Unit 5 Factor Market

Question 1

Factor Market

Answer 1

A market where firms buy resources like land, labor, and capital.

Question 2

MRP = MFC Rule

Answer 2

Firms hire where MRP = MFC to maximize profit.

Question 3

Derived Demand

Answer 3

The demand for a resource comes from the demand for the product it helps produce.

Question 4

Marginal Factor Cost (MFC)

Answer 4

The extra cost of hiring one more unit of a resource.

Question 4

Marginal Revenue Product (MRP)

Answer 4

The extra revenue made from hiring one more unit of a resource.
MRP = Marginal Product × Price

Question 5

Marginal Product (MP)

Answer 5

The additional output from using one more unit of input.

Question 6

Least-Cost Rule

Answer 6

Firms use this to combine resources efficiently:
→ MPL / PL = MPK / PK
Use more of the input with a higher ratio.

Question 6

Labor

Answer 6

A resource that includes human work, effort, and time used to produce goods or services.

Question 6

Determinants of Labor Demand (DL)

Answer 6

Resource Productivity
Price of Other Resources
Demand for Product

Question 7

Law of Diminishing Marginal Returns

Answer 7

Each extra worker adds less output than the one before after a certain point.

Question 8

Capital

Answer 8

A resource that includes tools, machines, and buildings used to produce other goods.

Question 9

Determinants of Labor Supply (SL)

Answer 9

Personal Values
Government Interventions (like taxes, laws)
Number of Qualified Workers

Question 10

Shift in Labor Demand

Answer 10

If workers become more productive or product demand rises, labor demand increases.

Question 11

Shift in Labor Supply

Answer 11

If more workers are trained or want jobs, supply shifts right.

Question 12

Resource Substitutes

Answer 12

If one resource becomes cheaper, demand for the other drops.

Question 13

Resource Complements

Answer 13

If one resource becomes more useful, demand for the other increases.

Question 14

Human Capital

Answer 14

The skills and training that make workers more productive.

Question 14

Labor Market Equilibrium

Answer 14

Where labor supply and demand meet; sets the wage and quantity of labor.

Question 15

Wage Rate

Answer 15

The price of labor, determined by the labor market.

Question 15

Increase in Minimum Wage

Answer 15

Can cause labor surplus (unemployment) if set above equilibrium.

Question 16

Perfectly Competitive Labor Market

Answer 16

Many firms hiring, many workers selling labor, no control over wage.

Question 16

Firm is a Wage Taker

Answer 16

Firms take the market wage and decide how many workers to hire.

Question 17

MRP = MFC Rule in Labor

Answer 17

Firms hire workers until the cost of hiring equals the revenue they bring.

Question 18

If MRP < MFC

Answer 18

The firm should hire fewer workers.

Question 18

If MRP > MFC

Answer 18

The firm should hire more workers.

Question 19

Labor Demand Curve for Firm

Answer 19

Same as the MRP curve.

Question 20

Long Run Labor Decisions

Answer 20

Firms can change all inputs, including capital and labor.

Question 21

Short Run Labor Decisions

Answer 21

In the short run, firms can only change labor—not fixed capital.

Question 22

Equilibrium in Labor Market

Answer 22

Wage where labor supply = labor demand.

Question 23

Imperfect Labor Market

Answer 23

Monopsonies set wages and hire fewer workers than in perfect competition.

Question 23

Monopsony

Answer 23

A labor market with one main buyer (firm) and many sellers (workers).

Question 23

Competitive Firms Maximize Profits

Answer 23

By hiring where wage = MRP.

Question 24

MFC > Wage in Monopsony

Answer 24

To hire more workers, the firm must raise wages for all, so MFC rises faster than wage.

Question 25

Monopsony Profit-Max Rule

Answer 25

Hire where MRP = MFC, then pay wage from supply curve.

Question 25

Monopsony vs. Perfect Competition

Answer 25

Monopsony pays lower wages and hires fewer workers.

Question 26

Example of Monopsony

Answer 26

A small town with one major employer like a coal mine or factory.

Question 27

Labor Supply Curve for Monopsony

Answer 27

Upward sloping, meaning it must pay more to attract more workers.

Question 28

Monopsony Wage and Hiring

Answer 28

Sets wage below MRP, leading to underpayment of labor.

Question 29

Deadweight Loss in Monopsony

Answer 29

Because less labor is hired than is socially optimal.

Question 29

Minimum Wage in Monopsony

Answer 29

Can increase wages and employment, unlike in perfect competition.

Question 30

Land Payment Name

Answer 30

Rent

Question 31

Labor Payment Name

Answer 31

Wages

Question 32

Capital Payment Name

Answer 32

Interest

Question 33

Marginal Resource Cost

Answer 33

additional cost of hiring one more unit of a resource (like a worker).

Question 34

MRC Formula

Answer 34

MRC = ΔTotal Resource Cost / ΔQuantity of Resource In perfect competition: MRC = Wage

Question 35

When should firms hire

Answer 35

Firms hire where MRC = MRP to maximize profit.

Question 36

Least Cost Combination Formula

Answer 36

How many output per dollar spent Marginal Product / Price ex: worker MPL = 30 P = 15