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Micro exam 5 study guide

by: kmb0095

Micro exam 5 study guide Econ 2020

Marketplace > Auburn University > Business > Econ 2020 > Micro exam 5 study guide
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all notes, graphs, and review questions/answers for exam 5
Principles of Economics: Microeconomics
William M. Finck
Study Guide
micro, Econ
50 ?




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This 16 page Study Guide was uploaded by kmb0095 on Sunday April 24, 2016. The Study Guide belongs to Econ 2020 at Auburn University taught by William M. Finck in Spring 2016. Since its upload, it has received 115 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.


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Date Created: 04/24/16
Intro to econ (ch. 1-2) Definition Formula Exam 5 notes 4/13/16  Oligopoly Characteristics Implications Few, mutually interdependent firms Actions of 1 firm will affect the market High barriers to entry LR ∏ can be > 0 Imperfect information Strategic cheating possible  Market: Incentive to collude o Collusion—cooperation among firms to raise each others’ profits  Cartel o Agreement among firms to restrict output to achieve monopoly power o Random Cartel Facts:  Cartels are illegal in U.S.  Cartels can increase profits to all firms regardless of product type  When all members follow the rules, firms split monopoly profit (best group outcome)  Firm: Incentive to cheat o Lowering the price attracts new consumers plus consumers from other firms; E dncreases Intro to econ (ch. 1-2) Definition Formula  Game Theory o 2 players make 1 decision independently and at the same time; move of other player is unknown  Prisoner’s Dilemma o Game in which the playoffs are such that the choice set that maximizes total welfare fails to maximize individual welfare (same as last chart) o Max Total Welfare—highest sum of profits o Max Individual Welfare—determine best choice in each scenario Intro to econ (ch. 1-2) Definition Formula  Factors That Break Down Collusion o Large number of sellers o Differentiated products o Differences in costs o Antitrust policy 4/15/16 Chapter 15—Labor Markets  Demand for Labor o Derived Demand—demand for a resource that depends on the demand for the demand for the products it helps to produce o There is a direct relationship between the demand for the product and the demand for labor  Labor Market o We = equilibrium wage rate o Le = equilibrium level of employment  Profit Maximization o Effects of Hiring a Worker:  Quantity of output rises  Total Revenue rises Intro to econ (ch. 1-2) Definition Formula  Total Cost rises  Profit is maximized when ∆TR = ∆TC  Marginal Revenue Product of Labor o The ∆TR from a 1unit increase in L o When a worker is hired, Q rises by MP L o When those units are sold, the firm earns MR on each o MRP =LMR * MP L  Marginal Factor Cost o The ∆TC from a 1unit increase in L o If we assume that labor is the firm’s only variable cost, then:  TVC = Labor * Wage  MFC = ∆TVC  Profit Maximization o Firms finds the profit-maximizing level of employment (L*) where:  MRP L MFC  Perfect Competition o Characteristics:  Many small employers compete for many workers with identical skills  Firms are “price” takers—they face a perfectly elastic SUPPLY of labor  Profit Maximization o MFC = ∆TVC = W (for Perfect Competition only) o This table won’ L W TVC MFC 1 8 8 8 2 8 16 8 3 8 24 8 4 8 32 8  Finding L* Math (Perfect Competition) o Find L* for a firm in a perfectly competitive labor market where W = $9 and MRP =L48 – 3L o Solution:  MRP L 48 – 3L and MFC = 9  9 = 48 – 3L  3L = 39  L* = 13 workers  Finding L* Table (Perfect Competition) L Q MP L MR MRP L MFC = W 1 10 10 3 30 6 2 18 8 3 24 6 3 22 4 3 12 6 4 24 2 3 6 6 Intro to econ (ch. 1-2) Definition Formula 5 25 1 3 3 6 o Given o Solve for o L* = 4 workers o Product/output market structure:  P.C. if MR is constant; Monopoly if MR is decreasing 4/18/16  Monopsony o Characteristics:  A single buyer (employer) in an industry  A monopsonist faces the entire, upward sloping market supply curve  Monopsonists are “price” makers, but as L rises, W rises as well  Finding L* and W* Table (Monopsony) L Q MP L MR MRP L W TVC MFC 1 12 12 5 60 2 2 2 2 22 10 4 40 4 8 6 3 31 9 3 27 6 18 10 4 38 7 2 14 8 32 14 5 43 5 1 5 10 50 18 o Given o Solve for o Formulas from last class:  MRP =LMR * MP L  TVC = Labor * Wage  MFC = ∆TVC o L* is where MRP =LMFC o L* = 4 workers o W* = $8 (Exploitation of Labor: W < MRP ) L o Output Market: Monopoly  Finding L* and W* Graph (Monopsony) Intro to econ (ch. 1-2) Definition Formula o Finding L* where MRP = MLC o Go to Supply to find W*  Finding L* and W* Math (Monopsony) o MRP = 55 – 3L L o W = 6 + 2L o Find L* and W* o Solution:  W = a + bL  MFC = a + 2bL  a and b are coefficients  MFC = 6 + 4L  55 – 3L = 6 + 4L  7L = 49  L* = 7  W* = 6 + 2(7)  W* = 6 + 14  W* = $20  Labor Union o A group of workers organized to advance the interests of the group o Goals:  Maximize wages  Maximize employment o Problem: According to the Law of Demand, when W rises, L falls  Factors that Increase D L o Increase in the D for output  Action: Advertise union-made o Increase in members’ productivity (D = MRP = MR * MP ) L L  Action: Apprenticeship programs o Increase in the price of substitute labor Intro to econ (ch. 1-2) Definition Formula  Action: Lobby for minimum wage increases  Factors That Decrease E ofdD L o Decrease in the E fdr output  Action: Lobby for import restrictions o Decrease the number of substitute inputs  Action: Lobby for more immigration laws o Strike  Withholding of labor services by a labor union 4/21/16  Role of Government in The US o Define and Enforce Property Rights o Correct Market Failure (externalities, public goods) o Additional Regulation  Enforcement of Property Rights o Provide National Defense—against foreign aggressors o Provide Police Protection—against domestic aggressors o Legal Enforcement of Contracts—protection against fraud Market Failure  The inability to bring about the socially optimal allocation of resources  Marginal Social Cost—the additional cost imposed on society as a whole by an additional unit of a good  Marginal Social Benefit—the additional gain to society as a whole from an additional unit  MC-MB Rule: o The socially optimal quantity of a good occurs where MSC = MSB  Supply and Demand represent the private costs and benefits, thus MSC = MSB in most markets  Externalities—external costs or benefits  Negative Externalities/External Costs o An uncompensated that an individual or firm imposes on others  MSC = S + Marginal External Cost Intro to econ (ch. 1-2) Definition Formula  Without regulation, Marginal Social Cost > Marginal Social Benefit  Socially optimal Q < Qe  Appropriate Government Policy: Tax; causing output to fall  Optimal tax = MEC  Pc = Consumer Price  Pp = Producer Price  Positive Externalities/External Benefits o An uncompensated benefit that an individual or forms confers on others  MSB = D + Mar. Ext. Benefit Intro to econ (ch. 1-2) Definition Formula  Without regulation, Marginal Social Benefit > Marginal Social Cost  Socially Optimal Q > Qe  Appropriate Government Policy: Subsidy, causing output to rise  Subsidy—a payment designed to encourage activities that yield external benefits  Optimal Subsidy = MEB 4/22/16  Review Intro to econ (ch. 1-2) Definition Formula o Negative Externality o Unregulated: Q = 100, P = 20 (MSC > MSB) o Optimal Policy: Tax of $7 o Regulated: Q = 80, P = $23  Public Goods o Goods that are both non-rival in consumption and non-excludable o Non-Rival in Consumption—good for which one person’s benefit does not reduce the benefit available to others o Non-Excludable—good for which the supplier cannot prevent non- payers from obtaining benefits  Free Rider Problem o The inability of potential providers of a good or service to obtain payment from those who benefit o Problem: private firms will not sell goods that are non-excludable o Solution: government must provide public goods such that MSB = MSC  Example of Public Good o A study group must decide how many hours of tutoring to purchase o MSC = $20 per hour o Group: 4 party animals, 2 bookworms Q MB BW MB PA Total MSB 1 8 4 8*2+4*4 = 32 2 7 3 7*2+3*4 = 26 3 6 2 6*2+2*4 = 20 4 5 1 5 4 0  Total MSC = (MB1*Pop1) + (MSB2*Pop2)  Q optimal3 hours Chapter 18—Excise Taxes  Excise Tax o Per-unit tax levied on the production of a specific good Intro to econ (ch. 1-2) Definition Formula o Goal of government = Maximize revenue o Goal of producer = pass the burden to the consumers o Pc = Consumer Price o Pp = Producer Price o Pc – Pp = Amount of Tax o When the market is taxed, supply shifts vertically by the amount of the tax o Consumer Burden = PcABPe o Producer Burden = PeBCPp o Tax Revenue = PcACPp o Deadweight Loss = ABC Review 1. Find welfare maximizing choices Intro to econ (ch. 1-2) Definition Formula max total welfare: (collude, collude) max individual welfare: cheat max consumer welfare: (cheat, cheat) 2. Firms find the profit-maximizing level of employment (L*) whereMRP L = MFC 3. MPRL = 90 – 3L and W = $18. Find L* MRP L MFC 90-3L = 18 3L = 72 L* = 24 workers 4. MRP L 80 – 5L and W = 8 + 2L. Find L* and W* MRP L 80 – 5L and MFC = 8 + 4L 80 – 5L = 8 + 4L 9L = 72 L* = 8 workers W* = 8 + 2(8) W* = 8 + 16 W* = $24 5. a) Complete the table L Q MPL MR MRP L W TVC MFC 1 8 8 4 32 8 8 8 2 14 6 4 24 10 20 12 3 18 4 4 16 12 36 16 4 21 3 4 12 15 60 24 5 23 2 4 8 18 90 30  given b) find L* and W* Intro to econ (ch. 1-2) Definition Formula L* = 3 workers W* = $12 c) is the firm selling its product in a PC market or a monopoly? PC (MR is a constant) 6. what is L* and W* for this monopsonist? 7. a) what type of externality is present in this market? positive (social benefit > private benefit) b) what is the equilibrium price and quantity in the market? Intro to econ (ch. 1-2) Definition Formula c) what is the value of the marginal external benefit? MEB = 42 – 32 = $10 d) what would be the appropriate policy for reaching the optimal Q? Intro to econ (ch. 1-2) Definition Formula subsidy of $10 per unit (=MEB) output will increase to 230 units; price will fall to $32 8. find optimal Q when MC = $600 Q MB (th) MB (oe) Total MDB (10 th and 20 oe) 1 45 15 45*10+15*20 = 750 2 40 10 40*10+10*20 = 600 3 35 5 4 30 0 5 25 ­5 Optimal quantity = 2 9. a) What is the amount of the tax? tax = Pc – Pp = 3 – 1.50 = $1.50 b) identify the areas Intro to econ (ch. 1-2) Definition Formula


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