Introduction to Economics
Microeconomics
Monopoly
The World Economy
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Econ 109
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Example Questions for the Final
11/19/98
III. (40 points) Answer all four questions.
1. The curves below illustrate the average product of labor, APL, and the marginal
product of labor, MPL, for a developing country. The annual rate of growth of
population in this agricultural country is high, and technological progress is
negligible.
a. Illustrate the fact that the working population in this “Malthusian”
country is at the subsistence wage.
b. What keeps the workers at a subsistence wage?
c. Label the portion of total output going to labor as the “wage bill”.
d. What is the total output of the country? Label it on the graph.
e. The difference between the total output and the wage bill is the output
going to the landowner class. Label it on the graph.
Output
MPL
APL
Number of Workers
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The Brief for Microsoft
 The
case for monopoly: Joseph Schumpeter
 Growth is the key to social welfare
 Large and growing firms reinvest profits in
future growth
– capital deepening
 Large
and growing firms have the resources
to invest in research and development
– technological change improves productivity
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The Brief for Microsoft
 Consumers
have not been hurt by Microsoft
 In contrast, consumers have benefited
 Any market power Microsoft has is tenuous
in the rapidly growing and changing
software industry
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Microsoft Trial
 Against
Microsoft
– predatory behavior
towards
competitors
– acting in restraint of
competition
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 For
Microsoft
– may have hurt
competitors but not
“competition”
– consumers have
benefited because
of Microsoft and
have certainly not
been hurt
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Microsoft Trial
 Slate
Magazine
– http://www.slate.com
 The
Microsoft Trial
 Message #10: Nov. 13, 1998
 From:
Jodie T. Allen
 To:
Slate - dispatch
 Jodie T. Allen is Slate's Washington editor.
 Day 16 of the Trial
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I will not pretend to be an objective observer of the
Microsoft trial. You wouldn't believe me if I did. Unlike my
predecessors in this assignment, I am bound by ties, both
sympathetic and financial, to the corporation whose rise to
power and affluence has earned it the enmity of the Justice
Department's antitrust division. My early working years
as a computer model builder in the era of IBM hegemony
also gave me a strong appreciation for the virtues of
compatibility. And I grew up rooting for the Yankees.
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For a Microsoft retainer, this might seem to be a
pretty good day for a courtroom visit. Microsoft spent the
morning in full attack on Steven McGeady, the Intel
executive who has charged that Microsoft strong-armed
Intel into abandoning work on Native Signal Processing--a
multimedia software project McGeady managed--and
pressured the chipmaker to stay out of software
programming in general. It displayed a string of e-mails and
memos between and among Microsoft and Intel executives
plus McGeady's own handwritten notes. Some were long and
dull, some short and amusing. One, a note from Intel CEO
Andrew Grove to Microsoft CEO Bill Gates after a July
1995 dinner they shared concludes with a "smiley face."
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Outline: Lecture Fourteen-Trade
 The
Western Movement: Manifest Destiny
– Autarchy
 self-sufficiency
– The Advantages of Exchange
 specialization
 The
Political Economy of Trade
– Arguments for Free Trade
– Arguments Against Free Trade
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Autarchy
 Self-Sufficient
Economy
– only trade within a region
– Sioux, Pawnees etc. were self-sufficient
 hunted
and gathered their food
 roamed the land and moved their homes
 made their clothes
– early settlers were self-sufficient: home
production
 grew
their food
 cleared the land and built their homes
 made their clothes
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Autarchy-continued
 West
of the Alleghanies
– opened up to trade by Erie canal
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Erie Canal
Completed
in 1825
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Production Functions, Labor Constraints and the Production
Possibility Frontier: Land is a Fixed Factor; Diminishing Returns
Agriculture
Production
Function with
diminishing
returns
Production Possibility Frontier
relative price of agricultural
goods to manufactured goods
depends on demand as well
as supply
Labor for
Agriculture
Manufactures
Labor
Constraint
450
Production Function
with diminishing returns
Labor for Manufactures
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Source: Lecture Eleven
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Isolated West
Production Possibility Frontier, PPF
Agriculture
Regional Tastes:
manufactures are
scarce and hard to
make, i.e. valuable
Manufactures
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The Slope of the Production
Possibility Frontier
Recall:
the slope of the production
possibility frontier reveals relative
values
– rate of exchange: 2 beaver pelts for every
mink pelt
 if
beaver pelts sell for 1 dollar, then mink
pelts are worth 2 dollars
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Production Functions, Labor Constraints and
the Production Possibility Frontier: No Fixed Factor
Beavers
Production
Function
Production Possibility Frontier
One mink is worth, or trades
for, two beavers: prices are
determined by labor inputs
2
1
Beaver Days
6
3
Labor
Constraint
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Minks
1
450
2
3
6
Mink Days
source: Lecture Eleven
Production Function
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Beavers
2
slope: ∆B/∆M = 2 = PM/PB = MCM/MCB
1
1
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Minks
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Isolated West
Production Possibility Frontier, PPF
Agriculture
Regional Tastes:
manufactures are
scarce and hard to
make, i.e. valuable
QAg
QMf
Manufactures
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
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Trade for a Small Region
 The
West takes Eastern trade prices as given
– after canals open up transportation and goods
are exchanged
 In
the East, manufactures are more plentiful
and agricultural goods are scarcer
– ∆Ag/∆Mf = PMf/PAg , is less steep, i.e in the East,
manufactures are less expensive relative to
agricultural goods
 the
East has a comparative advantage in
manufactures and the West has a comparative
advantage in agriculture
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West Trades with the East
Production Possibility Frontier, PPF
Agriculture
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
Regional Tastes:
Manufactures
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
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Trade Allows the West to Specialize in Agriculture
Production Possibility Frontier, PPF
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
Agriculture
Specialize
in Ag at B
Regional Tastes:
B
A
Manufactures
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
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Trade Permits the Decoupling of
Consumption from Production
 In
the self-sufficient West, people had to
produce what they consumed.
 When trade opened up with the East, the
West could specialize in producing
agricultural goods and import, i.e. trade for
manufactures
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Trade Allows the West to Decouple Production & Consumption
Production Possibility Frontier, PPF
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
Agriculture
QAg
Exports
Regional Tastes:
B
C
CAg
A
Imports
QMf
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CMf
Manufactures
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Specialization
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 West
Retrospective
better off with trade than with autarchy
– with trade it consumes more of agricultural and
manufactured goods
 because
of advantages of specialization
 We
don’t question the benefits of exchange
within nations, only betweeen nations
– trade is not an economic problem, quite the
contrary it is an economic benefit
– trade may be posed as a perceived political
problem, reflecting nationalism and jingoistic
attitudes
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International Trade: Pro & Con
Con
 Can’t
compete with
low wages abroad
 jobs are lost abroad
 need to protect infant
industries
 need to protect
strategic industries
 excessive
specialization
 unfair competition
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Pro
 Consumers
gain from
more goods
 competition keeps
industry progressive
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Whose Ox Gets Gored? Western Manufacturers Lose Jobs
Production Possibility Frontier, PPF
Agriculture
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
Regional Tastes:
Manufactures
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
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Single Commodity Dependent Economies
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Labor Costs
 Recall:
demand for labor: real wage equals
marginal product of labor
– i.e.: w/pQ = MPL
– or pQ = w/MPL = w/(∆Q/∆L)=w∆L/∆Q =MC
 wage
relative to labor productivity that
counts in determining the marginal cost of
production
 Unit labor costs: wage bill per unit of output
– average: wL/Q = w/APL
– margin: w/MPL
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Adam Smith
The Wealth of Nations (1776)
• opposes mercantilism: state protectionism
through quotas and tariffs
• advocates specialization, division of labor
• benefits of competition: invisible hand
David Ricardo
The Principles of Political Economy and Taxation
(1817)
• The Law of Comparative Advantage
• The Law of Diminishing Returns
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Summary-Vocabulary-Concepts
single commodity economy
 unit labor cost
 mercantilism
 division of labor
 invisible hand
 law of comparative advantage
 Adam Smith
 David Ricardo
 regionalization
 European Union
 China: special economic zones
 market size
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 autarchy/self-sufficiency 
 production
possibility
frontier
 exchange of goods
 comparative advantage
 specialization
 export
 import
 infant industry
 strategic industry
 unfair competition
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