Monopolistic Competition and Oligopoly - Econ 1 - Principles of Microeconomics

Define the following terms:

Cartel:

Collusion:

Mutually Interdependent Firms:

Oligopoly:

Predatory Pricing:

Mutual Interdependence:

Short Answer Questions:

1. Using complete sentences, write a brief paragraph explaining the differences between oligopolies in a contestable market and oligopolies a cartel market.

2. Why would low to no barriers to entry in an industry result in the competitive equilibrium even in an oligopoly with two firms?

3. If there are high barriers to entry, explain how an oligopoly with two firms can increase their short-run profits by tacit collusion?

4. Explain why a perfectly competitive firm will still earn a positive accounting profit even though they earn zero economic profit?

5. Explain why a monopolistically competitive firm has an incentive to advertise while perfectly competitive firms and monopolies do not.

6. What are four main barriers to entry which allow businesses to earn above normal profit?

7. Why does P = MR for the perfectly competitive firm while P > MR for the monopolist.

8. Why are oligopolistic firms "mutually interdependent"?

9. What are four different ways firms can differentiate their products from other competitors?

10. Why would firms facing competition choose to increase their average total cost of production through advertising and research and development in order to differentiate their products?

11. Why would the government make collusion illegal under anti-trust laws and regulations

12. Use the graph below to answer the following questions.

a. How many iPods would a contestable market model of oligopoly produce?

b. What price would the contestable market model of oligopoly charge?

c. How much profit would the contestable market model of oligopoly market make?

d. How many iPods would a cartel market model of oligopoly produce?

e. What price would a cartel market model of oligopoly charge?

f. How much profit will the cartel market model of oligopoly make?

Labor Markets

Part 1: Terms and Definitions

1. Competitive Labor Market
2. Monopsonistic Labor Market
3. Marginal Revenue Product
4. Marginal Product
5. Marginal Resource Cost
6. Marginal Factor Cost
7. Labor Unions

Part 2: Essay Questions. Please answer each question using complete sentences.

1. Explain how businesses decide to hire a worker

2. What are the primary functions of a labor union?

3. Explain how an area with only one employer (monopsony) will be able to pay less for their labor versus a competitive labor market.

4. Explain the concept of Derived Demand.

Part 3: How Businesses Decide to Hire a Worker

- You must remember, the decision to hire is a free choice and there must be some incentive for the business to pay a worker.
o Their money is there private property. Do you want someone to tell you what to do with your money?
- The Marginal Product (MP) is the additional output that an additional worker will produce for his business. This is very important because this is the incentive to hire more workers.
- The value of the marginal product is called the Marginal Revenue Product (MRP) is determined by multiplying the price by the marginal product
o The MRP is the demand for labor as it is the amount of additional money that an additional worker will add to the business
- The law of Diminishing Marginal Productivity states that eventually the productivity of an additional worker will decrease

The table below illustrates these concepts

1. Suppose the price of a chair is $20.00. Complete the table above
2. If the current wage rate was $10.00 how many workers would you hire?
3. If the wage was raised to $15.00 due to an increase in minimum wage, how many workers would you hire?
4. How did the businesses adjust to the raise in the minimum wage in this example?
5. Who benefitted from the minimum wage?
6. Who got hurt by the minimum wage?
7. Which of these people are more important?

Use the table below to answer the following questions

1. Complete the table above

2. A competitive labor market would hire workers at a wage of

3. Draw a graph illustrating the competitive markets hiring decision (two side-by-side graphs)

4. A monopsonistic labor market will hire workers at a wage of

5. Draw a graph illustrating the monopsonistic markets hiring decision (two side-by-side graphs)

7. Now suppose a labor union successfully negotiated a labor contract setting wages at $14. What would this do to the competitive labor market depicted in the above table?

8. Draw a corresponding graph to your answer for question 7.

9. Now suppose a labor union successfully negotiated a labor contract setting wages at $14. What would this do to the monopolistic labor market depicted in the above table?

10. Draw a corresponding graph to your answer for question 9.

11. Suppose the demand for the firm's product has increased due to a change in preferences. The increase in demand increased the price of the good to $4.50.

a. Complete the table below for the new price level.

b. As a result of the new price the new competitive wage rate is and workers will be employed

c. Draw two side-by-side graphs representing the derived demand for this firm's labor demand