Chapter 18 – Factors of Production
1. Explain why the labor demand curve is the value of the marginal product curve for labor
2. Explain why the labor supply curve is usually upward sloping
3. Explain why a competitive firm maximizes profit when it hires labor to the point where the wage equals the value of the marginal product of labor
4. Demonstrate the similarity between the labor market and the market for other factors of production
5. Explain why the change in the supply of one factor alters the value of the marginal product of the other factors
Chapter 19 – Earnings and Discrimination
1. Explain why an economics professor earns less than a corporate economist of similar age, background, and training
2. Explain the differing impact of policies aimed at increasing the educational attainment of all workers under the signaling and the human-capital view of education
3. List the characteristics of a market where superstars can arise
4. List three reasons why a wage can rise above the equilibrium wage
5. Explain why differences in wages among groups does not by itself say anything about how much discrimination there is in the labor market
6. Explain why competitive employers are unlikely to discriminate against groups of employees unless the customers or the government demands it
Chapter 20 – Distribution of Income
1. Explain how the women’s movement has affected income distribution in the United States
2. Name some factors that cause the measurement of income distribution to exaggerate the degree of income inequality
3. Compare and contrast utilitarianism, liberalism and libertarianism
4. Explain the concept of a negative income tax
Chapter 21 – Theory of Consumer Choice
1. Draw a budget constraint on a graph if you are given the value of income and the prices of the good
2. Explain why indifference curves must slope downward in the two products considered are ‘goods’
3. Explain the relationship between the relative prices and the marginal rate of substitution between two goods at the consumer’s optimum
4. Shift the budget constraint when the price of a good increases
5. Demonstrate the income and substitution effect on a graph using indifference curves and budget constraints
6. Show why someone’s labor-supply curve might be backward sloping
Chapter 22 – Frontiers
1. Describe the information asymmetry in the labor market
2. Explain why insurance companies screen potential customers
3. Generate an example of the Condorcet voting paradox
4. Explain why people are willing to sign contracts that require them to contribute a portion of their paychecks to a retirement savings program.
Wednesday, December 06, 2006
Saturday, December 02, 2006
Friday, December 01, 2006
Capital Supply
The expressed consumer preferences between consumption today and consumption tomorrow (alternatively, when young and when old) is precisely what defines the supply of financial capital in our stylized market. The important thing to note here is that the difference between the two consumption periods, essentially the gap between what is spend today and what will be spend tomorrow, is equal to the amount that households save today plus any interest rate on that amount.Therefore, we may ask: "How do interest rate changes affect household saving (and thus the supply of capital) in the market?
1. If the substitution effect of a higher interest rate is greater than the income effect, then households save more.
2. If the income effect of a higher interest rate is greater than the substitution effect, then households save less.
The two possible effects are shown in the diagram above. With a similar thinking that we applied to derive the backward-bending labor supply curve, you may infer that we are going to be faced with a backward-bending savings supply curve.
Labor Supply
We assume that the individual will try to maximize their utility, within a fixed number of hours (24 hours a day). This means, there is a trade off (opportunity cost) between how many hours a person works and the hours spent on leisure.
The opportunity cost involved in working - forgone hours of leisure - give a backward bending supply of labor curve for the individual (see Figure 1).
The key to understanding the principle is the concept of utility. For example, if the consumer is in equilibrium, then the utility they get purchasing goods with the income they earn in the last hour will equal the utility they would gain from the last hour leisure time. (i.e. the Marginal Utilities per dollar spent on each of the activities are equal, exactly at the consumption optimum).
If the wage rate increased from W1 to W2 then due to a higher income the individual would have a greater utility, hence, they would be willing to increase their hours worked per day to L2. Over this section of the curve the substitution effect is positive, the income effect is negative, but the substitution effect is greater than the income effect. Therefore, the increase in the real wage rate will cause an increase in the number of hours worked.
However, if the wage rate increased from W2 to W3, then the number of hours worked per day would fall from L2 to L3. This is because the income effect is greater than the substitution effect.
The processes involved in the decision to work more or less hours is termed the income and substitution effects. The higher wage means that the individual could work fewer hours to maintain the same consumption patterns of goods and services. Therefore, the income effect would mean that an individual would work fewer hours. However, the substitution effect is that the higher wage will mean the utility gained from the last hour work is greater than the utility gained from an hour of leisure. This is because the higher wage means the individual can purchase more goods. Consequently, the individual will substitute work for leisure until the utilities equal (i.e the consumer is back in equilibrium between work and leisure).
An interesting issue is that individuals have different characteristics and utilities. Hence the degree of trade off between the utility of an hour worked and the utility of an hour of leisure will be different. This implies that the elasticity of substitution between leisure and consumption will vary. It is likely that the low income households will tend to be less responsive to wage changes than higher income groups due to the high substitution effect.
Tuesday, November 21, 2006
Shifts in Labor Supply and Demand
An increase in the demand for labor will shift the labor demand curve to the right, creating a shortage at the original wage. This will put upward pressure on the equilibrium wage causing the quantity of labor supplied to increase. The value of the marginal product rises because MRPL = P x MPL (and either P or MPL have risen to cause the demand for labor to rise). This implies that both the wage and the value of the marginal product are now higher.
A decrease in the demand for labor, will shift the labor demand curve to the left, creating a surplus at the original wage. This will put downward pressure on the equilibrium wage causing the quantity of labor supplied to decrease. The value of the marginal product falls because MRPL = P x MPL (and either P or MPL have risen to cause the demand for labor to rise MRPL = P x MPL (and either P or MPL have fallen to cause the demand for labor to decline). This implies that both the wage and the value of the marginal product are now lower.
An increase in the supply of labor would shift the supply curve to the right, creating a surplus of workers at the original wage. This will put downward pressure on the equilibrium wage causing the quantity of labor demanded to rise. As the number of workers employed rises, the marginal product of labor falls due to the diminishing marginal product of labor. Thus, both the wage and the value of the marginal product of labor are now lower.
An decrease in the supply of labor would shift the supply curve to the left, creating a shortage of workers at the original wage. This will put upward pressure on the equilibrium wage causing the quantity of labor demanded to fall. As the number of workers employed falls, the marginal product of labor rises due to the diminishing marginal product of labor. Thus, both the wage and the value of the marginal product of labor are now higher.
A decrease in the demand for labor, will shift the labor demand curve to the left, creating a surplus at the original wage. This will put downward pressure on the equilibrium wage causing the quantity of labor supplied to decrease. The value of the marginal product falls because MRPL = P x MPL (and either P or MPL have risen to cause the demand for labor to rise MRPL = P x MPL (and either P or MPL have fallen to cause the demand for labor to decline). This implies that both the wage and the value of the marginal product are now lower.
An increase in the supply of labor would shift the supply curve to the right, creating a surplus of workers at the original wage. This will put downward pressure on the equilibrium wage causing the quantity of labor demanded to rise. As the number of workers employed rises, the marginal product of labor falls due to the diminishing marginal product of labor. Thus, both the wage and the value of the marginal product of labor are now lower.
An decrease in the supply of labor would shift the supply curve to the left, creating a shortage of workers at the original wage. This will put upward pressure on the equilibrium wage causing the quantity of labor demanded to fall. As the number of workers employed falls, the marginal product of labor rises due to the diminishing marginal product of labor. Thus, both the wage and the value of the marginal product of labor are now higher.
Sunday, November 19, 2006
Wednesday, November 15, 2006
More on Advertising
From: http://en.wikipedia.org/wiki/Advertising (check for more details)
Whereas marketing aims to identify markets that will purchase a product (business) or support an idea and then facilitate that purchase, advertising is the paid communication by which information about the product or idea is transmitted to potential consumers.
In general, advertising is used to convey availability of a "product" (which can be a physical product, a service, or an idea) and to provide information regarding the product. This can stimulate demand for the product, one of the main objectives of advertising. More specifically, there are three generic objectives of advertisements : communicate information about a particular product, service, or brand (including announcing the existence of the product, where to purchase it, and how to use it), persuade people to buy the product, and keep the organization in the public eye (called institutional advertising). Most advertising blends elements of all three objectives. Typically new products are supported with informative and persuasive ads, while mature products use institutional and persuasive ads (sometimes called reminder ads).
Advertising frequently uses persuasive appeals, both logical and emotional (that is, it is a form of propaganda), sometimes even to the exclusion of any product information. More specific objectives include increases in short or long term sales, market share, awareness, product trial, mind share, brand name recall, product use information, positioning or repositioning, and organizational image improvement.
Examples of the ideas, informative or otherwise, that advertising tries to communicate are product details, benefits and brand information. Advertising usually seeks to find a unique selling proposition (USP) of any product and communicate that to the user. This may take the form of a unique product feature or a perceived benefit. In the face of increased competition within the market due to growing numbers of substitutes there is more branding occurring in advertising. This branding attributes a certain personality or reputation to a brand, termed brand equity, which is distinctive from its competition. Generally, brand equity is a measure of the volume and homogeneity of, as well as positive and negative characteristics of, individual and cultural ideas associated with the product.
Effective advertising will stimulate demand for a product and build brand equity and brand franchise. When enough brand equity is created that the brand has the ability to draw buyers (even without further advertising), it is said to have brand franchise. The ultimate brand franchise is when the brand is so prevalent in people's mind (called mind share), that it is used to describe the whole category of products. This phenomena is sometimes known as "hyperbranding." Kleenex, for example, can distinguish itself as a type of tissue or a label for a category of products. That is, it is frequently used as a generic term. One of the most successful firms to have achieved a dominant brand franchise is Hoover, whose name was for a very long time synonymous with vacuum cleaner (and Dyson has subsequently managed to achieve similar status, having moved into the Hoover market with a more sophisticated model of vacuum cleaner). The strength of a brand franchise can be established to a greater or lesser degrees in various markets. In Texas, for example, it is common to hear people refer to any soft drink as a Coke, regardless of whether it is actually produced by Coca-Cola or not (more accurate terms would be 'cola' or 'soda').
A legal risk of the dominant brand franchise is that the name can become so widely accepted that it becomes a generic term, and loses trademark protection. Examples include "escalator", "aspirin" and "mimeograph".
Whereas marketing aims to identify markets that will purchase a product (business) or support an idea and then facilitate that purchase, advertising is the paid communication by which information about the product or idea is transmitted to potential consumers.
In general, advertising is used to convey availability of a "product" (which can be a physical product, a service, or an idea) and to provide information regarding the product. This can stimulate demand for the product, one of the main objectives of advertising. More specifically, there are three generic objectives of advertisements : communicate information about a particular product, service, or brand (including announcing the existence of the product, where to purchase it, and how to use it), persuade people to buy the product, and keep the organization in the public eye (called institutional advertising). Most advertising blends elements of all three objectives. Typically new products are supported with informative and persuasive ads, while mature products use institutional and persuasive ads (sometimes called reminder ads).
Advertising frequently uses persuasive appeals, both logical and emotional (that is, it is a form of propaganda), sometimes even to the exclusion of any product information. More specific objectives include increases in short or long term sales, market share, awareness, product trial, mind share, brand name recall, product use information, positioning or repositioning, and organizational image improvement.
Examples of the ideas, informative or otherwise, that advertising tries to communicate are product details, benefits and brand information. Advertising usually seeks to find a unique selling proposition (USP) of any product and communicate that to the user. This may take the form of a unique product feature or a perceived benefit. In the face of increased competition within the market due to growing numbers of substitutes there is more branding occurring in advertising. This branding attributes a certain personality or reputation to a brand, termed brand equity, which is distinctive from its competition. Generally, brand equity is a measure of the volume and homogeneity of, as well as positive and negative characteristics of, individual and cultural ideas associated with the product.
Effective advertising will stimulate demand for a product and build brand equity and brand franchise. When enough brand equity is created that the brand has the ability to draw buyers (even without further advertising), it is said to have brand franchise. The ultimate brand franchise is when the brand is so prevalent in people's mind (called mind share), that it is used to describe the whole category of products. This phenomena is sometimes known as "hyperbranding." Kleenex, for example, can distinguish itself as a type of tissue or a label for a category of products. That is, it is frequently used as a generic term. One of the most successful firms to have achieved a dominant brand franchise is Hoover, whose name was for a very long time synonymous with vacuum cleaner (and Dyson has subsequently managed to achieve similar status, having moved into the Hoover market with a more sophisticated model of vacuum cleaner). The strength of a brand franchise can be established to a greater or lesser degrees in various markets. In Texas, for example, it is common to hear people refer to any soft drink as a Coke, regardless of whether it is actually produced by Coca-Cola or not (more accurate terms would be 'cola' or 'soda').
A legal risk of the dominant brand franchise is that the name can become so widely accepted that it becomes a generic term, and loses trademark protection. Examples include "escalator", "aspirin" and "mimeograph".
LR Equilibrium in Monopolistic Competition
The picture above represents the long run equilibirum of a monopolistically competitive firm. The short run profits induce entry into the industy. The increased entry has two effects. The first is the business stealing effect. New companies, with new differentiated products, capture some of the market of the existing firms. At the same time, the existence of more substitutes due to entry, causes the demand curve for the individual firm to be more elastic (D to D' and MR to MR'). In the long run, the industry settles at a point where there are zero economic profits for all the firms (at q lower than the min of ATC).Tuesday, November 14, 2006
Demand Elasticity and Total Revenue
Note: Please ignore the minus sign in front of the elasticity numbers. This post refers to the the link between Total Revenue (TR) and the elastic part of the demand curve.
As shown in the figure, the elasticity in the upper part of the demand curve, between the horizontal intercept and the midpoint of the demand line is the area where the elasticity is less than -1 (or greater than +1). At the midpoint the elasticity is = 1, and this is where TR is maximized (i.e. where MR=0).
To the right of the midpoint, on the lower part of the demand curve, elasticity is greater than -1 (or less than +1). In this area TR is falling as the price falls.Firms should never willingly operate in the inelastic part of their demand curves. By producing less they can increase revenues so, by definition, profits would be higher. Firms will not operate where we have unit elasticity unless there are no costs of production.
Comments on PS 4
Hey guys, here are a couple of comments on PS4
a. With regards to extra credit, the range of credit is 1 to 3, one being given for legitimate effort and 3 given for a correct answer.
b. For question 1, please note that machinery is NOT a cost. Read the solutions carefully and let me know if you have further questions on this one.
c. Your graphs need to be more precise! Do not forget to label the axis and/or the curves! This is important! There is no reason to lose points on the hourlies for such things!
Also, a request from the grader: Please staple your problem sets before handing then in and your writing needs to be legible!
a. With regards to extra credit, the range of credit is 1 to 3, one being given for legitimate effort and 3 given for a correct answer.
b. For question 1, please note that machinery is NOT a cost. Read the solutions carefully and let me know if you have further questions on this one.
c. Your graphs need to be more precise! Do not forget to label the axis and/or the curves! This is important! There is no reason to lose points on the hourlies for such things!
Also, a request from the grader: Please staple your problem sets before handing then in and your writing needs to be legible!
Sunday, November 12, 2006
Battle of the Sexes, Where do they go?
The Battle of the Sexes is a two player game used in game theory. Imagine a couple, Kelly and Chris. Kelly would most of all like to go to the football game. Chris would like to go to the opera. Both would prefer to go to the same place rather than different ones. If they cannot communicate where should they go?The the payoff matrix labeled "Battle of the sexes (1)" is an example of Battle of the Sexes, where Chris chooses a row and Kelly chooses a column.
This representation does not account for the additional harm that might come from going to different locations and going to the wrong one. In order to account for this, the game is sometimes represented as in "Battle of the sexes (2)".
How do we find the Nash Equilibrium in this case? Is there more than one?
Classic Prisoner's Dilemma and Pop Culture
Game Theory and Pop Culture: http://gametheory.net/popular/
The classical prisoner's dilemma (PD)* is as follows:
The classical prisoner's dilemma (PD)* is as follows:
Two suspects A, B are arrested by the police. The police have insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the silent accomplice receives the full 10-year sentence and the betrayer goes free. If both stay silent, the police can only give both prisoners 6 months for a minor charge. If both betray each other, they receive a 2-year sentence each.
It can be summarized thus:
| | Prisoner A Stays Silent | Prisoner A Betrays |
| Prisoner B Stays Silent | Both serve six months | Prisoner B serves ten years; Prisoner A goes free |
| Prisoner B Betrays | Prisoner A serves ten years; Prisoner B goes free | Both serve two years |
The dilemma arises when one assumes both prisoners are selfish enough to want to minimize their own jail term. Each prisoner has two options: to cooperate with his accomplice and stay quiet, or to betray his accomplice and give evidence. The outcome of each choice depends on the choice of the accomplice. However, neither prisoner knows the choice of his accomplice. Even if they were able to talk to each other, neither could be sure that they could trust the other.
Let's assume the protagonist prisoner is rationally working out his best move. If his partner stays quiet, his best move is to betray as he then walks free instead of receiving the minor sentence. If his partner betrays, his best move is still to betray, as by doing it he receives a relatively lesser sentence than staying silent. At the same time, the other prisoner thinking rationally would also have arrived at the same conclusion and therefore will betray.
It would be rational then for a prisoner to decide to cooperate if only he could be sure that the other player would not betray, and thus achieve a better result than in mutual betrayal. However, such a cooperation is then rationally vulnerable to the treachery of selfish individuals, which we assumed our prisoners to be. Therein lies the paradox of the game.
If reasoned from the perspective of the optimal interest of the group (of two prisoners), the correct outcome would be for both prisoners to cooperate with each other, as this would reduce the total jail time served by the group to one year total. Any other decision would be worse for the two prisoners considered together. However by each following their individual interests, the two prisoners each receive a lengthy sentence, which in fact hurts both the interest of the group and that of the individuals.
*Source: Wikipedia, www.wikipedia.comWednesday, November 08, 2006
Oligopoly Watch
A great blog on Oligopolies: http://www.oligopolywatch.com/
(Note: we will be covering oligopolies in class, on Monday of next week)
(Note: we will be covering oligopolies in class, on Monday of next week)
What is a Natrual Monopoly?
A comprehensive review in Wikipedia: http://en.wikipedia.org/wiki/Natural_monopoly
Tuesday, November 07, 2006
PS4 Solutions and PS5
Hey everybody,
The solutions to PS4 have been posted on the Ec10 Website.
Also PS5 has been posted as well. It is due on Friday, Nov 17th in Section.
Please note, I will hold my regular office hours on Wednesday, 7-8:30pom in Room 112, Littauer.
The solutions to PS4 have been posted on the Ec10 Website.
Also PS5 has been posted as well. It is due on Friday, Nov 17th in Section.
Please note, I will hold my regular office hours on Wednesday, 7-8:30pom in Room 112, Littauer.
Tuesday, October 31, 2006
Profit Maximization for a Competitive Firm
http://www.whitenova.com/thinkEconomics/profit.html
Hey guys, here's another nice applet to use for your understanding of profit maximization by a competitive firm.
Again, here, if you scroll down you will find the section of the "Interactive Graph". There you can see the usual cost curves of a firm, i.e. the Marginal Cost (MC), the Average (Total) Cost (ATC) and the Average Variable Cost (AVC).
First you select any price on the Y-axis. This is the price that is prevalent in the market. Remember, the firm is a price taker, therefore at the prevailing market price, it's demand curve is a horizontal line. Next, once you choose the price, you are asked to choose the profit maximizing quantity. Where are the profits maximized according to what we said in class? What is the universal profit maximizing condition?
Once you find the correct profit maximizing quantity, click on it. If your answer is correct, the applet will tell you so. Then, a couple of colored rectangles will appear, and if you scroll over them, the relevant areas on the graph will be highlighted.
The areas are:
TR = Total Revenue
TC = Total Cost
Greek Capital Pi = Profit (or Loss)
TVC = Total Variable Cost
TFC = Total Fixed Cost
You can perform the same analysis for different prices too! Let me know if you have any questions!
Hey guys, here's another nice applet to use for your understanding of profit maximization by a competitive firm.
Again, here, if you scroll down you will find the section of the "Interactive Graph". There you can see the usual cost curves of a firm, i.e. the Marginal Cost (MC), the Average (Total) Cost (ATC) and the Average Variable Cost (AVC).
First you select any price on the Y-axis. This is the price that is prevalent in the market. Remember, the firm is a price taker, therefore at the prevailing market price, it's demand curve is a horizontal line. Next, once you choose the price, you are asked to choose the profit maximizing quantity. Where are the profits maximized according to what we said in class? What is the universal profit maximizing condition?
Once you find the correct profit maximizing quantity, click on it. If your answer is correct, the applet will tell you so. Then, a couple of colored rectangles will appear, and if you scroll over them, the relevant areas on the graph will be highlighted.
The areas are:
TR = Total Revenue
TC = Total Cost
Greek Capital Pi = Profit (or Loss)
TVC = Total Variable Cost
TFC = Total Fixed Cost
You can perform the same analysis for different prices too! Let me know if you have any questions!
Monday, October 30, 2006
Firms Long Run Average Cost Curve
Hey guys, as promised, here's the link to the website that talks about the actual construction of a Long Run Average Cost Curve:
http://www.whitenova.com/thinkEconomics/lrac.html
The first couple of paragraphs is a nice recap of what we talked about in class. When you scroll down, you will see a paragraph titled "Interactive Graph". SRATC stands for Short Run Average Total Cost whereas the K's refer to different levels of capital. In this case, you may think of the K's as more factories. To use the applet you have to:
Start by clicking on Q1. The applet will give you two points on the two short run cost curves. You have to chose which one is the most efficient. In other words, suppose that the market dictated that you have to produce Q1: would it make sense for you to build that next factory or not? Thus, once you click on Q1, the applet gives you your cost choices and you chose the graph that corresponds to the right factory (i.e. SRATC curve). If you do that for all quantities, Q1 to Q6 and you get the correct answer, the applet will show you have the LRAC curve is constructed.
Let me know if you have any questions on using this.Thanks.
http://www.whitenova.com/thinkEconomics/lrac.html
The first couple of paragraphs is a nice recap of what we talked about in class. When you scroll down, you will see a paragraph titled "Interactive Graph". SRATC stands for Short Run Average Total Cost whereas the K's refer to different levels of capital. In this case, you may think of the K's as more factories. To use the applet you have to:
Start by clicking on Q1. The applet will give you two points on the two short run cost curves. You have to chose which one is the most efficient. In other words, suppose that the market dictated that you have to produce Q1: would it make sense for you to build that next factory or not? Thus, once you click on Q1, the applet gives you your cost choices and you chose the graph that corresponds to the right factory (i.e. SRATC curve). If you do that for all quantities, Q1 to Q6 and you get the correct answer, the applet will show you have the LRAC curve is constructed.
Let me know if you have any questions on using this.Thanks.
Unit Test C
Unit Test C began on Sunday, Oct 29th and the deadline for our section is MONDAY, NOV 6th
You can find an updated Unit Test Schedule here
You can find an updated Unit Test Schedule here
Sunday, October 22, 2006
Friday, October 13, 2006
New Helpful Hint - Quotas
Please note that a new helpful hint has become available on the EC10 website and concerns Quotas! Make sure you have a look at it before the hourly!!
Thursday, October 12, 2006
1st Hourly Details
Change of exam location!
FOR BOTH MY 11AM AND 12PM SECTIONS: THE EXAM WILL TAKE PLACE AT 12PM IN Harvard 202!
Exam Coverage: All text readings up to and including Chapter 9 and all outside readings up to and including the ones for this week's problem set (#2).
Thus, Chapter 10 and Chapter 11 -- the topics of sections on this coming Friday and Monday will NOT be on this exam. They'll be tested on the next exam.
The official EC10 website now has "Practice Problems for First Hour Exam" section where you can find practice problems for the hourly.
For those of you that cannot attend my review section on Tuesday, 7:30-9:30pm, the Head Section Leader, David Johnson will give a coursewide review section on Tuesday 4:30-6pm, Room:TBA on the official EC10 website.
FOR BOTH MY 11AM AND 12PM SECTIONS: THE EXAM WILL TAKE PLACE AT 12PM IN Harvard 202!
Exam Coverage: All text readings up to and including Chapter 9 and all outside readings up to and including the ones for this week's problem set (#2).
Thus, Chapter 10 and Chapter 11 -- the topics of sections on this coming Friday and Monday will NOT be on this exam. They'll be tested on the next exam.
The official EC10 website now has "Practice Problems for First Hour Exam" section where you can find practice problems for the hourly.
For those of you that cannot attend my review section on Tuesday, 7:30-9:30pm, the Head Section Leader, David Johnson will give a coursewide review section on Tuesday 4:30-6pm, Room:TBA on the official EC10 website.
Subscribe to:
Comments (Atom)
