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AP Intermediate Economics (BIEAP) study materials
AP Intermediate Economics (BIEAP) study resources

AP Intermediate Economics (BIEAP) practice questions

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Question 1Introduction to Economics and Basic Concepts

In economics, the central problem of scarcity arises because:

  1. Some countries are poorer than others and therefore lack access to markets
  2. Governments refuse to print enough currency to satisfy every household
  3. Human wants are unlimited while productive resources are limited and have alternative uses Correct answer.
  4. Consumers are irrational and consistently make poor spending decisions

Explanation

Scarcity is the mismatch between unlimited wants and the finite resources available to satisfy them. Because resources also have alternative uses, every society must choose what to produce, how to produce it, and for whom.

Question 2Introduction to Economics and Basic Concepts

The opportunity cost of a decision is best defined as:

  1. The value of the next best alternative forgone when a choice is made Correct answer.
  2. The money actually paid out when a good is purchased
  3. The cost of producing one additional unit of output
  4. The total value of every alternative that was available

Explanation

Opportunity cost measures what is given up, valued at the single best alternative not chosen. It is not restricted to monetary payments and does not sum all forgone options together.

Question 3Introduction to Economics and Basic Concepts

A production possibility frontier that is concave to the origin (bowed outward) reflects:

  1. Constant opportunity cost as output of either good expands
  2. Zero opportunity cost once production is efficient
  3. Falling total output as more of either good is produced
  4. Increasing opportunity cost as more of one good is produced Correct answer.

Explanation

A bowed-out PPF shows that successively larger sacrifices of one good are needed to release resources for extra units of the other. This occurs because resources are not equally suited to both activities.

Question 4Introduction to Economics and Basic Concepts

A point lying inside a production possibility frontier indicates that:

  1. The economy has shifted its frontier outward through growth
  2. The opportunity cost of production has become zero
  3. The economy is using its resources inefficiently or has unemployed resources Correct answer.
  4. The economy has achieved an unattainable combination of output

Explanation

Points inside the frontier represent output combinations that could be increased without sacrificing anything else, which signals inefficiency or idle resources. Points on the curve are efficient and points beyond it are unattainable with current resources.

Question 5Introduction to Economics and Basic Concepts

In a market economy, the three fundamental economic questions are primarily resolved through:

  1. Custom and tradition passed between generations
  2. Decisions taken by a central planning authority
  3. The interaction of prices generated by supply and demand Correct answer.
  4. Directives issued by trade unions and producer associations

Explanation

In a market system, prices act as signals and incentives that coordinate decentralized decisions about what, how, and for whom to produce. No single planner sets those answers.

Question 6Introduction to Economics and Basic Concepts

Which feature is characteristic of a command economy?

  1. Private firms compete to maximise profit
  2. The state owns key resources and sets production targets Correct answer.
  3. Consumer sovereignty determines which goods are produced
  4. Prices are set freely by the forces of demand and supply

Explanation

A command economy relies on state ownership and central direction of resources, with output targets replacing market prices as the main coordinating device. Consumer preferences and profit motives play a subordinate role.

Question 7Introduction to Economics and Basic Concepts

A positive statement in economics is one that:

  1. Expresses a value judgement about what ought to be
  2. Is accepted by the majority of economists
  3. Is always favourable in its policy implications
  4. Can be tested against evidence and describes what is or will be Correct answer.

Explanation

Positive statements are factual claims that can in principle be verified or refuted with data. Normative statements, by contrast, involve opinions about what should happen and cannot be settled by evidence alone.

Question 8Introduction to Economics and Basic Concepts

The statement 'the government should raise the minimum wage to reduce poverty' is best classified as:

  1. A normative statement containing a value judgement Correct answer.
  2. A statement of the law of demand
  3. A testable hypothesis about wage elasticities
  4. A positive statement about labour markets

Explanation

The word 'should' signals a recommendation based on values, which makes the claim normative rather than purely factual. Evidence about minimum wages can inform the debate but cannot by itself prove the recommendation correct.

Question 9Introduction to Economics and Basic Concepts

The basic economic problem of allocation arises for society because:

  1. Firms always seek to maximise revenue rather than profit
  2. Governments collect taxes from households and firms
  3. Consumers always prefer more goods to fewer goods
  4. Resources are finite and capable of alternative uses, so choices must be made Correct answer.

Explanation

Allocation is a problem precisely because limited resources can be devoted to competing uses, forcing decisions about priorities. The need to choose is what makes the three fundamental questions unavoidable.

Question 10Introduction to Economics and Basic Concepts

Which of the following is classified as a factor of production called capital in economics?

  1. A worker's acquired skill in operating machinery
  2. A factory building used to manufacture furniture Correct answer.
  3. A natural forest used for timber extraction
  4. Money held in a household savings account

Explanation

In economics, capital refers to produced means of production such as machinery, tools and buildings used to make other goods. Money itself is a financial asset, and human skill belongs to labour.

Question 11Introduction to Economics and Basic Concepts

The reward received by the factor of production 'land' is called:

  1. Wages
  2. Interest
  3. Rent Correct answer.
  4. Profit

Explanation

Each factor of production earns a distinctive reward: land earns rent, labour earns wages, capital earns interest, and enterprise earns profit. Rent is the payment for the use of natural resources.

Question 12Introduction to Economics and Basic Concepts

A movement along a demand curve for coffee is most likely caused by:

  1. A change in the price of coffee Correct answer.
  2. A fall in the price of tea, a substitute
  3. A new study reporting health benefits of coffee
  4. An increase in consumers' incomes

Explanation

A change in the good's own price causes a movement along the existing demand curve, altering quantity demanded. The other options shift the whole curve by changing demand at every price.

Question 13Introduction to Economics and Basic Concepts

If the price of a good rises and, as a result, the quantity demanded falls, this illustrates:

  1. A shift in demand to the right
  2. The law of demand Correct answer.
  3. The law of supply
  4. An increase in demand

Explanation

The law of demand states an inverse relationship between price and quantity demanded, other things equal. A higher price reduces quantity demanded and is shown as a movement up along the demand curve.

Question 14Introduction to Economics and Basic Concepts

A technological improvement that lowers the cost of producing bread will:

  1. Cause a movement up along the supply curve of bread
  2. Shift the supply curve of bread to the left
  3. Shift the demand curve for bread to the right
  4. Shift the supply curve of bread to the right Correct answer.

Explanation

Lower production costs make it profitable to supply more bread at every price, shifting supply rightward. The result is a lower equilibrium price and a larger equilibrium quantity.

Question 15Introduction to Economics and Basic Concepts

At a price above the equilibrium price in a competitive market, we would expect:

  1. A shortage, because quantity demanded exceeds quantity supplied
  2. Demand to increase until the surplus disappears
  3. A surplus, because quantity supplied exceeds quantity demanded Correct answer.
  4. The market to clear immediately with no adjustment

Explanation

When price is above equilibrium, suppliers offer more than buyers wish to purchase, creating excess supply. Downward pressure on price then moves the market back toward equilibrium.

Question 16Introduction to Economics and Basic Concepts

Which of the following would shift the demand curve for a normal good to the left?

  1. An increase in the number of buyers in the market
  2. A rise in consumers' incomes
  3. A fall in consumers' incomes Correct answer.
  4. A fall in the price of a complementary good

Explanation

For a normal good, lower income reduces demand at every price, shifting the curve leftward. Changes in income, prices of related goods, tastes and buyer numbers are demand shifters.

Question 17Introduction to Economics and Basic Concepts

Two goods are complements when:

  1. They are consumed together, so a rise in the price of one reduces demand for the other Correct answer.
  2. An increase in the price of one raises demand for the other
  3. Their demand curves are both upward sloping
  4. They can be used in place of each other to satisfy the same want

Explanation

Complementary goods are used jointly, so the cross-price effect is negative: a higher price for one reduces consumption of both. Substitutes, by contrast, show a positive cross-price relationship.

Question 18Introduction to Economics and Basic Concepts

A market is said to be in equilibrium when:

  1. Quantity demanded equals quantity supplied and there is no tendency for price to change Correct answer.
  2. The government has fixed a legal maximum price
  3. Every consumer can afford the good at the prevailing price
  4. Producers have sold all their inventory at any price

Explanation

Equilibrium occurs where the demand and supply curves intersect, so the plans of buyers and sellers are consistent. At that price there is neither excess demand nor excess supply, removing pressure for change.

Question 19Introduction to Economics and Basic Concepts

An economy operating on its production possibility frontier reallocates resources to produce more of good X. The opportunity cost of the additional X is:

  1. The increase in total output resulting from the reallocation
  2. The money spent on the resources transferred
  3. Zero, because the economy remains on the frontier
  4. The amount of good Y that must be given up Correct answer.

Explanation

Along a PPF, producing more of one good requires sacrificing units of the other, and that sacrifice is the opportunity cost. Remaining on the frontier shows efficiency but does not eliminate the trade-off.

Question 20Introduction to Economics and Basic Concepts

Which statement about the circular flow of income in a simple two-sector model is correct?

  1. Government taxation is the main channel connecting households and firms
  2. Firms supply factors of production to households in exchange for wages
  3. Saving and investment are the only links between the two sectors
  4. Households supply factors of production and receive income, which they spend on goods from firms Correct answer.

Explanation

In the simple model, households own factors and sell their services to firms, receiving income that they spend on output produced by firms. This creates a continuous flow of real resources and money between the sectors.

Question 21Theory of Consumer Behaviour

In consumer theory, the assumption that a consumer's preferences are complete means that for any two bundles A and B, the consumer:

  1. can rank the two bundles as better, worse, or equally preferred Correct answer.
  2. prefers the cheaper of the two bundles
  3. must be indifferent between the two bundles
  4. always prefers the bundle with more of every good

Explanation

Completeness is about the consumer's ability to compare any pair of bundles and state a preference or indifference. It says nothing about prices, quantities, or forcing indifference; it only guarantees a ranking exists for every pair.

Question 22Theory of Consumer Behaviour

A consumer's indifference curve is convex to the origin. This shape reflects the assumption that marginal utility of a good:

  1. rises as more of that good is consumed
  2. diminishes as more of that good is consumed Correct answer.
  3. is unrelated to the slope of the curve
  4. is constant regardless of quantity

Explanation

A convex indifference curve has a diminishing marginal rate of substitution, which corresponds to diminishing marginal utility: as the consumer gets more of one good, each extra unit is worth less in terms of the other good. Convexity therefore encodes diminishing marginal utility.

Question 23Theory of Consumer Behaviour

The marginal rate of substitution of good X for good Y (MRSxy) at a point on an indifference curve equals:

  1. the slope of the budget line
  2. the total utility divided by the quantity of X
  3. the ratio of the prices of X and Y
  4. the absolute value of the slope of the indifference curve Correct answer.

Explanation

MRSxy measures how much Y the consumer will give up for one more unit of X while staying on the same indifference curve, which is the absolute slope of that curve. It equals the ratio of marginal utilities MUx/MUy, not a price ratio.

Question 24Theory of Consumer Behaviour

A consumer's budget line is written as PxQx + PyQy = M. If income M doubles while both prices stay unchanged, the budget line:

  1. rotates to become steeper
  2. shifts outward parallel to the original line Correct answer.
  3. pivots inward around the Y intercept
  4. remains exactly where it was

Explanation

Doubling income with unchanged prices raises both intercepts by the same proportion, so the line shifts outward parallel to itself. The slope, equal to the price ratio, does not change, so no rotation occurs.

Question 25Theory of Consumer Behaviour

The slope of a budget line, measured as the opportunity cost of one more unit of the good on the horizontal axis, is:

  1. the marginal utility of X
  2. the negative of income
  3. Px divided by Py Correct answer.
  4. Py divided by Px

Explanation

To buy one more unit of X the consumer must give up Px/Py units of Y, so the budget line's slope magnitude equals Px/Py. This price ratio is the market opportunity cost of X in terms of Y.

Question 26Theory of Consumer Behaviour

At the consumer's optimum with an interior solution, utility is maximized subject to the budget when:

  1. the marginal utility of each good is equal
  2. the budget line is tangent to the highest attainable indifference curve Correct answer.
  3. the consumer spends all income on the cheaper good
  4. the indifference curve cuts the budget line at two points

Explanation

At an interior optimum the highest reachable indifference curve just touches the budget line, so MRS equals the price ratio. Tangency is the geometric expression of MUx/Px = MUy/Py.

Question 27Theory of Consumer Behaviour

A consumer has MUx = 40, MUy = 20, Px = 4, and Py = 2. To raise utility while staying within the budget, the consumer should:

  1. buy more X and less Y
  2. buy more Y and less X
  3. change nothing because the consumer is already in equilibrium Correct answer.
  4. buy more of both goods

Explanation

Compute marginal utility per rupee: MUx/Px = 40/4 = 10 and MUy/Py = 20/2 = 10. Since the ratios are equal, the equilibrium condition holds and reallocating spending cannot raise utility.

Question 28Theory of Consumer Behaviour

When the price of a normal good falls, the substitution effect alone causes quantity demanded to:

  1. fall, because the consumer's real income has risen
  2. stay unchanged, because only the income effect operates
  3. rise, because the good is now relatively cheaper Correct answer.
  4. fall, because the budget line pivots inward

Explanation

The substitution effect isolates the change in relative price: a cheaper good becomes relatively more attractive, so the consumer substitutes toward it. For a price fall this effect always raises quantity demanded, even for inferior goods.

Question 29Theory of Consumer Behaviour

For an inferior good, the income effect of a price fall:

  1. reinforces the substitution effect
  2. is always zero
  3. works opposite to the substitution effect Correct answer.
  4. makes the demand curve vertical

Explanation

For an inferior good, a price fall raises real income, and the consumer responds by buying less of the good. The income effect therefore opposes the substitution effect, though normally the substitution effect dominates so demand still rises.

Question 30Theory of Consumer Behaviour

A Giffen good is distinctive because its demand curve:

  1. coincides with the income-consumption curve
  2. is horizontal at the equilibrium price
  3. slopes upward, so quantity demanded falls when price falls Correct answer.
  4. is perfectly elastic

Explanation

For a Giffen good the negative income effect is so strong that it outweighs the substitution effect, producing a positively sloped demand curve. A price fall then reduces quantity demanded, an exception to the law of demand.

Question 31Theory of Consumer Behaviour

An Engel curve for a normal necessity good typically:

  1. slopes downward throughout
  2. is vertical at all income levels
  3. is U-shaped
  4. slopes upward but at a decreasing rate as income rises Correct answer.

Explanation

An Engel curve plots quantity demanded against income. For a necessity, quantity rises with income but the income elasticity is less than one, so the curve flattens as income grows.

Question 32Theory of Consumer Behaviour

If a consumer's income rises by 10 percent and quantity demanded of a good rises by 25 percent, the income elasticity of demand is:

  1. 0.4, and the good is a necessity
  2. 2.5, and the good is a luxury Correct answer.
  3. 2.5, and the good is inferior
  4. 0.25, and the good is inferior

Explanation

Income elasticity equals the percentage change in quantity divided by the percentage change in income: 25/10 = 2.5. A value above one identifies a luxury good, since quantity responds more than proportionally to income.

Question 33Theory of Consumer Behaviour

Two goods are substitutes in consumption when the cross-price elasticity of demand between them is:

  1. infinite
  2. zero
  3. negative
  4. positive Correct answer.

Explanation

If the price of one good rises and demand for the other rises, the cross-price elasticity is positive, which defines substitutes. Consumers switch toward the now relatively cheaper alternative.

Question 34Theory of Consumer Behaviour

A consumer's indifference map shows indifference curves that are straight, downward-sloping parallel lines. This implies the two goods are:

  1. inferior goods
  2. consumed in fixed proportions
  3. perfect complements
  4. perfect substitutes Correct answer.

Explanation

Straight-line indifference curves mean a constant marginal rate of substitution, so the consumer will swap the goods at a fixed rate. That is the defining feature of perfect substitutes.

Question 35Theory of Consumer Behaviour

For perfect complements, the consumer's optimal bundle always lies:

  1. anywhere along a straight indifference curve
  2. where the marginal rate of substitution equals zero
  3. at the corner of the budget line where all income goes to one good
  4. at the kink of the L-shaped indifference curve touching the budget line Correct answer.

Explanation

With L-shaped indifference curves the consumer wants goods in fixed proportions, so utility rises only along the ray through the kinks. The optimum is where that kink just touches the budget line, not at a corner.

Question 36Theory of Consumer Behaviour

The assumption that preferences are transitive ensures that a consumer's indifference curves:

  1. can intersect
  2. cannot intersect Correct answer.
  3. are always straight lines
  4. are always upward sloping

Explanation

Transitivity rules out cyclical preferences such as A preferred to B, B to C, and C to A. If two indifference curves crossed, a single bundle would lie on both and yield contradictory rankings, so they cannot intersect.

Question 37Theory of Consumer Behaviour

A consumer's total utility from 3 units is 30 and from 4 units is 34. The marginal utility of the fourth unit is:

  1. 8.5
  2. 4 Correct answer.
  3. 34
  4. 30

Explanation

Marginal utility is the change in total utility from consuming one additional unit: 34 minus 30 equals 4. It is not the total, nor the average, of the quantities given.

Question 38Theory of Consumer Behaviour

When total utility is at its maximum, marginal utility is:

  1. at its maximum
  2. negative
  3. positive and rising
  4. zero Correct answer.

Explanation

Total utility rises while marginal utility is positive and peaks where marginal utility turns from positive to negative, which is at zero. Beyond that point extra units reduce total utility.

Question 39Theory of Consumer Behaviour

The law of diminishing marginal utility states that as consumption of a good increases, other things equal, the:

  1. price of the good falls
  2. additional satisfaction from each extra unit falls Correct answer.
  3. total utility from the good falls
  4. consumer's income falls

Explanation

The law concerns the increment, not the total: each successive unit adds less satisfaction than the previous one. Total utility can keep rising as long as marginal utility remains positive.

Question 40Theory of Consumer Behaviour

A consumer maximizes utility subject to a budget by equalizing:

  1. marginal utility per rupee spent across goods Correct answer.
  2. prices paid for each good
  3. total utility across all goods
  4. quantities purchased of each good

Explanation

The equilibrium condition is MUx/Px = MUy/Py, meaning the last rupee spent on each good yields the same marginal utility. Equalizing totals or quantities does not generally maximize utility.

Question 41Theory of Consumer Behaviour

An upward-sloping income-consumption curve indicates that both goods are:

  1. Giffen
  2. inferior
  3. perfect complements
  4. normal Correct answer.

Explanation

The income-consumption curve traces optimal bundles as income changes. If it slopes upward, consumption of both goods rises with income, which is the definition of normal goods over that range.

Question 42Theory of Consumer Behaviour

A consumer faces a corner solution in which all income is spent on good Y. At that optimum:

  1. MUx/Px exceeds MUy/Py
  2. MUy equals MUx
  3. MUy/Py = MUx/Px
  4. MUy/Py exceeds MUx/Px Correct answer.

Explanation

At a corner where only Y is bought, the consumer's marginal utility per rupee on Y is at least as great as on X, so no incentive exists to shift spending. The strict inequality is the corner-solution condition.

Question 43Theory of Consumer Behaviour

For a downward-sloping linear demand curve, total expenditure is maximized at the price where:

  1. price elasticity of demand equals one Correct answer.
  2. price elasticity of demand equals zero
  3. the price equals the Y intercept
  4. price elasticity of demand is infinite

Explanation

Total expenditure rises with a price cut while demand is elastic and falls once demand becomes inelastic, so the maximum occurs at unit elasticity. At that point marginal revenue is zero.

Question 44Theory of Consumer Behaviour

The compensating variation of a price rise measures the amount of income that must be given to a consumer to:

  1. equalize the new and old prices
  2. restore the original level of utility after the price change Correct answer.
  3. restore the original quantity purchased
  4. eliminate the substitution effect entirely

Explanation

Compensating variation is the income transfer that returns the consumer to the initial indifference curve after a price change. It is measured against the original utility level, not the original quantities.

Question 45Theory of Production and Costs

In the short run, which factor of production is typically treated as fixed for a manufacturing firm?

  1. The volume of electricity consumed by machines
  2. The quantity of factory floor space and machinery Correct answer.
  3. The number of hours worked by hourly employees
  4. The amount of raw material purchased each week

Explanation

Short-run analysis assumes at least one input cannot be varied, and for manufacturers plant and capital equipment are the standard fixed inputs. Labor, materials, and energy can usually be adjusted within the period. This distinction between fixed and variable inputs drives the shape of short-run cost curves.

Question 46Theory of Production and Costs

A firm's total product curve shows output rising at a decreasing rate as more labor is added. What does this indicate about the marginal product of labor?

  1. Marginal product is positive and rising
  2. Marginal product is positive but declining Correct answer.
  3. Marginal product is negative and falling
  4. Marginal product is zero and constant

Explanation

When total product increases at a diminishing rate, each additional worker still adds to output but adds less than the previous worker. Marginal product is therefore positive yet decreasing, which is the classic law of diminishing marginal returns. A falling total product would be required for marginal product to be negative.

Question 47Theory of Production and Costs

Which statement correctly describes the relationship between average product and marginal product of labor?

  1. Average product is always greater than marginal product when output rises
  2. Marginal product intersects average product at the maximum of marginal product
  3. Marginal product equals average product when marginal product is at its peak
  4. Average product rises whenever marginal product exceeds average product Correct answer.

Explanation

The average is pulled up whenever the new increment exceeds the existing average, so average product rises as long as marginal product lies above it. The two curves intersect where average product reaches its maximum, not where marginal product peaks. Marginal product actually peaks before it crosses the falling average product curve.

Question 48Theory of Production and Costs

An isoquant that is convex to the origin reflects which property of production?

  1. Constant returns to scale throughout the range
  2. A diminishing marginal rate of technical substitution Correct answer.
  3. Increasing fixed costs as output expands
  4. Perfect substitutability between the two inputs

Explanation

A convex isoquant means that as more of one input is used, progressively less of the other input can be given up for the same output. This is the diminishing marginal rate of technical substitution. Perfect substitutes would give straight-line isoquants, and returns to scale concern output response when all inputs change together.

Question 49Theory of Production and Costs

A firm's production function exhibits constant returns to scale. If it doubles both capital and labor, what happens to output?

  1. Output rises by more than double
  2. Output remains unchanged
  3. Output rises by less than double
  4. Output exactly doubles Correct answer.

Explanation

Constant returns to scale means that multiplying every input by a given factor multiplies output by that same factor. Doubling all inputs therefore doubles output. Less-than-proportionate growth indicates decreasing returns, and more-than-proportionate growth indicates increasing returns.

Question 50Theory of Production and Costs

Which situation best illustrates increasing returns to scale?

  1. A firm's output is unchanged when all inputs rise by 10 percent
  2. A farm's output rises by 5 percent when all inputs rise by 10 percent
  3. A workshop's output rises by 10 percent when all inputs rise by 10 percent
  4. A plant's output rises by 20 percent when all inputs rise by 10 percent Correct answer.

Explanation

Increasing returns to scale occur when a proportional increase in all inputs produces a larger proportional increase in output. A 20 percent output gain from a 10 percent input gain fits this definition. Specialization and indivisible capital often explain such gains at low output levels.