Micro final
at maximum, MPL = ____
APL marginal product tangent to total product curve
supply curve for output of a competitive firm is that portion of MC that is ______ the minimum of the AVC
above
how do firms differentiate themselves in monopolistic competition
advertising - gives them some monopoly power
what effect does advertising have on the consumer
advertising influences utility function of consumer (and their indifference curve) MAKES THE DEMAND CURVE LESS ELASTIC AND SHIFTS IT ex if your company vs other company's product has dy/dx = 2/1 , consumers will substitute 1x for 2 y. If you are maker of product Y, you want to reduce this ratio - you want to be worth more than only half an X so advertise to change the elasticity
what does isocost line show
all possible combinations of L and K that a firm can have
what is the producer surplus
amount they would've accepted to cover their costs, but got additional surplus area under P and above MC
what does the US government use most to regulate monopolies and why
anti trust laws to keep industries competitive goal is to keep industry competitive price ceilings seem anti capitalistic
as quantities of K decrease and quantities of L increase....
as MPL decreases, MPK increases
if MPL = 8 units, We = $10, Pe = $15, what is the cost of each worker, the total revenue, and the profit
workers will cost We x MPL = $80 TR is $120 (15 x 8) profit is thus $40
what is so inefficient about monopoly power
causes a misallocation of resources produces less output than socially desirable prices set higher (setting its price above marginal cost) DEADWEIGHT LOSS
Equation for MC
change in TC/change in Q (dTC/dQ) and We/MPL
what is meant by the tendency to cheat
cheating on the agreement made during collusion (e.g., agree to charge $2, but sneakily drop price to $1.75 so you can steal the other firm's customers)
if α+β = 1, the firm has ____ returns to scale
constant
what is the consumer surplus where is it represented on the graph
consumers WOULD be willing to pay additional money, but get to have product at lower P area below demand curve and above price
Equation for MR
dTR/dQ
MPL/MPK is continuously ______ as you move along the isoquant
declining
what are implications of pure monopoly
demand for firm and demand for market are equal (dont need to use horizontal summation) price SETTERS rather than price takers/responding to market preferences Where MR intersects with MC - output and corresponding price at this point is what they charge
What is Nash Equilibrium?
each firm makes the decision that gives the highest possible profit, given the actions of competitions [quadrant 1] - profits of firms are equal need to collude to be in quadrant 4, which would promote cheating because firm could make higher profit if they pull a fast one and produce more than the amount they agreed upon
Firm's ability to charge high prices (lerner index/monopoly power) depends on ________________
elasticity of demand
what does a long run production function look at
examines how a firm PLANS (not operates) between two variable inputs - no longer about supply and demand more about efficiency
long run production functions reflect decisions made on the _______ _______, while short run production function decisions reflect decisions made on the ___________ __________
executive boardroom; factory floor
T/F: the reason for diminishing marginal returns to labor is because workers become lazier/less motivated when firms are overpopulated
false - the only reason for diminishing marginal returns to labor is because fixed capital
T/F: the cobb alpha beta shortcut is always the best way to solve for returns to scale and MPL MPK MRTS
false - you can only use it for cobb douglas functions (cannot be any addition or subtraction, can only be L x K and their respective productivities) must plug in numbers if not cobb douglas
what is meant by the mutual interdependence between firms
firm's decisions depend on and influence other firm's decision to make decisions (e.g. pricing), need info about existing market DOES NOT OCCUR IN PC (just based off of demand and cost there)
interpret the following in words: MRTS(a) is 8/1 and MRTS(b) is 6/1
for MRTS(a)- for ouput level a, sacrifice 8 units of K for 1 unit of L and 1 unit of labor for 8 units of capital for MRTS(b)- for output level b, sacrifice 6 units of labor for 1 unit of L REFLECTS LAW OF DIMINISHING MRTS(l/k)
what is the connection for the conditions of profit maximization of output and input
for output - recall: Pe = We/MPL (Replace the MC with We/MPL) then multiply to put in terms for We - so Pe x MPL = We they are the exact same condition
when you are trying to find deadweight loss, how do you compare pure monopoly to perfect competition
for perfect competition, set P = MC (whereas in pure monopoly P > MC, so you just need to set MC = MR)
price discrimination enable firms to...
gain greater profit through price discrimination
what are isoquant maps
graph combining a number of isoquants, used to describe a production function each curve corresponds to a different level of output
loss of the consumer is less than/greater than/equal to the gain of the monopoly firm
greater than
what are examples of monopolistic competition
grocery stores hair salons gas stations restaurants
the higher the lerner index, the ____ the ability to set prices
higher
if (Pe)(MPL) > We, the firm should ______ the worker
hire
how do you find the market supply curve?
horizontal summation of the individual supply curve
what role of size of firm's operation play
how big the firm should be firm may be more or less efficient at different sizes depending on returns to scale
what does Pe x MPL represent
how much money you get frorm each worker
describe the role of natural monopolies
if just one firm, much higher cost -> to make profit if many firms in market, must change super high P2 to cover their cost. Becuase of economies of scale, can actually produce at lower price and GREATER quantity than individual firms could do make a huge profit, but dont exploit it at full economies of scale must regulate so don't exploit monopoly power at cost of society thus all natural monopolies are REGULATED
what is the role of diminishing marginal returns in the appearance/interpretation of isoquants
if one variable (either labor or capital) is fixed, there will be diminishing marginal returns to the other variable Isoquants are steeper as capital is substituted for labor, flatter as labor is substituted for capital
what are increasing returns to scale
if output MORE THAN doubles when inputs are doubled occurs through specialization/division of labor in larger scales of operations
what is the fixed proportions production function
impossible to make substitutes only 1 specific combo of labor and capital can be used to produce each output similar to like perfect complements in goods market requires exact proprtion e.x. - hiring drivers for trucks - additional trucks without hiring additional drivers to use them results in wasted resources isoquant is in shape of perfect L
where is advertising cost reflected
in average fixed cost MC is unchanged
describe in words the process of hiring until equilibrium
in beginning, additional workers increase production and the marginal product of labor. Firm will thus not stop hiring, because would be missing opportunity for lower MPL (stage 1). They want to hire in stage two, which is where wage rate determines how many workers the firm will hire
size of firm will affect efficiency in firms with ______ and ____ returns to scale but not _____ returns to scale
increasing and decreasing; constant
isoquants show ___ _______
input flexibility (the flexibility firms have when making production decision; enables smooth substitution of L for K or visa versa)
what does the graph of MPL in firm's demand for labor look like? the graph for MRPL..?
it is upsidedown parabola, downward sloping half is portion where firm should operate x axis = L/fixed K, y axis = dQ/dL (MPL) the graph of MRPL(MPL x Pe) looks very similar - the only difference is magnitude (each point is x amount larger than its corresponding point on the MPL graph) x acis = L/fixed K, y axis = Pe x MPL
if the price elasticity at a monopoly's profit maximizing point is high, what does it mean about the firm's product
it means that the product can be easily substituted for other products, so the monopoly power is smaller
what is unique about long run production function compared to short run production function
labor and capital are now variable
If MRTS(l/k) = MPL/MPK > We/re = 5/1 > 4/1, interpret in words
labor is five times as productive as capital, but costs only four times as much - thus, firm should buy more labor and less capital until MPL/MK = We/re
the larger the returns to scale, the _______ the firm should be
larger
with isoquants, as you get more and more of one variable, it becomes ___ and ___ productive and the other variable becomes relatively ____ productive
less and less; more
how is the supply curve for output of a competitive firm derived
look at different points of production that give relationship between price for market output and how much the firm is willing to supply
What is the definition of deadweight loss
loss in surplus incurred by monopoly power - would been better off in PC
what industries are have higher returns to scale? what industries have lower returns to scale?
manufacturing industries have larger RTS, because requires large investment in capital service industries have smaller RTS because they are more labor intensive - provide more efficiently in small quantities
what is monopolistic competition
many firms like in perfect competition, BUT no longer homogenous products - slightly differentiated products however, still no barriers to entry/exit because differentiated products -> very close substitute have SOME market power only because of differentiated product (achieved through advertising)
what is the slope of an isoquant
marginal rate of technical substitution - how quantity of one input can be substituted for quantities of the other while maintaining a constant output
what is a perfect substitute production function and what does its isoquant look like
means MRTS is constant at all points on the isoquant same output can be produced with mostly K, mostly L , or a balanced mix of the two ex: musical instruments - either lots of capital (machines) can make it, or lots of skilled labor (construction by hand) can make it at same rate isoquant is just diagonal line with slope of 1
how do you go from the graph of MPL to the graph of MRPL
multiply each point on the graph of MPL by a constant number Pe to get the graph of MRPL - converts output to revenue
demand for labor for individual firms is always _______ because of _______________ (which is a result of _______ capital)
negative; diminishing marginal product; fixed capital
What is the difference between pure monopoly and monopolistic competition
no significant differences between except that in monopolistic competition, price is more responsive to demand than in pure monopoly so demand curve is flatter, lower slope otherwise, no significant differences -> still charge at MC = MR (not MC = P) and Pe>MC and have deadweight loss
what is an example of natural monopolies
utility companies - as they produce more and more output, unit cost declines (economies of scale) [whereas if just one firm, much higher cost, thus to make a profit with many firms in market, must charge high P]
what do you need to determine the conditions for hiring labor
value of MPL, We, and Pe
what are the goals of cost minimizing input mix in the long run
what input mix gives me the greatest quantity for the smallest cost goal: Maximize Q=f(K,L) subject to C0 = (We)(L) + (re)(K) OR minimize C0 = (We)(L) + (re)(K) subject to Q=f(K,L) ex: 'Boeing agree to produce 100 airplanes - how can we produce specified amount at lowerst cost' is same thing as 'Boeing has budget of 1,000,000 to build a plane, what is the largest number of planes you can produce with 1,000,000 dollars?'
what are factor substitution possibilities
what is the appropriate mix fo inputs to minimize cost the firm is flexible if easy substitution
where is the breakeven price in the firm's supply graph
where ATC intersects with MC
AVC is minimized where
where MC = AC
what are public policies intended to regulate monopoly and are they effective
(A) financial incentives or disincentives 1. tax output of monopolies -> ineffective, actually increases price, reduces output and makes DWL worse 2. tax the profit of monopolies -> lump sum profit tax, pretty effective, government recovers some the deadweight loss through the tax and redistributes 3. control the output they produce - (dont talk about this) 4. price ceiling -> best option, government forces monopoly to charge same price as would in perfect competition 5. antitrust laws - prohibition of certain practices - collusion, makes price discrim illegal [e.g. AT&T tried to buy T-mobile and gov wouldn't allow it)
what is the opportunity cost of labor for capital
-We/re
what is equation for MRTS
-dK/dL - MPL/MPK
what is MRTS
-marginal rate of technical substitution -amount by which input of capital can be reduced when one extra unit of labor is used with unchanged level of output -change in K/change in L for fixed Q - slope of isoquants
what are profit maximizing conditions in a perfectly competitive market
1. MR (= Pe) = MC 2. MC is rising 3. Pe > or = to AVC
summarized both conditions for profit maximization of output and profit maximization of input/hiring
1. Pe = MC and MC rising 2. Pe x MPL = We and Pe x MPL must be declining
conditions for profit maximization of input/hiring in a competitive firm
1. Pe x MPL = We 2. Pe x MPL must be declining
conditions for hiring labor
1. Pe x MPL > or = to We (value of marginal product of labor is greater than wage rate/salary) 2. if Pe x MPL > We, hire worker if Pe x MPL < We, do not hire worker Pe x MPL = We = equilibrium condition (keep hiring up until this point, because you hire additional workers, MPL decreases, so Pe x MPL decreases, relative to exogenous We)
how does the MRTS tell us that it is equal to the ratio of the marginal products of inputs
1. additional input from increase in labor is represented by: MPL x change in L 2. reduction in output from a decrease in K is represented by: MPK x the change in K 3. output is constant, so total change must equal 0 4. thus, (MPL)(change in L) + (MPK)(change in K) = 0 5. MPL/MPK = (-change in K/change in L) which also equals MRTS
what are the government's means of regulating pricing
1. average cost pricing (gov says your average cost must = your price) Pm = ATC so that profit in the long run is zero (meaning they've effectively offset the opportunity cost) give sets price at output where AC = Demand government requires them to drop price from the monopoly price to the regulated price, fully exploiting economic full economies of scale [companies then come and prove that their p = AC biannually or annually)
factors affecting supply of labor
1. edogenous market price of output (Pe/MR) 2. price of factors of production (wage, rent) 3. productivity of variable input 4. technology - constant in short run 5. number of firms in a competitive market
long run production function assesses what two things
1. factor substitution possibilities 2. size of firm's operation (scale)
why might a firm with a pure monopoly NOT make profit?
1. insufficient demand (no matter how much monopoly power, cannot charge above demand) 2. high costs//inefficiency (ATC may still be higher)
what are the three features of monopolistic competition
1. many firms in the industry 2. products are differentiated (KEY FEATURE OF MONOPOLISTIC COMPETITION) 3. no significant barriers to entry elasticity of price is thus larger - products have close substitutes
what are the theoretically relevant factors that affect supply curve for output in competitive market
1. market price of output (Pe/MR) [endogenous] 2. wage rate of labor (b/c MC = We/MPL, so if We increases, curve will shift up) 3. relative price for all factors of production (one of which is labor) 4. productivity of the variable input (workers/any unit of labor - if MPL increases, We/MPL ratio will decreases, so MC will shift down - very important) 5. Technology (held constantly in the short run tho!) 6. number of firms in the competitive market
what are the prerequisites for the ability to practice price discrimination
1. must have monopoly power 2. there is no trading of the product in different segments of the market (person cannot buy product where it's cheaper and then go sell it where its more expensive) 3. Differences exist in the price elasticities of demand for the different market segments
what are the general features of the long run cost function
1. no constraint by fixed input 2. no need to differentiate between TC and TVC because no longer any fixed costs, all costs are variable 3. describes cost as size/scale of firm increases
what differentiates Oligopoly from monopolistic competition
1. oligopoly: both differentiated and homogenous products; (monop comp: close substitutes) 2. size is most distinguishing characteristic in oligopoly 3. oligop: strong barriers to entry (largely due to sheer size of the firm) 4. oligop: rivalry, not competition (because if firms are small, don't know their competition; in oligopoly, know all competitiors) 5. oligop: all firms are mutually interdepedent 6. oligop: firms must STRATEGIZE 7. oligop: prices are sticky, trying to avoid proice compeititon 8. oligop: promotes tendency to collude and cheat
what are the properties of the demand curve for labor
1. short run demand for labor of competitive firm is negatively sloped segment of the monetized value of MPL (MPL monetized by multiplying by Pe) 2. demand curve is always negatively sloped because of diminishing marginal returns 3. market demand is the horizontal summation of individual firms' demands for labor
what are the theoretically relevant factors that affect demand for labor in a competitive firm
1. wage rate (moves ALONG curve) 2. price of product (the Pe of Pe x MPL) (if Pe increases, curve shifts shifts up) 3. productivity of worker (MPL of the Pe x MPL) (if MPL increases curve shifts up - can not MPL with more capital by technology) 4. technology and level of capital - if MPL increases, Kbar -> shifts out 5. number of firms in the market (if number of firms increase, Marginal revenue product of labor shifts outward) 6. price of other inputs (substitutes and complements)
factors affecting demand for labor
1. wage rate (moves along curve) 2. price of product (Pe of (Pe)(MPL)) 3 productivity of input (MPL) 4. technology and amount of capital 5. number of firms in market 6. price of other inputs (substitutes and complements)
If P=100-2Q MC = 2 +5Q find deadweight loss
10.88 = Qm 78.22 = Pm Qc = 14 Pc = 74 DW loss = 33.8
if Pm = 12 and MC - 9, what is lerner index interpret in words
12-9/12 x 100 = 25% the monopoly is able to charge 25% more than its marginal cost because of its monopoly power
what are the key differences between pure monopoly and monopolistic competition
1: pure monop: no product substitutes (inelastic demand); monop competition: slight (highly elastic demand) 2. pure monop: high entry/exit barriers; monop competition: fewer entry barriers 3. pure monop: firm = industry; monopolistic comp: difference between firm and industry 4. pure monop: total control over price; monop comp: some control over price 5. pure monop: no competition; monop comp: extreme competition 6. pure monop: single seller; monop comp: 2-10 major sellers
if MRTS(l/k) = 8/1, what is the productivity of labor
1L = 8 K labor is 8x as productive as capital at that output (but, as you get more and more of L, it becomes a poorer substitute for capital)
assume production function: Q = 10L^.5K^.5 and Q = 200 - solve for MRTS
200 = 10L^.5K^.5 20 = L^.5K^.5 400 = LK K = 400/L for MRTS, dK/dL(400/L) = dK/dL dK/Dl(400L^-1) = dK/dL = -400/L^2
firms must stay in stage ______, where ________________ _________ ___________ are present
2; diminishing marginal returns
what is the equation of the isocost line
C0 = (We x L) + (re X K) (budget C0 must be enough to cover cost of labor and cost of capital price taking firms can only choose which combinations of K and L
what is the x intercept of the isocost line
C0/We
what is the y intercept of the isocost line
C0/re (budget divided by real rental rate of capital)
who are the biggest losers of monopoly
CONSUMERS
how are returns to scale reflected in isoquants? answer this for IRS, CRS, and DRS
CRS - isoquants are evenly spaced, as output increases proportionally IRS - isoquants move closer together as inputs are increased (as LESS than two times the amoutn of both inputs is needed to double output) DRS - isoquants get more and more spaced out, as MORE than twice the amount of both inputs is needed to double output)
what is total surplus
CS + PS
where is consumer surplus in perfect competition represented on the graph
CS = space between Pe andDemand curve (p equation)
if α+β < 1, the firm has _____ returns to scale
DRS
deadweight loss
DW loss = (1/2) (Pm - MCm)(Qc - Qm)
Lerner index and monopoly power is _______ related to demand elasticity
INVERSELY
if α+β > 1, the firm ____ returns to scale
IRS
describe the process of deriving the equations and equilibrium when first mover advantage is present
Input both quantities into demand equation: [presume firm 2 is first mover] P = 100 - 2(Q1 + Q2); c1 = 50Q1; c2 = 50Q2 2. find profit equation for each respective firm (should be equal if same cost): profit = TR - TC ~ PQ = TR = [100Q - 2(Q1 + Q2)Q1] - [100Q1] ~100Q - 2Q1^2 - 2Q1Q2 - 100Q PROFIT = 2Q1^2-2Q1Q2 now, assume that quantity produced by firm 1 must take firm 2's quantity as exogenous. Take derivative 4q1 - 2q2 = q1 REACTION EQUATION set 0 to zero to find response find profit maximization: plug reaction equation for q1 into firm 2's profit equation then, take derivative an set equal to zero then can plug in for q 1 and profit
what is the equation of the isocost line when rewritten in terms of K
K = C0/re - (We/re)L
what is the theoretical point of connection with conditions for profit max of output AND input
Key = MC = We/MPL
MR<MC, firm should produce ____
LESS
a higher Lerner calculation indicates that a firm has _____ monopoly power
MORE
if MR>MC, firm should produce ____
MORE - not trying to maximize price, trying to maximize profit
what is the equation for MPK if given the production function?
MPK = β(Q/K)
if Q=10LK^2, L = 2, and Q = 160, find MPL, MPK, MRTS?
MPL = (1)(160/1) = 160 MPK = if L = 1 and Q = 160, 160 = 10(1)(K^2) -> 16 = K^2 -> K = 4 so MPK = 2(160/4) = 80 MRTS = (1/2)(4/1) = 2 (or MpL/MPK = 160/80 = 2)
what is the equation for MPL if given the production function?
MPL =α(Q/L)
what are the conditions for profit maximization in a pure monopoly
MR = MC AND unlike perfect competition, price must be greater than MC -> (Pm>MC)
in isoquants substitute one input for the other at rate of ____
MRTS(l/k)
if given production function, what is MRTS(l/k)?
MRTS(l/k) = (α/β)(K/L)
for cost minimization, input mix should be _____
MRTS(l/k) = MPL/MPK = We/re budget line should equal the slope of the isoquant
What is first mover advantage?
Occurs when an organization can significantly affect its market share by being first to market with a competitive advantage
equation for TR
P*Q
When should a firm shut down?
P<AVC when the price is no longer enough to cover the average variable cost
if P = 120 -3Q and MR (dC/dQ) - 36 + 2.4Q, what is the price/quantity for pure monopoly? what is the price/quantity of perfect competition? what is PS for PM and PC? What is CS for PM and PC? What is deadweight loss?
PC => Q = 15.5; P = 73.2 PM => Q = 10; P = 90 PC => CS = 362.7; PS = 288.3 PM => CS = 150; PS = 420
list the differences for P.C., M.C., Oligopoly, P. M. for: number of firms, product differentiation, barriers,, market power
PC: many firms; homogenous products; no barriers to entry; no market power MC: many firms; differentiated products; no barriers to entry; small market power Olig: a few firms; homogenous AND differentiated products; substantial barriers; considerable market power PM:one firm; specialized products; formidable barriers; absolute market power
Competitive market profit maximization versus monopoly profit maximization
Pe = MR = MC AND MC RISING; MR = MC, Pm>MC
what is the difference between perfectly competitive and pure monopoly
Pm > MC - price they choose is greater than marginal cost in pure monopoly (perfect competition Pc = MC) thus pure monopoly charges price above MC
What is the Cobb-Douglas Production Function?
Q = A(L^α)(K^β) A = technology α = productivity of labor β = productivity of capital
If the equation for marginal cost is MC = 2Q^2 - 28Q + 222, and MC intersects with AVC at point Q = 10, what will the equation for the firm's supply curve be?
SUPPLY = 2Q^2 - 28Q + 222 ONLY WHERE Q > OR = TO 10
equation for ATC
TC/Q
equation for AVC
TVC/Q
MC =
W/MPL
equation for TVC
We * L
what is the Lerner formula
[(Pm - MC)/(Pm)] x 100 L = (1/Ep) aka (1/elasticity of price at profit maximizing point) measures monopoly power
equation for TC
a + bq - cq^2 + dq^3
what is an isoquant
a curve that demonstrates different combinations of labor and capital that generate the same output all possible combos of labor and capital a firm can use with given technology to produce a specific quantity of output
what is the third abuse of monopoly
barriers to entry for potential market-infiltrating firms; stifles growth
how can you justify the existence of monopolistic competition
because it introduces variety into consumer's life - in perfect competition, prices are homogenous, so monopolistic competition enables differentiation which introduces utility that utility can offset the deadweight loss
describe the process of deriving the equations and equilibrium when first mover advantage is NOT present (firms make decisions simultaneously)
because neither is making decisions first, need reaction equation for both firm one and firm two. (when share same cost equation, reaction equations are the same) set the two equations equal or use substitution to find where they intersect.
why does the long run cost function follow the trend it does
because of IRS - in stage one, economies of scale through specialization and division of labor then IRS decreases to constant returns to scale and finally DRS, because of management problems - cant effevtively govern. miscommunication
what shouldn't a firm shut down if it is not covering TFC
because still covering VARIABLE cost, and don't know what fixed costs will look like in the future
if Q = 12(K^.8)(L^.4) subject 5L + 40K = 800, find expansion path, quantities of labor and capital at maximized output, and the maximized output
budget line implies that We = 5 and Re = 40 need MPL/MPK = We/re -> 5/40 - MPL/MPK MPL = alpha(Q/L) -> alpha = .4 MPK = beta(Q/K) -> beta = .8 MPL/MPK = MRTS(l/k) =(alpha/beta)(K/L) plug in beta and alpha .4/.8(K/L) = (1/2)(K/L) MRTS(l/k) = we/re -> 1/2(K/M) = 5/40 2[(1/2)(K/L) = (5/40)]2 -> K/L = 10/40 -> 1/4 -> K=(1/4)L if firms wants to maximize quantity, firm should use 1 unit of capital for 4 units of labor = EXPANSION PATH EQUATION now plus into budget equation 5L + 40 (1/4 L) = 800 15L = 800 -> L = 53.3333 (53.3333)(1/4) = K -> K = 13.3333 to maximize output with a budget of $800, we at $5, re at $40, should use 53.33 units of L and 13.33 units of capital plug in these values to find maximized output Q = 12(K^.8)(L^.4) -> Q = 12 (53.33 ^ .4)(13.333 ^ .8) = 467
if MPL/MPK < We/re, the firm should
buy more capital and less labor until MPK/MPL = We/re
if MPL/MPK > We/re, the firm should
buy more labor and less capital until MPK/MPL = We/re
equation for isocost line:
c = We x L + r x K K = (c/re) - (we/re)(L)
how can you check your answers to questions regarding cost minimization/output maximization in the long run production functions
use alpha beta short cut if you got the right answer, MPL [= alpha(Q/L)] / MPK [=beta(Q/K) should equal MRTS (alpha/beta)(L/K)
if (Pe)(MPL) < We, the firm should ________ the worker
not hire
what is price discrimination
occurs when firm can charge different prices for the same product (e.g. seeing the same movie as matinee - cheaper than seeing same movie at night)(senior discounts)(often based on market segments)
what is an oliogopoly
only a few firms which are large relative to market (top 4-5 firms in the market dominate 70-80% of the market some homogeneity, some differentiation in market substantial market barriers -very difficult for new companies to enter market and compete (e.g. how would you like compete with Honda or Toyota if youre entering automobile market)
what are decreasing returns to scale
output LESS THAN doubles when input is doubled result of diffiulty running and organizing a large sc ale operation, reducing productivity (issues with coordination and communication)
what are constants returns to scale
output exactly doubles when input doubles size of firm's operation doesn't affect productivity of its factors
what are the two special cases of production functions
perfect substitutes fixed proportions production function (Leonitief)
what is one surefire way to determine returns to scale given a production function
plug in values : L = 1, K = 1, what is Q? L = 2, K = 2, what is Q? if Q does not double, not CRS
advertising is done to benefit the _________
producers
equation for profit
profit pi = TR - TC
how is monopoly power of firm quantified
quantified by difference between Pm & MC - how much more they can charge than their marginal costs
relative to perfect competition, a pure monopoly _____ prices and ____output
raises ; restricts
what are returns to scale
rate at which ouput increases as inputs are increase proportionally
monopoly gives you the ability to ___ _______, and elasticity of demand determines _________
set prices; prices
the demand for labor for individual firms is represented by the __________ portion of the MRPL graph
stage 2 - point where slope becomes negative but before crosses axis
describe diminishing MRTS
substitute more and more labor, the amount of capital they are willing to substitute K for L diminishes productivity of labor becomes relatively less and less valuable
what is the expansion path
tells you how much of one input to substitute for the other as scale of operation expands
wht does the convex shape of an isoquant tells us
that productivity of any 1 input is limited - production needs balanced mix of inputs MRTS - tells us that MRTS of two inputs is equal to the ratio of the marginal products of those inputs
for price discrimination, market is divided into segments -> represents elasticity in market segment A -> Ep(a) = 2 -> L=50% represents elasticity in market segment B -> Ep(b) = 4 -> L = 25% interpret into words
the monopoly has more monopoly power in market segmentA than in market segment B
what is the expansion path represented by
the rate at which firms should substitute units of capital for units of labor
factors that affect demand for labor are _______ _______ ______ the factors that affect supply of oupur
the same as only difference is that wage rate is endogenous in demand, Pe is endogenous in output/supply (whereas Pe is exogenous in demand and We is exogenous in supply)
what function do natural monopolies serve
there are economies of scale (marginal cost decreases as size of firms increase) to be gained from larger scales of operation good for firms with high cost (where huge investment to start business)
what issue do economists take with average cost pricing
they think its not good enough best solution would be P = MC, NOT AC For it to be perfectly competitive, should produce MORE Q, charge less, because the lerner index should equal 0. But, its practically impossible to find the MC so this is pretty much useless Also, if natural monopolies charge P = MC, they will incur a loss and can only stay in business if they are subsidized (Amtrak subsidized - otherwise could not stay in business)
how can monopolies reduce elasticity
through ADVERTISING - profit differentiation
what is the goal of a monopoly
to make demand curve less responsive to price changes REDUCE THEIR PRODUCT''S ELASTICITY
what is meant by the tendency to collude
to raise prices, firms can collude and agree to both raise prices so consumers have no other options
what does the long run cost function look like
total cost increases at decreasing rate, then is increasing at constant rate, and lastly is increasing at decreasing rate efficient -> stabilize -> inefficient
T/F: if you are satisfying one condition for profit maximization (either output or input/hiring), you are also satisfying the other (either output or input/hiring)
tru
T/F: anytime a firm has monopoly power, there is deadweight loss
true
T/F: monopoly does not guarantee profit
true
T/F: Mc can be found through both dTC/dQ an dTVC/dQ
true - fixed cost does not affect marginal cost because it is effectively a 'sunk' cost in the short run when you take the derivative of fixed cost, it becomes zero
