Monopoly and Monopsony Labor Market Behavior

Size: px
Start display at page:

Download "Monopoly and Monopsony Labor Market Behavior"

Transcription

1 Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and the labor market where they are a buyer) 1. If the firm faces a competitive output market, regardless of what quantity they produce they get the constant market price P for each unit sold. If they face a competitive labor market, regardless of how many people they hire they have to pay each worker the constant market wage w. Sometimes firms have market power - the ability to manipulate the price of the market good based on the quantity they use or produce. In the extreme case, firms may be the only seller or buyer in a market. If the firm is the only seller, it is called a monopolist, and can change P depending on how much it produces. If it is the only buyer, it is a monopsonist, and can change w depending on how much labor it employs. 2 Review of the General abor Supply Model et there be only one input in production - labor. Profit maximizing firms choose labor by setting the marginal cost of labor equal to the marginal benefit or marginal revenue product) of labor. In a competitive model, both P and w are taken as given - the only thing that isn t determined by market forces is the marginal product of labor. The first order conditions FOC) for profit maximization are 2 MRP = MC MP MR = MC 1) 1 In reality, firms may operate in many markets, selling multiple goods and using multiple inputs in production. They may face competitive markets in some and have market power in others. 2 The FOC is a result of a generic maximization problem such as max P Q)) Q) C) where the maximization is done over. Prepared by Nick Sanders, UC Davis Graduate Department of Economics 2006

2 where MP = doutput dabor = d MR = drevenue doutput = dr MC = dcosts dabor = dc d When firms take output price and wage as given, 1) simplifies to MP P = w 2) Now let s consider how things change when P or w is allowed to change with Q and, respectively. 3 The Monopolist abor Decision Since a monopolist is the only producer in a market, they see the entire demand curve when making their production decision. As such, the more they produce, the lower the price in the market. We represent this with an inverse demand curve where price is presented as a function of quantity supplied, or P P Q), where dp < 0. Returning to equation 1), MC is still w, because the firm takes the price of its inputs as given. MR, however, is no longer simply P, but is now MR monopolist dp Q) Q) = = P Q) + dp Q = P 1 + dp ) Q P = P ) 3) 2

3 where is the elasticity of demand percentage change in quantity demanded divided by percentage change in price) which is assumed to be negative 3. So for a monopolist MR monopolist = P 1 some nonzero number) < P which reflects that each additional unit sold in the market lowers the price of all other units sold, and at a given wage monopolists will hire less labor than perfectly competitive firms. As monopolists employ less labor, they have lower production and thus generate a higher market price than competitive firms. 3.1 Monopolist example et the firm face the inverse demand function P Q) = 50 2Q and a cost function C) = 50. The marginal productivity of labor is constant at 5, i.e. Q) = 5. Find the optimal level of employment for the firm, the optimal quantity produced, and the price in the market Solution Since the marginal productivity of labor is constant at 5, the only variation in the marginal revenue product of labor will be marginal revenue. To find marginal revenue, we first need to construct the revenue function, which is price times quantity, or 50 2Q) Q. The marginal revenue function is then d 50 2Q) Q) = d 50Q 2Q2 ) = 50 4Q 4) Equation 4) times the marginal product of labor gives the marginal revenue product of labor. Since we know the marginal product of labor d equals 5 as Q) = 5), MRP = Note that in the case of perfect competition, firms face a perfectly elastic demand curve, which implies that =. This means that for perfect competition 1 = 1 = 0 and 3) is back to 2). 3

4 The marginal cost of labor is the derivative of the cost function with respect to, or d50) d = 50, which is the same as saying the wage in the labor market is 50. Setting marginal cost equal to marginal revenue product then gives = = = Total production is Q2) = 5 2 = 10, and price is given by P 10) = ) = The Monopsonist abor Decision Since a monopsonist is the only buyer in a market, they see the entire supply curve when making their purchasing decisions. If they are a monopsonist in the labor market, the more people they hire, the higher the wage. Assuming they are a non-discriminating monopsonist, hiring one additional worker means they have to pay all workers employed the now higher wage. The marginal cost of labor is now a function of the quantity hired, or MC MC ). Again going back to equation 1), now MR = P because the firm takes the price of its good as given, but assuming labor is the only factor of production) MC monopsonist = dcosts d d[w) ] = d = w) + dw d = w 1 + dw ) d w 5) where dw d > 0 due to an upward sloping labor supply curve4 ) and w 4 Under perfect competition, the firm s labor hiring decision cannot affect the wage, so dw d simplifies to w ) w, and we re back to the usual competitive result of MC = w. 4 dw > 0, so d w > 0 and = 0. That means 5)

5 w 1 + dw d w) > w. Since each worker costs more for a monopsonist to hire than it would for a perfectly competitive firm, for a given price monopsonists hire less labor than firms in perfect competition. 4.1 Monopsonist Example et a non-discriminating firm face a perfectly elastic demand curve with a price of $5 note that saying their demand curve is perfectly elastic is equivalent to saying they face a fixed price that doesn t change with production). Their marginal productivity of labor is constant at 10 Q) = 10), and labor is the only factor of production. They face a labor supply curve equal to s = 8w 32. Find the optimal amount of labor hired and the wage in the market Solution The marginal revenue product of the monopsonist is constant here, since M R = P = 5 and MP = 10. But their marginal cost of labor is changing since with each person they hire, they need to pay all workers a higher wage. To find MC, we first need to construct the cost curve, and then take the derivative of that with respect to labor. The cost curve is the amount of labor hired times the wage, or w. The wage is given by the labor supply function, which we can mess with to get w. = 8w 32 8w = + 32 w = ) 5

6 which means the cost function C) and the marginal cost function MC are C) = 8 + 4) MC ) = dc)) d = ) We can now set marginal revenue product of labor equal to marginal cost of labor 7) and solve for. MRP = MC MP MR = MC 10 5 = = = 184 Plugging that in to 6) gives w = = 27. We can also get quantity produced, since Q) = 10 Q184) = We don t need to calculate price, since that is taken as fixed an is independent of labor hired/quantity produced. A-1 Appendix - Proofs Assuming Decreasing MP No need to worry about learning and memorizing the stuff in this section... this is just for those people that like to have mathematical intuition with their results. Again, I repeat, do not spend your time trying to memorize this. That being said, for those of you that are still reading, I ll continue. If we assume decreasing marginal productivity of labor, we can prove mathematically that monopolists and monopsonists hire less labor than competitive firms under the same wages and prices, respectively). 6

7 A-1.1 Monopolist Given some wage w, let s compare the first order conditions for competitive firm labor demand and the monopolist labor demand. For both, at the optimal equation 1) holds. But for the ) monopolist, the left hand side of 1) is MP P while for the perfectly competitive firm it is MP P. This implies MP monopolist MP monopolist P ) ) = MP competitive = MP competitive P Since ) < 1, it must be that MP monopolist > MP competitive, which implies that for the optimal, monopolist < competitive remember marginal product of labor is decreasing in ). A-1.2 Monopsonist Given some price P, using the FOC for the monopsonist and the fact that MRP competitive MRP monopsonist MP monopsonist 1 + dw d w MP monopsonist = w 1 + dw ) d w monopsonist MP 1 + dw d w P ) = MP competitive P by 2) = MP competitive 1 + dw ) d w P ) = w = w Since ) 1 + dw d w > 1, it must be that at the optimal amount of labor, MP monopsonist > MP competitive. 7

How Wages Are Determined in Labor Markets

How Wages Are Determined in Labor Markets ACTIVITY 4-5 How Wages Are Determined in Labor Markets This activity examines how wages and employment are determined in two types of labor s. A perfectly competitive labor is one in which all buyers and

More information

c 2009 Je rey A. Miron

c 2009 Je rey A. Miron Lecture 22: Factor Markets c 2009 Je rey A. Miron Outline 1. Introduction 2. Monopoly in the Output Market 3. Monopsony 4. Upstream and Downstream Monopolies 1 Introduction The analysis in earlier lectures

More information

Chapter 6 MULTIPLE-CHOICE QUESTIONS

Chapter 6 MULTIPLE-CHOICE QUESTIONS Chapter 6 MULTIPLE-CHOICE QUETION 1. Which one of the following is generally considered a characteristic of a perfectly competitive labor market? a. A few workers of varying skills and capabilities b.

More information

Employment and Pricing of Inputs

Employment and Pricing of Inputs Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

EconS 301 Review Session #8 Chapter 11: Monopoly and Monopsony

EconS 301 Review Session #8 Chapter 11: Monopoly and Monopsony EconS 301 Review Session #8 Chapter 11: Monopoly and Monopsony 1. Which of the following describes a correct relation between price elasticity of demand and a monopolist s marginal revenue when inverse

More information

LABOR UNIONS. Appendix. Key Concepts

LABOR UNIONS. Appendix. Key Concepts Appendix LABOR UNION Key Concepts Market Power in the Labor Market A labor union is an organized group of workers that aims to increase wages and influence other job conditions. Craft union a group of

More information

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

More information

EC130 FOUNDATIONS OF ECONOMIC ANALYSIS

EC130 FOUNDATIONS OF ECONOMIC ANALYSIS EC130 FOUNDATIONS OF ECONOMIC ANALYSIS 2004-2005 DEPARTMENT OF ECONOMICS UNIVERSITY OF WARWICK Topic 7 The Firm's Factor Markets: (i) The Labour Market Derived Demand for Labour Marginal Productivity Analysis

More information

Surplus Effects of Vertical Integration With and Without Double Marginalization - Examples 1

Surplus Effects of Vertical Integration With and Without Double Marginalization - Examples 1 Surplus Effects of Vertical Integration With and Without Double Marginalization - Examples 1 What is Double Marginalization? When firms have market power, they will set price above marginal cost, which

More information

Unit 7: Factor Markets

Unit 7: Factor Markets Unit 7: Factor Markets Factor Market Markets in which the factors of production are bought and sold. A factor input is either land, labor, capital, or entrepreneurship Entrepreneurship is not purchased

More information

PART A: For each worker, determine that worker's marginal product of labor.

PART A: For each worker, determine that worker's marginal product of labor. ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

More information

Integrating the Input Market and the Output Market when Teaching Introductory Economics

Integrating the Input Market and the Output Market when Teaching Introductory Economics 1 Integrating the Input Market and the Output Market when Teaching Introductory Economics May 2015 Clark G. Ross Frontis Johnston Professor of Economics Davidson College Box 7022 Davidson, NC 28035-7022

More information

Pre-Test Chapter 25 ed17

Pre-Test Chapter 25 ed17 Pre-Test Chapter 25 ed17 Multiple Choice Questions 1. Refer to the above graph. An increase in the quantity of labor demanded (as distinct from an increase in demand) is shown by the: A. shift from labor

More information

I. Output Decisions by Firms

I. Output Decisions by Firms University of Pacific-Economics 53 Lecture Notes #8B I. Output Decisions by Firms Now that we have examined firm costs in great detail, we can now turn to the question of how firms decide how much output

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

ECON 202: Principles of Microeconomics. Chapter 11 Firms in Perfectly Competitive Markets

ECON 202: Principles of Microeconomics. Chapter 11 Firms in Perfectly Competitive Markets ECON 202: Principles of Microeconomics Chapter 11 Firms in Perfectly Competitive Markets Firms in Perfectly Competitive Markets 1. Market Structures. 2. Perfectly Competitive Markets. 3. Maximizing Profit

More information

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

More information

A Detailed Price Discrimination Example

A Detailed Price Discrimination Example A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include

More information

Finance 360 Problem Set #5 Solutions

Finance 360 Problem Set #5 Solutions Finance 360 Problem Set #5 Solutions 1) Suppose that the demand curve for video rentals has been estimated to be Q = 500 50P Further, your average costs of supplying videos is equal to AC = 8.006Q +.00000Q

More information

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3 Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream

More information

AP Microeconomics Unit V: The Factor (Resource) Market Problem Set #5

AP Microeconomics Unit V: The Factor (Resource) Market Problem Set #5 1. /15 2. /20 3. /15 4. /25 Total: /75 Name: Team: AP Microeconomics Unit V: The Factor (Resource) Market Problem Set #5 1. ( /15) Define the term and explain a situation that demonstrates the real world

More information

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost: Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

More information

Topic 3.1a Short-Run Labour Demand. Professor H.J. Schuetze Economics 370

Topic 3.1a Short-Run Labour Demand. Professor H.J. Schuetze Economics 370 Topic 3.1a Short-Run Labour Demand Professor H.J. Schuetze Economics 370 Labour Demand Let s turn our attention away from employees to focus on the behaviour of employers or firms. Recall that labour demand

More information

Chapter 14. Markets for Factor Inputs

Chapter 14. Markets for Factor Inputs Chapter 14 Markets for Factor Inputs Competitive Factor Markets Characteristics 1. Large number of sellers of the factor of production 2. Large number of buyers of the factor of production 3. The buyers

More information

Chapter 6 Competitive Markets

Chapter 6 Competitive Markets Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

More information

Chapter 16 Monopolistic Competition and Product Differentiation

Chapter 16 Monopolistic Competition and Product Differentiation Goldwasser AP Microeconomics Chapter 16 Monopolistic Competition and Product Differentiation BEFORE YOU READ THE CHAPTER Summary This chapter develops the model of monopolistic competition. It also discusses

More information

Find the competitive equilibrium. The competitive equilibrium is where supply equals demand. Since MC=S, where MC = 2Q/3

Find the competitive equilibrium. The competitive equilibrium is where supply equals demand. Since MC=S, where MC = 2Q/3 Problem Set #13-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr. Cuellar (1) Consider the following demand and cost functions for a monopolistic firm. The industry demand

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

Profit Maximization. 2. product homogeneity

Profit Maximization. 2. product homogeneity Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out

More information

CHAPTER 13 MARKETS FOR LABOR Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 13 MARKETS FOR LABOR Microeconomics in Context (Goodwin, et al.), 2 nd Edition CHAPTER 13 MARKETS FOR LABOR Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary This chapter deals with supply and demand for labor. You will learn about why the supply curve for

More information

Microeconomics Instructor Miller Practice Problems Labor Market

Microeconomics Instructor Miller Practice Problems Labor Market Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.

More information

Module 2 Lecture 5 Topics

Module 2 Lecture 5 Topics Module 2 Lecture 5 Topics 2.13 Recap of Relevant Concepts 2.13.1 Social Welfare 2.13.2 Demand Curves 2.14 Elasticity of Demand 2.14.1 Perfectly Inelastic 2.14.2 Perfectly Elastic 2.15 Production & Cost

More information

Labor Demand. Labor Economics VSE Praha March 2009

Labor Demand. Labor Economics VSE Praha March 2009 Labor Demand Labor Economics VSE Praha March 2009 Labor Economics: Outline Labor Supply Labor Demand Equilibrium in Labor Market et cetera Labor Demand Model: Firms Firm s role in: Labor Market consumes

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and

More information

Perfect Competition. Chapter 12

Perfect Competition. Chapter 12 CHAPTER CHECKLIST Perfect Competition Chapter 12 1. Explain a perfectly competitive firm s profit maximizing choices and derive its supply curve. 2. Explain how output, price, and profit are determined

More information

Labelling Graph Axis Correctly

Labelling Graph Axis Correctly Labelling Graph Axis Correctly The Industry Price S D The Firm Quantity MC AC AR=MR Output Perfect Competition All of the units are sold at the same price because no single buyer or seller is large enough

More information

Production Functions

Production Functions Short Run Production Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Production Functions Outline. Chap : Short Run Production Function. Chap : ong Run Production Function. Chap

More information

Market Structure: Perfect Competition and Monopoly

Market Structure: Perfect Competition and Monopoly WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

More information

OVERVIEW. 7. In perfectly competitive markets, wages are determined by supply and demand.

OVERVIEW. 7. In perfectly competitive markets, wages are determined by supply and demand. 15 DEMAND FOR INPUTS OVERVIEW 1. Each firm is involved in two markets, a market for its output and a market for inputs. Decisions the firm makes in one market affect its decisions in the other market.

More information

Intermediate Microeconomics. Chapter 13 Monopoly

Intermediate Microeconomics. Chapter 13 Monopoly Intermediate Microeconomics Chapter 13 Monopoly Non-competitive market Price maker = economic decision maker that recognizes that its quantity choice has an influence on the price at which it buys or sells

More information

ECON 600 Lecture 3: Profit Maximization Π = TR TC

ECON 600 Lecture 3: Profit Maximization Π = TR TC ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something

More information

Chapter 11. Pricing with Market Power

Chapter 11. Pricing with Market Power Chapter 11 Pricing with Market Power Topics to be Discussed(Sec. 11.1-11.4) Capturing Consumer Surplus Price Discrimination Intertemporal Price Discrimination and Peak-Load Pricing The Two-Part Tariff

More information

1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B) plant. C) firm. D) multinational.

1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B) plant. C) firm. D) multinational. Miami Dade College ECO 2023 Principles of Microeconomics Summer B 2014 Practice Test #3 1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B)

More information

(Perfect) Competition

(Perfect) Competition (Perfect) Competition (Perfect) Competition The model of perfect competition is based on the following assumptions: (Perfect) Competition The model of perfect competition is based on the following assumptions:

More information

AP Microeconomics Review

AP Microeconomics Review AP Microeconomics Review 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return

More information

Microeconomics Instructor Miller Practice Problems Monopolistic Competition

Microeconomics Instructor Miller Practice Problems Monopolistic Competition Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.

More information

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.

More information

CASE FAIR OSTER PEARSON

CASE FAIR OSTER PEARSON CASE FAIR OSTER PEARSON Publishing as Prentice Hall PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N Prepared by: Fernando Quijano w/shelly Tefft 2of 35 Input Demand: The Labor and Land Markets

More information

LECTURE #13: MICROECONOMICS CHAPTER 15

LECTURE #13: MICROECONOMICS CHAPTER 15 LECTURE #13: MICROECONOMICS CHAPTER 15 I. WHY MONOPOLIES ARISE A. Competitive firms are price takers; a Monopoly firm is a price maker B. Monopoly: a firm that is the sole seller of a product without close

More information

THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM

THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM DEMAND FOR LABOUR IS DERIVED DEMAND Derived demand: occurs when the demand for a factor of production arises from the demand for the output

More information

Short-Run Production and Costs

Short-Run Production and Costs Short-Run Production and Costs The purpose of this section is to discuss the underlying work of firms in the short-run the production of goods and services. Why is understanding production important to

More information

MULTIPLE CHOICE QUESTIONS

MULTIPLE CHOICE QUESTIONS MULTIPLE CHOICE QUESTIONS 1. Refer to Figure 1. After a tax is imposed on diet soda, the price of a can of diet soda increases from $.50 to $.55. The area that represents the excess burden is (a) ABCE.

More information

Pure Competition Pure Monopoly Monopolistic Competition Oligopoly

Pure Competition Pure Monopoly Monopolistic Competition Oligopoly Pure Competition Pure Monopoly Monopolistic Competition Oligopoly Characteristics: Rare in the real world But helps analyze industries which are similar to pure competition Many sellers means that no one

More information

Deriving Demand Functions - Examples 1

Deriving Demand Functions - Examples 1 Deriving Demand Functions - Examples 1 What follows are some examples of different preference relations and their respective demand functions. In all the following examples, assume we have two goods x

More information

Pre-Test Chapter 26 ed17

Pre-Test Chapter 26 ed17 Pre-Test Chapter 26 ed17 Multiple Choice Questions 1. Which of the following describes a purely competitive labor market? A. MRP < Wage Rate. B. MRP > Wage Rate. C. Wage Rate = MRC. D. Wage Rate < MRC.

More information

Midterm Exam #1 - Answers

Midterm Exam #1 - Answers Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.

More information

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

Perfect Competition. We will use the second concept in here and your text, chapter 11.

Perfect Competition. We will use the second concept in here and your text, chapter 11. Perfect Competition There are two concepts of competition normally used in Economics: 1. The manner or process in which firms compete with one another for market share. 2. A description of a particular

More information

Unit 5.3: Perfect Competition

Unit 5.3: Perfect Competition Unit 5.3: Perfect Competition Michael Malcolm June 18, 2011 1 Market Structures Economists usually talk about four market structures. From most competitive to least competitive, they are: perfect competition,

More information

Problems on Perfect Competition & Monopoly

Problems on Perfect Competition & Monopoly Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In long-run equilibrium, every firm in a perfectly

More information

Solution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY

Solution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 900 (Section ) Chairat Aemkulwat Economics I: Microeconomics Spring 05 Solution to Selected Questions: CHAPTER MONOPOLISTIC

More information

Firm Supply: Market Structure & Perfect Competition

Firm Supply: Market Structure & Perfect Competition Firm Supply: Market Structure & Perfect Competition Firm Supply How does a firm decide how much to supply at a given price? This depends upon the firm s goals; technology; market environment; and competitors

More information

Pre-Test Chapter 22 ed17

Pre-Test Chapter 22 ed17 Pre-Test Chapter 22 ed17 Multiple Choice Questions 1. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be: A. NM times 0M. B. 0AJE. C. 0EGC. D. 0EHB. 2. For a pure

More information

Summary Chapter 12 Monopoly

Summary Chapter 12 Monopoly Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding

More information

Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

More information

Ans homework 5 EE 311

Ans homework 5 EE 311 Ans homework 5 EE 311 1. Suppose that Intel has a monopoly in the market for microprocessors in Brazil. During the year 2005, it faces a market demand curve given by P = 9 - Q, where Q is millions of microprocessors

More information

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive

More information

Tutorial 1. Monopoly and Price Discrimination.

Tutorial 1. Monopoly and Price Discrimination. Tutorial 1. Monopoly and Price Discrimination. Question 1. Suppose there are 10 students in a class and teacher brings a bag with 10 candies. Assume all students have identical preferences and have positive

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

MODULE 70: THE MARKETS FOR

MODULE 70: THE MARKETS FOR MODULE 70: THE MARKETS FOR LAND & CAPITAL SCHMIDTY SCHOOL OF ECONOMICS THE PURPOSE OF THIS MODULE IS TO SHOW HOW WE CAN USE SUPPLY AND DEMAND TO MODEL THE MARKETS FOR THE LAND AND CAPITAL INPUTS. Learning

More information

Microeconomics Instructor Miller Perfect Competition Practice Problems

Microeconomics Instructor Miller Perfect Competition Practice Problems Microeconomics Instructor Miller Perfect Competition Practice Problems 1. Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

More information

Good Luck writing the Mock Exam!!

Good Luck writing the Mock Exam!! PASS MOCK EXAM FOR PRACTICE ONLY Course: ECON 1000 B Facilitator: Ben Dates and locations of mock exam take up: FRIDAY DECEMBER 11: 10 12 ME 3380 1 3 ME 3380 It is most beneficial to you to write this

More information

12.1 Why and How Firms Price Discriminate

12.1 Why and How Firms Price Discriminate Chapter 12 Pricing and Advertising 12.1 Why and How Firms Price Why does Disneyworld charge local residents $369 for an annual pass and out-of-towners $489? Why are airline fares less if you book in advance?

More information

Online Review Copy. AP Micro Chapter 8 Test. Multiple Choice Identify the choice that best completes the statement or answers the question.

Online Review Copy. AP Micro Chapter 8 Test. Multiple Choice Identify the choice that best completes the statement or answers the question. AP Micro Chapter 8 Test Multiple Choice Identify the choice that best completes the statement or answers the question. 1. There would be some control over price within rather narrow limits in which market

More information

Oligopoly. What Is Oligopoly? What is Oligopoly?

Oligopoly. What Is Oligopoly? What is Oligopoly? CHAPTER 13B After studying this chapter you will be able to Oligopoly Define and identify oligopoly Explain two traditional oligopoly models Use game theory to explain how price and output are determined

More information

Labor Economics. Unit 3. Labor Demand

Labor Economics. Unit 3. Labor Demand 2016-1 Labor Economics Unit 3. Labor Demand Prof. Min-jung, Kim Department of Economics Wonkwang University Textbook : Modern Labor Economics: Theory and Public policy written by Ronald G. Ehrenberg This

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

Second Degree Price Discrimination - Examples 1

Second Degree Price Discrimination - Examples 1 Second Degree Discrimination - Examples 1 Second Degree Discrimination and Tying Tying is when firms link the sale of two individual products. One classic example of tying is printers and ink refills.

More information

DEMAND AND SUPPLY IN FACTOR MARKETS

DEMAND AND SUPPLY IN FACTOR MARKETS Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.

More information

5. The supply curve of a monopolist is A) upward sloping. B) nonexistent. C) perfectly inelastic. D) horizontal.

5. The supply curve of a monopolist is A) upward sloping. B) nonexistent. C) perfectly inelastic. D) horizontal. Chapter 12 monopoly 1. A monopoly firm is different from a competitive firm in that A) there are many substitutes for a monopolist's product but there are no substitutes for a competitive firm's product.

More information

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on

More information

Rutgers University Economics 102: Introductory Microeconomics Professor Altshuler Fall 2003

Rutgers University Economics 102: Introductory Microeconomics Professor Altshuler Fall 2003 Rutgers University Economics 102: Introductory Microeconomics Professor Altshuler Fall 2003 Answers to Problem Set 10 Chapter 15 1. The following table shows revenue, costs, and profits, where quantities

More information

Sample Exam According to Figure 6.1, A. Soup is a normal good C. Soup is a Giffen good B. Soup is an inferior good D. Bread is an inferior good

Sample Exam According to Figure 6.1, A. Soup is a normal good C. Soup is a Giffen good B. Soup is an inferior good D. Bread is an inferior good Sample Exam 2 1. Suppose the base year for a Lespeyres index is 2001. The value of the index is 1.3 in 2004 and 1.6 in 2006. By how much did the cost of the bundle increase between 2004 and 2006? A..3%

More information

A Dynamic Analysis of Price Determination Under Joint Profit Maximization in Bilateral Monopoly

A Dynamic Analysis of Price Determination Under Joint Profit Maximization in Bilateral Monopoly A Dynamic Analysis of Price Determination Under Joint Profit Maximization in Bilateral Monopoly by Stephen Devadoss Department of Agricultural Economics University of Idaho Moscow, Idaho 83844-2334 Phone:

More information

AP Microeconomics 2003 Scoring Guidelines

AP Microeconomics 2003 Scoring Guidelines AP Microeconomics 2003 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation; permission for any other use must be sought from the

More information

g. Less h. More i. Price j. Price k. Purchase a product l. Quantity supplied

g. Less h. More i. Price j. Price k. Purchase a product l. Quantity supplied Section 1 Word list a. Ability & willingness b. Chart form c. Decrease d. Demand e. Graph form f. Increase g. Less h. More i. Price j. Price k. Purchase a product l. Quantity supplied m. Responsiveness

More information

PART 1: MULTIPLE CHOICE

PART 1: MULTIPLE CHOICE ECN 201, Winter 1999 NAME: Prof. Bruce Blonigen SS#: MIDTERM 2 - Version A Tuesday, February 23 **************************************************************************** Directions: This test is comprised

More information

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost.

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost. 1. The supply of gasoline changes, causing the price of gasoline to change. The resulting movement from one point to another along the demand curve for gasoline is called A. a change in demand. B. a change

More information

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Economics of Competition and Regulation 2015 Maria Rosa Battaggion Perfect

More information

Bertrand with complements

Bertrand with complements Microeconomics, 2 nd Edition David Besanko and Ron Braeutigam Chapter 13: Market Structure and Competition Prepared by Katharine Rockett Dieter Balkenborg Todd Kaplan Miguel Fonseca Bertrand with complements

More information

Essential Graphs for Microeconomics

Essential Graphs for Microeconomics Essential Graphs for Microeconomics Basic Economic Concepts roduction ossibilities Curve Good X A F B C W Concepts: oints on the curve-efficient oints inside the curve-inefficient oints outside the curve-unattainable

More information

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine

More information

Monopolistic Competition 13A CHAPTER

Monopolistic Competition 13A CHAPTER Monopolistic Competition 13A CHAPTER After studying this chapter you will be able to Define and identify monopolistic competition Explain how output and price are determined in a monopolistically competitive

More information

UNIT 6. Pricing under different market structures. Perfect Competition

UNIT 6. Pricing under different market structures. Perfect Competition UNIT 6 ricing under different market structures erfect Competition Market Structure erfect Competition ure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

More information

Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,

More information