AP Microeconomics Market Structures 1 — Questions and Answers
Question 1: Which of the following is a characteristic of perfect competition?
- Firms produce differentiated products
- There are significant barriers to entry
- Firms are price takers (Correct answer)
- There is only one seller in the market
Correct answer: Firms are price takers
In perfect competition, firms are considered price takers because they are too small relative to the overall market to influence the market price. They must accept the prevailing market price for their output, and can sell as much as they want at that price without affecting it. This characteristic arises from the presence of many buyers and sellers, identical products, and free entry and exit.
Question 2: What is the key difference between monopolistic competition and perfect competition?
- The number of firms in the market
- The presence of barriers to entry
- The level of product differentiation (Correct answer)
- The ability to set prices
Correct answer: The level of product differentiation
The primary difference between monopolistic competition and perfect competition is the level of product differentiation. In perfect competition, products are identical, making firms perfect substitutes for one another. In contrast, monopolistic competition involves firms selling similar but slightly differentiated products, allowing them some limited control over their prices due to unique features, branding, or perceived quality.
Question 3: In a monopoly, the marginal revenue curve:
- Lies above the demand curve
- Coincides with the demand curve
- Lies below the demand curve (Correct answer)
- Is perfectly elastic
Correct answer: Lies below the demand curve
In a monopoly, the firm faces the entire downward-sloping market demand curve. To sell an additional unit, the monopolist must lower the price not only for that marginal unit but also for all previous units sold. Consequently, the marginal revenue (the additional revenue from selling one more unit) will always be less than the price, causing the marginal revenue curve to lie below the demand curve.
Question 4: What is a dominant strategy in game theory?
- A strategy that guarantees the highest payoff for all players
- A strategy that is the best choice regardless of the opponent’s action (Correct answer)
- A strategy chosen by firms in perfect competition
- A strategy that maximizes joint profit in a duopoly
Correct answer: A strategy that is the best choice regardless of the opponent’s action
A dominant strategy in game theory is a strategy that yields the highest payoff for a player, regardless of what strategy the other player(s) choose. If a player has a dominant strategy, they will always choose it because it guarantees them the best possible outcome, irrespective of their opponents' actions. This simplifies decision-making in strategic interactions.
Question 5: Which of the following is true in a monopolistic competition market in the long run?
- Firms earn economic profits
- Firms operate at the lowest point of their average total cost curve
- Firms produce where price equals marginal cost
- Firms earn zero economic profit (Correct answer)
Correct answer: Firms earn zero economic profit
In monopolistic competition, firms earn zero economic profit in the long run due to the absence of significant barriers to entry and exit. If firms are making economic profits in the short run, new firms will enter the market, increasing competition and shifting the demand curves faced by existing firms to the left. This process continues until economic profits are eroded to zero, meaning firms only cover their explicit and implicit costs.
AP Microeconomics Market Structures 1
Which of the following is a characteristic of perfect competition?