Lecture 11 Quiz

Model Answers Submitted By Students

  1. A ____________ is one and only one buyer in a market.

Monopsony (Sarah C.)

  1. In terms of P, MP, and W, state when a company in a competitive market hires an additional worker at wage W.

P x MP > W (Scott J.)

You hire an additional worker when (PxMP) > W (Zack S.)

When Marginal Benefit (Price times Marginal Product) exceeds Wage or when Marginal Profit is positive. (Sarah S.)

  1. What is the marginal factor cost of a monopsony when it increases is wage for 10 employees from $11 to $12 in hiring an 11th employee? Show your work.

$12+[10x($12-$11)] = $22 (Lisa H.)

  1. Kevin owns a company and notices that he receives fewer applications for jobs, and that his employees quit at a higher rate, than his competitors. What would you first look at as the possible reason?

At first glance, I would say that the wage for his employees is too low. If the wage is lower than that of other companies, then that explains why there is a low number of applications and a high quitting rate. (Chris R.)

… What I would first look at is how Kevin pays his employees and then how his competitors pay their employees. A discrepancy there may be the reason. The next thing to look at is what Kevin’s former employees think of their old boss. If Kevin is not a good boss, then that also would account for the high turnover rate he has. (Dan L.)

Does he make enough money to pay his employees? Are his competitors promising more benefits to their employees that Kevin can’t beat? If Kevin is making enough to pay his employees but not promising enough benefits his employees would leave. (Alexandra S.)

  1. Brandon unionized all the employees in an industry and then tried to both increase their wages and the number of people employed. Is this possible? Are there conditions which would make it possible?

Yes, it’s possible, but very unlikely. If the wage is increased, and more employees added, then if it’s in a competitive market (which is implied, since Brandon is unionizing an industry as opposed to a single company) then many of the companies will likely go out of business. It would be much more likely to happen if there were a monopsony. (Mary Rose B.)

This is possible if the industry is a monopsony. (Anthony B.)

If Brandon were to unionize all of the employees in an industry, and then demand an increase in wages and the number of people employed, it is unlikely that he would succeed. As wages increase, the demand for labor decreases …. (Eric J.)

  1. Suppose a Masters of Business Administration (MBA) costs $30,000 a year for two years and full time studying. How much would someone already making $40,000 a year have to earn upon graduation to make it worthwhile?

I’d say you should make at least $140,000 because that much money has been lost, not including interest for a loan. (Cara M.)

It cost $140,000 to get the masters. The answer really depends on how long he wants to wait to see a return on his investment. (Abigail L.)

  1. Suppose you run the local phone monopoly, and want to know the short-run and long-run conditions for shutting down. Explain them in terms of average variable cost (AVC), average total cost (ATC) and price (P).

A monopoly shuts down … in the short run, if AVC> P.

… in the long run, if ATC > P. (Kirstin L.)

I will shut down in the short-run if P<AVC. I will shut down in the long-run if P<ATC. (Michael N.)

  1. Abigail has to pay $10.50 to hire nine workers, and must increase the wage to $11 to hire a tenth worker. But the tenth worker will bring in $13 extra to the firm’s revenue. Does Abigail hire the tenth worker?

Abigail does NOT hire this new worker because this new worker will be losing the company money. Where beforehand the cost was $94.50, it is now $110 with the new worker. The difference is $15.50. The $13 thus will only partly cover the new costs and will lose the company money. (Charles A.)

No. She would lose money by hiring him, because the total cost of his wage, plus the fifty cent increase in the other nine worker’s wages, amounts to more than thirteen dollars. (Gregory J.)

She should not hire the tenth worker. The marginal factor cost of hiring the tenth employee would be: $11 + 9($.50) = $15.50. Accounting profit is total revenue minus explicit costs, so the accounting profit of hiring the tenth worker would be $13 – $15.50 = -$2.50. Thus, Abigail would lose $2.50 by hiring a tenth worker. (Chris J.)

  1. Marginal revenue product is the change in total revenue resulting from a unit change in the quantity of a variable unit employed. Now redo and explain question 46 on the exam:

Factor of production is any input (e.g., land, labor and capital) used to produce output. A monopolist will continue to purchase a particular factor of production until:

(a) average factor cost equals average revenue product

(b) marginal factor cost equals marginal revenue

(c) marginal factor cost equals marginal revenue product

(d) average factor cost equals marginal favor cost

  1. He will keep making money until MFC = MRP. … (Ben S.)

(c) … Factor of production is any input used to produce more output. So a monopolist will keep buying this factor of production, which increases his output, until the cost of this factor of production is equal to the revenue received from operating it. Once he has reached this point he is making no more profit off the factor of production. (Chris B.)

  1. If our class is a monopsony with respect to dinner speakers addressing large classes of high school homeschoolers, can we set the fee at whatever we like? Do we have leverage with respect to setting a fee?

We can’t because we have to live on the supply curve just as a monopoly has to live on the demand curve, and some people would rather not speak to our audience for less than a certain amount. … (Joseph S.)

Even if we were a monopsony, we would not be able to set the fee at whatever we like. There is still always the Law of Demand which clearly states that the higher the price, the lower the demand. … (Rebecca B.)

Yes, we do have major leverage about the price, assuming the speaker wants to talk at our dinner. (Kevin H.)

We can’t set the fee at whatever we want because at a certain point demand will be 0, causing our revenue to be 0. But we do have some leverage because if a dinner speaker wants a job he must get it from us. (Brandon M.)

… If our class is a monopsony only in New Jersey the speaker would either have to lower [his] costs or [he] would have to go out of state to speak. (Jessica H.)

We do not have complete liberty to change prices to extremes, because then speakers will just give up on being speakers and become lawyers or something (just kidding … (Alyssa G.)

  1. Explain: when consumer demand (demand for output) is more elastic, then demand for labor by a company tends to be more elastic.

If the demand for output is elastic any change in price will have a large effect on the demand for the good. This in turn raises or lowers the quantity or supply of the good. In order to increase or decrease supply, however, the firm must hire or fire existing labor. So the labor demanded by the firm changes according to the Q demanded. Now, if the demand for output is elastic, the demand for labor will also be elastic because it will have a domino effect along the specified changes. (Kris T.)

Well, It’s a little like pushing over a domino, and they all fall. It’s like a chain reaction. They’re all linked. Here, what if the demand for a product is elastic? Say then, a Wal-Mart opens selling the same stuff, and you lose business. So you sell less, and so you produce less, and then you don’t need those extra workers, so you fire them! (Phyllis S.)

  1. Imagine yourself as a powerful regulator who can set the price of a certain good in a certain industry wherever you want. Suppose that the free market, competitive equilibrium would have the price settle at P=$5. Where would you set the price if you diabolically wanted to cause a shortage of goods? Where would you set it if you diabolically wanted to cause a surplus of goods? Explain.

If you diabolically wanted to create a shortage of goods you would set the price of the goods anywhere below $5 because if the price is below the equilibrium price then the consumers will demand more than equilibrium quantity and the suppliers will supply less than equilibrium quantity. This creates a shortage of goods because there is more quantity demanded than quantity supplied. If you diabolically wanted to cause a surplus you would set the price above $5 because if the price is above equilibrium price then the suppliers will supply more than equilibrium quantity and consumer will demand less than equilibrium quantity. This creates a surplus because there is more quantity supplied than quantity demanded. (Tim S.)

If I wanted to cause a shortage, I would lower the price and set it at $4. For a surplus I would raise it to $6. The reason why is because then price is lowered, demand goes up. However, supply remains the same, so there’s not enough goods to satisfy demand. When it is raised, the Law of Demand comes into play again, only has the opposite effect-less people buy the goods so there is an oversupply. (Sarah B.)