AP Microeconomics Test Booklet

Unit 3 Review Name

The following questions refer to the graph below showing cost curves for a perfectly competitive firm.

1. If the market price is $10, how many widgets should this profit-maximizing firm produce?

A 3,000

B 6,000

C 12,000

D 16,000

E 21,000

2.

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 AP Microeconomics Test Booklet

Unit 3 Review

A 5.00

B 11.67

C 13.33

D 15.00

E 20.00

3. Which of the following statements regarding accounting profits, opportunity costs, and economic profits is
true?

A With positive opportunity costs, a firm can never earn economic profits.

B Accounting profits are equal to economic profits minus opportunity costs.

C If accounting profits are less than opportunity costs, there will be economic losses.

D Economic profits must always be greater than accounting profits.

E When economic profits are positive, accounting profits may be positive or negative.

4. Which of the following MUST be true of the long run?

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 AP Microeconomics Test Booklet

Unit 3 Review

A It is at least one year in duration.

B All factors of production are variable.

C At least one factor of production is fixed.

D Marginal costs are constant.

E Average total costs are constant.

5. Which of the following is true for a firm that uses labor as a variable input and capital as a fixed input in the
short run?

A If the marginal product of labor is negative, the average product of labor must also be negative.

If the marginal product of labor is rising, the average product of labor must be greater than the marginal
B
product of labor.

C If the average product of labor is rising, the marginal product of labor must be rising.

If the average product of labor is falling, the marginal product of labor must be less than the average product
D
of labor.

E The average product of labor can never be equal to the marginal product of labor.

6. Assume that in a perfectly competitive market, a firm's costs and revenues are

marginal cost = average variable cost at $20

marginal cost = average total cost at $30

marginal cost = average revenue at $25

a. How will this firm determine the profit maximizing level of output?
b. What price will this firm charge? Explain how the firm determined this price.

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 AP Microeconomics Test Booklet

Unit 3 Review

c. Should this firm produce in the short run? Why or why not?
d. Will this firm earn a profit or incur a loss? Why?

Please respond on separate paper, following directions from your teacher.

Assume a perfectly competitive firm is currently producing units of output. Its marginal cost is and
7.
rising at that output quantity. Its average variable cost is and its average fixed cost is . If the product’s
price is , which of the following will the firm do in the short run to maximize its profit?

A Shut down

B Produce, but less than units of output

C Produce more than units of output

D Continue to produce at exactly units of output

E Increase its price above

8. Bruce is a talented writer and graphic artist who enjoys both types of work equally. Instead of earning
$45,000 as a writer, Bruce now earns $25,000 in accounting profits as a graphic artist using the same
computer equipment he would have used as a writer. What is Bruce’s economic profit from choosing to
work as a graphic artist?

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 AP Microeconomics Test Booklet

Unit 3 Review

A -$45,000

B -$20,000

C $20,000

D $45,000

E $70,000

9. A typical firm in a perfectly competitive constant-cost industry is operating with an economic loss in the
short run. When the industry returns to long-run equilibrium, what will happen to the number of firms in the
industry, the market price, and the typical firm’s quantity?

Number of Firms Market Price Firm’s Quantity

A
Decrease Increase Increase

Number of Firms Market Price Firm’s Quantity

B
Decrease Decrease Increase

Number of Firms Market Price Firm’s Quantity

C
Decrease Increase Decrease

Number of Firms Market Price Firm’s Quantity

D
Increase Increase Decrease

Number of Firms Market Price Firm’s Quantity

E
Increase Decrease Decrease

Assume Nadia voluntarily leaves a job with a salary of per day to open and run a restaurant instead.
10.
After deducting all explicit costs from the restaurant revenues, Nadia has a gain of . Assuming there
are no additional implicit costs, which of the following statements is true?

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 AP Microeconomics Test Booklet

Unit 3 Review

A Nadia has an accounting profit of .

B Nadia has an accounting profit of .

C Nadia has an economic profit of .

D Nadia has an economic profit of .

E Nadia has an economic profit of .

11. Which of the following must be true if a firm is experiencing economies of scale?

A All costs are explicit.

B Long-run average total cost decreases as the firm’s output increases.

C Economic profits decrease as the firm’s output increases.

D Long-run average total cost remains constant as the firm’s output decreases.

E Proportionate increases in inputs result in less-than-proportionate increases in output.

12. Assume that a perfectly competitive firm is in long-run equilibrium. If industry demand for the product
increases, how will this firm’s price, output, and profit change in the short run?

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 AP Microeconomics Test Booklet

Unit 3 Review

Price Output Profit

A Increase Increase Increase

Price Output Profit

B
Increase Decrease Decrease

Price Output Profit

C
Increase Increase Decrease

Price Output Profit

D
No change Decrease Decrease

Price Output Profit

E
Decrease Increase Increase

13. If total revenue is increasing as output increases, marginal revenue is always

A equal to average revenue

B less than average revenue

C increasing

D decreasing

E greater than zero

The following question is based on the output and cost data in the table below.

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 AP Microeconomics Test Booklet

Unit 3 Review

14. If there is only one variable input, diminishing marginal returns first occur with the production of which unit
of output?

A 7th

B 6th

C 5th

D 4th

E 3rd

15. 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.
If the question prompts you to “Calculate,” you must show how you arrived at your final answer.

The table below shows the total costs faced by Hank’s Clothing Emporium for different quantities of
Good A sold.

Quantity Total Cost

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 AP Microeconomics Test Booklet

Unit 3 Review

Hank’s Clothing Emporium sells Good A in a perfectly competitive market with a downward-sloping
demand curve and an upward-sloping supply curve. The market price is per unit.

(a) Calculate the average fixed cost of producing units. Show your work.

(b) Identify the profit-maximizing quantity. Explain using marginal analysis.

(c) Calculate the economic profit at the profit-maximizing quantity you identified in part (b). Show your
work.

(d) Based on your answer to part (c), will the number of firms in the industry increase, decrease, or stay
the same in the long run? Explain.

(e) Based on your answer to part (c), will the market price increase, decrease, or stay the same in the
long run? Explain.

(f) The income elasticity of demand for Good A is , and the cross-price elasticity of demand for
khaki pants with respect to the price of Good A is . Based on your answer to part (e), what will
happen to the demand for khaki pants? Explain.

(g) Now assume that the market in which Hank’s Clothing Emporium operates is in long-run
equilibrium.
(i) Suppose the rent paid by Hank’s Clothing Emporium increases. Will Hank’s Clothing Emporium’s
profit-maximizing quantity of Good A increase, decrease, or stay the same in the short run? Explain.
(ii) Instead suppose Hank’s Clothing Emporium hires labor in a perfectly competitive market and the
market wage decreases. Will Hank’s Clothing Emporium’s profit-maximizing quantity of Good A
increase, decrease, or stay the same in the short run? Explain.

Please respond on separate paper, following directions from your teacher.

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