ECO101H1 Lecture Notes - Lecture 6: Normal Good, Marginal Revenue

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Eco101 lecture 6 substitution effect (se) & income effect (ie) in labour market, and. Theory of the firm continued. Theory of the firm, continued: average product of labour (apl) has a maximum point that intersects with the marginal. In fact, the relationship between the apc+mpc and avc+smc graphs is that they have an inverted relationship. Revenue, costs & profits: tr (total revenue) = p (price) q (quantity, ar (average revenue) , mr (marginal revenue) = What"s a cost: looking at input costs, economists say that, 1. Answer: pl = wage rate (explicit cost: 2. Answer: owner"s salary: 3. Owner who gives ,000 of funds to a store, when the interest rate is 12% Answer: interest- free loan: #2 & #3 are implicit costs. Profit maximization ( max rules: < 0 = loss, 2 options to fix situation, 1. Shut down (q = 0) = - tfc < 0: 2.

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15. (From Web Quiz) Which of the following statements is correct about the Income Effect (IE) and the Substitution Effect (SE) of a change in the price of Good X: a) If IE and SE work in the same direction, then X is an inferior good b) If IE and SE work in opposite directions, then X is a normal good c) If IE and SE work in opposite directions, then X could have downward-sloping demand * d) If IE and SE work in the same direction, then X could have upward-sloping demand e) All of a) through d) are incorrect.

Most goods and service that we enjoy are bought and sold in the market. However, leisure is something that we value but we do not buy it explicitly. What is the price of leisure? Explain what would happen to the amount of leisure that we would enjoy if the wage rate went up. Make sure to use the substitution and income effect to explain your answer and postulate whether leisure is a normal or inferior good. Why is the ultimate net effect not determinable by appealing to logic alone?

11. In your later studies in economics, you will Supply Curve of Labour learn that supply curves for labour can be "backward bending" (that is, can be negatively sloped if a rise in the wage rate leads workers to want to work less in order to take more vacations and more leisure time). Such a supply curve is represented at the right, where w is the wage rate per hour and L is the number of hours of labour. The demand curve for labour (representing the number of hours of labour demanded by firms which hire these workers) can be assumed to be downward sloping, as usual in this course. Which of the following statements about the stability of this situation is (are) generally true? 1) This labour market will be stable if the demand curve is flatter than the supply curve. In This labour market is inherently unstable. III) This labour market will be stable if a rise in wages Icads to excess supply of hours of work. A) only! B) only II C) only III DI & II (E) & III F) II & III G) I, II & III ) none of the three L

ECO101H1 Lecture Notes - Lecture 6: Normal Good, Marginal Revenue

ECO101H1 Full Course Notes

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