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Questions and Answers of
Economics
True or false: Average variable cost reaches its minimum point at a lower level of output than average total costs. Explain your answer, using a graph of average and marginal costs to illustrate.
You run a specialty bicycle company, which produces a limited quantity of extremely tricked-out racing bikes. Consider the following graph, which illustrates the short-run average total cost curves
Peter's Pipers produces plumbing pipe. The long-run total cost of Peter's pipes is L TC = 20,000Q - 200 Q2 +Q3, where Q is measured as thousands of feet of piping. The long-run marginal cost of
Each year on January 1, millions of Americans, having made New Year's resolutions to lose weight and get in shape, purchase annual gym memberships. A CNN survey indicates that 30% of all New Year's
True or false: All sunk costs are fixed, but not all fixed costs are sunk. Explain your response.
Karam recently opened a bar & grill. The costs associated with his new business are as follows:a. $300,000 to build the restaurantb. $30,000 for a liquor licensec. $50,000 on furniture and
Amanda owns a toy manufacturing plant with the production function Q = 100L - 3000, where L is hired labor hours. Assume that Amanda has no fixed costs. a. Rearrange Amanda's production function to
Consider three industries: organic onion farming, aluminum production, and car production. a. Drawing on the characteristics of a competitive market outlined in the chapter, explain which of the
The diagram below depicts the cost curves for a perfectly competitive jump drive producer that is currently operating at a loss.a. Suppose the market price of jump drives is $7. In the graph, outline
Five hundred small almond growers operate in areas with plentiful rainfall. The marginal cost of producing almonds in these locations is given by MC = .02Q, where Q is the number of crates produced
Consider Janis the pearl producer with cost curves as shown on the right. Janis produces 1,000 pearls when the price of pearls is $100.a. What is the area of producer surplus earned by Janis if the
Assume that soybean production is perfectly competitive. When we study the behavior of the firm, we assume that the demand faced by that firm is perfectly elastic. Yet in the marketplace, demand may
General supply and demand analysis suggests that, in the short run, a decrease in demand causes the price of a good to fall. a. Is the same assertion true (that decreases in demand cause prices to
Suppose eggs are produced competitively, and that the egg industry is a constant cost industry.a. Fill in the table with appropriate responses (increases, decreases, no change) in response to each of
Jiang's Pussycats sells ceramic kittens. The marginal cost of producing a particular kitten depends on how many kittens Jiang produces, and is given by the formula MC = 0.8Q. Thus, the first kitten
Janis is one producer in the perfectly competitive pearl industry. Janis's cost curves are shown on the right. Pearls sell for $100, and in maximizing profits, Janis produces 1,000 pearls per
When it comes to CD sales, country artist Taylor Swift is twice as popular as Carrie Underwood, and at least four times as popular as Blake Shelton. Yet all of their albums retail for the same price.
The graph in Problem 11 depicts the market demand for 30-weight ball bearings. That particular market segment is monopolized by a single producer named Irwin. Referring to that graph: a. How do the
Consumers in Carlandia are willing to purchase up to 100,000 cars each year. Suppose the long-run average cost curve for auto producers in Carlandia looks like that shown in the figure on the
Identify and explain the sources of market power for each case listed below: a. In the early 1990s, the DeBeers diamond cartel controlled almost all of the world's rough diamond production. b.
Juanita maintains the only greenhouse in isolated Point Barrow, Alaska, and therefore has a monopoly on the sale of fresh flowers. Her hired-gun statistician estimates that the elasticity of demand
The inverse demand for fresh flowers in Point Barrow, Alaska, is given by P = 10 - .01Qd. a. Use the demand function above to derive the associated marginal revenue function. (In other words, express
Carolina Atlantic sells specialty paper to commercial clients. The paper can be produced at zero marginal cost. Some clients are intensive users who are price-sensitive; their demands are given by P
Elario makes delicious cupcakes that he mails to customers across the country. His cupcakes are so delicious that he has a great degree of pricing power. Elario's customers have identical demands for
Nathan sells gourmet hot dogs. His customers have identical inverse demands, given by P = 5 − .25Q. Nathan can produce hot dogs at a constant marginal and average cost of $1. a. If Nathan operates
Identify the pricing strategy each seller uses in the items below: a. A local bar hosts "Ladies' Night" where women pay half-price. b. A local tire store offers Firestone tires at $160 each, or $400
For each situation below, identify an appropriate pricing strategy the firm could use to increase profits, if any: a. All Krispy Kreme customers have identical demands. b. Some movie buffs like
Most colleges and universities publish a single tuition figure, often right on their website. Yet, it's claimed that colleges and universities are masters of first-degree price discrimination. a.
In 1969, tobacco companies were the largest single product advertisers on television. That same year, the Surgeon General of the United States released a report linking smoking to adverse health
August and François are the only sellers of sparkling water at a market in a small, rural French town. They obtain their sparkling water for free from wells in their backyards, and transport it to
There are only three big tobacco companies, but they produce dozens of brands of cigarettes. Compare and contrast Bertrand competition with undifferentiated and differentiated products to explain why
Suppose you and a rival are the only producers of oysters in an isolated town. Every morning you both dive for oysters that you will sell in the market that afternoon. Each morning, you both have a
After years of training, Sara has landed a contract playing professional lacrosse. Eager to leverage her pro status by bringing in endorsements, she asks Jenny MacGuire to be her personal manager.
Abel, Brenda, and Carlos are members of the Human Resources Management club at their university. The club plans to bring a motivational speaker to campus with money earned selling doughnuts at the
Two graduate students are engaged to one another, and both are working on their master's theses-Michael in music education and Kristen in political science. Because both have incomes that are tied to
Use the check method to find the Nash equilibrium or equilibria (if any) in each of the followinga.b.
Trim the branches in the following game tree to solve the game depicted:
Tessa's Techs is a small, competitive firm that provides online and telephone support for people with computer problems. The marginal product of labor (measured in numbers of support requests
In Glutonia, there are 1,000 bakers who buy fl our to bake into bread. The marginal revenue product of fl our faced by each baker is MRPF = 60 − 0.01Q. The fl our market in Glutonia is perfectly
Tilda grows Brussels sprouts, and is a monopsony buyer of labor in her small town. The labor supply she faces is given in the following table, and shown in the accompanying graph.a. Calculate Tilda's
Suppose that the government of a small equatorial country requires all coconut producers to sell their output to the government. According to the text, a monopsony buyer's marginal expenditure is
In a coal-mining company town, one employer is the sole buyer of labor services. The labor supply curve is given by QL = −700 + 100W. a. Invert the labor supply curve so that the wage is expressed
The company town in Problem 13 estimates that the marginal revenue product of labor is given by MRPL = 19 − 0.02L. a. Equate the firm's marginal revenue product of labor and marginal expenditure to
The following diagram shows the marginal revenue product of labor and the supply of labor in the production of lemongrass.a. Express the marginal revenue product of labor in the lemongrass industry
In a tourist-destination city, the market for ATM fillers is perfectly competitive. The demand for ATM fillers is given by L = 200 − 5W, where L is the number of workers desired and W is their
Suppose that the employment of elevator mechanics is controlled, on the supply side, by a union. Is it better for the union to attempt to maximize the profits of its membership, or to maximize the
An oil-well fire is raging in Texas. The Texas state government is trying to hire International Well Control, a famed oil well-firefighting firm. Explain why the models of the labor market developed
Offer two explanations why, at below profit-maximizing levels of output, a firm is likely to find that its MRPL is greater than the prevailing market wage. What happens to the firm's MRPL as output
Consider the situation facing Tessa, the owner of Tessa's Techs in Problem 1. a. Draw Tessa's demand curve for labor. Then, draw the supply curve for labor that Tessa faces. b. On your graph,
The market for nurses is highly competitive on both the supply and demand side. Suppose a hospital is trying to determine how many nurses to hire. a. Graph the hospital's supply and demand for labor
The real wage a firm pays its employees measures the number of units of output the firm must sell in order to pay an employee's dollar wage. a. If employees at a whipped cream factory earn $21 per
The house painting industry is highly competitive on both the input and output sides. The marginal product of labor faced by a typical firm in the industry is given by MPL = 25 - L, where L is the
Crazy Eddie is the world's worst politician. At a recent political rally he told the crowd, "This country was founded on hard work. If elected, I plan to encourage that work by raising income taxes."
Consider Jillian, whose backward-bending labor supply curve is shown in the fi gure below. Above $50 per hour, increases in wages cause Jillian to work less, and enjoy more leisure. That implies that
Ricardo is considering purchasing an ostrich, which he can graze for free in his backyard. Once the ostrich reaches maturity (in exactly three years), Ricardo will be able to sell it for $2,000. The
Suppose that there are two types of workers in the world: Charlie Hustles, who are high-productivity workers, and Lazy Susans, who are low-productivity workers. The market would pay $70,000 (this and
AJ pays full price to view The Avengers at the multiplex. After three minutes of viewing, he realizes that the movie is worse than anything he could be watching on TV at home. Yet, he stays to the
One way of stating the Coase theorem is that "in the absence of transactions costs, the property right to an activity will be acquired by the party that values it most." This suggests that if
Identical twins Jo and Jerri have identical preferences; both love to go to football games, and both are looking forward to their alma mater's homecoming. Jo bought her ticket in advance; Jerri plans
Jameel is offered two sets of choices. Choice A. Take a $100 check that can be cashed today, or a $200 certified check that can be cashed in two years. Choice B. Take a $100 certified check that can
A town planning board must decide how to deal with the Kendall Elementary School building. Twenty years ago, the Kendall school (one of four in the town) was closed due to falling enrollment. For the
As vice president of sales for a rapidly growing company, you are grappling with the question of expanding your direct sales force (from its current level of 60 national salespeople) by hiring 5 to
A manufacturer of spare parts faces the demand curve,P = 800 − 2Q,And produces output according to the cost function,C = 20,000 + 200Q + .5Q2.a. Create a spreadsheet modeled on the example shown.7
Your firm competes with a close rival for shares of a $20 million per year market. Your main decision concerns how much to spend on advertising each year. Your rival is currently spending $8 million
a. Create a spreadsheet describing Amazon's output and pricing choices with respect to the Kindle e-reader. (Use the template from Problem S1 with price equation: P = 294 − 35Q and MC = $126.) Use
The economist Arthur Laffer has long argued that lower tax rates, by stimulating employment and investment, can lead to increased tax revenue to the government. If this prediction is correct, a tax
The economic staff of the US Department of the Treasury has been asked to recommend a new tax policy concerning the treatment of the foreign earnings of US firms. Currently the foreign earnings of
A firm’s total profit is given by ???? = 20x − x2 + 16y − 2y2.a. What values of x and y will maximize the firm’s profit?b. Repeat part a assuming the firm faces the constraint x + y ≤ 8.c.
The notion of elasticity is essential whenever the multiplicative product of two variables involves a trade-off. (Thus, we have already appealed to price elasticity to maximize revenue given the
Let’s revisit the maker of spare parts in Problem S1 of Chapter 2 to determine its optimal price. The firm’s demand curve is given by: Q = 400 − .5P, and its cost function by: C = 20,000 + 200Q
On a popular air route, an airline offers two classes of service: business class (B) and economy class (E). The respective demands are given by:PB = 540 − .5QB and PE = 380 − .25QE.Because of
Now suppose the airline in Problem S2 can vary the number of daily departures. a. Use marginal analysis to find the airline's profit-maximizing number of flights, and how many passengers of each type
a. Consider a different consumer who has much steeper indifference curves than those depicted in Figure 3A.1. Draw a graph showing such curves. What do these curves imply about his relative valuation
a. Suppose the income the consumer has available to spend on goods increases to $30. Graph the new budget line and sketch a new indifference curve to pinpoint the consumer's new optimal consumption
Suppose that the price of good X rises and the price of good Y falls in such a way that the consumer's new optimal consumption bundle lies on the same indifference curve as his old bundle. Graph this
The following regression was estimated for 23 quarters between 2007 and 2013 to test the hypothesis that tire sales (T) depend on new-automobile sales (A) and total miles driven (M). Standard errors
There is an ongoing debate about the roles of quantitative and qualitative inputs in demand estimation and forecasting. Those in the qualitative camp argue that statistical analysis can only go so
To help settle the scientific debate in Problem 7, an expert has provided annual data on the water table and rainfall over the last decade.a. Using the 10 years of data, estimate the equation, W = a
A soft-drink bottler collected the following monthly data on its sales of 12-ounce cans at different prices.a. Use a regression program to estimate a linear demand equation. If price is cut by $.10,
Your company's sales have been growing steadily over the last 17 quarters, as shown in the following table.You wish to predict the next four quarters' sales. (You are aware that your product's sales
The accompanying table, compiled by economists Karl Case and Robert Shiller, lists average US housing prices (in the form of a real, inflation-adjusted index) from 1975 to 2010.a. Using the years
A firm’s production function is well described by the equationQ = 2L − .01L2 + 3K − .02K2.Input prices are $10 per labor hour and $20 per machine hour, and the firm sells its output at a fixed
A second firm's production function is given by the equation Q = 12L.5K.5. Input prices are $36 per labor unit and $16 per capital unit, and P = $10. a. In the short run, the firm has a fixed amount
The accompanying spreadsheet captures the profit-maximizing decisions of a carmaker facing stricter fuel-efficiency standards as discussed earlier in the chapter. The carmaker in question must decide
As noted in Problem 5 of Chapter 3, General Motors (GM) produces light trucks in its Michigan factories. Currently, its Michigan production is 50,000 trucks per month, and its marginal cost is
Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms. Could lower transaction costs in e-commerce
A firm’s production function is given by the equationQ = 12L.5K.5,Where L, K, and Q are measured in thousands of units. Input prices are 36 per labor unit and 16 per capital unit.a. Create a
A multinational firm produces microchips at a home facility and at a foreign subsidiary according to the respective cost functions:CH = 120QH and CF = 50QF + .5QF2The firm sells chips in the home
a. A senior manager argues that the chip division's main purpose is to serve the firm's final-product divisions. Accordingly, these services should be offered free of charge; that is, the transfer
In the numerical example, suppose the firm can purchase chips on the open market at a price of $300. What production decisions should the divisions make in this case?
Over the last 30 years in the United States, the real price of a college education (i.e., after adjusting for inflation) has increased by almost 80 percent. Over the same period, an increasing number
In a perfectly competitive market, the cost structure of the typical firm is given by: C = 25 + Q2 − 4Q, and industry demand is given by: Q = 400 − 20P. Currently, 24 firms serve the market.a.
The industry demand curve in a perfectly competitive market is given by the equation: P = 160 − 2Q, and the supply curve is given by the equation: P = 40 + Q. The upward-sloping supply curve
In 2002, the Atlanta Journal and the Atlanta Constitution, once fierce competitors, merged to become the Atlanta Journal-Constitution, the only remaining daily newspaper in the city. a. Before the
Consider again the New York taxi market, where demand is given by Q = 10 − .5P, each taxi's cost is C = 980 + 3Qt, and ACMIN = $10 at 140 trips per week. a. Suppose that, instead of limiting
Pharmaceutical companies can expect to earn large profits from blockbuster drugs (for high blood pressure, depression, ulcers, allergies, sexual dysfunction) while under patent protection. What is
Imagine that the perfectly competitive market described in Chapter 7, Problem S1, was transformed into a pure monopoly. (What were formerly independent small firms are now production units owned by
Suppose a monopolist controls the industry described in Problem S2 of Chapter 7. The industry demand curve remains: P = 160 − 2Q. In addition, total production costs are unchanged: C = 800 + 40Q +
A dominant firm in an industry has costs given by C = 70 + 5qL. The dominant firm sets the market price, and the eight “small” firms coexisting in the market take this price as given. Each small
A firm faces a price equation P = 12.5 + .5A.5 − .25Q and a cost equation C = 5Q + A, where Q denotes its output and A denotes its level of advertising expenditure. a. Create a spreadsheet to
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