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AP Microeconomics › Unit 5
AP Microeconomics Unit 5: Factor Markets
10 to 13% of the exam · 180 practice questions · 12 free-response questions
Firms buy labor and other inputs in factor markets. Labor demand is derived from demand for the product, and a firm hires until marginal revenue product equals marginal factor cost. Expect tables where you compute marginal product and MRP, plus graphs of a competitive labor market beside a single firm. Monopsony, where one employer dominates hiring, gets its own graph. A common error is setting MRP equal to the wage there. A monopsonist hires where MRP equals MFC, then pays the lower wage on the supply curve.
Practice this unit
White belt covers core terms and foundational ideas, Regular is set at exam level, and Black belt has harder multi-step questions.
Topics in this unit
- 5.1 Introduction to Factor Markets (30 questions)
- 5.2 Changes in Factor Demand and Factor Supply (50 questions)
- 5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets (64 questions)
- 5.4 Monopsonistic Markets (36 questions)
Free-response questions
- Hiring Workers: Marginal Revenue Product (Short question, 5 points)
- A Minimum Wage (Short question, 5 points)
- One Employer in Town (Long question, 10 points)
- Labor or Capital? The Least-Cost Rule (Short question, 5 points)
- The Market for Bakers (Long question, 10 points)
- A Monopolist Hires Workers (Short question, 5 points)
- Ovens and Bakers: Hiring Two Inputs (Short question, 5 points)
- A Firm's Demand for Labor (Long question, 10 points)
- A Payroll Tax (Long question, 10 points)
- The Only Hospital in the Region (Short question, 5 points)
- Drawing a Monopsony: The Sawmill (Short question, 5 points)
- Solar Panels and the Market for Electricians (Short question, 5 points)
Sample questions
These are taken from the Regular set, with the answer and explanation shown.
Topic 5.1 Introduction to Factor Markets
1. Which of the following is true of the market labor supply curve for a particular occupation?
- AIt slopes up, since higher wages draw people from other jobs
- BIt is vertical, because the size of the population is fixed in the short run
- CIt slopes downward, because people want leisure
- DIt is horizontal at the minimum wage
- EIt is the same as the labor demand curve
Answer: A. Higher pay in one occupation attracts workers from other occupations and leads some people to work more, so supply slopes up.
Common trap: Picking B. The population may be fixed, but people can switch jobs, so more will choose a job when its pay rises.
Topic 5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
2. A firm in a perfectly competitive product market and labor market finds that its fifth worker's MRP is $28 and the wage is $30. Which statement is correct?
- AThe firm should hire the fifth worker if MP is rising
- BThe firm should hire the fifth worker and raise its price
- CThe fifth worker raises profit by $2
- DThe firm should hire workers until MRP is zero
- EThe firm should not hire the fifth worker
Answer: E. The fifth worker adds $28 in revenue but $30 in cost, so hiring her lowers profit by $2.
Common trap: Picking A or D. Positive output is not enough. The worker must add at least as much revenue ($28) as she costs ($30).
Topic 5.4 Monopsonistic Markets
3. A monopsonist faces a labor supply curve where each additional worker requires a $1 higher wage for everyone. It currently pays $20 to 10 workers. What is the MFC of the 11th worker?
- A$1
- B$11
- C$20
- D$21
- E$31
Answer: E. New wage bill = 11 × $21 = $231. Old wage bill = 10 × $20 = $200. MFC = $31.
Common trap: Picking D ($21), the new worker's wage. The firm also pays $1 more to each of the 10 workers it already has.