ECON1131 Lecture Notes - Economic Rent, Reservation Wage, Economic Equilibrium

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1 Apr 2014

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The amount of income to be earned is the heart of the matter in the labor supply decision. Individual"s preferred balance between income and leisure time: alternatives: how much time to spend working, constraints: time, not income, is the scarce resource. The wage that the individual receives determines the amount of income earned for each hour of leisure time sacrificed. Individual has to select the combination that yields the maximum amount of satisfaction. Because the substitution and income effects tug in opposite directions on the desire to work. Hours decrease as wage increases and hours increase as wage decreases. Whether the individual supply curve for labor is upward or downward sloping depends on the relative strength of the substitution and income effects. The overall supply of labor was downward sloping throughout the 20th century. The income effect appears to have dominated the substitution effect. Men and women respond differently to changes in wages.

Related Questions

Please If you can highlight or mark the correct answer

Activity : 2 point(s)

If P = $8 and MC = $5 + 0. 2Q, the competitive firm's profit-maximizing level of output is:

0.2

Activity : 2 point(s)

In the long run, firms will exit a perfectly competitive industry if:

excess profits exceed zero.

excess profits are less than zero.

total profit equals zero.

excess profits equal zero.

Activity : 2 point(s)

In long-run equilibrium, monopoly prices are set at a level where:

price exceeds marginal revenue.

industry demand equals industry supply.

industry demand is less than industry supply.

price exceeds average revenue.

Activity : 1 point(s)

The kinked demand curve theory of oligopoly assumes that rival firms:

react to price increases.

react to price increases and decreases.

do not react to price changes.

react to price decreases.

Activity : 1 point(s)

In oligopoly markets, the market demand curve is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 2 point(s)

The level of competition in a given market tends to increase if:

minimum efficient scale of firms increases.

the number of substitutes increases.

significant barriers to exit are imposed.

the number of potential entrants decreases.

Activity : 2 point(s)

In the short run, the:

firm has complete flexibility with respect to input use.

availability of all inputs is fixed.

operating period is longer than the planning period.

availability of at least one input is fixed.

Activity : 1 point(s)

In both monopolistic competition and oligopoly markets:

there is easy entry and exit.

consumers perceive differences among the products of various competitors.

economic profits may be earned in the long run.

there are many sellers.

Activity : 1 point(s)

In oligopoly equilibrium:

MC = AC

MC > AC

MR = MC

MC < AC

Activity : 2 point(s)

A firm will earn normal profits when price:

equals average total cost.

equals average variable cost.

equals marginal cost.

exceeds minimum average total cost.

Activity : 2 point(s)

Economic costs include both explicit and implicit cost. When analyzing costs the next-best use of a given asset is called:

current cost.

replacement cost.

historical cost

opportunity cost.

Activity : 2 point(s)

In a perfectly competitive market:

sellers and buyers have perfect information.

entry and exit are difficult.

c. sellers produce similar, but not identical products.

each seller can affect the market price by changing output.

Activity : 2 point(s)

In competitive market equilibrium, the firm's:

MR = MC and P > AR

MR = MC and P > AC

AR = AC and MR > MC

P = MR = AR = AC = MC

Activity : 1 point(s)

A firm should increase advertising if the net marginal revenue derived is:

equal to the marginal cost of advertising.

greater than the marginal cost of advertising.

greater than zero.

less than the marginal cost of advertising.

Activity : 2 point(s)

For a firm in perfectly competitive market equilibrium:

a replacement cost.

an implicit cost.

an explicit cost.

an opportunity cost.

Activity : 1 point(s)

In a monopolistically competitive industry, firms:

offer products that are not perfect substitutes.

make decisions in light of expected reactions from other firms.

set price equal to marginal cost.

are price takers.

Activity : 2 point(s)

Fixed costs include:

variable labor expenses.

output-related energy costs.

output-related raw material costs.

variable interest costs for borrowed capital.

Activity : 2 point(s)

A monopolist maximizes profits by producing a level of output when:

P = AC

P > MC

P < MC

P = MC

Activity : 2 point(s)

The demand curve for a unique product without substitutes is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 2 point(s)

At the point of minimum Average Variable Cost:

historical cost.

incremental cost.

current cost.

Activity : 2 point(s)

In the decision process, management should ignore:

implicit costs.

historical costs.

sunk costs.

incremental costs.

Activity : 1 point(s)

At the profit maximizing level of output for a monopolist:

P = AR and AR = AC

P = MC and MR > MC

P = MR and AC = MC

P > MC and MR = MC

Activity : 2 point(s)

In perfectly competitive markets, profits are maximized when:

MC=AC

P>AC

MR=MC

MR=P

Activity : 2 point(s)

Graphically, competitive market supply is measured by the:

vertical difference of competitor demand curves.

vertical sum of competitor demand curves.

horizontal difference of competitor MC curves.

horizontal sum of competitor MC curves.

Activity : 2 point(s)

For a firm in perfectly competitive market equilibrium:

MR < AR

P > AC

P > MR

P = MC

Activity : 2 point(s)

In the long run, firms will offer supply at the point where P = MR = MC if:

MC is rising.

MC is falling.

MC is constant.

P > AC

Activity : 2 point(s)

The firm demand curve in a competitive market is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 1 point(s)

Monopolistic competition is characterized by:

homogeneous products.

barriers to entry and exit.

perfect dissemination of information.

few buyers and sellers.

Activity : 2 point(s)

Marginal cost equals:

average variable cost at its maximum point.

the change in total fixed cost divided by the change in quantity.

the change in total variable cost divided by the change in quantity.

total cost divided by quantity.

Activity : 2 point(s)

In the short run, a perfectly competitive firm will shut down and produce nothing if:

excess profits equal zero.

total cost exceeds total revenue.

total variable cost exceeds total revenue.

the market price falls below the minimum average total cost.

Activity : 2 point(s)

For a monopoly in equilibrium:

MR = MC

MC â¤ AC

MR â¤ AC

P â¥ AC

Activity : 2 point(s)

When profits are maximized in a competitive market, average cost is always:

rising.

falling.

constant.

none of these.

Activity : 2 point(s)

So long as P > AVC, the competitive firm's short-run supply curve is equal to:

AVC

none of these.

Activity : 1 point(s)

The four-firm concentration ratio will rise following:

a rise in imports.

a fall in imports.

a merger between the two largest firms in the industry.

small firm entry.

Activity : 2 point(s)

In oligopoly markets, the market demand curve is:

point on the short-run marginal cost curve.

short-run average cost of production.

long-run average cost of production.

point on the short-run average cost curve.

Activity : 2 point(s)

The following market cannot be described as perfectly competitive:

the unskilled labor market.

the milk market.

discount retailing.

the agricultural grain markets.

Activity : 2 point(s)

In the long run, the:

availability of at least one input is fixed.

firm's operating decisions are typically constrained by prior capital expenditures.

availability of all but one input is fixed.

firm has complete flexibility with respect to input use.

Activity : 1 point(s)

The industry supply curve is derived through the horizontal summation of firm:

average cost curves.

marginal revenue curves.

marginal cost curves.

demand curves.

Activity : 2 point(s)

Price and product quality competition tends to be vigorous when:

entry barriers are low.

potential entrants are few.

product quality information is scarce.

the number of active sellers is few.

Activity : 1 point(s)

A perfectly functioning cartel results in:

oligopoly.

monopoly.

perfect competition.

monopolistic competition.

Activity : 1 point(s)

When prices in monopolistically competitive markets exceed those in a perfectly competitive equilibrium, this difference is the cost of:

information.

market power.

inefficiency.

product differentiation.

Activity : 1 point(s)

In the short run, a monopolist will:

shut down if price equals average total cost.

shut down if price is less than average total cost.

shut down if price is less than average variable cost.

never shut down.

Activity : 2 point(s)

In the short run, a perfectly competitive firm will shut down and produce nothing if:

typically involve multiple units of output.

do not vary across decision alternatives.

come into play when judging the costs of adding a new product line, advertising campaign, production shift, or organization structure.

play a role in determining the optimal course of action.

Activity : 2 point(s)

At the point of minimum AVC:

MC is falling.

MC is constant.

MC is rising.

MC = AVC.

Activity : 2 point(s)

A monopsony is a market with:

many sellers.

one buyer.

many buyers.

one seller.

Activity : 1 point(s)

The demand curve faced by a firm in a monopolistically competitive industry is:

the downward sloping industry demand curve.

downward sloping.

more elastic than the perfectly competitive firm's demand curve.

horizontal.

Activity : 2 point(s)

Perfect competition always prevails in markets with:

few buyers and sellers.

many buyers and sellers.

an even balance of power between sellers and buyers.

a single buyer.

Activity : 2 point(s)

If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:

constant returns to scale.

decreasing returns to scale.

decreasing returns to a factor input.

increasing returns to scale.

Activity : 2 point(s)

Average cost declines as output expands in a production process with:

constant returns to scale.

decreasing returns to scale.

decreasing returns to a factor input.

increasing returns to scale.

Activity : 2 point(s)

If the productivity of variable factors is decreasing in the short-run:

marginal cost must increase as output increases.

average cost must decrease as output increases.

average cost must increase as output increases.

marginal cost must decrease as output increases.

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

		$0.60
		$0.40
		$0.75
		$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

		a tax of $5 in Market X and a subsidy of $10 in Market Y.
		subsidizing both markets.
		taxing Market Y and subsidizing Market X.
		taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

		eliminated whenever it arises.
		regulated to take advantage of economies of scale.
		left alone to operate with excess capacity.
		taken over by the government.

4.When the size of the production is the most efficient:

		total cost is at the minimum.
		average cost is at the minimum.
		marginal cost is at the minimum.
		fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

		TR > TC
		P < AC
		Lifetime expected profit is positive.
		Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

		$75.
		$300.
		$225.
		$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

		too low; too high
		equal to the efficient price; too low
		too high; too low
		equal to the efficient price; too high

8.Which of the following statements is TRUE?

I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

		I only
		II and III only
		I, II, and III
		III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

		various options.
		more quantity.
		more discount.
		higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

		a shortage of 15 units.
		a surplus of 15 units.
		a supply of 20 units.
		no effect on the market.

11.In which of these instances does price function as a signal in the market?

		Suppliers invest more in exploration when the price of oil increases.
		Consumers complain of price gouging as the price of oil skyrockets.
		Government imposes price controls on the skyrocketing price of oil.
		All of the answers are correct.

12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.

		demand for; decrease; decrease
		supply of; increase; increase
		supply of; decrease; increase
		demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

		Cotton growers in California don't pay payroll taxes.
		The water used to grow California cotton is highly subsidized by the government.
		Cotton growers in California are mostly operated as nonprofit enterprises.
		The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

		the equilibrium price will fall to $7.50.
		competition among buyers will increase the current price.
		the current price will fall below $7.50 as sellers compete for market share.
		There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

		lower pork prices
		higher consumer income
		higher prices of feed grains used to feed beef cattle
		an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States		2	5
Germany		3	9

Reference: Ref 2-8

(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.

		two clocks; three clocks
		10 clocks; 27 clocks
		0.4 clocks; 0.33 clocks
		2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

		This trade makes Ella worse off by $200.
		This trade makes Mark better off by $200.
		Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
		This trade creates value by moving the guitar and drum set to people who value them more.

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

		$0.60
		$0.40
		$0.75
		$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

		a tax of $5 in Market X and a subsidy of $10 in Market Y.
		subsidizing both markets.
		taxing Market Y and subsidizing Market X.
		taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

		eliminated whenever it arises.
		regulated to take advantage of economies of scale.
		left alone to operate with excess capacity.
		taken over by the government.

4.When the size of the production is the most efficient:

		total cost is at the minimum.
		average cost is at the minimum.
		marginal cost is at the minimum.
		fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

		TR > TC
		P < AC
		Lifetime expected profit is positive.
		Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

		$75.
		$300.
		$225.
		$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

		too low; too high
		equal to the efficient price; too low
		too high; too low
		equal to the efficient price; too high

8.Which of the following statements is TRUE?

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

		I only
		II and III only
		I, II, and III
		III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

		various options.
		more quantity.
		more discount.
		higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

		a shortage of 15 units.
		a surplus of 15 units.
		a supply of 20 units.
		no effect on the market.

11.In which of these instances does price function as a signal in the market?

		Suppliers invest more in exploration when the price of oil increases.
		Consumers complain of price gouging as the price of oil skyrockets.
		Government imposes price controls on the skyrocketing price of oil.
		All of the answers are correct.

		demand for; decrease; decrease
		supply of; increase; increase
		supply of; decrease; increase
		demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

		Cotton growers in California don't pay payroll taxes.
		The water used to grow California cotton is highly subsidized by the government.
		Cotton growers in California are mostly operated as nonprofit enterprises.
		The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

		the equilibrium price will fall to $7.50.
		competition among buyers will increase the current price.
		the current price will fall below $7.50 as sellers compete for market share.
		There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

		lower pork prices
		higher consumer income
		higher prices of feed grains used to feed beef cattle
		an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States		2	5
Germany		3	9

Reference: Ref 2-8

		two clocks; three clocks
		10 clocks; 27 clocks
		0.4 clocks; 0.33 clocks
		2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

		This trade makes Ella worse off by $200.
		This trade makes Mark better off by $200.
		Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
		This trade creates value by moving the guitar and drum set to people who value them more.

ECON1131 Lecture Notes - Economic Rent, Reservation Wage, Economic Equilibrium

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