Factor markets practice questions (AP Microeconomics)

Sample questions

All 2 free AP Microeconomics questions on this unit, from the free AP Microeconomics Practice Exam and the free AP Microeconomics Free-Response Practice Questions (FRQ) with Answers. 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 · Factor markets
   A profit-maximizing firm hires labor in a competitive labor market at a wage of 90 dollars per day. It should hire additional workers up to the point where:
   • A.
     the marginal revenue product of labor equals 90 dollars
   • B.
     the marginal product of labor equals 90
   • C.
     the average product of labor is maximized
   • D.
     total output is maximized
   • E.
     the marginal revenue product of labor equals zero
   Show answerFrom the free AP Microeconomics Practice Exam →
2. Question 25 marks · Factor markets: labor demand (MRP)
   Pine Ridge Nursery sells potted plants in a perfectly competitive product market at 5 dollars per plant and hires workers in a perfectly competitive labor market at the going wage of 65 dollars per day. With a fixed amount of greenhouse space, the nursery's total output per day is 20 plants with 1 worker, 38 plants with 2 workers, 54 plants with 3, 68 plants with 4, 80 plants with 5 and 90 plants with 6 workers.
   (a)

   Calculate the marginal revenue product of the fourth worker. Show your work.

   [1]
   (b)

   Determine the number of workers Pine Ridge should hire per day to maximize profit at the wage of 65 dollars. Explain how you determined this.

   [1]
   (c)

   Suppose the market price of potted plants rises to 6 dollars while the wage stays at 65 dollars. Determine the number of workers the nursery will now hire, and explain the effect of the price change on its demand for labor.

   [1]
   (d)

   Return to the original price of 5 dollars per plant. The town sets a minimum wage of 75 dollars per day. Determine the number of workers the nursery will hire. Show your work.

   [1]
   (e)

   Explain why the nursery's demand curve for labor slopes downward.

   [1]
   Show answerFrom the free AP Microeconomics Free-Response Practice Questions (FRQ) with Answers →

Key terms

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

Derived demand

Demand for a factor of production comes from demand for the product it makes. Anything that raises the product's price or the factor's productivity shifts factor demand right.

Marginal revenue product (MRP)

The extra revenue from hiring one more unit of a factor: its marginal product times the marginal revenue of output (the price, for a competitive seller). The MRP curve is the firm's factor demand curve.

$$MRP = MP \times MR \;(= MP \times P \text{ for a price taker})$$

Hiring rule

Hire while the marginal revenue product exceeds the marginal factor cost, and stop where they are equal. In a competitive labor market the marginal factor cost is the wage.

$$MRP = MFC$$

Monopsony

A single buyer of labor facing the market supply curve. Its marginal factor cost lies above the wage it pays, so it hires fewer workers and pays a lower wage than a competitive market would.

$$MFC > W, \qquad Q_m: MRP = MFC, \quad W_m \text{ from supply}$$

Least-cost rule

To produce a given output at minimum cost, hire inputs so that the marginal product per dollar is equal across them.

$$\frac{MP_L}{P_L} = \frac{MP_K}{P_K}$$

Minimum wage in a labor market

A binding minimum wage in a competitive labor market raises the wage above equilibrium and creates unemployment (a surplus of labor). In a monopsony it can raise both wage and employment up to the competitive level.

Frequently asked questions

Other AP Microeconomics topics

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

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