Microeconomics: Factor Markets and Market Failures Flashcards
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Read the first 7 Microeconomics: Factor Markets and Market Failures flashcards as text
A monopsonist in the labor market hires fewer workers than a competitive firm because it:
Answer: Faces an upward-sloping labor supply curve and must raise wages for all workers
A monopsonist faces a rising supply curve, so hiring one more worker raises wages for all, making the marginal factor cost exceed the wage and causing under-hiring.
If the government imposes a per-unit tax on a good with a negative externality, the tax should equal:
Answer: The marginal external cost at the socially optimal quantity
A Pigouvian tax equal to the marginal external cost at the social optimum shifts supply to internalize the externality.
Which condition characterizes the profit-maximizing input choice for a firm in a competitive factor market?
Answer: MRC = MRP
Firms maximize profit by hiring until the marginal resource cost equals the marginal revenue product.
Public goods are characterized by non-rivalry and non-excludability. Which of the following is the best example?
Answer: National defense
National defense is consumed by all citizens simultaneously (non-rival) and no citizen can be excluded from its protection (non-excludable).
When a positive externality exists in a market, the private market will:
Answer: Underproduce relative to the social optimum
Positive externalities mean social benefit exceeds private benefit, so consumers underpay and the market underproduces the good.
A firm's derived demand for labor is said to be 'derived' because it depends on:
Answer: The demand for the firm's output
Labor demand is derived from the demand for the output that labor helps produce; if output demand rises, labor demand rises.
The Coase theorem suggests that externalities can be resolved through private bargaining when:
Answer: Property rights are well-defined and transaction costs are low
Coase argued that if property rights are clearly assigned and negotiation is cheap, parties will bargain to the efficient outcome regardless of initial rights assignment.