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1.Does increase in technical efficiency always results in maximizing profit of the
producer? Discuss with respect to agricultural goods. Provide reasons for your answer.
For the profits to be maximized, the process of production should be economically
efficient, but does that necessarily mean that it is also technically efficient? The
answer is no, which answers our first question as to whether or not an increase in
technical efficiency always results in maximizing profit of the producer. Taking an
example from agriculture, let us say that a producer knows that to produce 100 tons
of wheat, he can use either 10 workers and 1 acre, or use 1 worker and 100 acres.
Both choices can be technically efficient since neither uses more inputs than the
other, but that does not mean that they are both profit maximizing. The question as
to which one is the profit maximizing technique, we need to know the costs of inputs.
From that we can see that a technically efficient process could or could not be
economically efficient. In judging whether or not a technically efficient process we
should compare the cost of production of the two or more available processes and
choose the one that produces a given level of output at the lowest possible cost
2. Consider a firm increases the wage rate of a worker. The workers supplies fewer hours
of work at the increased wage rate. The firm then decides to set the overtime wage rate.
The worker increase supply of labor hours at the overtime wage rate. Discuss the reasons
for the behavior of the worker.
This is an example of the principle of rational choice. According to the principle of
rational choice, if there is diminishing marginal utility and the price of supplying a
good goes up, you supply more of that good. Since each worker is trying to
maximize his utility function, he would always make the choice that has a lower
opportunity cost. For example, if a worker is working for 20 hours a week at $5 per
hour, and the employer has increased his wages to $6 provided that he works an
extra hour; the additional income from the final hour of work gives the worker an
additional 24 units of utility. Now, if watching TV gives the worker the same 24
units of utility, then the worker is more likely to keep working the same number of
hours since he is already satisfying the Utility-maximum rule.
Assuming that the overtime rate is 1.5 times the regular wage rate, and with that
additional income, the worker can get more goods for working additional hours.
Since the additional goods raise the marginal utility the worker gets to 32 units of
utility, the marginal utility derived from working an extra hour exceeds the utility
from watching TV, so the worker chooses to work additional hours.
3. Most European countries have nationalized universities and colleges. Some countries
also use the law to ban private colleges. Can higher education be classified as a natural
monopoly in European countries and why? Can the professional skills and scholarly
achievements that constitute a faculty be classified as large, fixed costs? Can the same
reasoning be applied to large, established manufacturers such as General Motors? What
about medical drugs corporations? Rationalize your answer.
Natural monopoly is an industry in which a single firm can produce at a lower cost
than can two or more firms. A natural monopoly will occur when the technology is
such that indivisible setup costs are so large that average total costs fall within the
range of possible outputs.
I believe that higher education could be classified as a natural monopoly because the
Fixed Costs involved in the establishment of universities and colleges are high
(buildings, equipment…etc)
The professional skills and scholarly achievements that constitute a faculty can be
classified as large fixed costs since teaching experiences, whether the ability to
convey the material to the students, or knowledge of the subject matter takes long
years of building up, it is hard to acquire such capabilities in the short run.
Yes, the same reasoning can be applied to large, established manufacturers such as
General Motors because such an industry requires large investments in Fixed assets,
and since nearly all costs are variable in the long-run, then it can be classified as a
natural monopoly.
The case is different for medical drugs corporations, although such corporations
invest heavily in Research and development; such costs are really sunk costs and are
therefore irrelevant to the decisions; such corporations thus should not be classified
as natural monopolies.
4. The invention of the assembly line provided Ford Motor Company with an incredible
advantage over its competitors. This method of production may have made Henry Ford a
monopolist but competition never quite vanished. Based on your knowledge of market
forms, which form was more suitable to describe the position of Ford Motors and why?
Which market conditions make any market form preferable to monopoly? Does
regulation of monopolies discourage entrepreneurship? Why?
Based on the above facts, Ford Motor Company can be classified as an Oligopoly
since an Oligopoly is defined as a market structure in which there are only a few
firms; there are often significant barriers to entry.
As in the case with Ford Motor Company, when there are close substitutes, in a
market that has few firms with significant barriers to entry, Oligopoly is preferred
to a Monopoly; the reason behind that is that “Natural monopolies, by definition,
have declining average total cost…..when average total cost is declining, marginal
cost is less than average total cost. If regulators are to set price equal to marginal
cost, that price will be less than the firm’s average total cost, and the firm will lose
money. Instead of charging such a low price, the monopoly firm would just exit the
industry.i
5. Consider two firms X and Y produce identically tasting cold drinks. In order to
increase the demand for its cold drink firm X increases its advertisement outlay. However
the advertising doesn't increase its demand in the long run. Discuss why?
6. Consider there are three airlines in the U.S. economy: A, B, and C. There is a huge
capital cost of setting airlines. Consider airline A reduce its fare of economy class.
Airlines B and C reacts to it by reducing fares for all classes. What type of market form
are airlines. Consider in order to end the price war among themselves the three airlines
enter into agreement to fix their price and output. However the agreement doesn't last.
Discuss some of the reasons for the failure of such an agreement.
7. The philosopher Robert Nozick made a strong and challenging argument for a minimal
state in his book Anarchy, State, and Utopia. He said no state should provide any services
beyond law enforcement. This means that all highways, elementary schools, social
security, and other services outside police and homeland security should be privatized. Is
it reasonable from an economist's viewpoint to minimize the role of the government in
accordance with Nozick's moral argument? According to you can there be any exceptions
to this argument? Which services do you think the government should provide and which
services should be privatized? Give reasons to support your answer.
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Economics, Mankiw, G. P.330