Economics and Statistics

Market Failures: Market failures occur when a market fails to efficiently allocate goods or services, or when the market fails to provide a specific good or service. Externalities are the side effects of the production and consumption of a good or service. Positive externality : when a good or service produces a benefit for some that are neither the producer or consumer of the good/service. Example: when doctors administer flu shots to their patients. Other people who did not pay to get the vaccine, still benefit from this as the probability of getting the flu is lowered (see herd immunity ). If a good creates a positive externality , its marginal social benefit (or MSB) is greater than its marginal private benefit (MPB). MPB is the market demand. The graph above represents the market for flu vaccine. The presence of a positive externality creates a deadweight loss, since the privage market is unable to efficiently allocate vaccine (MSB>MC). The socially optimum price and quantity

1. If a firm has the following production function, and the firm is a monopoly with the following demand curve, find the MRPL equation for this firm. Step one, solve for the MPL: Step two, find the revenue function and derive the MR: Step three, remember the formula for the MRPL: 2. the demand and supply for labor in a market are as follows: Find the equilibrium wage rate and quantity of labor hired: Find the economic rent for workers at the equilibrium wage rate: If the workers want to optimize their economic rent, is the wage from part a the one they would choose? No, the economic rent is optimized by looking at the intersection of the MR and supply curve. You can see that if I set my wage at about $7.78, the economic rent for the workers is much bigger than the one found at the equilibrium wage rate. Source: the problems were inspired by the exercises on pages 297-298 in Study Guide For Microeconomics, 8th edition (2013) by J.Hamilton, and V.Suslow.

Perfectly-competitive factor markets: A competitive factor market is a market in which a large amount of firms are looking to hire similar workers. Due to the numerous firms in the market, each firm's hiring decision does not influence the market wage rate. These firms are referred to as wage-takers . The market wage (w) is determined by the equilibrium of the supply and demand curve for labor (see the graph below). The market labor demand is the summation of all the firms' MRP's at each quantity, and the market supply curve is determined by the workers' willingness to provide more labor at higher wage rates.  For a competitive firm, the market wage is the firm's marginal factor cost (MFC) and the supply curve (S) it faces. Supply equals marginal factor cost because wage is constant. The firm hires the quantity that is equal to the intersection between its MRP and w. Monospony in the factor market: A monospony occurs when there is only a single buyer in a market. If

Definition: Factor markets: markets for the factors of production (example: labor and capital). Markets are formed whenever consumers and producers meet to exchange goods or services. Deriving factor demand: the demand for goods or services in the product markets creates demand for the factors of production.  An increase (decrease) in demand for good X leads the suppliers to increase their production thereby increasing (decreasing) the demand for the factors of production.   Marginal revenue product: The demand for the factor of production is formed by multiplying a firm's marginal revenue by its marginal product.  Remember that by taking the derivative of the TR function with respect to Q we are able to find the MR. Marginal product on the other hand is found by taking the derivative of the production function with respect to a factor of production (L or K for example). Marginal revenue product (MRP): the change in total revenue when one more input is employed. It decreases as mor

You are given a payoff matrix for two firms in an oligopoly market. Find the dominant strategy (if any) for each firm. What profit would they each earn if they form a cartel (if possible)? Can the cartel hold in the long run? If not, what is the long run equilibrium? Payoff Matrix:  Firm A: high prices  Firm A: low prices Firm B: high prices A: $1000 B: $1000 A: $1200 B: $800 Firm B: low prices A: $600 B: $1200 A: $700 B: $700 The dominant strategy for firm A is to charge a low price for its product. You can see that no matter what firm B chooses, firm A is always better off by choosing the low price option (i.e its profit is always bigger than if it had charged a high price). The strategy for firm B depends on the choices firm A makes. If firm A charges a high (low) price then firm B should charge a low (high) price. In order to find the point at which the firms would collude (i.e act as one monopolistic firm), find the point(s) where the sum of economic profits is the greatest. Then