Cracking the AP Economics Macro & Micro Exams, 2017 Edition by Princeton Review

Author:Princeton Review [Review, The Princeton]
Language: eng
Format: epub
Publisher: Random House Children's Books
Published: 2016-09-27T00:00:00+00:00

CHAPTER 7 REVIEW QUESTIONS

1. E The long run average cost curve is always below the short run average cost curve except at the cost- minimizing point for that short run average cost curve. To the left of that point, the firm is using too much capital and fixed costs are too high. to the right of this point, the firm is using too little capital and diminishing returns to scale are causing costs to increase. See Figure 3. Therefore the answer is (E).

2. B If a monopoly faces a straight downward-sloping demand curve, then the marginal revenue for a monopoly is halfway between the demand curve and the vertical axis. See Figure 9. Therefore the answer is (B).

3. D The marginal cost curve always intersects the average variable cost curve at its lowest point (see Figure 7). Therefore the answer is (D).

4. B The best approach to this question is to use Process of Elimination. Consider that in oligopoly markets, there are a few (possibly large) firms that dominate the market, so eliminate (D). As perfect competition is reduced, these firms do make economic profit, so eliminate (A). As there are only a few firms that would most probably be subjected to antitrust legislation, and some of the antitrust legislation may have been developed in response to the actions of these oligopolies, eliminate (C). Typically in oligopolistic markets there are several buyers and few sellers. Therefore the sellers have market power, so eliminate (E). While interdependence is not a prerequisite for oligopolistic markets, it is a common feature of such markets. Therefore the answer is (B).

5. A Consider that monopolistic markets are characterized by one supplier and several buyers. The seller thus has the ability to control prices by either fixing prices or limiting quantity. As the firm is limiting quantity to maximize its revenue, it is causing more deadweight loss than a firm ordinarily would in a perfectly competitively market. A monopoly is unlikely to lower prices if in fact it is likely to raise prices, so eliminate (B). A monopoly reduces supply by limiting production, so eliminate (C). A monopoly has only one firm, so eliminate (D). Quality of goods is not discussed, as economics assumes that the goods are identical and meet the minimum quality standards, so eliminate (E). Therefore the answer is (A).

6. D With a question like this one, it is easier to work out the possible outcomes and compare them to the given choices. Let’s first look at Company’s A strategies: If Company B expands, then Company A does not expand. If Company B does not expand, then Company A does not expand. Therefore no matter what Company B does, Company A’s strategy would be to not expand. And therefore Company A has a dominant strategy, so eliminate (B), (C) and (E).

Turning to Company B, if Company A were to expand, Company B would not want to expand. If Company A does not expand, Company B does not expand. Therefore no matter what Company A does, Company B has a dominant strategy of not expanding, so eliminate (A).

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