--- title: "AP Microeconomics Unit 4 Practice Test" description: "A timed AP Microeconomics Unit 4 (Imperfect Competition) practice test in the AP format, drawn from 987 multiple-choice questions and 55 FRQs written for the unit. The standard version takes about 63 minutes." canonical: "https://fiveable.me/ap-micro/unit-test/4" type: "unit-test" subject: "AP Microeconomics" unit: "Unit 4" --- # AP Microeconomics Unit 4 Practice Test ## Overview A timed AP Microeconomics Unit 4 (Imperfect Competition) practice test in the AP format, drawn from 987 multiple-choice questions and 55 FRQs written for the unit. The standard version takes about 63 minutes. ## Test Format - 20 Multiple Choice Questions (23 minutes) - 1 FRQ – FRQ 1 – Long (20 minutes) - 1 FRQ – FRQ 2 – Short (20 minutes) ## Unit FRQs by Type - [FRQ 1 – Long](/ap-micro/frqs/long-frq?unit=4): 31 questions - [FRQ 2 – Short](/ap-micro/frqs/short-frq-2?unit=4): 7 questions - [FRQ 3 – Short](/ap-micro/frqs/short-frq-3?unit=4): 17 questions ## Practice Questions ### 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) A per-unit tax reduces output by increasing marginal cost; a lump-sum tax does not change output - (B) A per-unit tax increases output by increasing marginal cost; a lump-sum tax reduces output - (C) A per-unit tax does not change output; a lump-sum tax reduces output by increasing fixed costs - (D) A per-unit tax does not change output; a lump-sum tax increases output by increasing fixed costs - (E) A per-unit tax increases output by decreasing marginal cost; a lump-sum tax does not change output **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? - (A) An oligopoly with a few large firms - (B) Perfect competition with many small firms - (C) Monopolistic competition with differentiated products - (D) A natural monopoly with a single dominant firm **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? - (A) Regulating the firm as a natural monopoly to prevent excessive pricing power - (B) Breaking the firm into smaller competitors to encourage perfect competition - (C) Subsidizing new entrants to ensure constant returns to scale are achieved - (D) Imposing a price floor to guarantee the firm earns positive economic profits - (E) Allowing the firm to charge monopoly prices to recover its high fixed costs **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) A natural monopoly experiences economies of scale over the entire range of market demand - (B) A natural monopoly experiences diseconomies of scale over the entire range of market demand - (C) A natural monopoly experiences constant returns to scale over the entire range of market demand - (D) A natural monopoly experiences increasing marginal returns over the entire range of market demand - (E) A natural monopoly experiences economies of scale only at low output levels **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 $$20$$ each. To sell a 6th unit, it must lower the price to $$18$$ for all units. If the marginal cost of the 6th unit is $$5$$, what is the marginal profit of that unit? - (A) $$3$$ - (B) $$8$$ - (C) $$13$$ - (D) $$18$$ **Answer: (A)** Total Revenue for 5 units is $$100$$ ($$5 \times 20$$). Total Revenue for 6 units is $$108$$ ($$6 \times 18$$). $$MR$$ is $$8$$. Marginal profit is $$MR - MC = 8 - 5 = 3$$. ### 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? - (A) Firm output falls; advertising demand decreases - (B) Firm output falls; advertising demand increases - (C) Firm output rises; advertising demand decreases - (D) Firm output rises; advertising demand increases - (E) Firm output falls; advertising demand remains constant **Answer: (A)** Analyzing long-run adjustment is required. Entry of new firms reduces the demand and $$MR$$ for the existing firm's product. The firm reduces output to the new $$MR=MC$$ 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? - (A) Price will increase and quantity will decrease - (B) Price will decrease and quantity will increase - (C) Price will increase and quantity will increase - (D) Price will decrease and quantity will decrease - (E) Price will remain unchanged and quantity will decrease **Answer: (A)** A per-unit tax increases marginal cost, shifting the $$MC$$ curve upward (left). The new intersection with the downward-sloping $$MR$$ 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 $$10$$. To maximize profit, the firm will expand production until the price of the last unit is: - (A) equal to $$10$$ - (B) less than $$10$$ - (C) greater than $$10$$ - (D) equal to $$0$$ - (E) greater than $$20$$ **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 $$P = MR = MC$$, so $$P = 10$$. ### Question 9 A monopoly's profit-maximizing quantity occurs where marginal revenue equals marginal cost. How does this compare to the allocatively efficient quantity? - (A) It is lower than the quantity where price equals marginal cost - (B) It is higher than the quantity where price equals marginal cost - (C) It is equal to the quantity where price equals average total cost - (D) It is equal to the quantity where marginal revenue equals price **Answer: (A)** Comparing market outcomes shows that monopolies restrict output to raise price. The $$MR=MC$$ quantity is therefore less than the social optimum where $$P=MC$$. ### Question 10 A monopolist faces the demand curve $$P = 120 - 2Q$$ and has a marginal cost curve $$MC = 2Q$$. What are the profit-maximizing price and quantity? - (A) Price $$80$$; Quantity 20 - (B) Price $$40$$; Quantity 20 - (C) Price $$60$$; Quantity 30 - (D) Price $$80$$; Quantity 30 **Answer: (A)** Marginal revenue is $$120 - 4Q$$. Setting $$MR = MC$$ ($$120 - 4Q = 2Q$$) gives $$Q = 20$$. Plugging $$Q$$ into demand gives $$P = 80$$. ## Review the Unit - [4.1 Introduction to Imperfectly Competitive Markets](/ap-micro/unit-4/intro-imperfectly-competitive-markets/study-guide/qAJdHoeqKuPXCiAIn4PZ) - [4.2 Monopolies](/ap-micro/unit-4/monopolies/study-guide/BJd48CvY2QF5xDB7MX5N) - [4.3 Price Discrimination](/ap-micro/unit-4/price-discrimination/study-guide/Al6taBRp9MAtsUByw8DJ) - [4.4 Monopolistic Competition](/ap-micro/unit-4/monopolistic-competition/study-guide/CKKifD3UT2sqS7lGTEsc) - [4.5 Oligopoly and Game Theory](/ap-micro/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe) ## Other Unit Tests - [Unit 1: Basic Economic Concepts](/ap-micro/unit-test/1) - [Unit 2: Supply and Demand](/ap-micro/unit-test/2) - [Unit 3: Production, Cost, and the Perfect Competition Model](/ap-micro/unit-test/3) - [Unit 5: Factor Markets](/ap-micro/unit-test/5) - [Unit 6: Market Failure and the Role of Government](/ap-micro/unit-test/6) ## About This Document Canonical Fiveable pages are available as Markdown at the same path plus `.md`. - [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns - [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing - [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`) - [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`)