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AP Microeconomics Unit 5 Problem Set
Concept Group 1: Review of Key Concepts
1. Draw a correctly labeled circular flow model and answer these questions:
-Who sells products?
-Who buys products?
-Monopolistic, oligopolistic, monopolistically competitive, and perfectly competitive firms are examples of what kinds of
markets?
-What are the factors of production?
-Who sells resources?
-Who buys resources?
-Factors of production are bought and sold in which market?
2. Explain the law of diminishing marginal returns.
3. Explain the utility maximizing rule.
Unit Simulation: “Special Delivery”
Complete the chart below:
Marginal
Revenue
@ $3 per
item
Marginal
Revenue
Product @
$1 (How
much more
revenue did
the firm
earn with
the extra
worker?)
-
$3
10
13
10
3
15
19
Number of
Workers
Total Product
(How much
was delivered,
in total, each
round?)
Marginal
Product/Marginal
Physical Product
(How much more was
delivered with the
extra worker in this
round compared to the
last?)
0
0
1
Total
Revenue
(How much
did the firm
earn?)
MRC
(How much
did the
additional
worker
cost?)
TC
(What are
the firm’s
total
costs?)
$0
$0
-
$0
$3
$3
$30
$9
$30
$39
$5
$5
$5
$10
2
4
$3
$3
$6
$12
$45
$57
$5
$5
$15
$20
6
20
17
1
-3
$3
$3
$3
-$9
$60
$51
$5
$5
$25
$30
7
14
-3
$3
-$9
$42
$5
$35
8
12
-2
$3
-$6
$36
$5
$40
9
12
0
$3
$0
$36
$5
$45
10
11
-1
$3
-$3
$33
$5
$50
2
3
4
5
4.
5.
6.
7.
Profit
(By how
much did
total
revenue
exceed
total
cost?)
What do you notice happened to MP/MPP and MRP over time? What causes this to happen?
If you were this firm, how many workers would you hire? Why?
Which column above shows “demand for labor”? Explain.
MRP depends on two variables. Marginal Product and the price of the product being produced. For each of the following,
identify whether MP or Price changes and indicate if the demand (MRP) increase or decreases.
Situation
MP
Price
Demand/
MRP
The price of deliveries falls
Faster workers increases output significantly
Consumers prefer electronic deliveries
New and improved delivery robots increase the amount of
deliveries that can be made.
More consumers want to use the delivery service
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Concept Group 2: Perfectly Competitive Labor Markets
8. Give 4 characteristics of a perfectly competitive labor market.
9. Give an example of a perfectly competitive labor market.
10. How is a perfectly competitive labor market like a perfectly competitive firm?
11. Define derived demand.
12. Give an example of derived demand in action.
13. What is MRC? Define. What is another name for MRC?
14. In a perfectly competitive firm, does MRC change? Why or why not?
15. How do you calculate MRC?
16. What is MRP? Define.
17. Give two ways to calculate MRP.
18. A firm should continue hiring until ____=_____. What is another way of phrasing this?
19. What is demand for labor?
20. What is the Law of Demand for labor?
21. What is supply for labor?
22. What is the Law of Supply for labor?
23. How do you calculate the market demand for labor?
24. Draw a carefully labeled, side-by-side graph that shows the labor industry and a firm in a perfectly competitive labor
market. In the industry, label the equilibrium wage W E and quantity QE. In the firm, label the equilibrium quantity Qe.
25. Complete the chart below:
Abbrev.
Term
Definition
How to Calculate
MC
MRC/MFC
MR
MRP
MP/MPP
26. If the cost of labor, the only variable input, is $30, and the marginal physical product is labor is five units per hour, the
marginal cost of the first unit of output is ____.
27. If the cost of labor, the only variable input, is $50, and the marginal physical product is labor is ten units per hour, the
marginal cost of the first unit of output is ____.
2
Concept Group 3: Perfectly Competitive Labor Markets Examples
28. Complete the chart below for a toy firm that hires in a perfectly competitive labor market.
Number of
Workers
0
1
2
3
4
5
6
7
8
9
Output
(Quantity)
0
20
50
70
85
95
100
103
104
100
Marginal Product
-----
Price of
Toys
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
Total
Revenue
Marginal Revenue
Product
----
Marginal Resource
Cost (@$25/day)
29. Explain why the number of toys produced increases at a decreasing rate as more workers are hired.
30. Identify and explain the three stages of returns (increasing, diminishing, and negative). When you explain, describe what
causes the stages of returns to change.
31. Explain how a firm decides how many workers to hire. If the wage was constant at $25 per day, how many workers
should be hired? Explain how you got your answer.
32. Assume there is an increase in demand of toys and they are now $3 each. Explain how the level of employment be
affected. How many workers should be hired? Why did it change?
Units of Workers
Total Product
Product Price
0
0
$9
1
10
$8
2
20
$7
3
30
$6
4
40
$5
5
50
$3
33. Re-create this graph, and add necessary columns to calculate marginal revenue product.
34. If the wage rate is a constant $20 per hour, at what output should the firm produce? What if the wage rate was a constant
$40?
35. What kind of market are these products being sold in? How do you know?
36. What kind of labor market are workers being hired in? How do you know?
Concept Group 4: The Resource Market
37. Why does D=MRP?
38. Why is the D=MRP curve downward sloping?
39. Why does MRP shift to the right if demand for a product increases?
40. List and explain the three shifters of resource demand?
41. How is the demand for a resource (e.g. labor) affected when demand for that good increases?
42. How is the demand for a resource (e.g. labor) affected when workers become more productive?
43. List and explain the three shifters of resource supply?
44. If the price of rings increases, what will happen to the wages for jewelers? Why?
45. Why do surgeons make more money than maids? Draw a graph to show this phenomenon.
46. Define “investment in human capital.” What are some examples of ways that people invest in human capital?
47. List and explain some reasons why people are paid different wages.
48. Draw a side-by-side graph to show a perfectly competitive labor market and firm hiring workers. Show what happens to
wages and quantity in the firm if workers leave the industry.
49. What does it mean when a perfectly competitive labor market is “in equilibrium”?
50. Draw a graph of a labor market at equilibrium. Now establish a minimum wage. Show what happens on your graph.
51. What are some of the benefits of a minimum wage? Drawbacks?
3
Concept Group 5: Combining Resources (_____/23)
52. What is the least cost rule and formula? What does this formula show?
53. There is a firm that produces clothing using workers (W) and sewing machines (SM). Look at the following data.
Complete the chart. Workers cost $10 per hour, and sewing machines cost $20 each. Complete the chart below.
Q
0
1
2
3
4
5
TPW
0
90
130
160
180
190
MPW
PW
TPSM
0
80
120
150
160
165
MPSM
PSM
54. If the firm has $80 to spend, what combination of workers and sewing machines should it buy? What if it had only had
$40?
55. What is the profit maximizing rule for combining resources? Why does this rule “make sense”?
56. There is a firm that produces pizzas using workers and ovens. Look at the following scenarios, and note whether the firm
should increase, decrease, or stay put in terms of the number of workers and ovens it has. (_____/10) (W=Workers,
Ov=Ovens)
MRPW
PW
Increase?
Decrease?
Stay Put?
MRPOv
POv
Increase?
Decrease?
Stay Put?
$15
$6
$10
$10
$5
$10
$10
$15
$22
$11
$90
$45
$16
$16
$50
$30
$25
$12
$60
$10
57. In a competitive industry, suppose the marginal revenue product of the last cook hired is $25 and the marginal revenue
product of the last baker hired is $20. The firm must pay cooks $30 a day and bakers $15 a day. What should the firm do
to maximize profits?
Concept Group 6: Monoposony
58. Give 4 characteristics of a monoposony.
59. Give an example of a monopsony.
60. Calculate the total wages paid and MRC for the firm below.
Wage Rate
$3
$4
$5
$6
$7
$8
$9
# of Workers
0
1
2
3
4
5
6
Total Wages
Marginal Resource Cost
61. Why does MRC not equal wage in a monopsonistic labor market?
62. Why do unions exist?
63. How do unions increase wages?
4
Concept Group 7: Graph Practice (_____/)
64. Imagine that the graph to the left shows a perfectly
competitive firm. How many workers would be hired? What
would be the wage for the 1st worker? 10th worker?
65. Now imagine that the graph to the left shows a
monopsony. How many workers will be hired? What would
the wage be for the 1st worker? 9th worker?
66. If a union were created in this monopsony, what is
the maximum wage rate that the union could achieve without
causing the number of jobs to decline below that which the
monopsony would already provide?
67. The monopsonistic labor market shown to the
right is initially in equilibrium. If a minimum
wage is set at W, will the level of employment
increase or decrease? If a minimum wage is
set at W2, will the level of employment
increase or decrease?
FRQ Questions
1.
2011 #2
5
2.
3.
2011B #3
2010 #2
6
4.
2010B #2
5.
2008B #3
7
6.
2007 #2
7.
2006B #3
Unit 5: Factor Market – Multiple Choice Practice
1. Which of the following statements best illustrates the concept of derived demand?
A. As income goes up the demand luxury cars and jewelry will increase.
B. A decline in the price of margarine will reduce the demand for butter
C. A decline in the demand for shoes will cause the demand for leather to decline.
D. When the price of gasoline goes up, the demand for motor oil will decline.
2. Marginal Product is:
A) The output of the least skilled worker.
B) The amount an additional worker adds to the firm's total output.
C) A worker's output multiplied by the price at which each unit can be sold.
D) The amount any given worker contributes to the firm's total revenue.
E) The change in total cost associated with a new worker
8
Unitsof
labor
0
1
2
3
4
5
6
7
Total
Marginal Total
product product revenue
0
14
14
$ 42
10
30
90
35
39
117
126
44
2
132
3. Use the chart. How many units of output are produced when 2 workers are employed?
A) 4
B) 16
C) 24
D) 10
E) 25
4. Use the chart. Assuming perfect competition, at what price does each unit sell?
A)$1
B) $2
C) $3
D) $2.50 E) $4
5. An effective minimum wage must be placed ______ equilibrium and will cause _____ to be greater than _____.
A. above, Qd, Qs
B. above, Qs, Qd
C. below, Qs, Qd
D. below, Qd, Qs
E. at, shortage, surplus
6. A firm hiring labor in a perfectly competitive labor market faces a:
A) Horizontal labor supply curve and upward sloping labor demand curve.
B) Upward sloping labor supply curve and downward sloping labor demand curve.
C) Upward sloping labor supply curve and horizontal labor demand curve.
D) Horizontal labor supply curve and downward sloping labor demand curve.
7. In a perfectly competitive labor market, an increase in the demand for the product followed by an increase in the quantity of
skilled workers would cause:
A. Quantity to fall
B. Quantity to be indeterminate
C. Wage to be indeterminate
E
m
p
lo
y
m
e
n
t
0
1
2
3
4
5
6
D. Wage to fall
E. No shifts
M
a
r
g
in
a
l P
r
o
d
u
c
t
p
r
o
d
u
c
t
p
r
ic
e
0
$
3
1
4
3
1
2
3
9
3
7
3
4
3
2
3
E
m
p
lo
y
m
e
n
t
0
1
2
3
4
5
6
W
a
g
e
r
a
te
$
1
1
1
1
1
1
1
1
1
1
1
1
1
1
8. Use the chart. At a wage of $20, the firm will maximize profits by employing how many workers?
A) 2
B) 3
C) 4
D) 5
E) 6
9. The firm illustrated by the chart above has a MRP curve that is:
A) downsloping B) upsloping. C) perfectly inelastic. D) perfectly elastic. E) unknowable
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10. Use the graph. The firm's total labor cost:
A)is 0abc.
B) is 0wbc.
C) is wab.
D) is cbd
11.Use the graph. The above firm:
A) Hires labor in an imperfectly competitive labor market.
B) Is selling its product in an imperfectly competitive market.
C) Is a wage taker.
D) Must pay a higher marginal resource cost for each successive worker.
E) Is a wage maker.
12. Use the graph. If the government requires workers to obtain a license in this industry, what will happen to the wage and
quantity of workers hired by the firm?
A. The wage will stay the same, but the MRP would increase so quantity would increase
B. The wage would fall and the quantity would decrease
C. The wage would fall and the quantity would increase
D. The wage would increase and quantity would increase
E. The wage would increase and the quantity would fall
13. Which of the following is NOT a characteristic of a monopsony?
A. There is one firm hiring workers
B. The firm must increase the wage to increase the quantity of labor supplied
C. The MRC for the firm is upsloping, but the MRP for the market is perfectly elastic
D. Workers are immobile
E. The firm is a wage maker
10