Question 4

  • Substitution Effect and Income Effect

    The effect of a fall in price Normal good Inferior good Giffen good Substitution effect Increases quantity demanded Increases quantity demanded Increases quantity demanded Income effect Increases quantity demanded Decreases quantity demanded Decreases quantity demanded Overall Increases quantity demanded- downward sloping demand curve Increases quantity demanded; downward sloping demand curve Decreases quantity demanded; upward sloping demand curve

    If the price of a good increases, then there will be two different effects - known as the income and substitution effect. If a good increases in price. 1 . The good is relatively more expensive than alternative goods and people can switch to other goods. (substitution effect) 2. The increase in price reduces disposable income and this lower income may reduce demand. (income effect) The substitution effect states that an increase in the price of a good will encourage consumers to buy alternative goods. The substitution effect measures how much the higher price encourages consumers to use other goods, assuming the same level of income. The income effect looks at how the price change effects consumer income. If price rises, it effectively cuts disposable income and there will be lower demand. For example: • If the price of meat increases, then the higher price may encourage consumers to switch to alternative food sources, such as buying vegetables. • However, with the higher price of meat, it means that after buying some meat, they will have lower spare income. Therefore, consumers will buy less meat because of this income effect. If a good like a diamond increases, there will be little substitution effect because there are no alternatives to diamonds. However, a higher price of diamonds will lower demand because of the income effect.

Question 24

24. Which of the following statements correctly identifies a difference between perfect competition and monopolistic competition? (A) In perfect competition there are no barriers to entry, but there are strong barriers in monopolistic competition. (B) In perfect competition there are many firms, but in monopolistic competition there are onl a few firms. C) In perfect competition the firms all sell products that are exactly the same, but in monopolistic competition each firm sells a sli htl differentiated duct. (D) In perfect competition firms maximize profit by selling the quantity where marginal revenue equals marginal cost, but in monopolistic competition firms maximize profit by selling the quantity where marginal revenue exceeds marginal cost. (E) In perfect competition there are few consumers, but in monopolistic competition there are many consumers.

How does Monopolistic Competition differ from Perfect Competition? Number of producers (sellers in the market) Types of goods and services available for consumers Does the firm have control over their own prices? Is branding / marketing important? Are entry barriers zero, low or high? Perfect Competition Many Homogeneous NO — price takers NO Zero barriers Does this market structure lead to allocative yes: Price = MC efficiency in the long run? Does this market structure lead to yes - min LRAC productive efficiency in the long run? Monopolistic Competition Many Differentiated Yes — some pricing power Yes — key non-price competition Low barriers Not quite (P\>MC) No — higher LRAC

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Question 26

26. For an unregulated.mpnopolist, the Drofit- quantity will always be In ee stlcreglono e man curve w ere margm revenue eq s pnce (C) where price equals average total cost (D) where price equals marginal cost (E) where the marginal cost curve intersects the demand curve

Profit Maximization. The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Profit Maximization - Cliffs Notes https:mwww.cliffsnotes.com/study-guides/economics/monopoly/profit-maximization

Question 28

  • Marginal revenue product

    Marginal revenue product (MRP), also known as the marginal value product, is the market value of one additional unit of output. Marginal Revenue Product (MRP) - Investopedia 10 12 s 67 www.amosweb.com 9 10 www.investopedia.com/terms/m/marginal-revenue-product-mrp.asp

  • Marginal product

    In economics and in particular neoclassical economics, the marginal product or marginal physical product of an input (factor of production) is the change in output resulting from employing one more unit of a particular input (for instance, the change in output when a firm's labor is increased from five to six units), Marginal product - Wikipedia https://en.wikipedia.org/wiki/Marginal\_product 10 12 s 67 www.amosweb.com 9 10

  • Relationship between Marginal revenue product and Marginal product

    The Value of the Marginal Product and the Demand for Labor The value of the marginal product is the marginal product of the input multiplied by the market price of the output. l/ A/IPL = MPL x p MRP = MPLxP The value of the marginal product (also known as marginal revenue product) is measured in dollars. • It diminishes as the number of workers rises because the market price of the good is constant.

Question 41

41. Which of the following will occur in a perfectly competitive labor market if Firm X' s demand for labor decreases? Equilibrium Market Wage Rate (A) Increase No chan e No change (D) Decrease (E) Decrease Employment by Firm X Increase No chan e Decrease Decrease No change

Wages Ttr market Wages The single firm In a competitive labour market, the sir.le firm takes its wage rate from the market. MRP (0) D (MRP) Q Labour Labour

Question 42

10 15 Market Wage MRP 40 90 NUMBER OF WORKERS 42. The graph above shows the marginal revenue product (MRP) and the market wage rate for a profit-maximizing firm. Which of the following is true of the firm's hiring of labor? (A) It should hire 15 workers. (B) It should hire between 15 and 40 workers. (C) It should hire 40 workers. It should hire between 40 and 90 workers. It should hire 90 workers.

The Profit-Maximizing Employment Level Marginal approach to profit A firm should take any action that adds more to its revenue than to its cost Hire another worker when MRP \> W, but not when MRP < W To maximize profit, the firm should hire the number of workers such that MRP = w Where the MRP curve intersects the wage line Hall & Leiberman; Economics: Principles 11

Question 56

56. Which of the following is true of a monopolisti- cally competitive firm in long-run equilibrium? (A) (B) (D) (E) Price equals marginal cost and average total cost. Price equals average total cost but is greater than mar 'nal cost. Price equals marginal cost and is greater than average total cost. The firm makes no attempt to differentiate its products. The firm earns positive economic profits by producing at minimum average cost.

Price, cost, marginal revenue -ATC MC MG,c (b) Long-Run Equilibrium in Monopolistic Competition MC ATC QMC Quantity Minimum-cost output

  • Monopolistic competition operates to the left of minimum-cost output and has excess capacity

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