AP®︎ Microeconomics: Unit 3 Practice Test
Prepare for your quiz, test, or the AP exam with focused practice questions on Unit 3 of AP Microeconomics – Production, Cost, and the Perfect Competition Model.
Questions List
Unit 3 (All Topics)
Question 1 Topic 3.1Easy
This question tests the following: PRD-1.A.1
In economics, what is production?
What You’re Being Tested On:
Explore the learning objectives taken directly from the College Board’s AP® Microeconomics Curriculum. Ensure you’re prepared for the exact topics covered on the AP® exam, in-class tests, and quizzes, and gain confidence in your mastery of the material.
Unit 3: Production, Cost, and the Perfect Competition Model
This unit focuses on how firms make production decisions in the short and long run, analyzing costs, revenues, and profit maximization.
Topic 3.1: The Production Function
Learning Objective: PRD-1.A
a. Define (using graphs where appropriate) key terms and concepts relating to production and cost. b. Explain (using graphs where appropriate) how production and cost are related in the short run and long run. c. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.
Essential Knowledge: PRD-1.A.1
The production function explains the relationship between inputs and outputs both in the short run and the long run.
Essential Knowledge: PRD-1.A.2
Marginal product and average product change as input usage changes, and hence, total product changes.
Essential Knowledge: PRD-1.A.3
Diminishing marginal returns occur as the firm employs more of one input, holding other inputs constant, to produce a product (output) in the short run.
Topic 3.2: Short-Run Production Costs
Learning Objective: PRD-1.A
a. Define (using graphs where appropriate) key terms and concepts relating to production and cost. b. Explain (using graphs where appropriate) how production and cost are related in the short run and long run. c. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.
Essential Knowledge: PRD-1.A.4
Fixed costs and variable costs determine the total cost.
Essential Knowledge: PRD-1.A.5
Marginal cost, average (fixed, variable, and total) cost, total cost, and total variable cost change as total output changes, but total fixed cost remains constant at all output levels, including zero output.
Essential Knowledge: PRD-1.A.6
Production functions with diminishing marginal returns yield an upward-sloping marginal cost curve.
Essential Knowledge: PRD-1.A.7
Specialization and the division of labor reduce marginal costs for firms.
Essential Knowledge: PRD-1.A.8
Cost curves can shift in response to changes in input costs and productivity.
Topic 3.3: Long-Run Production Costs
Learning Objective: PRD-1.A
a. Define (using graphs where appropriate) key terms and concepts relating to production and cost. b. Explain (using graphs where appropriate) how production and cost are related in the short run and long run. c. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.
Essential Knowledge: PRD-1.A.9
In the long run, firms can adjust all their inputs, and as a result, all costs become variable.
Essential Knowledge: PRD-1.A.10
The relationship between inputs and outputs in the long run is described by the scale of production—increasing, decreasing, or constant returns to scale.
Essential Knowledge: PRD-1.A.11
The long-run average total cost is characterized by economies of scale, diseconomies of scale, or constant returns to scale (efficient scale).
Essential Knowledge: PRD-1.A.12
The minimum efficient scale plays a role in determining the concentration of firms in a market and the market structure.
Topic 3.4: Types of Profit
Learning Objective: CBA-2.C
a. Define the different types of profit. b. Explain how firms respond to profit opportunities. c. Calculate a firm’s profit or loss.
Essential Knowledge: CBA-2.C.1
Firms respond to economic profit (loss) rather than accounting profit.
Essential Knowledge: CBA-2.C.2
Accounting profit fails to account for implicit costs (such as cost of financial capital, compensation for risk, or an entrepreneur’s time), which, if fully compensated, result in normal profit.
Topic 3.5: Profit Maximization
Learning Objective: CBA-2.D
a. Define (using graphs or data as appropriate) the profit-maximizing rule. b. Explain (using a graph or data as appropriate) the profit-maximizing level of production.
Essential Knowledge: CBA-2.D.1
Firms are assumed to produce output to maximize their profits by comparing marginal revenue and marginal cost.
Topic 3.6: Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
Learning Objective: PRD-2.A
Explain (using graphs or data where appropriate) firms’ short-run decisions to produce positive output levels, or long-run decisions to enter or exit a market in response to profit-making opportunities.
Essential Knowledge: PRD-2.A.1
In the short run, firms decide to operate (i.e., produce positive output) or shut down (i.e., produce zero output) by comparing total revenue to total variable cost or price to average variable cost (AVC).
Essential Knowledge: PRD-2.A.2
In the absence of barriers to entry or exit, in the long run (i.e., once factors that are fixed in the short run become variable), firms enter a market in which there are profit-making opportunities and exit a market when they anticipate economic losses.
Topic 3.7: Perfect Competition
Learning Objective: PRD-3.A
a. Define (using graphs as appropriate) the characteristics of perfectly competitive markets and efficiency. b. Explain (using graphs where appropriate) equilibrium and firm decision making in perfectly competitive markets and how prices in perfectly competitive markets lead to efficient outcomes. c. Calculate (using data from a graph or table as appropriate) economic profit (loss) in perfectly competitive markets.
Essential Knowledge: PRD-3.A.1
A perfectly competitive market is efficient. Firms in perfectly competitive markets face no barriers to entry and have no market power.
Essential Knowledge: PRD-3.A.2
In perfectly competitive markets, prices communicate to consumers and producers the magnitude of others’ marginal costs of production and marginal benefits of consumption and provide incentives to act on that information (i.e., price equals marginal cost in an efficient market).
Essential Knowledge: PRD-3.A.3
In perfectly competitive markets, firms can sell all their outputs at a constant price determined by the market.
Essential Knowledge: PRD-3.A.4
At a competitive market equilibrium, firms are price takers and select output to maximize profit by producing the level of output where the marginal cost equals marginal revenue (at the price).
Essential Knowledge: PRD-3.A.5
At a competitive market equilibrium, the price of a product equals both the private marginal benefit received by the last unit consumed and the private marginal cost incurred to produce the last unit, thus achieving allocative efficiency.
Essential Knowledge: PRD-3.A.6
In a short-run competitive equilibrium, price can either be above or below its long-run competitive level resulting in profits or losses, motivating entry or exit of firms and moving prices and quantities toward long-run equilibrium.
Essential Knowledge: PRD-3.A.7
In a long-run perfectly competitive equilibrium, productive efficiency implies all operating firms produce at efficient scale, price equals marginal cost and minimum average total cost, and firms earn zero economic profit.
Essential Knowledge: PRD-3.A.8
Firms may be in a constant cost, increasing cost, or decreasing cost industry. Long-run prices depend on the portion of the long-run cost curves on which firms operate.
Essential Knowledge: PRD-3.A.9
A perfectly competitive market in long-run equilibrium is allocatively and productively efficient.
