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Exam 5 lectures 1-2

by: Karlee Castleberry

Exam 5 lectures 1-2 Econ 2020

Marketplace > Auburn University > Business > Econ 2020 > Exam 5 lectures 1 2
Karlee Castleberry
GPA 3.1

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About this Document

These notes consist of Dr. Finck's first and second lectures for exam 5! This includes all of the information about Oligolopy's from the online lecture 1!
Principles of Economics: Microeconomics
William M. Finck
Class Notes
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This 6 page Class Notes was uploaded by Karlee Castleberry on Sunday April 17, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Spring 2016. Since its upload, it has received 34 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.


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Date Created: 04/17/16
Exam 5 Lecture 1-2 [definition formula relationships between variables] {lecture 1}  Oligopoly Characteristics: Implications: 1. Few, mutually 1. actions of 1 firm will affect interdependent firms the market 2. high barriers to entry 2. LR ∏ can be > 0 3. imperfect information 3. strategic cheating possible o MARKET: Incentive to collude  Collusion- cooperation among firms to raise each other’s profits P collude ∏ P comp MC = ATC Q collude Q comp o Cartel  Agreement among firms to restrict output to achieve monopoly power  Facts:  Illegal in US  Can increase profits to all firms  When all members follow rules, firms split monopoly profit o FIRM: Incentive to cheat  Lowering price attracts new consumers plus consumers from other firms; E increases d Extra profit P collude P cheat D cheat MC = ATC D collude Q collude Q cheat o Game theory  2 players make 1 decision independently and at the same time; move of other player is unknown o Prisoner’s dilemma  Game in which the payoffs are such that the choice set that maximizes total welfare fails to maximize individual welfare  Max total welfare- highest sum of profits  Max individual welfare- determine best choice in each scenario o Factors that break down collusion  Large # of sellers 2  Differentiated products  Differences in costs  Antitrust policy {Lecture 2}  Chapter 15 – Labor Markets o Demand for labor  Derived demand- demand for a resource that depends on the demand for the products it helps to produce  There is a direct relationship between the demand for the product and the demand for labor o SL wage We D L Le Level of employment  We = equilibrium wage rate  Le = equilibrium level of employment o Profit – maximization  Effects of hiring a worker:  1. Quantity of output rises  2. Total revenue rises 3  3. Total cost rises  Profit is maximized when ∆TR = ∆TC o Marginal revenue product of labor-  The ∆TR from a 1-unit increase in L  When a worker is hired, Q rises byLMP  When those units are sold, the firm earns MR on each  MRP L MR * MP L o Marginal factor cost-  The ∆TC from a 1-unit increase in L  If we assume that labor is the firm’s only variable cost, then:  TVC = Labor * Wage  MFC = ∆TVC o Firms find the profit-maximizing level of employment (L*) where:  MRP = MFCL  Perfect Competition Characteristics: 1. Many small employers compete for many workers with identical skills 2. Firms are “price” takers – they face a perfectly elastic SUPPLY of labor o MFC = ∆TVC = W for perfect competition only L W TVC MFC 1 8 8 8 4 2 8 16 8 3 8 24 8 4 8 32 8 o Finding L* Graph (perfect competition) wage We SL= MFC D L MRP L L* Level of employment  Find L* for a firm in a perfectly competitive labor market where W = $9 and MRL = 48 – 3L  MRP L 48 – 3L and MFC = 9  9 = 48 – 3L  3L = 39  L* = 13 workers o 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 5 25 1 3 3 6  L* = 4 workers 5  Product/output market structure:  P.C. if MR is constant; Monopoly if MR is decreasing 6


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