ECON 101 Tutorial: Week 9 Shane Murphy Office Hours: Monday 3:00-4:00 – LUMS C85

Outline Roll Call Motivation Problems Discussion

Motivation

Exercise 1 Let P = 130 – (q1 + q2) Let MC1 = MC 2 = 10 a)If Firm 1 sets q1=40, what is the demand and revenue function for firm 2? What is marginal revenue for firm 2? What is firm 2’s best response? b)Now do the same for any value of q1. c)Do part b again but assume that competition is on prices (Bertrand). d)What is the stackelberg outcome? What is the competitive outcome? What is the single firm monopoly outcome?

Exercise 1 – What you need to know How to solve a Cournot model: Set P = 130 – (q1+q2) So TR1 = [130 – (q1+q2)]q1 TR1 = 130q1 – q1^2 – q2q1 And find MR MR1 = 130 – 2q1 – q2 Set MC = MR 10 = 130 – 2q1 – q2 Solve: q1 = (120 – q2)/2 Since q1=q2, we have q1 = (120 – q1)/2 Solve for q1, q1 = 40. So q2 = 40, p – 50, profit1 = profit2 = 1600

Exercise 1 – What you need to know How to solve a Bertrand and perfectly competative model: Set P = MC P = 10, Q = 120, profits = 0 How to solve a monopoly You probably do not need to solve a stackelberg – but recognize that the firm that goes first produces more output and gets greater profit.

Exercise 2 a) What is the relationship between marginal product of labor and marginal cost of production? a)They are always equal since labor and production are the two essential factors of production in our models b)The optimal output occurs where they intersect since marginality is the optimality condition c)They are inversely related since diminishing returns in production imply rising marginal cost for a given wage d)None of the above since Shane is too lazy to come up with another option

Exercise 2 b) What is the equation relating marginal product of labor, marginal cost of production, and wage? a)Wage = MPL^a * MCP^b b)Wage – MPL = profit – MCP c)Wage/MCP = MPL d)None of the above since Shane is too lazy to come up with another option

Exercise 3a) Which of the following do not cause a labor demand curve to shift? a)Output price b)Technological change c)Rise in supply of complementary inputs will increase labor demand d)Rise in supply of substitute inputs will reduce labor demand e)Increased minimum wage

Exercise 3b) Which of the following do not cause a labor demand curve to become more elastic (flatten)? a)Higher price elasticity of demand for final product b)Greater elasticity of supply in other factors of production c)Greater ease of substitution between labor and other inputs d)Lower price elasticity of demand for final product

Exercise 4) Ch 17 q4) If there are two types of workers, those with computer skills and those without, what will result if computers become more useful and more important to profit and productivity? a)Workers with cpu skills will have increased MP, shifting demand for these workers to the right and increasing wages for those with cpu skills. b)Workers without cpu skills will have increased MP, shifting demand for these workers to the right and increasing wages for those without cpu skills. c)All workers will see an increase in wages. d)Workers without cpu skills will see an increase in their value as some of their number go back to school to train in cpu skills.

Exercise 5a) Which of the following do not cause a labor supply curve to shift? a)Changes in non-labor income that are independent of wage ie lump-sum welvare payments b)Changes in property income c)Lottery wins d)Inheritances e)Divorce payments f)Grants g)Changes in labor demand

Exercise 5b) Which of the following do not cause a labor supply curve to become more inelastic (steeper)? a)Changes in wage rate b)Changes in income tax rates c)Change in taste for work d)Change in overtime premia e)Change in labor demand

Exercise 7) Ch 17 q9) Which of the following is a reason minimum wage distorts the labor market for teenagers more than for adults. a)Teenagers have a lower value of marginal product so it is more likely that the minimum wage will be above their value of marginal product b)The demand for teenage labor is more elastic than for adult labor, so the minimum wage law distorts the market more c)Both d)Neither

Exercise 8) The Nasty Party gets into government and decides to cut lump-sum unemployment benefits. Show the likely effects on an income-leisure diagram. Does labor supply rise or fall? Rises

Discussion Exercise 7) Ch17 q8) University students sometimes work as summer interns for private firms of the government. Many of these positions pay little or nothing. a)What is the opportunity cost of taking such a job? b)Explain why students are willing to take these jobs. c)If you were to compare the earnings later in life of workers who had worked as interns and those who had taken summer jobs that paid more, what would you expect to find?