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Questions and Answers of Economics

Suppose a business experiences a sudden increase in its fixed costs. For example, suppose property taxes increase dramatically. What impact, if any, will this have the firm's AFC (average fixed
Which of the following statements regarding a tariff is false?a) A tariff always increases producer surplusb) A tariff always reduces government revenue for the imposing nationc) A tariff always
Consider the following information, and answer the question below. China and England are international trade partners. The following data are expected payoffs for the two countries. Both China and
In your opinion, how efficient are capital markets in the United States? Is market efficiency time varying or constant? Explain/give a short description of evidence consistent with your point of view
A pollution tax encourages firms to develop more efficient abatement technology. State True/False and discuss or justify your choice
How does the FED protect the purchase power of savings?
How concentrated are income gains among the top 1/10th of one percent?
Define the role of the mathematical concepts of maximization and equilibrium in microeconomic theory.
Define and distinguish between productive efficiency and allocative efficiency.
What are consumers assumed to maximize? What are some constraints under which this maximization takes place? Describe the individual consumer’s constrained maximum. Can you characterize this
Define price elasticity of demand and explain what ranges of value it may take.
Use the notion of opportunity cost to explain why “There’s no such thing as a free lunch.”
What are firms assumed to maximize? Under what constraints do firms perform this maximization? Describe how the individual firm determines the output level that achieves that maximum. Can you
Characterize these different market structures in which a firm may operate: perfect competition, monopoly, oligopoly, and imperfect competition. Compare the industry output and price in a perfectly
What conditions must hold for a monopoly to exist?
Suppose that the local government determines that the price of food is too high and imposes a ceiling on the market price of food that is below the equilibrium price in that locality. Predict some of
In the United States in the late twentieth century, no-fault divorce laws became the norm in the states (divorce being a matter for states, not the federal government, to regulate). Ignoring for the
The Truth-in-Lending Act (15 U.S.C. §§1601–1604 (1982)) requires the uniform disclosure of the interest rate to borrowers in a readily intelligible form. Assume that before the act, there was
What is general equilibrium and under what conditions will it be achieved? What are the welfare consequences of general equilibrium?
What are the four sources of market failure? Explain how each of them causes individual profit- and utility-maximizers to make decisions that may be privately optimal but are socially suboptimal.
Which of the following are private goods and might, therefore, be provided in socially optimal amounts by private profit-maximizers? Which are public goods and should, therefore, be provided by the
What is meant by Pareto efficiency or Pareto optimality? What is the importance of the initial distribution of resources in determining what the distribution of resources will be after all Pareto
A valuable resource in which we typically forbid voluntary exchange is votes. This may be inefficient in that, as we have seen, given any initial endowment of resources, voluntary exchange always
Distinguish between the Pareto criterion for evaluating a social change in which there are gainers and losers and the Kaldor-Hicks (or potential Pareto) criterion.
What is a dominant strategy in a game? Where both players in a two-person game have a dominant strategy, is there an equilibrium solution for the game? What is a Nash equilibrium? Is a
Suppose that the equation were y = 5 + x. Show in a graph like the one in Figure what the graph of that equation would look like. Is the relationship between x and y direct or inverse? Is the slope
Begin at point (x0, y0). Now decrease x from x0 to x1. How much must y increase to offset the decrease in x and keep the consumer indifferent?
Suppose that, instead of increasing his level above the initial choice, the decision maker first tries decreasing the amount of whatever it is he is attempting to maximize. Explain how the comparison
Using a graph like Figure, show the effect on the determination of the socially optimal amount of pollution-reduction effort of the following:1. Some technological change that lowers the marginal
In figure, if the firm is producing output, is there any external cost being generated? If so, why is this output level called a social optimum? Would it not be optimal to have no external cost? At
As global demand rises for technology and engineering services, Wipro, Ltd., wants to bring much of the business to Bangalore. The Indian company—which has offices across Europe, Asia, and the
In what ways have the economic problems caused by the recent crisis in the banking and financial industries affected business firms? In what ways have these problems affected employees and
What factors caused American business to develop into a mixed economic system rather than some other type of economic system?
Is gross domestic product a reliable indicator of a nation’s economic health? What might be a better indicator?
Discuss this statement: “Business competition encourages efficiency of production and leads to improved product quality.”
In our business system, how is government involved in answering the four basic economic questions? Does government participate in the system or interfere with it?
Apple never stops reinventing both design and technology to remain competitive around the world. Its iPod has become an icon, holding an impressive 70 percent share of the U.S. market for digital
What reasons would you give if you were advising someone to study business?
What factors affect a person’s choice of careers?
Describe the four resources that must be combined to organize and operate a business. How do they differ from the economist’s factors of production?
Describe the relationship among profit, business risk, and the satisfaction of customers’ needs.
What are the four basic economic questions? How are they answered in a capitalist economy?
Explain the invisible hand of capitalism.
Describe the four basic assumptions required for a laissez-faire capitalist economy.
Based on Figure, outline the economic interactions between business and households in our business system.The Circular Flow in Our Mixed EconomyOur economic system is guided by the interaction of
How does capitalism differ from socialism and communism?
Define gross domestic product. Why is this economic measure significant?
How is the producer price index related to the consumer price index?
What are the four steps in a typical business cycle? How are monetary and fiscal policy related to the business cycle?
Choose three of the economic measures described in Table and describe why these indicators are important when measuring a nation’s economy.
Identify and compare the four forms of competition.
Explain how the equilibrium, or market, price of a product is determined.
Four different environments that affect business were described in Chapter 1. Choose one of the environments and explain how it affects a small electronics manufacturer located in Oregon.
In 1966, Alfred Peet opened a shop selling coffee beans and loose tea—and unknowingly started the gourmet coffee movement in America. Peet’s family had been in the coffee business in Holland; so
Think about how you would construct a model of how your college is governed. Which officers and administrators would you include and exclude from your model if the objective were one of the
Explain why a government policy maker cannot afford to ignore economic theory.
Portray the following hypothetical data on a two variable diagram:Measure the slope of the resulting line, and explain what this numbermeans.
Colin believes that the number of job offers he will get depends on the number of courses in which his grade is B+ or better. He concludes from observation that the following figures are typical:Put
In Figure, interpret the economic meaning of points A and B. What do the two points have in common? What is the difference in their economicinterpretation?
Which are the two biggest national economies on earth? Why are they so much bigger than the others?
What is meant by a “factor of production?” Have you ever sold any on a market?
Why do you think per-capita income in Connecticut is nearly double that in West Virginia?
Most American businesses are small, but most of the output is produced by large businesses. That sounds paradoxical. How can it be true?
What is the role of government in a mixed economy?
Discuss the resource limitations that affecta. The poorest person on earthb. Bill Gates, the richest person on earthc. A farmer in Kansasd. The government of Indonesia
If you were president of your college, what would you change if your budget were cut by 10 percent? By 25 percent? By 50 percent?
If you were to leave college, what things would change in your life? What, then, is the opportunity cost of your education?
Raising chickens requires several types of feed, such as corn and soy meal. Consider a farm in the former Soviet Union. Try to describe how decisions on the number of chickens to be raised, and the
A person rents a house for which she pays the landlord $24,000 per year. The house can be purchased for $200,000, and the tenant has this much money in a bank account that pays 4 percent interest per
Graphically show the production possibilities frontier for the nation of Stromboli, using the data given in the following table. Does the principle of increasing cost hold in Stromboli?Stromboli’s
Jasmine’s Snack Shop sells two brands of potato chips. She produces them by buying them from a wholesale supplier. Brand X costs Jasmine $1 per bag, and Brand Y costs her $1.40. Draw Jasmine’s
Discuss the likely effects of the following:a. Rent ceilings on the market for apartmentsb. Floors under wheat prices on the market for wheatUse supply-demand diagrams to show what may happen in each
U.S. government price supports for milk led to an unceasing surplus of milk. In an effort to reduce the surplus about a decade ago, Congress offered to pay dairy farmers to slaughter cows. Use two
It is claimed in this chapter that either price floors or price ceilings reduce the actual quantity exchanged in a market. Use a diagram or diagrams to test this conclusion, and explain the common
The same rightward shift of the demand curve may produce a very small or a very large increase in quantity, depending on the slope of the supply curve. Explain this conclusion with diagrams.
In 1981, when regulations were holding the price of natural gas below its free-market level, then-Congressman Jack Kemp of New York said the following in an interview with the New York Times: “We
From 1990 to 1997 in the United States, the number of working men grew by 6.7 percent; the number of working women grew by 11 percent. During this time, average wages for men grew by 20 percent,
What shapes would you expect for demand curves for the following?a. A medicine that means life or death for a patientb. French fries in a food court with kiosks offering many types of food
The following are the assumed supply and demand schedules for hamburgers in College town:a. Plot the supply and demand curves and indicate the equilibrium price and quantity.b. What effect would a
Suppose the supply and demand schedules for bicycles are as they appear below.a. Graph these curves and show the equilibrium price and quantity.b. Now suppose that it becomes unfashionable to ride a
The following table summarizes information about the market for principles of economics textbooks:a. What is the market equilibrium price and quantity of textbooks?b. To quell outrage over tuition
How are the following demand curves likely to shift in response to the indicated changes?(a) The effect of a drought on the demand curve for umbrellas(b) The effect of higher popcorn prices on the
The two accompanying diagrams show supply and demand curves for two substitute commodities: tapes and compact discs (CDs).a. On the right-hand diagram, show what happens when rising raw material
Consider the market for beef discussed in this chapter. Suppose that the government decides to fight cholesterol by levying a tax of 50 cents per pound on sales of beef. Follow these steps to analyze
The demand and supply curves for T-shirts in Tourist town, U.S.A., are given by the following equations:Q = 24,000 – 500PQ = 6,000 – 1,000PWhere P is measured in dollars and Q is the number of
You probably use “aggregates” frequently in everyday discussions. Try to think of some examples. (Here is one: Have you ever said, “The students at this college generally think . . .”? What,
Try asking a friend who has not studied economics in which year he or she thinks prices were higher: 1870 or 1900? 1920 or 1940? (In both cases, prices were higher in the earlier year.) Most young
Give some reasons why gross domestic product is not a suitable measure of the well-being of the nation. (Have you noticed newspaper accounts in which journalists seem to use GDP for this purpose?)
Use an aggregate supply-and-demand diagram to study what would happen to an economy in which the aggregate supply curve never moved while the aggregate demand curve shifted outward year after year.
Which of the following transactions are included in gross domestic product, and by how much does each raise GDP?a. Smith pays a carpenter $50,000 to build a garage.b. Smith purchases $10,000 worth of
If an earthquake destroys some of the factories in Poorland, what happens to Poorland’s potential GDP? What happens to Poorland’s potential GDP if it acquires some new advanced technology from
Why is it not as terrible to become unemployed nowadays as it was during the Great Depression?
“Unemployment is no longer a social problem because unemployed workers receive unemployment benefits and other benefits that make up for most of their lost wages.” Comment
Why is it so difficult to define full employment? What unemployment rate should the government be shooting for today?
Show why each of the following complaints is based on a misunderstanding about inflation:a. “Inflation must be stopped because it robs workers of their purchasing power.”b. “Inflation makes it
Two countries start with equal GDPs. The economy of Country A grows at an annual rate of 3 percent while the economy of Country B grows at an annual rate of 4 percent. After 25 years, how much larger
Most economists believe that from 2000 to 2003, actual GDP in the United States grew slower than potential GDP. What, then, should have happened to the unemployment rate over those three years? Then,
Country A and Country B have identical population growth rates of 1 percent per annum, and everyone in each country always works 40 hours per week. Labor productivity grows at a rate of 2 percent in
What is the real interest rate paid on a credit card loan earning 18 percent nominal interest per year, if the rate of inflation isa. zero?b. 4 percent?c. 8 percent?d. 15 percent?e. 20 percent?
Suppose you agree to lend money to your friend on the day you both enter college at what you both expect to be a zero real rate of interest. Payment is to be made at graduation, with interest at a

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