Deck 12: Pure Monopoly

Question 1

Suppose the productivity of capital and labor are as shown in the accompanying table. The output of these resources sells in a purely competitive market for $1 per unit. Both capital and labor are hired under purely competitive conditions at $3 and $1, respectively.
a. What is the least-cost combination of labor and capital the firm should employ in producing 80 units of output Explain.
b. What is the profit-maximizing combination of labor and capital the firm should use Explain. What is the resulting level of output What is the economic profit Is this the least costly way of producing the profit-maximizing output

Answer 1

a) Any specific level of output will be produced with the least costly combination of variable resources when the marginal product per dollars' worth of each input is the same - that is, when So, the least-cost combination is found by equating the ratios of the marginal products of each input to their prices. It is given that price of capital = $3 and price of labour = $1. The least cost combination of labour and capital to be employed in producing 80 units of output iS₂ units of capital anD₄ units of labour. In this combination, the ratios of marginal products of labour and capital to their prices are equal.
At 4 units of labour , At 2 units of capital , b) A firm is employing the profit-maximizing combination of resources when each resource is used to the point where its marginal revenue product equals its price. In terms of labour and capital, profit maximizing combination occurs when the MRP of labour equals the price of labour and MRP of capital equals the price of capital.
It is given that the output of these resources sells in a purely competitive market for $1 per unit. Both capital and labour are hired under purely competitive conditions at $3 and $1, respectively.
In a purely competitive resource market, the marginal resource cost (MRC) is equal to the resource price P. Thus, for any competitive resource market, we have the profit maximizing equation as MRP (resource) = P (resource).
At 7 units of capital, At 7 units of labour , So, the firm should use 7 units of capital and 7 units of labour to get the profit-maximizing combination.
The resulting level of output iS₁42 (= 96 from capital anD₄6 from labour).
Total revenue (TR)
= Price × Quantity
= 142 ×$1
= $142
Total cost (TC)
= Fixed cost + variable cost
= (7×$3) + (7×$1)
= $28
Economic profit
= TR - TC
= $142 - $28
= $114.
If a firm is maximizing profit according to the above equation, then it must be using the least-cost combination of inputs to do so. Hence, we can conclude that this is the least costly way of producing the profit-maximizing output.

Question 2

In each of the following four cases, MRP L and MRP C refer to the marginal revenue products of labor and capital, respectively, and P L and P C refer to their prices. Indicate in each case whether the conditions are consistent with maximum profits for the firm. If not, state which resource(s) should be used in larger amounts and which resource(s) should be used in smaller amounts.
a.
b.
c.
d.

Answer 2

a) Therefore, the ratios of MRP; price for both the resources labor and capital is more than 1. So, both the resources should be used in larger amounts. b) Ratio of MRP and price is less than 1 in case of labor and more than 1 in case of capital. So, labor should be used in smaller amounts and capital in larger amounts. c) Ratios of MRP and Price for both the resources, labor and capital is exactly equal to 1. So, in this condition maximum profits are obtained for the firm. d) Both the above ratios are less than 1. Hence, both labor and capital should be used in smaller amounts.

Question 3

Florida citrus growers say that the recent crackdown on illegal immigration is increasing the market wage rates necessary to get their oranges picked. Some are turning to $100,000 to $300,000 mechanical harvesters known as "trunk, shake, and catch" pickers, which vigorously shake oranges from trees. If widely adopted, what will be the effect on the demand for human orange pickers What does that imply about the relative strengths of the substitution and output effects

Answer 3

If mechanical harvesters are widely adopted, there will be a decrease in the demand for human orange pickers.
This implies that substitution effect will have greater relative strength than the output effect. That is, with the increase in wage rates for citrus growers, they substituted mechanical harvesters for human orange pickers.

Question 4

Explain the economics of the substitution of ATMs for human tellers. Some banks are beginning to assess transaction fees when customers use human tellers rather than ATMs. What are these banks trying to accomplish

Question 5

What is the significance of resource pricing Explain how the factors determining resource demand differ from those determining product demand. Explain the meaning and significance of the fact that the demand for a resource is a derived demand. Why do resource demand curves slope downward

Question 6

SELECTED OCCUPATIONS-WHAT ARE THEIR EMPLOYMENT OUTLOOKS Use the A to Z index in the Bureau of Labor Statistics Occupational Outlook, at www.bls.gov/oco/, to determine the general and specific employment outlooks for ( a ) textile machinery operators, ( b ) financial managers, ( c ) computer operators, and ( d ) dental hygienists. Why do these job outlooks differ

Question 7

At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market.
a. How many workers will the firm hire if the market wage rate is $27.95 $19.95 Explain why the firm will not hire a larger or smaller number of units of labor at each of these wage rates.
b. Show in schedule form and graphically the labor demand curve of this firm.
c. Now again determine the firm's demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive labor unit. Compare this demand curve with that derived in question 2 b. Which curve is more elastic Explain.
Marginal product data, top to bottom: 17; 14; 12; 10; 7; 5. Total revenue data, top to bottom: $0, $34; $62; $86; $106; $120; $130. Marginal revenue product data, top to bottom: $34; $28; $24; $20; $14; $10.

Question 8

THE OVERALL DEMAND FOR LABOR-IN WHICH COUNTRIES HAS IT INCREASED THE MOST In countries where real wages are steady or rising, increases in total employment reflect increases in labor demand. Go to the Bureau of Labor Statistics Web site, www.bls.gov/fls , and select Comparative Civilian Labor Force Statistics. Calculate the percentage increases in civilian employment for the United States, Japan, Germany, France, Great Britain, Italy, and Canada for the most recent 10-year period. Which three countries have had the greatest growth of labor demand, as measured by the percentage change in employment Which three the smallest

Question 9

Suppose that marginal product tripled while product price fell by one-half in Table 12.1. What would be the new MRP values in Table 12.1 What would be the net impact on the location of the resource demand curve in Figure 12.1
Reference Table 12.1
Reference Figure 12.1

Question 10

In 2005 General Motors (GM) announced that is would reduce employment by 30,000 workers. What does this decision reveal about how it viewed its marginal revenue product (MRP) and marginal resource cost (MRC) Why didn't GM reduce employment by more than 30,000 workers By less than 30,000 workers

Question 11

(Key Question) What factors determine the elasticity of resource demand What effect will each of the following have on the elasticity or location of the demand for resource C, which is being used to produce commodity X Where there is any uncertainty as to the outcome, specify the causes of the uncertainty.
a. An increase in the demand for product X.
b. An increase in the price of substitute resource D.
c. An increase in the number of resources substitutable for C in producing X.
d. A technological improvement in the capital equipment with which resource C is combined.
e. A fall in the price of complementary resource E.
f. A decline in the elasticity of demand for product X due to a decline in the competitiveness of product market X.