Microeconomics Final
barriers to entry in a monopoly
1. resources, one company owns and operates all/most of the resources (resource) 2. government intervention, patents and copyrights (government monopoly) 3. cheaper for one entity to produce, more efficient for one company than more than one (natural monopoly)
which worker will earn more and why: lawyer with 1 year experience v lawyer with 6 yrs experience
6 years, that lawyer has more experience which is human capital so they will be compensated more
name some characteristics of a job that might require a positive compensating differential
a compensating differential is paid for the disagreeable, unplesant nature of a job. other things being equal jobs will pay more if they are dirty, noisy, smelly, solitary, unsafe, hard, require travel, working odd hours
why does a monopolist produce less than the socially efficient quantity of output
a monopolist produces less than the socially efficient quantity of output because a monopolist is interested in the largest profit, which occurs when marginal revenue is equal to marginal cost. the socially efficient quantity would require the monopolist to produce enough output that he would be forced to lower his price and then his marginal cost would be larger than his marginal revenue and he would lose out on profit opportunities
how does a monopolistically competitive firm choose the quantity and price that maximizes its profits
a monopolistically competitive firm finds where their marginal cost equals their marginal revenue and produces at that quantity and charges a price consistent with their demand curve for a profit
when should firms stop hiring workers
add workers if hiring them will increase the profits of the company, stop when the cost of hiring another worker is more than the marginal product of their labor
what events will shift the demand for labor to the right
an increase int he price of output produced by labor, an advance in labor-augmenting technology used in production, and an increase in the supply of factors used with labor in production
which worker will earn more and why: attractive salesperson v homely salesperson
attractive, beauty is scarce and economics is about scarcity
which would spend more on advertising: bayer aspirin v generic aspirin
bayer aspirin would spend more to signal faith in their brand
which worker will earn more and why: local blues band v beyonce
beyonce because everyone wants to listen to her and she has the technological means to let more people listen to her
what characteristics does monopolistic competition have in common with perfect competition
both monopolistic and perfect competition have many sellers in a market with free entry and exit. because both have free entry and exit both types of competition have zero profit in the long run
what events will shift the supply of labor to the right
change in tastes, immigration, reduction in alternative options
which worker will earn more and why: keypunch operator v computer specialist
computer specialist, to compensate for the human capital
which worker will earn more and why: an economics professor or a corporate economist
corporate economist, their job is not as desirable, also they have an increased marginal product of labor
what are necessary conditions for a superstar to arise in a market
every customer in the market wants to enjoy the good supplied by the best producer and the good is produced with a technology that makes it possible for the best producer to supply every customer at a low cost
barrier to entry: Prozac (brand name drug)
government monopoly
barrier to entry: this textbook
government monopoly
barrier to entry: united states postal service
government monopoly
what are the implications of education for both views
human capital: increased access to education leads to increased productivity which leads to an increase in wages signaling theory: increased education leads to a greater supply of all high-ability people and decreases the total wage
explain the human-capital view and the signaling view of education
human capital: values education as a means to receive more human capital and therefor become more productive as workers. the signaling theory: that because it is easier for high-ability to receive degrees, people with degrees are automatically more high-ability than people without degrees
if one firm cheats and produces one additional increment of production what is the level of profit, what is the level of profit for each firm
if one firm cheats and produces another increment of production, then that firm's profits increase, but the profits of the other firm decrease because the new quantity drive the prices down
if the monopolist is able to costlessly and perfectly price discriminate, is the outcome efficient? What is the value of the consumer surplus, the producer surplus and the total surplus
if the monopolist is able to perfectly price discriminate then the market becomes efficient because everyone is charged at exactly their willingness to pay. this unexcludes some who would have been excluded from the market at a monopolist's price and collecting all of the deadweight loss. the total surplus is equal to the producer surplus there is no consumer surplus because every consumer is charged exactly what they are willing to pay for a product thus increasing the producer surplus
what might the solution of collusion be if the participants were able to repeat the game
if the participants repeat the game enough eventually they may find it in their best interests to work together. a strategy that they could use is "tit-for-tat" or one firm copies whatever the 1st firm does in the 1st round in the 2nd round
in the long run, is Mario's pizza profitable? (monopolistic competition)
in the long run Mario's pizza is not profitable. if Mario's is one restaurant in the city with many restaurants all with different menus, Mario's is monopolistically competitive. monopolistically competitive markets have free entry and exit which drives profit to zero in the long run
describe 3 reasons why the measure of income distribution may not truly measure someone's ability to maintain a certain standard of living. does this exaggerate or understate the true distribution of standard of living
in-kind transfers, economic life cycle, transitory v permanent income. this exaggerates the true distribution standard of living
an increase of the value of the product
increases the marginal product of labor, and therefore the wages of the laborers
when household own capital directly, capita income is in the form of rental payments to households. in which form is capital paid when businesses own capital
interest, dividends, retained earnings
if oligopolists would be better off if they could why do they so often fail to cooperate
it is rational to place one's self interests before others, so often oligopolists each act in their own best interests and cheat to achieve the dominant strategy and earn more profit, and therefore achieve a nash equilibrium
which would spend more on advertising: John Deere farm tractor v John Deere lawn mower
lawn mowers because they are sold to consumers instead of industries
which worker will earn more and why: grocery clerk v lawyer
lawyer, compensate them for going to school, larger human capital
of the 3 political philosophies discussed, which one differs the most from the other two and why. also what does each suggest about income redistribution
libertarianism differs from both utilitarianism and liberalism bc it argues that income is earned only by the individuals and not by society, so no social planner has the right to alter the distribution of income if it was generated by a fair playing field.
provide 3 reasons why wages might be set above the equilibrium wage
minimum wage laws (government imposed), the market power of labor unions (treat of strike raises wages), and efficiency wages (firms pay above the equilibrium wage to increase productivity because high wages reduce turnover, increase effort, and raise the quality of job applications)
what characteristics does monopolistic competition have in common with a monopoly
monopolistic competition involves many sellers all selling slightly differentiated products this is similar to monopolies because they face downward demand curves and are able to be price makers
what is the market structure: restaurants in a large city
monopolistic competition, large number of sellers all selling different products
what is the market structure: legal services in a city
monopolistic competition, many lawyers each slightly different
what is the market structure: economics textbook
monopolistic competition, there are many sellers of many different types of economics books
what is the market structure: trash collection
monopoly, easier and more effective for one firm to complete the service
what is the market structure: retail market for electricity
monopoly, one firm can produce at a lower cost than many firms
what is the market structure: "principles of economics"
monopoly, the government protects copyrights of specific books
barrier to entry: edison power company
natural monopoly
which worker will earn more and why: dayshift v nightshift
night shift, compensating differentials because no one really wants to work at night
does a monopolist charge the highest possible price for its output? how does a monopolist choose the price it will charge for its product?
no a monopolist does not charge the highest possible price for its output because even a monopolist is subject to a downward sloping demand curve, so if a producer charged the highest possible price there would be little to no product sold. the monopolist determines the prices for products by determining how much output is produced. for every unit of output produced the price of all units is reduced in price, so by producing large amounts of outputs the monopolist chooses a low price and with small amounts of output there is a high price
does a difference in average wages among groups by itself suggest that there is discrimination in the labor market
no because average wages among groups are in part based on differences in human capital and job characteristics, a wage differential among groups alone tells us nothing about discrimination
is it possible for a monopolistically competitive firm to generate economic profit in the long run
no it is not possible. when firms earn profit in the short run it encourages new entry into the market, which increases the supply and drives down the demand and the price. when monopolistically competitive markets start to become unprofitable firms will exit driving down supply and increasing demand and price, bringing the market to P=ATC or zero profit
if the poverty rate is 15% does it mean that about 15 percent of the population live their entire lives in poverty
no there is a great deal of variation in a person's income from year to year and a great deal of variation in a person's income over their life cycle. there is also variation from generation to generation within a family. as a result, a much larger portion of the population than 15% live their lives in poverty and very few live large portion of their lives in poverty
does poverty affect all groups within the population the same
no with regard to race, blacks and Hispanics are more likely to live in poverty. with regard to age, young are more likely to live in poverty than the old. with regard to family, families headed by single females are more likely to live in poverty
should antitrust laws be utilized to stop all mergers?
no, many synergies between the merging firms that reduce costs and increase the efficiency
can profits from advertising a monopolistically competitive firm be translated to the long run?
no, profits attract entry which reduces the demand faced by each firm to the point where it is again tangent to its ATC curve
is Mario's pizza producing at an efficient scale? (monopolistically competitive)
no, profits attract new firms which reduce the demand for an in incumbent firm's product to the point where its demand is tangent to its ATC curve causing P=ATC and profits equal zero . bc the tangency of demand ant ATC is in the negatively sloping portion of ATC the firm is operating at less than the efficient scale. if mario's expanded output MC would exceed MR and P<ATC so profits would be negative
which worker will earn more and why: carpenter at a nuclear power plant, carpenter of houses
nuclear power plant, non-monetary differential, that job is more dangerous
what is the market structure: breakfast cereal
oligopoly, few firms with nearly identical types of cereal
what is the market structure: auto tires
oligopoly, few firms, all tires are essentially the same
what is the market structure: air travel from any one airport
oligopoly, there are a limited amount of airlines that service any airport but the services are identical
what is the market structure: retail market for gasoline
perfect competition, many sellers all selling the same product
what is the market structure: gold bullion
perfect competition, still unsure of what this is
is perfect price discrimination efficient? who receives the surplus
perfect price discrimination is efficient because it eliminates the deadweight loss that accompanies a monopoly. in this case the consumer surplus is received by the monopolist. when everyone pays exactly their willingness to pay there is no consumer surplus and because in some cases the producer is selling output for a price higher than their willingness to sell they receive the surplus
what is permanent income? why might we wish to use permanent income when measuring the the distribution of income? if we used permanent income would that exaggerate or understate the true distribution of the standard of living
permanent income is a person's normal or average income. using it removes the life-cycle effects and the transitory effects that cause any given year's income to be nonrepresenative of the person's true standard of living. this would understate the true distribution standard of living because we cannot fully smooth our living standards by borrowing when young or when we have a bad year
what is predatory pricing? do economists think that predatory pricing is commonly employed as a profitable business strategy
predatory pricing is when firms slash their prices to a rate below the market value in order to run competitors out of business and become the last remaining firm so they can assume the market power of a monopolist. economists don't think that this is a good idea because selling at a price below the price level is very costly to a firm
barrier to entry: DeBeers diamonds
resource monopoly
barrier to entry: perrier spring water
resource monopoly
suppose there is an increase in college enrollments which causes an increase in the demands for textbooks. what should happen in the markets for labor and capital employed in the manufacturing of textbooks
shift in demand of labor, increase in the value of marginal products of labor and capital because the price of the output produced by them has risen. wage and rental rates should also rise
is society better off at nash equilibrium or a competitive equilibrium
society is better off at the nash equilibrium because there is a larger quantity for a lower price and the market is moved closer to the social optimum
the best carpenter on the planet v the best writer on the planet
the best writer, they can reach a greater audience
what causes the deadweight loss in a monopolistically competitive market
the deadweight loss is caused because firms fail to produce units that the buyer values in excess of the cost of production. loss is due to the reduced quantity
which worker will earn more and why: a history professor v an economics professor
the economics professor, the market wage for an economics professor is higher due to the economist's higher value of marginal product in the corporate labor market
why must the equilibrium wage in the market for labor equal the value of the marginal product of labor for each firm
the equilibrium wage is determined by supply and demand for labor in the market for labor. each firm hires workers up to the point where that wage equal the point where that wage equals the value of the marginal product of the labor in each firm
which worker will earn more and why: lazy plumber v hardworking plumber
the hardworking plumber, they have a greater marginal product of labor
which would spend more on advertising: a firm producing low-quality ice cream or a firm producing high quality ice cream
the high quality ice cream to signal their quality and lead to repeat buyers
why does the firms demand curve for labor slope downward
the marginal product of labor is diminishing as more labor is added to the production process. Because the price of output is given in a competitive market it follows that the value of the marginal product also declines as the quantity of labor is increased
compare the efficient solution and the monopolist's solution
the monopolist's price is too high and the quantity is too low. In a monopolistic economy, every additional unit produced by the monopoly results in every unit sold for a lower price. because a monopoly is only interested in a profit, they produce until their marginal revenue equals their marginal cost, resulting in inefficient amounts of quantity at a high price, resulting in a profit for the monopoly
which would spend more on advertising: the bakery that bakes Old Home Wheat v a wheat farmer
the old home wheat bread because it is a differentiated product than just wheat
what is the optimal solution to the prisoners' dilemma
the optimal solution to the prisoners' dilemma is for each to remain silent
if the market were perfectly competitive what would the price and quantity be
the price and the quantity of a perfectly competitive market would be the price and quantity in which the total profits are equal to zero
why is the firm's demand curve for labor the value of the marginal product of labor?
the profit-maximizing firm will hire workers up to the point where the value of the marginal product of labor is equal to the wage, beyond that point, additional workers cost more than the value of their marginal product and their employment would reduce profit. because the value-of-the-marginal-product curve determines how many workers the firm will hire at each wage, it is the demand curve for labor
explain the difference between the rental price of a factor v the purchase price of a factor
the rental price is the price one pays to use the factor for a limited time while the purchase price for a factor is the price that one pays to own the factor indefinitely, the purchase price of a factor depends on the current and expected further value of the marginal product of the factor
what would happen if another firm entered a market oligopoly collusion
there would be greater quantity for a lower price and the market would move closer to equilibrium
what if a school increases the supply of workers
this is a movement along the demand curve because it is a shift of the supply curve
what if the price of the good increases
this is a shift of the demand curve because it increases the value of the marginal product of each worker
if both firms cheat and each produces one additional increment of production compared to the cooperative solution what is the level of profit generated
this is less than the cooperative solution. nash solution (both of the firms choosing their dominant strategy)
why does someone with a great amount of human capital that was acquired through education earn more than someone with a small amount of human capital
to compensate the individual for going to school and receiving the human capital. also it is thought that education makes people more productive which increases their marginal product of labor and therefore their wages
what is the outcome in an oligopolistic market if the oligopolists collude and form a cartel
when oligopolists collude they act as a monopolist would. together they control the entire market and split the profit and the production levels that a monopolist would produce
how does the increase in the value of the marginal product affect the firm and the owners of the facts of production employed by the firm
when the price of output changes the prosperity of the firm and the inputs move together the prosperity of the firm and the inputs are increases
what else happens when the value of the marginal product of labor increases
when the value of the marginal product increases all the inputs also increase. the value of the marginal product of the land and the capital increase and so the rental rates increase also
if two firms colluded and formed a cartel, what price and quantity would be generated by this market, what is the profit generated by the market, and what is the profit generated by each firm
when two oligopolies collude and form a cartel they act as a monopoly. therefore they would set the price and quantity at the level where their marginal cost is equal to the marginal revenue. each firm will produce half of the quantity and each receives half of the profit
is there deadweight loss in a monopoly?
yes, there is deadweight loss in this market. because individuals who would have bought the product at an efficient price and quantity are excluded from the market because of the current quantity and price
