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Exam 3

Exam 3. 12/4 chapters 10-12, 16 35 multiple choice, 1 problem labor demand example, ch 11 no calculators bring pencil, Oswego ID. Final Exam. Monday, 12/15, 8-10 a.m. 80 multiple choice bring pencil, Oswego ID cumulative study guide posted this week if taking MAT 102, 120, 210, 220

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Exam 3

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  1. Exam 3 • 12/4 • chapters 10-12, 16 • 35 multiple choice, 1 problem • labor demand example, ch 11 • no calculators • bring pencil, Oswego ID

  2. Final Exam • Monday, 12/15, 8-10 a.m. • 80 multiple choice • bring pencil, Oswego ID • cumulative • study guide posted this week • if taking MAT 102, 120, 210, 220 • makeup is Tues., 12/16, 2- 4 • makeup ONLY if you have a conflict with MAT

  3. Exam 3 Review • Monopolistic Competition • how does it compare? • choosing P & Q • Oligopoly • how does it compare? • interdependence

  4. Labor market • labor demand • labor supply • Public goods • Other (time permitting) • economic rent • collective bargaining

  5. Monopolistic competition • differentiated product • firms’ products are substitutable, • but NOT identical • many firms, no collusion • zero economic profit in LR • marketing means higher costs

  6. downward-sloping demand • MR < P • choose Q • where MR = MC • choose P • using demand curve

  7. P, cost MC $70 D MR Q (jeans/day) 150

  8. Oligopoly • few firms • interdependent • barriers to entry • differentiated, but substitutable product • economic profit possible in LR • set of possible behaviors

  9. Interdependence & behavior • P, Q decisions of one firm, • affects profits of other firm • cartel • firms collude to act like a monopoly • price leadership • one firm sets price, others follow

  10. game theory • show strategies when outcomes are interdependent • be able to interpret game box • be able to find Nash equilibrium? • is it best outcome?

  11. Airbus 3 planes 4 planes 4 planes Boeing 3 planes Payoff matrix profit, mil $ 32 30 32 40 40 36 30 36

  12. questions • IF Airbus is to earn $40 million profit, how many plane must Boeing produce? • 3 planes • What is Nash equilibrium? • 4 planes each • Is there a better outcome? • Yes, 3 planes each

  13. Labor demand • car wash example! • calculate MP, MRP • given wage, how much labor is hired? • hire until MRP = MRC • extra revenue of a unit of labor = • extra cost of a unit of labor (wage)

  14. what increases labor demand?(shifts right) • increase in demand for final product • healthcare & nurses • increase in labor productivity • increase in price of substitute for labor • ATMs vs. bank teller • decrease in price of complement to labor • truck and truck driver

  15. increase in technology • computer programmers • but demand for some types of labor will fall

  16. Labor supply • allocating scarce resource: time • substitution effect: • as wage rises, leisure is more expensive • work more, take less leisure

  17. income effect: • as wage rises, income rises • take more leisure since leisure is a normal good • work less

  18. substitution > income effect • labor supply upward sloping • substitution < income effect • labor supply downward sloping

  19. assume substitution > income effect, • UNLESS wages very high • backward bending labor supply curve

  20. S wage Q labor subst. < inc. effect subst. > inc. effect

  21. what increases labor supply?(shifts right) • increase adult population • increases in preferences for work • increase in education/training • decrease in nonwage income

  22. Public Goods • 2 characteristics: • nonrival, nonexclusive • nonrival • can be consumed by one person, without decreasing amount available for others

  23. nonexclusive • impossible or costly to exclude others from using it, once purchased

  24. examples: • lighthouse • flood control dam • national defense • law enforcement

  25. quasi-public good • nonrival, but exclusive • open access good • rival, but nonexclusive • private good • rival, exclusive • examples, page 341

  26. provision of public goods • public goods are nonexclusive • people will not buy them voluntarily • wait for someone else to buy them • free-rider problem • market will fail to provide public goods • so government taxes, and then provides public goods

  27. Provision of public goods • preferences of median voter • determine many outcomes • special interest • small groups with big stake -- rent seeking behavior • voters not well-informed -- rational ignorance

  28. special interest legislation • concentrated benefits (to a few) • widespread costs (to many) • public goods legislation • widespread benefits • widespread costs

  29. Collective bargaining • done between labor unions & employers • union negotiates wages, benefits, working conditions with employer • contract • agreement applies to all workers

  30. when disagreements arise • mediator • third party tries to help both sides agree • binding arbitration • both sides agree to accept a third party compromise • strike • not all unions can strike

  31. Economic rent • supply & demand of a resource • resource earnings • earnings • opp. cost + rent

  32. P res. S P* D Q res. Q* upward-sloping supply earnings split rent opp. cost

  33. P res. S P* D Q res. Q* inelastic supply earnings mostly rent rent opp. cost

  34. P res. S P* D Q res. Q* elastic supply earnings mostly opp. cost rent opp. cost

  35. if supply is perfectly inelastic (vertical) • no other uses for resource • opp. cost is zero • all earnings are rent

  36. if supply is perfectly elastic (horizontal) • many other uses for resources • earnings = opp. cost • no rent

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