AP Microeconomics Unit 5: Factor Markets

Review AP Microeconomics Unit 5 through factor prices, labor-market shifts, competitive input choice, marginal revenue product, and monopsony.

Covered syllabus points

5.1 Introduction to Factor Markets 5.2 Changes in Factor Demand and Factor Supply 5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets 5.4 Monopsonistic Markets

[Maximum number: 3]

RKB is a profit-maximizing monopoly that produces a new, patented electronic device. RKB is earning positive economic profit.

(a)

Assume that RKB hires workers in a perfectly competitive labor market.

[ 3 ]

(i)

Draw a correctly labeled graph for the labor market, showing the equilibrium wage and quantity of labor, labeled $\mathrm{W}_{\mathrm{E}}$ and $\mathrm{Q}_{\mathrm{E}}$ , respectively.

[ 1 ]

(i) Draw a correctly labeled graph of a perfectly competitive labor market with a downward-sloping demand (D) curve and an upward-sloping supply (S) curve and show the equilibrium wage and quantity of labor, labeled $\mathrm{W}_{\mathrm{E}}$ and $\mathrm{Q}_{\mathrm{E}}$ , respectively.

Figure for Answer to Question (i) — AP Microeconomics

(ii)

Suppose immigration increases the number of workers in this labor market. On your graph in part (d)(i), show the new equilibrium wage and quantity of labor, labeled $\mathrm{W}_{2}$ and $\mathrm{Q}_{2}$ , respectively.

[ 1 ]

(ii) The graph from part (d)(i) must show a rightward shift in the labor supply curve, resulting in a lower equilibrium wage rate, labeled $\mathrm{W}_{2}$ , and a higher equilibrium quantity of labor, labeled $\mathrm{Q}_{2}$ .

Figure for Answer to Question (ii) — AP Microeconomics

(iii)

RKB uses the optimal combination of capital and labor in its production process. The firm rents capital at $500 per unit, and the last unit of capital rented has a marginal product of 2,500 units. If the marginal product of the last unit of labor hired is 1,000 units, calculate the wage rate. Show your work.

Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

[ 1 ]

(iii) Calculate the wage rate as $200 and show your work. 1 point

\begin{aligned} & \frac{\text { Marginal Product of Capital }}{\text { Rental Price }}=\frac{\text { Marginal Product of Labor }}{\text { Wage Rate }} \\ & \frac{2,500}{\$ 500}=\frac{1,000}{\text { Wage Rate }} \\ & \text { Wage Rate }=\$ 200 \end{aligned}

Total for part (d)

for question 1

10 points

[Maximum number: 2]

Voda Reservoir is a profit-maximizing firm and the only producer of bottled water in a country.

Currently, Voda Reservoir is earning negative economic profit.

(a)

Voda Reservoir hires workers in a perfectly competitive labor market.

[ 2 ]

(i)

If the demand for bottled water increases, what will happen to Voda Reservoir's demand

for labor? Explain.

[ 1 ]

(ii)

The government implements a new regulation that increases the minimum age required

for a worker to be employed in a bottled-water factory. What will happen to the market

wage in the short run? Explain.

[ 1 ]

Point 9	increase in demand for bottled water will increase the price and marginal revenue of bottled water, increasing the marginal revenue product of labor.
Point 10	State that the market wage will increase in the short run and explain that the new regulation will decrease the supply of workers.	1 point

[Maximum number: 1]

The table provided shows the short-run production function for Lowen Feline, a profit-maximizing firm that produces cat food.

Table for Question Unit 5: Factor Markets question 3 — AP Microeconomics

Lowen Feline sells as many bags of cat food as it wants at a market price of $ 10 per bag and hires as many workers as it wants at a market wage of $ 18.

Determine the profit-maximizing number of workers Lowen Feline will hire. Explain using marginal analysis.

State that the profit-maximizing number of workers is 7 and explain that the marginal
revenue product (MRP) of the $7^{\text {th }}$ worker ($ 20) is greater than the marginal factor cost
(MFC) of the $7^{\text {th }}$ worker (wage =$ 18 ), and that the hiring of the $8{ }^{\text {th }}$ worker would
decrease profits because the MRP of the $8^{\text {th }}$ worker ($10) is less than the MFC of the $8^{\text {th }}$
worker (wage = $18).

1 point

[Maximum number: 5]

Quartz Excavations is a profit-maximizing firm and the only employer of miners of quartz in a

small town. The graph provided shows the labor market for miners.

Figure for Question Unit 5: Factor Markets question 4 — AP Microeconomics

(a)

Identify Quartz Excavations' profit-maximizing number of miners to hire.

[ 1 ]

(b)

Will Quartz Excavations pay its profit-maximizing number of miners a wage rate that is

equal to $15, greater than $15, or less than $15? Explain using numbers.

[ 1 ]

(c)

Suppose the government sets a minimum wage (a price floor on wages) at $\$ 25$ . Calculate the

total wage bill for Quartz Excavations at the resulting profit-maximizing number of miners.

Show your work.

[ 1 ]

C
Point 3	Calculate the total wage bill as $50 and show your work.
Total Wage Bill $=\$25\times2=\$50$	1 point

(d)

Suppose that instead of a minimum wage, there is now an increase in the demand for quartz.

[ 2 ]

(i)

Will the marginal revenue product of miners increase, decrease, or remain the same?

Explain.

[ 1 ]

(ii)

After the demand for quartz increases, Quartz Excavations hires the new

profit-maximizing number of miners. Will the marginal factor cost of the last

miner hired be greater than, less than, or equal to the marginal factor cost of the

last miner hired before the demand for quartz increased?

[ 1 ]

All question bank results loaded

Covered syllabus points

Unit 5: Factor Markets question 1

Question (a)

Question (i)

Question (ii)

Question (iii)

Unit 5: Factor Markets question 2

Question (a)

Question (i)

Question (ii)

Unit 5: Factor Markets question 3

Unit 5: Factor Markets question 4

Question (a)

Question (b)

Question (c)

Question (d)

Question (i)

Question (ii)