Transcript Discussion_Session_4_-_Reviewx

Discussion Session 4 - Review
07/15/2015
Supply and Demand through a Labor Lens
• In the labor market, demand comes from firms who
“consume” labor to produce goods. Really labor is an input.
• Similar to how in the market for our demand for goods, the
most consumers were willing to pay was how much benefit
they received from the good, firms are only willing to pay up
to their marginal revenue product from an additional worker.
• That is to say the benefit to a firm from an additional worker
is how much she adds to the firms total revenue. This is the
firms highest willingness to pay.
Supply and Demand through a Labor Lens
• In the labor market, supply comes from households who supply
their labor.
• The lowest price a household will be willing to accept to work is
the value of the of the leisure it is giving up. Here this is the
opportunity cost of working, and determines the lowest wage at
which a worker will work.
• This is similar to the supply curve in a good’s markets, where the
firm has the option to produce bearing the marginal cost of an
additional unit or not produce and bear zero additional cost. The
firm would need the additional revenue to be at least as high as
the marginal cost.
• 1. Suppose we have a labor market where the demand for labor is:
• w=60-L
• The supply of labor is given by:
• w=20L
• Here L is the quantity of labor and w is the wage.
• a. Find the equilibrium wage and quantity of labor. Show this
graphically.
• b. Show the worker and firm surplus in this market. Is there any
Deadweight Loss? Is there any unemployment?
• a. Find the equilibrium wage and quantity of labor. Show this
graphically.
We set supply equal to demand to find L.
60-L=2L -> L=20
We then plug this into either or supply or demand equation
to find w. w=2*20=40
• b. Show the worker and firm surplus in this market. Is there any
Deadweight Loss? Is there any unemployment?
• a. Find the equilibrium wage and quantity of labor. Show this
graphically.
We set supply equal to demand to find L.
60-L=2L -> L=20
We then plug this into either or supply or demand equation
to find w. w=2*20=40
• b. Show the worker and firm surplus in this market. Is there any
Deadweight Loss? Is there any unemployment?
There is no DWL here because we are at the quantity where MRP=w
(with no market interference like taxes). Unemployment occurs
when LS>LD. That is to say there are workers willing to work who
currently do not have a job. Here we have, LS=LD, so there is no
unemployment.
• c. Suppose the government sets a minimum wage of $35 how do
our labor, wage, worker surplus, and firm surplus change? Is
there DWL or unemployment?
• c. Suppose the government sets a minimum wage of $35 how do
our labor, wage, worker surplus, and firm surplus change? Is
there DWL or unemployment?
Here the minimum wage of $35 is below the equilibrium
wage of $40. This means it does not “bite” and has no effect
in the market. All of our results from a and b remain the
same.
• c. Suppose the government sets a minimum wage of $35 how do
our labor, wage, worker surplus, and firm surplus change? Is
there DWL or unemployment?
Here the minimum wage of $35 is below the equilibrium
wage of $40. This means it does not “bite” and has no effect
in the market. All of our results from a and b remain the
same.
• d. Now suppose the government sets a minimum wage of $44.
What is our new L and w? Show this graphically making sure to
label LS, LD, worker surplus, producer surplus and any DWL. Is
there unemployment?
• d. Now suppose the government sets a minimum wage of $44.
What is our new L and w? Show this graphically making sure to
label LS, LD, worker surplus, producer surplus and any DWL. Is
there unemployment?
Now we have our minimum wage biting, so w=44. This
means 44=60-LD, so LD=14. Similarly 44=2LS , so LS=22.
This means we have a surplus of labor and LS>LD. This
means we have an unemployment of 22-14=8.
Price Discrimination
• Suppose the local monopolist dance club faces the following demand.
P
19
18
17
16
15
14
13
12
11
Q
1
2
3
4
5
6
7
8
9
• The monopolist has a constant marginal cost of 4.
• What is our monopolist’s profit maximizing price and quantity. What
are producer and consumer surplus?
• What is our monopolist’s profit maximizing price and quantity. What
are producer and consumer surplus?
P
19
18
17
16
15
14
13
12
11
Q
1
2
3
4
5
6
7
8
9
TR
19*1=19
18*2=36
17*3=51
64
75
84
91
96
99
MR
19
36-19=17
51-36=15
13
11
9
7
5
3
MC
4
4
4
4
4
4
4
4
4
• What is our monopolist’s profit maximizing price and quantity. What
are producer and consumer surplus?
• The monopolist produces as long as MR≥MC, so up until a quantity
of 8. For the 9th unit the MR is 3 and the MC is 4, so the
monopolists profits would fall by a dollar. The monopolist charges
P=12 from the demand curve.
• Consumer surplus for each unit is the consumers willingness to
pay minus what they actually pay. That is:
• (19-12)+(18-12)+(17-12)+(16-12)+(15-12)+(14-12)+(13-12)+(1212)=28
• Producer surplus for each unit is the price the producer receives
minus the cost for that additional unit. This is just profits before
subtracting out fixed costs. That is:
• (12-4)*8=64.
• Suppose the monopolist realizes that the 6 blondes that come in just
want to have fun, and that she can charge these blondes more than
other customers. Namely:
• Demand for blondes:
Demand for non-blondes:
P
19
18
17
16
15
14
Q
1
2
3
4
5
6
P
13
Q
1
12
11
10
2
3
4
9
8
5
6
• What is our monopolist’s profit maximizing price and quantity in each
market. What are producer and consumer surplus in each market?
• What is our monopolist’s profit maximizing price and quantity in each
market. What are producer and consumer surplus in each market?
• For blondes:
P
Q
TR
MR
MC
19
1
19*1=19 19
4
18
2
18*2=36 36-19=17 4
17
3
17*3=51 51-36=15 4
16
4
64
13
4
15
5
75
11
4
14
6
84
9
4
• What is our monopolist’s profit maximizing price and quantity. What
are producer and consumer surplus?
• For blondes:
• The monopolist wants to sell to all 6 blondes in the market as
MR>MC for all 6. This means for the blonde market, Q=6 and
P=14
• Consumer surplus in the blonde market is:
• (19-14)+(18-14)+(17-14)+(16-14)+(15-14)+(14-14)=15
• Producer surplus in the blonde market is:
• (14-4)*6=60.
• What is our monopolist’s profit maximizing price and quantity in each
market. What are producer and consumer surplus in each market?
• For non-blondes:
P
Q
TR
MR
MC
13
1
13*1=13 13
4
12
2
12*2=24 24-13=11 4
11
3
11*3=33 33-24=9
4
10
4
40
7
4
9
5
45
5
4
8
6
48
3
4
• What is our monopolist’s profit maximizing price and quantity. What
are producer and consumer surplus?
• For non-blondes:
• The monopolist wants to sell to the first 5 non-blondes in the
market as MR≥MC up to and including the 5th unit. This means for
the blonde market, Q=5 and P=9
• Consumer surplus in the blonde market is:
• (13-9)+(12-9)+(11-9)+(10-9)+(9-9) =10
• Producer surplus in the blonde market is:
• (9-4)*5=25.
• When the monopolist price discriminates does her producer surplus
increase or decrease? Does overall consumer surplus increase? Are
there winners and losers on the consumer side?
• The price discriminating monopolist receives a total producer
surplus of 60+25=85. This is greater than the producer surplus of
64 without price discrimination.
• Overall consumer surplus goes down to 15+10=25 from 28.
• The losers are the blondes who now pay a higher price for the
same good. The winners are the non-blondes who pay a lower
price and may now be able to purchase whereas before they could
not. Since overall consumer surplus fell the blondes lost more
than the non-blondes gained.
Other Important Topics
• Production Possibilities and Opportunity Costs
• Taxes and Subsidies
• Long Run vs Short Run for Firms
• Monopolistic Competition
• Oligopoly
• Regulation
• Supply and Demand Shifts