Cracking the AP Economics Macro & Micro Exams, 2019 Edition by Princeton Review

Author:Princeton Review
Language: eng
Format: epub
Publisher: Random House Children's Books
Published: 2018-10-15T16:00:00+00:00

6. D

If the elasticity of demand is less than 1, the demand is inelastic. Choices (A), (B), and (E) can be eliminated as they incorrectly define elasticity in terms of the demand price elasticity given in the question, 0.78. Because of the direct relationship between price and total revenue for inelastic goods, the firm should increase its price, as it will increase its revenue. The answer is (D).

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 on this page. Choices (A), (B), and (C) can be eliminated because the SRAC and LRAC curves will intersect at the quantity for which the amount of capital in question is the cost minimizing amount. Choice (D) can be eliminated because LRAC is below the SRAC due to lack of fixed costs in the long term. 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 on this page. 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 on this page). Choice (A) can be eliminated because MC intersects MR to find the profit-maximizing quantity. Choices (B) and (E) can be eliminated because the AVC, by definition, represents an average of marginal costs and will not intersect at its minimum and maximum points. Choice (C) can be eliminated because AVC is a parabola with a positive slope and doesn’t have a single maximum point. 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 competitive market.

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