AP Microeconomics Unit 5 FRQ Practice: Factor Markets

Free Response Question · Unit 5 · Marginal Revenue Product, Hiring & Monopsony

Northgate Cannery is the only employer in an isolated town. It sells canned goods in a perfectly competitive product market at a constant price of $2 per unit. The table shows its production and labor-supply data.

Workers	Total Product	Marginal Product	MRP ($)	Wage Needed ($)	Total Labor Cost ($)	MFC ($)
1	15	15	30	12	12	12
2	28	13	26	14	28	16
3	39	11	22	16	48	20
4	48	9	18	18	72	24
5	55	7	14	20	100	28
6	60	5	10	22	132	32

Explain how the marginal revenue product of the third worker was calculated, and explain why MRP falls as more workers are hired.

✓ Model answer (earns the point)

MRP = marginal product × marginal revenue. Because the cannery sells in a perfectly competitive product market, marginal revenue equals price, so MRP = MP × P.

For the third worker: MP = 39 − 28 = 11 units, and P = $2, so MRP = 11 × $2 = $22.

MRP falls as employment rises because of diminishing marginal returns. With capital fixed, each additional worker adds less output than the one before (MP falls from 15 to 13 to 11…), and since price is constant, falling MP drags MRP down with it.

Why it scores: Two things must appear: the arithmetic MP × P = 11 × $2 = $22, and diminishing marginal returns as the reason for the decline. Noting that MR = P specifically because the product market is competitive strengthens the response — writing MRP = MP × MR without that link is incomplete.

Suppose Northgate Cannery instead hires in a perfectly competitive labor market where the market wage is $18. How many workers will it hire? Explain.

✓ Model answer (earns the point)

The cannery will hire 4 workers.

In a perfectly competitive labor market the firm is a wage taker: it can hire as many workers as it wants at $18, so the labor supply curve facing the firm is horizontal and MFC = wage = $18.

Applying the rule MRP = MFC: the fourth worker's MRP is exactly $18, matching the wage, while the fifth worker's MRP of $14 falls short of the $18 cost. The firm therefore stops at four workers.

Why it scores: The point requires both the number and the MRP = MFC justification, plus the recognition that MFC equals the wage in a competitive labor market. A response that compares MRP to the wage without ever naming MFC still earns credit, but must show the marginal comparison — "4 workers" alone does not.

Now return to the assumption that Northgate is the only employer in town. How many workers will it hire, and what wage will it pay? Explain how you determined the wage.

✓ Model answer (earns the point)

As the town's only employer, Northgate is a monopsonist. It hires where MRP = MFC: the third worker's MRP of $22 exceeds the MFC of $20, but the fourth worker's MRP of $18 falls below the MFC of $24. So it hires 3 workers.

The wage is not read off the MFC curve. The monopsonist pays the lowest wage that will attract three workers, which comes from the labor supply schedule — the "wage needed" column. At three workers, that wage is $16.

Why it scores: Two separate points: the quantity from MRP = MFC, and the wage read off the labor supply schedule rather than off MFC. Answering "$20" — the MFC at three workers — is the signature monopsony error and earns nothing for the wage point, even if the quantity is right.

Compare the monopsony outcome with the competitive outcome from part (B). Explain the effect on employment and wages, and identify what this gap between MRP and the wage is called.

✓ Model answer (earns the point)

The monopsonist hires fewer workers at a lower wage: 3 workers at $16, versus 4 workers at $18 in the competitive labor market.

The cause is that MFC lies above the labor supply curve under monopsony. To attract an additional worker the firm must raise the wage for every worker it already employs, so the true marginal cost of that hire exceeds the wage itself. Facing this higher marginal cost, the firm stops hiring sooner.

At three workers the last worker produces $22 of marginal revenue product but is paid only $16. That $6 gap between MRP and the wage is called monopsonistic exploitation. Because employment falls short of the competitive level, the outcome also generates deadweight loss.

Why it scores: Credit requires the correct direction on both variables (fewer workers and lower wages), a causal explanation grounded in MFC exceeding supply, and the term monopsonistic exploitation. Stating the comparison without explaining why MFC sits above supply earns only partial credit.

How to score points on AP Microeconomics FRQs

Name the rule before the number. "The firm hires where MRP = MFC" is frequently its own point on factor-market questions.
Check which labor market you're in first. Competitive means MFC = wage; monopsony means MFC > wage. Nearly every mistake in this unit starts by getting this wrong.
Read the monopsony wage off supply. MFC locates the quantity only — the wage always comes from the labor supply curve at that quantity.
MRP = MP × MR, and MR = P only in a competitive product market. Say why the substitution is valid rather than assuming it.
Show marginal comparisons in both directions. Demonstrate that the last hired worker passes the test and the next one fails it.
Use the table's own numbers. Graders look for the specific values you're comparing, not a general description of the rule.

Workers	Total Product	Marginal Product	MRP ($)	Wage Needed ($)	Total Labor Cost ($)	MFC ($)
1	15	15	30	12	12	12
2	28	13	26	14	28	16
3	39	11	22	16	48	20
4	48	9	18	18	72	24
5	55	7	14	20	100	28
6	60	5	10	22	132	32

Workers	Total Product	Marginal Product	MRP ($)	Wage Needed ($)	Total Labor Cost ($)	MFC ($)
1	15	15	30	12	12	12
2	28	13	26	14	28	16
3	39	11	22	16	48	20
4	48	9	18	18	72	24
5	55	7	14	20	100	28
6	60	5	10	22	132	32

Workers	Total Product	Marginal Product	MRP ($)	Wage Needed ($)	Total Labor Cost ($)	MFC ($)
1	15	15	30	12	12	12
2	28	13	26	14	28	16
3	39	11	22	16	48	20
4	48	9	18	18	72	24
5	55	7	14	20	100	28
6	60	5	10	22	132	32