The long-run equilibrium quantity and price in a perfectly competitive and monopolistic firm and their profits have to be derived and compared. Concept Introduction: Perfect Competition - A market is said to be perfectly competitive when it has a virtually infinite number of buyers and sellers selling a homogenous product with free entry into and exit from the market. The buyers and sellers have perfect knowledge about the products and markets and there are no selling and transportation costs. The sellers are price takers and they face a perfectly elastic demand curve. The monopolistic firm - A form of imperfect competition where there are a very large number of buyers and sellers in the market. The products are nearly but not perfectly homogenous, i.e. there is product differentiation. The entry and exit of firms are free. Unlike the perfect competition, the firms have selling costs and imperfect knowledge marks the structure of the market. The market is a deviation from the ideal but not as competitive as the oligopoly or duopoly market. The demand curve facing the firm here is high though not perfectly elastic. It is a downward sloping demand curve. Marginal Revenue (MR) - The revenue earned by a firm by selling one additional unit of the output is the marginal revenue of the firm. Marginal Cost (MC) - The cost incurred by a firm in the production of one more unit of output is the marginal cost of the firm.

Question

As indicated in the attached image, U.S. earnings for high- and low-skill workers as measured by educational attainment began diverging in the 1980s. The remaining questions in this problem set use the model for the labor market developed in class to walk through potential explanations for this trend. 1. Assume that there are just two types of workers, low- and high-skill. As a result, there are two labor markets: supply and demand for low-skill workers and supply and demand for high-skill workers. Using two carefully drawn labor-market figures, show that an increase in the demand for high skill workers can explain an increase in the relative wage of high-skill workers. 2. Using the same assumptions as in the previous question, use two carefully drawn labor-market figures to show that an increase in the supply of low-skill workers can explain an increase in the relative wage of high-skill workers.

Answer 1

Question

Chapter 10, Problem 1.2PA

To determine

The long-run equilibrium quantity and price in a perfectly competitive and monopolistic firm and their profits have to be derived and compared.

Concept Introduction:

Perfect Competition- A market is said to be perfectly competitive when it has a virtually infinite number of buyers and sellers selling a homogenous product with free entry into and exit from the market. The buyers and sellers have perfect knowledge about the products and markets and there are no selling and transportation costs. The sellers are price takers and they face a perfectly elastic demand curve.

The monopolistic firm- A form of imperfect competition where there are a very large number of buyers and sellers in the market. The products are nearly but not perfectly homogenous, i.e. there is product differentiation. The entry and exit of firms are free. Unlike the perfect competition, the firms have selling costs and imperfect knowledge marks the structure of the market. The market is a deviation from the ideal but not as competitive as the oligopoly or duopoly market. The demand curve facing the firm here is high though not perfectly elastic. It is a downward sloping demand curve.

Marginal Revenue (MR) - The revenue earned by a firm by selling one additional unit of the output is the marginal revenue of the firm.

Marginal Cost (MC) - The cost incurred by a firm in the production of one more unit of output is the marginal cost of the firm.

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