One of the three fundamental tasks of a firm is to hire or buy inputs, and this part of the business is shown in economics with supply curves for resources. The table below shows two supply curves that represent two different markets of resources. In which of these markets is the firm a price taker? ?? Market for Labor Market for Machines Neither market Both markets In which is it a price searcher? ?? Market for Labor Market for Machines Neither market Both markets Marginal resource cost is the cost of adding another unit of resource. In the two tables below, fill in the marginal-resource-cost columns. (If you have problems, try to first compute the total cost, and from that get marginal resource cost.) Market for Labor Market for Machines Wage Amount of Labor Supplied Marginal Resource Cost Price Amount of Capital Supplied Marginal Resource Cost $10 1 $ $10 1 $ $10 2 $ $11 2 $ $10 3 $ $12 3 $ $10 4 $ $13 4 $ $10 5 $ $14 5 $ A supply curve is a boundary that limits buyers. What will the supply curve for labor shown above look like if we draw it? ?? A horizontal line A vertical line A line sloping downward to the right A line sloping upward to the right The region in which the firm is allowed by this supply curve is the area ?? above/to the left below/to the right of the supply curve. With the first supply curve above, where price and hence average resource cost is constant, marginal resource cost is ?? greater than equal to less than price. In the second supply curve, where price is rising and hence average resource cost is rising, marginal resource cost is ?? greater than equal to less than price. What should matter to the firm when it decides how much of a resource to buy, the price or the marginal resource cost? ?? price marginal resource cost The supply curve that a monopsonist faces is similar to ?? the first supply curve above the second supply curve above both supply curves above neither supply curve above . Suppose the firm facing the second supply curve can buy the first at $10, then buy another for $11.00 but still keep buying the first at $10, etc. This pattern of pricing is a form of price discrimination. What would the marginal resource cost of the fourth unit of capital be in this case? $ Some introductory courses in economics explain income and substitution effects while other introductory courses leave them for more advanced courses. Here are a few questions that should let you know what is involved in them and why they can sometimes be important. For most goods and services the income effect is very small and can be ignored. Below are some exceptions. a) Suppose that the price of automobiles rises. As a result, you can afford to buy ?? more less goods, and this income effect encourages you to buy ?? more less car services. The substitution or incentive effect ?? increases decreases the attractiveness of buying cars relative to other goods and services. Hence, what can we predict? ?? People will buy more cars. People will buy fewer cars. We cannot be sure what they will do. b) Suppose wages rise. As a result, people will be able to afford ?? more less goods and services, and thus the income effect encourages them to buy ?? more less leisure, which means they want to work ?? more less . This is the income effect. The substitution or incentive effect says that the attractiveness of earning money relative to other uses of time has ?? increased decreased . Hence, what can we predict? ?? People will work more. People will work less. We cannot be sure what they will do. c) Suppose interest rates rise. As a result, the possible consumption patterns over our lifetime are ?? higher lower and this income effect should cause people to ?? consumer more and save less consume less and save more . The substitution or incentive effect notes that consuming in the future is ?? more less attractive to consuming in the present, and this should cause saving to ?? increase decrease . Hence, what can we predict? ?? People will save more. People will save less. We cannot be sure what they will do. d) Suppose rents fall. As a result, you can afford ?? more less goods and services including housing, and this income effect encourages you to buy ?? more less housing. The substitution or incentive effect ?? increases decreases the attractiveness of housing relative to other goods and services. Hence, what can we predict? ?? People will rent more housing. People will rent less housing. We cannot be sure what they will do.
One of the three fundamental tasks of a firm is to hire or buy inputs, and this part of the business is shown in economics with supply curves for resources. The table below shows two supply curves that represent two different markets of resources. In which of these markets is the firm a price taker? ?? Market for Labor Market for Machines Neither market Both markets In which is it a price searcher? ?? Market for Labor Market for Machines Neither market Both markets
Marginal resource cost is the cost of adding another unit of resource. In the two tables below, fill in the marginal-resource-cost columns. (If you have problems, try to first compute the total cost, and from that get marginal resource cost.)
A supply curve is a boundary that limits buyers. What will the supply curve for labor shown above look like if we draw it? ?? A horizontal line A vertical line A line sloping downward to the right A line sloping upward to the right The region in which the firm is allowed by this supply curve is the area ?? above/to the left below/to the right of the supply curve.
With the first supply curve above, where price and hence average resource cost is constant, marginal resource cost is ?? greater than equal to less than price. In the second supply curve, where price is rising and hence average resource cost is rising, marginal resource cost is ?? greater than equal to less than price. What should matter to the firm when it decides how much of a resource to buy, the price or the marginal resource cost? ?? price marginal resource cost The supply curve that a monopsonist faces is similar to ?? the first supply curve above the second supply curve above both supply curves above neither supply curve above .
Suppose the firm facing the second supply curve can buy the first at $10, then buy another for $11.00 but still keep buying the first at $10, etc. This pattern of pricing is a form of price discrimination. What would the marginal resource cost of the fourth unit of capital be in this case? $
Some introductory courses in economics explain income and substitution effects while other introductory courses leave them for more advanced courses. Here are a few questions that should let you know what is involved in them and why they can sometimes be important. For most goods and services the income effect is very small and can be ignored. Below are some exceptions.
a) Suppose that the price of automobiles rises. As a result, you can afford to buy ?? more less goods, and this income effect encourages you to buy ?? more less car services. The substitution or incentive effect ?? increases decreases the attractiveness of buying cars relative to other goods and services. Hence, what can we predict? ?? People will buy more cars. People will buy fewer cars. We cannot be sure what they will do.
b) Suppose wages rise. As a result, people will be able to afford ?? more less goods and services, and thus the income effect encourages them to buy ?? more less leisure, which means they want to work ?? more less . This is the income effect. The substitution or incentive effect says that the attractiveness of earning money relative to other uses of time has ?? increased decreased . Hence, what can we predict? ?? People will work more. People will work less. We cannot be sure what they will do.
c) Suppose interest rates rise. As a result, the possible consumption patterns over our lifetime are ?? higher lower and this income effect should cause people to ?? consumer more and save less consume less and save more . The substitution or incentive effect notes that consuming in the future is ?? more less attractive to consuming in the present, and this should cause saving to ?? increase decrease . Hence, what can we predict? ?? People will save more. People will save less. We cannot be sure what they will do.
d) Suppose rents fall. As a result, you can afford ?? more less goods and services including housing, and this income effect encourages you to buy ?? more less housing. The substitution or incentive effect ?? increases decreases the attractiveness of housing relative to other goods and services. Hence, what can we predict? ?? People will rent more housing. People will rent less housing. We cannot be sure what they will do.
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