AP Micro Unit 5 Exam Review

To calculate marginal revenue product,

• multiply the marginal product by the marginal cost

• multiply the marginal product by the product price

• divide the marginal product by the marginal cost

• divide the marginal product by the product price

Answer explanation

The marginal revenue product of labor (MRP)

refers to the change in a firm’s total revenue from hiring one additional unit of labor. The best way to calculate the MRP is to multiply the marginal product (producing one more unit of output) by the product price.

John is starting his own business after years of working as a factory worker. In order to maximize his profit, how many workers should he hire?

• He should hire until the marginal cost equals the marginal revenue.

• He should hire until the marginal product equals wage.

• He should hire until the marginal cost equals wage

• He should hire until the marginal revenue product equals wage.

Answer explanation

Choice D is the best answer because the revenue product of labor (MRP) refers to the change in a firm’s total revenue from hiring one additional unit of labor. All firms should hire to the point where MRP = W.

If the automobile industry needed to raise workers’ wages, which of the following is a likely result of the labor supply curve?

• The labor supply curve will be horizontal.

• The labor supply curve will be vertical.

• The labor supply curve will shift to the left.

• The labor supply curve will shift to the right.

Answer explanation

Wages are a major cost to firms. If wages

increase, then the cost of production will increase, which would shift the labor supply curve to the left.

Beta Industries hires workers for $9 an hour. The price of their product is $5. How many hours of work are required for a marginal revenue product of $40?

• 8

• 4.5

• 20

• 36

Answer explanation

Remember the formula for MRP (MRP = the

marginal product multiplied by the product price). To answer this question just plug in the numbers: MRP/P = MP or 40/5 = 8 hours. All other choices are miscalculations.

What is the relationship between the MRP curve and the demand curve?

• They both slope downward.

• They both slope upward.

• There is a diminishing marginal return.

• They are horizontal in the long run.

Answer explanation

Choices C, D, and E are incorrect because they

would all result in an increase in demand. Choice A is the best choice because the marginal revenue product (MRP) refers to the change in a firm’s total revenue from hiring one additional unit of labor. As you know, the demand curve slopes downward because of the law of demand, and the MRP curve slopes downward because as marginal product falls, so does the marginal revenue product.

How does a monopsony find the equilibrium number of workers to hire?

• MRP = W

• MRP < W

• MRC > W

• MC < MB

Answer explanation

Like any profit-maximizing firm, the equilibrium

point to determine the number of workers to hire is where MRP = W.

Where will you find equilibrium in a competitive labor market?

• MFC = MRP

• MRP = MRC

• MRC = W

• MRP = W

Answer explanation

Like any profit-maximizing firm, the equilibrium

point to determine the number of workers to hire is where MRP = W.

A single firm that has market power in the labor market is known as a(n)

• purely competitive firm

• monopsony

• oligarchy

• monopolistic competition

Answer explanation

Choice B is the best answer because a monopsony in a factor market is where a sole firm has total market power.

Seth finally realized his dream to open a 24-hour bagel café. Which of the following scenarios would increase Seth’s demand for labor?

• The price of wheat increases.

• The price of dairy increases.

• The price of wheat decreases.

• A blight destroys thousands of acres of farmland.

Answer explanation

Choice C is the best answer because wheat is a

factor of production for producing bagels. If the price of a factor of production decreases, Seth can increase production and his demand for labor will increase.

If the output effect is greater than the substitution effect, what will happen to the demand for labor?

• increases

• decreases

• Increases and then gradually decreases

• Decreases and then gradually increases

Answer explanation

The output effect states that there will be a rise

in output if the price of a resource used in the production of a product decreases, and firms will increase production and the demand for labor will increase.