Microeconomics Exam 3 Study Guide Chapter 10 1 Who demands and supplies in a resource market Firms demand and households supply 2 What are the characteristics of a competitive labor market A firm using only one variable factor of production which is labor will use labor as long as its marginal revenue product exceeds its unit cost 3 How do firms decide how many workers to hire They hire the last worker whose marginal revenue product of labor MRPL is greater or equal to wage 4 MRPL Marginal Revenue Product of Labor the additional revenue generated from the last worker employed change in total revenue TR divided by the change in labor L 5 MFC Marginal Factor Cost the additional cost of employing another unit of the input 6 You can calculate a firm s MRPL by multiplying the marginal productivity of labor MPL by the value added from labor to the last unit of output Px or by dividing the change in TR by the change in L 7 What is a firm s demand for labor The downward sloping portion of MRPL 8 How do you find the market demand for labor The sum of each firms MRPL curves Chapter 12 1 What condition satisfies Pareto Optimality No change can be made in an economic arrangement where some people benefit and no one loses ex Voluntary exchange and no effect on third parties 2 What condition satisfies Potentially Efficient No change can be made to an economic arrangement where some people benefit more than other people lose ex Breaking up monopolies would be more of a win for customers than it would be a loss for the firms 3 What s the socially efficient level of production characterized by in product markets P MC The value to society from the last unit consumed is equal to the opportunity cost of resources used to produce the last unit 4 What does price represent The value to society from the last unit consumed 5 What does MC represent The opportunity cost of resources used to produce the last unit 6 What does P MC mean for society Society values the last unit greater than the opportunity cost of producing it society prefers more output 7 What does P MC mean for society Society values the last unit less than the opportunity cost of producing it society prefers less output 8 What market structure results in the socially efficient level of production With perfect competition each firm produces where P MC 9 What s the socially efficient level of employment in labor markets MRPL PL wage 10 What does MRPL represent to society The value of society from employing the last unit of labor 11 What does the market price of labor PL represent Opportunity cost of employing the last unit of labor 12 If MRPL PL what does that mean to society Society gains more value from employing another worker than the opportunity cost of the worker society prefers more workers 13 Market Failure When free markets fail to provide the most efficient outcome 14 4 Sources of Market Failure 1 Imperfect Competition few buyers or sellers differentiated products or barriers to entry in the long run 2 Public Goods 3 Externalities when 3rd parties are affected by the product exchange or consumption of a good 4 Imperfect Asymmetric Information the buyer and seller have a different amount of information 15 Public Goods Goods which are non rival and non exclusive in competition under produced by free markets ex Police protection 16 Positive Externalities Public education P MC where P no longer represents the additional value to society of the last unit since free markets under produce these goods 17 Negative Externalities Pollution gambling P MC where MC no longer represents the opportunity cost of producing the last unit since free markets over produce goods with negative externalities 18 Moral Hazard One party to a contract passes the cost of the behavior to the other party 19 Adverse Selection A market outcome only attracts one type of undesirable buyer or seller Chapter 13 1 Market structure of a monopoly 1 many buyers and sellers 2 no close substitutes 3 barriers to entry in the long run 2 Barriers to Entry 1 Legal barriers patents copyrights government franchises 2 Sole ownership of a key resource 3 Natural monopoly 4 Network externalities buyers gain value from a product when other buyers purchase it like Facebook 3 Natural Monopoly Large economies of scale relative to demand then one firm can produce a good cheaper than many firms would ex Power water utilities tend to have high fixed costs and relatively lower MC 4 Monopolists set the price on the market demand curve 5 How does a monopolist increase their output By lowering their price where MR is always below price 6 What s a monopoly s marginal revenue curve MR and how does it get its shape MR starts at the same point as the demand curve and is a straight line down at a negative angle below the demand curve 7 How does a monopoly maximize profit Where MR MC 8 What s the relationship between MR and the demand curve MR is positive when demand is elastic MR is negative when demand is inelastic MR is zero when demand is unitary elastic 9 What decisions do monopolies face in the short run and the long run In the long run the monopolist must maintain its barriers to entry In the short run if P MC then monopolies under produce from society s point of view 10 How can a monopolist earn an economic profit in the long run By maintaining its barriers to entry 11 Rent Seeking Behavior Any activity to create or protect barriers to entry 12 How much do monopolists spend on rent seeking behavior Firms are willing to spend as much as their economic profits on rent seeking behavior 13 Do monopolies produce the socially efficient level of production Monopolies lead to inefficient levels of output by producing less and charging more which makes it socially inefficient 14 What was the first legislation enacted to break up and prevent monopolies The Sherman act of 1890 Chapter 15 1 Market structure for monopolistic competition 1 many buyers and sellers 2 products are differentiated 3 free entry and exit in the long run 2 How is monopolistic competition different from perfect competition In monopolies products are differentiated where as in perfect competition products are homogenous 3 Demand for a monopolistic competitive firm Less elastic than a perfectly competitive firm but more elastic than the demand curve a monopolist faces because there are close substitutes 4 What is the shape of a monopolistic competitive firm s MR The same shape as an monopolists except that it s more flat 5 What is