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AP Micro

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Unit 5

5.6 MC Answers and Review

8 min read•december 17, 2021

AP Microeconomics 🤑

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Answers and Review for Multiple Choice Practice on Factor Markets

⛔STOP ⛔ Before you look at the answers, make sure you gave this practice quiz a try so you can assess your understanding of the concepts covered in Unit 5. Click here for the practice questions: AP Micro Unit 5 Multiple Choice Questions.

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Facts about the test: The AP Microeconomics exam has 70 multiple choice questions and you will be given 1 hour to complete the section. That means it should take you around 8 minutes to complete 10 questions.

*The following questions were not written by College Board and, although they cover information outlined in the AP Microeconomics Course and Exam Description, the formatting on the exam may be different.

1. What is the least amount employers can legally pay their employees?

A. law of decreasing wages

B. wage law

C. minimum wage

D. minimum pay

Explanation: Minimum wage is a term for a wage floor. A price floor keeps the price from meeting equilibrium in the product market, and wage floor keeps the wage above equilibrium in the resource market. Like a price floor, a wage floor means you will have a surplus, but a surplus of labor.

📄 Read Unit 5.2: Changes in Factor Demand and Factor Supply

2. Choose the correct factor payments for land, labor, capital, and entrepreneurship.

A. rent, wage, interest, and profit

B. rent, pay, revenue, and money

C. real estate, workers, interest, and cash

D. rent, pay, interest, and capital

Explanation: Factor payments are the exchanges in the resource market (aka factor market) on the circular flow model. Rent is the price for land, wage is the price of labor, interest is the price for capital, and profit is the price of entrepreneurship.

📄 Read Unit 5.0: Factor Markets

3. There is ___________ relationship between wage and the quantity of labor demanded.

A. not a

B. a contentious

C. a direct

D. an inverse

Explanation: There is an inverse relationship between wage and quantity labor demanded, because when wages increase, firms are less willing to employ people. If the wages decrease, then firms are more willing to hire people. Lower wages = lower costs for companies.

📄 Read Unit 5.2: Changes in Factor Demand and Factor Supply

4. Which of the following is the correct formula for marginal resource cost (MRC)?

A. MRC= Change in total cost/ Change in inputs

B. MRC=Change in total product/Change in total costs

C. MRC = Change in inputs/Change in total costs

D. MRC= Total costs/Quantity of inputs

Explanation: To find the additional costs of one more resource, we must see the change in total costs divided by the change in inputs (or workers). While AP will usually keep the change in input to 1 worker (for example, adding one worker to the one you previously hired would be a change of 1 worker), AP may try to confuse you by adding 2 workers. Don't forget it's change in inputs; not always 1!

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

5. Which of the following is the correct formula for marginal revenue product (MRP)?

A. MRP= Change in inputs/ Change in total product

B. MRP= Change in total profit/change in revenue

C. MRP= Change in total costs/change in input

D. MRP= Change in total revenue/change in inputs

Explanation: Don't forget the R in MRP stands for revenue! We are looking for the additional revenue acquired by hiring one more person. MRP then can be found by looking at the change in revenue divided by the change in inputs.

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

6.A business's demand for labor is known as derived demand because

A. a worker's pay depends on how much human capital has been invested by the business.

B. workers want to work and try to keep their wages low to attract businesses.

C. the business gains more total revenue through hiring more workers

D. the number of workers needed depends on the products demanded by consumers in the product market.

Explanation: Businesses are seeking profit. Only NGOs and charity nonprofits are in business just to employ people. Profit-seeking companies must hire more people to keep up with consumer demand for their products. Seeking profits means you want to keep costs low . Hiring more labor would increase the costs. Only do it when you have to!

📄 Read Unit 5.1: Introduction to Factor Markets

7. All of the following are shifters for the demand for labor EXCEPT:

A. Price of an inferior good

B. Price of the product

C. Productivity of the worker

D. Change in price of substitute goods or complementary goods.

Explanation: Firms are the ones demanding labor in the factor market. Businesses are reluctant to increase costs, because it cuts into profit. A shift happens due to something influencing the product-market. If there is an increase in demand for a good in the product market from consumers, businesses will demand more labor to produce more goods (derived demand).

📄 Read Unit 5.1: Introduction to Factor Markets

8. All of the following are shifters for the supply of labor EXCEPT:

A. Education and Training

B. Cultural expectations

C. Working conditions

D. A change in the price of a substitute good

Explanation: Workers sell their labor in a free factor market. Shifters of the supply of labor are things that will either increase the workers willingness to sell their labor or increase their knowledge to enter other markets.

📄 Read Unit 5.2: Changes in Factor Demand and Factor Supply

9. The least cost rule is _____________.

A. MPx/Px = MPy/Py

B. MPx + MPy =1

C. MPx/MPy

D. MPx-MPy/Mpy

Explanation: Just like maximizing utility in the product market in Unit 1, we are trying to get the biggest bang for our buck in the factor market. We are trying to get the most labor with the money budgeted to pay for the labor. To find that, we need to find the marginal product per dollar (MPx/Px). This will equal the other labor choice (MPy/Py).

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

10. A toy company has just built an assembly line which includes robots and machinery to make dolls. They begin to hire humans to maintain the machines. As more workers get hired, an economist will expect

A. marginal product will increase sharply and then rise at a reduced rate as more people are hired.

B. marginal product will be negative as more people are hired.

C. marginal product will decrease at first and then rebound to equilibrium as more people are hired.

D. marginal product will increase at first and then decrease as more people are hired.

Explanation: At first, more workers allows for job specialization and greater efficiency, but then there is a point where people start getting in each other's way or fighting for the fixed resources.

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

11. In a perfectly competitive labor market, the individual firm's _____________ is perfectly elastic.

A. MRC

B. MRP

C. MP

D. Market supply

Explanation: Because the firm is a wage taker in a perfectly competitive factor market, it cannot set the wage by itself. Thus, the wage stays the same no matter how many people they employ.

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

12. The structure of a factor market where the individual business is the wage maker because only one business is hiring workers is called a

A. monopsony.

B. monopoly.

C. perfect competition.

D. monopolistic competition.

Explanation: A monopsony is the factor market equivalent to a monopoly in the product market. In fact, you could argue a monopsony is a reflection of a monopoly.

📄 Read Unit 5.4: Monopsony Markets

13. All of the following are reasons why wages may be different for workers doing the same job EXCEPT

A. geographic immobility

B. not enough information about the job posted

C. wage discrimination

D. low wages

Explanation: People can be paid different wages even though they worked the same job. Low wages does not explain the difference in wages between people. Wage discrimination is illegal in the US, but historically happened. For example, women were paid lower wages than men because of their gender. Race has also historically meant unequal wages. However, companies can legally have different wages for one job if they don't let people disclose their earnings (not enough information presented) and people aren't willing to move to the job with higher wages (geographic immobility).

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

14. If the government sets a minimum wage above equilibrium wage in a perfectly competitive factor market, which of the following is most likely to happen:

A. The quantity of labor demanded will far exceed the supply of labor.

B. Unemployment will rise because companies will reduce hiring low wage workers.

C. There will be a shortage of workers in the factor market.

D. Wages will fall for company CEOs.

Explanation: Minimum wage above the equilibrium wage means that the quantity demanded for labor is less than the quantity of workers willing to supply their labor.

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

15. Unions can lead to different wages in a business because

A. unions enjoy higher production.

B. unions will agree to create similar wages with non-union members

C. unions lower the company costs in general.

D. unions can threaten to strike or use collective bargaining to negotiate higher wages for union members.

Explanation: Workers working together in a union can negotiate wages as a group (collective bargaining) which means union members may enjoy higher wages than those not in the union. Union members hold the power to withhold labor which motivates companies to allow members to have higher pay.

📄 Read Unit 5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

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