Economics Model Answers Eleven

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Introductory: 1. A ________________ is one and only one buyer in a market.


2. Why do you think an economics course spends so much studying monopolies and monopsonies?

Sellers strive to be like monopolies, and buyers strive to be like monopsonies. While they never attain the perfect ideal, many come close enough to justify studying the perfect monopoly and perfect monopsonies.

A perfect circle does not really exist. But so many things come very close to this, and thus a perfect circle is worth studying in geometry.

Intermediate: 3. What is the marginal factor cost of a monopsony when it increases is wage for 10 employees from $11 to $12 in hiring an 11th employee? Show your work.

This is the cost of the new employee ($12) plus the additional cost of ($12-$11) for all the existing employees in raising their salary to $12. The total is thus:

marginal factor cost = $12 + ($12-$11)x10 = $12 + $10 = $22

4. In terms of P, MP, and W, state when a company in a competitive market hires an additional worker at wage W.

When P times MP is greater than W: P x MP > W . This occurs when the marginal benefit (price times marginal product) exceeds the marginal cost (wage).

5. Max unionized all the employees in an industry and then tried to increase both their wages and the number of people employed. Is this possible? Are there conditions which would make it possible?

As wages increase, the demand for labor decreases, so it is unlikely that Max could both increase wages and the number of people employed. However, if the industry consists of a monopsony then this is possible if it is profitable.

6. Suppose you manage a monopoly, and want to know the short-run and long-run conditions for shutting down. Explain them in terms of average variable cost (AVC), average total cost (ATC) and price (P).

A monopoly shuts down in the short run if AVC>P, and it shuts down in the long run if ATC>P.

7. Sharon has to pay $10.50 to hire nine workers, and must increase the wage to $11 to hire a tenth worker. But the tenth worker will bring in $13 extra to the firm’s revenue. Does Sharon hire the tenth worker?

No, because the marginal factor cost of hiring the tenth employee is $11 for that worker, and also $.50 times 9 to increase the wages of all the other workers. This totals $15.50, which is greater than the $13 in additional revenue. Sharon would lose money by doing this, so she should not do it.

Honors: 8. “Marginal revenue product” is the change in total revenue resulting from a unit change in the quantity of a variable unit employed. Now redo and explain this question from the exam: “Factor of production” is any input (e.g., land, labor and capital) used to produce output. A monopolist will continue to purchase a particular factor of production until:
(a) average factor cost equals average revenue product

(b) marginal factor cost equals marginal revenue

(c) marginal factor cost equals marginal revenue product

(d) average factor cost equals marginal favor cost

The correct answer is (c), because the owner can increase profits by increasing his input until he does not make enough additional revenue (marginal revenue product) to cover his additional cost (marginal factor cost) for that additional input.

9. If our class is a monopsony with respect to hiring a dinner speaker for a special homeschool dinner we might hold, can we set the fee at whatever we like? If not, why not?

We would still have a supply curve for labor that will see decreased supply at lower fees. At zero fees, for example, we may not be able to find any experienced dinner speaker.

10. Explain: when consumer demand (demand for output) is more elastic, then demand for labor by a company tends to be more elastic.

If the demand for output is elastic, then a small change in price will have a large effect on demand for the good. This large effect then has a large effect on how much supply is of the good is desired, which in turn has a large effect on the demand for labor to produce the good. (this answer could be improved)

11. Imagine yourself as a powerful regulator who can set the price of a certain good in a certain industry wherever you want. Suppose that in the free market, competitive equilibrium would have price “P”. Where would you set the price if you diabolically wanted to cause a shortage of goods? Where would you set it if you diabolically wanted to cause a surplus of goods? Explain.

If you set the price lower than P, then you'll cause a shortage. If you set the price higher than P, then you'll cause a surplus.