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Questions and Answers of Economics

Why is zero pollution not the best solution for society? Can we have too little pollution? Why or why not?
A number of countries have either banned incandescent light bulbs already or have begun phasing out such lighting in favor of more fuel-efficient compact fluorescent bulbs. These restrictions are
Suppose that the only way to reduce pollution from paper production is to reduce output. The government imposes a tax equal to the marginal harm from the pollution on the monopoly producer. Show that
Many jurisdictions strictly limit sales of hard liquor (liquor with a significantly higher alcohol content than wine) in an effort to limit the associated negative externalities. (De Melo et. al.,
To prevent overfishing, could regulators set a tax on fish or on boats? Explain and illustrate with a graph.
Are broadcast television and cable television public goods? Is exclusion possible? If either is a public good why is it privately provided?
Guards patrolling a mall protect the mall’s two stores. The television store’s demand curve for guards is strictly greater at all prices than that of the ice-cream parlor. The marginal cost of a
In 2009, when the world was worried about the danger of the H1N1 influenza virus (swine flu), Representative Rosa DeLauro and Senator Edward Kennedy proposed the Healthy Families Act in Congress to
Receiving flu shots provides private benefits to recipients. However, pandemic influenza spreads between cities through the international airline network and between cities and rural areas through
You and your roommate have a stack of dirty dishes in the sink. Either of you would wash the dishes if the decision were up to you; however, neither will do it in the expectation (hope?) that the
Potentially, 240 automobile drivers per minute may use the EZPass lanes of the Interstate 78 toll bridge over the Delaware River that connects Easton, Pennsylvania, and Phillipsburg, New Jersey.
Under federal laws, firms in many agricultural industries can force all industry members to contribute to collective activities such as industry advertising if the majority agrees. Under the Beef
Do publishers sell the socially optimal number of managerial economics textbooks? Discuss in terms of public goods, rivalry, and exclusion.
Woz Enterprises specializes in electrical components. The market for one particular component is perfectly competitive and in long-run equilibrium. Marginal cost is constant at 30. Woz can develop a
In Question 6.1 assume that the R& D cost is 150. Are consumers made better off by the action taken by Woz? Does total surplus rise?
In Question 6.1 with an R& D cost of 150 suppose that the government waits until Woz works out the new process and then changes patent rules, requiring Woz to charge a price no greater than 12. Does
For trade secrets to effectively protect intellectual property, it is important that the innovation cannot be easily reverse engineered, a process by which a firm can take a rival’s product and
In the Managerial Solution example, who benefits and who loses from the invention? Does the innovating firm capture the full value of its innovation?
Suppose that auto workers in South Korea can pro-duce components used to make cars at the rate of six sets of components per worker per day and can assemble cars at the rate of four cars per worker
Trade between North and South Korea was legalized in 1988, but is currently very limited. Assume, however, that Hyundai has 200 workers in a plant in North Korea just across the boundary with South
ABC Software, a small software producer, decides to renovate its premises. Instead of hiring an outside contractor and trades people, the firm decides to use its employees—secretaries, programmers,
Carrot Patch Dolls, a small doll producer in Malaysia, is considering producing a new doll variety. Production of this doll type requires an initial setup cost, followed by constant variable cost.
Suppose that one euro can be exchanged for 1.3 U.S. dollars and that one U.S. dollar can be exchanged for 80 Japanese yen. If these currencies can be traded freely with low transaction costs, what
Figure 17.1 shows the effect on the exchange rate (U.S. dollars per euro) on the demand for euros by U. S. residents. What would happen if the U.S. government tried to establish a fixed exchange
Explain why gray markets reduce the ability of multinational firms to price discriminate.
In the first quarter of 2012, the world price for raw sugar, 24¢ per pound, was about 70% of the U.S. price, 34¢ per pound, because of quotas and tariffs on sugar imports. As a consequence,
How would the shape of the total supply curve in Q & A 17.1 change if the U.S. domestic supply curve hit the vertical axis at a price above p?
Canada has 20% of the world’s known freshwater resources, yet many Canadians believe that the country has little or none to spare. Over the years, U.S. and Canadian firms have struck deals to
Given that the world supply curve is horizontal at the world price for a given good can a subsidy on imports raise welfare in the importing country? Explain your answer.
After Mexico signed the North American Free Trade Agreement (NAFTA) in 1994, corn imports from the United States doubled within a year, and today U.S. imports make up nearly one-third of the corn
During the Napoleonic Wars, Britain blockaded North America, seizing U.S. vessels and cargo and impressing sailors. At President Thomas Jefferson’s request, Congress imposed a nearly
A government is considering a quota and a tariff, both of which will reduce imports by the same amount. Why might the government prefer one of these policies to the other?
Why do antidumping policies limit the ability of firms to carry out international price discrimination?
In Table 17.3, suppose that the payoff if both firms enter is positive, 5 rather than – 5, while the other payoffs remain the same. Now, what is the effect of a subsidy of 10 to Novartis?
As a result of the North American Free Trade Agreement, many iconic “American” cars are not assembled in the United States. Explain why. Provide some examples of U.S. cars that are assembled
The Timex Group, a large multinational watch-maker, has its headquarters in the Netherlands. It has subsidiaries in many countries, including the Timex Group USA and TMX Philippines, Inc. One
In Question 4.2, what transfer price would maximize the profit of TMX Philippines?
In Question 4.2 suppose that the Philippines has a lower corporate tax rate than the United States. How would that lower tax rate affect the transfer price that maximizes the overall profit of the
Outsourcing of services by American firms has contributed significantly to wage growth in India. Explain why using a graph of the Indian labor market.
Suppose Hewlett-Packard is considering outsourcing its telephone- based technical support functions for its printers to India. The hourly cost of a tech support person in the United States is $ 50
Chanel perfume is sold in France and in the United States. Assume initially that one euro is worth $ 1.30 and that a 100 ml bottle of perfume sells for $ 80 in the United States. If Chanel does not
Say that the citizens of Tucson, Arizona, vote to increase the minimum wage within the city to $ 10 per hour above the prevailing federal minimum wage of $ 7.25. Explain how one would use positive
Explain why it is important to look at a good’s real price as opposed to its nominal, or absolute, price.
Tokyo’s streets are characterized by a plethora of vending machines—dispensing everything from soft drinks, candy bars, and cigarettes to magazines, personal toiletries, and beer. Unlike in other
In 2002, Pat Tillman turned down a contract offer of $ 3.6 million over 3 years from the Arizona Cardinals to enlist in the U. S. Army in the wake of the September 11 attacks on the United States.
By any absolute or relative measure, mail order and online shopping has increased dramatically over the past few decaders. Explain why this might be the case on account of the growth of two- wage-
One of the questions prospective full-time MBA program applicants confront is whether they should pursue the degree soon after college or wait four to six years. Assume that 10 years after college, a
What economic forces might explain why the relative price of telephone services fell while the relative price of medical care increased between 1983 and 2013?
Some people have argued that the United States cannot afford a volunteer army in which wages are high enough to attract competent enlistees. Instead, they suggest paying lower wages and drafting the
A university produces two commodities: research and teaching. The resources the university uses include faculty and staff, libraries, classrooms, and so on. The following schedule indicates some
A demand curve is drawn holding “other things constant.” What does the “other things constant” provision mean, and why is it important to a correct interpretation of the law of demand?
In economics, what do we mean by the term shortage? In unregulated competitive markets, are there ever shortages? Have you ever heard noneconomists use the term shortage with a different meaning?
As a regional manager for American Airlines, you have recently undertaken a survey of economy-class load factors (the percentage of economy- class seats that are filled with paying customers) on the
Suppose that the demand curve for corn is downward-sloping but that the supply curve is perfectly price inelastic at a quantity of Q* once the corn is harvested. Furthermore, assume that the
If the price of gasoline is $ 4.00 per gallon and the price elasticity of demand is 0.4, how much will a 10 percent reduction in the quantity placed on the market increase the price? Will total
Given two parallel, downward-sloping, linear demand curves, is the demand elasticity the same at any given price? Given two downward-sloping, linear demand curves, with one showing consumption to be
If a cable operator estimates basic tier demand elasticity to equal unity (Application 2.7), will profit be increased by raising rates? Explain. How about if the basic tier demands elasticity is
In a recent year, close to 30 percent of all flights into and out of New York City’s John F. Kennedy International Airport experienced delays. Explain how this phenomenon is related to a federal
Suppose that the typical economics student is interested in consuming (and spends all her money on) only two commodities: economics study guides and horror movie passes. An unlimited supply of horror
Because demand curves and supply curves are always shifting, markets can never attain an equilibrium.” Does this imply that the concept of equilibrium is not useful?
“A decrease in supply will lead to an increase in the price, which decreases demand, thereby lowering price. Thus, a decrease in supply has no effect on the price of a good.” Evaluate this
Heidi spends all her income on going to the movies, regardless of her income level or the price of movie passes. What is her income elasticity of demand for movie passes? What is her price elasticity
A few years ago, the bidding for a human kidney offered on the Internet auction site eBay hit $ 5.7 million before the company put a stop to it citing a federal law that makes it illegal to sell
A show by U2 in the New York City area was an instant sellout due to major purchasing of tickets by Ticketmaster. Just as quickly, however, thousands of ticket listings started appearing on
Imelda spends her entire income on shoes and hats. Draw the budget line for each of the following situations, identifying the intercepts and the slope in each case.a. Monthly income is $ 1,000, the
With the per-unit prices of broccoli (B) and pork rinds (R) equal to $ 2 and $ 1, a consumer, George, with an income of $1,000 purchases 400R and 300B. At that point, the consumer’s MRSBR = 2R /
Prior to 1979, the food stamp program required families to pay a certain amount for food stamps. Suppose a family can receive $ 150 in food stamps for a payment of $ 50; no other options are offered.
Using an indifference map, explain why U.S. parents with two children both of the same sex are more likely to go for a third child than are parents with one child of each gender.
Sam is subject to a 40 percent tax on income, and her after-tax income is $ 90,000, as in Figure. Now sup-pose the government permits her to deduct her contributions (to Oscar) from her income before
When we use the composite- good convention, what do we mean by a composite good and how do we measure it? What is the slope of the budget line? What is the slope of an indifference curve? Does the
The federal government bans the use of food stamps to buy cigarettes, alcohol or prepared foods such as deli sandwiches and restaurant entrees. Should a similar ban be implemented against the
Draw a set of indifference curves relating two “bads” such as smog and garbage. What characteristics do these curves have?
Is it inconsistent to claim that (a) people’s preferences differ and (b) at their current consumption levels, their marginal rates of substitution are equal?
Explain why the food stamp program can have the same effect on the consumption pattern and well-being of recipients as an outright cash transfer of the same cost. Why do you think it is not converted
Suppose that Thurston, a color- blind consumer, has $ 80 to spend on either pink or lime- green sweaters. Thurston does not care what color sweater he wears but deems it very important to buy as many
Measure the income of Samantha on the vertical axis and the income of Oscar on the horizontal axis, as we did in Figure. Draw several of Sam’s indifference curves under the following
If Sam’s preferences relating her own income and Oscar’s income conform to the Golden Rule (“Love thy neighbor as thyself”), what would her indifference curves in a diagram like Figure look
Using indifference maps, explain how Kraft’s makeover of the Oreo successfully accounted for different consumer preferences in China versus for low-sugar, wafer-like cookies versus higher- sugar,
People’s rankings of activities are sometimes described in terms of their “priorities.” For example, some students claim that getting good grades takes priority over watching television or
Explain how the indifference curve and budget line apparatus are used to derive a consumer’s demand curve. For a demand curve, certain things are held constant. What are they, and how does this
If the per-unit price of college education rises and the prices of all other items fall, is it possible for the consumer to end up on the same indifference curve as before the price changes? If so,
“A Giffen good must be an inferior good, but an inferior good need not be a Giffen good.” Explain this statement fully, using the concepts of income and substitution effects.
Given the OLS estimates for the coefficients and intercept in the basic tier cable demand equation (3), calculate the following: a. Income elasticity of demand for basic service evaluated at the
Suppose that there are only five consumers of a software game program. The demand curve for each of the consumers is identical. Will the market demand curve that is obtained by horizontally summing
In the tax-plus-rebate example discussed in the text, suppose that the government adjusts the size of the rebate so that the consumer stays on her initial indifference curve (U2 in Figure 4.4). Show
Left and right shoes are perfect complements for most people. If only the price of right shoes increased, what would be the substitution effect of such a price change on the typical consumer’s
Diamonds clearly satisfy less important needs than water, which is essential to life. Yet according to market prices, the essential commodity, water, is worth less than the less essential commodity,
Define consumer surplus, and explain how you would show it in a diagram containing a demand curve for some product. What would consumer surplus equal in Figure if the demand was perfectly elastic at
Explain how a bandwagon effect might speed up the rate at which DVD players are adopted by consumers. Do likewise for the case of cable television subscriptions.
Suppose that the P–C curve associated with a pharmaceutical drug is downward sloping. If the government underwrites a certain percentage of consumers’ drug purchases, will the government outlays
Mary Gail has a different price– consumption curve associated with each possible income level. If two of these curves intersect, are Mary Gail’s preferences rational?
Assume that Dan’s income–consumption curve for potatoes is a vertical line when potatoes are on the horizontal axis. Show that Dan’s demand curve for potatoes must be downward sloping.
Suppose that George is interested in only two goods, cigars and scotch. Employ the indifference curve/ budget line apparatus to show a case where a decrease in the price of cigars leads to an
Repeat the preceding question but assume that a decrease in the price of cigars leads to a decrease in George’s scotch consumption. Does this imply that scotch is an inferior good in George’s
Could the snob effect ever overpower the combined substitution and income effects associated with an increase in the price of a good? Explain why or why not.
During the 1970s, 55 percent of banks with more than 15 branches installed automated teller machines (ATMs), as opposed to 16 percent of banks with only 2 branches. Explain why this phenomenon
Tony currently goes to the dentist twice a year at $ 150 per visit. His employer subsidizes Tony’s purchases by paying half the cost of each dental visit in excess of one visit per year. (No
How can the government reduce a consumer’s consumption of schooling by providing schooling at no cost? Explain in words and show in a diagram.
At the “all you can eat” brunch buffet offered by Chez Paul’s Cajun Restaurant, consumers pay a price of $ 15 and then can consume all they want. Show a consumer’s optimal consumption point
In a two-year period, Anna has earnings of $ 6 million this year (year 1) and earnings of $ 10 million next year (year 2). She can borrow or lend at an interest rate of 25 percent. Suppose that Anna

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