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Questions and Answers of Banking

1. The short-run marginal cost curve is shaped like the letter _____and the short-run average cost curve is shaped like the letter _____.2. The negatively sloped portion of the short-run marginal
1. Arrows up or down. When marginal cost is less than average cost, an increase in output_____ average cost. When marginal cost exceeds average cost, an increase in _____output average cost.2. The
1. The presence of _______explains the negatively sloped portion of a long-run average-cost curve, and the notion of _______explains the horizontal portion of the curve.2. Consider the information
1. The average cost of producing an iPhone is about $ _____.2. The cost of producing the first fake killer whale is about three times the cost of producing the second because the firm uses _____
In the search for alternatives to fossil fuels, a prominent contender is switchgrass, a perennial grass that is native to the U.S. plains states. The principal advantage of switchgrass and other
For another example of a competitive market, consider phone service in the developing world, where many people relied on pay phones until the recent development of mobile phones generated a new
For an example of the law of supply with market entry, consider the market for wolfram during World War II. Wolfram is an ore of tungsten, an alloy required to make heat-resistant steel for armor
The mining industry is another example of an increasing-cost industry. Copper mines differ in the purity of their ore and the cost of extracting it. When the price of copper is relatively low, only
Restrictions on residential development make housing suppliers less responsive to changes in demand. As a result, the housing market is more prone to cycles of rising and falling prices. In a market
1. The firm-specific demand curve shows the relationship between the ____ charged by the firm and the ____ by the firm.2. The firm-specific demand curve is ____ (horizontal/negatively) sloped for a
1. Economic profit equals ________minus________.2. Economic cost equals ________cost plus ________cost.3. For a perfectly competitive firm, marginal revenue equals ________, and to maximize profit,
1. A firm will continue to operate an unprofitable business if _________exceeds _________cost.2. Your firm has a total revenue of $500, a total cost of $700, and a variable cost of $600. You should
1. A firm€™s short-run supply curve shows the relationship between ________ on the horizontal axis and________ on the vertical axis.2. To draw a firm€™s short-run supply curve,
1. Draw the Supply Curves. The following table shows short-run marginal costs for a perfectly competitive firm:a. Use this information to draw the firms marginal cost curve.b. Suppose the shut-down
1. The long-run supply curve shows the relationship between ________on the horizontal axis and ________on the vertical axis.2. Arrows up or down: As the total output of an increasing- cost industry
1. As the price of copper increases, the quantity of copper produced increases because areas with relatively high ________enter the market.2. Wolfram Elasticity. Consider the Application Wolfram
1. The short-run supply curve is steeper than the long run supply curve because of the principle of _________2. Arrows up or down: Suppose the demand for shirts increases. In the short run, the price
1. As the total output of a constant-cost industry increases, ________the cost does not change, so the long-run supply curve is _______ (horizontal/ positively sloped/negatively sloped).2. A
A developer interested in building a casino in Creswell, Oregon, placed a curious announcement in the local newspaper. If local voters approved the casino, the developer promised to give citizens a
On a hot day, are you willing to pay more than you normally would for an ice-cold can of Coke? If so, you re the type of consumer Coca-Cola Company had in mind when it developed a high- tech vending
In late 2007, Radiohead released its album In Rainbows for downloading directly from its Web site. The band adopted an unusual pricing strategy: Let each consumer decide how much to pay. This looks
1. For a monopolist, marginal revenue is ___________ (greater/less) than price.2. A monopoly that cuts its price gains revenue from its ________customers but loses revenue from its
1. Book Pricing: Publishers versus Authors. Consider the problem of setting a price for a book. The marginal cost of production is constant at $20 per book. The publisher knows from experience that
1. A monopoly is inefficient solely because the monopolist gets a profit at the expense of consumers. ____________ (True/False)2. To show the deadweight loss from monopoly, we compare the monopoly
1. Consumer Compensation. Consider the story of Coca-Cola and the scoreboard in the chapter. Your job is to fully compensate each student for the cost associated with the soft-drink monopoly. Suppose
1. A patent increases the incentive to develop new products because it ________ the price of the product and thus generates profit to cover a firms costs of _______.2. In some cases, a patent is
1. Senior Discounts for Movies. Your movie theater charges a single price of $6. The marginal cost of each patron is $1. A recent marketing survey revealed the following information about senior
1. A price-discriminating firm will charge a higher price to consumers with a relatively ________ (elastic/ inelastic) demand and a lower price to consumers with a relatively ________
In many stores, nationally advertised brands share the shelves with store brands. For example, you can buy Kellogg s Frosted Flakes or Safeway s Frosted Flakes. Similarly, Bayer Aspirin shares a
One way to get into a monopolistically competitive market is to get a franchise for a nationally advertised product. If you want to get into the donut market, you could pay a franchise fee of $40,000
The National Atmospheric and Space Administration (NASA) is ending its space-shuttle program, but has developed programs to encourage firms to enter the market for space flight. Once the shuttle
For another example of signaling from advertising, consider movies. A movie distributor may produce several movies each year but advertise just a few of them. Although there are few repeat consumers
1. A profit-maximizing firm picks the quantity of output at which ______ equals ______.2. Arrows up or down: At a firm’s current level of output, marginal revenue exceeds the marginal cost. The
1. Monopolistic competition refers to a market in which old boys act naturally as they transport tight slacks in the back of Dodge Ram pickup trucks. ___________ (True/False)2. There are
1. The trade-off with entry is that an increase in the number of firms leads to higher _________but greater _______.2. When products are differentiated by location, the entry of firms generates
1. Advertising for eyeglasses _________ (increases/decreases) the price of eyeglasses because advertising promotes _________.2. An advertisement that succeeds in getting consumers to try the product
Between 2006 and 2011, many of the top-selling branded drugs will lose their patent protection. The producers of generic versions of the branded drugs will enter markets with hundreds of billions of
The Got Milk? Advertisement campaign is run by the National Fluid Milk Producers, an industry group that is funded by a tax of $0.20 per hundredweight of processed milk. Milk producers pool their
1. A market is considered unconcentrated if the Herfindahl-Hirschman Index (HHI) is below _______and is highly concentrated if the HHI is at least ______.2. For a market with four firms, each with a
1. Arrows up or down: If we move from the cartel outcome to the duopoly outcome, the price ___________, the quantity per firm __________, and the profit per firm __________.2. A dominant strategy is
1. For firms with a low-price guarantee, the promise of matching a lower price is a(n) ________ promise, because all firms will charge the same ________ price.2. Suppose that Jack and Jill use a
1. Under a price-leadership model, a sudden drop in price by the leader is unlikely to trigger a price war if other firms believe that the price cut was caused by higher ________.2. Arrows up, down,
1. Consider a market with two firms managed by Harry and Vera. Under a cartel (both firms pick the high price), each firm earns a profit of $80. Under a duopoly (both firms pick the low price), each
1. Otto has a monopoly on limousine service, and Carla is thinking about entering the market. The outcome of the entry-deterrence game represented by the game tree on the following page is that Otto
1. The producers of branded drugs are responding to the introduction of generic competitors by _______and_______.2. Ninja Turtles versus Tai Chi Frogs. The demand for fantasy amphibians is linear,
1. The advertiserâ€™s dilemma is that both firms would be better if ______ advertises, but each has an incentive to ______.2. The advertisers dilemma shown in Figure occurs when advertising
In the middle part of the nineteenth century, the British parliament staged an experiment in private enterprise. In the early part of the century, water was drawn from local rivers, stored in ponds
In 2001 H.J. Heinz Company announced plans to buy Milnot Holding Company s Beech-Nut for $185 million. The merger would combine the nation s second- and third-largest sellers of baby food, with a
In 1981 the FTC brought an antitrust suit against Xidex Corporation for its earlier acquisition of two rivals in the microfilm market. By acquiring Scott Graphics, Inc., in 1976 and Kalvar
1. Arrows up or down: At a natural monopolist s current level of output, marginal cost exceeds marginal revenue. The firm should ______ its output and _______ its price.2. The entry of a second firm
1. The purpose of antitrust policy is to promote _______, which leads to lower _______.2. There are three types of antitrust policies: (1) _______, (2) _______, and (3) _______.3. In the Staples case
1. Incentive to Raise Prices after a Merger. Consider the application Heinz and Beech-Nut Battle for Second Place. Suppose the merger of two firms will reduce the price elasticity of demand for each
1. The deregulation of the airline industry led to _______prices on average, but _______prices in cities.2. There were two sources of pressure to deregulate electricity market: (1) _______ and (2)
List the financial transactions you have engaged in over the past week. Howmight each one have been carried out 50 years ago?
How were you, your family or your friendsaffected by the recent failure of the financial system to function normally during the financial crisis of 2007-2009?
Name two distinct financial markets and describe the kind of asset traded in each.
The government is heavily involved in the financial system. Explain why.
If offered the choice of receiving $1,000 today or $1,000 in one year’s time, which option would you choose, and why?
If time has value, why are financial institutions often willing to extend you a 30-year mortgage at a lower annual interest rate than they would charge for a one-year loan?
If 2 percent growth is your break-even point for an investment project, under which outlook for the economy would you be more inclined to go ahead with the investment: (1) A forecast for economic
Why are large, publiclylisted companies much more likely than small businesses to sell financial instruments such as bonds directly to the market, while small businesses get their financing from
During the financial crisis of 2007-2009, some financial instruments that received high ratings in terms of their safety turned out to be much riskier than those ratings indicated. Explain why
Many people believe that, despite ongoing financial innovations, cash willalways be with us to some degree as a form of money. What Core Principle couldjustify this view?
Why do you think the financial system has become more globally integrated over time? Can you think of any downside to this increased integration?
Suppose financial institutions didn’t exist but you urgently needed a loan. Where would you most likely get this loan? Using Core Principles, identify an advantage and a disadvantage this
To begin using FRED, plot the consumer price index (FRED code: CPIAUCSL) and find the date and level of the latest observation. Then plot the inflation rate measured as the percent change from a year
Plot the level of real GDP (FRED code: GDPC1). Then plotthe rate of economic growth as the percent change from a year ago of this index. Describe how real GDP behaves in recessions, which are denoted
Examine nominal GDP (FRED code: GDP) by repeating the steps in Data Exploration Problem 3. Based on the figure showing percent change from a year ago, what was special about the behavior of nominal
Plot on one figure the percent change from a year ago of both the GDP deflator (FRED code: GDPDEF) and real GDP (FRED code: GDPC1). How does the GDP deflator link nominal and real GDP? Since the
Describe at least three ways you could pay for your morning cup of coffee. What are the advantages and disadvantages of each?
You are the owner of a small sandwich shop. A buyer may offer one of several payment methods: cash, a check drawn on a bank, a credit card, or a debit card. Which of these is the least costly for
Explain how money encourages specialization, and how specialization improves everyone’s standard of living.
Give four examples of ACH transactions you might make.
You receive a check drawn on another bank and deposit it into your checking account. Even though this is a “demand deposit” the funds are not immediately available for your use. Why? Would your
You visit a tropical island that has only four goods in its economy – oranges, pineapples, coconuts and bananas. There is no money in this economy. a. Draw a grid showing all the prices for this
Consider again the tropical island described in Problem 12. Under what circumstances would you recommend the issue of a paper currency by the government of the island? What advantages might this
What factors should you take into account when considering using the following assets as stores of value?a. Goldb. Real estatec. Stocksd. Government bonds
Suppose a significant fall the price of certain stocks caused the market makers in those stocks to experience difficulties with their funding liquidity. Under what circumstances might that
Consider an economy that only produces and consumes two goods-food and apparel. Suppose the inflation rate based on the consumer price index is higher during the year than that based on the GDP
Assuming no interest is paid on checking accounts, what would you expect to see happen to the relative growth rates of M1 and M2 if interest rates rose significantly?
Could the dollar still function as the unit of account in a totally cashless society?
Why might each of the following commodities not serve well as money?a. Tomatoesb. Bricksc. Cattle
Despite the efforts of the United States Treasury and the Secret Service, someone discovers a cheap way to counterfeit $100 bills. What will be the impact of this discovery on the economy?
Over a nine-year period in the 16th century, King Henry VIII reduced the silver content of the British pound to one-sixth its initial value. Why do you think he did so? What do you think happened
Under what circumstances might you expect barter to reemerge in an economy that has fiat money as a means of payment? Can you think of an example of a country where this has happened recently?
Under what circumstances might money in the form of currency be the best option as a store of value?
Find the most recent level of M2 (FRED code: M2SL) and of the U.S. population (FRED code: POP). Compute the quantity of money divided by the population. Do you think your answer is large? Why?
Reproduce Figure 2.3 from 1960 to the present, showing the percent change from a year ago of M1 (FRED code: M1SL) and M2 (FRED code: M2SL). Comment on the pattern over the last five years. Would it
Whichusually grows faster: M1 or M2? Produce a graph showing M2 divided by M1. When this ratio rises, M2 outpaces M1, and vice versa. What is the long-run pattern? Is the pattern stable?
Traveler’s checks are a component of M1 and M2. Using FRED, produce a graph of this component of the monetary aggregates (FRED code: TVCKSSL). Explain the pattern you see.
Plot the annual inflation rate based on the percent change from a year ago of the consumer price index (FRED code: CPIAUCSL). Comment on the average and variability of inflation in the 1960s, the
While we often associate informal financial arrangements with poorer countries where financial systems are less developed, informal arrangements often co-exist within the most developed financial
The Chicago Mercantile Exchange has announced the introduction of a financial instrument that is based on rainfall in the state of Illinois. The standard agreement states that for each inch of rain
The Wall Street Journal has a daily listing of what are called "Money Rates” or interest rates on short-term securities. Locate it either in a recent issue of the newspaper by looking at the index
Designated market makers, who historically have provided liquidity (i.e,, have stood by ready to buy and sell) in markets for specific stocks, have declined in importance. Explain this decline in
Commercial banks, insurance companies, investment banks, and pension funds are all examples of financial intermediaries. For each of these, give an example of a source of their funds and an example
Life insurance companies tend to invest in long-term assets such as loans to manufacturing firms to build factories or to real estate developers to build shopping malls and skyscrapers. Automobile
Everything else being equal, which would be more valuable to you – a derivative instrument whose value is derived from an underlying instrument with a very volatile price history or one derived
You decide to start a business selling covers for smart phones in a mall kiosk. To buy inventory, you need to borrow some funds. Why are you more likely to take out a bank loan than to issue bonds?
Splitland is a developing economy with two distinct regions. The northern region has great investment opportunities, but the people who live there need to consume all of their income to survive.

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