AP Microeconomics Flashcards: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 11 cards to help you master important concepts.
If a firm hires workers to the point where the market wage is greater than the marginal revenue product of the last worker hired, is it maximizing profit?
No, it is not maximizing profit. The last worker hired is costing the firm more in wages than they are generating in revenue, so the firm should hire fewer workers.
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If a firm hires workers to the point where the market wage is greater than the marginal revenue product of the last worker hired, is it maximizing profit?
No, it is not maximizing profit. The last worker hired is costing the firm more in wages than they are generating in revenue, so the firm should hire fewer workers.
What is the Marginal Factor Cost (MFC) in a perfectly competitive labor market?
The marginal factor cost (also called marginal resource cost) is the cost of hiring one additional unit of a factor. In a perfectly competitive labor market, the MFC is equal to the market wage.
In a perfectly competitive labor market, how is the wage for a single firm determined?
The wage is set by the overall market forces of supply and demand for labor. The individual firm has no control over the wage and simply accepts it as given.
What is the cost-minimization rule for allocating multiple inputs?
To minimize costs or maximize profits, firms allocate inputs such that the last dollar spent on each input yields the same amount of marginal product.
For a firm in a perfectly competitive *output* market, what is the relationship between MRP and the Value of the Marginal Product of Labor (VMPL)?
The marginal revenue product of labor is equal to the value of the marginal product of labor (VMPL). This is because for these firms, marginal revenue equals the product's price (MRP = VMPL = MPL x P).
What is the Marginal Revenue Product (MRP) of a factor of production?
It is the change in total revenue divided by the change in that factor of production. It is calculated as the factor's marginal product multiplied by the firm's marginal revenue (MRP = MP × MR).
Under what condition should a firm continue to hire more workers?
A typical firm hires labor in a perfectly competitive labor market as long as the marginal revenue product of labor is greater than the market wage.
What is the profit-maximizing rule for a firm hiring labor in a perfectly competitive factor market?
The firm hires the quantity of workers where the marginal factor cost (which equals the market wage) is equal to the marginal revenue product of labor (MFC = MRP).
A firm's marginal revenue product for the next worker is $25, and the market wage is $20. Should the firm hire this worker to maximize profit?
Yes, the firm should hire the worker. The worker will add more to total revenue ($25) than to total cost ($20), thus increasing the firm's profit.
What are the key characteristics of a perfectly competitive factor market?
In a perfectly competitive factor market, the wage is set by the market, and each individual firm is a 'wage taker,' meaning it can hire any quantity of workers at the established market wage.
A firm calculates that the marginal product per dollar for labor is 12 and for capital is 15. To minimize costs, what should the firm do?
The firm should use more capital and less labor. This is because the last dollar spent on capital yields a higher marginal product than the last dollar spent on labor.