Which of the following is not a characteristic of a perfectly competitive industry?

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Energy can be generated using either coal or natural gas as an input. If the supply of coal is interrupted, what are the most likely effects on the price and quantity of natural gas traded on the open market? Assume a perfectly competitive market with no government policy intervention.

Possible Answers:

Price increases, Quantity decreases

Price increases, Quantity increases

No change

Price decreases, Quantity increases

Price decreases, Quantity decreases

Correct answer:

Price increases, Quantity increases

Explanation:

Coal and natural gas are substitutes for each other based on the description given in the question. Therefore, an interruption in the supply of coal will lead to an increase in the demand for natural gas. This will increase both the price and quantity of natural gas.

Iron ore is an important input in steelmaking. If the cost of iron ore increases, what are the likely effects on the equilibrium price and quantity in the market for steel? Assume a perfectly competitive market.

Possible Answers:

No effect

Price decreases, Quantity decreases

Price increases, Quantity decreases

Price decreases, Quantity increases

Price increases, Quantity increases

Correct answer:

Price increases, Quantity decreases

Explanation:

An increase in the cost of iron ore will make steel production more expensive.

Because production costs increase, steelmakers will be less willing to produce steel at any given price. Therefore, the market price of steel will increase, and less steel will be traded on the market.

Which of the following scenarios will result in an increase in the market price for iron ore?

Possible Answers:

The wages paid to workers extracting iron ore fall as a depressed construction market reduces the demand for iron.

The cost of other building materials, such as lumber and concrete, falls.

The wages paid to workers extracting iron ore increase, and at the same time a construction boom increases the demand for iron.

The completion of a rail network allows iron ore producers to significantly reduce the cost of transporting the product to market.

A significant new deposit of iron ore is discovered.

Correct answer:

The wages paid to workers extracting iron ore increase, and at the same time a construction boom increases the demand for iron.

Explanation:

We need to choose the scenario that results in a higher equilibrium price. This will result from an increase in demand and a decrease in supply. Only one answer choice matches this scenario. The other choices create a lower equilibrium price or an ambiguous change.

Which of the following is NOT a characteristic of a perfectly competitive market?

Possible Answers:

Entry barriers limit the number of new firms that can enter the market.

The quality and characteristics of a good or service do not vary between different suppliers.

Buyers and sellers have perfect information on the quality of the good or service exchanged.

Firms sell at a price point such that marginal cost equals marginal revenue.

Buyers and sellers do not incur transactions costs when trading on the market.

Correct answer:

Entry barriers limit the number of new firms that can enter the market.

Explanation:

Perfectly competitive markets are characterized by their LACK of entry and exit barriers, which makes it easy for firms to enter or leave the market as conditions change.

Which of these actions most obviously produces a positive externality?

Possible Answers:

Remodeling your kitchen

Keeping your yard clean and maintained

Parking rusty, old cars on your front lawn

Planting an herb garden in your private backyard

Cutting to the front of the line at the movies

Correct answer:

Keeping your yard clean and maintained

Explanation:

Keeping your yard clean and maintained is a positive quality that residents and visitors in your neighborhood will also benefit from. Some of the other answers are also positive, but they only have a private benefits, not public ones.

Reference this chart for the question below:

If the market is perfectly competitive, and the market price of the good is $6, how many units should this supplier produce and sell on the market?

Possible Answers:

Cannot be determined

4

3

5

7

Explanation:

Marginal revenue equals marginal cost at $6 for the 5th unit produced. Total revenue equals total cost at both the 4th and 5th unit, but this is not the determining factor.

Which of these actions most obviously produces a negative externality?

Possible Answers:

Trashing your room

Farming sweet potatoes

Selling your old stuff online

Working as a software engineer

Littering

Explanation:

Trashing your room really only affects you. Only littering, which affects the general public, is clearly a negative externality.

Which of the following breakdowns in the rules of perfect competition is likely to result in a market externality?

Possible Answers:

Firms sell differentiated, non-identical products

Many sellers, one buyer

High entry and exit barriers

Poorly defined property rights

Increasing returns to scale in production

Correct answer:

Poorly defined property rights

Explanation:

Among the available choices, only poorly defined property rights is likely to result in an externality. For example, poorly defined intellectual property rights could result in firms not reaping the full benefit of their research and development and therefore doing less than is socially optimal.

The following are characteristics of a perfectly competitive market. Among these, which is most clearly lacking in the market for used cars?

Possible Answers:

Buyers and sellers have perfect information on the quality of the product

Large number of buyers and sellers

Well defined property rights

Lack of increasing returns to scale

Factors of production are perfectly mobile in the long run

Correct answer:

Buyers and sellers have perfect information on the quality of the product

Explanation:

Although few real-life markets meet the characteristics of perfect competition exactly, the lack of perfect (or even equal) information about the goods being traded stands out in the used car market. When dealing in used cars, the seller typically has much more information about the quality of the car than the buyer.

The other answers more or less fit the perfect competition model. There are many buyers and sellers, the property rights of the buyer and seller are well defined, there are limited returns to scale (i.e. small used car sellers have not been competed out of existence), and factors of production (labor, land) can be put to other uses.

Reference this chart for the question below:

The marginal cost of producing the 7th unit of output is:

Correct answer:

Explanation:

The total cost of producing 7 units is $49. Since the total cost of producing 6 units is $38, the marginal cost of producing the 7th unit must be $11.

All AP Microeconomics Resources

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