Free CLEP Principles of Microeconomics Practice Test (2026)

Question 1

In the short run, a firm's marginal cost curve eventually slopes upward mainly because of

Accepted Answer

diminishing marginal returns, since each added worker adds less output while working with a fixed amount of capital

Answer

average fixed cost that rises as output grows

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diseconomies of scale from building a larger plant

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fixed costs that rise as output grows

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a product price that falls as the firm sells more

Question 2

A monopolist faces the demand curve P = 60 − 5Q, so its marginal revenue is MR = 60 − 10Q. Its marginal cost is a constant $20. What price will it charge to maximize profit?

Accepted Answer

$40

Answer

$20

Answer

$30

Answer

$50

Answer

$60

Question 3

Spraying to control mosquitoes would protect every household in a town. When a group asks each household for a voluntary $20 donation to pay for it, few people give, since the spraying would protect them whether or not they paid. This illustrates

Accepted Answer

the free-rider problem, which is why such services are usually paid for through taxes

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a negative externality, which calls for a tax on the service

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a price ceiling, which creates a shortage

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a natural monopoly, which calls for price regulation

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the tragedy of the commons, in which a shared resource is used up

Question 4

As incomes in a city rise, people buy fewer bus rides and drive more, even though bus fares have not changed. For these riders, bus rides are

Accepted Answer

an inferior good

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a Giffen good

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a luxury good

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a good with perfectly inelastic demand

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a normal good

Question 5

Tasha can spend Saturday working a shift that pays $120, or she can go to a concert. She already bought the $60 concert ticket and cannot resell it. If she goes to the concert, what is her opportunity cost?

Accepted Answer

$120, the pay she gives up

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$0, because the ticket is already paid for

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$60, the price of the ticket

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$120 plus whatever the concert is worth to her

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$180, the pay plus the ticket

Question 6

In a market, quantity demanded is Qd = 100 − 2P and quantity supplied is Qs = 3P − 20. The government sets a price floor of $30. What results?

Accepted Answer

A surplus of 30 units

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No effect, because a price floor matters only when it is below equilibrium

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A shortage of 30 units

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A shortage of 12 units

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A surplus of 18 units

Question 7

Which event would shift a country's production possibilities curve outward?

Accepted Answer

A new technology that raises output per worker in every industry

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A rise in the world price of the goods the country exports

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A hurricane that destroys many of the country's factories

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A fall in unemployment from 8 percent to 5 percent

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A decision to produce more of one good and less of the other

Question 8

A new oil discovery lowers the price of gasoline, and drivers buy more gasoline. On the demand side, economists describe the drivers' response as

Accepted Answer

an increase in quantity demanded, shown as a movement along the demand curve

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a decrease in quantity demanded, shown as a movement up the demand curve

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an increase in demand, shown as a rightward shift of the demand curve

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an increase in demand, shown as a movement along the supply curve

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a decrease in demand, shown as a leftward shift of the demand curve

Question 9

A government wants to cut a region's total sulfur emissions by 40 percent. Some factories can cut emissions cheaply, while for others it is very costly. Compared with requiring every factory to cut its emissions by 40 percent, a system of tradable pollution permits will most likely

Accepted Answer

reach the same total cut at a lower total cost, because firms that can cut cheaply will cut more and sell their spare permits

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remove the need for the government to set any limit on total emissions

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reach the same total cut at a higher total cost, because firms must spend money buying permits

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fail to reduce total emissions, because firms can buy the right to pollute

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reduce emissions only at the factories with the highest cleanup costs

Question 10

A town is deciding how many snowplows to own. Each of the first 2 plows adds more in yearly benefits than it costs. The third plow would add $40,000 in benefits and cost $35,000 a year, and the fourth would add $30,000 in benefits and cost $35,000 a year. Marginal analysis says the town should own

Accepted Answer

3 plows

Answer

as many plows as its budget allows

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2 plows

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enough plows to make total benefits as large as possible

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4 plows

Question 11

A car maker doubles all of its inputs, including factory space, machines, and workers, and its output more than doubles. This shows

Accepted Answer

increasing returns to scale, which mean falling long-run average cost

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higher fixed costs, which mean rising average fixed cost

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diminishing marginal returns, which mean rising short-run marginal cost

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decreasing returns to scale, which mean rising long-run average cost

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constant returns to scale, which mean flat long-run average cost

Question 12

A health study makes almonds more popular, and at the same time a new harvesting machine lowers the cost of growing them. In the almond market, what must happen?

Accepted Answer

Equilibrium quantity rises, but the change in price cannot be known without the sizes of the shifts

Answer

Equilibrium price falls and quantity rises

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Equilibrium price and quantity both stay the same because the shifts cancel out

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Equilibrium price and quantity both rise

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Equilibrium price rises, but the change in quantity cannot be known

Question 13

Why is a perfectly competitive market in long-run equilibrium said to be allocatively efficient?

Accepted Answer

Price equals marginal cost, so the value buyers place on the last unit equals the cost of making it

Answer

Each firm sells a differentiated product, so buyers get variety

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Price equals average variable cost, so firms just cover their variable costs

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Firms produce at the lowest point of average total cost, so costs are as low as possible

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Marginal revenue is greater than marginal cost, so firms keep expanding

Question 14

A small bakery hires workers in a perfectly competitive labor market where the going wage is $18 an hour. What is its marginal resource cost of hiring one more hour of labor?

Accepted Answer

$18, because it can hire as many workers as it wants at the going wage

Answer

More than $18, because hiring another worker means paying a higher wage to everyone

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Zero, because wages are a fixed cost in the short run

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Equal to the worker's marginal revenue product, whatever the wage

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Less than $18, because each added worker is less productive

Question 15

Two airlines, Northline and Southway, each choose a High or Low fare. Daily profits in thousands of dollars, listed as (Northline, Southway), are: both High (8, 6); Northline High and Southway Low (5, 7); Northline Low and Southway High (6, 4); both Low (3, 2). What is the Nash equilibrium?

Accepted Answer

Northline chooses High and Southway chooses Low

Answer

Northline chooses Low and Southway chooses High

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Both choose High

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Both choose Low

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There is none, because Southway has no dominant strategy

Question 16

Two of the three largest makers of a product propose to merge. Antitrust regulators are most likely to try to block the merger because it would

Accepted Answer

reduce competition, making it easier for the remaining firms to raise prices

Answer

move the market closer to perfect competition

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make market demand more elastic

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increase the number of firms in the industry

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create economies of scale that lower costs

Question 17

For which of these goods is demand most likely to be the most price elastic?

Accepted Answer

One particular brand of bottled water

Answer

Electricity for home heating and lighting

Answer

Table salt

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Insulin for a person with diabetes

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Gasoline in the first week after a price rise

Question 18

In economics, the long run is best defined as a period

Accepted Answer

long enough that the firm can change the amounts of all of its inputs

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in which price equals average variable cost

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in which at least one input, such as the factory, is fixed

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of more than one year

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in which firms earn zero accounting profit

Question 19

A firm sells its product in a competitive market at $5 each and hires workers in a competitive labor market at $80 a day. Each of its first 3 workers adds more output than the 4th. The 4th worker adds 18 units a day, the 5th adds 15, and the 6th adds 12. How many workers should it hire?

Accepted Answer

4 workers

Answer

3 workers

Answer

5 workers

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6 workers

Answer

7 workers

Question 20

Compared with a monopolist that charges every buyer the same price, a monopolist that practices perfect price discrimination, charging each buyer the most that buyer will pay, will

Accepted Answer

produce the efficient quantity, but buyers will be left with no consumer surplus

Answer

create a larger deadweight loss than the single-price monopolist

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produce less output than the single-price monopolist

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earn less profit than the single-price monopolist

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leave buyers with more consumer surplus than a competitive market would

Question 21

A city's water utility has very high fixed costs, and its average total cost keeps falling over the whole range of market demand. If regulators require it to charge a price equal to marginal cost, what problem arises?

Accepted Answer

The price is below average total cost, so the utility takes a loss unless it gets a subsidy

Answer

The utility produces less than the unregulated monopoly would

Answer

A shortage develops because the price is above equilibrium

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Marginal cost rises above average total cost, so the utility must raise its price

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The utility earns large economic profits

Question 22

A per-unit tax will create the largest deadweight loss in a market where

Accepted Answer

both demand and supply are very elastic

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both demand and supply are very inelastic

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supply is perfectly inelastic

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demand is perfectly inelastic

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the tax is collected from buyers rather than sellers

Question 23

Why does a firm in a perfectly competitive market accept the market price instead of setting its own?

Accepted Answer

It is one of many sellers of an identical product, so buyers would switch to rivals if it charged more

Answer

It sells a differentiated product that only it can supply

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Its demand curve slopes downward, so it can sell more only by cutting its price

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The government sets the price in competitive markets

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It has high fixed costs that keep rivals out

Question 24

An economist says that a farm earned zero economic profit last year. What does this mean?

Accepted Answer

The farm covered all of its costs, including the owner's opportunity costs, so the owner earned a normal profit

Answer

The farm's revenue covered only its explicit costs, so the owner should close it

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The farm lost money and will likely shut down soon

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The farm had zero accounting profit

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The farm's revenue was below its variable costs

Question 25

In one hour, a worker in Avalon can make 4 shirts or 2 radios, and a worker in Brisa can make 3 shirts or 1 radio. Which statement is correct?

Accepted Answer

Avalon has a comparative advantage in radios, and Brisa has a comparative advantage in shirts

Answer

Brisa has a comparative advantage in radios, and Avalon has one in shirts

Answer

Neither country has a comparative advantage, because their opportunity costs are equal

Answer

Avalon has a comparative advantage in both goods, so trade cannot help either country

Answer

Avalon should make both goods because it has an absolute advantage in both

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