Education.com
Try
Brainzy
Try
Plus

Factor Markets Review Questions for AP Economics

By — McGraw-Hill Professional
Updated on Mar 4, 2011

The study guides for these review questions can be found at:

Questions

  1. Your aunt runs a small firm from her home making apple pies. She hires some friends to help her. Which of the following situations would most likely increase her demand for labor?
    1. The price of apple peelers/corers rises.
    2. Your aunt's friends gossip all day, slowing their dough making process.
    3. There is a sale on ovens.
    4. A new study reveals that apples increase your risk of cancer.
    5. The price of apples increases.
  2. The price of labor is $2 and the price of capital is $1. The marginal product of labor is 200 and the marginal product of capital is 50. What should the firm do?
    1. Increase capital and decrease labor so that the marginal product of capital falls and the marginal product of labor rises.
    2. Increase capital and decrease labor so that the marginal product of capital rises and the marginal product of labor falls.
    3. Decrease capital and increase labor so that the marginal product of capital rises and the marginal product of labor falls.
    4. Decrease capital and increase labor so that the marginal product of capital falls and the marginal product of labor rises.
    5. Increase both capital and labor until the ratio of marginal products per dollar is equal.
  3. A competitive labor market is currently in equilibrium. Which of the following most likely increases the market wage?
    1. More students graduate with the necessary skills for this labor market.
    2. Demand for the good produced by this labor is stronger.
    3. The price of a complementary resource increases.
    4. The Labor Department removes the need for workers to pass an exam before they can work in this field.
    5. Over time, one large employer grows to act as a monopsonist.
  4. Use Table 10.6 to respond to questions 4 to 5.

  5. If a firm is hiring labor in the perfectly competitive labor market, the wage and employment are
    1. $3 and zero.
    2. $4 and 10.
    3. $5 and 20.
    4. $6 and 30.
    5. $7 and 40.
  6. If a firm hires labor in a monopsony labor market, the wage and employment are
    1. $3 and zero.
    2. $4 and 10.
    3. $5 and 20.
    4. $6 and 30.
    5. $7 and 40.

Answers and Explanations

  1. C—Since ovens would be a less expensive complementary resource (with more ovens, they can bake more pies), your aunt needs more employees to go along with the extra ovens. Apple corers and peelers are complements, but even if you think they are substitutes, the impact on labor demand is uncertain because of the competing output and substitution effects.
  2. C—Do a quick ratio of marginal product per dollar. When you see that the MPL/PL > MPK/PK, you notice that the firm is getting more "bang for the buck" with labor. Immediately rule out any choice that says they hire less labor. The only way that MPL/PL falls to equal MPK/PK is to decrease the capital and increase the labor, causing the MPK to rise and the MPL to fall. The firm does this until the marginal products divided by the prices are equal.
  3. B—The equilibrium wage rises with stronger demand or lessened supply of labor. The stronger demand for the product increases the wage as the demand for labor increases. All other choices either increase the labor supply or decrease the demand, thus decreasing the wage. Emergence of monopsony decreases the wage below competitive levels.
  4. E—In a competitive labor market, equilibrium is where W = MRPL.
  5. D—In a monopsony labor market, equilibrium is where MFC = MRPL.
Add your own comment

Ask a Question

Have questions about this article or topic? Ask
Ask
150 Characters allowed