# Economics

## Quiz 12 :Market Structures Ii: Monopolistic Competition

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SUBSTITUTION AND INCOME EFFECTS Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn't increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.
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Substitution effect of increase in income:
Substitution effect states that if the income increases, then the people would work for more hours since the opportunity cost of leisure time is high. If the person is idle or taking rest for an hour instead of working, then he/she will lose more money now than before. Therefore, the increasing income induces the worker to work for more hours to earn more income. Hence, the increase in income leads to an increase in the supply of labor and vice-versa.Income effect of increase in income:
Income effect states that if the income increases, then people would work fewer hours since they can earn the same amount of income by reducing the work hours. If the person's income increases, then the people would demand more goods, including leisure time. Hence, the increase in income leads to a reduction in the labor supply and vice-versa.Increase in living cost:
If other things remain constant, the increasing living cost reduces the purchasing power. To compensate the decreasing value, people would work for more hours to earn more income. Since the decreasing income reduces the demand for normal goods, including leisure time, income effect is dominated than the substitution effect.

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INDUSTRIAL UNIONS Why are unions more effective at raising wages in oligopolistic industries than in competitive industries?
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Labor union:
Labor union refers to the systematic organization of employees with the intention to protect their rights and improve their standard of working environment.
Perfect competition:
Perfect competition refers to the market structure with the features of more number of sellers and buyers in the market. Firms sell homogenous product. Price is fixed by the market demand and supply. Individual firms cannot change the price. Firms can easily enter or exit from the market. Firms and consumers are well informed about the market. Firms are competing with each other.
Oligopoly:
Oligopoly refers to the market structure with the features of few sellers and more buyers. Oligopoly firms produce homogenous goods and are competing with themselves. There is no easy entry in to the market due to huge investment. Information about the market is unavailable.Wage increases:
When the wage of labor increases, then the cost of production would increase. This in turn leads to an increase in the price of product to maintain the profit. Since prices are fixed by the market forces in the perfect competition, the firms cannot increase the price. Hence, unions are less effective to increase the wages in perfect competition.
But in the case of oligopolistic competition, firms can fix the price. If the wage increases, then the firms can increase the price of the product. Hence, unions are effective to increase the price in oligopolistic competition.

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USES OF TIME Describe the three possible uses of an individual's time, and give an example of each.
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Three uses of an individual's time:
An individual's time can be utilized in the following three ways:
Market work
Market work refers to the man hours devoted to produce goods and services through which an individual can earn income in the labor market. In other words, any work that is paid for in the labor market is market work.
Examples:
• Time spent by a carpenter to make wooden furniture in the furniture shop.
• Work hours spent by salesmen to sell televisions in television shops.
Nonmarket work
Nonmarket work refers to the man hours devoted to satisfy individual's his/her own needs which cannot earn income in the labor market. In other words, any work which is unpaid is called nonmarket work.
Examples:
• Time spent on personal care.• Time devoted for babysitting.• Time spent on household chores.
• Time devoted for tutoring children.
Leisure
Leisure refers to the time which is not spent on both paid and unpaid work. In other words, it is time spent on entertainment and relaxation.
Examples:
• Walking in a park.
• Weekend parties.
• Listening to music.• Watching videos.

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MEDIATION AND ARBITRATION Distinguish between mediation and binding arbitration. Under what circumstances do firms and unions use these tools? What is the role of a strike in the bargaining process?
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INDUSTRIAL UNIONS Review the logic underlying Exhibit 5. Then determine the effect, on the industry and a typical firm, of an increase in the demand for industry output. Show your conclusions on a graph. Does the magnitude of the increase in demand make a difference?
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WHY WAGES DIFFER Why might permanent wage differences occur between different markets for labor or within the same labor market?
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UTILITY MAXIMIZATION How does a rational consumer allocate time among competing uses?
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SUBSTITUTION AND INCOME EFFECTS Suppose that the substitution effect of an increase in the wage rate exactly offsets the income effect as the hourly wage increases from $12 to$13. What would the supply of labor curve look like over this range of wages? Why?
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Case Study: Winner-Take-All Labor Markets What characterizes a winner-take-all labor market? Offer some reasons why corporate heads now earn relatively more than they did in 1980.
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WORK AND UTILITY Explain the concept of the "net utility of work." How is it useful in developing the labor supply curve?
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CRAFT UNIONS Both industrial unions and craft unions attempt to raise their members' wages, but each goes about it differently. Explain the difference in approaches and describe the impact these differences have on excess quantity of labor supplied.
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NONWAGE DETERMINANTS OF LABOR SUPPLY Suppose that two jobs are exactly the same except that one is performed in an air-conditioned workplace. How could you measure the value workers attach to such a job amenity?
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THE STRIKE Why might firms in industries with high fixed costs be inclined to prevent strikes or end strikes quickly?
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Case Study: Federal Bailout of GM, Chrysler, and the UAW How would the UAW benefit for increased demand for GM and Chrysler vehicles? Reference Case Study: Public Policy Federal Bailout of GM, Chrysler, and the UAW In the 1970s, the United Auto Workers (UAW) negotiated what have been called "gold-plated benefits" for their workers and retirees. General Motors, Ford, and Chrysler, the so-called Big Three, believed that because they dominated the U.S. auto market and because they all faced the same labor costs, any higher costs could simply be passed along to car buyers. What could go wrong? Well, what went wrong was an onslaught of fierce competition from foreign automakers who would develop a reputation for high quality at competitive prices. These foreign automakers also began building plants in the United States operated by mostly nonunion workers. Pay and benefits for these nonunion workers, while still attractive, amounted to about three quarters of what UAW workers were getting (and UAW pay was double what average Americans earned). Not only were UAW wages higher, but union work rules-some 5,000 pages detailing what each worker could and could not be asked to do-imposed expensive inefficiencies on production. If work rules were violated, a union representative could shut down the assembly line. General Motors, Ford, and Chrysler, were making costly vehicles that not enough people wanted to buy, and the companies were losing money by the truckload. GM, for example, lost over $60 billion between 2005 and 2008. Hard hit by fallout from the global financial crisis of 2008 and facing bankruptcy, the Big Three turned to the federal government for help. After some UAW pressure and political wrangling, federal officials agreed on a bailout of about$85 billion, with most of that going to GM (Ford ultimately decided not to accept federal aid). The agreement called for GM and Chrysler to file for bankruptcy. By doing so, both companies were able to walk away from huge debt burdens built up from years of making costly products that didn't sell well enough. Those who had owned the companies, the stockholders, got wiped out in the bankruptcy-they got nothing. Bondholders and other creditors also took a beating-they would get back less than a third of what they had lent the automakers. Some suppliers were also left hanging and many dealerships were shut down. The group that benefited most from the bailout was UAW workers. They ended up owning 10 percent of the new GM and a majority of the new Chrysler. In years leading up to the bailout, many workers had taken buyouts, meaning that the company paid them a chunk of money to leave their jobs. The union also made some concessions, but mostly on the pay and benefits of workers hired in the future. Existing workers gave up little in the bailout agreement-certainly little compared to the drubbing suffered by company stockholders, creditors, suppliers, and car dealers. The new GM emerged from bankruptcy with the federal government owning 61 percent in return for its $43 billion "investment." Much of the federal bailout money would be used to buy out existing workers and shore up the health care fund for union retirees. The Big Three are hoping to hire new workers at lower wages, but recently-laid-off workers still have first claim on any job openings, and they must be rehired at their previous high wages, not the lower wages to be paid new workers. The Congressional Budget Office estimated that the government bailout would ultimately cost taxpayers$34 billion. That translates into \$300 per U.S. household to support the pay and benefits of those making twice what average American workers earn. We can't necessarily blame the UAW for the demise of the American auto industry. Demanding higher pay, better benefits, and more restrictive work rules sounds like the job description of union representatives. But we can blame the managements for going along with these demands. Top auto executives lost their jobs in the bankruptcy. UAW workers gave up little in the bankruptcy. In today's competitive marketplace, only an efficient, flexible work force will thrive. Technology advances too rapidly to drag along wages that exceed the market rate and featherbedding work rules that slow down production.
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Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the term "union strike." Find a website with a date within the two most recent years. Analyze the union situation described.
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Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the phrase " nonmarket work." On the Results page, go to the News Section. Click on the link for the January 7, 2008, article "Research on Marriage and Family Described by Scientists at University of California." According to the article, what are some differences between work by boys and girls in Indonesia?