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Assignment #11 Name: Sid Virpura Tutorial Number: 2 Due the week of November 27th at the beginning of tutorial. Please hand in a physical copy of your assignment before tutorial begins. Late assignments will not be accepted. Answers for assignment questions will be provided in tutorial only and not posted to Brightspace. Content for this assignment can be found in your textbook Chapters 17-18. /38 1. If a group of sellers could form a cartel, what quantity and price would they try to set? /2 They would set the price in the same way a monopoly would, so the price would be the point where marginal revenue is equal to the marginal cost. 2. Compare the quantity and price of an oligopoly to those of a monopoly. /2 An oligopoly produces more quantity, due to the higher competition between suppliers and as a result the price is lower than that of a monopoly. 3. Compare the quantity and price of an oligopoly to those of a competitive market. /2 The quantity produced by a competitive market is higher and the price is lower than that of a oligopoly. 4. How does the number of firms in an oligopoly affect the outcome in its market? /2 The more firms are in an oligopoly the higher the quantity produced and the lower the price for each good. 5. What is the prisoner’s dilemma, and what does it have to do with oligopoly? /2 The prisoners dilemma states that cooperation would lead to the best outcome for a group as a whole, even though it may not be the best outcome for each individual on their own. Though cooperation would lead to the best result, over time companies will eventually all choose a strategy that benefits themselves.

6. A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $1000 per diamond, and the demand for diamonds is described by the following schedule: /10 Price Quantity $8000 5000 7000 6000 6000 7000 5000 8000 4000 9000 3000 10 000 2000 11 000 1000 12 000 a. If there were many suppliers of diamonds, what would be the price and quantity? b. If there was only one supplier of diamonds, what would be the price and quantity? c. If Russia and South Africa formed a cartel, what would be the price and quantity? If the countries split the market evenly, what would be South Africa’s production and profit? What would happen to South Africa’s profit if it increased its production by 1000 while Russia stuck to the cartel agreement? d. Use your answer to part (c) to explain why cartel agreements are often not successful. a. With many suppliers of diamonds, Total Revenue = Total Cost. Price would be $1000 and quantity would be 12,000. b. For a monopolistic firm, the difference between Total Revenue and Total Cost would be maximized. Referring to the chart, the price is $7000 and the quantity is 6000. c. Oligopolistic firms behave like monopolistic, so they would maximize the difference between Total Revenue and Total Cost. Resulting in a price of $7000 and quantity of 6000. If both countries split it in half, South African production would result in a quantity of 3000 and price of $7000. d. Cartels are usually not successful because they require equal cooperation from both/all parties. The total profit of the cartel is higher when the cooperate, however if they were to break their agreement each party could make more profit individually. So over time, this is the cooperation breaks down leading to one firm overtaking the other.

7. Explain how a firm’s production function is related to its marginal product of labour, how a firm’s marginal product of labour is related to the value of its marginal product, and how a firm’s value of marginal product is related to its demand for labour. /4 The production function begins to slope downward when the marginal product of labor becomes negative. The value of the marginal product of labor is the marginal product of labor multiplied by the price per unit sold with the marginal product of labor. The firm’s value of marginal product is equal to the demand for labour, because the firm will continue to hire employees until the wage exceeds the marginal product. 8. Give two examples of events that could shift the demand for labour and explain. /2 Government policy regarding wage – firms would be forced to change their demand for labour given the new wages because if there is an increase in wage, the firm would now be losing money if they keep the same amount of workers. Change in demand for product – change in demand for a product would change the quantity demanded and thus change the quantity of supply the firm needs to meet. 9. Give two examples of events that could shift the supply of labour and explain why they do so. /2 Immigration/Change in labor force – Immigration or any other policy that changes the population/work force in the economy would change the quantity supplied of labor. Government Policy regarding wage – an increase in wages would cause the supply of labor to increase. With an increase in wage there would be more people willing to supply labor at the higher price than a previously lower price. 10. Explain how the wage can adjust to balance the supply and demand for labour while simultaneously equalling the value of the marginal product of labour. /2 Marginal product of labour decreases with each additional input and thus wage can be used (by increasing or decreasing) to balance the supply and demand. An increase in wage would increase the supply for labor while a decrease in wage would decrease the supply of labor. 11. If the population of Canada suddenly grew because of a large immigration, what would happen to wages? What would happen to the rents earned by the owners of land and capital? /2 The supply of labor would shift to the right, because of an increase in population, and thus wages would decrease. The rent earned by landlords would increase because the demand for housing and land would also increase with a higher population. 12. Suppose a freeze in British Columbia destroys part of the apple crop. /6

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a. Explain what happens to the price of apples and the marginal product of apple pickers as a result of the freeze. Can you say what happens to the demand for apple pickers? Why or why not? b. Suppose the price of apples doubles and the marginal product falls by 30 percent. What happens to the equilibrium wage of apple pickers? c. Suppose the price of apples rises by 30 percent and the marginal product falls by 50 percent. What happens to the equilibrium wage of apple pickers? a. The supply of apples would decrease, leading to an increase in the price of apples. As the price of apples rises, the marginal product of apple pickers also increases. However, the overall demand for apple pickers may not necessarily increase, as it depends on the elasticity of demand for apples and the availability of alternatives. b. The equilibrium wage of apple pickers would likely decrease. The decrease in marginal product implies that each additional worker contributes less to the overall output, reducing the demand for labor and lowering the equilibrium wage. c. The equilibrium wage of apple pickers would likely decrease. The increase in the price of apples might suggest a higher demand for apple pickers, but the decrease in marginal product counteracts this effect. The decrease in productivity implies that additional workers contribute much less to the overall output, leading to a lower equilibrium wage.

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