AP Micro Microeconomics: Factor Markets and Market Failures 3

Question 1

The marginal revenue product (MRP) of labor is calculated as:

Accepted Answer

Marginal product × price of output

Answer

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?

Accepted Answer

A rise in the demand for the good capital helps produce

Answer

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:

Accepted Answer

A monopsonist employer faces a monopoly union

Answer

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:

Accepted Answer

High-risk individuals are more likely to purchase insurance than low-risk individuals

Answer

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:

Accepted Answer

A surplus of labor (unemployment) in the unionized sector

Answer

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.

AP Practice Test

AP Practice Test

AP Micro Microeconomics: Factor Markets and Market Failures 3