A) An increase in the demand for housing,
resulting in a decrease in the quantity of
housing supplied
(B) An increase in rents, resulting in an increase
in the quantity of housing supplied
(C) An increase in the demand for housing,
resulting in an increase in the quantity of
housing demanded
(D) A decrease in rents, resulting in an increase in
the quantity of housing supplied
As more wheat is produced, how will the (E) A decrease in the demand for housing,
opportunity cost of producing wheat, as resulting in an increase in the quantity of
represented in Figures 1 and 2, be affected? housing supplied
Figure 1 Figure 2
(A) Decrease Increase
(B) Increase Decrease
(C) No change Increase
(D) No change Decrease
(E) Increase No change

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3. Assume that the market for lemonade is perfectly 4. When marginal utility is falling but positive, total
competitive and currently in equilibrium. Lemons utility will
are key ingredients in lemonade. If the price of
(A) decrease at an increasing rate
lemons decreases, how will the lemonade market
(B) decrease at a decreasing rate
be affected?
(C) remain constant
(A) Supply will shift leftward, increasing the (D) increase at an increasing rate
equilibrium price and decreasing the (E) increase at a decreasing rate
equilibrium quantity of lemonade.
(B) Supply will shift rightward, increasing the 5. The reason that firms in perfect competition earn
equilibrium price and increasing the zero economic profit in the long run is that
equilibrium quantity of lemonade.
(A) firms are small
(C) Supply will shift rightward, decreasing the
(B) there are a large number of sellers
equilibrium price and increasing the
(C) firms cannot advertise
equilibrium quantity of lemonade.
(D) there are no barriers to entry or exit
(D) Demand will shift leftward, decreasing the
(E) the commodities produced are relatively
equilibrium price and decreasing the
inexpensive
equilibrium quantity of lemonade.
(E) Demand will shift rightward, increasing the
6. If the output of a firm doubles when the firm
equilibrium price and increasing the
doubles all of its inputs, the firm must be
equilibrium quantity of lemonade.
experiencing
(A) economies of scale
(B) increasing returns to scale
(C) constant returns to scale
(D) decreasing returns to scale
(E) diseconomies of scale

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 7. The graph above shows the marginal product (MP) and the
average product (AP) of labor for a firm that uses labor as the
only variable input and hires its labor in a perfectly competitive
market. At which quantity of labor does marginal cost change
from decreasing to increasing?
(A) L1
(B) L2
(C) L3
(D) L4
(E) L5

8. A contractor is employing labor and capital to 9. A single-price monopolist is currently producing in

build an office complex. At the current mix of the inelastic portion of its market demand curve. In
inputs, the marginal product of labor is 30 square order to maximize profits, the monopolist should
feet per day, and the marginal product of capital change the price and output in which of the
is 90 square feet per day. The price of labor is following ways?
$1,000 per day, and the price of capital is $3,000
Price Output
per day. To hire inputs in a cost-minimizing way,
the firm should (A) Increase Increase
(B) Increase Decrease
(A) hire more labor and less capital
(C) Increase Not change
(B) hire less labor and more capital
(D) Decrease Increase
(C) hire more labor and more capital
(E) Not change Increase
(D) hire less labor and less capital
(E) make no changes to the mix of inputs

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10. Assume that a profit-maximizing, perfectly 14. If the production of good X creates a positive
competitive firm has economic losses in the externality, then from society’s perspective, the
short run. If the firm continues to produce and industry that produces good X tends to produce
sell its goods, then which of the following must
(A) less than the socially optimal amount of
be true?
good X
(A) The firm is covering all of its fixed and (B) greater than the socially optimal amount
variable costs of production. of good X
(B) The firm is covering all of its fixed costs but (C) the socially optimal amount of good X
not all of its variable costs of production. (D) a surplus of good X, unless subsidized
(C) The firm is covering all of its variable costs (E) a shortage of good X, unless taxed
but not all of its fixed costs of production.
(D) The firm is covering all of its implicit costs 15. If the goal of government regulators of a natural
but not all of its explicit costs. monopoly is to reduce deadweight loss without
(E) The firm must have raised the price of its subsidizing the monopolist, government
goods in order to minimize its losses. regulators would set a price equal to
(A) average variable cost
11. The demand curve for a monopolistically
(B) average total cost
competitive firm is downward sloping
(C) average fixed cost
because
(D) short-run marginal cost
(A) there are a large number of firms (E) long-run marginal cost
(B) the product is produced by using scarce
resources 16. A production possibilities curve can shift inward
(C) the products produced by different firms if there is
are not identical
(A) an increase in productivity
(D) it is easy for firms to enter or exit the market
(B) an increase in unemployment
(E) the marginal cost rises as output produced
(C) an increase in the price of raw materials
increases
(D) a misallocation of resources
(E) a natural disaster
12. Which of the following is true of a perfectly
competitive firm in long-run equilibrium?
17. A country produces computers and rice. If
(A) It produces its output at minimum average resources are fully employed and there is
total cost. technological progress only in the production of
(B) It earns positive economic profits. rice, the opportunity costs of producing computers
(C) It will exit the industry. and rice will change in which of the following
(D) Its price exceeds marginal cost. ways?
(E) Its price exceeds marginal revenue.
Opportunity Cost Opportunity Cost
of Computers of Rice
13. Game theory is most commonly used for
analyzing the pricing behavior of firms in which (A) Increase Increase
market structure? (B) Increase Decrease
(C) No change Decrease
(A) Perfect competition
(D) Decrease Increase
(B) Monopolistic competition
(E) Decrease Decrease
(C) Oligopoly
(D) Monopoly
(E) Monopsony

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 Total Variable
Daily Output
Cost
0 $0
1 20
2 30
3 48
4 72
5 100

21. Based on the cost and output data in the table

above, a perfectly competitive firm will shut
18. In the graph above, S is the original supply curve, down if price falls below
and S1 is the supply curve including an excise tax.
The area representing the tax revenue to the (A) $30
government is (B) $20
(C) $18
(A) P1P3VT (D) $16
(B) P2P4RZ (E) $15
(C) P2P4XU
(D) P2UQ30 22. Shelby is an entrepreneur who has decided to
open a small advertising firm. She rents office
(E) P3VQ20 space at a cost of $25,000 per year, she has
employed an assistant at a salary of $30,000
19. Which of the following would cause the supply per year, and she incurs annual utility and office
curve for notebook computers to shift to the right? supply expenses of $20,000. Her best alternative
(A) An increase in the price of notebook is to work elsewhere and to earn a salary of
computers $50,000 per year. How much annual revenue
(B) An increase in the number of firms producing must her firm receive so that Shelby earns zero
notebook computers economic profit?
(C) An increase in the wages of workers in the (A) $50,000
notebook-computer industry (B) $75,000
(D) A decrease in the price of notebook (C) $100,000
computers (D) $125,000
(E) A decrease in the supply of notebook (E) $150,000
computers

20. A perfectly competitive market in equilibrium

is allocatively efficient and it maximizes
(A) total consumer surplus
(B) total producer surplus
(C) the sum of total consumer surplus and total
producer surplus
(D) total revenue
(E) total external benefits

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23. A firm produces 400 books and sells each book 24. For a perfectly competitive firm producing the
for $15. If the explicit cost of producing the books profit-maximizing quantity, the average total cost
is $4,500 and the implicit cost is $1,000, the is $10 and the average variable cost is $8. If the
firm’s economic profit is market price for its product is $10, which of the
following is true for the firm?
(A) $0
(B) $500 (A) It is sustaining a loss and should shut down.
(C) $1,000 (B) It is earning zero economic profit and will
(D) $1,500 remain in business.
(E) $5,000 (C) Its accounting profits exceed implicit costs.
(D) It will temporarily shut down until price rises.
(E) It is making an economic profit that will
attract other firms to the industry.

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 Questions 25-26 refer to the monopoly graph below, where
MC = marginal cost, ATC = average total cost, D = demand,
and MR = marginal revenue.

25. The profit-maximizing combination of output 26. If the monopolist could engage in perfect price
and price for a single-price monopoly is discrimination, the monopolist’s total output and
the price charged for the last unit of output sold
(A) Q1 and P1
would be
(B) Q1 and P2
(C) Q1 and P4 (A) Q1 and P1
(D) Q2 and P3 (B) Q1 and P2
(E) Q3 and P2 (C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2

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27. If a large number of unskilled workers enter the Palm Leaves Coconuts
labor market, which of the following is most
likely to occur in the labor market for unskilled Robert 8 2
workers? Frank 10 5
(A) The supply curve will shift to the right and
the wage rate will decrease. 31. The table above shows the maximum number of
(B) The supply curve will shift to the left and the palm leaves or coconuts that Robert and Frank
wage rate will increase. can pick respectively in a single day. Which of the
(C) The demand curve will shift to the right and following is true?
the wage rate will increase.
(D) The demand curve will shift to the left and (A) Robert has a comparative advantage in
the wage rate will decrease. picking coconuts.
(E) There will be a movement up along the (B) Frank has a comparative advantage in picking
demand curve and the wage rate will palm leaves.
increase. (C) Robert and Frank can both benefit from trade
with each other if 1 coconut is traded for
28. Assume that a profit-maximizing, perfectly 1 palm leaf.
competitive firm hires labor in a perfectly (D) Robert and Frank can both benefit from trade
competitive labor market. If the market with each other if 1 coconut is traded for
wage is $12 per hour and the price of the 3 palm leaves.
product is $3 per unit, the firm will (E) Robert and Frank can both benefit from trade
with each other if 1 coconut is traded for
(A) hire more workers if each worker can 5 palm leaves.
produce 3 units per hour
(B) hire another worker if the output per hour 32. Relative to a command economy, resources in a
of the additional worker exceeds 4 units market economy are more commonly allocated by
(C) hire fewer workers, since the hourly wage
exceeds the cost of producing one unit of (A) democratic elections
output (B) government planning
(D) not hire any workers, since the cost of labor (C) the price system
is greater than the price of the output (D) established traditions
(E) continue to operate in the short run but not (E) a system of checks and balances
in the long run
33. If a 10 percent increase in the price of a good
29. Antitrust policy seeks to prevent or eliminate leads to a 25 percent decrease in the quantity
which of the following practices? demanded of the good, demand is
(A) Firing of workers (A) relatively inelastic
(B) Collusion and price fixing (B) relatively elastic
(C) Pollution of rivers (C) unit elastic
(D) Monopolistic competition (D) perfectly elastic
(E) Discrimination in the labor market (E) perfectly inelastic

30. National defense is a good example of a pure 34. For an inferior good, an increase in consumer
public good because it is income will cause

(A) nonrival and nonexcludable (A) the demand curve to shift to the left
(B) nonrival and excludable (B) the demand curve to shift to the right
(C) rival and nonexcludable (C) the short-run supply curve to shift to the right
(D) rival and excludable (D) the long-run supply curve to shift to the right
(E) free and provided at zero cost (E) new firms to enter the market in the long run

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35. Which of the following will cause the demand 39. E Soda and R Soda are the only two firms in
curve for good X to shift to the right? the soft-drink industry. The companies cannot
cooperate. Each firm can follow a high-price
(A) An increase in the price of good Z,
strategy or a low-price strategy for pricing its
a complement to good X
product. In the payoff matrix below, the first entry
(B) An increase in the price of good Y,
in each cell shows the profits to E Soda and the
a substitute for good X
second entry shows the profits to R Soda.
(C) An increase in the consumer’s income,
if good X is an inferior good
(D) A decrease in the price of good X R Soda
(E) An increase in the supply of good X
Low Price High Price
36. One reason consumers typically increase the
quantity of a good they purchase when the price Low Price $25, $25 $90, $15
of the good decreases is that E Soda
(A) the marginal utility of the good increases High Price $15, $90 $75, $75
(B) consumers’ purchasing power increases
(C) consumers increase their purchases of
substitute items Given the information in the payoff matrix, it can
(D) consumers increase their purchases of be concluded that
complementary items (A) neither E Soda nor R Soda has a dominant
(E) the demand for the good increases strategy
(B) E Soda has a dominant strategy but R Soda
37. Which of the following is true of a does not
monopolistically competitive firm in long-run (C) R Soda has a dominant strategy but E Soda
equilibrium? does not
(A) The firm produces the allocatively efficient (D) both firms will choose the high-price strategy
level of output. (E) both firms will choose the low-price strategy
(B) The firm is allocatively inefficient, because it
produces an output level at which price is 40. A firm with market power engages in price
greater than marginal cost. discrimination to
(C) The firm produces an output level that (A) earn a higher profit
minimizes average total cost. (B) increase consumer surplus
(D) The firm produces in the inelastic range of (C) decrease deadweight loss
its demand curve. (D) make its demand more elastic
(E) The firm earns positive economic profits but (E) make its demand more inelastic
zero accounting profits.
41. Reff Corp is a firm with total revenue of $1,000,
38. Assume that a firm uses labor and capital to marginal cost of $5, and average variable cost
produce a product. The firm hires labor at a wage of $4. Both the output and the input markets are
rate of $4 per unit and rents capital at $5 per unit. perfectly competitive, and Reff Corp is currently
At its current output level, the marginal physical in long-run equilibrium. Reff Corp’s output and
products of labor and capital are 20 and 30 units, total fixed cost of production must be equal to
respectively. To minimize its cost of production which of the following?
without changing the level of output, the firm
should Output Fixed Cost

(A) make no changes (A) 250 $ 800

(B) hire more labor and rent more capital (B) 250 $ 400
(C) hire less labor and rent more capital (C) 200 $ 200
(D) hire more labor and rent less capital (D) 200 $ 400
(E) hire less labor and rent less capital (E) 200 $ 800

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 Quantity of Marginal Marginal Revenue 45. The following table shows Kent’s annual income
Labor Product Product over two years and the income taxes paid in
each year.
0 --- ---
1 20 $40 Annual Income
Income Taxes
2 14 28
Year 1 $100,000 $20,000
3 12 24
Year 2 $120,000 $30,000
4 8 16
5 6 12 With no changes in the marginal tax-rate
schedule, which of the following is true about the
6 4 8
tax rates?
42. Based on the table for a perfectly competitive firm (A) The marginal tax rate was equal to the
above, if the wage rate for labor is $15, how many average tax rate for both incomes.
units of labor should the firm hire? (B) The marginal tax rate on the last $20,000
earned was greater than the marginal tax
(A) 2 rate at $100,000 income, but the average tax
(B) 3 rate decreased with the increase in income.
(C) 4 (C) The average tax rate when Kent earned
(D) 5 $120,000 was less than the marginal tax rate
(E) 6 on the last $20,000 he earned.
(D) The amount paid in income tax increased as
43. Assume labor and capital are substitute inputs. A income increased, so the tax is proportional.
manufacturer will employ more labor if (E) The amount paid in income tax increased as
(A) the price of labor increases income increased, so the tax is regressive.
(B) the marginal product of labor decreases
(C) the price of capital increases 46. Dana and Robin produce smoothies and pizza.
(D) the marginal product of capital increases In one hour Dana can make 20 smoothies or
(E) the product’s demand decreases 10 pizzas. In one hour Robin can make
18 smoothies or 6 pizzas. Which of the
44. Assume that the firms in an industry pollute a following statements is true?
river. If there is no government intervention, the (A) Robin has an absolute advantage in making
firms will smoothies and a comparative advantage in
(A) produce more output than is socially making pizzas.
efficient (B) Robin has both an absolute advantage and a
(B) pay production costs that are higher than comparative advantage in making pizzas.
actual social costs (C) Dana has a comparative advantage in making
(C) charge a lower price than is necessary to both smoothies and pizzas.
maximize profit (D) Dana has a comparative advantage in making
(D) charge a higher price to pay for the pollution pizzas, and Robin has a comparative
(E) increase production to achieve allocative advantage in making smoothies.
efficiency (E) Dana has a comparative advantage in making
smoothies, and Robin has a comparative
advantage in making pizzas.

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47. In which of the following cases would a firm’s 49. Consumer surplus in a market for a good exists
total revenue increase? because
(A) Price increases and demand is elastic. (A) binding price floors encourage producers
(B) Price decreases and supply is inelastic. to increase the supply of the good
(C) Price decreases and demand is elastic. (B) some consumers would be willing to pay
(D) Price decreases and supply is elastic. more than the equilibrium price of the good
(E) Price decreases and demand is inelastic. (C) when the price of the good decreases, most
consumers increase their demand for the
good
(D) producers do not have market power to set
their own price
(E) some producers charge different prices
for the good in different markets

50. Assume Pat spends all of her allowance to

purchase 4 apples and 4 candy bars. Pat’s
marginal utility of the fourth apple is 20 utils,
and her marginal utility of the fourth candy bar
is 40 utils. If an apple costs $1.00 and a candy
bar $0.50, to maximize utility Pat should
(A) purchase more apples and more candy bars
(B) maintain the current purchase of 4 apples
48. In the diagram above, if there is a price ceiling set and 4 candy bars
at P1, consumer surplus will be represented by the (C) purchase more apples and fewer candy bars
area (D) purchase fewer apples and more candy bars
(E) purchase fewer apples and fewer candy bars
(A) ABC
(B) P2 BP0 51. A firm is producing 100 units of output at a total
(C) P3 BP2 cost of $400. The firm’s average variable cost is
(D) P3 ACP1 $3 per unit. What is the firm’s total fixed cost?
(E) P3BCP1 (A) $1
(B) $50
(C) $100
(D) $300
(E) $400

52. A profit-maximizing firm will shut down in the

short run any time the firm’s total revenue is less
than its
(A) total cost
(B) fixed cost
(C) total variable cost
(D) explicit cost
(E) implicit cost

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 Quantity of Output Total Variable Cost Nature View
(units)
Bids High Bids Low
0 $0
1 $40
Bids
$600, $300 $520, $400
2 $50 High
3 $65 Evergreen
4 $90
Bids
$720, $100 $500, $200
53. Assume that the fixed cost is $50. Based on the Low
cost and output data in the table above, what is the
marginal cost when the firm increases its output
from three to four units and the average total cost 54. Evergreen and Nature View are bidding for
of producing 4 units? a landscaping contract. The payoff matrix above
Marginal Cost Average Total Cost shows what each firm’s total weekly profits from
all its operations will be for each combination
(A) $35 $40 of bids. The first entry in each cell shows
(B) $35 $35 Evergreen’s profit, and the second entry in each
(C) $25 $35 cell shows Nature View’s profit. A Nash
(D) $25 $25 equilibrium results under which of the following
(E) $10 $25 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

55. Suppose that the demand for soft drinks is price

elastic and the supply is price inelastic. If the
government imposes a sales tax on soft drinks,
which of the following will occur in the short run?
(A) The tax burden will fall equally on both
consumers and producers.
(B) The tax burden will fall more on producers.
(C) The tax burden will fall more on consumers.
(D) The percentage increase in the price of soft
drinks will be greater than the percentage
increase in the quantity demanded.
(E) The percentage decrease in total revenue will
be greater than the percentage decrease in
the quantity demanded.

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 56. If both supply and demand for wheat increase, the equilibrium
price and quantity of wheat will most likely change in which
of the following ways?
Price Quantity
(A) Decrease Decrease
(B) Decrease Increase
(C) Indeterminate Increase
(D) Increase Decrease
(E) Increase Indeterminate

57. The last worker currently employed by a firm

has a marginal product of 3 units per hour and is
paid $20 per hour. Assuming that both the
labor market and product market are perfectly
competitive and that the product’s price is $5 per
unit, the firm should do which of the following?
(A) Decrease wages
(B) Increase wages
(C) Employ more workers
(D) Employ fewer workers
(E) Increase the product’s price

58. Hope Hospital is a monopsonistic employer of

nurses. The marginal revenue product of nursing
services, the marginal factor (resource) cost of
nursing services, and the market supply curve of
nursing services are depicted in the figure above
by MRP, MFC, and S, respectively. What wage-
quantity combination does Hope Hospital choose
in order to maximize its profits?
(A) W1 and Q1
(B) W1 and Q3
(C) W2 and Q2
(D) W2 and Q4
(E) W3 and Q3

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 Number of Workers Total Product
1 15
2 20
3 24
4 27
5 29

59. The table above shows the short-run output for

a perfectly competitive firm. If the price of the
product is $10, what is the marginal revenue 60. Which of the following is true based on the graph
product of the third worker hired? above?
(A) $24 (A) Quantity of education in the private market
(B) $27 is more than the socially optimal quantity.
(C) $40 (B) Consumers of education could be subsidized
(D) $240 in order to achieve the socially optimal
(E) $300 quantity.
(C) Producers of education could be taxed
in order to achieve the socially optimal
quantity.
(D) Consumers of education could be taxed
in order to achieve the socially optimal
quantity.
(E) Consumption of education has a negative
externality.

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 END OF SECTION I

IF YOU FINISH BEFORE TIME IS CALLED, YOU MAY

CHECK YOUR WORK ON THIS SECTION.

DO NOT GO ON TO SECTION II UNTIL YOU ARE TOLD TO DO SO.

MAKE SURE YOU HAVE DONE THE FOLLOWING.

 PLACED YOUR AP NUMBER LABEL ON YOUR ANSWER SHEET

 WRITTEN AND GRIDDED YOUR AP NUMBER CORRECTLY ON YOUR

ANSWER SHEET

 TAKEN THE AP EXAM LABEL FROM THE FRONT OF THIS BOOKLET

AND PLACED IT ON YOUR ANSWER SHEET

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Section II: Free-Response Questions

This is the free-response section of the 2016 AP exam.

It includes cover material and other administrative instructions
to help familiarize students with the mechanics of the exam.
(Note that future exams may differ in look from the following content.)
AP Microeconomics Exam
®

SECTION II: Free Response 2016

DO NOT OPEN THIS BOOKLET UNTIL YOU ARE TOLD TO DO SO.

At a Glance
Total Time
1 hour
Number of Questions
3
Percent of Total Score
33.33%
Writing Instrument
Pen with black or dark
blue ink
Electronic Device
None allowed

Reading Period
Time
10 minutes. Use this
time to read the Instructions
questions and plan your
answers. You may begin The questions for Section II are printed in this booklet. You may use page 3 and the pages
writing your responses the questions are printed on to organize your answers and for scratch work, but you must
before the reading
period is over. write your answers on the lined pages provided for each question.

Writing Period The proctor will announce the beginning and end of the reading period. You are advised
to spend the 10-minute period reading all the questions and planning your answers. You
Time may begin writing your responses before the reading period is over.
50 minutes
Write clearly and legibly. Do not skip lines. Cross out any errors you make; crossed-out
Question 1
work will not be scored.
Suggested Time
25 minutes Manage your time carefully. You may proceed freely from one question to the next. You
Percent of Section II Score may review your responses if you finish before the end of the exam is announced.
50%

Question 2
Suggested Time
12.5 minutes
Percent of Section II Score
25%
Question 3
Suggested Time
12.5 minutes
Percent of Section II Score
25%

Form I
Form Code 4MBP4-S

34
 MICROECONOMICS
Section II
Total Time—60 minutes
Reading Period—10 minutes
Writing Period—50 minutes

Directions: You are advised to spend the first 10 minutes reading all of the questions and planning your
answers. You will then have 50 minutes to answer all three of the following questions. You may begin
writing your responses before the reading period is over. It is suggested that you spend approximately half
your time on the first question and divide the remaining time equally between the next two questions.
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled
diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with
black or dark blue ink.

Question 1 begins on page 4.

Question 2 begins on page 10.
Question 3 begins on page 14.

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NOTES WRITTEN ON THIS PAGE WILL NOT BE SCORED.
WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

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1. Kohelis Mining is a monopoly and is currently operating at a loss.
(a) Draw a correctly labeled graph and show each of the following.
(i) The profit-maximizing quantity, labeled QM
(ii) The profit-maximizing price, labeled PM
(iii) The average total cost curve, labeled ATC
(iv) The allocatively efficient quantity, labeled QA
(b) Suppose the government grants Kohelis Mining a lump-sum subsidy such that the firm earns
zero economic profit.
(i) On your graph from part (a), shade the area of the subsidy.
(ii) Will the profit-maximizing quantity increase, decrease, or remain the same? Explain.
(c) Suppose instead the government provides Kohelis Mining a per-unit subsidy such that the firm
earns zero economic profit.
(i) Will the profit-maximizing quantity increase, decrease, or remain the same? Explain.
(ii) Will the price paid by consumers increase, decrease, or remain the same?
(d) In this market, will the lump-sum or the per-unit subsidy lead to an increase in the total consumer surplus,
or is the change indeterminate? Explain.

THIS PAGE MAY BE USED FOR TAKING NOTES AND PLANNING YOUR ANSWERS.
NOTES WRITTEN ON THIS PAGE WILL NOT BE SCORED.
WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

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ANSWER PAGE FOR QUESTION 1

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Question 1 is reprinted for your convenience.

1. Kohelis Mining is a monopoly and is currently operating at a loss.

(a) Draw a correctly labeled graph and show each of the following.
(i) The profit-maximizing quantity, labeled QM
(ii) The profit-maximizing price, labeled PM
(iii) The average total cost curve, labeled ATC
(iv) The allocatively efficient quantity, labeled QA
(b) Suppose the government grants Kohelis Mining a lump-sum subsidy such that the firm earns
zero economic profit.
(i) On your graph from part (a), shade the area of the subsidy.
(ii) Will the profit-maximizing quantity increase, decrease, or remain the same? Explain.
(c) Suppose instead the government provides Kohelis Mining a per-unit subsidy such that the firm
earns zero economic profit.
(i) Will the profit-maximizing quantity increase, decrease, or remain the same? Explain.
(ii) Will the price paid by consumers increase, decrease, or remain the same?
(d) In this market, will the lump-sum or the per-unit subsidy lead to an increase in the total consumer surplus,
or is the change indeterminate? Explain.

THIS PAGE MAY BE USED FOR TAKING NOTES AND PLANNING YOUR ANSWERS.
NOTES WRITTEN ON THIS PAGE WILL NOT BE SCORED.
WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

Unauthorized copying or reuse of

any part of this page is illegal.
GO ON TO THE NEXT PAGE.
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ADDITIONAL PAGE FOR ANSWERING QUESTION 1

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ADDITIONAL PAGE FOR ANSWERING QUESTION 1

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ADDITIONAL PAGE FOR ANSWERING QUESTION 1

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2. Kerri goes shopping for volleyballs. The table below shows the dollar value of the total benefit she receives from
buying various quantities of volleyballs.

Volleyballs Total Benefit

0 $0

1 $50

2 $95

3 $125

4 $146

5 $156

6 $160

7 $161

(a) Calculate the marginal benefit Kerri receives from buying the third volleyball.
(b) Assume the price of each volleyball is $9.
(i) Calculate Kerri’s total consumer surplus if she buys two volleyballs. Show your work.
(ii) How many volleyballs should Kerri buy to maximize her total consumer surplus from volleyballs?
Explain using marginal analysis.
(c) Assume that the market for volleyballs is perfectly competitive and that soccer balls are a substitute
for volleyballs.
(i) Draw a correctly labeled graph of the market for volleyballs, and label the equilibrium price
as P1 and the equilibrium quantity as Q1.
(ii) If the price of soccer balls decreases, show the effect on the equilibrium price and quantity of
volleyballs on your graph in part c(i).
(d) Assume instead that a 10 percent increase in income causes the demand for volleyballs to fall
by 5 percent.
(i) Calculate the income elasticity of demand for volleyballs.
(ii) Does the value of the income elasticity indicate that volleyballs are a normal good or an
inferior good? Explain.

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WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

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ANSWER PAGE FOR QUESTION 2

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ADDITIONAL PAGE FOR ANSWERING QUESTION 2

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ADDITIONAL PAGE FOR ANSWERING QUESTION 2

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3. CleanIt is a perfectly competitive, profit-maximizing trash collection firm. CleanIt hires workers
in a perfectly competitive labor market.
(a) Draw side-by-side graphs for the labor market and for CleanIt and show each of the following.
(i) The market wage, labeled WM, and the quantity of workers hired in the market, labeled LM
(ii) The marginal factor (resource) cost curve, labeled MFC
(iii) The marginal revenue product curve, labeled MRP
(iv) The wage paid by the firm, labeled WF, and the quantity of workers hired by the firm, labeled LF
(b) Assume that CleanIt is the only firm in the industry to adopt a new technology. The new technology
increases the productivity of CleanIt’s workers.
(i) In the short run, will the wage paid by CleanIt be higher than, lower than, or equal to WF? Explain.
(ii) In the short run, will the number of workers hired by CleanIt increase, decrease, or stay the same?
Explain.
(c) CleanIt uses capital in the form of trucks, which it rents for $10,000 each. The marginal product of the
last truck used is 100,000 units. If CleanIt is minimizing its costs and the marginal product of the last worker
hired is 500 units, calculate the wage. Show your work.

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WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

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ANSWER PAGE FOR QUESTION 3

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ADDITIONAL PAGE FOR ANSWERING QUESTION 3

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ADDITIONAL PAGE FOR ANSWERING QUESTION 3

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 STOP

END OF EXAM

THE FOLLOWING INSTRUCTIONS APPLY TO THE COVERS OF THE

SECTION II BOOKLET.

 MAKE SURE YOU HAVE COMPLETED THE IDENTIFICATION

INFORMATION AS REQUESTED ON THE FRONT AND BACK
COVERS OF THE SECTION II BOOKLET.

 CHECK TO SEE THAT YOUR AP NUMBER LABEL APPEARS IN

THE BOX ON THE COVER.

 MAKE SURE YOU HAVE USED THE SAME SET OF AP

NUMBER LABELS ON ALL AP EXAMS YOU HAVE TAKEN
THIS YEAR.

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