Timed practice

Full practice exams

Pick an exam. Each one shows its format first, then runs one section at a time on its own clock.

Practice Exam 1

60 multiple-choice and 3 free-response questions, in the format of the AP Microeconomics Exam.

Choose a mode

Exam conditions Timed like the real exam. Nothing is checked until a section ends.Study mode Untimed. Each answer is checked as you give it, with its explanation.

Testing accommodations

Time and a half Each section gets 1.5 times the time.Double time Each section gets twice the time.Untimed The clock shows time used and never ends a section.

You can switch to study mode or start over at any point during the exam.

Section	Questions	Time
Section I: Multiple Choice	60	70 minutes
Section II: Free Response	3	60 minutes

A four-function calculator is allowed on both sections of the exam.

How the exam works

One section at a time. When a section's clock reaches zero, the section ends and is scored.
Multiple choice is scored when its section ends, with an explanation for every choice.
Free response is never scored by the page. When the section ends, you see the scoring guide and a model response for each part and tick the points your answer earns.
At the end you get your score and the time you used for each section.
In study mode each multiple-choice answer is checked as soon as you give it, with its explanation, and each free-response question has a button that opens its scoring guide.
Switching to study mode partway keeps your answers and checks the ones you have given. Start over clears everything and lets you choose a mode again.
Your answers are kept in this browser tab if the page reloads, and nowhere else.

Section I: Multiple Choice

60 questions · 70 minutes

Beneath the farms of Mirrowdale Valley lies an aquifer holding billions of gallons of fresh water. Farmers pump it to irrigate crops, the valley's town draws its drinking water from it, and a new food-processing plant wants a share as well. An economist says the water is scarce. Which of the following best explains why?
Answer: A.
1. A
  Correct. Scarcity means there is not enough of a resource to meet all of the wants for it. Farms, the town and the plant together want more water than the aquifer can supply, so every gallon sent to one use is a gallon another use gives up. That trade-off is what scarcity creates, however large the stock looks.
2. B
  Scarcity compares a resource with the wants for it, not with how much other places have. A valley with the largest aquifer in the region would still face scarcity if its wants exceeded the supply.
3. C
  This runs the cause backward. Water commands a price because it is scarce. A resource with no price, such as a free study room that too many people want, can still be scarce.
4. D
  Running out someday is not what makes a resource scarce. Water is scarce today because today's wants for it exceed what the aquifer can supply, even if it never runs dry.
5. E
  A pumping limit is one way to decide who gets the water. It is a response to scarcity. The water would be scarce with or without the rule.
In Quorvale, an invented country, the government owns all farmland and leases it to farm families. Each family decides which crops to plant and sells its harvest to whoever pays the most, and crop prices rise and fall with buying and selling. Which of the following describes how Quorvale's system differs from a pure command economy?
Answer: C.
1. A
  Ownership is only half of the system. In a pure command economy a central plan also decides what is produced and who gets it, and in Quorvale prices do that.
2. B
  Farm families also decide how to farm, and prices decide who consumes the harvest. The government's only role here is owning the land.
3. C
  Correct. An economic system has two parts: its institutional arrangements, such as who owns resources, and its coordinating mechanism. Quorvale keeps state ownership of land, as a command economy would, but prices coordinate what farms grow and who buys the harvest. A pure command economy would use a central plan for both, so Quorvale is a mixed economy.
4. D
  Every economy faces scarcity and must answer what, how and for whom, whatever its system. Quorvale answers them partly through the state and partly through prices.
5. E
  This reverses the stem. Quorvale's families, not a plan, choose the crops, and prices guide those choices.
Tolvenna produces only potatoes and tractors and is producing at a point on its production possibilities curve where it makes some of each. Tolvenna clears a large area of new farmland that can be used only for growing potatoes. Which of the following is true after the change?
Answer: D.
1. A
  A parallel outward shift needs more resources or better technology for both goods. The new land can be used only for potatoes, so the most tractors Tolvenna can build, using every resource on tractors, has not changed.
2. B
  That trade-off holds on the old curve. The new curve lies outside the old point, so Tolvenna can add potatoes without giving up tractors, or add both.
3. C
  A change in the resources available for either good moves the curve. Here the potato end moves out, so the curve pivots outward along that axis.
4. D
  Correct. The curve pivots out along the potato axis while its tractor end stays put. With the new land, Tolvenna can grow the potatoes it was already growing with fewer of its other resources, so it can move some of them into tractors and have more of both. Only if it made nothing but tractors would the new land be of no use.
5. E
  The maximum tractor output assumes every resource goes to tractors, so no potatoes are grown and the new land sits idle. That endpoint stays where it was. Freed resources can raise tractor output only at points where some potatoes are still grown.
Brevorra, an invented country, produces only fishing trawlers and oats. Using all of its resources fully and efficiently, it can produce these combinations: A, 0 trawlers and 100 thousand tons of oats; B, 15 trawlers and 94 thousand tons; C, 25 trawlers and 86 thousand tons; D, 40 trawlers and 62 thousand tons; E, 50 trawlers and 30 thousand tons. When Brevorra moves from C to D, what is the opportunity cost of each additional trawler?
Answer: B.
1. A
  That divides the wrong way: 15 / 24 = 0.625 is trawlers per thousand tons of oats, the cost of oats in trawlers. Put the good given up, oats, on top.
2. B
  Correct. From C to D, Brevorra gains 40 - 25 = 15 trawlers and gives up 86 - 62 = 24 thousand tons of oats. Each trawler costs 24 / 15 = 1.6 thousand tons of oats.
3. C
  That divides the 24 thousand tons by 10, as if the move added 10 trawlers. The steps in this table differ in size, and C to D adds 15.
4. D
  That is the cost per trawler from D to E, (62 - 30) / 10. The move asked about is from C to D.
5. E
  That is the total given up for all 15 trawlers. Divide it by the 15 trawlers gained to get the cost of each one.
Ilvarra and Sombrel are invented countries with the same quantity of resources. Ilvarra can produce more cocoa than Sombrel and more radios than Sombrel, and the two countries' opportunity costs of producing a radio are different. Which of the following correctly describes the two countries' advantages?
Answer: E.
1. A
  Making more of each good is absolute advantage. Comparative advantage compares opportunity costs, and the country with the higher opportunity cost of a radio has the lower opportunity cost of cocoa, so no country has it in both.
2. B
  Gains from trade come from comparative advantage. Because the opportunity costs differ, each country can specialize in the good it gives up less to make, and both can consume beyond their own production possibilities.
3. C
  No country can give up less of both goods. If Sombrel's opportunity cost of a radio is lower than Ilvarra's, its opportunity cost of cocoa is higher, because the cost of cocoa in radios is the reciprocal of the cost of a radio in cocoa.
4. D
  Ilvarra's absolute advantage in both goods leaves Sombrel's comparative advantage in place. Sombrel still makes one of the two goods at a lower opportunity cost than Ilvarra does.
5. E
  Correct. Producing more of both goods with the same resources is an absolute advantage in both. Comparative advantage depends on opportunity cost, and since the costs differ, each country gives up less than the other to make one of the two goods.
Varnokk and Elsimar are invented countries with constant opportunity costs. In a year, Varnokk can produce either 200 wagons or 800 bales of hay, and Elsimar can produce either 100 wagons or 600 bales of hay. Each country specializes according to its comparative advantage, and they trade. At which of the following terms of trade would both countries gain from the trade?
Answer: C.
1. A
  Varnokk would get only 3 bales for a wagon that costs it 4 bales to make. It would do better making its own hay, so it would refuse.
2. B
  At 4 bales a wagon Varnokk gets exactly what making hay itself would give it. It gains nothing, so this rate does not help both countries.
3. C
  Correct. A wagon costs Varnokk 800 / 200 = 4 bales and Elsimar 600 / 100 = 6 bales, so Varnokk makes wagons and Elsimar makes hay. At 5 bales a wagon, Varnokk gets more hay per wagon than the 4 it would give up making hay itself, and Elsimar pays less than the 6 bales a wagon costs it to build.
4. D
  At 6 bales a wagon Elsimar pays exactly what a wagon costs it to build at home. Elsimar gains nothing, so this rate does not help both countries.
5. E
  Elsimar would pay 7 bales for a wagon it can build for 6. It would do better building its own wagons, so it would refuse.
Perpetua owns a small storefront building outright and rents it to a shoe store. She is deciding whether to end the lease and open her own bakery in the building instead. How should a rational decision-maker in her position treat the building when she adds up the costs of opening the bakery?
Answer: D.
1. A
  No check changes hands, but she still gives something up: the rent she could keep collecting. Leaving out that implicit cost makes the bakery look cheaper than it is.
2. B
  What she paid years ago is past and cannot be recovered by either choice. The cost that matters now is what she gives up by choosing the bakery, the rent.
3. C
  The rent she gives up is a cost whether or not the bakery turns out to be profitable. Costs are counted before the decision, not only when the result is good.
4. D
  Correct. Rational agents count implicit costs as well as explicit ones. Using the building for a bakery means giving up the rent the shoe store pays, so that forgone rent is part of the economic cost of the bakery.
5. E
  She keeps the shoe store's rent only if she does not open the bakery. Giving up that rent is a cost of the bakery.
Linnea has $10 to spend at a museum gift shop on postcards and keychains. Keychains cost $2 each. Her marginal utility from the 1st through 4th postcard is 40, 28, 16 and 8 utils, and from the 1st through 4th keychain it is 18, 16, 10 and 6 utils. Postcards used to cost $4 each, but the shop has cut their price to $2. At the new price, which combination maximizes Linnea's total utility?
Answer: D.
1. A
  That was her best choice at the old $4 price. At $2 a postcard it costs only $6, leaving $4 unspent, and a lower price changes the comparison.
2. B
  The 4th postcard brings 8 / 2 = 4 utils per dollar, less than the 8 utils per dollar from a 2nd keychain. This combination gives 110 utils against 118.
3. C
  That ranks postcards by their utils per dollar at the old $4 price, 10, 7, 4 and 2. At the new price each postcard is worth twice as many utils per dollar, so she buys a 3rd postcard instead of a 3rd keychain.
4. D
  Correct. At $2 each, postcards give 20, 14, 8 and 4 utils per dollar and keychains give 9, 8, 5 and 3. Buying in order from the highest, five items fill the $10: postcards 1 and 2, keychain 1, then postcard 3 and keychain 2, each at 8 utils per dollar. The last dollar on each good brings the same 8 utils, and total utility is 40 + 28 + 16 + 18 + 16 = 118.
5. E
  Six items at $2 each cost $12, more than her $10. A combination must be affordable before its utility counts.
One point on Lysette's weekly demand curve for drop-in pottery classes shows a price of $9 and a quantity of 3 classes. Which of the following does this point tell us?
Answer: E.
1. A
  The price on the curve is the value of the last class, not of all three. Her earlier classes are worth more to her than $9, so her total benefit is more than $9.
2. B
  She would pay $9 for each class at that price, $27 in all, and the first classes are worth more to her than that. The point does not describe a price for the three together.
3. C
  Consumer surplus is the gap between what each class is worth to her and the price she pays. The point shows a price, not that gap.
4. D
  At prices below $9 she would buy more than 3 classes, by the law of demand. The point gives the quantity at $9 only.
5. E
  Correct. A demand curve is a marginal benefit curve. At $9 she buys 3 classes and not a 4th, so the 3rd class is worth about $9 to her and a 4th would be worth less.
Fennistow's city government pays a $300 rebate to anyone who buys a new electric scooter, and it announces that the rebate will end next month. Buyers know scooters will cost them more after that. Which of the following is most likely to happen to the demand for electric scooters in Fennistow this month?
Answer: A.
1. A
  Correct. Expected future prices are a determinant of demand. Buyers who expect a higher price later move their purchases forward, so at every price this month they want more scooters, and demand shifts right.
2. B
  An expected rise in a future price makes buying now more attractive, not less. This month's demand rises; next month's is what falls.
3. C
  Buyers act on expectations. The announcement changes this month's buying plans before the rebate ends.
4. D
  Nothing about this month's price has changed, so this is not a movement along the curve. A changed expectation shifts the whole curve.
5. E
  The announcement changes what buyers expect to pay. Sellers' costs stay the same, so the supply curve stays put while demand moves.
Firms that make ceramic mugs in a competitive market switch to a faster kiln that lowers their cost of making each mug. In the same month, the wage these firms pay their workers rises. Nothing else changes. What happens to the supply of ceramic mugs?
Answer: E.
1. A
  Nothing makes one determinant always stronger than another. A large wage rise could outweigh a small gain in technology.
2. B
  A small wage rise could be outweighed by a large gain in technology. The two shifts work against each other, so the result depends on their sizes.
3. C
  Both changes alter firms' costs at every price, so they shift the supply curve. A movement along the curve comes only from a change in the mug's own price.
4. D
  Production costs are a determinant of supply. Buyers' willingness to pay is unchanged by how mugs are made.
5. E
  Correct. The faster kiln lowers costs and shifts supply to the right. The higher wage raises costs and shifts supply to the left. Without knowing the sizes of the two shifts, the direction of the net change cannot be determined.
Thornacre's outdoor pool cuts the price of a day pass from $8 to $6, and the number of day passes sold rises from 300 to 420 a day. Using the midpoint method, which of the following describes the price elasticity of demand for day passes over this range and the change in the pool's daily total revenue?
Answer: D.
1. A
  That divides the price change by the quantity change, 28.6 / 33.3. Elasticity puts the percentage change in quantity on top.
2. B
  The elasticity is right, but a price cut raises total revenue when demand is elastic: $2,520 is more than $2,400.
3. C
  That uses the starting values, 120 / 300 = 40 percent and 2 / 8 = 25 percent, instead of the midpoint averages. The rise in total revenue is right, but the midpoint method gives about 1.17.
4. D
  Correct. The quantity changes by 120 / 360 = 33.3 percent and the price by 2 / 7 = 28.6 percent, using the averages of the two values. Their ratio is about 1.17 in absolute value, so demand is elastic. Total revenue rises from 8 x 300 = $2,400 to 6 x 420 = $2,520, a rise of $120, as it should when price falls and demand is elastic.
5. E
  Total revenue does change, from $2,400 to $2,520. Unit elastic demand would leave it unchanged, and these percentage changes are not equal.
The toothpaste aisle at Pomfret Market stocks a dozen brands, and shoppers see them as nearly the same. Compared with the demand for toothpaste in general, the demand for any one brand in the aisle is most likely
Answer: A.
1. A
  Correct. Price elasticity of demand depends on the availability of substitutes. If one brand raises its price, shoppers can pick up a nearly identical tube from the same shelf, so its sales fall a lot. Toothpaste in general has few close substitutes, so its demand is less elastic.
2. B
  The stem says shoppers see the brands as nearly the same, which leaves little reason for loyalty. With close substitutes a step away, one brand's demand is more elastic.
3. C
  How narrowly a good is defined changes how many substitutes it has. One brand has a dozen on the same shelf; toothpaste as a whole has few.
4. D
  The conclusion is right, but the reason points the other way. Goods buyers feel they must have tend to have less elastic demand. One brand's demand is elastic because of the substitutes beside it.
5. E
  Being a small part of the market gives one brand's buyers more places to go, and that makes its demand more elastic.
Grauwell Hall has exactly 900 seats and sells tickets to a single performance of a touring play, letting the ticket price rise or fall until the seats sell. Demand for the tickets rises sharply after strong reviews. Which of the following best describes the result?
Answer: A.
1. A
  Correct. Price elasticity of supply measures how much quantity supplied responds to price. For one performance the hall cannot add seats at any price, so quantity supplied stays at 900 and its supply is perfectly inelastic, with an elasticity of zero. A rise in demand can only raise the price.
2. B
  An upward-sloping supply curve would let quantity rise. The hall has no more than 900 seats to offer, however high the price goes.
3. C
  That describes a horizontal supply curve. Here quantity cannot change at all, which is the opposite case.
4. D
  A rise in demand with fixed seats cannot lower the number sold. Quantity stays at 900 while the price rises.
5. E
  The 900 seats fix the quantity only. When demand rises, buyers bid the price up.
During a recession in Corvain, an invented country, household incomes fall and, with prices unchanged, households buy more secondhand winter coats than before. For these households, secondhand winter coats are
Answer: B.
1. A
  For a normal good, quantity moves in the same direction as income. Here income fell and purchases rose.
2. B
  Correct. Income fell and the quantity demanded rose, so the two moved in opposite directions. The income elasticity of demand is negative, which means the coats are an inferior good.
3. C
  The good is inferior, but the sign is wrong. A rise in quantity divided by a fall in income is a positive percentage change over a negative one, so the elasticity is negative.
4. D
  A negative income elasticity is what defines an inferior good, so this pairs the right sign with the wrong name.
5. E
  Cross-price elasticity compares quantity with the price of another good. No other price changed here; income did.
The owner of Hartsell Outfitters wants to know whether her customers treat camp stoves and the fuel canisters that fit them as complements. Which measure would answer her question, and what result would show that the two goods are complements?
Answer: E.
1. A
  The measure is right, but a positive value means the goods are substitutes: a higher price of one raises the quantity demanded of the other.
2. B
  Income elasticity tells whether one good is normal or inferior. It says nothing about how two goods are related.
3. C
  Own-price elasticity describes how one good's quantity responds to its own price. It cannot show a relationship between two goods.
4. D
  Price elasticity of supply describes how sellers respond to price. How buyers treat two goods together is measured on the demand side.
5. E
  Correct. Cross-price elasticity divides the percentage change in the quantity of one good by the percentage change in the price of another. For complements a higher price of stoves lowers the quantity of canisters demanded, so the value is negative.
A perfectly competitive market for folding chairs has no market failures. Suppose sellers produce and sell more chairs than the equilibrium quantity. Compared with equilibrium, what happens to total economic surplus in this market?
Answer: E.
1. A
  More chairs do not mean more surplus. The extra chairs are worth less to buyers than they cost to make, and that loss outweighs any gain to buyers.
2. B
  A trade adds surplus only when the buyer values the good more than it costs to make. Past equilibrium that is no longer true.
3. C
  A price change can move surplus between buyers and sellers, but producing units whose cost exceeds their value destroys surplus outright.
4. D
  Buyers who get chairs at a lower price do gain. Total surplus falls because of the costly extra units, not because buyers gain nothing.
5. E
  Correct. Past the equilibrium quantity, the supply curve lies above the demand curve, so each extra chair uses resources worth more than buyers would pay for it. Producing those units subtracts from total surplus. Equilibrium is efficient because it stops exactly where marginal benefit equals marginal cost.
In Selvana's market for fresh persimmons, a widely reported study finds that persimmons are less healthy than people had believed. In the same season, mild weather brings Selvana's growers a record harvest. Which of the following best describes the effect on the equilibrium price and quantity of persimmons?
Answer: C.
1. A
  That is the result of the drop in demand alone. The larger harvest pushes quantity the other way.
2. B
  That is the result of the rise in supply alone. The drop in demand pushes quantity the other way.
3. C
  Correct. The study decreases demand and the harvest increases supply. Both shifts push the price down. The demand shift lowers quantity while the supply shift raises it, so the change in quantity depends on which shift is larger.
4. D
  This swaps the two results. Both shifts lower the price, so the price change is known; it is the quantity that depends on the sizes of the shifts.
5. E
  When demand falls and supply rises, both shifts push the price the same way, down, so the price change is known.
Bicycles are sold in a perfectly competitive market, and the price of the steel used in bicycle frames rises sharply. Bicycle helmets are complements to bicycles and are made without steel. What happens to the equilibrium price and quantity in the market for bicycle helmets?
Answer: B.
1. A
  That would follow if the higher bicycle price raised the demand for helmets, as it would for a substitute. Helmets are complements, so their demand falls.
2. B
  Correct. Costlier steel decreases the supply of bicycles, which raises their price and lowers the quantity bought. Fewer bicycle riders want fewer helmets, so the demand for helmets falls, and a decrease in demand lowers both the price and the quantity of helmets.
3. C
  That is the result of a decrease in supply. Helmet makers' costs did not change; what changed is the demand for helmets.
4. D
  A falling price with a rising quantity comes from an increase in supply. Nothing made helmets cheaper to produce.
5. E
  Helmets use no steel, but they are linked to bicycles through demand. A change in the bicycle market spills over into the helmet market.
In Druvenna County, the perfectly competitive market for bags of potting soil clears at $10 a bag with 800 bags sold a day. The county then places a $3 per-unit tax on sellers of potting soil. In the new equilibrium, buyers pay $12 a bag and 700 bags are sold a day. Which of the following is correct?
Answer: E.
1. A
  That multiplies the tax by the 800 bags sold before the tax. The tax itself cuts sales to 700, and only bags sold are taxed.
2. B
  The revenue is right, but the shares are reversed. Buyers' price rose by $2, from $10 to $12, while sellers' price fell by only $1, to $9.
3. C
  That is buyers' total spending, 12 x 700. The county collects only the $3 tax on each bag.
4. D
  That counts only the buyers' $2 share of each bag's tax, 2 x 700. The county collects the full $3 on every bag, including the $1 sellers bear.
5. E
  Correct. Tax revenue is the tax times the quantity sold after the tax: 3 x 700 = $2,100. Buyers pay $12 instead of $10, so they bear $2 of each tax; sellers keep 12 - 3 = $9 instead of $10, so they bear $1.
The market for raw wool in Pemberlin, an invented country, is perfectly competitive and clears at $5 a pound. Pemberlin's government sets a price ceiling for raw wool at $6 a pound. Which of the following will result?
Answer: D.
1. A
  A surplus comes from a binding price floor, a minimum set above equilibrium. A ceiling is a maximum, and at $6 it leaves the $5 market price legal.
2. B
  A ceiling creates a shortage only when it is set below the equilibrium price. At $6, above equilibrium, the market price of $5 is already allowed.
3. C
  A ceiling sets a maximum, not the price. At any price above $5, sellers would offer more than buyers want, so the price stays at $5.
4. D
  Correct. A price ceiling is a legal maximum price. Set above the $5 equilibrium, it does not stop the market from reaching equilibrium, so it does not bind and the market clears at $5 as before.
5. E
  The ceiling does not bind, so the efficient quantity is still traded and no deadweight loss arises. Buyers already pay only $5, below the $6 limit.
In Nesmara's weekly domestic market for crates of lemons, the quantities demanded by buyers and supplied by Nesmara's own growers are:
- $4 a crate: quantity demanded 900, quantity supplied 100
- $5 a crate: quantity demanded 800, quantity supplied 200
- $6 a crate: quantity demanded 700, quantity supplied 300
- $7 a crate: quantity demanded 600, quantity supplied 400
- $8 a crate: quantity demanded 500, quantity supplied 500
Nesmara trades freely at a world price of $4 a crate, then places a $2 tariff on each imported crate. How much tariff revenue does Nesmara's government collect each week?
Answer: B.
1. A
  That taxes the 300 crates Nesmara grows itself. The tariff is charged only on crates brought in from abroad.
2. B
  Correct. The tariff raises the price in Nesmara to 4 + 2 = $6. There buyers want 700 crates and growers supply 300, so imports are 700 - 300 = 400 crates. Revenue is 2 x 400 = $800.
3. C
  That taxes all 700 crates bought. The tariff is collected only on imported crates, not on the 300 grown at home.
4. D
  That taxes the 800 crates imported before the tariff. The higher price cuts imports, so only 400 crates are taxed.
5. E
  That multiplies the 400 imported crates by the $6 price. The government collects only the $2 tariff on each one.
Windle Kite Co. assembles kites at one long workbench. With 0, 1, 2, 3, 4, 5 and 6 workers, it assembles 0, 5, 14, 27, 40, 48 and 54 kites a day. With how many workers is the average product of labor greatest?
Answer: C.
1. A
  With 2 workers the average is 14 / 2 = 7 kites, and the next two workers each add 13 kites, which pulls the average up.
2. B
  With 3 workers the average is 27 / 3 = 9 kites. The 4th worker adds 13 kites, more than that average, so the average keeps rising to 10.
3. C
  Correct. Average product is total product divided by workers: 5, 7, 9, 10, 9.6 and 9 kites per worker for 1 through 6 workers. It peaks at 10 with 4 workers. The 5th worker adds only 8 kites, less than the average of 10, so the average falls after that.
4. D
  The 5th worker is where diminishing marginal returns begin: marginal product falls from 13 to 8. Average product already starts falling there, to 48 / 5 = 9.6.
5. E
  Total product is greatest with 6 workers, but average product is 54 / 6 = 9, below its peak of 10.
In the short run, a firm adds workers while its equipment stays the same. Which of the following best explains why diminishing marginal returns eventually set in?
Answer: A.
1. A
  Correct. Diminishing marginal returns occur when a firm uses more of one input while holding the others constant. As workers crowd the same machines and space, each new worker has less equipment to work with, so marginal product falls.
2. B
  The model assumes the workers are equally skilled. Returns diminish because the equipment is fixed, not because later workers are worse.
3. C
  That describes diseconomies of scale, a long-run idea in which a firm changes all of its inputs. Diminishing returns are a short-run idea with some inputs fixed.
4. D
  Diminishing returns are about output per added worker, not the wage. Marginal product falls even when every worker earns the same wage.
5. E
  Diminishing returns mean each added worker adds less, not that output falls. Total product can keep rising for a long while after marginal product starts to fall.
At Lorrimer Lampshades, each worker used to make a whole lampshade from start to finish. The owner reorganizes the same workers so that each one does a single step, such as cutting, gluing or trimming, over and over. The equipment, materials and wages do not change. Which of the following is the most likely effect on Lorrimer's costs?
Answer: C.
1. A
  Fixed costs, such as the rent on the workshop, are paid whatever the output. Rearranging who does which step leaves them where they were.
2. B
  Passing work along a line takes some coordination, but splitting a job into repeated steps is how workers get faster. The usual result is a lower cost of each added lampshade.
3. C
  Correct. Specialization and the division of labor let each worker get quicker at one task, so the same workers and equipment turn out more lampshades an hour. Each added lampshade then takes less paid labor time, which lowers marginal cost.
4. D
  Average fixed cost is total fixed cost divided by output. The fixed cost has not changed, and splitting the work into steps cannot raise it at any output.
5. E
  The wage bill for an hour is the same, but it now buys more lampshades. A lower labor cost per lampshade means lower variable and marginal costs.
Abernook Saddlery makes leather saddles. The price of the leather it uses rises, so every saddle now takes $40 more in leather than before. Its other costs do not change. Which of the following describes the effect on its short-run cost curves?
Answer: B.
1. A
  Spreading lowers a fixed cost per unit, not a cost that comes with each saddle. A $40 rise on every saddle raises the average per saddle by the full $40.
2. B
  Correct. Leather is a variable input, and the extra $40 is added to every saddle. Each added saddle costs $40 more, so MC rises by $40; total variable cost rises by $40 times the quantity, so AVC and ATC rise by $40 too. Fixed cost is unchanged, so AFC stays put.
3. C
  ATC rises because AVC rises. And each added saddle now costs $40 more to make, so MC rises as well.
4. D
  Fixed costs did not change, so AFC, fixed cost divided by output, is unchanged.
5. E
  Marginal cost is the cost of one more saddle, and one more saddle now needs $40 more leather. A cost that is the same for every unit still raises MC.
Which of the following holds for a firm's costs in the long run but not in the short run?
Answer: D.
1. A
  Diminishing marginal returns come from holding some inputs fixed while adding another, which is a short-run situation.
2. B
  Average fixed cost exists only when some cost is fixed. In the long run there is no fixed cost to spread.
3. C
  Making more output costs more in both the short run and the long run, so this does not separate them.
4. D
  Correct. In the long run a firm can adjust every input, including its plant and equipment, so all of its costs become variable and there is no fixed cost.
5. E
  Marginal cost crosses average total cost at its minimum in both time frames. It does not set the long run apart.
A firm that makes rowing machines is producing in the range of output where its long-run average total cost falls as output rises. Which of the following would most likely lower its cost per rowing machine in the long run?
Answer: C.
1. A
  Adding workers to a fixed plant is a short-run change, and it runs into diminishing marginal returns. The long-run gain here comes from a bigger scale of operation.
2. B
  Coordination problems belong to diseconomies of scale, where cost per unit rises with output. This firm is on the falling part of the curve.
3. C
  Correct. Where long-run average total cost falls as output rises, the firm has economies of scale. Growing to a larger scale lowers its cost per unit, at least until it reaches the minimum efficient scale.
4. D
  Its cost per unit is still falling with output, so it has not yet reached the lowest cost. Growing would lower it further.
5. E
  Competition does not change the cost of making a rowing machine. Two smaller plants would move the firm back up the falling part of its cost curve.
Marguerite and Dagny each run a picture-framing shop in the same town. Last year the two shops took in the same revenue and paid the same explicit costs, and each owner put the same amount of her own savings into her shop. Before opening, Marguerite worked as an engineer, a job that paid far more than Dagny's old job as a shop assistant. Which of the following compares the two owners' profits last year?
Answer: B.
1. A
  Both shops' books show the same revenue and the same explicit costs, so their accounting profits are equal. Only economic profit, which counts the job each owner gave up, differs.
2. B
  Correct. Accounting profit subtracts only explicit costs, and those are identical, so the two accounting profits are equal. Economic profit also subtracts implicit costs, and Marguerite gave up a better-paid job, so her implicit cost is larger and her economic profit is smaller.
3. C
  The higher salary Marguerite gave up is a larger implicit cost, and a larger cost lowers economic profit. Her economic profit is the smaller of the two.
4. D
  The salary an owner gives up never appears on the books, so it cannot lower accounting profit. It is economic profit that differs between the two owners.
5. E
  Revenue, explicit costs and savings are the same, but the forgone salaries are not. Economic profit counts the job each owner gave up, and Marguerite gave up more.
Gwendolyn is deciding whether to quit her job and use her savings to open a tea room. She has estimated the tea room's yearly revenue and its explicit costs, such as rent, supplies and wages. What else does she need to know to decide whether opening the tea room would earn an economic profit?
Answer: A.
1. A
  Correct. Economic profit subtracts implicit costs as well as explicit ones. Her implicit costs are the pay she gives up by leaving her job and what her savings would earn elsewhere, so she needs those to know whether the tea room beats her alternatives.
2. B
  What she paid in the past is a sunk cost. It is the same whatever she decides, so it does not affect the decision.
3. C
  That comparison is accounting profit, and she already has both numbers. A positive accounting profit can still be an economic loss.
4. D
  Other tea rooms' accounting profit leaves out implicit costs, and their owners' alternatives are not hers.
5. E
  Rent and supplies are explicit costs, which she has already estimated. The missing piece is her implicit costs.
A firm produces a positive amount of output and picks the quantity that makes its profit as large as possible. Its revenue and cost curves are smooth. Which of the following is true at that quantity?
Answer: A.
1. A
  Correct. Profit keeps growing while one more unit adds more to revenue than to cost, and starts shrinking once the next unit adds more to cost than to revenue. The turning point is where marginal revenue equals marginal cost.
2. B
  Revenue is highest where marginal revenue has fallen to zero. The units just before that point can cost more to make than they bring in, so the quantity with the most revenue is usually not the one with the most profit.
3. C
  The lowest point of ATC is where cost per unit is smallest, not where profit is largest. A firm earns more by producing past that point as long as each extra unit adds more to revenue than to cost.
4. D
  Price equal to ATC means zero economic profit. A competitive firm ends up there in the long run, but it is not how any firm chooses its output, and it is false for a firm that is earning a profit.
5. E
  Marginal cost is lowest where diminishing marginal returns set in. Revenue plays no part in where that point falls, so it cannot be the profit-maximizing quantity.
Pemberdine Pallets sells wooden pallets in a perfectly competitive market at $40 a pallet. Its total cost each day, including its implicit costs, is:
- 0 pallets: $20
- 1 pallet: $34
- 2 pallets: $56
- 3 pallets: $86
- 4 pallets: $123
- 5 pallets: $167
The town then starts charging a fee of $5 on every pallet the firm makes. The price of a pallet stays at $40. After the fee, what is Pemberdine's profit-maximizing output each day?
Answer: C.
1. A
  The 1st pallet does have the widest gap between its $40 price and its $19 cost with the fee. But profit keeps rising as long as each pallet brings in more than it costs, and that is still true of the 2nd and 3rd pallets.
2. B
  Two pallets is where average total cost with the fee is lowest, $33 a pallet. The firm is not trying to make cost per pallet as small as possible: the 3rd pallet adds $40 to revenue and only $35 to cost, so it raises profit.
3. C
  Correct. The fee adds $5 to the cost of every pallet, so marginal cost becomes $19, $27, $35, $42 and $49. The 3rd pallet adds $35 to cost and $40 to revenue; the 4th would add $42 and only $40. Profit is $19 at 3 pallets and $17 at 4.
4. D
  Four pallets was the best output before the fee, when the 4th pallet cost $37. A fee on each pallet is a variable cost, not a fixed one, so it raises marginal cost, and the 4th pallet now costs $42, more than its $40 price.
5. E
  Five pallets comes from adding the fee to the price instead of to the cost. Buyers still pay $40, and the fee comes out of Pemberdine's revenue on each pallet, so marginal cost rises and output falls.
Vossbury Gravel sells gravel in a perfectly competitive market. A sharp rise in the price of diesel fuel, which its trucks and loaders burn on every load, pushes Vossbury's average variable cost above the market price at every level of output. The price of gravel has not changed yet, and firms expect the higher fuel price to last. Which describes what Vossbury should do now and what happens in the market over time?
Answer: E.
1. A
  With the price below average variable cost, each load Vossbury sells brings in less than the fuel and other variable costs it takes to dig. Operating loses its fixed cost plus more; shutting down loses only the fixed cost.
2. B
  Cutting output does not fix the problem. At every output the price is below AVC, so any positive output loses more than shutting down does.
3. C
  Vossbury is a price taker. If it asks more than the market price, buyers go to other pits and it sells nothing.
4. D
  Shutting down is right for now, but it only stops the variable costs. The fixed costs remain, so the firm is still losing money, and with losses expected to last, firms leave the market in the long run.
5. E
  Correct. In the short run a firm shuts down when the price is below AVC, because then its loss is just its fixed cost. In the long run fixed costs can be escaped too, so with losses expected to last, some firms exit the market.
Which of the following is a perfectly competitive firm's short-run supply curve?
Answer: D.
1. A
  Between the lowest points of AVC and ATC the firm loses money but still covers its variable cost, so in the short run it keeps producing. Starting the curve at the lowest ATC leaves out prices at which the firm does supply output.
2. B
  The firm picks its quantity by setting price equal to marginal cost. AVC only tells it whether to produce at all.
3. C
  ATC tells the firm whether it is earning a profit, not how much to produce. Reading quantity off the ATC curve gives the wrong output at every price.
4. D
  Correct. At any price the firm produces where price equals marginal cost, so the marginal cost curve gives the quantity it supplies. Below the lowest point of AVC it shuts down and supplies nothing, so only the part above that point counts.
5. E
  The horizontal line at the market price is the firm's demand and marginal revenue curve. It shows what the firm can sell at that price, not how much it chooses to produce.
Ardonne Box Company is a typical firm in the perfectly competitive market for corrugated shipping boxes. The market price is $7.50 a case, and firms expect it to stay there. At its profit-maximizing output of 1,200 cases a week, Ardonne's average total cost is $8.10 and its average variable cost is $6.90. Which describes Ardonne's weekly economic profit and what happens to the number of firms in the market over time?
Answer: A.
1. A
  Correct. Economic profit is (price - ATC) x quantity = ($7.50 - $8.10) x 1,200 = -$720, a loss. The price covers AVC, so Ardonne keeps operating for now, but with no barriers to exit and losses expected to last, some firms leave over time.
2. B
  Covering AVC is the test for operating in the short run, not for staying in the market. In the long run nothing is fixed, and firms that expect losses to continue exit.
3. C
  $720 is (price - AVC) x quantity. Leaving out fixed cost makes a loss look like a profit. Profit is measured against average total cost, which is above the price here.
4. D
  $9,720 is Ardonne's total cost, $8.10 x 1,200. The loss is total cost minus total revenue, $9,720 - $9,000.
5. E
  $1,440 is (ATC - AVC) x quantity, Ardonne's fixed cost. That is the loss it would have if it shut down, not the loss it has while operating.
The market for galvanized nails is perfectly competitive, is a constant cost industry, and starts in long-run equilibrium at $20 a box, the lowest average total cost of a typical firm. Every firm then adopts a new coating process that lowers the lowest point of its average total cost to $16 a box. Demand for nails does not change. Once the market reaches its new long-run equilibrium, how does the quantity of nails sold compare with the quantity sold before the change?
Answer: D.
1. A
  Demand does not shift, but the price changes. At a lower long-run price, buyers move down their unchanged demand curve and buy more nails.
2. B
  The lower costs bring economic profit at $20, which draws firms in rather than pushing them out. The price falls because of that entry.
3. C
  Entry does not stop at the old quantity. It continues until profit is gone, at a price of $16, and at that lower price buyers take more nails than they did at $20.
4. D
  Correct. Lower costs mean economic profit at $20, which draws in new firms. In a constant cost industry their entry does not change costs, so market supply keeps rising until the price falls to the new lowest ATC, $16. Demand has not changed, so at $16 buyers purchase more nails than at $20.
5. E
  A perfectly competitive firm's demand curve is horizontal at the market price. It moves down with the price; nothing makes it shift right, and market demand has not changed.
In the perfectly competitive market for paper drinking straws, a typical firm in long-run equilibrium sells straws at $3 a carton. At its output, its marginal cost is $3 a carton and its average total cost is $3 a carton, the lowest point of its ATC curve. Which describes this market?
Answer: E.
1. A
  Price equal to marginal cost is allocative efficiency, but the firm is also producing at the lowest point of ATC, which is productive efficiency. Both hold.
2. B
  The firm is producing at the lowest ATC, so it is productively efficient, but price also equals marginal cost, which makes it allocatively efficient as well. Both conditions are met.
3. C
  Zero economic profit is not a sign of inefficiency. It means firms earn a normal return, and here price equals both marginal cost and the lowest ATC.
4. D
  An economic profit would mean the price is above the lowest ATC. Efficiency comes from price equal to marginal cost and output at the lowest ATC, not from profit.
5. E
  Correct. Price equal to marginal cost means the last carton is worth exactly what it costs to make, which is allocative efficiency. Producing at the lowest point of ATC is productive efficiency.
Which of the following is true of a firm that sells in an imperfectly competitive output market, all else constant?
Answer: B.
1. A
  That describes a price taker in a perfectly competitive market. An imperfect competitor faces a downward-sloping demand curve, so at the current price it can sell only so many units.
2. B
  Correct. A firm in an imperfectly competitive market faces a downward-sloping demand curve, so selling one more unit means lowering its price.
3. C
  A firm that charges every buyer one price sets that price above marginal cost at its chosen output. Price equal to marginal cost is the result in perfect competition.
4. D
  Marginal revenue equals price only for a price taker. A firm that must cut its price to sell more gets less than the price from the extra unit, because the lower price applies to the units it was already selling.
5. E
  Barriers to entry can keep new firms out, so a monopoly or an oligopoly can earn economic profit in the long run. Zero long-run profit follows only where entry is free.
In the country of Vashenna, Wickstead Minerals controls every known deposit of a rare mineral sand used to make spark plug insulators, and no other firm can get the sand anywhere in the country. No law or patent keeps other firms out of the business. Which barrier to entry protects Wickstead?
Answer: D.
1. A
  The stem rules this out: no law or patent keeps rivals away. A legal barrier is one the government creates.
2. B
  Nothing in the example says a factory would be costly. A rival with plenty of money still could not make insulators without the sand.
3. C
  Advertising can make buyers prefer one brand, but it does not stop rivals from producing. Here rivals cannot produce at all.
4. D
  Correct. Wickstead holds the only supply of an input the product needs. Rivals cannot enter because they cannot get that input, which is exclusive ownership of a key resource.
5. E
  Diseconomies of scale raise cost per unit as a firm grows, which makes room for smaller rivals rather than keeping them out.
Ardwyn Bridge Company runs the only toll bridge to an island and wants to maximize its profit. At its current number of crossings a day, marginal revenue is positive but less than marginal cost. What should Ardwyn do to increase its profit?
Answer: A.
1. A
  Correct. The last crossings add more to cost than to revenue, so cutting them raises profit. Moving back up the demand curve to fewer crossings lets Ardwyn charge a higher toll.
2. B
  Positive marginal revenue only means total revenue is still rising. Profit depends on cost too, and each extra crossing here adds more to cost than to revenue.
3. C
  The toll and the number of crossings are tied together by the demand curve. A higher toll means drivers make fewer crossings, so Ardwyn cannot keep the same number.
4. D
  Along a downward-sloping demand curve, more crossings can be sold only at a lower toll. Raising the toll and selling more at the same time is not possible.
5. E
  Cutting crossings is right, but fewer crossings go with a higher toll on the demand curve, not a lower one. A lower toll would bring more drivers, not fewer.
The town of Marrowby gets its water from one company that pipes water to every home. The company's long-run average total cost keeps falling as it serves more homes, all the way past the number of homes in the town. Which explains why the town is served by one company rather than several?
Answer: E.
1. A
  It is the other way around. Average cost falls as output grows, so smaller firms would each sit higher on the cost curve and have higher average costs.
2. B
  Smaller firms would have higher average costs because they lose economies of scale, not because they meet diseconomies of scale. Diseconomies mean cost per unit rises as a firm grows, which is not happening here.
3. C
  A monopoly charges a price above marginal cost. The single firm here is simply the cheapest way to supply the town.
4. D
  Collusion is about firms acting together to raise price. It does not explain why one firm has lower costs than several would.
5. E
  Correct. When economies of scale continue across the whole market, one firm can serve every home at a lower average cost than any split among several firms. That is a natural monopoly.
Sendrick Labs holds the patent on an eye drop and is its only seller. On Sendrick's graph, the demand and marginal cost curves are straight lines. Marginal revenue equals marginal cost at 30,000 bottles a month, where marginal cost is $14 a bottle. The demand curve shows a price of $26 at 30,000 bottles, and the demand and marginal cost curves cross at 40,000 bottles and $22. Average total cost at 30,000 bottles is $18. What is the deadweight loss from Sendrick's monopoly each month?
Answer: C.
1. A
  $20,000 is only the part of the triangle above $22, 0.5 x ($26 - $22) x 10,000. The deadweight loss runs all the way down to the marginal cost curve.
2. B
  $40,000 is only the part of the triangle below $22, 0.5 x ($22 - $14) x 10,000. The lost surplus also includes the part between $22 and the demand curve.
3. C
  Correct. The deadweight loss is the triangle between demand and marginal cost from 30,000 to 40,000 bottles. Its height at 30,000 bottles is $26 - $14 = $12 and its base is 10,000 bottles, so it is 0.5 x $12 x 10,000 = $60,000.
4. D
  $120,000 is $12 x 10,000 with the one-half left off. The area between the two curves is a triangle.
5. E
  $240,000 is Sendrick's profit, ($26 - $18) x 30,000. That profit is surplus moved from buyers to the firm, and moved surplus is still counted in the total.
Which of the following is an example of price discrimination?
Answer: D.
1. A
  The bigger cake costs more to make, so its higher price reflects a cost difference. Price discrimination is charging different prices for the same good when costs are the same.
2. B
  One price for everyone is the opposite of price discrimination. The hotel is not separating guests by what they are willing to pay.
3. C
  Here the price rises for every buyer because the station's own cost went up. Nothing separates buyers into groups paying different prices.
4. D
  Correct. The program is identical and costs the same to provide to anyone, but the firm charges students less because they are, on average, willing to pay less. That is price discrimination, used to raise profit by selling to buyers who would not pay the full price.
5. E
  A wheat farmer is a price taker with no market power, so it cannot set different prices for different buyers. Every buyer pays the market price.
Dorvan is the only piano tuner on a remote island. Five households each want one tuning this year, and the most each will pay is $50, $42, $35, $27 and $18. Each tuning costs Dorvan $24 in time and travel. If he charges everyone one price, he picks the price that gives him the most profit. If instead he learns each household's top price and charges each household exactly that, by how much does his profit rise?
Answer: B.
1. A
  $16 comes from tuning all five pianos. The household that will pay only $18 costs $24 to serve, so tuning it loses $6. Dorvan's best profit with a separate price for each household is $58, not $52.
2. B
  Correct. With one price, $42 is best: 2 x ($42 - $24) = $36, more than $26 at $50, $33 at $35 or $12 at $27. Charging each household its top price, he tunes the four willing to pay at least $24 and earns ($50 + $42 + $35 + $27) - 4 x $24 = $58. The rise is $58 - $36 = $22.
3. C
  $25 compares against a single price of $35, which earns 3 x $11 = $33. Selling to more households at one price is not the best single price here: $42 earns $36.
4. D
  $36 is Dorvan's profit at the best single price. The question asks how much profit rises, which is the difference between the two outcomes.
5. E
  $58 is his total profit when each household pays its top price. The rise subtracts the $36 he would have made with one price.
How does a typical firm in long-run equilibrium in monopolistic competition compare with a typical firm in long-run equilibrium in perfect competition?
Answer: A.
1. A
  Correct. Free entry and exit drive economic profit to zero in both. The monopolistically competitive firm produces less than the output that minimizes ATC, which is excess capacity, while the perfect competitor produces at the lowest ATC.
2. B
  Both earn zero economic profit in the long run, but only the perfect competitor produces at the lowest point of ATC. The monopolistically competitive firm stops short of it.
3. C
  A monopolistically competitive firm faces downward-sloping demand, so its price is above marginal cost. Only the perfect competitor prices at marginal cost.
4. D
  Free entry removes economic profit in the long run in both structures. The part about allocative efficiency is right, but the firms do not keep a profit.
5. E
  The perfect competitor produces at the lowest ATC, so it has no excess capacity. In the long run both firms charge a price equal to ATC, which is why both earn zero profit.
Hair salons in the town of Brennoch each offer their own style of service, and they are earning economic profit. There are no barriers to entry, and several new salons open. For a typical salon that was already there, what happens to the demand for its haircuts and to its economic profit?
Answer: E.
1. A
  New salons take customers away from the existing ones. With more competitors, each salon sells fewer haircuts at every price.
2. B
  Each new salon pulls some customers away, so demand for an existing salon's haircuts falls. Its price also stays above marginal cost, because its demand curve still slopes down.
3. C
  Demand does fall, but in long-run equilibrium a monopolistically competitive firm stops short of the lowest point of ATC. Its price ends up equal to ATC at a smaller output, which leaves excess capacity.
4. D
  Entry continues only while there is profit to be had. Once profit reaches zero, entry stops, so the market does not settle at a loss.
5. E
  Correct. Each new salon draws some customers away, so demand for an existing salon's haircuts decreases. Entry continues until economic profit is driven to zero.
Ondrel Freight and Bayvane Freight are the only two carriers on a shipping route. Each decides, once and at the same time, whether to hold its fleet at its current size or expand it. Their yearly profits, in thousands of dollars, are:
- Both hold: Ondrel 62, Bayvane 54
- Ondrel expands, Bayvane holds: Ondrel 75, Bayvane 38
- Ondrel holds, Bayvane expands: Ondrel 40, Bayvane 55
- Both expand: Ondrel 45, Bayvane 35
Which outcome is the Nash equilibrium?
Answer: B.
1. A
  Both holding gives the largest combined profit, 116 thousand, but it is not stable. Ondrel would earn 75 instead of 62 by expanding while Bayvane holds.
2. B
  Correct. Expanding is Ondrel's dominant strategy: 75 beats 62 when Bayvane holds, and 45 beats 40 when Bayvane expands. Given that Ondrel expands, Bayvane earns 38 by holding and 35 by expanding, so it holds. Neither can gain by changing alone.
3. C
  At this outcome Ondrel earns 40, but it would earn 45 by expanding too. A Nash equilibrium needs every player to be doing its best given the other's choice.
4. D
  Bayvane does better by expanding only when Ondrel holds (55 against 54). When Ondrel expands, Bayvane earns 38 by holding and 35 by expanding, so it would switch to holding.
5. E
  A Nash equilibrium needs one outcome where neither player gains by switching alone, and Ondrel expanding while Bayvane holds is that outcome. Not every game has one, but this one does.
Tamsett Asphalt and Vorrel Asphalt each choose a high price or a low price. Tamsett's weekly profit, in thousands of dollars, is:
- Both high: 80
- Tamsett low, Vorrel high: 95
- Tamsett high, Vorrel low: 30
- Both low: 50
Low is Tamsett's dominant strategy. A regulator plans to fine Tamsett a fixed amount every week that it charges the low price. To make high Tamsett's dominant strategy, the weekly fine must be more than which amount?
Answer: C.
1. A
  $5,000 is the difference between the two gaps, $20,000 - $15,000. A fine that small leaves low ahead of high whatever Vorrel does.
2. B
  $15,000 closes the gap only when Vorrel prices high (95 against 80). When Vorrel prices low, low earns 50 and high earns 30, so a fine of just over $15,000 still leaves low ahead by almost $5,000.
3. C
  Correct. Low beats high by 95 - 80 = 15 thousand when Vorrel is high and by 50 - 30 = 20 thousand when Vorrel is low. For high to be better in both cases, the fine must be more than the larger gap, $20,000.
4. D
  $35,000 adds the two gaps. Tamsett compares its options one column at a time, so the fine only has to beat the larger gap, not their sum.
5. E
  $50,000 is Tamsett's whole profit when both price low. The fine does not need to wipe out that profit, only to make high pay more than low.
Suppose the wage paid to hotel housekeepers in a city rises from $16 to $18 an hour. Other things constant, how do hotels and housekeepers respond?
Answer: D.
1. A
  A change in the wage itself moves hotels and workers along the curves; it does not shift them. Demand and supply shift only when something other than the wage changes.
2. B
  This reverses both relationships. A higher wage makes each housekeeper more costly, so hotels hire fewer, and it makes the job more attractive, so more people offer to work.
3. C
  A wage change does not shift labor demand. And nothing here has changed the output price or how productive housekeepers are, which are what would move it.
4. D
  Correct. The quantity of labor demanded is negatively related to the wage, and the quantity supplied is positively related to it. At $18, hotels want fewer housekeeper hours and more people want to work them.
5. E
  The quantity supplied does rise, but hotels respond to a higher wage by hiring fewer housekeepers. The quantity demanded falls.
Demand for rooftop solar panel systems rises sharply, and the price of an installed system goes up. In the perfectly competitive labor market for solar panel installers, what happens to the equilibrium wage and the number of installers employed?
Answer: E.
1. A
  A lower wage with more employment comes from labor supply shifting right. Nothing here gives more people a reason to offer to install panels at each wage.
2. B
  A higher wage with less employment comes from labor supply shifting left. The change here is to the price of what installers produce, which moves labor demand.
3. C
  Both falling would mean labor demand decreased. A higher price for installed systems makes each installer's work worth more to firms, not less.
4. D
  Labor demand comes from the demand for what workers produce. When the output price rises, the labor market feels it.
5. E
  Correct. A higher price for installed systems raises the marginal revenue product of each installer, so labor demand shifts right. The wage and the number employed both rise.
In the competitive market for long-haul truck drivers, new routing software lets each driver deliver more loads a week. At the same time, many older drivers retire and fewer young people train to drive trucks. What is the effect on the equilibrium wage and the number of drivers employed?
Answer: A.
1. A
  Correct. Higher productivity raises each driver's marginal revenue product, so labor demand shifts right. Retirements and fewer new drivers shift labor supply left. Both shifts push the wage up, but they push employment in opposite directions, so without their sizes the change in employment is unknown.
2. B
  Both shifts raise the wage: more demand for drivers and fewer drivers available. A falling wage would need demand to fall or supply to rise.
3. C
  This has the shifts working in the wrong way. The two shifts agree on the wage, which rises, and disagree on employment.
4. D
  Fewer drivers available does pull employment down, but stronger demand pulls it up. It is the wage that both shifts move the same way.
5. E
  Employment would rise only if the demand increase were larger than the supply decrease. Nothing in the example gives the sizes, so the change in employment cannot be pinned down.
Garrick Wheelworks is the only maker of a patented bicycle wheel, and it hires its workers in a perfectly competitive labor market. For the last worker Garrick hires, the marginal revenue product is less than the worker's marginal product multiplied by the price of a wheel. Which of the following best explains why?
Answer: C.
1. A
  Garrick hires in a perfectly competitive labor market, so the wage stays put as it hires. A wage change would also affect what a worker costs, while the gap here is in the revenue a worker brings in.
2. B
  Diminishing returns lower the worker's marginal product, but that same lower number is used on both sides of the comparison. It cannot explain why the revenue from the worker falls short of marginal product times price.
3. C
  Correct. Marginal revenue product is marginal product times marginal revenue. Garrick is the only seller, so to sell the extra wheels it must lower its price on all of its wheels, which puts marginal revenue below price. A seller in a perfectly competitive output market would have marginal revenue equal to price, and its MRP would equal marginal product times price.
4. D
  Being a wage taker describes the labor market Garrick hires in. It says nothing about how the revenue from a worker's output compares with that output valued at the price.
5. E
  A less skilled worker has a smaller marginal product, and that same smaller number is used in both calculations. The gap comes from the output market, where Garrick has to cut its price to sell more.
Brumley Plastics makes molded parts using workers and machine time. The last hour of labor it uses adds 50 parts and costs $20. The last hour of machine time it uses adds 120 parts and costs $60. To make its current output at the lowest possible cost, what should Brumley do?
Answer: B.
1. A
  Machine time does add more parts per hour, 120 against 50, but it also costs three times as much. Comparing marginal products without their prices points the wrong way.
2. B
  Correct. Labor adds 50 / $20 = 2.5 parts per dollar, and machine time adds 120 / $60 = 2 parts per dollar. Moving dollars from machine time to labor makes the same output for less, until the last dollar spent on each yields the same marginal product.
3. C
  The current mix is the cheapest only if the last dollar on each input adds the same output. Here labor adds 2.5 parts per dollar and machine time only 2.
4. D
  Using more of both raises output and cost together. The question is how to make the current output for less, which means changing the mix.
5. E
  Shifting toward labor is right, but not all the way. As Brumley adds labor, its marginal product falls, and the shift should stop once the two inputs give the same output per dollar.
Eskerford Mill is the only employer of mill workers in its town. To hire more workers, it must raise the hourly wage it pays all of them. The wage it must pay and the marginal revenue product of the last worker are:
- 1 worker: wage $10, marginal revenue product $30
- 2 workers: wage $12, marginal revenue product $26
- 3 workers: wage $14, marginal revenue product $22
- 4 workers: wage $16, marginal revenue product $18
- 5 workers: wage $18, marginal revenue product $14
To maximize its profit, how many workers does Eskerford hire, and what wage does it pay?
Answer: B.
1. A
  Two comes from comparing marginal revenue product with total labor cost ($10, $24, $42) instead of with the change in that cost. The 3rd worker raises the wage bill by only $18 and adds $22.
2. B
  Correct. Total labor cost is $10, $24, $42, $64 and $90, so the marginal factor cost of each worker is $10, $14, $18, $22 and $26. The 3rd worker adds $22 and costs $18; the 4th would add $18 and cost $22. Eskerford hires 3 and pays the $14 that 3 workers require.
3. C
  $18 is the marginal factor cost of the 3rd worker: the $14 wage plus the $2 raise to the first two. Eskerford pays only the wage it takes to attract 3 workers.
4. D
  $22 is the 3rd worker's marginal revenue product. A monopsonist pays the wage on the labor supply schedule, which is below what the last worker adds.
5. E
  Four workers at $16 is where marginal revenue product meets the wage, the result in a competitive labor market. Eskerford counts the raise to its existing workers, so it hires fewer and pays less.
In the market for a good, marginal social benefit equals marginal social cost at 420 units a week, but the market produces 500 units a week. Which explains why total economic surplus would be larger at 420 units?
Answer: C.
1. A
  If those units were worth more to society than they cost, producing them would add to surplus, and the best quantity would be above 420, not at it.
2. B
  The units before 420 are worth more to society than they cost, which is why they add to surplus. Marginal social benefit equals marginal social cost only at the 420th unit.
3. C
  Correct. Past 420 units, each extra unit costs society more than it is worth. Producing those 80 units subtracts from total surplus, which is deadweight loss, so cutting back to 420 makes total surplus larger.
4. D
  Total surplus counts buyers and sellers together. A higher price moves surplus from buyers to sellers but does not make the total larger.
5. E
  Price equal to average total cost tells you a firm earns zero economic profit. The efficient quantity is set by marginal social benefit and marginal social cost.
Fertilizer plants in the region of Olvast release runoff that harms fishing streams, and the plants pay nothing for the harm. In the competitive fertilizer market, the marginal external cost is $6 a ton at every quantity, so the marginal social cost curve lies $6 above the supply curve. Demand and supply are straight lines. The market produces 900 tons a week, and the socially optimal quantity is 600 tons a week. What is the deadweight loss each week?
Answer: E.
1. A
  $5,400 is the external cost of all 900 tons, $6 x 900. The first 600 tons are worth making even after the harm is counted, so their external cost is not lost surplus.
2. B
  $3,600 is the external cost of the 600 tons that should be made, $6 x 600. Those tons are worth more to society than they cost, so they are not where the loss is.
3. C
  $2,700 uses all 900 tons as the base, 0.5 x $6 x 900. Only the 300 tons past the optimum cost society more than they are worth.
4. D
  $1,800 is $6 x 300 without the one-half. The gap between marginal social cost and marginal social benefit shrinks to zero at 600 tons, so the area is a triangle.
5. E
  Correct. The deadweight loss is the triangle between marginal social cost and demand from 600 to 900 tons. At 900 tons the gap between them is the $6 external cost, and it closes to zero at 600 tons, so the loss is 0.5 x $6 x 300 = $900.
A tannery on the Darrow River dumps waste that kills fish at a fish farm downstream. Only these two firms use the river, and no one holds a legal right to clean water in it. Which change would let the two firms reduce the pollution through a private agreement?
Answer: D.
1. A
  A per-unit subsidy lowers the tannery's cost of each hide, so it processes more hides and dumps more waste.
2. B
  A binding price ceiling might cut how much leather is made, but it is not an agreement between the two firms, and it does nothing to price the harm to the fish farm.
3. C
  Taxing the fish farm's output shrinks the farm, the side being harmed. It does nothing to make the tannery account for the damage it causes.
4. D
  Correct. The externality exists because no one owns the right to clean water. Once the fish farm holds that right, the tannery must either stop polluting or pay the farm to accept some waste, so the harm gets priced in a private deal. With only two firms, the cost of making that deal is low.
5. E
  Rent is a fixed cost. Lowering it does not change how much each hide costs to process, so it does not change how much waste the tannery dumps.
Wild blueberries grow on a large public moor, and anyone may pick as many as they like. Every berry one picker takes is a berry no one else can pick. Which describes the blueberries on the moor?
Answer: A.
1. A
  Correct. A berry one person picks cannot be picked by another, so the berries are rival, and no one can be kept off the moor, so they are non-excludable. Each picker ignores what their picking costs everyone else, so the berries get picked too early and too heavily.
2. B
  The berries are rival, but no one can be kept from picking them, so they are not excludable. A private good needs both.
3. C
  A public good can be used by many people at once without being used up. Each berry picked is gone for everyone else, so the berries are rival.
4. D
  The berries are rival, not non-rival, and nothing stops anyone from picking, so they are not excludable either.
5. E
  Non-excludable is right, but the berries are rival: a berry one person picks cannot be picked by someone else. That is why they get overused.
Merrisk Power is the only electricity supplier in a valley, and its long-run average total cost falls over the whole range of demand. It sells electricity in blocks of 100 kilowatt-hours, and its marginal cost is constant at $4 a block. Unregulated, it sells 12,000 blocks a month at $9 each, where its average total cost is $7. Regulators then require it to charge $4, the price at which the demand curve meets marginal cost, and it would sell 24,000 blocks a month, where its average total cost is $5.50. How large a lump-sum subsidy each month does Merrisk need to keep producing at the regulated price without an economic loss?
Answer: B.
1. A
  $24,000 is the profit Merrisk earned before regulation, ($9 - $7) x 12,000. The subsidy only has to cover the loss at the regulated price, not replace the profit it gave up.
2. B
  Correct. At $4 a block and 24,000 blocks, revenue is $96,000 and total cost is $5.50 x 24,000 = $132,000, a loss of $36,000. A natural monopoly priced at marginal cost loses money because marginal cost is below average total cost, so it needs a lump-sum subsidy equal to that loss.
3. C
  $60,000 adds the lost profit to the loss. Zero economic profit already includes a normal return, so the subsidy only has to bring economic profit up to zero.
4. D
  $96,000 is Merrisk's total revenue at the regulated price, which customers already pay. The subsidy covers only the gap between revenue and total cost.
5. E
  $132,000 is Merrisk's whole total cost. Its customers pay $96,000 of that, so the subsidy needs to cover only the remaining $36,000.
The income Gini coefficient is 0.31 in Oskelund and 0.47 in Haskeny. Which comparison do these two figures support on their own?
Answer: C.
1. A
  A Gini coefficient measures how income is shared among households. A poor country and a rich one can have the same Gini.
2. B
  A higher Gini means a less equal distribution overall, so this points the wrong way, and the Gini alone does not give the share of any one group.
3. C
  Correct. A Gini coefficient closer to zero means a Lorenz curve closer to the line of perfect equality. At 0.31, Oskelund's income is shared more equally than Haskeny's at 0.47.
4. D
  This reverses the scale. A larger Gini coefficient means more inequality, so Haskeny's income is shared less equally.
5. E
  Poverty rates depend on how many people fall below a poverty line, which depends on income levels as well as how income is shared. The Gini alone does not give it.

Section II: Free Response

3 questions · 60 minutes

Question 1: Long 10 points

In the country of Quessany, Vellacourt Instruments holds the only patent on a handheld soil-moisture meter that farmers use to decide when to irrigate. No other firm may sell the meter, so Vellacourt is an unregulated monopoly, and it is currently earning a positive economic profit. Its average total cost curve is U-shaped, and its marginal cost curve slopes upward. Vellacourt hires its assembly workers in a perfectly competitive labor market.

Respond to parts (a) through (g). Draw any graph on your own paper.
1. (a)
  
  Draw a correctly labeled graph for Vellacourt and show each of the following.
  
  (i) The profit-maximizing quantity and price, labeled QM and PM, respectively
  
  (ii) Vellacourt's economic profit, shaded completely
  Question 1, part (a): your response. It stays in this browser tab and is never sent anywhere.
  Score part (a)
  - 1 point Draws a correctly labeled graph with price (or dollars) on the vertical axis and quantity on the horizontal axis, a downward-sloping demand curve, and a marginal revenue curve that lies below the demand curve.Earns it: "Axes P and Q; D slopes down; MR starts at the same point on the price axis and falls faster, below D"; "price and quantity of meters on the axes, demand labeled D = AR, MR drawn under it"Does not: MR drawn on top of the demand curve or horizontal (that is a perfectly competitive firm; a monopoly must lower its price to sell one more meter, so MR is below demand); curves drawn with no labels, or axes left unlabeled (the task asks for a correctly labeled graph)
  - 1 point Draws an upward-sloping MC curve and shows QM on the quantity axis where MR = MC, with PM read from the demand curve directly above QM.Earns it: "QM where MR crosses MC; go straight up to D and across to the price axis for PM"Does not: PM set where MC crosses demand (that is the efficient price, not the monopoly price); PM read off the MR curve at QM (MR = MC there, but buyers pay what the demand curve says); QM where demand crosses MR or where MR = 0 (that is the revenue-maximizing quantity)
  - 1 point Draws an ATC curve that lies below PM at QM and completely shades the rectangle between PM and ATC, from the price axis out to QM. The point is earned for a rectangle consistent with the QM and PM the student shows.Earns it: "ATC is below PM at QM; the box from ATC up to PM and from 0 to QM is shaded as profit"Does not: ATC drawn above PM at QM (the stem says the firm earns a positive economic profit); the shaded area runs from PM down to MC rather than to ATC (profit per unit is price minus average total cost); a triangle shaded between demand and MC (that is deadweight loss, not profit)
  Model response
  The vertical axis is Price and the horizontal axis is Quantity of meters. The demand curve D slopes down. The marginal revenue curve MR starts at the same point on the price axis and falls twice as fast, so it lies below D. The marginal cost curve MC slopes up, and the U-shaped ATC curve has MC passing through its lowest point. QM is the quantity where MR crosses MC. Straight above QM, the demand curve gives the price PM. At QM the ATC curve sits below PM, and the rectangle from ATC up to PM, running from the price axis out to QM, is shaded as Vellacourt's economic profit.
2. (b)
  
  At PM, is the demand for Vellacourt's meter price elastic, price inelastic, or unit elastic? Explain.
  Question 1, part (b): your response. It stays in this browser tab and is never sent anywhere.
  Score part (b)
  - 1 point States that demand is elastic and explains that at QM marginal revenue equals marginal cost, which is positive, and marginal revenue is positive only where demand is elastic. Also acceptable: a monopoly never produces where demand is inelastic, because there a lower output at a higher price would raise total revenue and lower total cost. Also acceptable: QM is less than the quantity where MR equals zero, so PM is on the elastic portion of demand.Earns it: "Elastic. MR = MC at QM and MC is above zero, so MR is positive, which happens only on the elastic part of demand."; "Elastic: if demand were inelastic, raising price and selling fewer meters would raise revenue and cut cost, so profit would rise."; "Elastic. MR crosses MC to the left of where MR reaches zero, and the part of demand above positive MR is the elastic part."Does not: "Inelastic, because it is the only seller and farmers need it" (having no close substitutes does not put the firm on the inelastic part of its demand curve; MR would be negative there); "Unit elastic, because MR = MC" (unit elasticity is where MR = 0, and MC is positive); "Elastic" with no reason (the task asks for an explanation)
  Model response
  Demand is elastic at PM. Vellacourt produces where MR = MC, and marginal cost is positive, so marginal revenue at QM is positive. Marginal revenue is positive only where a price cut raises total revenue, which is the elastic part of the demand curve.
3. (c)
  
  At QM, Vellacourt sells 50,000 meters a year at a price of $45 each, and its average total cost is $31 per meter. Calculate Vellacourt's economic profit. Show your work.
  Question 1, part (c): your response. It stays in this browser tab and is never sent anywhere.
  Score part (c)
  - 1 point Calculates an economic profit of $700,000, with work shown: ($45 - $31) x 50,000, or total revenue of $2,250,000 minus total cost of $1,550,000.Earns it: "(45 - 31) x 50,000 = $700,000"; "TR = 45 x 50,000 = 2,250,000; TC = 31 x 50,000 = 1,550,000; profit = $700,000"Does not: "$14" (that is profit per meter, not total profit); "$2,250,000" (that is total revenue; costs were not subtracted); "$700,000" with no work (the task says show your work)
  Model response
  Profit per meter is $45 - $31 = $14. Economic profit is $14 x 50,000 = $700,000. Checking another way: total revenue is $45 x 50,000 = $2,250,000, total cost is $31 x 50,000 = $1,550,000, and the difference is $700,000.
4. (d)
  
  The government of Quessany begins charging Vellacourt a fixed annual fee for holding the patent. The fee is the same no matter how many meters Vellacourt sells, and it is smaller than Vellacourt's economic profit. Will Vellacourt's profit-maximizing quantity increase, decrease, or stay the same? Explain.
  Question 1, part (d): your response. It stays in this browser tab and is never sent anywhere.
  Score part (d)
  - 1 point States that the quantity stays the same and explains that a fixed fee does not change marginal cost or marginal revenue (it raises only fixed cost and average total cost), so MR still equals MC at QM.Earns it: "Stays the same. The fee is a fixed cost, so MC does not move and MR = MC at the same quantity."; "Same quantity: the fee shifts ATC up but not MC, and the firm chooses output by MR = MC."Does not: "Decrease, because its costs went up" (the fee raises total cost by the same amount at every output, so the cost of one more meter does not change); "Stays the same, because it is a monopoly and sets its own price" (the right answer with the wrong reason); "Increase, to cover the fee" (selling more than QM lowers profit; MR is below MC there)
  Model response
  The quantity stays the same. A fee that does not depend on output is a fixed cost. It shifts the ATC curve up, but it adds nothing to the cost of one more meter, so the MC curve does not move, and neither does MR. Vellacourt still maximizes profit where MR = MC, which is still QM. Its profit falls by the amount of the fee.
5. (e)
  
  Suppose instead that there is no fee, and regulators set a price ceiling on the meter at the price where Vellacourt's marginal cost curve crosses its demand curve. At that price Vellacourt still earns at least a normal profit, so it stays in the market. Producing and using the meter create no external costs or benefits.
  
  (i) On your graph in part (a), show the quantity Vellacourt sells under the ceiling, labeled QR.
  
  (ii) Will there be any deadweight loss in the market for meters under the ceiling?
  Question 1, part (e): your response. It stays in this browser tab and is never sent anywhere.
  Score part (e)
  - 1 point On the graph from part (a), shows QR at the quantity where the MC curve crosses the demand curve, to the right of QM. The point is earned for a QR consistent with the curves the student drew.Earns it: "A horizontal ceiling line at the price where MC crosses D, and QR below that crossing, to the right of QM"Does not: QR where the ceiling crosses MR (under the ceiling, the firm can sell each meter up to QR at the ceiling price, so its marginal revenue equals the ceiling price out to the demand curve); QR to the left of QM (the ceiling is below PM, and the efficient quantity is larger than the monopoly quantity)
  - 1 point States that there is no deadweight loss under the ceiling (it is eliminated).Earns it: "No. The deadweight loss is eliminated."; "There is no deadweight loss, because the firm now produces where demand meets MC."Does not: "Yes, a price ceiling always creates deadweight loss" (that holds for a binding ceiling in a competitive market; here the ceiling moves a monopoly up to the efficient quantity); "The deadweight loss gets smaller" with no statement that it is gone (at QR none is left)
  Model response
  (i) On the graph from part (a), a horizontal line at the price where MC crosses D marks the ceiling, below PM. QR is the quantity straight below that crossing, to the right of QM. Out to QR, Vellacourt can sell every meter at the ceiling price, so the ceiling price is its marginal revenue, and it produces until MC rises to meet it.
  
  (ii) No. At QR the value buyers place on the last meter, read from the demand curve, equals the marginal cost of making it, so the deadweight loss is eliminated.
6. (f)
  
  Labor is a variable input for Vellacourt. Compared with the unregulated monopoly, will the number of assembly workers Vellacourt hires under the ceiling in part (e) be greater, smaller, or the same? Explain.
  Question 1, part (f): your response. It stays in this browser tab and is never sent anywhere.
  Score part (f)
  - 1 point States that Vellacourt hires more assembly workers and explains that it makes more meters at QR than at QM, so it needs more labor. Explaining that the demand for labor is derived from the demand for the product, or that the ceiling raises the marginal revenue of the meters between QM and QR and with it the marginal revenue product of labor, also earns the point.Earns it: "Greater. It makes more meters at QR than at QM, and making more meters takes more workers."; "More workers: labor demand is derived from output, and output rises from QM to QR at the same wage."Does not: "Smaller, because the ceiling cuts the price and so cuts the value of what a worker makes" (the ceiling raises the firm's marginal revenue on the meters between QM and QR, and making more meters takes more workers); "The same, because the labor market is perfectly competitive" (the wage stays the same, but the number hired depends on how much the firm produces); "Greater" with no reason (the task asks for an explanation)
  Model response
  Greater. The firm makes more meters at QR than at QM, and the demand for labor comes from the demand for what the workers make, so Vellacourt hires more assembly workers at the same market wage.
7. (g)
  
  Suppose instead that there is no fee and no ceiling, and Vellacourt can practice perfect price discrimination. Would its output be greater than, less than, or equal to QR?
  Question 1, part (g): your response. It stays in this browser tab and is never sent anywhere.
  Score part (g)
  - 1 point States that output would be equal to QR.Earns it: "Equal to QR"; "The same as QR, where demand meets MC"Does not: "Equal to QM, because it is still a monopoly" (with perfect price discrimination each extra meter sells at its own price without cutting the price on the others, so the firm keeps selling until price equals MC); "Greater than QR" (past QR the price a buyer would pay is below MC, so those meters lose money)
  Model response
  Equal to QR. Charging each buyer the most that buyer will pay means a lower price on one more meter does not lower the price of the others, so the demand curve is the firm's marginal revenue curve. It produces where demand meets MC, which is QR.
Your score: 0 of 10, from the boxes you ticked.
Question 2: Short 5 points

Kestrow Tackle ties fishing flies by hand and sells them in a perfectly competitive market for $6 per dozen. It hires workers in a perfectly competitive labor market for fly tyers, where the market wage is currently $110 per worker per day. Labor is Kestrow's only variable input. The table shows how many dozen flies Kestrow ties in a day with each number of workers.

Kestrow Tackle, output per day
Number of workers Total product (dozens of flies)

0 0
1 30
2 56
3 78
4 95
5 107
6 113

Respond to parts (a), (b), (c), and (d). Draw any graph on your own paper.
1. (a)
  
  Calculate the marginal revenue product of the fourth worker. Show your work.
  Question 2, part (a): your response. It stays in this browser tab and is never sent anywhere.
  Score part (a)
  - 1 point Calculates a marginal revenue product of $102, with work shown: the fourth worker adds 95 - 78 = 17 dozen, and 17 x $6 = $102. Computing the change in total revenue, $570 - $468 = $102, also earns the point.Earns it: "MP = 95 - 78 = 17; MRP = 17 x 6 = $102"; "TR with 4 workers is 570, with 3 it is 468, so MRP = $102"Does not: "$570" (that is the total revenue from 4 workers, not what the fourth adds); "17" (that is the marginal product in dozens of flies; it has not been turned into revenue); "$142.50" (that is revenue per worker, an average, not the marginal worker's contribution)
  Model response
  The fourth worker raises output from 78 to 95 dozen, a marginal product of 17 dozen. Each dozen sells for $6, so the fourth worker's marginal revenue product is 17 x $6 = $102.
2. (b)
  
  How many workers will Kestrow hire to maximize profit? Explain.
  Question 2, part (b): your response. It stays in this browser tab and is never sent anywhere.
  Score part (b)
  - 1 point States that Kestrow hires 3 workers and explains that the third worker's marginal revenue product ($132) is greater than the wage of $110, while the fourth worker's ($102) is less than the wage. Showing that total revenue minus the wage bill is highest with 3 workers ($138, against $116 with two and $130 with four) also earns the point.Earns it: "3 workers. The third adds $132, more than the $110 wage; the fourth adds only $102, less than $110."; "Hire 3: MRP of the 3rd is 132 > MFC of 110, MRP of the 4th is 102 < 110"Does not: "4 workers, because the fourth worker's MRP of $102 is close to the wage" (hiring the fourth adds $110 to cost and only $102 to revenue, so profit falls); "6 workers, because every worker adds output" (a worker is worth hiring only if what the worker adds to revenue covers the wage); "3 workers" with no comparison of marginal revenue product and the wage, and no comparison of profit at different numbers of workers (the task asks for an explanation)
  Model response
  The marginal revenue products of workers one through six are $180, $156, $132, $102, $72, $36. A firm hires a worker as long as that worker's marginal revenue product is at least the wage, which is the marginal factor cost here. The third worker adds $132, more than the $110 wage, so Kestrow hires the third. The fourth would add $102 to revenue and $110 to cost, so Kestrow stops at 3 workers.
3. (c)
  
  Draw correctly labeled side-by-side graphs for the labor market for fly tyers and for Kestrow, and show each of the following.
  
  (i) The market wage and quantity of labor, labeled $110 and QM, respectively
  
  (ii) The number of workers Kestrow hires, labeled QK
  Question 2, part (c): your response. It stays in this browser tab and is never sent anywhere.
  Score part (c)
  - 1 point Draws a correctly labeled graph of the labor market, with the wage on the vertical axis and the quantity of labor on the horizontal axis, a downward-sloping labor demand curve and an upward-sloping labor supply curve crossing at a wage of $110 and quantity QM.Earns it: "Market graph: W and Q of labor on the axes, D for labor slopes down, S for labor slopes up, they cross at $110 and QM"Does not: axes labeled price and quantity of flies (this is the market for workers, so the axes are the wage and the quantity of labor); labor supply drawn sloping down or labor demand sloping up
  - 1 point Draws a correctly labeled graph for Kestrow beside the market graph with a horizontal labor supply curve (MFC, also written MRC) at the market wage of $110, a downward-sloping MRP curve, and QK where MRP = MFC.Earns it: "Firm graph: a flat line at $110 labeled S = MFC = W, the MRP curve sloping down, QK below where they cross"; "QK = 3 workers where MRP crosses the horizontal wage line at $110"; "A flat line at $110 labeled S = MRC = W, a downward-sloping MRP = D curve, and QK where they cross"Does not: an upward-sloping labor supply curve for Kestrow (one small firm can hire as many tyers as it wants at the market wage, so the supply of labor it faces is horizontal); QK where the MRP curve meets the horizontal axis (that is where one more worker adds nothing, far past the profit-maximizing number); a firm wage line at a different height from the market wage
  Model response
  On the left, the labor market for fly tyers has Wage on the vertical axis and Quantity of labor on the horizontal axis. Labor demand D slopes down, labor supply S slopes up, and they cross at a wage of $110 and quantity QM. On the right, Kestrow's graph has the same vertical axis and Number of workers on the horizontal axis. A horizontal line at $110, drawn across from the market wage, is labeled S = MFC. Kestrow's MRP curve slopes down and crosses that line at QK, which is 3 workers.
4. (d)
  
  Many experienced fly tyers move to the area, and the market wage for fly tyers falls to $70 per day. Kestrow's product price does not change, and the table still describes its output. Using the table, identify how many workers Kestrow now hires.
  Question 2, part (d): your response. It stays in this browser tab and is never sent anywhere.
  Score part (d)
  - 1 point Identifies 5 workers. The fifth worker adds $72, more than the new wage of $70, and the sixth adds $36, less than $70.Earns it: "5 workers"; "5, since the 5th worker's MRP of $72 is above $70 and the 6th worker's $36 is below it"Does not: "4 workers" (the fifth worker's MRP of $72 is still above the $70 wage, so hiring the fifth raises profit); "6 workers, because the wage fell" (the sixth worker adds only $36, less than the $70 wage); "3 workers, because MRP did not change" (MRP is the same, but the wage it is compared with is lower)
  Model response
  Kestrow now hires 5 workers. The fifth worker's marginal revenue product is 12 x $6 = $72, which is more than the $70 wage, and the sixth worker's is 6 x $6 = $36, which is less.
Your score: 0 of 5, from the boxes you ticked.

Kestrow Tackle, output per day
Number of workers	Total product (dozens of flies)
0	0
1	30
2	56
3	78
4	95
5	107
6	113

Question 3: Short 5 points

In the city of Haldrenmoor, most homes are row houses that share walls with their neighbors. A fire sprinkler system in one house also protects the houses next to it, because a fire put out early does not spread through the shared walls. Each sprinkler system gives the neighbors an external benefit worth $160, and this marginal external benefit is the same at every quantity. Sprinkler systems are sold in a perfectly competitive market, and installing them creates no external costs, so the marginal private cost of each system is also its marginal social cost. The table shows the marginal private benefit and the marginal private cost of sprinkler systems.

Sprinkler systems in Haldrenmoor
Quantity (thousands of systems per year)	Marginal private benefit ($)	Marginal private cost ($)
10	1,500	1,260
11	1,460	1,300
12	1,420	1,340
13	1,380	1,380
14	1,340	1,420
15	1,300	1,460
16	1,260	1,500

Respond to parts (a), (b), (c), and (d). Draw any graph on your own paper.

(a)

Using the table, identify each of the following.

(i) The market equilibrium quantity

(ii) The socially optimal quantity
Question 3, part (a): your response. It stays in this browser tab and is never sent anywhere.
Score part (a)
- 1 point Identifies a market equilibrium quantity of 13 thousand systems and a socially optimal quantity of 15 thousand systems. Both are needed for the point.Earns it: "(i) 13 thousand (ii) 15 thousand"; "Market: 13,000 systems, where MPB = MPC = $1,380. Optimal: 15,000, where MPB + 160 = MPC = $1,460."Does not: "(ii) 14 thousand" (at 14 thousand, MSB is $1,500 and MSC is $1,420, so one more system still adds more benefit than cost); "(ii) 11 thousand, where MPB minus 160 equals MPC" (the external benefit is added to private benefit, not subtracted); "(ii) 16 thousand" (there MSB of $1,420 is below MSC of $1,500)
Model response
(i) The market equilibrium is where marginal private benefit equals marginal private cost: 13 thousand systems, where both are $1,380.

(ii) Marginal social benefit is marginal private benefit plus $160. At 15 thousand systems, MSB is $1,300 + $160 = $1,460, which equals the marginal social cost of $1,460. The socially optimal quantity is 15 thousand systems.
(b)

Draw a correctly labeled graph of the market for sprinkler systems, and show each of the following.

(i) The market equilibrium quantity, labeled QM

(ii) The socially optimal quantity, labeled QS
Question 3, part (b): your response. It stays in this browser tab and is never sent anywhere.
Score part (b)
- 1 point Draws a correctly labeled graph with price (or benefit and cost) on the vertical axis and quantity on the horizontal axis, a downward-sloping marginal private benefit curve (MPB or D), an upward-sloping marginal private cost curve that is also marginal social cost (MPC = MSC or S), and a marginal social benefit curve (MSB) above the MPB curve.Earns it: "D = MPB slopes down; MSB is above it, the same distance at every quantity; S = MPC = MSC slopes up"Does not: MSB drawn below MPB (the neighbors gain from each system, so society values it more than the buyer does); a separate MSC curve drawn above MPC (the stem says installing the systems creates no external cost, so MPC and MSC are one curve)
- 1 point Shows QM where MPB crosses MPC = MSC and QS where MSB crosses MPC = MSC, with QS greater than QM. The point is earned for labels consistent with the curves the student drew.Earns it: "QM under the crossing of D and S; QS under the crossing of MSB and S, to the right of QM"Does not: QS to the left of QM (with an external benefit the market buys too few systems, not too many); QM and QS both marked at the crossing of MSB and S
Model response
The vertical axis is Price, benefit and cost, in dollars, and the horizontal axis is Quantity of sprinkler systems. The demand curve, labeled D = MPB, slopes down. The MSB curve lies above it, the same distance higher at every quantity, because each system is worth $160 more to society than to its buyer. The supply curve, labeled S = MPC = MSC, slopes up. QM is marked below the point where D = MPB crosses S. QS is marked below the point where MSB crosses S, to the right of QM.
(c)

Using marginal analysis and numbers from the table, explain why the market equilibrium quantity is not allocatively efficient.
Question 3, part (c): your response. It stays in this browser tab and is never sent anywhere.
Score part (c)
- 1 point Explains that at the market quantity of 13 thousand, the marginal social benefit of a system ($1,380 + $160 = $1,540) is greater than its marginal social cost ($1,380), so producing more systems would add more to society's benefit than to its cost; the market produces too few. The point is earned for an explanation consistent with the quantities the student gave in part (a).Earns it: "At 13 thousand, MSB is 1,540 but MSC is only 1,380. Society gains $160 more than it gives up on the next system, so the market stops too soon."; "Buyers ignore the $160 benefit to neighbors. At 13 thousand MSB = $1,540 > MSC = $1,380, so too few are installed."Does not: "It is not efficient because buyers ignore their neighbors" with no numbers (the task asks for marginal analysis using the table); "At 13 thousand MPB equals MPC, so it is efficient" (private benefit leaves out the $160 the neighbors receive); "Too many systems are installed" (with an external benefit the market quantity is too small)
Model response
At the market quantity of 13 thousand, buyers stop where their own benefit, $1,380, equals the marginal cost of $1,380. They leave out the $160 the neighbors gain, so the marginal social benefit of that system is $1,540. Since $1,540 is more than the marginal social cost of $1,380, more systems would add more to society's benefit than to its cost. Too few systems are installed, so the market is not allocatively efficient.
(d)

The city wants the market to reach the socially optimal quantity by paying buyers a subsidy for each sprinkler system they install. Identify the per-unit subsidy that would do this, and explain how it moves the market to the socially optimal quantity.
Question 3, part (d): your response. It stays in this browser tab and is never sent anywhere.
Score part (d)
- 1 point Identifies a subsidy of $160 per system and explains that it raises what buyers are willing to pay for each system by $160, so the demand (MPB) curve shifts up to the MSB curve and the new equilibrium is at 15 thousand, where MSB = MSC. Explaining that buyers now pay a net price of $1,300 while sellers receive $1,460 at 15 thousand also earns the point.Earns it: "$160. Demand rises by $160 at every quantity, so it lands on MSB and the market settles at 15 thousand."; "A $160 subsidy, equal to the external benefit. At 15 thousand sellers get $1,460 and buyers pay $1,460 - $160 = $1,300, which is what the 15,000th system is worth to them."Does not: "$160, which shifts the demand curve down by $160" (a payment to buyers raises what they will pay, so demand shifts up); "A subsidy of $1,460, the MSB at the optimum" (that pays far more than the external benefit and pushes the market past 15 thousand); "$160" with no explanation of how it changes the market
Model response
The city should pay $160 per system, the amount of the external benefit. The subsidy raises what each buyer is willing to pay for a system by $160, so the demand curve shifts up by $160 at every quantity and sits on top of the MSB curve. The new equilibrium is where that curve crosses supply, at 15 thousand systems: sellers receive $1,460, and buyers pay $1,460 - $160 = $1,300 of their own money. Buyers now count the neighbors' benefit, so the market reaches the socially optimal quantity.

Your results

Section	Score	Time used
Section I
Section II

Free-response scores are the points you ticked against the scoring guide. The page never grades them.

Practice Exam 2

60 multiple-choice and 3 free-response questions, in the format of the AP Microeconomics Exam.

Choose a mode

Exam conditions Timed like the real exam. Nothing is checked until a section ends.Study mode Untimed. Each answer is checked as you give it, with its explanation.

Testing accommodations

Time and a half Each section gets 1.5 times the time.Double time Each section gets twice the time.Untimed The clock shows time used and never ends a section.

You can switch to study mode or start over at any point during the exam.

Section	Questions	Time
Section I: Multiple Choice	60	70 minutes
Section II: Free Response	3	60 minutes

A four-function calculator is allowed on both sections of the exam.

How the exam works

One section at a time. When a section's clock reaches zero, the section ends and is scored.
Multiple choice is scored when its section ends, with an explanation for every choice.
Free response is never scored by the page. When the section ends, you see the scoring guide and a model response for each part and tick the points your answer earns.
At the end you get your score and the time you used for each section.
In study mode each multiple-choice answer is checked as soon as you give it, with its explanation, and each free-response question has a button that opens its scoring guide.
Switching to study mode partway keeps your answers and checks the ones you have given. Start over clears everything and lets you choose a mode again.
Your answers are kept in this browser tab if the page reloads, and nowhere else.

Section I: Multiple Choice

60 questions · 70 minutes

Every morning, Orrisport's fishing boats land crabs at the town dock. At the going price, every crab landed is sold, and no buyer who is willing to pay that price goes without. An economist still says that crab is scarce in Orrisport. Which of the following explains how both statements can be true?
Answer: B.
1. A
  Price is how a market rations a scarce good, not what makes it scarce. If crab were free, people would want far more than the boats could land, which would make the scarcity easier to see, not end it.
2. B
  Correct. Crab is scarce because there are not enough boats, crews and crabs to give everyone all the crab they would want if it were free. A shortage is a different idea: quantity demanded greater than quantity supplied at the going price. A price that clears the market removes the shortage but not the scarcity.
3. C
  This treats scarcity as if it were a shortage. A market that clears has no shortage, but it is still a market for a scarce good, and nothing in the stem says the price is about to change.
4. D
  Coming from nature is not what makes a good scarce. Factory goods use labor, capital and materials, which are scarce too, so nearly every good with a price is scarce.
5. E
  Clearing means the price has removed any shortage; the market is still allocating a scarce good. Scarcity does not depend on a market failing to clear.
Valquessa is a market economy. Over two years its households buy many more solar water heaters and far fewer gas water heaters. No government agency tells anyone to change what they make. Which of the following best explains how Valquessa's economy moves resources into making solar water heaters?
Answer: E.
1. A
  Equipment already bought is a sunk cost and does not decide what pays from here on. As gas heater prices and profits fall, firms in a market economy move away from making them.
2. B
  Planners assigning workers and materials is how a command economy answers what to produce. The stem says no government agency directs the change.
3. C
  When households want more of a good, its price tends to rise, not fall. A falling price would signal firms to make less of the good, not more.
4. D
  Households do not vote on output. Spending acts like a vote only because it moves prices and profits, and firms respond to those.
5. E
  Correct. In a market economy, consumer spending answers what to produce. More buyers push up the prices of solar heaters, the higher profits draw firms in, and those firms bid workers, capital and materials away from gas heater making.
Ithrenne and Bruvast are invented countries with the same resources, the same technology and the same production possibilities curve for capital goods and consumer goods. This year Ithrenne chooses a point on the curve with more factory machinery and fewer consumer goods than the point Bruvast chooses. Nothing else differs between them. Which of the following is the most likely result over the next ten years?
Answer: A.
1. A
  Correct. Machinery is a factor of production. By making more of it now, Ithrenne adds more to its stock of capital, so in later years it can produce more of both kinds of goods, and its curve shifts out further. The cost was fewer consumer goods this year.
2. B
  Consumer goods are used up by households; they do not add to what an economy can produce later. Bruvast has more goods to enjoy now, and less new capital, so its curve grows less.
3. C
  The two countries have the same resources this year but not in later years. The one that builds more machinery ends up with more capital, so the curves move apart.
4. D
  Starting on the same curve does not fix where the curves will be later. Building capital goods adds to future resources, and more resources shift a curve outward.
5. E
  Making more capital goods is still a point on the curve: every resource is in use, only in a different mix. A point inside the curve needs idle or wasted resources.
Tazmerel produces only sorghum and sewing machines, with constant opportunity costs, so its production possibilities curve is a straight line. Tazmerel's sewing machine makers switch to a simpler design that takes fewer parts and fewer hours to build, so the most sewing machines Tazmerel can make rises, while sorghum is grown just as before. Compared with before the new design, which of the following is true?
Answer: C.
1. A
  This reverses the two costs. With the new design a machine takes fewer resources to make, and fewer resources could have grown less sorghum, so a machine now costs less sorghum, not more.
2. B
  The new design does not change how sorghum is grown, but it changes what a ton of sorghum costs. Opportunity cost is what the same resources could have produced instead, and in sewing machines that is now more.
3. C
  Correct. Only the sewing machine end of the curve moves out. A machine now takes fewer resources to build, and fewer resources taken from farming means less sorghum given up, so each machine costs less sorghum. Turned around, the resources that grow a ton of sorghum could now build more machines, so each ton costs more sewing machines.
4. D
  Growth in one good does not make both goods cheaper in terms of each other. The two opportunity costs are reciprocals, so when one falls the other must rise.
5. E
  That is half right. A sewing machine does cost less sorghum, but the two costs are reciprocals, so a ton of sorghum must now cost more sewing machines.
Oskivar and Drennick are invented countries with constant opportunity costs. In a year, Oskivar can produce either 120 tons of tin or 60 bolts of linen, and Drennick can produce either 80 tons of tin or 80 bolts of linen. At first, each country splits its resources evenly between the two goods. Then each country specializes completely in the good in which it has a comparative advantage. Compared with their combined output before, how does their combined output change?
Answer: E.
1. A
  The resources are the same, but they are used differently. Moving each country's resources into the good it makes at the lower opportunity cost raises what those same resources produce in total.
2. B
  That is the result of specializing the wrong way, Oskivar in linen (60 bolts) and Drennick in tin (80 tons), for 80 tons and 60 bolts. A bolt costs Oskivar 2 tons of tin and Drennick only 1, so Drennick should make the linen.
3. C
  That compares each specialist's new output only with its own old output of that good, 120 - 60 and 80 - 40. Combined output before also includes the 40 tons of tin Drennick made and the 30 bolts Oskivar made.
4. D
  Those are the combined totals after specializing, not the change. Before, the two countries made 100 tons of tin and 70 bolts of linen between them.
5. E
  Correct. A bolt of linen costs Oskivar 120 / 60 = 2 tons of tin and Drennick 80 / 80 = 1 ton, so Oskivar specializes in tin and Drennick in linen. Before: 60 + 40 = 100 tons and 30 + 40 = 70 bolts. After: 120 tons and 80 bolts, which is 20 more tons and 10 more bolts.
Ondine runs a bookkeeping office. She can both prepare tax returns and sort clients' receipts faster than her assistant, Marek, and their opportunity costs of the two tasks differ. Which of the following is true?
Answer: B.
1. A
  Being faster at both is an absolute advantage. Every hour Ondine spends sorting receipts is an hour of tax returns she gives up, so doing everything herself wastes her time on the task where she gives up the most.
2. B
  Correct. Comparative advantage depends on opportunity cost, not speed. Ondine gives up less for one task and Marek for the other, so if each specializes in that task, the office finishes more work than if Ondine does it all.
3. C
  Comparative advantage compares opportunity costs, not speed. Because their opportunity costs differ, Marek gives up less than Ondine for one of the tasks, even though he is slower at both.
4. D
  If Marek does both, Ondine's faster work is left unused. The office does best when each person does the task in which that person's opportunity cost is lower than the other's.
5. E
  Having an absolute advantage in both tasks does not give a comparative advantage in both. If Ondine's cost of one task is lower than Marek's, her cost of the other is higher.
Rosalba needs to make a one-way trip to her sister's wedding in another city. A one-way bus ticket costs $40 and the trip takes 9 hours. A one-way train ticket costs $110 and the trip takes 4 hours. Every hour she spends traveling is an hour she cannot work at her job, which pays $18 an hour. Counting both explicit and implicit costs, which way is cheaper for her, and by how much?
Answer: A.
1. A
  Correct. The bus costs $40 + 9 hours at $18, or $40 + $162 = $202. The train costs $110 + 4 hours at $18, or $110 + $72 = $182. The train saves 5 hours of pay, $90, which is more than its $70 higher fare, so it is $20 cheaper.
2. B
  That counts only the pay she gives up, 5 fewer hours at $18. The train's fare is $70 higher, which takes back most of that saving.
3. C
  That adds the lost pay to the bus fare but not to the train fare, $202 against $110. Both trips take hours she could have worked.
4. D
  The totals are $202 for the bus and $182 for the train. The $20 difference is real, but it favors the train.
5. E
  That compares only the ticket prices, $110 - $40. The hours she gives up at work are a real cost of each trip.
Which of the following decisions can be judged only by comparing its total benefit with its total cost, rather than one small step at a time?
Answer: D.
1. A
  One more hour is a small step. The cafe can compare what that hour adds to revenue with what it adds to cost, and stay open only if the hour pays.
2. B
  Pages can be added one at a time. The student can keep reading while the next page is worth more to her than what she gives up to read it.
3. C
  One more mile is a small step, so the runner can compare its marginal benefit with its marginal cost and add it only if the benefit is larger.
4. D
  Correct. A move is all or nothing: moving part of a household gets the family none of what it wants from the new city. The family should move only if the total benefit of moving is at least its total cost, counting implicit costs such as the jobs and friends it leaves behind.
5. E
  Trays come one at a time, so the bakery can bake another while the next tray adds more to revenue than to cost.
In the model of rational consumer choice, which of the following is a consumer assumed to do?
Answer: D.
1. A
  Marginal utility is largest for the first unit of a good, so making it as large as possible would mean buying one of everything. The model has her maximize total utility, the satisfaction from everything she buys.
2. B
  She would do that only if the goods were free. With prices and a limited income, she stops sooner, where the marginal utility per dollar of the last unit of each good is equal.
3. C
  Equal spending ignores how much satisfaction each dollar brings. She compares marginal utility per dollar across goods, not the dollars she spends.
4. D
  Correct. A rational consumer picks the affordable combination of goods that gives the greatest total utility. Her income and the prices she faces are the constraint, and diminishing marginal utility is why she spreads her spending across goods.
5. E
  Price alone does not decide. A cheap good that adds little satisfaction can lose out to a costly one that adds more satisfaction per dollar.
In Pyrrhane, tickets to roller derby bouts are a normal good. In the same season, household incomes in Pyrrhane rise and the price of tickets to the city's hockey games, a close substitute for roller derby tickets, falls sharply. Which of the following describes the effect on the demand for roller derby tickets?
Answer: B.
1. A
  That is the effect of the income change alone. The cheaper hockey tickets pull demand for roller derby tickets the other way.
2. B
  Correct. Higher incomes increase demand for a normal good, shifting it right. A lower price of a substitute decreases demand, shifting it left. Without knowing which shift is larger, the direction of the net change in demand is unknown.
3. C
  That is the effect of the cheaper substitute alone. Higher incomes push demand for a normal good up at the same time.
4. D
  Only a change in the price of roller derby tickets themselves moves along the demand curve. Incomes and the price of a substitute are determinants of demand, so they shift the curve.
5. E
  A lower price of a substitute draws buyers away, so it decreases demand. A higher substitute price is what raises demand.
A northern city passes a rule that property owners must clear the ice from their sidewalks within two hours after a storm ends, and the demand for bags of ice melt there rises. Nothing changes the cost of making or shipping ice melt. As the price of ice melt rises to its new equilibrium, which of the following happens on the sellers' side of the market?
Answer: E.
1. A
  Nothing that shifts supply has changed: costs, technology and the number of sellers are the same. Sellers offer more because the price is higher, which is a movement along the curve, not a shift of it.
2. B
  The price rises because demand increased. Supply did not change, and a decrease in supply would have lowered the quantity sold, not raised it.
3. C
  Unchanged costs mean the supply curve stays put, but sellers still respond to the price. At a higher price they offer more along that curve.
4. D
  That is the law of demand, which describes buyers. For sellers, the law of supply says a higher price raises the quantity supplied.
5. E
  Correct. The demand curve shifts right and the price rises. Sellers respond by moving up their unchanged supply curve, so quantity supplied rises. The supply curve itself does not move.
A city planetarium raises the price of a show ticket from $20 to $25, and the number of tickets it sells each week falls from 1,000 to 800. Nothing else changes. Measuring the percentage changes with the midpoint method, over this price range the demand for show tickets is
Answer: A.
1. A
  Correct. With the midpoint method the quantity change is 200 / 900 and the price change is 5 / 22.5, both about 22.2 percent, for an elasticity of 1. Total revenue agrees: $20 times 1,000 = $20,000 before and $25 times 800 = $20,000 after, and revenue that does not change with the price marks unit elastic demand.
2. B
  Those percentages use the starting values, 200 / 1,000 and 5 / 20, not the midpoints the question asks for. Measured from the midpoints, both changes are about 22.2 percent, so demand is unit elastic.
3. C
  Those percentages use the ending values, 200 / 800 and 5 / 25. Measured from the midpoints, both changes are about 22.2 percent, so the elasticity is 1.
4. D
  A fall of 200 tickets says nothing about elasticity until it is compared, in percent, with the change in price.
5. E
  Perfectly inelastic demand would leave sales unchanged at 1,000. Sales fell by 200, so buyers did respond to the price.
Asha says that because a straight-line demand curve has the same slope at every point, its price elasticity of demand must be the same at every price. Which of the following is the best response?
Answer: D.
1. A
  Slope compares changes in units, dollars against tickets or pounds. Elasticity compares percentage changes, so on a straight line the two come apart.
2. B
  A straight-line demand curve has an elastic range, a unit elastic point and an inelastic range. Being straight does not make it unit elastic anywhere but one point.
3. C
  That reverses the pattern. Near the price axis, quantity is small and price is high, so a given change is a large percentage of quantity and a small percentage of price; that is the elastic end.
4. D
  Correct. Elasticity is the percentage change in quantity divided by the percentage change in price. At high prices, quantity is small, so a fixed change in quantity is a large percentage, while a fixed change in price is a small one. Demand is more elastic at high prices and less elastic at low prices, even though the slope never changes.
5. E
  Substitutes are one determinant of elasticity, but they do not explain why elasticity changes along a single curve, where the substitutes are the same at every point.
Makers of fountain pens in Pellingham fit every pen with a nib made from a rare metal mined in only one place, and no other metal will do. The more of the metal pen makers buy, the faster its price climbs. Makers of ballpoint pens there use steel and plastic that they can buy from many suppliers at about the same price however much they buy. Compared with the supply of ballpoint pens, the supply of fountain pens is most likely
Answer: C.
1. A
  A higher price does help pay for the metal, but each extra pen costs more to make than the one before, so quantity supplied rises only a little. That is less elastic supply, not more.
2. B
  Being the same kind of good does not make two supplies equally elastic. How easily sellers can get more inputs without paying more decides how far quantity supplied responds to price.
3. C
  Correct. Price elasticity of supply depends on how easily producers can get more of their inputs, or alternative inputs, without paying more. Fountain pen makers cannot switch to another metal, and the one they need costs more the more they buy, so a rise in the price of pens brings a smaller rise in quantity supplied than it does for ballpoint pens.
4. D
  Selling at the market price describes a single price-taking firm, not how far the whole quantity supplied responds to the price. Rising metal costs make fountain pen supply respond less, not without limit.
5. E
  Supply elasticity is about sellers. It depends on what it costs them to produce more, which here turns on the metal they need.
Studies find that the cross-price elasticity of demand for macadamia nuts with respect to the price of pistachios is positive. A blight in pistachio orchards then raises the price of pistachios. The costs of growing macadamia nuts do not change. What happens to the equilibrium price and quantity of macadamia nuts?
Answer: E.
1. A
  A positive cross-price elasticity marks substitutes, not complements. Complements would have a negative one.
2. B
  The stem says the costs of growing macadamia nuts do not change, so their supply stays put. The change comes through demand.
3. C
  The blight affects macadamia nuts through their buyers. When pistachios cost more, some of them switch, even though macadamia trees grow as before.
4. D
  The price of macadamia nuts itself has not changed yet; the price of a related good has. A change in a related good's price shifts the demand curve rather than moving along it.
5. E
  Correct. A positive cross-price elasticity means the goods are substitutes: a higher price of pistachios raises the quantity of macadamia nuts demanded at every price. Demand shifts right with supply unchanged, so their equilibrium price and quantity both rise.
A ski area wants to know how strongly the number of lift tickets it sells responds to how much it spends on advertising, with ticket prices held constant. Which of the following measures that response?
Answer: B.
1. A
  Ticket prices are held constant, so their percentage change is zero. The response being measured is in tickets sold.
2. B
  Correct. An elasticity divides the percentage change in the quantity that responds by the percentage change in the thing that caused it. Elasticity can be measured for any determinant of demand, not only the price.
3. C
  That puts the cause on top and the response on the bottom, which flips the measure. The quantity that responds, tickets sold, goes in the numerator.
4. D
  That is a ratio of units, tickets per dollar, much like a slope. An elasticity compares percentage changes, so it does not depend on the units used.
5. E
  Price elasticity is only one kind. Economists measure income elasticity, cross-price elasticity and the response to any other determinant of demand or supply the same way.
In Wystera's weekly market for crates of nectarines, which is perfectly competitive, quantity demanded is Qd = 900 - 30P and quantity supplied is Qs = 20P - 100, where P is the price of a crate in dollars. What is total economic surplus at the market equilibrium?
Answer: C.
1. A
  That is consumer surplus alone, one-half times 300 crates times ($30 - $20). Total economic surplus adds producer surplus.
2. B
  That is producer surplus alone, one-half times 300 crates times ($20 - $5). Total economic surplus adds consumer surplus.
3. C
  Correct. Setting 900 - 30P = 20P - 100 gives P = $20 and Q = 300 crates. Demand meets the price axis where Qd = 0, at $30, and supply meets it where Qs = 0, at $5. Total surplus is the triangle between them: one-half times 300 times ($30 - $5) = $3,750, which is $1,500 of consumer surplus plus $2,250 of producer surplus.
4. D
  That is total revenue, $20 times 300 crates. Revenue is what buyers pay sellers, not the surplus either side gains.
5. E
  That is the full rectangle, 300 times ($30 - $5). Surplus is the triangle between the curves, so it is half of that.
At the equilibrium price of a magic show ticket, many fans buy tickets who would have paid much more than that price. The difference between what those fans would have paid and what they actually pay, added up over all of the buyers, is
Answer: A.
1. A
  Correct. Consumer surplus is the gap between the most each buyer would pay and the price, summed over everyone who buys.
2. B
  Producer surplus is the sellers' side: the price received minus the least each seller would accept. The stem describes buyers.
3. C
  Deadweight loss is surplus that is lost because trades that would help both sides do not happen. Here the trades do happen.
4. D
  Total revenue is the price times the number of tickets sold, the amount buyers pay. The stem asks about what buyers would have paid beyond that.
5. E
  A shortage is more quantity demanded than supplied at a price. At the equilibrium price there is no shortage.
In Ennerdal, each steer sent to market yields both beef and one cowhide. A popular new dish sharply raises the demand for beef, and farmers send more cattle to market. The tastes and incomes of cowhide buyers do not change. What happens to the equilibrium price and quantity of cowhides?
Answer: E.
1. A
  Complements are goods that buyers use together, like beef and steak sauce. Beef and cowhides are not bought together; they are produced together, so the link runs through supply, not through cowhide demand.
2. B
  Shifting resources between goods describes goods that compete for the same inputs. Here one animal yields both, so producing more beef produces more cowhides, not fewer.
3. C
  Cowhide demand is unchanged, but cowhide supply is not. The extra cattle sent to market for beef each come with a cowhide.
4. D
  Nothing in the stem shifts the demand for cowhides; buyers' tastes and incomes are the same. The change in the cowhide market comes from the supply side.
5. E
  Correct. Beef and cowhides come from the same animals. Higher demand for beef leads farmers to send more cattle to market, so the supply of cowhides shifts right. With demand for cowhides unchanged, their price falls and the quantity bought and sold rises.
In a perfectly competitive market for winter tires, the price is below the equilibrium price. Which of the following describes how the market moves to equilibrium?
Answer: D.
1. A
  Below equilibrium there is a shortage, and a lower price would make it worse: buyers would want more and sellers would offer less.
2. B
  A price below equilibrium does not change any determinant of supply, so the curve stays put. The market reaches equilibrium by a movement along both curves.
3. C
  Buyers do compete, but that raises the price, which moves buyers along an unchanged demand curve. Their demand curve does not shift.
4. D
  Correct. At a price below equilibrium, quantity demanded exceeds quantity supplied. Buyers who go without bid the price up, and as it rises, sellers move up their supply curve and buyers move up their demand curve until the two quantities match.
5. E
  Sellers offer more only at a higher price. At the same price they keep supplying the same quantity, so the shortage lasts until the price rises.
Pedicab rides in the city of Ystrella are sold in a perfectly competitive market with no externalities. The city then issues a fixed number of ride permits, which limits the number of rides each day to fewer than the market was providing. Compared with before the limit, which of the following is true?
Answer: B.
1. A
  A limit on quantity is not a price control. With fewer rides allowed, riders compete for them and the fare rises to what buyers will pay for the last permitted ride, so no shortage lasts at the old fare.
2. B
  Correct. With fewer rides, the last ride is worth more to riders than the old fare, so the fare rises. The rides that no longer happen were worth more to riders than they cost drivers to provide, so their surplus is lost: total economic surplus falls by the deadweight loss.
3. C
  Drivers cannot sell more rides than the permits allow, so cutting fares would not win them more business. With fewer rides available, riders bid the fare up.
4. D
  Drivers may gain from the higher fare, but riders lose more, and the surplus from the rides that no longer happen goes to no one. A limit below the efficient quantity lowers total surplus.
5. E
  Part of the riders' loss is a gain to drivers, but not all of it. The surplus that the lost rides would have created disappears for both sides.
In Nerovia's weekly market for bundles of bamboo poles, demand is P = 60 - 0.1Q and supply is P = 10 + 0.1Q, where P is the price of a bundle in dollars and Q is bundles a week. The market clears at $35 and 250 bundles. The government then sets a price ceiling of $25 a bundle. Compared with the equilibrium, what happens to consumer surplus and producer surplus?
Answer: C.
1. A
  The ceiling's deadweight loss is one-half times 100 bundles times ($45 - $25) = $1,000, but not all of it falls on buyers. Buyers who still get a bundle pay $10 less on each of 150 bundles, a $1,500 gain that outweighs their $500 share of the loss.
2. B
  That counts only the $10 price cut on the 150 bundles still sold, which moves $1,500 from sellers to buyers. It leaves out the $500 of surplus each side loses on the 100 bundles that are no longer traded.
3. C
  Correct. At $25 sellers offer (25 - 10) / 0.1 = 150 bundles, so only 150 trade, and buyers value the 150th bundle at 60 - 0.1(150) = $45. Consumer surplus goes from one-half times 250 times $25 = $3,125 to one-half times 150 times $15 + 150 times $20 = $4,125, up $1,000. Producer surplus goes from $3,125 to one-half times 150 times $15 = $1,125, down $2,000.
4. D
  That assumes buyers get the 350 bundles they want at $25. Sellers offer only 150 at that price, and a bundle that is never sold gives no one any surplus.
5. E
  Those are only the two halves of the $1,000 deadweight loss. The ceiling also moves $1,500 of surplus from sellers to buyers on the 150 bundles still sold.
Talvreth imports porcelain sinks at the world price. Its government is choosing between a tariff on each imported sink and an import quota. Either policy would raise the price of sinks in Talvreth by the same amount and allow the same number of imports. Under the quota, the government would give the import licenses away for free. Which of the following is a difference between the two policies?
Answer: A.
1. A
  Correct. Under the tariff, the government collects the tariff on every imported sink. Under the quota, the same gap between the domestic price and the world price on each imported sink goes to whoever holds the free licenses, not to the government.
2. B
  Both policies raise the price buyers pay by the same amount, so both lower consumer surplus by the same amount.
3. C
  Both policies raise the domestic price by the same amount, so domestic producers move up their supply curve by the same amount under either one.
4. D
  The stem says the two policies raise the price by the same amount.
5. E
  Both policies cut the quantity bought and raise domestic production by the same amounts, so both create the same deadweight loss.
Hobnail Stencil Works cuts stencils in one workshop with a fixed set of cutting tables. With 5 workers it makes 60 stencils an hour. The 5th worker added 18 stencils an hour, and a 6th worker would add 15. If Hobnail hires the 6th worker, what happens to the average product of labor?
Answer: D.
1. A
  That divides only the 6th worker's 15 stencils by 6. Average product divides total output, 60 + 15 = 75 stencils, by all 6 workers.
2. B
  That divides the old 60 stencils by 6 workers, leaving out the 6th worker's output. Diminishing marginal returns mean marginal product is falling, which does not by itself make average product fall.
3. C
  Average product changes whenever the new worker adds a different amount from the current average. Here 15 is above 12, so the average moves up.
4. D
  Correct. Average product with 5 workers is 60 / 5 = 12 stencils. With 6 it is (60 + 15) / 6 = 12.5. The 6th worker's marginal product of 15 is above the old average of 12, so it pulls the average up, even though marginal product has fallen from 18.
5. E
  That averages two averages, (12 + 15) / 2. The new average weights all 6 workers equally: 75 / 6 = 12.5.
A firm adds workers to a fixed amount of equipment. At the number of workers where the marginal product of the last worker hired is zero, which of the following is true?
Answer: C.
1. A
  Average product is greatest where marginal product crosses it, while marginal product is still positive. When marginal product is zero, average product is already falling.
2. B
  Diminishing marginal returns begin when marginal product starts to fall, which happens well before it reaches zero.
3. C
  Correct. Total product rises while each added worker adds a positive amount. A worker who adds nothing leaves total product unchanged at its peak, and a further worker with negative marginal product would lower it.
4. D
  A marginal product of zero means the last worker adds nothing, not that output is zero. The other workers' output is still there.
5. E
  Average product is still positive here, since total output is positive, while marginal product is zero. The two are equal only where average product is at its peak.
A firm's marginal cost has been rising as it produces more. At its current output, the marginal cost of one more unit is below its average total cost. If it produces one more unit, what happens to its average total cost?
Answer: A.
1. A
  Correct. When an added unit costs less than the current average, it pulls the average down. That holds even while marginal cost is rising, which is why average total cost keeps falling until marginal cost crosses it at its lowest point.
2. B
  Rising marginal cost does not decide the direction of average total cost. What matters is whether marginal cost is above or below the average, and here it is below.
3. C
  One cheaper unit pulls the average down a little, not all the way to that unit's cost. The average still includes the cost of every earlier unit.
4. D
  Fixed cost is unchanged, but it is spread over one more unit, and the added unit costs less than the average. Both push average total cost down.
5. E
  Total cost does rise, but output rises too. Average total cost falls when the added cost is smaller than the current cost per unit.
Plover Pottery makes clay flowerpots and pays each worker $120 a day. Labor is its only variable input. With 3 workers it makes 50 flowerpots a day, and with 4 workers it makes 66. What is the marginal cost of a flowerpot when Plover hires the 4th worker?
Answer: D.
1. A
  That divides one worker's wage by all 66 flowerpots. Marginal cost spreads the added cost only over the added output.
2. B
  That divides the wage by the 50 flowerpots made before the 4th worker arrived. The 4th worker's wage pays for the 16 flowerpots that worker adds.
3. C
  That is average variable cost with 4 workers, 4 times $120 = $480 spread over 66 flowerpots. Marginal cost looks only at the added worker and the added output.
4. D
  Correct. The 4th worker adds $120 to total cost and 66 - 50 = 16 flowerpots to output. Marginal cost is $120 / 16 = $7.50 a flowerpot.
5. E
  That divides the wage by the 4 workers. Marginal cost is per flowerpot, not per worker.
Mallowfield Foods is choosing which size of plant to build for making jars of peanut butter. It expects to sell about 2,000 cases a month for many years. Its average total cost per case in each plant would be:
- Small plant: $9 at 1,000 cases, $8 at 2,000 cases, $11 at 3,000 cases
- Medium plant: $10 at 1,000 cases, $7 at 2,000 cases, $8 at 3,000 cases
- Large plant: $12 at 1,000 cases, $8.50 at 2,000 cases, $6.50 at 3,000 cases
Which plant should it build, and what is its long-run average total cost at 2,000 cases a month?
Answer: E.
1. A
  $9 is the small plant's cost at 1,000 cases, where it is the cheapest of the three. Mallowfield expects 2,000 cases, so the plant to build is the one that is cheapest at that output.
2. B
  $6.50 is the lowest cost in the table, but the large plant reaches it only at 3,000 cases. At the 2,000 cases Mallowfield expects, the large plant costs $8.50 a case.
3. C
  That is the large plant's cost at 2,000 cases, but a bigger plant is not always cheaper. At 2,000 cases the medium plant costs less.
4. D
  That averages the three plants' costs at 2,000 cases, (8 + 7 + 8.50) / 3. Long-run average total cost at an output is the lowest cost any plant offers there, not the average across plants.
5. E
  Correct. In the long run the firm can choose any plant size, so its long-run average total cost at each output is the lowest short-run average total cost available there. At 2,000 cases that is the medium plant at $7, below $8 and $8.50.
In the market for industrial glass bottles, the minimum efficient scale is large compared with the quantity buyers take at a price equal to the lowest long-run average total cost. A new molding process then lowers the minimum efficient scale a great deal, while the lowest long-run average total cost and market demand stay the same. Which of the following is the most likely long-run result?
Answer: C.
1. A
  Demand is the same, but the size a firm needs to reach its lowest cost has shrunk. The same market now has room for more firms of that size.
2. B
  A smaller minimum efficient scale works the other way: a firm no longer needs a large share of the market to keep its cost low, so the market can hold more firms.
3. C
  Correct. The number of firms that can each produce at the lowest long-run average total cost is roughly the market quantity divided by the minimum efficient scale. A much smaller scale with the same quantity leaves room for many more firms, so the market is likely to become less concentrated.
4. D
  The stem says the lowest long-run average total cost is unchanged. What fell is the output at which a firm first reaches that cost.
5. E
  Reaching the lowest cost at a smaller output does not mean costs start rising sooner, and even if they did, firms could stay at the efficient size. A smaller efficient size makes room for more firms.
Ottavia runs a home-organizing service. Last year it took in $95,000 and paid $31,000 in explicit costs. She has $40,000 of her own savings in the business, which would have earned 5 percent a year in a bank, and running the business takes all of her working time. What is the highest salary her best other job could pay for the business still to have earned at least a normal profit?
Answer: B.
1. A
  That subtracts the whole $40,000 of savings from accounting profit. The savings are not used up; the implicit cost is the interest they would have earned, 5 percent of $40,000 = $2,000.
2. B
  Correct. Accounting profit is $95,000 - $31,000 = $64,000. Her savings would have earned 5 percent of $40,000 = $2,000, an implicit cost. A normal profit means economic profit of at least zero, so the salary she gives up can be at most $64,000 - $2,000 = $62,000.
3. C
  That is accounting profit. It leaves out the $2,000 her savings would have earned in the bank, another implicit cost.
4. D
  That adds the $2,000 of interest instead of subtracting it. Interest her savings could have earned elsewhere is a cost of running the business.
5. E
  That subtracts the interest from revenue but leaves out the $31,000 in explicit costs.
Tarrowby Block Company sells concrete blocks in a perfectly competitive market. At its current output, the market price is below its average total cost, so it is taking an economic loss, but the price is above its average variable cost. The marginal cost of the last block it made is below the price, and its marginal cost is rising. What should Tarrowby do to make its profit as large as possible?
Answer: D.
1. A
  Comparing the price with average total cost tells Tarrowby whether it has a profit or a loss, not whether one more block pays. The last block added less to cost than the price it sold for, so cutting output gives up blocks that add to profit.
2. B
  No rule makes the gap between marginal cost and ATC a stopping point. While marginal cost is below the price, each extra block adds more to revenue than to cost, so the current output is too small.
3. C
  The shutdown test compares the price with average variable cost, and the price is above AVC here, so producing loses less than closing. A price below ATC means a loss, not a reason to stop.
4. D
  Correct. Marginal revenue equals the price, and the last block's marginal cost is below it. Each additional block adds more to revenue than to cost until rising marginal cost reaches the price, so making more raises profit, which here means shrinking the loss.
5. E
  Tarrowby is a price taker. Above the market price, buyers would get identical blocks from other firms, and it would sell none.
Ruddle Thread Works makes linen thread and sells it by the case in a perfectly competitive market. Counting implicit costs as well as explicit ones, its daily total cost at each output is:
- 0 cases: $40
- 1 case: $62
- 2 cases: $78
- 3 cases: $92
- 4 cases: $110
- 5 cases: $134
- 6 cases: $166
- 7 cases: $206
The market price of a case falls from $35 to $27. At each price Ruddle produces its profit-maximizing output. By how much does its daily economic profit fall?
Answer: C.
1. A
  That is Ruddle's economic profit at the new price, 5 x $27 - $134. The question asks how far profit falls from the $44 it earned at $35.
2. B
  That multiplies the $8 price cut by the 5 cases Ruddle makes afterward. Cutting output from 6 cases to 5 also saves cost, and profit actually falls from $44 to $1.
3. C
  Correct. The marginal costs of the 1st through 7th cases are $22, $16, $14, $18, $24, $32 and $40. At $35 Ruddle makes 6 cases and earns 6 x $35 - $166 = $44. At $27 the 6th case's $32 cost is above the price, so it makes 5 and earns 5 x $27 - $134 = $1. Profit falls by $44 - $1 = $43.
4. D
  That treats the new profit as zero. At $27 Ruddle still earns $1 a day at 5 cases, so profit falls by $43, not by all $44.
5. E
  That multiplies the $8 cut by 6 cases, as if Ruddle kept making 6. At $27 the 6th case costs $32 and brings in only $27, so Ruddle cuts back to 5, which loses $5 less.
Tarnmoor Lake Boat Rentals rents rowboats from April through October. Each November it stops renting for the winter. It keeps its boats, goes on paying the yearly lease on its dock, and reopens in April. Which describes what the firm does each November?
Answer: A.
1. A
  Correct. Producing zero output for a time while staying in the market is a shutdown. The dock lease is a fixed cost that Tarnmoor owes whether or not it rents a boat, and it keeps paying it all winter.
2. B
  Exit means leaving the market for good, once no cost is fixed. Tarnmoor keeps its boats and its lease and reopens in April, so it never leaves.
3. C
  A shut-down firm stops paying its variable costs, such as staff wages, but its fixed costs go on. Tarnmoor still pays its dock lease all winter.
4. D
  Revenue against total cost is the long-run test, and Tarnmoor has not left. Its winter closing compares revenue with variable cost, and it keeps its boats and its lease.
5. E
  A firm that only closes for the winter is still in the market. It keeps its boats and its lease, so there is no exit in the fall and no new entry in the spring.
In Brisk County, many small woodshops can make either wooden toys or picture frames with the same tools and workers. Both goods are sold in perfectly competitive markets with no barriers to entry or exit. Toy makers are earning economic profit, and frame makers are taking economic losses. Which describes what happens in the long run?
Answer: E.
1. A
  That reverses the direction. Shops move toward profit and away from losses, so they leave frames and start making toys.
2. B
  Entry and exit change the number of sellers, so they shift supply. Buyers want the same number of toys and frames at each price as before.
3. C
  The direction of the move is right, but its effect on prices is reversed. More toy makers means more toys offered at every price, which lowers the toy price, and fewer frame makers raises the frame price.
4. D
  Producing where price equals marginal cost settles how much a shop makes in the short run. In the long run shops can change which good they make, and profit and loss tell them to.
5. E
  Correct. With no barriers, economic profit draws shops into toys and losses push shops out of frames. Toy supply shifts right and its price falls; frame supply shifts left and its price rises. The moves stop when neither market offers a profit or a loss.
In a perfectly competitive market in equilibrium, every buyer and every seller faces the same price. What does that price tell them?
Answer: B.
1. A
  The price matches the cost of the last unit made, which is marginal cost, not the average cost of all units. And it reflects what the last unit is worth to a buyer, not the total benefit of every unit.
2. B
  Correct. Each seller produces until its marginal cost reaches the price, and each buyer buys until marginal benefit falls to the price. So the price measures the marginal cost of the last unit produced and the marginal benefit of the last unit consumed, and it pays each side to act on that.
3. C
  A price does not reveal any firm's profit or the number of buyers. It carries the marginal cost and marginal benefit of the last unit, because both sides adjust until those equal the price.
4. D
  The price equals the lowest ATC only in long-run equilibrium, and it equals what the last unit is worth to a buyer, not the highest price any buyer would pay.
5. E
  Fixed costs do not change what one more unit costs, so the price does not carry them, and buyers' incomes are not what it measures. It carries the marginal cost and marginal benefit of the last unit.
Every firm that makes brass drawer pulls has the same costs, and each one's average total cost is lowest, at $3.20 a pull, when it makes 4,000 pulls a week. The pulls are sold in a perfectly competitive market, the industry is a constant cost industry, and the market is in long-run equilibrium with buyers purchasing 520,000 pulls a week at $3.20. Then fashions in cabinet hardware change, so that at $3.20 buyers would purchase only 400,000 pulls a week. In the short run, before any firm leaves, the price falls and each firm cuts its output to 3,200 pulls a week. Once the market reaches its new long-run equilibrium, how many fewer firms are in the market than before demand fell?
Answer: C.
1. A
  That treats the return of the price to $3.20 as a return to the old market. With constant costs the price does come back to $3.20, but buyers then take only 400,000 pulls, so fewer firms are needed to make them.
2. B
  That divides 400,000 by the short-run output of 3,200 and subtracts the result, 125, from 130. In long-run equilibrium each remaining firm is back at its efficient scale, 4,000 pulls, where ATC is lowest.
3. C
  Correct. Before, there are 520,000 / 4,000 = 130 firms. In the new long-run equilibrium the price is back at $3.20, buyers take 400,000 pulls, and each firm again makes 4,000, so there are 400,000 / 4,000 = 100 firms, 30 fewer.
4. D
  That is the number of firms in the new long-run equilibrium. Subtract it from the 130 there before to find how many left.
5. E
  That is the number of firms before demand fell, 520,000 / 4,000. The question asks how many leave.
Upholstery shops in the city of Wexley sell in a perfectly competitive market, and all of them rent workshop space in one small industrial district. Rents there rise when shops open and fall when shops close, and rent is the only input price that changes with the size of the industry. The market starts in long-run equilibrium at a price of $240 to re-cover a sofa. Then demand falls and stays lower. Once the market reaches its new long-run equilibrium, which is true?
Answer: D.
1. A
  That is the constant cost result. Here the shops that leave lower the rents in the district, so every remaining shop's costs fall, and the long-run price ends lower than $240.
2. B
  Fewer sellers do push the price back up from its short-run low, but exit also lowers the district's rents. Costs fall, so the price stops rising at a lower minimum ATC, below $240.
3. C
  At the lower price shops take losses, and with no barriers some of them leave. That exit is what moves the market to its new long-run equilibrium.
4. D
  Correct. The fall in demand brings losses, so some shops exit. As the industry shrinks, rents in the district fall, lowering every shop's costs. Exit stops when the price equals the new, lower minimum ATC, so the long-run price ends below $240. This is an increasing cost industry.
5. E
  Lower demand brings losses, not profits, so shops leave rather than enter.
Kessimer Press publishes the only field guide to the mosses of its region and charges every buyer the same price. It now sells 40 copies a week at $25 each. To sell a 41st copy, it would have to lower its price to $24.50 on every copy it sells. What is the marginal revenue of the 41st copy?
Answer: B.
1. A
  That is the price cut on one copy. The cut applies to all 40 copies already being sold as well.
2. B
  Correct. Total revenue goes from 40 x $25 = $1,000 to 41 x $24.50 = $1,004.50, so the 41st copy adds $4.50. That is less than its $24.50 price, because selling it means taking $0.50 off each of the other 40 copies, $20 in all.
3. C
  That is the revenue Kessimer gives up on its first 40 copies, 40 x $0.50. Marginal revenue also counts the $24.50 the 41st copy brings in.
4. D
  That is the price of the 41st copy. It would be the marginal revenue only if Kessimer could sell that copy without cutting the price of the others.
5. E
  That is total revenue from 41 copies. Marginal revenue is the change in total revenue, $1,004.50 - $1,000.
A firm with market power produces where its marginal revenue equals its marginal cost. At that output, the price it charges is above the marginal cost of the last unit. Which describes the efficiency of this outcome?
Answer: E.
1. A
  When the price is above marginal cost, buyers value the last unit more than it costs to make, so more units would add surplus. Output is too low, not too high.
2. B
  MR = MC maximizes the firm's profit, not total surplus. Efficiency needs the price, the buyer's marginal benefit, to equal marginal cost, and here it is higher.
3. C
  Voluntary purchases do not make the quantity efficient. Some buyers who value another unit at more than its marginal cost, but less than the price, go without it, and that surplus is lost.
4. D
  The amount buyers pay above cost on the units sold is a transfer from buyers to the firm. The inefficiency is in the units not made: output stops while the price is still above marginal cost.
5. E
  Correct. The price is what a buyer would pay for the last unit, its marginal benefit, and it is above marginal cost. Producing more would add units worth more than they cost, so the firm produces less than the efficient quantity.
Brenlow Instruments held the only patent on a pipe-leak detector and, as its only seller, earned an economic profit. When the patent expires, many firms begin selling identical detectors, and no seller has market power. Production costs do not change. Compared with when Brenlow was a monopoly, what happens to the price of detectors and the quantity sold?
Answer: A.
1. A
  Correct. The patent was the barrier to entry that let Brenlow restrict output and charge a price above marginal cost. With many sellers of identical detectors, competition drives the price down toward marginal cost, and the quantity sold rises toward the level where price equals marginal cost.
2. B
  That reverses the effect. The patent was the barrier to entry, and with it gone, more sellers push the price down.
3. C
  A lower price draws more buyers along the demand curve, so the quantity sold rises, not falls.
4. D
  With many sellers of an identical product, no firm can hold the price above marginal cost, so the price falls from the monopoly level.
5. E
  More sellers mean more supply at every price, and that lowers the price rather than raising it.
Pellock Ice Arena is the only ice rink on an island and charges every skater the same price for a session. Its demand curve is a straight line that meets the price axis at $60 and the quantity axis at 1,200 sessions a week. To maximize its profit, it sells 480 sessions a week at $36 each. What is the consumer surplus in this market each week?
Answer: E.
1. A
  That is Pellock's total revenue, $36 x 480. Consumer surplus is what skaters would have paid above the price, the triangle above $36 and below demand.
2. B
  That uses $60 as the height of the triangle, 1/2 x $60 x 480. The height is the gap between the top of demand and the price, $60 - $36.
3. C
  That is the rectangle ($60 - $36) x 480. The area under a straight demand curve and above the price is a triangle, so take half of it.
4. D
  That uses the price, $36, as the height, 1/2 x $36 x 480. The triangle runs from $36 up to $60.
5. E
  Correct. Consumer surplus is the triangle under demand and above the $36 price, out to 480 sessions: 1/2 x ($60 - $36) x 480 = $5,760.
A firm with market power wants to charge one group of buyers a higher price than another group for the same product, which costs the same to supply to both. Which condition must hold for this price discrimination to raise its profit?
Answer: C.
1. A
  A perfectly competitive firm is a price taker and cannot charge any group more than the market price. Price discrimination needs market power.
2. B
  If both groups respond to price in the same way, the best price is the same for both, and charging them differently gains nothing. The groups must differ in how they respond to price.
3. C
  Correct. If buyers who pay the low price could resell to those charged the high price, the high-price group would buy from them instead, and the firm could not keep the two prices apart.
4. D
  The stem says supplying both groups costs the same. A price gap that only reflects a cost gap is not price discrimination.
5. E
  A price ceiling would only limit what the firm can charge that group. Nothing about it lets the firm keep the two prices apart.
Vellmont Gym is the only fitness club in a remote town. It sells memberships to two groups it can tell apart by ID, retirees and working adults, and a membership cannot be transferred. Retirees' demand for memberships is more price elastic than working adults' demand, and serving a member costs the club the same for either group. If the club sets a price for each group to maximize its profit, which is true?
Answer: D.
1. A
  A strong response to price is a reason to charge a group less, not more. A high price drives away many retirees, so the club earns more by keeping their price down.
2. B
  Equal costs do not mean equal prices for a firm with market power. Each group's price is set from its own demand, and the two demands differ.
3. C
  The size of a group does not decide its price; how strongly it responds to price does. Working adults respond less, so they pay more.
4. D
  Correct. The club sets each group's quantity where that group's marginal revenue equals the common marginal cost. Because retirees' demand is more elastic, a price rise loses many of their sales, so their profit-maximizing price is lower, and working adults, whose demand is less elastic, pay more.
5. E
  The stem says serving either group costs the same. The lower retiree price comes from their more elastic demand, not from a cost difference.
The city of Lanthorn has about 60 dog groomers. Each offers its own style of grooming and sets its own prices, and anyone who passes a licensing exam can open a grooming shop. Which market structure best describes dog grooming in Lanthorn?
Answer: B.
1. A
  Many sellers and free entry fit, but perfect competition also needs identical products. Each groomer's style is its own, so buyers do not see them as the same.
2. B
  Correct. Many groomers, each with its own style of service and its own price, and entry open to anyone who passes the exam: that is monopolistic competition.
3. C
  An oligopoly has a few firms whose choices depend closely on one another, usually behind high barriers to entry. Sixty groomers with open entry is far from that.
4. D
  Each style is somewhat different, but other groomers offer close substitutes and new ones can open, so no groomer controls the market as a monopoly would.
5. E
  Monopsony is a single buyer in a factor market. The question is about the market where groomers sell their service.
Corliss Cafe is a typical firm in long-run equilibrium in a monopolistically competitive market, and it produces less than the output at which its average total cost is lowest. Suppose Corliss instead produced the output at which its ATC is lowest and charged the highest price at which buyers would take that quantity. Compared with its long-run equilibrium, what would happen to its economic profit?
Answer: A.
1. A
  Correct. In long-run equilibrium Corliss's demand curve just touches its ATC curve at the output it chooses and lies below ATC at every other output. To sell the larger quantity it must cut its price, and at that output the price is below ATC, so it earns an economic loss.
2. B
  Its cost per unit does fall, but it must cut its price to sell the extra output, and the price falls by more. Its demand curve lies below ATC everywhere except at its long-run output.
3. C
  That would be true for a price taker, whose demand is horizontal at the lowest ATC. Corliss's demand slopes down and touches ATC to the left of ATC's lowest point, so at the larger output the price is below the lowest ATC.
4. D
  Selling more does not always add to revenue, and revenue is only half of profit. Here the price at the larger output is below ATC, so total cost is greater than total revenue.
5. E
  Free entry drives profit to zero at the output the firm chooses, where its demand touches ATC. At any other output the same demand curve lies below ATC, and the firm would lose money.
Which of the following must be true of every Nash equilibrium in a game between two players?
Answer: E.
1. A
  In a prisoner's dilemma the Nash equilibrium gives both players less than the cooperative outcome would, so it need not give the largest combined payoff.
2. B
  A dominant strategy is one way to reach a Nash equilibrium, but a game can have one even when a player has no dominant strategy.
3. C
  A Nash equilibrium needs no agreement. It holds because no player can do better on its own, given the other's action.
4. D
  Payoffs at a Nash equilibrium can be very unequal; the definition says nothing about how they are split.
5. E
  Correct. At a Nash equilibrium each player's action is its best response to the other's, so neither can raise its own payoff by switching on its own.
Corrandale Market and Fenstock Grocer are the only two grocery stores in a town. The two stores make a single choice at the same moment: stay open late or close at the usual hour. Their weekly profits, in thousands of dollars, are:
- Both close at the usual hour: Corrandale 50, Fenstock 46
- Corrandale stays open late, Fenstock closes: Corrandale 58, Fenstock 40
- Corrandale closes, Fenstock stays open late: Corrandale 44, Fenstock 52
- Both stay open late: Corrandale 48, Fenstock 38
Which is true about dominant strategies in this game?
Answer: C.
1. A
  Fenstock does better by staying open late only when Corrandale closes (52 against 46). When Corrandale stays open late, Fenstock earns more by closing (40 against 38), so its best action depends on Corrandale's.
2. B
  Corrandale earns more by staying open late whatever Fenstock does: 58 against 50, and 48 against 44. That is a dominant strategy.
3. C
  Correct. For Corrandale, staying open late pays more whether Fenstock closes (58 against 50) or stays open (48 against 44). Fenstock's best choice flips: late if Corrandale closes (52 against 46), the usual hour if Corrandale stays late (40 against 38). Only Corrandale has a dominant strategy.
4. D
  Staying open late is Fenstock's best reply only when Corrandale closes. When Corrandale stays late, Fenstock earns 40 by closing and 38 by staying open, so late is not dominant for it.
5. E
  Closing at the usual hour gives Corrandale less in both cases: 50 against 58, and 44 against 48. Its dominant strategy is to stay open late.
Hallisay Marine and Brockmere Marine are the only two makers of fiberglass boat hulls in a region. They agree that each will cut its output so that the price rises to what a single monopoly would charge. Each then finds that producing somewhat more than its agreed share raises its own profit, whatever the other does. The agreement cannot be enforced, and each chooses its output on its own. What is the most likely result?
Answer: A.
1. A
  Correct. Producing more is each firm's dominant strategy, as in a prisoner's dilemma, so both break the agreement and the monopoly outcome slips away. Even so, with only two sellers the price generally stays higher, and the quantity lower, than in a perfectly competitive market.
2. B
  Joint profit is highest under the agreement, but each firm decides on its own and earns more by producing extra whatever the other does. Nothing holds either one to its share.
3. C
  Cheating lowers the price, but an oligopoly generally ends with a higher price and a lower quantity than perfect competition. Two firms each producing somewhat more than their shares do not usually push the price all the way down to marginal cost.
4. D
  Each firm's own profit rises when it produces more, not less, so neither cuts its output further.
5. E
  Producing more pays each firm whatever the other does, so both cheat, not just one.
A firm is deciding how many workers to hire. Which of the following does that decision depend on?
Answer: D.
1. A
  Leisure preferences and the size of the local population shape the supply of labor, the workers' side of the market. The firm's hiring decision is its demand for labor.
2. B
  Fixed costs are paid however many workers the firm hires, so they do not change whether one more worker pays. Rivals' profits do not enter either.
3. C
  Workers wanting jobs does not make hiring them pay. The firm hires a worker only if what the worker adds to revenue covers the wage.
4. D
  Correct. A worker is worth hiring when the value of what the worker adds, the extra output times the price it sells for, covers the cost of the worker, the wage. So productivity, the output price and the wage all enter the decision.
5. E
  Hiring turns on what one more worker adds, a marginal comparison. Averages, totals and fixed costs do not tell the firm whether the next worker pays.
In the city of Vantley, line cooks are hired in a perfectly competitive labor market. Several large distribution centers open nearby and pay more for work that, like a line cook's, needs no special training. Many people who would have worked as line cooks take those jobs instead. Restaurants' demand for line cooks does not change. What happens in the market for line cooks?
Answer: B.
1. A
  That is a rightward shift of labor supply. Better jobs elsewhere draw people away, so fewer offer to work as line cooks at each wage: supply shifts left.
2. B
  Correct. The pay available in other jobs is a determinant of labor supply. Fewer people offer to work as line cooks at every wage, so supply shifts left along unchanged demand, the wage rises and employment falls.
3. C
  Both rising would take an increase in restaurants' demand for line cooks, which the stem rules out. A leftward supply shift raises the wage but lowers employment.
4. D
  Both falling would take a decrease in demand. The change here is on the workers' side, a decrease in supply, which raises the wage.
5. E
  Distribution center jobs are not line cook jobs, but they change how many people offer to work as line cooks, and that shifts the supply of line cooks.
Which of the following would shift the supply curve of labor for welders to the right?
Answer: E.
1. A
  A higher price for what welders make raises the value of their work to firms. That shifts the demand for welders, not the supply.
2. B
  A change in the wage moves along the supply curve: more welders offer to work at a higher wage. It does not shift the curve.
3. C
  Higher productivity makes each welder more valuable to firms, which shifts the demand for welders to the right, not the supply.
4. D
  Fewer projects means firms want fewer welders, a leftward shift of labor demand.
5. E
  Correct. Education and training are determinants of labor supply. With more people qualified, more offer to work as welders at every wage, so supply shifts right.
Brindle Lane Bakery hires bakers by the hour in a perfectly competitive labor market at $18 an hour, and labor is its only variable input. Its daily total revenue with different amounts of labor is:
- 40 hours: $1,200
- 50 hours: $1,450
- 60 hours: $1,650
- 70 hours: $1,820
- 80 hours: $1,960
- 90 hours: $1,940
If the bakery chooses among these amounts, how many hours of labor a day maximize its profit?
Answer: D.
1. A
  Average revenue per hour, $1,940 / 90 = about $21.56, is still above the wage, but hiring turns on what each extra hour adds. The hours from 80 to 90 lower total revenue by $20.
2. B
  Every block up to 80 hours raises total revenue, but the hours from 60 to 80 add only $17 and $14 an hour, less than the $18 wage, so they lower profit.
3. C
  The hours from 60 to 70 add $1,820 - $1,650 = $170, or $17 an hour, which is below the $18 wage. Using them lowers profit by $10.
4. D
  Correct. The marginal revenue product of labor is the change in total revenue divided by the change in hours: $25, $20, $17, $14 and -$2 an hour for each block of 10 hours. The hours from 50 to 60 add $20 an hour, above the $18 wage, and the next block adds $17, below it. The bakery uses 60 hours.
5. E
  Marginal revenue product starts falling after 50 hours, but the hours from 50 to 60 still add $20 an hour against an $18 wage, so they raise profit.
Tollard Brickyard sells bricks in a perfectly competitive output market and hires laborers in a perfectly competitive labor market. A building boom raises the market price of bricks. Brickyards hire only a small share of the region's laborers, so the market wage for laborers does not change, and each laborer's marginal product is the same as before. What happens to the marginal revenue product of Tollard's laborers and to the number it hires?
Answer: A.
1. A
  Correct. For a seller in a perfectly competitive output market, marginal revenue is the price, so MRP equals marginal product times the price of a brick. A higher price raises the MRP of every laborer, and with the wage unchanged, laborers who were not worth hiring before now add more to revenue than they cost. Tollard hires until MRP, which falls as it adds laborers, comes down to the wage.
2. B
  Marginal product is unchanged, but MRP is marginal product times the price, and the price of a brick is higher. Each laborer's output is worth more.
3. C
  The wage is the same, but what each laborer adds to revenue is higher. A firm hires while MRP is above the wage, and the higher price puts more laborers in that range.
4. D
  Tollard is a price taker and can sell all the bricks it makes at the market price. The higher price raises the revenue from each brick it sells.
5. E
  In a perfectly competitive labor market Tollard can hire all the laborers it wants at the market wage, so it has no reason to pay more.
In the town of Kelderby, respiratory therapists used to work for many small clinics, each hiring at the market wage in a perfectly competitive labor market. A single health company then buys every clinic and becomes the only employer of respiratory therapists in the town. The supply of therapists and the marginal revenue product of their work do not change. Compared with before, what happens to the wage of therapists and the number employed?
Answer: C.
1. A
  A single employer has no rivals to outbid for therapists, so it has no reason to pay more. It holds employment down to keep the wage down.
2. B
  Fewer jobs on offer, not more, is how the company keeps the wage low. A lower wage on an upward-sloping supply curve brings forth fewer therapists, so employment cannot rise.
3. C
  Correct. As the only employer, the company knows that hiring more therapists means paying a higher wage to all of them, so each extra therapist costs it more than the wage. It hires fewer than the competitive clinics did and pays the lower wage that the smaller number requires on the supply curve.
4. D
  The curves are the same, but the decision is not. The many clinics each took the wage as given; one employer chooses where to be on the supply curve, and it picks fewer workers at a lower wage.
5. E
  Hiring fewer therapists lets the company pay less, because on an upward-sloping supply curve fewer workers will work for a lower wage. The wage falls along with employment.
In the market for used delivery vans in Dalvanne, each seller knows whether a van has a hidden engine problem, but buyers cannot tell before they buy. So buyers will pay only a price that reflects an average van, and many owners of sound vans keep them rather than sell at that price. Why is this market outcome inefficient?
Answer: E.
1. A
  Some buyers do overpay for bad vans, but that is a transfer from buyer to seller. The lost surplus comes from sound vans that never change hands.
2. B
  Voluntary sales can still leave surplus unclaimed. Trades that would benefit both sides, a sound van sold to a buyer who values it more, do not happen.
3. C
  Nothing here gives a seller market power; there are many sellers. The problem is that buyers cannot see quality.
4. D
  No government sets the price here. The price is held down because buyers cannot tell sound vans from bad ones.
5. E
  Correct. Because sellers know a van's quality and buyers do not, buyers offer only an average price. Owners of sound vans, worth more to many buyers than to their owners, keep them, so trades that would raise total surplus never happen. Asymmetric information pulls the market away from the efficient allocation.
Many households in the valley town of Thornmere heat their homes by burning firewood. The smoke settles over the valley and harms neighbors' health, and no household pays for that harm. Firewood is sold in a perfectly competitive market. Compared with the socially optimal quantity, how much firewood does the market sell, and why?
Answer: B.
1. A
  The harm falls on neighbors, not on the buyers, so it does not reduce what buyers are willing to pay. Market demand reflects only private benefit.
2. B
  Correct. Each household buys firewood until its own marginal benefit equals the price, ignoring the cost its smoke imposes on others. Marginal social benefit is below marginal private benefit, so the market sells more than the quantity where marginal social benefit equals marginal social cost.
3. C
  The price covers the private cost of supplying firewood, but the market leaves out the harm from smoke. With an external cost, the market quantity is not the optimal one.
4. D
  At the market quantity, buyers' private benefit equals sellers' cost. The extra cost lands on neighbors, which puts the optimum below the market quantity, so the market sells more, not less.
5. E
  The trees are part of sellers' private cost and are already in the price. The external cost here comes from burning the wood, which buyers do.
A valley town wants a flood-warning siren on a hillside. Once it is built, everyone in the valley hears it, and no one can be kept from hearing it. One more household hearing it does not make it any harder for others to hear. Why would a private firm be unlikely to build and run the siren?
Answer: D.
1. A
  One household hearing the siren takes nothing away from another; the siren is non-rival. That is the opposite of what this choice says.
2. B
  Serving one more household costs nothing, since the siren is already sounding. The problem is collecting payment, not cost.
3. C
  A firm that could charge would be a monopoly, but here it cannot charge at all, because no one can be kept from hearing the siren.
4. D
  Correct. The siren is non-excludable and non-rival, a public good. Since everyone hears it whether or not they pay, each household has an incentive to free ride, and a private firm could not collect enough to cover its cost.
5. E
  Overuse is a problem of rival goods that anyone can take, such as fish in a lake. Hearing the siren uses nothing up.
Aldwater Gypsum Works holds the only license to quarry gypsum in the country of Orvenne. Its marginal cost is constant at $30 a ton. Its demand curve is a straight line on which it would sell nothing at $90 a ton and sells 1,000 more tons a year for every $1 cut in price. Its marginal revenue curve also starts at $90 and falls $2 for every 1,000 tons. Unregulated, it sells 30,000 tons a year at $60 a ton. The government then puts a tax of $10 on every ton Aldwater sells. To maximize its profit after the tax, what price does Aldwater charge, and how many tons does it sell?
Answer: A.
1. A
  Correct. The tax raises marginal cost to $30 + $10 = $40. Marginal revenue is $90 - $2 for each 1,000 tons, so it equals $40 at 25,000 tons, and demand at 25,000 tons gives a price of $90 - $25 = $65. The price rises by $5, half the tax, and output falls by 5,000 tons.
2. B
  That adds the whole $10 to the price and reads the quantity from demand. Aldwater sets output where marginal revenue meets the new $40 marginal cost, at 25,000 tons, and charges $65.
3. C
  That treats the tax like a fixed fee. A tax on every ton raises marginal cost, so the profit-maximizing output falls and the price rises.
4. D
  Aldwater cannot raise its price and keep its sales: on its demand curve, 30,000 tons sell only at $60. Output falls to where marginal revenue equals the higher marginal cost.
5. E
  That sets the price equal to the new marginal cost, as a competitive market would. A monopolist produces where marginal revenue, not price, equals marginal cost.
Coldharbour Glass and Tremby Glass are the only two makers of greenhouse glass panels in their country, and they compete with each other on price. They propose to merge into one company, and the merger would not lower the cost of making a panel. Regulators block the merger under the country's antitrust law. Which of the following best explains the decision?
Answer: C.
1. A
  A merger of the only two sellers removes price competition, so it tends to raise prices, not lower them. Low prices are not what antitrust law guards against here.
2. B
  A firm with no rival faces the whole downward-sloping market demand and produces where marginal revenue equals marginal cost, with the price above marginal cost.
3. C
  Correct. Antitrust policy tries to keep markets competitive. Merged into one seller, the two firms would gain market power, and with no cost saving to pass on, the company would sell fewer panels at a higher price. Buyers would lose more than the company gains, so total surplus would fall.
4. D
  Antitrust law targets the loss of competition, not profit as such. Firms in competitive markets earn positive accounting profits all the time.
5. E
  The stem says the merger would not change the cost of making a panel. The concern is the price and quantity a single seller would choose.
The country of Kirrinmoor replaces part of its income tax, under which households with higher incomes paid a larger percentage of their income, with a sales tax at one rate on all purchases. Households with lower incomes spend a larger share of their income than households with higher incomes. All else equal, how does Kirrinmoor's Lorenz curve for after-tax income change?
Answer: B.
1. A
  The same rate on purchases is not the same rate on income. Lower-income households spend more of what they earn, so the sales tax takes a larger percentage of their income.
2. B
  Correct. The old tax was progressive and the sales tax is regressive: it takes a larger share of income from lower-income households, who spend more of what they earn. Shifting toward it leaves after-tax income less equally shared, so the Lorenz curve bows farther from the line of equality.
3. C
  Higher-income households may pay more tax in dollars, but inequality depends on shares of income. As a share of income they now pay less than before, and lower-income households pay more.
4. D
  The Lorenz curve shows how income is shared, not how much tax is collected. Moving the tax burden toward lower-income households changes that sharing even if total revenue stays the same.
5. E
  The direction is right, but the reason is backward. Lower-income households spend a larger share of their income, so the sales tax falls more heavily on low incomes, not high ones.

Your results

Section	Score	Time used
Section I
Section II

Free-response scores are the points you ticked against the scoring guide. The page never grades them.

Practice Exam 1

Section I: Multiple Choice

Section II: Free Response

Question 1: Long 10 points

Question 2: Short 5 points

Question 3: Short 5 points

Your results

Practice Exam 2

Section I: Multiple Choice

Section II: Free Response

Question 1: Long 10 points

Question 2: Short 5 points

Question 3: Short 5 points

Your results