Factor Markets Practice Questions

8 representative multiple-choice questions on factor markets for AP Microeconomics, drawn from our 15-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

1. 1. The demand for labor is called a 'derived demand' because:

   • A. It is derived from the supply of labor in the market
   • B. It is derived from the demand for the product that labor produces
   • C. It is derived from the government's minimum wage policy
   • D. It is derived from the marginal cost of production
   Show answer

   Correct answer: B. It is derived from the demand for the product that labor produces

   Firms hire workers because customers want to buy what those workers make. When product demand drops, hiring drops right along with it -- that's the derivation. Option A confuses two independent schedules; labor demand and labor supply are determined by totally different factors. Option C is off base since minimum wage is a policy tool, not a source of demand for workers. Option D mixes a supply-side cost concept into what is fundamentally a demand-side question.

2. 2. A competitive firm sells output at $20 per unit. If the marginal product of the 4th worker is 6 units, what is the marginal revenue product of the 4th worker?

   • A. $24
   • B. $80
   • C. $120
   • D. $26
   Show answer

   Correct answer: C. $120

   MRP = P x MPL = $20 x 6 = $120. Straight multiplication. Option A looks like an addition error ($20 + something). Option B plugs in the wrong MPL or wrong price somewhere. Option D seems to come from adding the numbers rather than multiplying them.

3. 3. Which of the following would shift the labor supply curve to the right?

   • A. An increase in the price of the product that labor produces
   • B. An increase in immigration of qualified workers
   • C. A decrease in the number of firms in the industry
   • D. A decrease in the marginal product of labor
   Show answer

   Correct answer: B. An increase in immigration of qualified workers

   More qualified workers entering the country means more people willing to work at every wage level -- rightward shift of labor supply. Option A would boost MRP, which shifts labor demand, not supply. Keep the two curves straight: supply is about how many people show up wanting to work, demand is about how many workers firms want to hire. Fewer firms reduces demand for labor. Lower MPL hits demand through the MRP calculation.

4. 4. Compared to a competitive labor market, a monopsony results in:

   • A. A higher wage and more workers hired
   • B. A higher wage and fewer workers hired
   • C. A lower wage and fewer workers hired
   • D. A lower wage and more workers hired
   Show answer

   Correct answer: C. A lower wage and fewer workers hired

   The monopsonist hires where MRP = MFC, then reads the actual wage paid off the supply curve at that lower employment quantity. Because MFC sits above supply, the profit-maximizing hire count falls below competitive levels. Fewer workers on the supply curve means a lower wage. Both employment and wages are suppressed relative to competition -- that's the whole distortion. Options A and B both claim higher wages, but monopsony power is specifically about the ability to suppress wages through restricted hiring. Option D gets the wage direction right but the employment direction wrong.

5. 5. If the demand for a product increases, what happens in the labor market for workers who produce that product?

   • A. Labor supply shifts right, lowering the wage
   • B. Labor demand shifts right, increasing both the wage and employment
   • C. Labor demand shifts left, decreasing both the wage and employment
   • D. There is no effect because the product market and labor market are independent
   Show answer

   Correct answer: B. Labor demand shifts right, increasing both the wage and employment

   Derived demand in action. Product demand rises, which means price or quantity sold goes up, MRP increases at every employment level, and labor demand shifts right. Wages and employment both rise. Option A confuses which curve is affected -- product demand changes hit labor demand, not supply. Option C has the direction backward. Option D flatly contradicts derived demand, since MRP = P x MPL directly links product markets to labor markets.

6. 6. The concept of 'derived demand' implies that if consumer preferences shift away from coal toward natural gas, the labor market for coal miners will experience:

   • A. An increase in labor demand as miners are needed to close the mines
   • B. A rightward shift in labor supply as miners accept lower wages
   • C. A leftward shift in labor demand as MRP of coal miners falls
   • D. No change because wages are set by union contracts, not product demand
   Show answer

   Correct answer: C. A leftward shift in labor demand as MRP of coal miners falls

   Coal demand falls, coal prices fall, revenue for coal companies drops, and MRP of coal miners declines at every employment level. Labor demand shifts left, and both wages and employment fall. Option A confuses the direction entirely. Option B describes a supply change, but the shock originates in the product market and therefore hits the demand side. Option D is wrong because even unionized wages ultimately depend on the employer's willingness and ability to pay, which is driven by MRP.

7. 7. A monopsonist employer currently hires 50 workers at $20/hour. To attract a 51st worker, it must raise the wage to $20.50/hour for all workers. The marginal factor cost of the 51st worker is:

   • A. $20.50
   • B. $45.50
   • C. $25.50
   • D. $20.00
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   Correct answer: B. $45.50

   MFC = new worker's wage + the raise applied to all existing workers. The 51st worker earns $20.50. The $0.50 raise hits all 50 existing workers: 50 x $0.50 = $25.00. Total MFC = $20.50 + $25.00 = $45.50. Option A only counts the new worker's wage and ignores the raise for existing staff -- this is by far the most common mistake on monopsony MFC calculations. Option C seems to add $5 instead of $25 somewhere. Option D uses the old wage before the raise.

8. 8. If the government imposes a binding minimum wage above the competitive equilibrium in a perfectly competitive labor market, the result will be:

   • A. An increase in both wages and employment
   • B. A surplus of labor (unemployment) because quantity supplied of labor exceeds quantity demanded
   • C. A shortage of labor because firms want to hire more workers at the higher wage
   • D. No effect because firms will simply pass the cost to consumers
   Show answer

   Correct answer: B. A surplus of labor (unemployment) because quantity supplied of labor exceeds quantity demanded

   A binding minimum wage above equilibrium works like any price floor -- it creates a surplus. Firms demand fewer workers at the higher wage (moving up along demand), while more people want jobs at that higher wage (moving up along supply). The gap between quantity supplied and quantity demanded is unemployment. Option A describes what happens in a monopsony, not in a competitive market. Option C has surplus and shortage mixed up. Option D oversimplifies the mechanics; even if some costs get passed through, the immediate labor market effect is still a surplus of workers.