AP Micro Microeconomics: Factor Markets and Market Failures 2 — Questions and Answers
Question 1: A monopsonist in the labor market hires fewer workers than a competitive firm because it:
- Sets the wage equal to the MRP
- Faces an upward-sloping labor supply curve and must raise wages for all workers (Correct answer)
- Has a perfectly elastic labor supply
- Sets MRP equal to the market wage
Correct answer: Faces an upward-sloping labor supply curve and must raise wages for all workers
A monopsonist faces a rising supply curve, so hiring one more worker raises wages for all, making the marginal factor cost exceed the wage and causing under-hiring.
Question 2: If the government imposes a per-unit tax on a good with a negative externality, the tax should equal:
- The producer's marginal cost at equilibrium
- The marginal external cost at the socially optimal quantity (Correct answer)
- The consumer's marginal benefit at the market equilibrium
- The total external cost across all units produced
Correct answer: The marginal external cost at the socially optimal quantity
A Pigouvian tax equal to the marginal external cost at the social optimum shifts supply to internalize the externality.
Question 3: Which condition characterizes the profit-maximizing input choice for a firm in a competitive factor market?
- MRC = MRP (Correct answer)
- W = AVC
- MFC > MRP
- MRP = MRC = 0
Correct answer: MRC = MRP
Firms maximize profit by hiring until the marginal resource cost equals the marginal revenue product.
Question 4: Public goods are characterized by non-rivalry and non-excludability. Which of the following is the best example?
- A toll road
- A local fishing lake
- National defense (Correct answer)
- A private gym membership
Correct answer: National defense
National defense is consumed by all citizens simultaneously (non-rival) and no citizen can be excluded from its protection (non-excludable).
Question 5: When a positive externality exists in a market, the private market will:
- Overproduce relative to the social optimum
- Underproduce relative to the social optimum (Correct answer)
- Produce exactly the socially optimal quantity
- Produce where MSC equals MSB
Correct answer: Underproduce relative to the social optimum
Positive externalities mean social benefit exceeds private benefit, so consumers underpay and the market underproduces the good.
Question 6: A firm's derived demand for labor is said to be 'derived' because it depends on:
- The prevailing market wage rate
- The demand for the firm's output (Correct answer)
- The number of firms in the labor market
- The supply of capital available to the firm
Correct answer: The demand for the firm's output
Labor demand is derived from the demand for the output that labor helps produce; if output demand rises, labor demand rises.
Question 7: The Coase theorem suggests that externalities can be resolved through private bargaining when:
- Transaction costs are high and property rights are clear
- Property rights are well-defined and transaction costs are low (Correct answer)
- Government sets the correct Pigouvian tax
- The market is monopolistic
Correct answer: Property rights are well-defined and transaction costs are low
Coase argued that if property rights are clearly assigned and negotiation is cheap, parties will bargain to the efficient outcome regardless of initial rights assignment.
AP Micro Microeconomics: Factor Markets and Market Failures 2
A monopsonist in the labor market hires fewer workers than a competitive firm because it: