AP Microeconomics Exam

SECTION I: Multiple Choice 2018

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 and 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,
66.67% completely fill in the corresponding circle on the answer sheet. Give only one answer to
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Use your time effectively, working as quickly as you can without losing accuracy. Do not
spend too much time on any one question. Go on to other questions and come back to
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 4OBP4-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 —1 hour and 10 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. The study of economics exists because people are 3. If a hurricane reduced the crab population, the
confronted with the basic problem of price of crabs and quantity sold would change
in which of the following ways?
(A) elasticity
(B) negative externality Price Quantity
(C) scarcity
(A) Increase Increase
(D) overabundance
(B) Increase Decrease
(E) monopoly
(C) Decrease Increase
(D) Decrease Decrease
(E) No change Decrease

4. To determine whether two goods are

Quantity of Pollution complements, one would calculate the
Reduction Total Benefit
(A) price elasticity of demand
(in tons) (in dollars)
(B) price elasticity of supply
0 0 (C) income elasticity of demand
(D) cross-price elasticity of demand
1 300 (E) input-price elasticity of supply
2 550
3 650
4 725
5 775

2. The table above shows the total benefit associated

with reducing different levels of pollution on a
small island. The cost of eliminating one ton of
pollution is $150. Which of the following is the
optimal quantity of pollution to eliminate?
(A) 5 tons
(B) 4 tons
(C) 3 tons
(D) 2 tons
(E) 1 tons

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 Questions 7-8 are based on the table below, which
shows a firm’s average variable cost and average
total cost.

Average Average
Variable Total
Output Cost Cost
1 $40 $160
2 35 95
3 40 80
4 45 75
5. The diagram above depicts the demand and supply
5 50 74
curves for good Y. The perfectly competitive
market is initially in equilibrium, but the 6 55 75
government decides to institute a price floor
program by setting the price of good Y at PF and
agrees to purchase all unsold units of good Y 7. The average fixed cost of producing four units of
output is equal to
from the producers. The cost of this program to
the government is represented by which of the (A) $120
following areas? (B) $95
(C) $75
(A) 0PF JQ2 (D) $50
(B) 0PF KQ3 (E) $30
(C) GIKH 8. In the short run, the lowest price at which the firm
(D) Q1I JQ2 will continue to produce is
(E) Q1IKQ3 (A) $80
(B) $74
6. For a normal good, the income effect of a price (C) $50
change refers to the change in the consumption of (D) $35
the good that occurs because of the change in (E) $30

(A) consumers’ purchasing power

(B) the demand for a substitute good
(C) the supply of the good
(D) relative price
(E) marginal utility

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9. Bruce is a talented writer and graphic artist who 14. Which of the following would cause the wage for
enjoys both types of work equally. Instead of computer programmers to increase?
earning $45,000 as a writer, Bruce now earns
(A) A decrease in the amount of physical capital
$25,000 in accounting profits as a graphic artist
per computer programmer
using the same computer equipment he would
(B) An improvement in the education of
have used as a writer. What is Bruce’s economic
computer programmers
profit from choosing to work as a graphic artist?
(C) An increase in the social prestige associated
(A) -$45,000 with being a computer programmer
(B) -$20,000 (D) A decrease in the value that computer
(C) $20,000 programmers place on leisure
(D) $45,000 (E) A minimum wage set below the equilibrium
(E) $70,000 wage in the market for computer
programmers
10. Game theory is most useful in describing
outcomes in markets where 15. The socially optimal quantity of a public good
is provided when
(A) firms are price takers
(B) there is only one producer (A) marginal private cost equals marginal private
(C) there are many small producers benefit
(D) products are identical for all firms (B) marginal social cost equals marginal social
(E) there are interdependent firms benefit
(C) total private cost equals total social benefit
11. Which of the following is a characteristic of firms (D) total social cost equals total social benefit
in a perfectly competitive industry? (E) marginal social benefit minus marginal social
cost is at a maximum
(A) Engaging in collusive behavior
(B) Facing significant barriers to entry
16. Command economies differ from capitalist
(C) Setting the market price
economies mainly because of which of the
(D) Producing identical products
following?
(E) Earning positive long-run economic profit
(A) Command economies have higher prices
12. A perfectly competitive firm’s short-run supply for oil.
curve is the portion of the marginal cost curve (B) Capitalist economies have higher prices
that is for oil.
(C) Command economies have higher degree
(A) above the average total cost curve
of government ownership of resources.
(B) above the average variable cost curve
(D) Capitalist economies have higher degree
(C) above the minimum average fixed cost curve
of government ownership of resources.
(D) above the demand curve
(E) Command economies rely on prices to
(E) between the average fixed cost curve and the
allocate resources.
average variable cost curve
17. In the rental housing market, what would be the
13. Which of the following is a necessary condition
effect of a rent control that was set at the market
for price discrimination?
equilibrium rental price?
(A) Resale of the product or service is possible.
(A) It would increase the number of housing
(B) Buyers have identical elasticities of demand.
units available, creating a surplus.
(C) The seller can separate consumers according
(B) It would decrease the number of housing
to their elasticities of demand.
units available, creating a shortage.
(D) The seller is a perfectly competitive firm.
(C) It would have no impact on the number of
(E) Buyers are aware of prices charged to other
housing units available.
buyers.
(D) It would increase the consumer surplus and
decrease the producer surplus.
(E) It would decrease the consumer surplus and
increase the producer surplus.

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18. If the demand for product X is perfectly elastic 19. All of the following cause a rightward shift in the
and the supply of product X decreases, which of demand schedule for a normal good EXCEPT
the following will occur in the market for X ?
(A) a decrease in the price of the good
(A) Total revenue will increase. (B) a decrease in the price of a complementary
(B) Total revenue will decrease. good
(C) Total revenue will remain the same. (C) an increase in the price of a substitute good
(D) Quantity demanded will exceed quantity (D) an increase in consumers’ income
supplied. (E) an increase in consumers’ preference for the
(E) Quantity supplied will exceed quantity good
demanded.

20. The graphs above show Mary’s demand for hamburgers and Mark’s demand for hamburgers. Suppose Mary and
Mark are the only two consumers in the market. Which of the following is a point on the market demand curve
for hamburgers?
Price Quantity
(A) $2 12
(B) $4 7
(C) $6 6
(D) $8 4
(E) $10 8

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21. A firm is currently employing a cost-minimizing 24. Monopolistically competitive product markets are
combination of labor and capital for a given level inefficient because
of output. The firm is employing 20 workers, and
(A) price equals the marginal value to the buyer
the marginal product of the last worker is 40 units
of the last item produced
of output. The firm is employing 100 units of
(B) price is greater than marginal cost
capital, and the marginal product of the last unit
(C) excessive competition prevents other firms
of capital is 10 units of output. If the wage rate is
from entering the market
$20 per hour, what is the price of capital?
(D) homogeneous goods are usually overpriced
(A) $2.5 per hour (E) short-run economic profit-making
(B) $5 per hour opportunities exist
(C) $10 per hour
(D) $100 per hour 25. North Springs and South Springs are two firms
(E) $200 per hour that serve the local market for bottled water. Each
firm must choose to either maintain or increase
22. If a firm’s production function exhibits its current output. The first entry in each cell in
diminishing marginal product of the variable the payoff matrix below shows the profits for
input in the short run, which of the following North Springs, and the second entry in each cell
about the firm’s short-run marginal cost (MC) shows the profits for South Springs.
curve must be true?
(A) As output increases, the MC curve slopes South Springs
upward.
(B) As output increases, the MC curve slopes Maintain Increase
downward and becomes flatter. Output Output
(C) As output increases, the MC curve slopes
downward and becomes steeper. Maintain
$15, $30 $15, $45
(D) The MC curve is horizontal. North Output
(E) The MC curve is vertical. Springs Increase
$30, $26 $27, $28
Output
23. Catering, Inc., which provides catering services
in a perfectly competitive market, was maximizing
profits at the market price of $22 per meal. The If the two firms do not cooperate, which of the
market price has recently increased to $28 per following represents the payoff North Springs and
meal. Which of the following short-run South Springs receive in the dominant-strategy
adjustments will increase profits for Catering, Inc.? equilibrium and the Nash equilibrium?

(A) Increasing output until the marginal cost Dominant Strategy Nash Equilibrium
equals the new price (A) None ($27, $28)
(B) Increasing output until the average total cost (B) ($27, $28) ($15, $45)
equals the new price (C) ($30, $26) ($15, $45)
(C) Decreasing output because of the increase in (D) ($27, $28) ($27, $28)
market price (E) ($30, $26) ($27, $28)
(D) Increasing the wage rate paid to its workers
(E) Increasing advertising to increase demand for
the meals

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26. A monopolist’s demand curve is necessarily Questions 30-31 refer to the following diagram,
(A) the same as the market demand curve which shows the marginal social cost (MSC), the
(B) the same as its marginal revenue curve marginal private cost (MPC), and the marginal
(C) upward sloping social benefit (MSB) associated with the
(D) perfectly elastic production of a good in a market.
(E) perfectly inelastic

27. 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.

28. When the demand for new homes decreases, the 30. Which of the following describes the type of
demand for construction workers who build externality generated by the unregulated private
homes decreases. This relationship illustrates market and the resulting deadweight loss?
the concept of Type of Deadweight
(A) derived demand Externality Loss
(B) diminishing marginal productivity of labor (A) Positive egh
(C) substitution in production (B) Positive ehf
(D) supply shock (C) Negative ehf
(E) property rights (D) Negative egh
(E) Negative P4ghP2
29. Which of the following is likely to shift an
industry’s labor supply curve to the left? 31. The government can attempt to correct the
externality by setting a
(A) A decrease in immigration restrictions
(B) A decrease in the cost of child care (A) per-unit tax equal to (P4 − P1)
(C) An increase in the number of (B) per-unit tax equal to (P4 − P2)
remote-working jobs
(C) per-unit subsidy equal to (P4 − P2)
(D) An increase in preference for leisure
(E) An increase in wages (D) per-unit subsidy equal to (P3 − P2)
(E) price ceiling at P2

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32. Both Amy and Brad produce and consume apple 34. Assume that the supply of corn is relatively price
pie and ice cream. In one hour, Brad makes inelastic, while the demand for corn is relatively
five apple pies or ten gallons of ice cream while price elastic. If the government imposes a per-unit
Amy makes fifteen apple pies or fifteen gallons of excise tax on the production of corn, the incidence
ice cream. Based on the above information, one of the tax will fall
can correctly conclude that
(A) entirely on buyers
(A) Brad has an absolute advantage in making ice (B) more on buyers than on sellers
cream and will sell ice cream to Amy (C) entirely on sellers
(B) Brad has a comparative advantage in making (D) more on sellers than on buyers
ice cream and will sell ice cream to Amy (E) equally on both buyers and sellers
(C) Brad does not have a comparative advantage
in making either good and will not trade 35. Assume the following utility schedule for
with Amy Aaliyah’s ice cream consumption. If she
(D) Brad has an absolute advantage in making consumes 6 units, what is the value of her
apple pies but a comparative advantage total utility from consuming ice cream?
in making ice cream
Quantity Consumed Marginal Utility
(E) Brad’s opportunity cost of making
ice cream is higher than Amy’s 1 8
2 6
33. If the government imposes a per-unit tax on
personal computers, consumer surplus in the 3 4
personal computer market will 4 2
(A) decrease, because the price paid by 5 0
consumers for personal computers will have
increased 6 -2
(B) decrease, because there will be more personal
computers on the market (A) 22
(C) increase, because personal computer (B) 20
manufacturers will pass the tax on to (C) 18
consumers (D) 0
(D) increase, because consumers will buy more (E) -2
imported personal computers
(E) not change because the demand is unit elastic

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36. Economies of scale can be illustrated by 39. There are four firms in an oligopolistic industry.
The four firms agree to collude and act like
(A) an increasing short-run marginal cost curve
a monopoly. If one of the firms violates the
as a firm produces more output
agreement and charges a lower price or sells
(B) a decreasing short-run average total cost
a larger quantity than what was agreed to, what
curve as a firm produces more output
will happen in the short run?
(C) a downward-sloping long-run supply curve
for an industry (A) The firm that cheats will earn higher profits,
(D) a decreasing long-run average total cost curve and industry profits will be lower.
as a firm produces more output (B) The firm that cheats will earn higher profits,
(E) an increasing long-run average total cost and industry profits will be higher.
curve as a firm produces more output (C) The firm that cheats will earn lower profits,
and industry profits will be lower.
37. In a monopsonistic labor market, a firm will (D) The firm that cheats will earn lower profits,
continue to hire workers until the marginal and industry profits will be higher.
revenue product of labor (E) The firms that do not cheat will earn higher
profits.
(A) equals marginal factor (resource) cost,
resulting in more workers being hired
40. Which of the following can give a firm market
at a lower wage compared with a perfectly
power?
competitive labor market
(B) equals marginal factor (resource) cost, (A) Having access to common information
resulting in fewer workers being hired (B) Producing a standardized or homogeneous
at a lower wage compared with a perfectly product
competitive labor market (C) Lacking barriers to entry or exit
(C) equals marginal factor (resource) cost, (D) Having a large number of competitors in
resulting in fewer workers being hired the market
at a higher wage compared with a perfectly (E) Having economies of scale in production
competitive labor market over the range of market output
(D) is less than marginal factor (resource) cost,
resulting in more workers being hired at a 41. In monopolistic competition, a goal of
lower wage compared with a perfectly advertising is to
competitive labor market
(A) reduce a firm’s short-run average total cost
(E) is less than marginal factor (resource) cost,
(B) minimize a firm’s long-run average total cost
resulting in fewer workers being hired at a
(C) make a firm’s demand curve more elastic
lower wage compared with a perfectly
(D) make a firm’s demand curve less elastic
competitive labor market
(E) shift a firm’s demand curve to the left
38. 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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Questions 42-43 are based on the following output 44. In a perfectly competitive market for a good with
and total revenue for a monopolist in the product a downward sloping demand curve and an upward
market. sloping supply curve, the marginal social benefit
is greater than the marginal social cost at the
Output Total market equilibrium quantity. The government
imposition of a new per-unit tax on the production
Quantity Revenue of the good would
(units) ($)
(A) have no effect on the price of the good
0 0 (B) increase consumer surplus
(C) increase the deadweight loss
1 11
(D) increase producer surplus
2 20 (E) increase the quantity sold of the good
3 27
4 32
5 35
6 36
7 35

The marginal product of labor is constant at 1 unit

for every additional unit of labor. The monopolist
hires labor in a perfectly competitive market at the
wage rate of $5 per hour.

42. What is the marginal revenue product of labor

when the firm produces the third unit of output?
(A) $3
(B) $7
(C) $9
(D) $20
(E) $27

43. How many units of labor should the firm employ

to maximize profits?
(A) 1
(B) 2
(C) 4
(D) 5
(E) 6

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 47. Assume that the market for beef is perfectly
competitive and in equilibrium. Which of the
following would most likely result in an increase
in both the equilibrium price and the equilibrium
quantity of beef?
(A) An increase in the supply of chicken,
a substitute good
(B) A decrease in consumers’ income, assuming
that beef is a normal good
(C) An increase in the supply of potatoes,
a complementary good
(D) An increase in the price of corn, an input
in the production of beef
(E) An announcement by the medical community
that consumption of beef increases the risk
of heart disease

48. Assume that more corn is used to produce

45. The Lorenz curves in the graph above show the ethanol. Simultaneously, more effective control of
effects of a tax system on income inequality. pests and weeds occurs in farming. Which of the
Which of the following statements must be true? following will definitely occur in the corn
(A) Before the tax, 20% of families lived market?
below the poverty level, and after the tax, (A) The price of corn will increase.
none did. (B) The quantity of corn will decrease.
(B) The tax redistributed income only from the (C) The price of corn will decrease.
top 20% of families to the lowest 20%. (D) The quantity of corn will increase.
(C) The tax system is proportional. (E) The supply of corn will decrease.
(D) The tax system is regressive.
(E) The tax system is progressive. 49. The absolute value of the price elasticity of
demand for a good increases when
46. Movement along a production possibilities curve
shows which of the following? (A) the good has fewer substitutes
(B) the good becomes a necessity
(A) The trade-offs society faces (C) consumers spend greater portion of their
(B) The total amount of available resources budget on the good
(C) The combination of inputs required for (D) the price of an input used to produce the good
a given output increases
(D) The relationship between the price of (E) the good must be purchased immediately
an input and the quantity demanded
(E) The decrease in efficiency

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50. Mickey has a $20 gift card that she is planning 52. The table below shows a competitive firm’s total
to use to download 10 songs and 5 games. The variable cost (TVC) and total fixed cost (TFC) at
download price for each song is $1 and the various units of output.
download price for each game is $2. Her marginal
utility from the tenth song is 30, and her marginal Output TVC TFC
utility from the fifth game is 70. Based on this 0 0 9
information, which of the following statements
is true? 1 3 9
(A) Mickey’s plan will maximize her utility. 2 8 9
(B) Mickey can increase utility by buying more 3 15 9
songs and fewer games.
(C) Mickey can increase utility by buying more 4 26 9
games and fewer songs.
5 38 9
(D) Since games are twice as expensive as songs,
Mickey should buy twice as many songs.
(E) Since games are twice as expensive as songs, When output is 3 units, which of the following is
Mickey should buy twice as many games. correct?
Average
51. Max Company produces electronic gadgets using Variable Marginal
labor and capital. If Max increases labor and Cost Cost
decreases capital to produce the same quantity of
gadgets, what will happen to the marginal product (A) 5 6
(MP) of labor and the MP of capital? (B) 5 7
(C) 6 5
(D) 7 7
MP of Labor MP of Capital
(E) 7 6
(A) Decrease Increase
(B) Decrease No change
(C) Increase Increase
(D) Increase Decrease
(E) No change Increase

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Questions 53-54 refer to the graph of a profit- 55. Which of the following is true of a
maximizing firm below. monopolistically competitive firm in
long-run equilibrium?
(A) It produces where price equals marginal
cost, and it earns zero economic profits.
(B) It produces where marginal revenue exceeds
marginal cost, and it earns positive
economic profits.
(C) It produces where marginal cost equals
marginal revenue, and the price is equal to
average total cost.
(D) It produces at the minimum average total
cost, and it utilizes all excess capacity.
(E) It produces more than the allocatively
efficient quantity, and the price is greater
than marginal cost.

56. Assume that barber shops operate in perfectly

competitive product and factor markets. Which
53. The firm’s total revenue is equal to of the following will happen to working barbers if
the price of haircuts decreases?
(A) area P1P2KL (A) The marginal product of the last barber hired
(B) area P1P3JL will not change.
(B) The marginal product of the last barber hired
(C) area 0P3JQ1 will decrease.
(D) area 0P2KQ1 (C) The marginal revenue product curve will shift
to the right.
(E) area JLM (D) The marginal revenue product curve will shift
to the left.
54. The firm’s economic profit is equal to (E) There will be a movement upward along
(A) area 0P3 JQ1 the marginal revenue curve.
(B) area 0P2 KQ1 57. In a market with two firms, a firm that has a
(C) area P2 P3 JK dominant strategy will do which of the following?
(D) area P1 P3 JL (A) Maintain that strategy independent of the
(E) zero 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.

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58. Antitrust policies are put in place to limit which 60. One major difference between public goods and
of the following? private goods is that
(A) Income inequality (A) public goods exclude nonpaying consumers,
(B) Monopoly power while private goods are available to all
(C) Double taxation of corporations (B) public goods are inferior goods, while private
(D) Price ceilings goods are normal goods
(E) The provision of public goods (C) public goods generate negative externalities,
while private goods generate positive
59. If the government regulates a natural monopolist externalities
to produce the allocatively efficient level of (D) it is difficult to charge customers directly for
output, it will require the monopolist to set a price the provision of public goods
that is (E) it is impossible for private firms to produce
public goods
(A) equal to its marginal cost and grant a subsidy
to cover the loss
(B) equal to its average total cost and levy a tax
on the excess profit
(C) greater than its marginal cost and levy a tax
on the excess profit
(D) greater than its marginal cost but that
minimizes the deadweight loss
(E) greater than its average total cost but that
minimizes the deadweight loss

END OF SECTION I

IF YOU FINISH BEFORE TIME IS CALLED, YOU MAY

CHECK YOUR WORK ON THIS SECTION.

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MAKE SURE YOU HAVE DONE THE FOLLOWING.

• PLACED YOUR AP NUMBER LABEL ON YOUR ANSWER SHEET

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Section II: Free-Response Questions

This is the free-response section of the 2018 AP xam.

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 2018

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 4OBP4-S

34
 MICROECONOMICS
Section II
Total Time —1 hour
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.

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.

GO ON TO THE NEXT PAGE.

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1. Assume that pencils are manufactured in a perfectly competitive market that is in long-run equilibrium.
(a) Draw correctly labeled side-by-side graphs for the pencil market and for a representative firm and show
each of the following.
(i) The market price and quantity, labeled PM and QM, respectively
(ii) The firm’s profit-maximizing price and quantity, labeled PF and QF, respectively
(b) What is the relationship between PM and PF? Explain.
(c) Rent on the factory building is an important fixed cost in the production of pencils, and the industry
experiences significant increases in rent.
(i) What will happen to the firm’s profit-maximizing quantity in the short run? Explain.
(ii) On your graph in part (a), show the impact of the rent increase and completely shade the area
representing the firm’s profit or loss in the short run.
(d) As a result of the rent increase, what will happen to each of the following in the long run?
(i) The number of firms in the market. Explain.
(ii) The market equilibrium quantity relative to QM and the market equilibrium price
relative to PM. 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.
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ANSWER PAGE FOR QUESTION 1

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Question 1 is reprinted for your convenience.

1. Assume that pencils are manufactured in a perfectly competitive market that is in long-run equilibrium.
(a) Draw correctly labeled side-by-side graphs for the pencil market and for a representative firm and show
each of the following.
(i) The market price and quantity, labeled PM and QM, respectively
(ii) The firm’s profit-maximizing price and quantity, labeled PF and QF, respectively
(b) What is the relationship between PM and PF? Explain.
(c) Rent on the factory building is an important fixed cost in the production of pencils, and the industry
experiences significant increases in rent.
(i) What will happen to the firm’s profit-maximizing quantity in the short run? Explain.
(ii) On your graph in part (a), show the impact of the rent increase and completely shade the area
representing the firm’s profit or loss in the short run.
(d) As a result of the rent increase, what will happen to each of the following in the long run?
(i) The number of firms in the market. Explain.
(ii) The market equilibrium quantity relative to QM and the market equilibrium price
relative to PM. 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. The graph below depicts the market conditions Zhao, Inc., faces in the zizzles market, where D = demand,
MSB = marginal social benefit, MR = marginal revenue, MSC = marginal social cost, and MPC = marginal
private cost.

(a) What two potential sources of market failure exist in the market for Zhao’s zizzles? Explain each
potential source of market failure using the information in the graph.
(b) Using numerical values from the graph, identify Zhao’s profit-maximizing quantity and price.
(c) Assume a $15 per-unit tax is imposed on the zizzles market. Using numerical values from the graph,
identify Zhao’s profit-maximizing quantity and price.
(d) Zhao opposes the $15 per-unit tax analyzed above in part (c) and instead proposes a policy of no
government intervention. If economic advisers are only interested in maximizing social welfare, would they
support the policy of no government intervention? 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.
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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. Assume milk is produced and sold in a perfectly competitive market. To help milk producers, the government
imposes an effective price floor on milk. Assume milk producers continue to sell milk only to households after
the imposition of the price floor.
(a) Draw a correctly labeled graph for the milk market and show the price floor, labeled PF , and the quantity of
milk purchased by households, labeled QF.
(b) Is the market for milk allocatively efficient after the price floor is imposed? Explain.
(c) On your graph from part (a), shade the area that represents total producer surplus after the price floor is
imposed.
(d) Assume the absolute value of price elasticity of demand for milk is 2 throughout the price range. Would total
consumer spending on milk increase, decrease, not change, or be indeterminate after the imposition of the
price floor? Explain.
(e) Assume the price floor in the milk market caused the equilibrium price of eggs, a related consumption good,
to increase.
(i) Draw a correctly labeled graph of the egg market, and show the effect of the price floor in the milk
market on the egg market.
(ii) What economic term describes the relationship between milk and egg?

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.
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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 FRONT 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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