ETHIO-LENS COLLEGE

Department of Management

Individual Assignment for

Microeconomics II

Name: Meles Gebresemaeti

Target group: Year III

26-06-2016
Mekelle, Tigray
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

Contents
PART I: Multiple Choice ................................................................................................................... 1
PART II: Discussion questions ........................................................................................................... 1
1. Breakdown of the degrees of price discrimination: ..................................................................... 1
2. Patents and copyrights are crucial tools for a monopolist in the market: ...................................... 2
3. Because a monopolist is the only seller in a market, how is the price determined? ...................... 2
4. Why a monopoly regarded as inefficient in production when compared to a competitive firm? ... 2
5. Substitution and income effects, relation to the slope of the labour - supply curve?..................... 3
6. What causes labour - market segmentation? Relation to wage differentials? ............................... 4
7. The impact of overtime pay on the individual labour supplier's time constraint: .......................... 5
8. When direct broad cast satellite transmissions and fiber - optic cable - television networks will
greatly increases the number of available television charnels. What impact will this have on the
labour - leisure trade off? illustrate. ................................................................................................ 6
9. How do the elasticity of demand for a product, the availability of substitutes, and union labour as
a proportion of total costs affect the elasticity of demand for union labour? .................................... 7
10. What is monopsony? How is the phenomona related to monopoly in output market? ................ 8

PART I: Multiple Choice

1. D 6. D
2. D 7. D
3. D 8. B
4. C 9. B
5. A
PART II: Discussion questions
1. Breakdown of the degrees of price discrimination:
a. First-Degree Price Discrimination (Perfect Price Discrimination)
Characteristics:
• The monopolist charges each consumer the maximum price they are willing to pay.
• The monopolist captures all the consumer surplus (the difference between what the consumer
is willing to pay and the market price).
• Example: A car dealer negotiates with each individual customer to extract the highest possible
price they are willing to pay for a specific car.
b. Second-Degree Price Discrimination
Characteristics:
• The monopolist charges different prices based on the quantity purchased.
• Consumers who purchase larger quantities receive a lower price per unit.
• Example: A utility company might offer tiered pricing based on electricity consumption. The
more electricity a household uses, the lower the price per kilowatt-hour might become.
c. Third-Degree Price Discrimination
Characteristics:
• The monopolist divides the market into different segments based on certain consumer
characteristics (like age, location, etc.).
• Each segment is charged a different price.

Page 1 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

• Example: Movie theaters offering student discounts, senior discounts, or different prices based
on geographic locations.
2. Patents and copyrights are crucial tools for a monopolist in the market:
• Market Exclusivity:
Patents: Grant the legal right to exclusively produce, use, and sell an invention for a specific period.
This creates a temporary monopoly by preventing competitors from offering the same product or
process for the duration of the patent.
Copyrights: Grant the legal right to control the reproduction, distribution, and public performance
of an original creative work (like books, music, software). This provides exclusive control over the
use of copyrighted material, creating a monopoly in the market for that specific work.
• Competitive Advantage:
By limiting competition, patents and copyrights allow the monopolist to enjoy market power and
set higher prices for their products compared to a competitive market. This translates to increased
profits as the monopolist faces reduced pressure to lower prices due to the lack of close substitutes
readily available to consumers.
• Investment Incentives:
Patents and copyrights provide incentives for innovation and creative work. Knowing they can
exclusively benefit from their creations, inventors and creators are more likely to invest in research
and development, leading to advancements in technology and artistic expression.
• Barrier to Entry:
Patents and copyrights act as barriers to entry for new firms, making it difficult and costly for
potential competitors to enter the market. This helps the existing monopolist maintain its market
dominance and deter competition from eroding its profits.
3. Because a monopolist is the only seller in a market, how is the price determined?
The price determination for a monopoly involves a balancing act between two key factors:
1. Demand: This represents the willingness and ability of consumers to purchase the product at
different price points. A monopoly faces a downward-sloping demand curve, indicating that as the
price increases, the quantity demanded by consumers will decrease.
2. Marginal Cost: This refers to the additional cost incurred by the firm to produce one more unit of
output. Understanding the marginal cost helps the monopoly determine the minimum price they need
to charge to cover their production costs.
Here's how these factors interact in price determination for a monopoly:
• Profit Maximization Goal: The primary objective of a monopoly is to maximize its profit. This
translates to finding the price-quantity combination that generates the highest level of profit.
• Balancing Act: The monopoly will simply not choose the highest possible price. Doing so would
drastically reduce the quantity demanded, potentially leading to lower profits.
• Marginal Revenue (MR): This concept is crucial in understanding the optimal price for a
monopoly. MR represents the additional revenue earned from selling one more unit of output.
Unlike a firm in a perfectly competitive market where price and MR are equal, a monopoly's MR
is always less than the price due to the downward-sloping demand curve.
• Equilibrium Point: The monopoly will set the price where marginal revenue (MR) equals
marginal cost (MC). At this point, the additional revenue from selling another unit is just enough
to cover the additional cost incurred to produce it. This point represents the profit-maximizing
price and output for the monopoly.
4. Why a monopoly regarded as inefficient in production when compared to a competitive firm?
Here are some key reasons why:

Page 2 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

1. Production Level:
• A monopoly typically produces less output than a competitive market would at the same price.
This happens because:
o Profit maximization: To maximize profits, a monopoly chooses the point where marginal
revenue (MR) equals marginal cost (MC). However, in a downward-sloping demand
curve, this point usually lies below the level where price equals marginal cost (P = MC).
o P > MC: This means that the price charged by the monopoly is higher than the marginal
cost of production. This creates a deadweight loss in the market, representing a loss of
potential economic welfare compared to the efficient allocation of resources.
• In contrast, in a perfectly competitive market, firms are price takers and produce at the point
where P = MC, leading to a higher overall output and a more efficient allocation of resources.
2. Lack of Incentive to Innovate:
• Facing limited competition, monopolies have less pressure to innovate and develop more
efficient production methods. They can maintain existing technologies and still enjoy a
dominant position in the market.
• Competitive firms, on the other hand, constantly strive to reduce costs and improve
efficiency to stay competitive and attract customers. This innovation pressure leads
to technological advancements that ultimately benefit consumers.
3. Resource Allocation:
• Monopolies may misallocate resources due to their market power. They may choose to:
o Invest more in lobbying or advertising to maintain their dominant position instead of
investing in research and development.
o Become bureaucratic and less efficient due to the lack of competitive pressure.
• In competitive markets, resource allocation is driven by consumer preferences and market
forces, leading to a more efficient utilization of resources as firms try to attract customers
with better products and prices.
5. Substitution and income effects, relation to the slope of the labour - supply curve?
When the wage rate increases, workers face a change in their opportunity cost of leisure. This change
triggers two effects:
1. Substitution Effect:
• This effect focuses on the trade-off between work and leisure. As the wage rate (reward for
work) increases, leisure becomes relatively more expensive compared to working. This
incentivizes individuals to substitute leisure time with work to maximize their income.
• In other words, working becomes more attractive compared to leisure, leading individuals
to supply more labor at a higher wage.
2. Income Effect:
• This effect considers the overall purchasing power of the individual. A higher wage
rate increases their nominal income, even if they work the same amount. This change in
income can influence their demand for both goods and leisure.
• In this case, the income effect can go in two directions:

Page 3 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

o Normal goods: If leisure is considered a normal good, the increased income might
lead individuals to desire more leisure time, potentially reducing the labor supplied at
the higher wage.
o Inferior goods: If leisure is considered an inferior good, the increased income might
lead individuals to spend less time on leisure and supply more labor to afford other
desired goods.
Relating to Labor Supply Curve:
• The substitution effect always increases the quantity of labor supplied due to the incentive to
work more when the wage rate rises.
• The income effect can either reinforce the substitution effect (in case of normal goods for
leisure) or counteract it (in case of inferior goods for leisure).
• The overall slope of the labor supply curve depends on the relative strength of these two
effects. Typically, the substitution effect is stronger than the income effect, leading to
an upward-sloping labor supply curve. This indicates that, in general, as the wage rate
increases, individuals are willing to supply more labor.
Visualizing the Effects:
Imagine a graph with the wage rate on the Y-axis and the quantity of labor supplied on the X-axis.
• The initial equilibrium point is represented by the intersection of the original labor supply
curve and the demand curve for labor.
• When the wage rate increases, the substitution effect will shift the supply curve to the right,
indicating an increase in labor supplied at each wage level.
• The income effect, depending on the nature of leisure as a good, might either further shift the
curve to the right (reinforcing the substitution effect) or slightly shift it to the left
(counteracting the substitution effect).
• The final equilibrium point will reflect the combined impact of both effects, determining the
new quantity of labor supplied at the higher wage rate.
6. What causes labour - market segmentation? Relation to wage differentials?
Labor market segmentation refers to the division of the labor market into distinct submarkets with
limited mobility between them. This creates barriers that prevent workers from easily moving
between different segments, leading to wage differentials (differences in wages) between them. Here
are some key factors contributing to labor market segmentation:
1. Skills and qualifications:
• Educational attainment: Workers with higher levels of education and specific skills are often
concentrated in higher-paying segments of the labor market, while those with limited
qualifications may be confined to lower-paying segments.
• Vocational training and certifications: Specific industry certifications or licenses can act as
barriers to entry in certain segments, limiting access and contributing to wage differences.
2. Geographic location:
• Cost of living: Wages can vary significantly based on geographic location. Areas with
a higher cost of living may offer higher wages to attract and retain workers, while wages
in lower cost-of-living areas might be lower.

Page 4 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

• Industry concentration: Certain industries might be concentrated in specific geographic

regions, creating limited job opportunities in those locations, potentially leading to wage
differentials between regions.
3. Discrimination:
• Unfair practices based on factors like race, gender, age, or disability can restrict access to
certain segments of the labor market, leading to wage gaps between different groups of
workers.
4. Institutional factors:
• Minimum wage laws: While intended to protect workers, minimum wages can create
a segmentation between low-skilled jobs where the wage is close to the minimum and higher-
paying segments.
• Unionization: Unions can negotiate higher wages and benefits for their members, creating
a wage differential between unionized and non-unionized workers.
Wage Differentials:
• Due to the segmentation, different segments of the labor market offer disparate wage levels.
Workers in high-demand, high-skill segments typically command higher wages compared to
those in low-demand, low-skill segments.
• This creates wage gaps between different groups of workers, which can raise concerns
about income inequality and social mobility.
7. The impact of overtime pay on the individual labour supplier's time constraint:
Imagine a worker with a standard workweek of 40 hours and an hourly wage rate of $10. Their total
income from standard work is $400 (40 hours * $10/hour).
Overtime Pay:
• Let's introduce overtime pay with a premium rate of 1.5 times the regular wage. This means
for every hour worked beyond the standard 40 hours, the worker earns $15 per hour (1.5 *
$10/hour).
Impact on Time Constraint:
• The original budget line representing the worker's income possibilities considers only the
standard wage.
• With overtime pay, the budget line kinks upwards at the point representing 40 hours. This
kink signifies the increased earning potential for each additional hour worked beyond the
standard workweek.
Effect on Hours Worked:
• Income Effect: As the income from standard work increases (due to a higher wage rate or
longer workweeks), the worker might choose to substitute leisure with work to increase their
overall income. This could lead to our working more hours.
• Substitution Effect: However, the introduction of overtime pay also introduces a substitution
effect. Now, each additional hour worked beyond 40 hours becomes more valuable due to the
higher overtime wage. This incentivizes the worker to substitute leisure time with overtime
hours to **maximize their income within the same number of total hours worked (standard +
overtime) or even work fewer standard hours and compensate with overtime.
Overall Impact:

Page 5 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

The combined effect of the income and substitution effects on the number of hours worked depends
on the relative strength of each effect and the individual's preferences regarding work and leisure.
Possible Scenarios:
1. Income effect dominates: The individual might work more standard hours to increase their
overall income, even though the overtime pay makes each additional hour more valuable.
2. Substitution effect dominates: The individual might work fewer standard
hours and compensate with overtime hours to take advantage of the higher overtime wage and
enjoy more leisure time.
3. Balanced effect: The individual might adjust their work-leisure balance to a certain extent,
working slightly more or less than before, depending on their specific preferences and needs.
Visualizing the Impact:
Imagine a graph with leisure time on the X-axis and income on the Y-axis.
• The original budget line represents the income possibilities without overtime pay.
• The new budget line with the kink shows the income possibilities with overtime pay.
• The intersection of the budget line and the indifference curve (representing the worker's
preferences) will determine the equilibrium point and the chosen combination of leisure and
income (hours worked).
8. When direct broad cast satellite transmissions and fiber - optic cable - television networks will
greatly increases the number of available television charnels. What impact will this have on the labour
- leisure trade off? illustrate.
The introduction of new technologies like direct broadcast satellite transmissions and fiber-optic cable
networks in the 1990s significantly increased the number of available television channels. This had a
complex impact on the labor-leisure trade-off for individuals working in the entertainment industry,
potentially influencing their choices between work and leisure time.
Potential Impacts:
1. Increased Demand for Content:
• The rise of numerous channels created a greater demand for diverse content, potentially
leading to:
o Increased job opportunities: More channels might require more content creators,
producers, actors, directors, and other personnel, increasing the demand for labor in
the industry.
o Longer work hours: To meet the demand for diverse content, existing employees
might be required to work longer hours or take on additional responsibilities,
impacting their leisure time.
2. Specialization and Efficiency:
• With a wider range of channels catering to specific niches, the industry might become more
specialized. This could lead to:
o Shorter work hours for some: Individuals with specialized skills highly sought after in
specific niches might be able to command higher wages and potentially work fewer
hours while still earning a desired income.
o Longer work hours for others: As channels compete for viewership, they
might demand greater efficiency and productivity from their employees, potentially
leading to longer work hours for some workers.

Page 6 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

3. Technological Advancements:
• The new technologies could lead to:
o Increased automation: Certain tasks, like editing or animation, might become more
automated, potentially reducing the need for some labor, impacting some individuals'
work-leisure balance.
o New skill requirements: New technologies might also require workers to develop new
skills to stay relevant, potentially requiring additional time investment for training
and upskilling, affecting their leisure time.
4. Flexible Work Arrangements:
• The rise of new technologies might also create opportunities for:
o Remote work: Some jobs in the entertainment industry, like writing or script editing,
might become more amenable to remote work, offering employees greater
flexibility in managing work and leisure time.
o Freelance work: The increased demand for content might create opportunities
for freelance work, allowing individuals to set their own work hours and potentially
achieve a better work-leisure balance.
9. How do the elasticity of demand for a product, the availability of substitutes, and union labour as a
proportion of total costs affect the elasticity of demand for union labour?
The elasticity of demand for union labor is influenced by three key factors:
1. Elasticity of Demand for the Product:
• High Price Elasticity: If the product produced by the unionized workforce has a highly elastic
demand, meaning demand falls significantly with price increases, firms are more likely
to reduce production and lay off workers when faced with higher unionized labor costs. This
translates to a more elastic demand for union labor, as a small increase in wages can lead to a
larger decrease in the quantity of labor demanded by the firm.
• Low Price Elasticity: Conversely, if the product has a low price elasticity (demand remains
relatively stable with price changes), firms might be less likely to reduce production even
with higher labor costs, leading to a less elastic demand for union labor.
2. Availability of Substitutes:
• Availability of Substitutes: If there are close substitutes readily available for the product
produced by the unionized workforce, firms can easily switch to alternative production
methods or sources of labor, making the demand for union labor more elastic. A small
increase in wages can lead to a larger decrease in demand as firms switch to substitutes.
• Limited Substitutes: When few or no close substitutes exist, firms are less likely to
switch even with higher unionized labor costs, making the demand for union labor less
elastic.
3. Union Labour as a Proportion of Total Costs:
• High Proportion: If the cost of unionized labor represents a significant portion of the total
production cost, even a small increase in wages can have a larger impact on the final product
price. This can lead to a more elastic demand for union labor, as firms are more sensitive to
cost changes and might be more likely to reduce production or lay off workers.
• Low Proportion: Conversely, if the cost of unionized labor is a smaller portion of the total
cost, firms might be able to absorb higher wages without significantly impacting the final
price, leading to a less elastic demand for union labor.

Page 7 of 8
 Ethio-Lens College
Individual assignment for Microeconomics II
Name: Meles Gebresemaeti | Target group: III Year | Dept.: Management | Sub. date: ______

10. What is monopsony? How is the phenomona related to monopoly in output market?
Monopsony refers to a market structure where there is a single buyer for a good or service, giving
them significant control over the market. This contrasts with a monopoly, which refers to a market
with a single seller. While both structures involve a single dominant player, the power dynamics play
out differently:
Similarities:
• Dominant Player: Both monopsony and monopoly involve a single entity holding significant
market power.
• Price Setting: Both can exert some influence on the price within the market.
Differences:
• Market Side: Monopsony operates on the demand side of the market, controlling buying
power for a good or service. In contrast, a monopoly operates on the supply side, controlling
the selling power of a good or service.
• Price Effect: While both can influence prices, a monopoly tends to set prices higher than in a
competitive market, whereas a monopsony typically pushes prices for the good or service
they buy lower than in a competitive market.
Understanding Monopsony:
Imagine a town with only one hospital (monopsony). The hospital is the sole buyer of labor from
nurses and doctors in the area. This gives the hospital significant power to:
• Dictate wages: The hospital can set lower wages for nurses and doctors compared to what
they might earn in a competitive market where other hospitals exist.
• Limit job opportunities: With only one buyer, nurses and doctors might have fewer job
options and be forced to accept the offered wages.
Relationship to Monopoly:
Monopsony and monopoly are often considered "mirror images" of each other, operating on opposite
sides of the market. They share some similarities in terms of the dominating power held by a single
entity, but the way they influence the market and affect prices differs based on whether they control
the demand or supply side.
Consequences of Monopsony:
Like monopolies, monopsonies can lead to inefficiencies in the market:
• Lower wages: Workers might face lower wages compared to a competitive market.
• Reduced production: Monopsonies may choose to buy less than the socially optimal level to
further lower prices paid to sellers.
• Limited innovation: The lack of competition might stifle incentives for innovation as the
monopsony faces less pressure to improve efficiency or offer better wages to attract workers.

Page 8 of 8