Modern Labor Economics Theory and Evidence Public Policy

Question: Discuss about the Modern Labor Economics for Theory and Evidence Public Policy. Answer: As there is only one supplier in the market, the market is similar to a monopoly market. This will give the seller the opportunity of being the price maker and earn supernormal profit. Increasing the revenue will require the seller to lose the profit maximizing strategy. For maximizing revenue marginal revenue has to be zero (MR = 0), whereas, the profit maximizing policy suggests the marginal revenue (MR) has to be equal to marginal cost (MC) (Ehrenberg Smith, 2016). The following figure presents the situation. As per the figure above, to increase the revenue will require the seller to lower the price level. As per the law of demand, a decrease in price will increase the demand and sales as well. This will only in turn increase the revenue, which is the objective of the seller (Canto, Joines Laffer, 2014). On the other hand, if he increases the price, it will reduce the demand and the total revenue might fall even if the profit increases, which is not the goal of the seller. The main purpose of the seller is to maximize the revenue. To do so, he has to change his production process from equalling marginal revenue to marginal cost. The new policy that has to be adopted here is producing at a point where the marginal revenue is zero. According to absolute advantage theory when a country is more efficient in producing a good, it has absolute advantage over the other countries (Feenstra, 2015). It does not mean it will increase efficiency in the countrys overall production. Comparative advantage theory has to be adopted here to ensure increased efficiency and losing the opportunity cost which will affect the countries negatively. As per the figure above, the country 1 has absolute advantage over country 2, over the both goods. But this does not mean producing both the goods will help the countrys economy. If the country 1 according to the figure above produces good 1 and the country 2 produces good 2, then trade, it will increase the social welfare and generate more income. This way both countries can improve from trade. It will increase both countries Gross Domestic Product. The comparative advantage theory suggests that in doing so the country will avoid the lesser opportunity cost and increase efficiency (Costinot et al., 2013). The country two will also benefit from this situation. If one among the two counties has absolute advantage over all the goods, it should produce the good which bears less opportunity cost. This will leave other country with the option of producing the other good for which it incurs less opportunity cost as well. This way both the countries can increase efficiency. References: Canto, V. A., Joines, D. H., Laffer, A. B. (2014). Foundations of supply-side economics: Theory and evidence. Academic Press. Costinot, A., Donaldson, D., Vogel, J., Werning, I. (2013). Comparative advantage and optimal trade policy (No. w19689). National Bureau of Economic Research. Ehrenberg, R. G., Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge. Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university press.