AP Microeconomics — Unit 5: Factor Markets
Practice questions, answers, and key terms for Unit 5, aligned to the College Board CED.
Exam weighting: Unit 5 is 10-13% of the AP Microeconomics exam.
What AP Microeconomics Unit 5 covers
The College Board Course and Exam Description breaks Unit 5 into 4 topics:
- 5.1 Introduction to Factor Markets
- 5.2 Changes in Factor Demand and Factor Supply
- 5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
- 5.4 Monopsonistic Markets
AP Microeconomics Unit 5 practice questions
In a product market, you buy coffee from Starbucks. In a factor market, Starbucks buys something from you. What is it buying — and why are the roles flipped?
A market where factors of production are bought and sold. Firms buy (demand labor); households sell (supply labor) — the reverse of the product market.
iPhone demand craters 80% overnight. The factory workers are just as fast and skilled as yesterday. Why does Apple suddenly want to hire fewer of them anyway?
Because labor demand is DERIVED from product demand. A worker's value to the firm isn't just how many units they make — it's how much REVENUE those units bring in. If nobody's buying iPhones, the output is worth less, so each worker generates less revenue and Apple wants fewer of them.
In the product market, you'd draw a downward-sloping demand and upward-sloping supply with price on the Y-axis. The labor market graph looks almost identical — but the axes and the roles are flipped. What goes where?
Wage rate on the y-axis, quantity of labor on the x-axis. Labor demand slopes down; labor supply slopes up; they cross at the market wage.
Two things happen at the coffee shop: a new espresso machine makes each barista twice as fast, AND the going wage for baristas drops $2/hr. Both lead to more hiring — but only ONE moves the labor demand curve itself. Which, and why?
The espresso machine shifts labor demand right; a wage drop slides along it. Higher productivity raises MRP at every wage (a shift); a wage change is just movement along.
A new factory opens across town paying way more than you do. You haven't touched your own wage at all — yet suddenly you can barely keep workers. What just happened to the labor supply curve facing YOUR firm?
It shifted left — a better-paying job nearby pulls your workers away. Fewer workers are willing to work for you at any wage; alternative jobs are the shifter.
Your 5th barista makes 3 extra lattes an hour, and each latte sells for $6 in a competitive market. You're about to pay her $20/hr. Does she earn her keep?
No — her MRP is 3 × $6 = $18, below the $20 wage, so don't hire. Hire only if MRP ≥ wage; $18 < $20, so she loses you $2/hr.
The next worker you could hire would add $18 of revenue (MRP). The market wage is $22. Your manager says 'we're short-staffed, just hire him.' Should you?
No. That worker brings in $18 but costs $22 — a $4 loss every hour. In a competitive labor market you hire only while MRP ≥ wage, and stop the instant MRP dips below it. Being short-staffed doesn't change the math.
Your 5th hire cranks out 10 extra units an hour; your 10th hire, crammed into the same kitchen, adds only 3. The product price never changed. Why is the 10th worker worth less to you than the 5th?
Diminishing marginal returns — capital is fixed, so MP falls. MRP = MP × price, so falling MP drags MRP down even at a steady price.
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Key terms in Unit 5
These 5 terms show up in the Unit 5 cards. Each one links to its definition in the AP Microeconomics key-term reference.
Drill all of Unit 5 with spaced repetition
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