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What is the Hotelling Paradox?
View of product differentiation
"More of the same"-fewer choinces, almost no variety, few important, significant differences in products
What are some effects of advertising on prices of goods and services?
Decrease In Supply, Increase in Demand -shown on graph
- Increase price:
- Increase cost, increase demand
- Decrease price:
- promotes price competition and comparison shopping
Industry dominated by a few large firms
Ex- car ford, chrysler, gm, toyota
One firm in an oligopoly changes price, all other firms follow and set same price (mutually interdependent)
Why do mutually interdependent Oligopolies have a kinked demand curve?
- Firm A lowers price: assume other firms match a price decrease. Sales volume will increase by a small amount. Demand Inelastic. TR goes down
- Firm A raises price: assume other firms do not match a price increase, sales volume will decrease alot. Demand Elastic.
Briefly describe what a "Cartel" is?
- Group of sellers in an industry who get together (meeting) and adopt common policies regarding price, production level, market area, or any business practice.
- Firms cooperate in order to increase profits
Explain how a Cartel can increase the profits for each member.
- Strong Cartel
- Demand is inelastic
- Dominant market share
- Cohesiveness-to resist economic incentive to break agreement
Explain why every Cartel member has an economic incentive to break the Cartel agreement.
In a carel at a quota MR>MC incentive to produce more than quato so profits go higher
Demand for labor is based on Demand for final product being produced
Marginal Product of Labor
Extra output produced by hirig one more worker
Marginal Revenue Product of Labor
- Extra revenue generated for the firm by hiring one more worker.
- MRP= Marginal product * price of goods
What is the decision rule used by an employer to determine if an additional unit of labor whould be hired?
Benefits vs Cost
- MRP > Wage - hire
- MRP < Wage - don't hire
Draw a graph of the demand curve for labor.
- MRP=Demand for labor
- straight line for wage given
- above wage line hire, below no hire
Why does the supply of labor curve have a positive slope?
Higher wage attracts more people into this occupation (Incentive)
Use a supply-demand graph to show how the "equilibrium wage" can be determined
- graph supply of labor and demand for labor
- where they intersect is the equilibrium
Use a supply-demand graph to explain how the minimum wage can cause unemployment
- graph supply and demand curve
- minimum wage is above market wage
- creates a surplus of workers
- causing unemployment
What can cause a change in the Demand for Labor?
- increase in demand-increase in use of final product being produced, worker productivity, and use of complimentary factor of production.
- decrease in demand- decrease in final product being produced, increase in use of a substitue factor of production
anything that a worker does in order to increase productivity
Use supply-demand graphs to illustrate the effect that a change in supply of labor would have on the equilibrium wage.
- Increase in supply: job more popular, immigration of workers, decrease in number of alternative job opportunities
- Decrease in supply: job is less popular, limited training facilities, emigration, lots of alternate job opportunities
Use supply-demand diagrams to show how workers can raise their own wages.
- Decrease in supply, Increase in Demand
- teacher illustration
Common property resources
natural resources that are owned equally by everyone "no single owner"
How do common property resources get over utilized in a market economy?
single person incur opportunity cost of managing resources vs. society at large gets future benefits
Private property resources
natural resources that have a single owner
- seller can exclude non payer from using good
- your use of a private good prevents others from using the same private good
goods that once provided can be consumed equally by everyone reqardless who pays.
seller can not exclude a non payer from using public good
your use of a public good does not prevent other people from using the same public good
person who consumes a public good but does not pay
Why is there a tendency for public goods to be under-provided in a market economy?
your consumption of a public good depends on the contribution of others. Incentive to free ride, if too many public good underprovided
Collective good (closed public good)
- seller can exclude a non payer and your use does not prevent others from useing the product.
- Ex. toll roads
Why is it possible to earn positve economic profit from production of a collective good
seller incurs production cost 1 time, each consumer pays for product
How does an economist determine the optimal level of pollution?
- weigh the marginal benefits of cleaning the environment vs. cost of cleaing the environment
- hard to compare
- Occurs when an action by someone imposes uncompensated cost on other people
- ex-build a freeway could lower home value for others
- Occur when an action by someone creates uncompensated benefits on other people.
- ex-build a freeway, restaurant owner gets more customers
Why would negative externalities cause the social marginal cost curve to differ from the private marginal cost curve?
- negative externalities-some cost are being borne by society at large
- private mc paid by firm
- social mc full cost to society
- social mc = private mc + negative externalities
Why would negative externalities cause a the firm to sell its products at the wrong price and produce at the wrong quantity
wrong price frim ins not payint its full producing cost
What are 2 ways to deal with Negative externalities?
- zoning laws
- interalize the externalitiy
What is meant by internalize the externality
force compensation on person who creates the negative externalities