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M O N O P O L I S T I C C O M P E T I T I O N
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7. The chapter says that
monopolistically competitive
firms may send Christmas cards to their customers.
What do they accomplish by this? Explain in words and
with a diagram.
8. If you were thinking of entering the ice-cream business,
would you try to make ice cream that is just like one of
the existing brands? Explain your decision using the
ideas of this chapter.
9. Describe three commercials that you have seen on TV.
In what ways, if any, were each
of these commercials
socially useful? In what ways were they socially
wasteful? Did the commercials affect the likelihood of
your buying the product, and why?
10. For each of the following pairs of firms,
explain which
firm would be more likely to engage in advertising.
a.
a family-owned farm or a family-owned restaurant
b.
a manufacturer of forklifts or a manufacturer
of cars
c.
a company that invented a very reliable watch or a
company that invented a less reliable watch that
costs
the same amount to make
11. Twenty years ago the market for chicken was perfectly
competitive. Then Frank Perdue began marketing
chicken under his name.
a.
How do you suppose Perdue created a brand name
for chicken? What did he gain from doing so?
b.
What did society gain from having brand-name
chicken? What did society lose?
12. The makers of Tylenol
pain reliever do a lot of
advertising and have very loyal customers. In contrast,
the makers of generic acetaminophen do no advertising,
and their customers shop only for the lowest price.
Assume that the marginal costs of Tylenol and generic
acetaminophen are the same and constant.
a.
Draw a diagram showing Tylenol’s demand,
marginal-revenue, and marginal-cost curves. Label
Tylenol’s price and markup over marginal cost.
b.
Repeat part (a) for a producer of generic
acetaminophen. How do the diagrams differ?
Which company has the bigger markup? Explain.
c.
Which company has the
bigger incentive for careful
quality control? Why?
I N T H I S C H A P T E R
Y O U W I L L . . .
E x a m i n e h o w a
c h a n g e i n t h e
s u p p l y o f o n e f a c t o r
a l t e r s t h e e a r n i n g s
o f a l l t h e f a c t o r s
L e a r n w h y
e q u i l i b r i u m w a g e s
e q u a l t h e v a l u e o f
t h e m a r g i n a l
p r o d u c t o f l a b o r
A n a l y z e t h e l a b o r
d e m a n d o f
c o m p e t i t i v e , p r o f i t -
m a x i m i z i n g f i r m s
C o n s i d e r t h e
h o u s e h o l d d e c i s i o n s
t h a t l i e b e h i n d
l a b o r s u p p l y
C o n s i d e r h o w t h e
o t h e r f a c t o r s o f
p r o d u c t i o n — l a n d
a n d c a p i t a l — a r e
c o m p e n s a t e d
When you finish school, your income will be determined largely by what kind of
job you take. If you become a computer programmer, you will earn more than if
you become a gas station attendant. This fact is not surprising, but it is not obvious
why it is true. No law requires that computer programmers be paid more than gas
station attendants. No ethical principle says that programmers are more deserv-
ing. What then determines which job will pay you the higher wage?
Your income, of course, is a small piece of a larger economic picture. In 1999
the total income of all U.S. residents was about $8 trillion. People earned this in-
come in various ways. Workers earned about three-fourths
of it in the form of
wages and fringe benefits. The rest went to landowners and to the owners of
capi-
tal
—the economy’s stock of equipment and structures—in the form of rent, profit,
and interest. What determines how much goes to workers? To landowners? To the
owners of capital? Why do some workers earn higher wages than others, some
T H E M A R K E T S F O R T H E
F A C T O R S O F P R O D U C T I O N
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T H E E C O N O M I C S O F L A B O R M A R K E T S
landowners higher rental income than others, and some capital owners greater
profit than others? Why, in particular, do computer programmers earn more than
gas station attendants?
The answers to these questions, like most in economics, hinge on supply and
demand. The supply and demand for labor, land, and capital determine the prices
paid to workers, landowners, and capital owners. To understand why some peo-
ple have higher incomes than others, therefore, we need to look more deeply at
the markets for the services they provide. That is our job in this and the next two
chapters.
This chapter provides the basic theory for the analysis of factor markets. As
you may recall from Chapter 2, the
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