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Opportunity cost

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1. You won a free ticket to see an Eric Clapton concert (which has no resale value). Led Zeppelin is performing on the same night and is your next-best alternative activity. Tickets to Zepp cost $75. On any given day, you would be will to pay up to $100 to see Zepp play. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?

2. Why is it necessary to equate marginal revenue product with marginal resource costs when optimizing in the resource market? What gets optimized and what is determined? What do these terms actually represent?

3. What mechanism(s) allow(s) markets to clear? In other words, how exactly does equilibrium come about, what are the forces causing it to occur? How can one tell that equilibrium has been achieved? What's the difference between a flow equilibrium and a stock equilibrium?

4. Show and explain how minimum wage legislation might cause unemployment under some scenarios but not cause unemployment under others.

5. How is a labor supply curve derived? What is the impact on the labor supply curve for physicians by illegal immigration? What is the impact for roofers? If there is a difference, explain why. If there is no difference, explain why.

6. How is an isocost curve determined? Draw an example of an isocost curve and show how it would be impacted by minimum wage legislation.

7. If there is perfect competition in the labor market but imperfect competition in the product market, what does the representative firm's labor market decision process look like? Explain.

8. Show how a labor demand curve is derived. Carefully explain the shift factors for the labor demand curve.

9. What shape do the average and marginal product curves have when the production function is a Cobb-Douglas? Show why they must look that way.

10. Explain why MRP = MRC at optimality. In what way is this universal?

11. How are costs tied to the production function? Show and explain.

12. What insight(s) can be gleaned by the knowledge that costs are tied to short run production functions?

13. Explain why the MRC curve is not the same as the supply of labor curve.


Solution Preview

1. The opportunity cost is the value of the forgone opportunity. If you go to Eric Clapton, you can't see Led Zeppelin. Since the value you derive from this is 100, but tickets are only $75 on that particular night, the opportunity cost is $25.

2. The resource market generally refers to the labor market. The marginal revenue product of labor is the additional value each worker can create for the firm, which the with marginal resource cost is the wage the firm pays. If the value generated by the next worker is greater than the wage, the firm will want to hire more workers. When it is less, it will want to lay them off. When they are equal, the optimal wage is determined. It is optimal because it generates the most overall benefit for society.

3. When the amount of goods suppliers are providing is increasing, we say that stock is increasing. This causes sellers to lower their prices, so as not to have to dispose of the good and lose all their investment. In stock-flow equilibrium, the price at any instant is the willingness of buyers to meet the sellers price. Flow equilibrium is the process by which stocks are brought back to equilibrium levels. At this point, sellers are able to sell all that they produce.

4. If a minimum wage law is passed that makes it illegal to pay less than M per hour, employers will continue to keep on payroll only those workers whose hourly work brings in more than M in revenues. Consequently, those workers who are least productive, and therefore are likely to be paid the least before a minimum wage, are also the ones most likely to become unemployed after a minimum wage is implemented. If however, all employers were generating more revenue than the minimum wage, the minimum wage law would have no effect on unemployment..

5. The labor supply curve describes how many workers are willing to work at any given wage. It is unlikely that any illegal immigrant ...

Solution Summary

Example of opportunity cost using rock concerts