Microeconomics: Factor Markets and Market Failures Flashcards

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

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).

Which of the following would shift the demand for capital to the right?

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.

A bilateral monopoly in a labor market occurs when:

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.

Asymmetric information in insurance markets can cause adverse selection because:

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.

If a union successfully raises the wage above the competitive equilibrium, the likely result is:

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.

Economic rent is best defined as:

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).

Cap-and-trade systems address negative externalities by:

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.