Economics Homework Twelve - Model

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1. A monopoly is one seller without any competitors. What is a "monopsony"?

A monopsony is only one buyer. (Allie)
A monopsony is when a buyer has control over all of the purchases. (Isaac)

2. Define, in your own words, what a "production possibilities curve" is.

A production possibility curve is used to determine the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other. (Amanda)
A visual example of all the different good combinations that a company can produce. (Anna)

3. Review: how is the elasticity of demand for labor related to the price elasticity of demand for the product of that labor?

If the item is elastic so will be the demand for labor. (Aran)
This is a tricky question, and it helps to consider the extreme case to get the right answer. If the good produced by the firm is highly price elastic, then a small increase in price causes a large decrease in demand for the good, and thus a large decrease in output by the firm. But this large decrease in output means there must be a large decrease in the number of workers needed to produce that output. Thus the demand for labor is highly elastic also. (Instructor)

4. Do you think that government policy should give high priority to the Lorenz curve? Explain the issue that a Lorenz curve addresses, and whether you think that should be a high priority of government economic policy.

The Lorenz curve shows the actual distribution of income among society as compared to an equal distribution of income in society. In my opinion, this should not be one of the government's high priorities. Philanthropists around the nation are already contributing greatly to the equal distribution of income since they are sharing their wealth with those who are poverty-stricken. The government has no right to try to forcefully take income away from the wealthy and give it to the poor. This money should be given willingly. The government should, instead, stick to giving people all the facts about goods/services and their benefits or hazards. (Trisha)
Instructor's note: There was a mistake in Lecture 12's description of what an actual Lorenz curve usually looks like in depicting the actual income distribution for a real population. Here's an example curve:
http://ingrimayne.com/econ/AllocatingRationing/MeasuringIncomeDist.html (Note the shape of the actual income distribution is different from the erroneous step function I described in Lecture 12. Sorry!)

5. Look again at Figure A. What is the opportunity cost of shifting production from B to C?

350 cars (Mark)

6. Review: explain again what AFC, AVC and ATC are, and how they relate to each other. When should a firm shut down in the short run?

AFC is average fixed costs: total fixed costs divided by number of units produced . AVC is average variable costs: total variable costs divided by number of units produced. ATC is average total costs, FC+VC/Q. A firm should shut down in the short run if AVC>P. (Duncan)
AFC, average fixed cost, is the fixed cost divided by the output. AVC, average variable cost, is the variable cost divided by the output. ATC, average total cost, is total cost divided by output. AFC and AVC when added together should equal the ATC. ... (Seth)
... A monopsony is only one buyer. (Deborah)

7. What is needed to reach point D in Figure A? (In other words, what causes a production possibilities curve to shift outward?)

The production possibility frontier of the goods would have to shift and the production and efficiency would have to increase for point D to be reached. The output of the goods must increase due to maybe an increase in workforce, advances in technology, and capital equipment available for businesses. (Veronika)

8. Look again at Figure C in the lecture (the first graph in this Lecture). At what point is total revenue maximized?

Total revenue is maximized when marginal revenue equals 0 (crosses the x-axis). This is the quantity at Point E, and the price on the demand curve corresponding to that quantity. (Instructor)

9. Explain why the production possibilities curve is convex (opening downward like the top of a circle) rather than concave (opening upward like the inside of a bowl) or a straight line.

It is convex because it is inefficient converting a factory from the production of one good to another. The maximum total number of goods that can be produced will be near the mid-point, and the overall total declines as all the factories are converted to producing only one good or the other. (Instructor)

10. Suppose you are a monopsony, and you must pay $9 per hour ($9/hr) to hire nine workers, but in order to hire one more worker you must pay $10/hr. The tenth worker will bring in $15 extra per hour to the firm’s revenue. Do you hire the tenth worker?

No. That one extra worker would end up costing you $19 an hour [$10 for the extra work plus an additional $1 per nine workers to raise their wage to $10 per hour], with revenue of only $15. That’s a loss of $4 an hour. (Michelle)

11. In the term "comparative advantage," to what does the adjective "comparative" refer? What is the term actually "comparing"? Explain.

At first I thought had something to do with comparing the efficiencies of the two nations, but really Comparative Advantage compares the efficiency of production between the two products within a nation. That is, compare the two efficiencies of production and choose the more efficiently produced good as your main product. (Addison)
It is really a "comparison of the comparisons." What really matters is how much more efficiently a nation can produce one good relative to another good, compared with how much more efficiently the other nation can produce one good relative to another good. But don't get too tangled up in this detail for purposes of the exam. Any comparison of nations and their production of two goods on the exam is likely a question about comparative advantage, and the correct answer will almost certainly be for the cheaper country to produce what it produces best. (Instructor)