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Lecture 8

# Economics 2151B - Lecture 8.docx

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School
Western University
Department
Economics
Course
Economics 2150A/B
Professor
Kristin Denniston
Semester
Winter

Description
Economics 2151B Monday February 3 Lecture 9 Homework 2 • Due Wednesday at midnight Midterm • Mon. Feb. 10 • In class • Remember: ID, calculator, #2 pencil • Covers ch. 9-12 o There will be no math questions from ch. 9 (just concept problems), but there will be math questions from ch. 10-12 • Make sure you review the examples from the homework (some will be used on the exam) • Multiple choice will test concepts o eg. How does a monopoly set its optimal price and quantity in the market? o eg. What is third degree price discrimination? • There may be 1 or 2 short answer questions testing on the concept o These will come from the notes o eg. How does OHIP act as a monopsony purchaser of health care? • We will do more review on Wednesday • Extra office hours will be scheduled for Friday so you can come and ask questions Chapter 11 (con’t) Last time… • 1. Multiplant Model o The monopolist maximizes profits by choosing its total quantity where the total MC curve = MR o You create the total MC curve by horizontally summing the output from both plants o When you horizontally sum you need to convert the MC curves as:  Q 1 f(MC )1  Q 2 f(MC )2  Q 1 Q =2MC T  MC T MR  total Q  Q  MC  Q 1 1 MC 2Q 2 o In the optimal solution to this problem, MC1= MC (2he marginal cost of the last unit produced in each plant is equal)  This makes sense because if the marginal production was lower in plant 2, you would shift production to plant 1 o Applications of this model:  Ontario Power Generation (a monopoly producer of electricity) • Daily it tries to shift production between the two plants to keep its costs down  *A Cartel • A cartel occurs when we have few firms in the market that collude to act like a monopolist for the entire industry • They restrict industry output to achieve the monopoly price, quantity, and profit • They split up the monopoly profit among each other based on different countries’ marginal costs of production • eg. OPEC (Organization of Petroleum Exporting Countries) restricted output by working together to decide how much oil they would produce • The cartel eventually breaks down because there is an incentive to cheat (we will talk about this in ch. 13) • 2. Uniform Pricing Model o One monopolist sells in two markets o SKIP in ch. 11 • 3. Monopsonist Market o One buyer in the market o *eg. OHIP is our only purchaser of health care or doctor’s visits in Ontario  They have a lot of power to set prices when negotiating with doctors  *You should remember that OHIP is a monopsony purchaser of health care for the exam  One of the benefits of social health care is that it gives the government a lot of bargaining power o They face the entire market supply curve o It is the opposite of the monopoly model (a monopolist is the only seller in the market, a monopsonist is the only seller) o eg. A lone hospital in a rural area  They are the only purchaser of nursing labour Monopsony in a Labour Market • w = wage or price of labour • L = quantity of labour hired • Q = f(L) o The monopsonist is not using any capital – they are just hiring labour o This is the production function of the monopsonist when they are producing output to sell in a goods market ΔQ dQ • MPL = ΔL = dL • Demand for Labour o MRPL = marginal revenue product of labour = MR x MPL = P x MPL (if the monopsonist is selling in a competitive output market) • this is likely the formula you will use for your homework & exam ΔTR ΔQ o MRPL = ΔQ = ΔL  This says that our demand for labour is equal to the number of units of output that we get from an extra worker x how much money we get from that amount of output we get from the extra worker • Supply of Labour o w = f(L) o The marginal cost to the monopsonist will increase faster than the supply curve o The marginal expenditure on labour curve/marginal labour cost curve  We assume that the monopsonist is hiring at one wage rate only - they can’t negotiate a lower wage to the second person they hire (you must offer a higher wage to everyone to get them to work for you)  To induce another unit of L to work for you, you must offer a higher w to all workers you hire o Derivation of MEL  The total cost of labour to the monopsonist = w(L) x L dTC ΔTR
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