AP Microeconomics Factor Markets and Market Failures 1

Question 1

In a perfectly competitive labor market, the wage rate is determined by:

Accepted Answer

The interaction of market supply and demand for labor

Answer

In a perfectly competitive labor market, the wage rate is determined by the collective interaction of the market supply and demand for labor. The equilibrium wage is established where the total quantity of labor demanded by all firms equals the total quantity of labor supplied by all workers. Individual firms and workers are wage takers, accepting this market-determined rate.

Question 2

A firm will hire additional units of a resource until:

Accepted Answer

Marginal revenue product equals the resource price

Answer

A profit-maximizing firm will continue to hire additional units of a resource, such as labor or capital, as long as the additional revenue generated by that resource exceeds its cost. This means the firm will hire until the marginal revenue product (MRP) of the resource equals its price (MRC). At this point, the firm maximizes its profit by ensuring that the last unit hired adds as much to revenue as it does to cost.

Question 3

Which of the following is an example of a market failure?

Accepted Answer

The production of negative externalities, such as pollution

Answer

A market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a suboptimal outcome for society. The production of negative externalities, such as pollution, is a prime example because the private costs of production do not fully reflect the social costs. This leads to overproduction of the polluting good and a reduction in overall societal welfare.

Question 4

Public goods are characterized by which two key features?

Accepted Answer

Non-excludability and non-rivalry

Answer

Public goods are defined by two key characteristics: non-excludability and non-rivalry. Non-excludability means it is difficult or impossible to prevent individuals from consuming the good, even if they don't pay for it. Non-rivalry means that one person's consumption of the good does not diminish another person's ability to consume it simultaneously.

Question 5

To correct a negative externality, governments can:

Accepted Answer

Answer

To correct a negative externality, such as pollution, governments can impose a tax on the activity generating the externality. This tax should ideally be set equal to the marginal external cost at the socially optimal output level. By internalizing the externality, the tax makes producers or consumers bear the full social cost, incentivizing a reduction in output to the socially efficient quantity.

AP Practice Test

AP Practice Test

AP Microeconomics Factor Markets and Market Failures 1