Econ 2302 Final

Output Loss from Strikes

Employers lose sales and profit Workers sacrifice income Economy loses output

Total Labor Cost equals

Unit of Labor x Wage Rate

Oligopolistic industry

When the largest four firms in an industry controls 40% or more of the market, that industry is considered oligopolistic

Monopolistic competition firms earn only nominal profit in the

long run

When supply is elastic,

consumers bear most of the tax burden

(1)Land Rent | (2) Quantity Supplied | (3) Quantity Demanded | (4) Quantity Demanded | (5) Quantity Demanded $400 | 70 | 40 | 30 | 10 300 | 70 | 50 | 40 | 20 200 | 70 | 60 | 50 | 30 100 | 70 | 70 | 60 | 40 Refer to the table, in which the values for columns (2) through (5) are in acres. If the relevant columns are (1), (2), and (3), land rent will be

$100 per acre Land rent is determined by the intersection of the demand for and supply of land. For example, if the quantity supplied of land is 70 acres, at a quantity demanded of 70 acres the rent is $100 per acre.

On January 1, 2019, Alex deposited $2,000 into a savings account that pays interest of 10 percent, compounded annually. If he makes no further deposits or withdrawals, how much will Alex have in his account on December 31, 2021 (3 years later)?

$2,662 To find the future value (FV) of a present sum of money (PV), use the following formula: FV = PV(1 + i)t , where i is the interest rate and t represents the number of time periods. In this problem, time is specified in years and the interest is compounded annually. A deposit of $2,000 into an account paying 10 percent interest, compounded annually, will be worth $2,662 [= $2,000(1 + 0.1)3] in three years.

Units of Labor | Wage Rate | MRC(of Labor) | MRP(of Labor) 1 | $8 | $8 | $12 2 | $8| $8 | $10 3 | $8 | $8 | $8 4 | $8 | $8 |$6 5 | $8 | $8 | $4 Refer to the given data. At the profit-maximizing level of employment, this firm's total labor cost will be

$24 A purely competitive firm will maximize profit by employing labor to the point where MRP = MRC. If, for example, the MRC (also the wage rate) is $8, and the MRP of the third unit of labor is $8, then the firm will employ 3 workers. A firm hiring 3 workers at a wage rate of $8 per worker will have a total labor cost of $24 (= 3 × $8).

Labor Demand Data | Labor Supply Data Employment | Total Product | Product Price | Employment | Wage Rate 0 | 0 | $ 2.20 | 0 | -- 1 | 15 | 2.00 | 1 | $1.00 2 | 28 | 1.80 | 2 | 2.00 3 | 39 | 1.60 | 3 | 3.00 4 | 48 | 1.40 | 4 | 4.00 5 | 55 | 1.20 | 5 | 5.00 6 | 60 | 1.00 | 6 | 6.00 The table shows labor demand data on the left and labor supply data on the right. What will be the profit-maximizing wage rate?

$3 The profit-maximizing level of employment occurs where MRP = MRC (or the highest level of employment were MRP > MRC, if MRP and MRC do not equal). To find MRP, first find total revenue at each level of employment, which is equal to total product times product price. The change in total revenue from one employment level to the next measures the MRP. To calculate MRC, first find the total wage cost for each level of employment, which equals employment times the wage rate. The change in total wage cost from one employment level to the next measures MRC. After using the MRP and MRC data to find the profit-maximizing employment level, look in the wage rate column to find the corresponding profit-maximizing wage rate.

On January 1, 2019, Alex deposited $5,000 into a savings account that pays interest of 5 percent, compounded annually. If he makes no further deposits or withdrawals, how much will Alex have in his account on December 31, 2021 (3 years later)?

$5,788 To find the future value (FV) of a present sum of money (PV), use the following formula: FV = PV(1 + i)t , where i is the interest rate and t represents the number of time periods. In this problem, time is specified in years and the interest is compounded annually. A deposit of $5,000 into an account paying 5 percent interest, compounded annually, will be worth $5,788 [= $5,000(1 + 0.05)3] in three years.

Suppose you earn $40,000 per year and pay taxes based on marginal tax rates. The first tax bracket, which taxes at 10 percent, ranges from $0 to $20,000. The second tax bracket, which taxes at 25 percent, ranges from $20,001 to $80,000. How much will you pay in total taxes?

$7,000 Since you pay a marginal tax rate of 10 percent on your first $20,000 of income, the tax on this portion of your income equals $2,000 (= $20,000 × 0.10). The remaining $20,000 of your income is taxed at 25 percent, so the tax on this portion of your income equals $5,000 (= $20,000 × 0.25). Therefore, your total tax will be $7,000 (= $2,000 + $5,000).

Annual Interest Rate equals

(Account Balance at the End of Year/Account Balance at the Beginning of the Year) - 1

Taxable Income | Total Tax $ 1,000 | $ 500 2,000 | 600 3,000 | 700 4,000 | 800 5,000 | 900 6,000 | 1,000 Refer to the income tax schedule given in the table. If your taxable income increases from $4,000 to $5,000, you will encounter a marginal tax rate of

10 percent To find the marginal tax rate over an income rate, divide the change in total tax by the corresponding change in taxable income. If the total tax rises by $100 when income rises by $1,000, the marginal tax rate is 10 percent (= $100/$1,000).

Industry Y is dominated by five large firms that hold market shares of 20, 20, 25, 25, and 10. The Herfindahl index for this industry is

2150

Assume Manfred's Shoe Shine Parlor hires labor, its only variable input, under purely competitive conditions. Shoe shines are also sold competitively. Units of Labor | Total Product | Marginal Product | Total Revenue 0 | 0 | 1 | 14 | 14 | $112 2 | | 10 | 3 | 30 | | 240 4 | 35 | | | 5 | 39 | | 312 6 | | | 336 7 | 44 | 2 | 352 How many units of output are produced when 6 workers are employed?

42 Total product (TP) measures the number of units of output produced. Marginal product (MP) measures how much TP changes when another unit of labor is added.

Monopolistic Competition

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.

Herfindahl Index

A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry

Elasticity of Resource Demand

A measure of the responsiveness of firms to a change in the price of a particular resource they employ or use; the percentage change in the quantity of the resource demanded divided by the percentage change in its price. Erd = Price Change in Resource Quantity of Demand/Percentage Change in Resource Price

P(Market Price) equals

ATC(Average Total Cost)

Total Cost equals

ATC(Average Total Cost) x Quantity of Output

Differentiated product

An oligopoly in which firms produce a differentiated product

Homogenous product

An oligopoly in which firms produces a standardized product

Efficiency Loss of Tax(Deadweight Loss of Tax) equals

Area ABC(Activity-Based Costing)

Tax Revenue to Government equals

Area EFAC

After-Tax Consumer Surplus equals

Area above Government Tax Revenue and below Demand Curve

After-Tax Producer Surplus equals

Area above Supply Curve and below Government Tax Revenue

Assess the economic desirability of collusive pricing.

Collusive pricing is economically desirable from the oligopoly's viewpoint because it results in monopoly profits

In 2018, approximately 5 percent of all work time lost was due to work stoppages.

False

The demand for computers is derived from the demand for the capital resources that are used to produce computers.

False

MC(Marginal Cost)

Increase in Total Cost by Producing One Extra Unit of Produce

Marginal Resource(Labor) Cost equals

Increase in Total Labor Cost by Hiring One Extra Unit of Labor

MR(Marginal Revenue)

Increase in Total Revenue by Selling One Extra Unit of Product

P(Market Price) <

MC(Marginal Cost) -------> No allocative efficiency

MR(Marginal Revenue) equals

MC(Marginal Cost), Profit Maximization Output

MRP(Marginal Revenue Product)

MR(Marginal Revenue) = Change in TR(Total Revenue)/Change in Q(Quantity Demanded) Increase in Total Revenue by Hiring One Extra Unit of Resource

MRP(Marginal Revenue Product) equals

MRC(Marginal Resource Cost); determines the profit maximization usage of resources

MRC(Marginal Resource Cost)

MRP(Marginal Revenue Product) = MRC(Marginal Resource Cost) Increase in Total Cost by Hiring One Extra Unit of Resource

The profit-maximizing rule for a firm hiring both labor (L) and capital (C) under conditions of imperfect competition is

MRPL / MRCL = MRPC / MRCC = 1.

MRPl/Pl equals

MRPc/Pc equals 1

Marginal Tax equals

Marginal Income x Marginal Tax Rate

P(Market Price) >

Minimum ATC(Average Total Cost) -----> No productive efficiency

Real Interest Rate equals

Nominal Interest Rate - Inflation Rate

MRCc equals

Pc

Percentage Change in Real Wage equals

Percentage Change in Nominal Wage - Change in Price Level

MRCl(Marginal Resource Cost of Labor) equals

Pl

Total Revenue equals

Price x Quantity

The Least-Cost Rule

The combination of labor and capital that minimizes total costs for a given production rate. Hire L and K so that MPL / PL = MPK / PK or MPL/MPK = PL/PK

In the short run, a tool manufacturer has a fixed amount of capital. Labor is a variable input. The cost and output structure that the firm faces is shown in the table below. Calculate the total labor cost and the marginal resource cost, and then fill in the blanks in the labor supply table. Units of Labor | Total Production | Wage Rate 10 | 200 | $11 11 | 220 | $12 12 | 238 | $13 13 | 254 | $14 14 | 268 | $15 15 | 280 | $16

Total Labor cost | Marginal Resource (Labor) Cost 110 | - 132 | 22 156 | 24 182 | 26 210 | 28 240 | 30 The total labor cost is the wage rate multiplied by the number of workers. For example, at 10 units of labor, total labor cost is $110 (= 10 × $11). Follow this same process to compute the total labor cost for each quantity of labor. The marginal resource cost is the change in the total labor cost divided by the change in the number of workers. For example, for the 11th worker, the marginal resource (labor) cost is $22 (= $132 − $110)/(11 − 10).

Monopolistic competition entails a deadweight loss to society, even if the firms earn zero economic profits.

True

Nominal profit is considered an economic cost.

True

Potential rivals may be more likely to collude if they view themselves as playing a repeated game rather than a one-time game.

True

Which cannot be a characteristic of an oligopolistic industry?

a perfectly elastic firm demand curve

Suppose that you own a 20-acre plot of land that you would like to rent out to wheat farmers. For them, bringing in a harvest involves $30 per acre for seed, $80 per acre for fertilizer, and $70 per acre for equipment rentals and labor. With these inputs, the land will yield 40 bushels of wheat per acre. a. If the price at which wheat can be sold is $7 per bushel and if farmers want to earn a normal profit of $10 per acre, what is the most that any farmer would pay to rent your 20 acres? b. What price would the farmer pay to rent your 20 acres if the price of wheat rises to $8 per bushel?

a. $1,800 b. $2,600 To answer this question, we begin by calculating the revenue generated per acre. A bushel of wheat sells for $7 and each acre produces 40 bushels of wheat. Thus, revenue per acre equals $280 (= $7 × 40). Since there are 20 acres of land on the farm, total revenue equals $5,600 (= 20 × $280). The total cost per acre equals $190 (= $30 + $80 + $70 + $10), which is the sum of the seed cost, fertilizer cost, equipment rental, and normal profit, respectively. Thus, the total cost for the 20-acre farm is $3,800 (= 20 × $190). a. To find the most any farmer would pay to rent the 20-acre farm (land), we subtract the total cost from total revenue. This equals $1,800 [= $5,600 (revenue) − $3,800 (cost)]. So, the most the farmer would be willing to pay to rent the land is $1,800, since anything more would result in a loss (negative economic profit). b. If the price of wheat increased to $8 a bushel, then total revenue per acre would equal $320 (= $8 × 40). Total revenue for the farm would equal $6,400 (= 20 × $320). The total cost remains the same, $3,800. This implies $2,600 remains for potential land payment (= $6,400 − $3,800), which is the most any farmer would be willing to pay to rent the land.

Suppose that the interest rate is 5 percent. a. What is the future value of $100 five years from now? How much of the future value is total interest? b. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent?

a. $127.63; 27.63 b. $12.63 a. To calculate the future value of $100 five years from now, we compound the interest for the five years. The future value for each successive year is: Year 1: $100 × 1.05 = $105 (carry this amount forward to year two). Year 2: $105 × 1.05 = $110.25 (carry this amount forward to year three). Year 3: $110.25 × 1.05 = $115.76 (carry this amount forward to year four). Year 4: $115.76 × 1.05 = $121.55 (future value in four years). If the problem calls for more than 4 years, continue for each remaining year. Note this answer could also be found via substitution back to year 1, which gives us the formula: Future value = initial amount × (1 + interest rate)t, where t is the number of years of compounding. For the values above, we have the future value = $100 × 1.055 = $127.63. b. To calculate the future value of total interest, subtract the principal (the initial amount) from the total future value. This is $27.63 (= $127.63 − $100). c. To find out how much greater total interest would be at an interest rate of 7 percent than at an interest rate of 5 percent, first find the future value at the 7 percent interest rate. Using the formula above, future value = $100 × 1.055 = $140.26. Second, find the future value of total interest. This is $40.26 (= $140.26 − $100). Finally, subtract the total interest at the 5 percent rate from the total interest at the 7 percent rate. This equals $12.63 (= $40.26 − $27.63).

Suppose that a monopolistically competitive restaurant is currently serving 270 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $13 per meal. a. What is this firm's profit or loss? b. Will there be entry or exit? Will this restaurant's demand curve shift left or right? In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $9. Suppose that the allocatively efficient output level in long-run equilibrium is 220 meals. c. What is the size of the firm's economic profit? d. Is the deadweight loss for this firm greater than or less than $80?

a. $810 13-10=3x270=810 b. Entry; left c. 0 d. Less than

Suppose that the marginal product of labor for a local bakery is 96 units per day and the price of labor is $6 per day. a. What does the least-cost rule say that the ratio of the marginal product of capital to the price of capital should be? b. Now suppose that the marginal product of labor is 96 units per day, the price of labor is $6 per day, and the price of capital is $4 per day. What does the least-cost rule say that the marginal product of capital should be?

a. 16:1 b. 64 a. The ratio of the MPL to the price of labor should be equal to the ratio of the MPC to the price of capital. That is, the ratio of the MPL to the price of labor is 96/6, which should equal the ratio of the MPC to the price of capital. b. The MPC is equal to the price of capital times the ratio of the MPL to the price of labor. (This comes from setting the ratio of the MPC to the price of capital equal to the ratio of the MPL to the price of labor.) The ratio of the MPL to the price of labor is 96/6, and multiplying that by the price of capital ($4) results in an MPC of 64 (16 × 4).

Firm | Market Share A | 40% B | 40% C | 10% D | 5% E | 5% This industry shown in this table illustrates

an oligopoly

Profit maximizing firm must produce

at least cost

The federal gasoline tax is assessed on a per-gallon basis, and the proceeds are used for highway maintenance and improvements. This tax is consistent with the

benefits-received principle of taxation

When demand is inelastic,

consumers bear most of the tax burden

Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of supply of X is unitary (coefficient = 1). If the incidence of the tax is such that the consumers of X pay $1.85 of the tax and the producers pay $0.15, we can conclude that the

demand for X is inelastic Incidence of a tax depends on the relative price elasticities of supply and demand. If demand is more elastic than supply, the sellers pay a greater share of the tax. Where demand is relatively more inelastic, the buyers pay more of the tax. If the elasticities are the same (e.g. both unitary elastic), we would expect the burden to fall equally on buyers and sellers.

In the long run, the price charged by a monopolistically competitive firm seeking to maximize profit will

exceed MC but equal ATC

Firm | Market Share A | 40% B | 40% C | 10% D | 5% E | 5% Suppose that Firm A in this table was found guilty of antitrust violations and split into two firms with equal market share. This would cause the Herfindahl index to

fall to 2,550

Year | Beginning Period Value | Total Interest | End Period Value 1 | $1,000 | $60 | $1,060 2 | $1,060 | A | B 3 | C | D | $1,191 Refer to the table representing Darcy's bank account. If she deposited $1,000 into her account at the beginning of year 1 and made no further deposits or withdrawals, the $1,191 value at the end of year 3 represents the

future value of the $1,000 deposit made at the beginning of year 1 Future value is the amount to which some current amount of money will grow as interest compounds over time. The value of at the end of year 3 represents the future value of a deposit made at the beginning of year 1, plus interested compounded over 3 years.

Firms might be tempted to cheat on the collusive agreement because each firm could achieve

higher profits

Price collusion is mutually profitable because each firm achieves

higher profits

The demand for a resource is a derived demand. This is because

if there were no demand for output, there would be no demand for input. Resources—factors of production—are not hired or bought because an employer or buyer desires them for themselves. The demand for resources is entirely derived from what the firm believes the resources can produce. If there were no demand for output, there would be no demand for input. The demand for a resource depends, then, on how productive it is in producing output and on the price of the output.

According to age-earnings data,

investments in education result in higher earnings

An industry having a four-firm concentration ratio of 75 percent

is an oligopoly

When a firm does not minimize its cost,

it cannot reach maximum profit

Suppose that a union successfully negotiated a 14 percent wage increase and the quantity of labor demanded decreased by 14 percent. Given a fixed labor demand curve, we can conclude that

labor demand is unit-elastic

MRC(Marginal Resource Cost) equals the

market wage rate when the resource market is purely competitive

At long-run equilibrium in monopolistic competition, there is

neither allocative nor productive efficiency

In an oligopolistic market, there is likely to be

neither allocative nor productive efficiency.

Business and household borrowings are components of

the demand for loanable funds

When borrowing needs increase,

the demand of loanable fund shifts to the right, causing a higher interest rate, and the equilibrium quantity of loanable funds would increase

Monopolistic competition firms might have economic profit or loss in the

short run

Price collusion might occur in oligopolistic industries because

price competition can lower revenue for all firms

Price leadership is legal in the United States, whereas price-fixing is not. This is because

price leadership is not an agreement, whereas price-fixing is.

When demand is elastic,

producers bear most of the tax burden

When supply is inelastic,

producers bear most of the tax burden

The factors determining resource demand differ from those determining product demand. This is because

product demand depends on income and tastes, whereas resource demand is a derived demand. Product demand is a question of income and tastes, whereas resource demand is more passive in the sense that it is derived from the demand for the products the resource can produce. If a resource cannot be used in the production of a desired product, there will not be any demand for it. Additionally, resources are often less mobile than products, so their geographic location relative to demand for the output they produce may be an important factor determining demand for resources in particular geographic areas.

An increase in the minimum wage would likely

reduce employment and increase income An increase in the minimum wage would likely reduce employment; however, there could be income gains for those retaining employment.

The Profit-Maximizing Rule implies

the Least-Cost Rule

If government levies a tax or fee on hunting licenses and uses the resulting revenue for wildlife stocking programs, this would be an example of

the benefits-received principle of taxation

Unit of Labor | Total Product | Product Price 0 | 0 | $ 2.20 1 | 15 | 2.00 2 | 28 | 1.80 3 | 39 | 1.60 4 | 48 | 1.40 5 | 55 | 1.20 6 | 60 | 1.10 The data in the table reveal that

the firm is selling its product in an imperfectly competitive market

Other things equal,

the greater the elasticities of demand and supply, the greater the efficiency loss of a particular tax. All other things being equal

There will be a greater incidence of an excise tax on consumers

the less elastic the demand; the more elastic the supply A tax will be shifted to the group with the least ability to adjust. The incidence of an excise tax is likely to be primarily on consumers when demand is highly inelastic (consumers cannot adjust much to a price change) and primarily on producers when demand is elastic (consumers will switch to other products). A tax will be shifted to the group with the least ability to adjust. The more elastic the supply, the more ability producers have to adjust, and the greater the incidence of an excise tax on consumers and the less on producers.

If the U.S. population in 2012 were grouped into quintiles by income

the top two income quintiles paid more in taxes than the benefits they received from government spending

A competitive firm is minimizing its total cost of producing a specific quantity of output when

their respective ratios of MP to price are equal

The efficiency loss of a tax is the net benefit society gives up because

too little of the product is produced The efficiency loss of a sales tax or excise tax is the net benefit society sacrifices because consumption and production of the taxed product are reduced below the allocatively efficient output (which would occur without the tax).

An excise tax of a specified amount shifts the supply curve

upward by the amount of the tax per unit

From 2016 to 2026, the U.S. Bureau of Labor Statistics expects that there will be a fall in demand for

word processors and typists