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ECON 1 Lecture Notes - Lecture 6: Demand Curve, Reservation Wage, Opportunity Cost

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tancoyote391
5 Mar 2018
School
UCSB
Department
Economics
Course
ECON 1
Professor
Ryan Oprea

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ECON 1 Full Course Notes
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Document Summary

5 dollar workers can earn 120 12 dollars. If the minimum wage exceeds competitive equilibrium wage, minimum wage, If the minimum wage exceeds the competitive equilibrium wage and the demand for labor is price elastic, an increase in the minimum wage will decrease the total wages of employed workers. An industry is in the long run equilibrium if every firm in the industry has positive profits. Why are there more biomedical firm than game manufacturers that has to do with relevant demands in the industry. Short run: a period of time during which only some decisions can be changed. Long run: a period of time long enough to allow all decisions to be changed. Stage 1= long run: decide whether to rent restaurant space. Some costs are fixed, some vary with output. 10 dollars is the cost needed to break even.

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Related Questions

1) As the unemployment rate rises:

A) the separation rate decreases.

B) the young and unskilled experience lower-than-average increases in unemployment.

C) the young and skilled experience larger-than-average increases in unemployment.

D) the young and unskilled experience larger-than-average increases in unemployment.

E) the proportion of the unemployed finding a job increases.

2) The natural level of employment will increase when which of the following occurs?

A) a decrease in the markup of prices over costs

B) an increase in the natural level of output

C) an increase in the actual unemployment rate

D) an increase in unemployment benefits

E) an increase in the markup of prices over costs

3) Suppose workers and firms expect the overall price level to increase by 4%. Given this information, we would expect that:

A) the real wage will decrease by 4%.

B) the real wage will increase by 4%.

C) the nominal wage will increase by less than 4%.

D) the nominal wage will increase by more than 4%.

E) the nominal wage will increase by exactly 4%.

4) An increase in the minimum wage will cause:

A) a reduction in the equilibrium real wage.

B) an increase in the natural rate of unemployment.

C) an increase in the equilibrium real wage.
D) a decrease in the natural rate of unemployment.

E) no change in the natural rate of unemployment.

5) In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on:

A) firms' markup over labor costs.

B) the nominal wage.

C) the interest rate.

D) the expected price level.

E) government spending.

6) The short-run aggregate supply curve (AS) is upward sloping because:

A) an increase in output causes an increase in employment, a reduction in unemployment, an increase in the nominal wage, and an increase in the price level.

B) a reduction in the aggregate price level causes a reduction in nominal money demand and a reduction in the interest rate.

C) a reduction in the aggregate price level (P) will cause a reduction in the interest rate and an increase in output.

D) an increase in the aggregate price level will cause an increase in the interest rate and a reduction in output.

E) an increase in the nominal wage causes a reduction in the amount of output that firms are willing to produce.

7) Assume that the economy is initially operating at the natural level of output. A simultaneous expansionary monetary policy and an increase in oil prices will cause which of the following?

A) an increase in output and a reduction in the interest rate in the short run

B) a reduction in output and an increase in the interest rate in the short run

C) a reduction in output and a reduction in the interest rate in the short run

D) an ambiguous effect in output and an increase in the price level in the short run

E) an ambiguous effect in output and a reduction in the price level in the short run

8) Assume that the economy is initially operating at the natural level of output. A one-time 4% reduction in the nominal money supply will cause:

A) a 4% increase in the price level in the medium run.

B) a 4% reduction in the price level in the medium run.

C) a 4% increase in the real money supply in the medium run.

D) a 4% increase in the interest rate (i) in the medium run.

E) a 4% reduction in investment in the medium run.

9) The original Phillips curve implied that:

A) the markup over labor costs is zero.

B) the expected inflation rate is equal to last year's inflation rate.

C) a lower rate of unemployment causes an increase in the rate of inflation.

D) the inflation is always zero.

E) the expected inflation is always zero.

10) In the Phillips curve equation, which of the following will NOT cause a rise in the current inflation rate?

A) a rise in the minimum wage

B) a rise in the expected inflation rate

C) a rise in the employment insurance

D) a drop in the markup

E) a fall in the unemployment rate

2. Using the AS and AD, WS and PS, and IS-LM graphs, illustrate and explain the short run and medium run effects of less stringent enforcement of existing antitrust legislation (Monopolist market power increased) . Explain what happens to P, Y, I, W/P, I and u.

Individals are of two di §erent abilities: high (H) and low (L). An individual knows his or her own

ability but an employer does not. Employers believe that both types of individuals are equally likely

in the population, and therefore has an initial (prior) belief that an individual is high ability with

probability 1. Before an individual looks for a job, he or she has an opportunity to go to college. 2

Assume that attending college does not change an individualiÌs ability; this problem shows that even in

this circumstance, college can perform a useful social function. The e §ort cost of attending college is

di §erent for individuals of di §erent abilities. In order to attend college, high ability individuals must

expend e §ort 1, and low ability individuals must expend e §ort 1, where a < 3 (this means that a 3a

low ability individual has a higher cost of attending college). Not attending college costs 0. After

observing an individualiÌs education (that is, whether he or she attended college) an employer makes

the individual a job o §er. The wage that the individual receives is equal to the employeriÌs belief that

the individual is high ability, given the level of schooling that the individual has chosen to acquire. For

example, if the employer believes that a college graduate is high ability with probability 2 he will o §er 3

a college graduate a wage of 2 . If he believes that an individal with no college education is high ability 3

with probability 1 , he will o §er an individual without college a wage of 1 : An individualiÌs payo § is 44

equal to his wage, minus the cost of education..

First consider a separating equilibrium. In a separating equilibrium, high ability individuals attend college, but low ability individuals do not.

  1. (a) If the employer observes that an individual did not attend college, what is his belief about the individualiÌs ability? What wage will he o §er individuals who do not attend college?

  2. (b) If the employer observes that an individual did attend college, what is his belief about the indi- vidualiÌs ability? What wage will he o §er individuals who attend college?

  3. (c) Given the wages paid to college graduates and those who do not attend, will the high-ability individual chooose to attend college? (Hint: compare the payo § of attending college for the high ability graduate to the payo § of not attending college)

  4. (d) Given the wages paid to college graduates and those who do not attend, for which values of a will the low-ability individual chooose to attend college? (Hint: compare the payo § of attending college for the low ability graduate to the payo § of not attending college)

  5. (e) In a separating equilibrium, a low ability individual does not attend college. For which values of a is this expectation consistent with the low ability individualiÌs strategy?

    Now, consider a pooling equilibrium in which all individuals attend college; that is, both high and low ability individuals attend college. If some individual were to choose not to attend college, the employer would believe that he or she must be low ability, and would o §er a wage of 0.

  6. (f) If the employer observes that an individual attended college, what is his belief about the individ- ualiÌs ability? What wage will he o §er to college graduates? (Hint: The employer expects that all individuals attend college. This means that attending college conveys no information about the individualiÌs true ability).

  7. (g) Given the wages paid to college graduates (and the wage that would be paid to non-grads) would the high-ability individual choose to attend college? For which values of a would the low ability individual choose to attend college?

  8. (h) In a pooling equilibrium, both high and low ability individuals attend college. For which values of a is this expectation consistent with the individualsiÌstrategies?

    Finally, consider a sem-separating equilibrium in which high-ability individuals attend college (for sure), but low ability students attend college with probability 0 < s < 1:

  9. (i) If the employer sees that an individual attends college what is his belief that the individual is high-ability? What is the wage to college graduates? (Hint: Remember, all high ability individuals attend, but low ability individuals attend with probability s. Divide the probability of an individual being high ability and attending college by the overall probability of an individual attending college).

  1. (j) If the employer sees that an individual did not attend college, what are his beliefs about the individualiÌs ability? (Hint: all high ability individuals attend college)

  2. (k) The low-ability individual is willing to randomize between attending college and not attending college. Use this to Önd the probability that the low-ability individual attends in equilibrium.

    Bonus: Comment on the purpose of college illustrated in this example. How is this purpose a §ected as college becomes easier for the low-ability type (i.e. as a increases)?

I. When the question requires a supply or demand graph, you are required to draw the graph(s) to answer the question. Do not forget to label your graphs completely and correctly.

II. If the question has multiple parts, like a, b, and c; you need to draw a graph for each part that requires one and separate your answers as a, b, and c.

III. When you draw graphs, you are also required to label them completely in order to earn full credit for your answers.

Separate your answers with their question number.

Question 1: Patrick owns a bagel business in Seattle and he wants to increase his total revenue. He knows that when bagels are $1.00, he sells 250 an hour, and when lowers the price to $0.75 he sells 275 an hour.

a. Using the midpoint formula and showing your work, calculate the price elasticity of demand for Patrick's bagels.

b. Using the price elasticity of demand for Patrick's bagels, explain whether he should raise or lower the price to generate more revenue.

c. Andrew's bakery moves in across the street from Patrick's shop. Explain what is likely to happen to the price elasticity of demand for Patrick's bagels.

 

Question 2: If we know that the price elasticity of demand is:

a. 5, graph the demand curve.

b. 0.5, graph the demand curve.

c. infinite, graph the demand curve

 

Question 3: A firm knows that the price elasticity of demand for its service is 0 (zero).

a. Graph this demand curve.

b. What should the firm do to the price of its good to raise total revenue?

 

Question 4: In a recession, there are many unemployed workers. Employers find that when the price of labor is $9.00, the quantity supplied is 200 workers. When they lower the wage to $8.50, 175 workers are willing to work.

a. Using the midpoint formula and showing your work, calculate the price elasticity for workers.

b. Over time, technology becomes more efficient as a substitute for workers. What happens to a firm's demand for workers? Explain.