Microeconomics: Factor Markets and Market Failures Flashcards
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Read the first 7 Microeconomics: Factor Markets and Market Failures flashcards as text
The elasticity of demand for labor is likely to be MORE elastic when:
Answer: It is easy to substitute capital for labor
When capital can easily substitute for labor, a wage increase leads firms to replace workers with machines, making labor demand highly responsive to wage changes.
In a competitive factor market, economic profit is eventually driven to zero, but workers can still earn economic rent if:
Answer: Their supply is inelastic relative to demand, creating earnings above opportunity cost
Workers with rare or hard-to-replicate skills face inelastic supply; high demand bids up their wages well above their opportunity cost, generating economic rent.
A negative production externality shifts the marginal social cost (MSC) curve relative to the marginal private cost (MPC) curve. Which statement is correct?
Answer: MSC lies above MPC by the amount of the external cost
Negative externalities impose costs on third parties not borne by producers, so society's total cost (MSC) exceeds the producer's private cost (MPC).
A professional sports league that acts as a monopsonist in the labor market will pay players:
Answer: A wage below their MRP
A monopsony employer uses its market power to pay workers below their MRP, capturing the surplus that would otherwise go to workers.
Which of the following best illustrates the concept of tragedy of the commons?
Answer: Overfishing in international waters because each fisherman ignores the cost to others
The tragedy of the commons occurs when individuals overuse a shared, rival resource because they do not bear the full social cost of their use.
When a union acts as a monopoly seller of labor, it typically achieves a higher wage by:
Answer: Restricting the supply of labor, moving up the employer's demand curve
A monopoly union restricts labor supply (e.g., through membership limits or strikes), forcing employers up their downward-sloping demand curve to a higher wage.
In the context of factor markets, the 'transfer earnings' of a factor refer to:
Answer: The minimum payment needed to keep the factor in its current use
Transfer earnings are the opportunity cost of a factor — the minimum it must earn to prevent it from moving to its next best alternative use.