Economics Model Answers Eleven

Introductory:

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

monopsony

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.

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?

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).

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?

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

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?

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

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.