Quiz 13: Monopolistic Competition and Oligopoly

Business

(a) The marginal revenue product (MRP) of a driver per day is simply the revenue that hiring an additional driver brings to the company per day. We see that a driver can deliver 50 packages a day, with each package giving the firm revenues of $20. This means that in one day, a driver will provide for the firm revenues of $1000. Therefore, the MRP per driver per day is $1000. (b) The MRP of the supervisor can be determined first by seeing how many additional packages the vehicle can deliver when the supervisor is in place, and then multiplying this by the value of each package. We see that originally, a driver can deliver 50 packages - so hiring a supervisor increased the product from 50 to 60, meaning the marginal product of a supervisor iS10 packages delivered. Therefore, at $20 a package, the marginal revenue product of the supervisor iS10 packages times $20, which is $200. Since the cost of hiring a supervisor is $300, we see that profits must fall by $100 per day, since hiring a supervisor cost $300 per day but he will only add $200 of additional revenue for the firm. (c) To make up for the $100 loss in profit, each vehicle must then deliver 5 more packages per day. Since each package delivered is $20, 5 additional packages delivered will mean $100 of additional revenue for the firm. This $100 of additional revenue will be enough to negate the loss in profit of having to hire a supervisor, such that the firm is now back to the profit level it had before having to hire a supervisor. (d) Similarly, if we change the price of delivery instead to make up for the $100 loss in profit from having a supervisor in a delivery truck, then prices must be raised by $1.67 per package. We see that with a supervisor, 60 packages are delivered. The question then is how much price for each package delivered has to go up in order for the $100 loss in profit from having to hire a supervisor to be made up. We see that the price increase must be $100 divided by 60 packages, which is $1.67 per package. Therefore, if the firm charges $21.67 per package, they will make enough to completely negate the loss in profit from having to hire a supervisor. (Note that $1.67 is rounded from img )

Industries and occupations that have high rates of unionization and those that have low rates of unionization are required to be stated. Industries that have high rates of unionization are: • Government • Transportation • Telecommunication • Construction • Manufacturing Industries that have low rates of unionization are: • Mining • Retail trade • Finance • Agriculture Occupations that have high rates of unionization are: • Protective services • Teachers • Production workers • Transportation services • Social workers Occupations that have low rates of unionization are: • Sales workers • Food workers • Managers Unionization rates are also high in occupations and industries where the managers do not put much effort to counter the formation of unions. Moreover, unionization rates tend to be high in industries and occupations where the bargaining power of labor is high in unions and low at the individual level. E.g. bargaining power of protective services workers (such as workers in the fire department) is extremely high in unions because societies find it extremely hard to afford strikes by these workers. Similarly, for workers in construction, bargaining power is high in the union but very low at the individual level.

(a) Compensation in 2000 was $24 per hour, since a worker who works one hour will be paid $20 in wage and $4 in health benefits. In 2010, the compensation was $30 per hour, since a worker will be paid $21 in wage and $9 in health benefits per hour. Thus, the increase from $24 to $30 is an increase of img , img or 25%. Hence, on average, that is approximately a 2.5% increase per year over ten years. (b) To find out the percentage change in wages in the plant from 2000 to 2010, we simply take the wage in 2010, subtract that by the wage in 2000, and dividing the difference by the wage in 2000. Since in 2000, the wage is $20 and in 2010, the wage is $21, we have: img Hence, the growth in wage is 0.05 x 100%, or 5%. On average then, the increase in wage per year is 5% divided by 10 years, which is 0.5% per year. (c) If workers saw the health benefit to be of equal value to wage, then we see that the workers will look at the total compensation as their income. Therefore, as calculated already in part (a), the workers will feel that their income has increased by 25% over the ten years. However, if they only consider their wages to be their income, then they would feel that their income have only gone up by 5% in the ten years, as calculated in part (b). (d) Yes, workers may feel like their wages are stagnating even when total compensation is increasing because an increase in health benefits may not be completely felt by the worker. A worker who do not need the health benefits may see that their wage has only gone up by $1 more per hour in ten years, so they may feel like their wages are stagnating. However, a worker may value the health benefits that the firm provides highly, and if so, they will feel as if their income has gone up by quite a bit over the last ten years (since we will then include the increase in health benefits).

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