An argument against optimum currency areas (OCA) is that the single currency and the common interest rate used in an OCA would mean one-size-fits-all monetary policy. Explain this argument, and consider whether and under what condit

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Input employment decisions (price and quantity) depend upon the market structure of both product and factor markets. Discuss.

Input employment decisions.

The objective of any ordinary firm in any given market is to maximise its profits. It generates these profits by selling its produce- whether it be goods or services- to consumers. The act of producing a finished good or service ordinarily requires the use of one or more inputs, each of which has its own characteristics and properties in relation to the production of the firms output. Very common examples of inputs- or factors of production- include capital goods (e.g. Machinery, tools, vehicles), labour, and energy (usually in the form of electricity). Different combinations of factors of production can change the level of a firms output, and the relationship between the quantity produced and the inputs used (and often relationships between the inputs themselves) is known as the production function. A production function can be expressed algebraically in the following form:

Function 1

Where (Q) represents output, which is a function (f) of whatever number of inputs used (X1 through to Xn). For example, a two input production function involving capital and labour could take the form:

Function 2

Where (K) represents capital and (L) labour. Given a production function like this, a firm could always increase the quantity it produces by increasing one or all inputs and the firm would simply employ an infinite number of inputs in order to achieve infinite output. However, since in reality inputs are scarce and thus have prices, the firm can only employ the combinations of inputs that its budget will allow. For example, if a firm with production Function 2 faced equal prices, say wages for one unit of labour (w) and the price of capital (r)  were equal at (w)=0.25 and (r)=0.25, it could afford any combination of inputs along or within the isocost line shown on Figure 1, given a budget of 1. The firm, given a budget, will then chose the combination of factor inputs which maximise their output subject to their budget constraint. In Figure 1, the optimal combination of capital and labour is shown by the point at which the isocost line (representing the area within the firm’s budget) is tangential to the isoquant (representing all possible combinations of capital and labour for a given output) for Q=5 (the highest output that can be achieved). Any of the points within the isocost line would also be possible, but would be sub- optimal since they would fall upon a lower output isoquant.

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Figure 1

As can be seen from Figure 1, the Isocost line for (w)=0.25, (r)=0.25 is tangential to the isoquant Q=4 at the point L=2, K=2, meaning that the optimal combination of inputs is 2K, 2L.

Market Structure

The scenario depicted in Figure 1 could describe a firm acting under perfect competition, with competition also prevailing in factor markets. The firm, being part of a perfectly competitive market (one encompassing a large number of relatively small firms  in competition with one another), can sell all of its output at the market clearing price, and is a price taker ...

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