2025 AP AP Microeconomics Practice Paper with Answers

A.
i. The market graph displays a downward-sloping market demand curve (D) and an upward-sloping market supply curve (S), with the intersection determining the equilibrium price \(P_M\) and quantity \(Q_M\).
ii. The firm graph is drawn directly to the right of the market graph. As a price taker, Evergreen Planters faces a perfectly elastic demand curve: a horizontal line extended from \(P_M\) labeled \(d = \text{MR} = \text{AR} = P_E\). The firm’s upward-sloping marginal cost (MC) curve intersects MR at the profit-maximizing quantity \(Q_E\).
iii. Because the market is in long-run equilibrium, the firm earns zero economic profit (normal profit). Thus, the U-shaped average total cost (ATC) curve must be tangent to the horizontal demand curve at \(Q_E\), and the MC curve passes directly through the minimum point of the ATC curve.

B.
The firm's profit-maximizing output will remain unchanged in the short run. A lump-sum fee is a fixed cost, which increases total fixed cost (TFC) and average total cost (ATC), but does not alter marginal cost (MC) or marginal revenue (MR). Since the profit-maximization rule is \(\text{MR} = \text{MC}\), the output level remains at \(Q_E\).

C.
i. An increase in consumer demand shifts the market demand curve to the right (\(D_1 \to D_2\)), resulting in a higher market equilibrium price \(P^* > P_M\) and a higher market equilibrium quantity \(Q^* > Q_M\).
ii. The number of firms in the market will increase in the long run. In the short run, the higher market price \(P^*\) causes existing firms to earn positive economic profits (\(P > \text{ATC}\)). Because there are no barriers to entry in a perfectly competitive market, these economic profits incentivize new firms to enter the market.

D.
Evergreen Planters should hire more workers.
- The marginal revenue product of labor is \(\text{MRP}_L = \text{MP}_L \times P = 15 \times \$10 = \$150\).
- The marginal factor cost (wage) is \(\text{MFC} = W = \$120\).
- Because \(\text{MRP}_L > \text{MFC}\) (\(\$150 > \$120\)), the revenue generated by hiring an additional worker exceeds the cost of hiring that worker, so hiring more workers will increase total profit.

E.
i. \(\text{LRATC}_{400} = \frac{\text{LRTC}}{\text{Quantity}} = \frac{\$4,000}{400} = \$10\) per urn.
ii. Evergreen Planters is experiencing economies of scale. When producing 200 urns, \(\text{LRATC}_{200} = \frac{\$2,400}{200} = \$12\). When production increases to 400 urns, LRATC falls from $12 to $10. A decrease in long-run average total cost as output increases indicates economies of scale.

Question 1 Scoring Guidelines (10 points total):

Part A (4 points):
- Point 1: 1 point for drawing a correctly labeled market graph with a downward-sloping demand curve (D) and an upward-sloping supply curve (S), and labeling the market equilibrium price as \(P_M\) and the market equilibrium quantity as \(Q_M\).
- Point 2: 1 point for drawing a correctly labeled graph for Evergreen Planters showing a horizontal demand and marginal revenue curve (\(d = \text{MR}\)) extended from the market price \(P_M\) and labeling the firm's price as \(P_E\).
- Point 3: 1 point for showing a rising marginal cost (MC) curve and the firm's profit-maximizing quantity, labeled \(Q_E\), where \(\text{MR} = \text{MC}\).
- Point 4: 1 point for showing the average total cost (ATC) curve tangent to the firm's \(d = \text{MR}\) curve at \(Q_E\) and the MC curve passing through the minimum point of the ATC curve.

Part B (1 point):
- Point 5: 1 point for stating that Evergreen Planters' profit-maximizing quantity will not change in the short run and explaining that a lump-sum fee is a fixed cost that does not affect marginal cost (MC) or marginal revenue (MR).

Part C (2 points):
- Point 6: 1 point for showing a rightward shift of the market demand curve on the market graph from part A and labeling the new market equilibrium price as \(P^*\) and new market equilibrium quantity as \(Q^*\).
- Point 7: 1 point for stating that the number of firms will increase in the long run and explaining that the higher market price creates positive economic profit in the short run, attracting new firms to enter the market.

Part D (1 point):
- Point 8: 1 point for stating that Evergreen Planters should hire more workers and explaining that the marginal revenue product of labor (\(\text{MRP}_L = \$150\)) is greater than the wage / marginal factor cost (\(\text{MFC} = \$120\)).

Part E (2 points):
- Point 9: 1 point for calculating the long-run average total cost of producing 400 urns as $10 per urn and showing the work: \(\text{LRATC} = \frac{\$4,000}{400} = \$10\).
- Point 10: 1 point for stating that Evergreen Planters experiences economies of scale and explaining that as output increases from 200 to 400 urns, long-run average total cost decreases from $12 (\(\frac{\$2,400}{200}\)) to $10 (\(\frac{\$4,000}{400}\)).

A. A profit-maximizing firm in the labor market hires workers up to the point where the marginal factor cost equals the marginal revenue product (\(\text{MFC} = \text{MRP}\)). Looking at the table, at \(L = 3\), \(\text{MFC} = \$140\) and \(\text{MRP} = \$140\). Thus, the profit-maximizing number of loggers is 3.

B. Apex Timber will pay a wage of $100 per day. As a monopsonist, the firm pays the wage corresponding to the labor supply curve for the profit-maximizing quantity of 3 workers, which is $100 (less than the \(\text{MFC}\) and \(\text{MRP}\) of $140).

C.
i. With a binding minimum wage of $140, the firm's marginal factor cost becomes perfectly elastic (horizontal) at \(\text{MFC} = \$140\) up to the labor supply at that wage (5 workers). The firm maximizes profit where \(\text{MFC} = \text{MRP} = \$140\), which occurs at 3 loggers.
ii. \(\text{Total Wage Bill} = \text{Wage} \times \text{Quantity of Loggers} = \$140 \times 3 = \$420\).

D. The marginal revenue product of loggers will decrease. Because the demand for labor is a derived demand, a decrease in the market demand for lumber causes the market price (and marginal revenue) of lumber to fall. Since \(\text{MRP}_L = \text{MR} \times \text{MP}_L\) (or \(P \times \text{MP}_L\)), a decrease in product price decreases the \(\text{MRP}\) at all levels of labor.

• Part A (Point 1): 1 point for stating that the profit-maximizing number of loggers is 3 (where MFC = MRP = $140).
• Part B (Point 2): 1 point for stating that the wage rate is $100 and explaining that the wage is determined by the supply schedule at the hired quantity of 3 workers ($100 < $140).
• Part C(i) (Point 3): 1 point for identifying that the firm will hire 3 loggers at the $140 minimum wage.
• Part C(ii) (Point 4): 1 point for calculating the total wage bill as $420 and showing the work: $140 × 3 = $420.
• Part D (Point 5): 1 point for stating that the marginal revenue product of loggers will decrease and explaining that the decrease in the demand for lumber decreases the price and marginal revenue of lumber (MRP = MR × MP).

A. Brew Haven's dominant strategy is to choose Loyalty Program:
- If Daily Grind chooses Loyalty Program, Brew Haven gets $400 from Loyalty Program versus $300 from No Program ($400 > $300).
- If Daily Grind chooses No Program, Brew Haven gets $700 from Loyalty Program versus $600 from No Program ($700 > $600).
Since Loyalty Program yields higher profit regardless of Daily Grind's choice, it is a dominant strategy.

B. Daily Grind's dominant strategy is to choose Loyalty Program:
- If Brew Haven chooses Loyalty Program, Daily Grind gets $400 from Loyalty Program versus $250 from No Program ($400 > $250).
- If Brew Haven chooses No Program, Daily Grind gets $650 from Loyalty Program versus $500 from No Program ($650 > $500).
Since Loyalty Program yields higher profit regardless of Brew Haven's choice, it is a dominant strategy.

C. The Nash equilibrium is when both firms choose (Loyalty Program, Loyalty Program), resulting in payoffs of ($400, $400).

D. To find the maximum combined profit, evaluate the sum of payoffs in each cell:
- (Loyalty, Loyalty): $400 + $400 = $800
- (Loyalty, No Program): $700 + $250 = $950
- (No Program, Loyalty): $300 + $650 = $950
- (No Program, No Program): $600 + $500 = $1,100
The maximum combined profit is $1,100.

E. Subtracting $150 from Daily Grind's profit whenever it selects Loyalty Program:
- If Brew Haven chooses Loyalty Program, Daily Grind's payoff becomes $400 - $150 = $250 (from Loyalty) vs $250 (from No Program).
- If Brew Haven chooses No Program, Daily Grind's payoff becomes $650 - $150 = $500 (from Loyalty) vs $500 (from No Program).
Since Daily Grind receives the exact same payoff from both strategies under each scenario ($250 = $250 and $500 = $500), Loyalty Program is no longer strictly dominant.

• Part A (Point 1): 1 point for stating that Brew Haven has a dominant strategy of Loyalty Program and explaining using numbers: $400 > $300 when Daily Grind chooses Loyalty Program, and $700 > $600 when Daily Grind chooses No Program.
• Part B (Point 2): 1 point for stating that Daily Grind has a dominant strategy of Loyalty Program and explaining using numbers: $400 > $250 when Brew Haven chooses Loyalty Program, and $650 > $500 when Brew Haven chooses No Program.
• Part C (Point 3): 1 point for identifying the Nash equilibrium as (Loyalty Program, Loyalty Program) or Brew Haven chooses Loyalty Program and Daily Grind chooses Loyalty Program.
• Part D (Point 4): 1 point for calculating the maximum combined profit as $1,100 and showing the work: $600 + $500 = $1,100 (or identifying the No Program, No Program outcome).
• Part E (Point 5): 1 point for stating 'No' and explaining that after the $150 fee, Daily Grind's payoffs from Loyalty Program equal its payoffs from No Program ($250 = $250 if Brew Haven plays Loyalty, and $500 = $500 if Brew Haven plays No Program), so Loyalty Program is no longer strictly dominant.