Imperfect competition practice questions (AP Microeconomics)

Sample questions

All 4 free AP Microeconomics questions on this unit, from the free AP Microeconomics Practice Exam. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 12 marks · Monopoly & marginal revenue
   For a single-price monopolist, marginal revenue is less than price at every output beyond the first unit because:
   • A.
     the monopolist faces a perfectly elastic demand curve
   • B.
     to sell an additional unit it must lower the price on all units sold
   • C.
     marginal cost rises as output expands
   • D.
     monopolists always produce where demand is inelastic
   • E.
     price is set by the government regulator
   Show answerFrom the free AP Microeconomics Practice Exam →
2. Question 22 marks · Monopolistic competition
   In long-run equilibrium, a firm in monopolistic competition earns zero economic profit and produces where:
   • A.
     $P = MC =$ minimum ATC
   • B.
     $P = ATC > MC$, with excess capacity
   • C.
     $P > ATC > MC$
   • D.
     $P = MC < ATC$
   • E.
     $MR = MC$ and $P =$ minimum ATC
   Show answerFrom the free AP Microeconomics Practice Exam →
3. Question 32 marks · Game theory
   Two rival firms each choose whether to advertise. If both advertise, each earns 4 million dollars; if neither advertises, each earns 6 million dollars; if only one advertises, the advertiser earns 8 million dollars and the other earns 2 million dollars. The Nash equilibrium of this game is:
   • A.
     neither firm advertises, because joint profit is highest
   • B.
     there is no Nash equilibrium in this game
   • C.
     exactly one firm advertises
   • D.
     both firms advertise, because advertising is a dominant strategy
   • E.
     both firms advertise only if they can collude
   Show answerFrom the free AP Microeconomics Practice Exam →
4. Question 410 marks · Monopoly
   Monopoly. A single-price monopolist faces the market demand curve $P = 20 - Q$, where $P$ is the price in dollars and $Q$ is output in thousands of units. Marginal cost is constant at $MC = 4$, and there are no fixed costs.
   $P = 20 - Q, \qquad MC = 4$
   (a)

   Calculate the profit-maximizing quantity and price. Show your work.

   [3]
   (b)

   Calculate the monopolist's profit at this output.

   [2]
   (c)

   Identify the allocatively efficient level of output and explain why the monopolist does not produce it.

   [2]
   (d)

   Calculate the deadweight loss caused by the monopoly.

   [3]
   Show answerFrom the free AP Microeconomics Practice Exam →

Key terms

The definitions and formulas AP Microeconomics expects for imperfect competition, typeset as they appear on the paper.

Monopoly and marginal revenue

A single seller facing the market demand curve. Marginal revenue lies below demand (to sell one more unit it must lower the price on all units), so the monopolist produces where $MR = MC$ and charges the price on the demand curve above that quantity.

$$MR < P, \qquad Q^*: MR = MC, \quad P^* \text{ from demand}$$

Monopoly inefficiency

Output is below the allocatively efficient level ($P > MC$), creating deadweight loss, and price exceeds minimum ATC. A perfectly price-discriminating monopolist removes the deadweight loss but captures all the surplus.

Natural monopoly and regulation

A firm whose ATC falls across the whole market demand. A fair-return price sets $P = ATC$ (zero economic profit); a socially optimal price sets $P = MC$, which requires a subsidy because it means a loss.

Monopolistic competition

Many firms selling differentiated products with free entry. In the long run economic profit is zero but price exceeds marginal cost and the firm produces with excess capacity, at an output below minimum ATC.

$$P = ATC > \min ATC, \qquad P > MC$$

Oligopoly and game theory

A few interdependent firms. A payoff matrix shows each firm's outcome for every combination of choices; a dominant strategy is best whatever the rival does, and a Nash equilibrium is a pair of choices from which neither firm wants to deviate.

Collusion and cartels

Firms acting jointly as a monopoly to restrict output and raise price. The arrangement is unstable because each member gains by cheating, the prisoner's dilemma in the payoff matrix.

Frequently asked questions

Other AP Microeconomics topics

• Basic economic concepts
• Supply and demand
• Production, cost and perfect competition
• Factor markets
• Market failure and the role of government

All AP Microeconomics topics · AP Microeconomics exam guide · All free practice exams