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AP Microeconomics
Unit 4 Study Guide
Part A: Resource Markets (3 points)
Resources: Chapter 27 & 28 of textbook; “The Demand for Resources” PowerPoint; notes on ACDC
Econ video clips; notes on monopsony; least-cost hiring rule handout
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Define derived demand.
Define marginal revenue product (MRP) & state the formulas.
Define marginal resource cost (MRC) & state the formula.
In a perfectly competitive labor market, how are MRC & wage related?
State the rule for determining the quantity of a resource to employ in order to maximize profits.
List and describe the determinants of resource demand.
If a product increases in popularity, what effect will that have on the price of the product? Then,
what effect will that price change have on the marginal revenue product of workers in that
industry, all else equal?
8. Draw a side-by-side graph of a perfectly competitive labor market and firm. Be sure to label each
axis and show the following:
a. Market equilibrium wage & quantity of labor
b. The S = MRC and D = MRP curves for the firm.
c. The wage and optimal quantity of labor for the firm.
d. Know how the determinants can cause the D = MRP curve to shift left or right, and affect
the optimal quantity of labor.
9. A firm operates in a perfectly competitive labor market and sells its product in a perfectly
competitive product market. The price of the product is $10 and the wage of the workers is $60.
Use the following table to determine the optimal quantity of workers this firm should hire:
Quantity of
Labor
0
Total Product
1
9
2
20
3
30
4
35
5
35
0
Marginal
Product
---
MRP
(=Price x MP)
---
MRC
---
10. What is a monopsony?
11. In a monopsony labor market, how are MRC & wage related?
12. Draw a graph of a monopsony. Be sure to label each axis and show the following:
a. The supply, MRC, and D = MRP curves for the firm.
b. The wage and optimal quantity of labor.
13. How do the wage and quantity of workers in a monopsony compare to the wage and quantity of
workers in a perfectly competitive market?
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AP Microeconomics
Unit 4 Study Guide
14. Explain the least-cost hiring rule and the conditions that must be satisfied. Know how to do the
two problems on your notes handout.
Part B: Externalities & Role of the Government (3 points)
Resources: Chapter 30 of textbook; notes on externalities; role of the government notes handout
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Define market failure.
Define negative externality and spillover costs.
What are two examples of negative externalities?
Draw a correctly labeled graph of a negative externality. Be sure to label each axis and show the
following:
a. The D = MSB, S = MPC, and MSC curves.
b. Free market price & quantity
c. Optimal price & quantity
d. Deadweight loss (DWL)
5. What is the central problem a negative externality creates, and what is the government solution
to this problem?
6. How does the solution stated above remedy the problem created by the negative externality, and
how does it affect DWL?
7. Define positive externality and spillover benefits.
8. What are two examples of positive externalities?
9. Draw a correctly labeled graph of a positive externality. Be sure to label each axis and show the
following:
a. The D = MPB, S = MSC, and MSB curves.
b. Free market price & quantity
c. Optimal price & quantity
d. Deadweight loss (DWL)
10. What is the central problem a positive externality creates, and what is the government solution to
this problem?
11. How does the solution stated above remedy the problem created by the positive externality, and
how does it affect DWL?
12. Draw a graph with a line of perfect income equality and a Lorenz curve showing inequality.
Label each axis and curve.
13. If the Lorenz curve becomes more curved (center moves further away from the perfect equality
line), what does that mean for income inequality?
14. What does the Gini ratio/coefficient tells us, and what does it mean when it’s closer to one or to
zero?
15. Define public good and give an example.
16. Why do public goods result in the free-rider problem, and how is this remedied?
17. Explain the difference between a progressive, regressive, and proportional tax.
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