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Questions and Answers of Economics

Gail works in a flower shop, where she produces 10 floral arrangements per hour. She is paid $ 10 an hour for the first eight hours she works and $ 15 an hour for each additional hour she works. What
The only variable input a janitorial service firm uses to clean offices is workers who are paid a wage, w, of $ 10 an hour. Each worker can clean four offices in an hour. Use math to determine the
A firm has a Cobb- Douglas production function, q = ALaKß, where a + ß < 1. On the basis of this information, what properties does its cost function have? For example, a U. S. chemical firm has
Equation 6.5 gives the short run variable cost function for Japanese beer as VC = 0.55q1.67. If the fixed cost is 600 and the firm produces 550 units, deter-mine the C, VC, MC, AFC, and AVC. What
A firm builds shipping crates out of wood. How does the cost of producing a 1-cubic-foot crate (each side is 1-foot square) compare to the cost of building an 8-cubic-foot crate if wood costs $ 1 a
The invention of a new machine serves as a mobile station for receiving and accumulating packed flats of strawberries close to where they are picked, reducing workers’ time and burden of carrying
A bottling company uses two inputs to produce bottles of the soft drink Sludge: bottling machines (K) and workers (L). The isoquants have the usual smooth shape. The machine costs $ 1,000 per day to
Suppose that the government subsidizes the cost of workers by paying for 25% of the wage (the rate offered by the U. S. government in the late 1970s under the New Jobs Tax Credit program). What
The all-American baseball is made using cork from Portugal, rubber from Malaysia, yarn from Australia, and leather from France, and it is stitched (108 stitches exactly) by workers in Costa Rica. To
California’s State Board of Equalization imposed a higher tax on “alcopops,” flavored beers containing more than 0.5% alcohol-based flavorings, such as vanilla extract (Guy L. Smith, “On
A U. S. electronics firm is considering moving its production to a plant in Mexico. Its estimated production function is q = L0.5 K0.5 (based on Hsieh, 1995). The U. S. factor prices are w = r = 10.
What is the long- run cost function for a fixed-proportions production function for which it takes two units of labor and one unit of capital to produce one unit of output as a function of the wage,
In what types of industry would you expect to see substantial learning by doing? Why?
A firm’s learning curve, which shows the relation-ship between average cost and cumulative output (the sum of its output since the firm started producing), is AC = a + bN–r; where AC is its
In the Mini-Case “Learning by Drilling,” an oil drilling firm’s average cost when working with production company M depends partly on its own cumulative drilling experience, N, and partly on
The United Kingdom started regulating the size of grocery stores in the early 1990s, and today the average size of a typical U. K. grocery store is roughly half the size of a typical U. S. store and
Laura sells mushrooms and strawberries to tourists. If Laura spends the morning collecting only mushrooms, she picks 8 pints; if she spends the morning picking strawberries, she collects 6 pints. If
A refiner produces heating fuel and gasoline from crude oil in virtually fixed proportions. What can you say about economies of scope for such a firm? What is the sign of its measure of economies of
In figure, show that there are wage rates and capital rental costs such that the firm is indifferent between using the wafer-handling stepper technology and the stepper technology. How does this
What types of firms would not normally maximize profit?
Describe three important consequences of “going public” by selling shares in an initial public offering.
What types of firm organization allow owners of a firm to obtain the advantages of limited liability?
A firm has three different production facilities, all of which produce the same product. While reviewing the firm’s cost data, Jasmin, a manager, discovers that one of the plants has a higher
A firm has revenue given by R(q) = 100q – 3q2 and its cost function is C(q) = 100 + 10q. What is the profit-maximizing level of output? What profit does the firm earn at this output level?
Should a firm ever produce if it is losing money (making a negative economic profit)? Why or why not?
At the time of its initial public offering (initial sale of stock), Groupon, an Internet company that provides discount coupons, used unusual measures of its business performance (Michael J. de la
A firm that owns and manages rental properties is considering buying a building that would cost $ 800,000 this year, but would yield an annual revenue stream of $ 50,000 per year for the foreseeable
Should a firm shut down if its weekly revenue is $ 1,000, its variable cost is $ 500, and its fixed cost is $ 800, of which $ 600 is avoidable if it shuts down? Why? 2.5.
A firm has to pay a tax equal to 25% of its revenue. Give a condition that determines the output level at which it maximizes its after-tax profit.
In Q& A 7.2, suppose that Ann’s compensation, Y, is half of the firm’s profit minus $ 30,000: Y = π / 2 – 30,000. Will she still seek to maximize the firm’s profit?
A firm’s revenue varies with its output: R(q). Its manager’s income, Y, equals aR(q), where 0 6 a 6 1 is the manager’s share of the firm’s revenue. Use calculus to prove that maximizing aR(q)
Three firms have identical revenue and profit functions with the same general shape as those in figure Firm 1 is a private sector firm operated by an owner- manager who wishes to maximize profit.
Each of the three firms in Question 3.3 has a revenue function R(q) = 100q – 2q2 and a cost function C(q) = 100 + 20q. Determine how much output each firm chooses. C
Michael, the CEO of a successful firm, enjoys both income Y, and perquisites, S (such as a nice office and expensive office furniture). Michael’s utility function (Chapter) is U(S, Y) with normal
Inside directors of a firm are also executives of the firm, and they normally receive compensation that includes some form of profit sharing. Outside directors are not employees of the firm. They
Why are steps taken by corporate management to avoid takeovers often not in shareholders’ best interests?
How does the market for corporate control encourage firms to maximize profits?
An acquiring firm, A, seeks to buy a target firm, T. The acquiring firm has better managers. The value of the target firm, if acquired by A, is $ 100 million. The value of the target firm under its
In 2012, the Campbell Soup Company acquired Bolthouse Farms for $ 1.55 billion. This acquisition increased the level of vertical integration in Campbell, as Bolthouse Farms owned and operated
Katie’s Quilts is a small retailer of quilts and other bed linen products. Katie currently purchases quilts from a large producer for $ 100 each and sells them in her store at a price that does not
A producer of ballpoint pens has been purchasing ink from an ink supplier and is considering acquiring the ink supplier. Would the pen company be more or less likely to vertically integrate by buying
When the western part of the United States was sparsely populated, many small towns had a single schoolhouse in which one teacher taught all subjects to students of all ages. Nowadays, in large
Which market structure best describes (a) airplane manufacturing, (b) electricians in a small town, (c) farms that grow tomatoes, and (d) cable television in a city? Why?
Consider the following change to Angelo’s situation in the Managerial Solution. Now Angelo can provide loans to only one of the two groups. If he loans to the safer group, he gets his 10% in Year 1
A large city has nearly 500 restaurants, with new ones entering regularly as the population grows. The city decides to limit the number of restaurant licenses to 500. Which characteristics of this
Why would high transaction costs or imperfect information tend to prevent price-taking behavior?
Mercedes-Benz of San Francisco advertises on the radio that it has been owned and operated by the same family in the same location for 50 years (as of 2012). It then makes two claims: first, that it
According to the “Oil, Oil Sands, and Oil Shale Shutdowns” Mini-Case, the minimum average variable cost of processing oil sands dropped from $ 25 a barrel in the 1960s to $ 18 due to
Many marginal cost curves are U-shaped. As a result, it is possible that the MC curve hits the demand or price line at two output levels. Which is the profit- maximizing output? Why?
Initially, the market price was p = 20 and the competitive firm’s minimum average variable cost was 18, while its minimum average cost was 21. Should it shut down? Why? Now this firm’s average
Should a firm shut down if its revenue is R = $ 1,000 per week, a. Its variable cost is VC = $ 500, and its sunk fixed cost is F = $ 600? b. Its variable cost is VC = $ 1,001, and its sunk fixed cost
The cost function for Acme Laundry is C( q) = 10 + 10q + q2, so its marginal cost function is MC = 10 + 2q, where q is tons of laundry cleaned. Derive the firm’s average cost and average variable
Beta Laundry’s cost function is C(q) = 30 + 20q + q2.a. What quantity maximizes the firm’s profit if the market price is p? How much does it produce if p = 60? b. If the government imposes a
If the pre-tax cost function for John’s Shoe Repair is C(q) = 100 + 10q – q2 + 1/3 q3, and it faces a specific tax of t = 10, what is its profit-maximizing condition if the market price is p? Can
If a specific subsidy (negative tax) of s is given to only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change? Use a
Fierce storms in October 2004 caused TomatoFest Organic Heirlooms Farm to end its tomato harvest two weeks early. According to Gary Ibsen, a partner in this small business (Carolyn Said, “Tomatoes
The Internet is affecting holiday shipping. In years past, the busiest shipping period was Thanksgiving week. Now as people have become comfortable with e- commerce, they purchase later in the year
What is the effect on the short-run equilibrium of a specific subsidy of s per unit that is given to all n firms in a market?
As of 2013, customers at California grocery and drug stores must pay an extra 10¢ for every paper bag that the store provides (the store keeps this fee). Does such a charge affect the marginal cost
What is the short-run and long-run effect on firm and market equilibrium of the U. S. law requiring a firm to give its workers six months’ notice before it can shut down its plant?
In late 2004 and early 2005, the price of raw coffee beans jumped as much as 50% from the previous year. In response, the price of roasted coffee rose about 14%. Similarly, in 2012, the price of raw
The “Upward-Sloping Long-Run Supply Curve for Cotton” Mini-Case shows a supply curve for cotton. Discuss the equilibrium if the world demand curve crosses this supply curve in either (a) a flat
Chinese art factories are flooding the world’s generic art market (Keith Bradsher, “Own Original Chinese Copies of Real Western Art!” New York Times, July 15, 2005). The value of bulk shipments
The 2010 oil spill in the Gulf of Mexico caused the oil firm BP and the U. S. government to greatly increase purchases of boat services, various oil-absorbing materials, and other goods and services
In 2009, the voters of Oakland, California, passed a measure to tax medical cannabis (marijuana), effectively legalizing it. In 2010, the City Council adopted regulations permitting industrial-scale
For a firm, how does the concept of producer surplus differ from that of profit if it has no fixed costs?
Suppose that the demand curve for wheat is Q = 100 – 10p and the supply curve is Q = 10p. The government imposes a price ceiling of p = 3. a. Describe how the equilibrium changes.b. What effect
Using a graph similar to figure, show that increasing output beyond the competitive level decreases total surplus because the cost of producing this extra output exceeds the value consumers place on
Use an indifference curve (Chapter) diagram (gift goods on one axis and all other goods on the other) to illustrate that a consumer is better off receiving cash rather than a gift. Relate your
The government sets a minimum wage above the current equilibrium wage. What effect does the minimum wage have on the market equilibrium? What are its effects on consumer surplus, producer surplus,
The North American Free Trade Agreement provides for two- way, long- haul trucking across the U. S.-Mexican border. U. S. truckers have objected, arguing that the Mexican trucks don’t have to meet
In the Managerial Solution, would it make a difference to the analysis whether the lump-sum costs such as registration fees are collected annually or only once when the firm starts operation? How
Give an answer to the Managerial Problem for the short run rather than for the long run.
In a perfectly competitive market, all firms are identical there is free entry and exit, and an unlimited number of potential entrants. Now, the government starts collecting a specific tax t. What is
If the inverse demand function is p = 300 – 3Q, what is the marginal revenue function? Draw the demand and marginal revenue curves. At what quantities do the demand and marginal revenue lines hit
If the inverse demand curve a monopoly faces is p = 10Q–0.5, what is the firm’s marginal revenue curve?
If the inverse demand function is p = 500 – 10Q, what is the elasticity of demand and revenue at Q = 10?
For the monopoly in figure at what quantity is its revenue maximized? Why is revenue maximized at a larger quantity than profit? Modify panel b of figure to show the revenue curve.
Using a graph, show under what condition the monopoly operates—does not shut down—in the long run. Discuss your result in terms of the demand curve and the average cost curve at the
Why might a monopoly operate in any part (downward sloping, flat, upward sloping) of its long-run average cost curve, but a competitive firm will operate only at the bottom or in the upward-sloping
AT& T Inc., the large U. S. phone company and the one- time monopoly, left the payphone business at the beginning of 2009 because people were switching to wireless phones. U.S. consumers owning
Show that after a shift in the demand curve, a monopoly’s price may remain constant but its output may rise.
Does it affect a monopoly’s profit if it chooses price or quantity (assuming it chooses them optimally)? Why can’t a monopoly choose both price and quantity?
The inverse demand function a monopoly faces is p = 100 – Q. The firm’s cost curve is C(Q) = 10 + 5Q. What is the profit- maximizing solution? How does your answer change if C(Q) = 100 + 5Q?
The inverse demand function a monopoly faces is p = 10Q–0.5. The firm’s cost curve is C(Q) = 5Q. What is the profit-maximizing solution?
Why is the ratio of the monopoly’s price to its marginal cost, p/MC, larger if the demand curve is less elastic at the optimum quantity? Can the demand curve be inelastic at that quantity?
When will a monopoly set its price equal to its marginal cost?
At the profit-maximizing quantity in figure, what is the elasticity of demand? What is the Lerner Index?
Using the information in Q&A 9.2, calculate the elasticity of demand faced by Apple at the profit maximizing price and quantity using the inverse demand function.
When the iPod was introduced, Apple’s constant marginal cost of producing its top-of-the-line iPod was $ 200 (iSuppli), its fixed cost was approximately $ 736 million, and we estimate that its
A monopoly has a constant marginal cost of production of $ 1 per unit and a fixed cost of $ 10. Draw the firm’s MC, AVC, and AC curves. Add a downward- sloping demand curve, and show the profit-
A monopoly has an inverse demand function given by p = 120 – Q and a constant marginal cost of 10. Calculate the deadweight loss if the monopoly charges the profit-maximizing price.
What is the effect of a lump-sum tax (which is like an additional fixed cost) on a monopoly?
If the inverse demand function is p = 120 – Q and the marginal cost is constant at 10, how does charging the monopoly a specific tax of t = 10 per unit affect price and quantity and the welfare of
Show mathematically that a monopoly may raise the price to consumers by more than a specific tax imposed on it.
Can a firm operating in the upward- sloping portion of its average cost curve be a natural monopoly? Explain.
Once the copyright runs out on a book or music, it can legally be placed on the Internet for anyone to download. In 1998 the U.S. Congress extended the copyright law to 95 years after the original
In the “Botox” Mini- Case, consumer surplus, triangle A, equals the deadweight loss, triangle C. Show that this equality is a result of the linear demand and constant marginal cost assumptions.
Based on the information in the “Botox” Mini- Case, what would happen to the equilibrium price and quantity if the government had set a price ceiling of $ 200 per vial of Botox? What welfare
Using a graph, explain why a firm might not want to spend money on advertising, even if such an expenditure would shift the firm’s demand curve to the right.

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