AP Microeconomics Unit 4 practice questions
Try 10 multiple-choice questions from Unit 4 here. Pick an answer to see why it's right or wrong, then take the timed test above for a full AP-style set.
Question 1
A government considers imposing either a per-unit tax or a lump-sum tax on a monopoly. Both taxes reduce the firm's profits, but they differ in their effect on the profit-maximizing quantity. Which of the following best describes this difference?
A per-unit tax reduces output by increasing marginal cost; a lump-sum tax does not change output
A per-unit tax increases output by increasing marginal cost; a lump-sum tax reduces output
A per-unit tax does not change output; a lump-sum tax reduces output by increasing fixed costs
A per-unit tax does not change output; a lump-sum tax increases output by increasing fixed costs
A per-unit tax increases output by decreasing marginal cost; a lump-sum tax does not change output
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Answer: (A)
Differentiating between variable and fixed costs shows that per-unit taxes shift the marginal cost curve upward, changing the intersection with marginal revenue. Lump-sum taxes affect only fixed costs, leaving the marginal decision and output level unchanged.
Question 2
Research shows that the minimum efficient scale for producing automobiles is 5 million units per year, while the total domestic demand is 10 million units. Which market structure is this industry most likely to resemble?
An oligopoly with a few large firms
Perfect competition with many small firms
Monopolistic competition with differentiated products
A natural monopoly with a single dominant firm
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Answer: (A)
Analyzing the ratio of market demand to minimum efficient scale (10 million / 5 million = 2) suggests the market can only support about two efficient firms, leading to an oligopoly.
Question 3
An electric utility company faces a long-run average total cost curve that decreases continuously as output increases to meet total market demand. Which policy approach is most often used to address this specific cost structure?
Regulating the firm as a natural monopoly to prevent excessive pricing power
Breaking the firm into smaller competitors to encourage perfect competition
Subsidizing new entrants to ensure constant returns to scale are achieved
Imposing a price floor to guarantee the firm earns positive economic profits
Allowing the firm to charge monopoly prices to recover its high fixed costs
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Answer: (A)
Connecting the cost structure to policy reveals that a continuously falling LRATC creates a natural monopoly. Governments regulate these firms because competition would be inefficient (raising average costs).
Question 4
How does the concept of economies of scale differ between a natural monopoly and a perfectly competitive firm?
A natural monopoly experiences economies of scale over the entire range of market demand
A natural monopoly experiences diseconomies of scale over the entire range of market demand
A natural monopoly experiences constant returns to scale over the entire range of market demand
A natural monopoly experiences increasing marginal returns over the entire range of market demand
A natural monopoly experiences economies of scale only at low output levels
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Answer: (A)
Differentiating the market structures shows that a natural monopoly's LRATC continues to fall as it supplies the whole market, whereas a competitive firm reaches minimum efficient scale at a small fraction of demand.
Question 5
A monopolist sells 5 units at each. To sell a 6th unit, it must lower the price to for all units. If the marginal cost of the 6th unit is , what is the marginal profit of that unit?
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Answer: (A)
Total Revenue for 5 units is (). Total Revenue for 6 units is (). is . Marginal profit is .
Question 6
In a monopolistically competitive industry, firms are currently earning positive economic profits. As new firms enter the market, how does the profit-maximizing adjustment of an existing firm affect its demand for advertising services?
Firm output falls; advertising demand decreases
Firm output falls; advertising demand increases
Firm output rises; advertising demand decreases
Firm output rises; advertising demand increases
Firm output falls; advertising demand remains constant
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Answer: (A)
Analyzing long-run adjustment is required. Entry of new firms reduces the demand and for the existing firm's product. The firm reduces output to the new point, reducing its need for inputs like advertising.
Question 7
A firm faces a downward-sloping demand curve. If the government imposes a per-unit tax on the product, how will the profit-maximizing price and quantity change?
Price will increase and quantity will decrease
Price will decrease and quantity will increase
Price will increase and quantity will increase
Price will decrease and quantity will decrease
Price will remain unchanged and quantity will decrease
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Answer: (A)
A per-unit tax increases marginal cost, shifting the curve upward (left). The new intersection with the downward-sloping curve occurs at a lower quantity, which corresponds to a higher price on the demand curve.
Question 8
A monopolist practices perfect price discrimination with a constant marginal cost of . To maximize profit, the firm will expand production until the price of the last unit is:
equal to
less than
greater than
equal to
greater than
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Answer: (A)
Under perfect price discrimination, the demand curve becomes the marginal revenue curve because the firm captures the full price of every unit. The firm produces until , so .
Question 9
A monopoly's profit-maximizing quantity occurs where marginal revenue equals marginal cost. How does this compare to the allocatively efficient quantity?
It is lower than the quantity where price equals marginal cost
It is higher than the quantity where price equals marginal cost
It is equal to the quantity where price equals average total cost
It is equal to the quantity where marginal revenue equals price
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Answer: (A)
Comparing market outcomes shows that monopolies restrict output to raise price. The quantity is therefore less than the social optimum where .
Question 10
A monopolist faces the demand curve and has a marginal cost curve . What are the profit-maximizing price and quantity?
Price ; Quantity 20
Price ; Quantity 20
Price ; Quantity 30
Price ; Quantity 30
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Answer: (A)
Marginal revenue is . Setting () gives . Plugging into demand gives .
What's on the AP Microeconomics Unit 4 practice test
The standard version takes about 63 minutes and follows the timing and directions of the AP exam, sized to one unit:
- 20 Multiple Choice Questions (23 minutes)
- 1 FRQ – FRQ 1 – Long (20 minutes)
- 1 FRQ – FRQ 2 – Short (20 minutes)
Questions are drawn from 987 multiple-choice questions and 55 FRQs written for Unit 4, Imperfect Competition.
Practice AP Microeconomics Unit 4 FRQs
Answer the unit's free-response questions one at a time and get a score on every part.
- FRQ 1 – Long (31 questions)
- FRQ 2 – Short (7 questions)
- FRQ 3 – Short (17 questions)
Review Unit 4 before you start
- 4.1 Introduction to Imperfectly Competitive Markets
- 4.2 Monopolies
- 4.3 Price Discrimination
- 4.4 Monopolistic Competition
- 4.5 Oligopoly and Game Theory