Economics 104 Topic 4: Imperfect Markets

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Questions and Answers

Why is marginal revenue (MR) lower than price (P) under a monopoly?

Because of the downward sloping demand curve. (correct)

Due to perfect elasticity of demand.

MR always equals P in monopolistic markets.

There are multiple buyers influencing the price.

What characterizes a monopoly in an industry?

There are multiple sellers but with identical products.

There is only one seller of the good. (correct)

There are many buyers and many sellers.

The market price is determined through auction.

What does the equation MR = P(Q) - Q indicate about marginal revenue?

Marginal revenue can be negative in some scenarios. (correct)

Marginal revenue increases with increasing output.

Marginal revenue is always greater than price.

Marginal revenue is independent of output.

In a perfectly competitive market (PCM), what is the relationship between price and marginal revenue?

P = MR Signup and view all the answers

What kind of market structure is formed when there is only one buyer of an input?

Monopsony Signup and view all the answers

When the elasticity of demand (eQ) is equal to infinity, which of the following occurs?

MR = P Signup and view all the answers

In which market structure is it true that price is greater than marginal revenue?

Monopoly Signup and view all the answers

What implication does a downward sloping demand curve have for a monopolist?

They must lower the price to sell more units. Signup and view all the answers

What condition indicates the profit-maximizing level of labor, L?

MVPL = MFCL Signup and view all the answers

At what point can exploitation occur in a monopsonistic labor market?

When MVPL > w Signup and view all the answers

If LPCM is greater than LM, what can be concluded about the wages under each scenario?

wPCM > wM Signup and view all the answers

To find the profit maximizing level of L using the function, which equation must be satisfied?

P * Q(L) = w(L) * L Signup and view all the answers

Which of the following best describes the relationship under perfect competition between MVPL and wage?

MVPL = w Signup and view all the answers

What does the equation $rac{ ext{d} ext{π}}{ ext{d}L} = 0$ imply in this context?

Profit is maximized Signup and view all the answers

In the context of labor market equilibrium, what does MFCL represent?

Marginal Factor Cost of Labor Signup and view all the answers

What occurs when the value of additional output produced is greater than the cost to society in a monopsonistic market?

Inefficient allocation occurs Signup and view all the answers

What condition applies when marginal revenue product of labor equals the marginal factor cost in a perfectly competitive market?

MRPL = w Signup and view all the answers

In the context of a monopoly in the product market, which relationship holds true as output increases?

P > MR Signup and view all the answers

What characterizes the factor market condition in a monopsony?

MFCL > w(L) Signup and view all the answers

When both the product market is imperfect and the factor market is perfectly competitive, which equation holds?

MVPL = w Signup and view all the answers

In the scenario of an imperfect market both in product and factor, what equality is established?

MRPL = MFCL Signup and view all the answers

What outcome occurs when comparing output levels between a monopoly and a perfectly competitive market?

QPCM > QM Signup and view all the answers

In the case of a perfectly competitive market for labor, which statement correctly reflects price relationships?

MRPL = MR Signup and view all the answers

Which of the following statements is true regarding the marginal factor cost in a perfectly competitive factor market?

MFCL = MRPL Signup and view all the answers

What is the formula for the Marginal Factor Cost of Labor (MFCL) under monopsony?

MFCL = w(L) + L * (dw/dL) Signup and view all the answers

If w(L) = 20 + 2L, what is the expression for the Marginal Factor Cost of Labor (MFCL)?

MFCL = 20 + 4L Signup and view all the answers

Why might the Marginal Factor Cost of Labor (MFCL) exceed the wage rate w(L)?

Firms need to offer higher wages to attract new workers. Signup and view all the answers

What does the equation TFCL = w(L) * L represent?

Total Factor Cost of Labor Signup and view all the answers

What is the relationship between MFCL and w(L) for a firm under monopsony conditions?

MFCL can be greater than w(L). Signup and view all the answers

What does MFCL > w(L) imply for the firm's labor market strategy?

The firm needs to increase wages to attract more labor. Signup and view all the answers

If w(L) is defined as 20 + 2L, what is the derivative dw/dL equal to?

2 Signup and view all the answers

What is the purpose of increasing wages for old workers alongside new workers according to the MFCL?

To maintain equity among employees. Signup and view all the answers

What does the equation $\delta = MVPL - wM$ represent in the context of monopsonistic exploitation?

The difference between the marginal value product of labor and the wage paid to labor Signup and view all the answers

What is the outcome when $L^M < L^PCM$?

Employment restriction due to market power Signup and view all the answers

How is the marginal cost of labor calculated in monopsonistic conditions?

It increases as more labor is employed Signup and view all the answers

What is the equation used to derive the profit maximizing condition in this model?

$MVPL = MFCL$ Signup and view all the answers

What is the calculated value of $wM$ at equilibrium when $L^*M = 30$?

145 Signup and view all the answers

What results from setting $MVPL = wPCM$ in a perfectly competitive situation?

Higher wages than in a monopsony Signup and view all the answers

What does $L^*PCM$ signify in the context of this model?

The labor employment level in a perfectly competitive market Signup and view all the answers

How is $MFCL$ calculated based on the given formulas?

$MFCL = 100 + 3L$ Signup and view all the answers

Study Notes

Learning Objectives

Compare perfectly competitive versus imperfect factor markets.
Demonstrate profit maximization in imperfect product and factor markets.

Key Concepts

Monopoly: A market structure with a single seller, leading to lower Marginal Revenue (MR) than Price (P).
Marginal Revenue in Monopoly: MR is less than P due to the relationship between Total Revenue (TR) and Quantity (Q).
Monopsony: A market structure with a single buyer of inputs, causing wage effects.

Market Comparisons

In perfectly competitive markets, Price equals Marginal Revenue (P = MR).
In imperfect markets (monopoly), Price is greater than Marginal Revenue (P > MR).
Two major markets:
- Product Market: Marginal Revenue equals Marginal Cost (MR = MC)
- Factor Market: Marginal Revenue Product of Labor (MRPL) equals Marginal Factor Cost of Labor (MFCL)

Factor Market Cases

Perfectly Competitive Product & Factor Markets:
- MVPL (Marginal Value Product of Labor) equals wage (w).
Imperfect Product & Perfectly Competitive Factor Market:
- MVPL equals MFCL.
Perfectly Competitive Product & Imperfect Factor Market:
- MRPL (Marginal Revenue Product of Labor) equals wage (w).
Imperfect in both Product and Factor Markets:
- MRPL equals MFCL.

Profit Maximization

Profit maximization condition: MRPL = MFCL.
For monopsony, the condition is modified to reflect wage differentials and incentives for hiring.

Monopsony Analysis

Wage Rate and Labor Demand:
- A monopsonist faces an upward-sloping labor supply, necessitating higher wages for additional labor.
Graphical Representation shows wage differentials and quantity levels between monopsony and perfect markets.

Numerical Example

Production Function: Q(L) = 25L - 0.1L²
Output Price: P = 10
Wage Rate Function: w(L) = 100 + 1.5L
Marginal Product of Labor (MPL): Derived as MPL = 25 - 0.2L.

Profit Maximization Calculations

Monopsony Level of Labor (L*M): Solved as L*M = 30 with corresponding wage wM = 145.
Marginal Factor Cost (MFCL) and MVPL equality at L*M established at 190.

Perfect Competition Reference

Comparatively, L*PCM calculated as approximately 42.875 and corresponding wage wPCM at 164.286.

Exploitation Rate in Monopsony

Defined as δ = MVPL - wM, indicating potential inefficiencies in labor hiring.

Conclusion Insights

Monopsonistic conditions lead to employment restriction (LM < LPCM) and wage repression (wM < wPCM).

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Description

This quiz focuses on Employment of Factors in Imperfect Markets as covered in Economics 104. Students will compare perfectly competitive and imperfect factor markets, and demonstrate profit maximization strategies. It's designed to enhance understanding of the complexities within these market structures.