Microeconomics: Factor Markets and Market Failures Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Microeconomics: Factor Markets and Market Failures flashcards as text
In a competitive labor market, what is the relationship between the wage and the marginal factor cost (MFC)?
Answer: MFC = wage
In a competitive labor market, each firm is a wage-taker, so hiring one more worker costs exactly the market wage, making MFC equal to the wage.
Moral hazard occurs when:
Answer: A party takes on more risk after being insured because it bears less of the cost
Moral hazard is the behavioral change that occurs when someone is insulated from risk, leading to riskier actions than they would otherwise take.
Which policy tool best addresses the free-rider problem associated with public goods?
Answer: Government provision funded by taxation
Because free riders consume public goods without paying, voluntary markets underprovide them; government provision financed by compulsory taxes solves this.
When the price of a complement in production falls for a firm, the firm's demand for labor used to produce the good will most likely:
Answer: Increase, as lower costs raise output and thus labor demand
Cheaper complementary inputs reduce overall production costs, encouraging greater output and therefore higher derived demand for all inputs including labor.
A minimum wage set above the market-clearing wage is an example of a:
Answer: Price floor in the labor market
A minimum wage acts as a price floor; it is a legal minimum below which wages cannot fall, binding only when set above equilibrium.
If the MRP of the 10th worker is $50 and the wage is $60, the profit-maximizing firm should:
Answer: Not hire the 10th worker because MRC exceeds MRP
Since the cost of hiring the 10th worker ($60) exceeds the revenue it generates ($50), profit falls and the firm should not hire that worker.
Which of the following is an example of government failure in addressing market failure?
Answer: A regulation that imposes costs exceeding the externality it corrects
Government failure occurs when policy intervention creates inefficiencies greater than the market failure it was meant to fix.