Factor Markets worksheet
The answer key prints on its own page, so hand out everything before it.
Factor Markets: practice worksheet
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
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
3. A profit-maximizing firm should hire an additional worker when:
- (A) The worker's MRP is less than the wage
- (B) The worker's MRP equals zero
- (C) The worker's MRP is greater than or equal to the wage
- (D) The total product of labor is maximized
4. 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
5. In a monopsony labor market, the marginal factor cost (MFC) curve lies above the labor supply curve because:
- (A) The monopsonist pays different wages to different workers
- (B) The monopsonist must raise the wage for all workers to attract one more
- (C) The government imposes a tax on each worker hired
- (D) Workers in a monopsony are less productive than in a competitive market
6. 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
7. A minimum wage set above the monopsony wage but below the competitive equilibrium wage will:
- (A) Decrease employment because it creates a labor surplus
- (B) Have no effect because the monopsonist ignores wage laws
- (C) Increase both the wage and employment toward competitive levels
- (D) Eliminate the monopsonist's profit entirely
8. 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
9. A competitive firm sells its product for $15. The marginal product of labor for the 3rd, 4th, and 5th workers are 10, 7, and 3 units respectively. If the wage is $90 per worker, how many workers should the firm hire?
- (A) 3 workers
- (B) 4 workers
- (C) 5 workers
- (D) 2 workers
10. 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
Factor Markets: answer key
1. (B) 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. (C) 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. (C) If a worker brings in $90 in revenue and costs $70, that's $20 in additional profit. Keep hiring until MRP = wage. Option A has it backward -- MRP below the wage means the worker costs more than they generate, which loses money. Option B would mean the worker produces nothing of value, so there's no reason to hire them. Option D confuses the goal; maximizing total product ignores costs entirely and is not the same thing as maximizing profit.
4. (B) 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.
5. (B) If the monopsonist has 10 nurses at $30/hour and needs an 11th, it has to offer $31/hour -- to everyone, not just the new hire. The 11th nurse costs $31 in direct wages plus $1 x 10 = $10 in raises for existing staff. Total MFC = $41, which is well above the $31 supply curve wage. That gap is the whole reason MFC sits above supply. Option A is wrong because the monopsonist pays a single wage to all workers. Option C describes a tax, which is unrelated to the structural MFC-supply gap. Option D confuses productivity with hiring cost mechanics.
6. (C) 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.
7. (C) This is the counterintuitive monopsony result that trips students up. A minimum wage in the right range flattens the supply curve and pulls MFC down to the mandated wage. The gap that allowed the employer to underpay vanishes. Hiring becomes profitable at higher quantities, so both wages and employment rise toward where they'd be in a competitive market. Option A applies the standard competitive-market logic (price floor creates surplus), but that doesn't apply here because the minimum wage is correcting an existing distortion rather than creating a new one. Option B is absurd. Option D overstates things -- the firm still earns profit, just with less monopsony rent.
8. (B) 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.
9. (B) Worker 3: MRP = $15 x 10 = $150, which exceeds the $90 wage. Hire. Worker 4: MRP = $15 x 7 = $105, still above $90. Hire. Worker 5: MRP = $15 x 3 = $45, well below $90. Do not hire -- the firm would lose $45 on that worker. So hire 4 workers. Option A stops too early and leaves $15 in profit on the table from worker 4. Option C goes one worker too far and loses $45. Option D quits way too early.
10. (C) 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.