ECO204: Homework Assignment 4
Due March 21 , 2011 at the start of lecture (Lec 101: 10:10am, Lec 201: 11:10am)
Late homework will not be accepted for credit.
1. True, False or Uncertain. For each of the sections below, carefully read the statement and
determine whether the statement is true, false or uncertain. In order to receive full credit
for the problem, you must expl ain the reason for your answ er. Answers that are given
without an explanation will not receive any credit. If the answer you give is based on any
assumptions, be sure to state them clearly.
a. If firms exercise market power in the output market, it will also have implications
for the factor markets equilibrium.
b. Methods to eliminate or reduce moral h azard may include sending signals of
quality to the uninformed party, such as offering warranties.
c. Labor supply curves indicate that workers are always willing to work more as the
wage rate increases.
d. Characteristics of markets that suffer from asymmetric information include the
elimination of certain markets and pricing above marginal cost.
e. The type of contract used to preven t adverse selection depends on what the
principal can observe.
2. Xtran is a monopolist company for a new pate nted food supplement for athletes. If the
demand for its product is P = 25-2Q, and the firm’s short run (i.e. capital is fixed)
production function is Q=4L. Derive the first order condition and the firm’s demand for
labor as a function of market wages.
3. A firm located i2 Los Angeles makes jackets using a production function given by
Q=10L – 0.5L , where Q is the number of jackets produced per hour and L is the number
of workers. Labor is the only factor of production. The firm can sell as many jackets as it
wants at a price of $4. Suppose the firm is a monopsonist in the labor market such that it
faces the labor