AP Micro Microeconomics: Factor Markets and Market Failures 3 — Questions and Answers
Question 1: The marginal revenue product (MRP) of labor is calculated as:
- Wage × number of workers
- Marginal product × price of output (Correct answer)
- Total revenue ÷ total labor
- Price of output ÷ marginal product
Correct answer: Marginal product × price of output
MRP equals the additional output from one more worker (MP) multiplied by the revenue earned from selling that output (price in a competitive market).
Question 2: Which of the following would shift the demand for capital to the right?
- A decrease in the rental price of capital
- A rise in the demand for the good capital helps produce (Correct answer)
- A fall in labor productivity
- An increase in the real interest rate
Correct answer: A rise in the demand for the good capital helps produce
Higher demand for a firm's output increases the MRP of capital, shifting capital demand rightward.
Question 3: A bilateral monopoly in a labor market occurs when:
- Two competitive firms dominate hiring
- A monopsonist employer faces a monopoly union (Correct answer)
- Two unions negotiate with a single employer
- The government sets both a price floor and price ceiling
Correct answer: A monopsonist employer faces a monopoly union
Bilateral monopoly pits a single buyer (monopsonist) against a single seller of labor (monopoly union), and the wage outcome depends on bargaining power.
Question 4: Asymmetric information in insurance markets can cause adverse selection because:
- Insurers always have more information than buyers
- High-risk individuals are more likely to purchase insurance than low-risk individuals (Correct answer)
- Moral hazard reduces demand for insurance
- Insurance companies collude to raise premiums
Correct answer: High-risk individuals are more likely to purchase insurance than low-risk individuals
When buyers know more about their risk than insurers, high-risk individuals disproportionately seek coverage, raising costs and potentially causing market unraveling.
Question 5: If a union successfully raises the wage above the competitive equilibrium, the likely result is:
- A surplus of labor (unemployment) in the unionized sector (Correct answer)
- A shortage of labor in the unionized sector
- Higher employment in the unionized sector
- No change in employment if demand is inelastic
Correct answer: A surplus of labor (unemployment) in the unionized sector
A wage floor above equilibrium creates a surplus of workers willing to work at the higher wage but whom employers won't hire, resulting in unemployment.
Question 6: Economic rent is best defined as:
- The payment for use of a building or land
- Payment to a factor above its opportunity cost (Correct answer)
- The profit earned by a monopoly firm
- The cost of producing one more unit of output
Correct answer: Payment to a factor above its opportunity cost
Economic rent is the surplus payment a factor receives above what is necessary to keep it in its current use (its opportunity cost or transfer earnings).
Question 7: Cap-and-trade systems address negative externalities by:
- Taxing each unit of pollution at a fixed rate
- Creating a market for pollution permits that limits total emissions (Correct answer)
- Banning all production of the externality-generating good
- Subsidizing firms to install pollution controls
Correct answer: Creating a market for pollution permits that limits total emissions
Cap-and-trade sets a total pollution cap, issues permits, and lets firms trade them so pollution reductions occur where they are cheapest.
AP Micro Microeconomics: Factor Markets and Market Failures 3
The marginal revenue product (MRP) of labor is calculated as: