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Microeconomics Theory and Applications 12th edition Edgar K. Browning, Mark A. Zupan - Solutions
“A higher interest rate lowers the present cost of future consumption.” “A higher interest rate raises the future cost of present consumption.” Use an example to show that both statements are correct.
“For a person who saves in year 1, a higher interest rate will increase consumption in year 2 but may either increase or reduce the amount saved in year 1.” Explain this statement, using the concepts of income and substitution effects. Use a diagram like Figure, and separate the income and
Rocker Bruce Springsteen insured his vocal cords for $ 6 million. Dancer Fred Astaire insured his legs for $ 75,000 each. And, in 1999, singer and actress Jennifer Lopez reportedly took out a $ 1 billion insurance policy on her entire body. Why might stars such as these find it advantageous to take
We assumed in the text that families receive the public school subsidy at no direct cost. Yet families pay property (and other) taxes that are used to finance schools. Does this fact invalidate the analysis in the text?
Based on the assumptions of Figure, is it possible for a person to benefit from shifting from the fixed annual fee to the price-per-unit system if that person is initially (under the annual fee arrangement) consuming more than 2,000 units of trash disposal? Justify your answer with a diagram.
What would an indifference map (with expected return on the vertical axis and risk on the horizontal axis) look like for a risk neutral investor? For a risk-loving investor?
Explain why the delays associated with surfing the Web are greater because users are charged a flat monthly fee to access the Web instead of per-unit use charges. Suppose that the per-unit use charge was set at a level such that the average Internet user ends up paying the same total amount if her
Americans spend almost $ 700 billion per year on legalized gambling—roughly $ 200 billion more than they spend on groceries. Most Americans‚ however‚ also show evidence of risk aversion in other aspects of their behavior such as buying automobile‚ home‚ and life insurance. Why might
With an excise tax of $ 0.20 per six-pack, Kristine purchases three six- packs of Diet Coke per day. If the government eliminates the excise tax and, instead, requires Kristine to pay $ 0.60 per day as a lump-sum tax (the daily tax liability is $ 0.60, regardless of how much Diet Coke Kristine
Even though they enter graduate school at roughly the same age, law students typically own nicer cars than do Ph.D. students. Assuming that there is no difference across the two groups in terms of preferences and current incomes, explain this phenomenon. Rely on the intertemporal choice model
What do the dimensions of the Edgeworth exchange box signify? How does a point in the box identify the distribution of goods between two consumers? What does a point on one of the sides of the box indicate? What does it mean if we are located at one of the corners of the box? (Examine each corner
Define efficiency and inefficiency in the context of the distribution of goods between two consumers. If the distribution lies inside an Edgeworth box, how does knowledge of the consumers’ marginal rates of substitution permit us to tell whether the distribution is efficient?
Bill and Hillary confront the same market prices for health care and hamburgers. Bill’s optimal consumption point is a corner equilibrium where he consumes only hamburgers; Hillary’s optimal point involves consumption of both health care and hamburgers. Are their MRSs equal? Does the
“Private markets ration goods among consumers in an efficient way.” Explain what this statement means. Does it imply that there is no basis for thinking that some other distribution would be better?
Tickets to the National Football League’s (NFL’s) championship game, the Super Bowl, are sold by the League at a below- market- clearing price. This policy produces a short-age. To allocate the relatively scarce tickets, the NFL typically employs a nonprice rationing scheme. For example, during
Use the analytical framework of this chapter to explain why ticket scalping frequently occurs at college athletic events. Why does it occur at some events and not at others? Who benefits and who is harmed by this practice? Should steps be taken to suppress ticket scalping?
Landing fees at many airports are based on aircraft weight. However, these fees do not accurately measure the cost associated with a landing or takeoff. This is because the opportunity cost of a plane using a runway primarily reflects the amount of time that other aircraft no longer have access to
Fill in the spaces in the accompanying table associated with the firm William Perry, Inc., that delivers refrigerators in the Chicago area, using the two inputs of labor andtrucks.
State the law of diminishing marginal returns. How is it illustrated by the data in the table of the preceding question? There is a proviso to this law that certain things be held constant: What are these things? Give examples of situations where the law of diminishing marginal returns is not
Consider your time spent studying as an input in the production of total points on an economics test. Assume that other inputs (what could they be?) are not varied. Draw the total, average, and marginal product curves. Will they have the general shapes shown in Figure? Why or why not?
Assume that the marginal product of each input employed by Microsoft depends only on the quantity of that input employed (and not on the quantities of other inputs), and that diminishing marginal returns hold for each input. Explain why Microsoft’s isoquants must be convex if these assumptions
Isoquants are downward sloping, nonintersecting, and convex. Explain the basis for each of these characteristics.
Show how a total product curve for an input can be derived from an isoquant map. Why does the question specify “a total product curve rather than “the” total product curve?
American Airlines produces round- trip transportation between Dallas and San Jose using three inputs: capital (planes), labor (pilots, flight attendants, and so on), and fuel.Suppose that American’s production function has the following Cobb– Douglas form: T = aKbLcFd = 0.02 K0.25
Economists classify production functions as possessing constant, decreasing or increasing returns to scale. Yet, from a cause-and-effect point of view, it is not readily apparent why decreasing returns to scale should ever exist. That is, if we duplicate an activity we ought to get duplicate
Define isoquant. What is measured on the axes of a diagram with isoquants? What is the relationship between the isoquant map and the production function?
In the commuting example in the text, we assumed that the car in question got 25 miles per gallon if driven at 60 mph and 26 miles per gallon if driven at 55 mph. If the car gets 1 more mile per gallon for each 5-mile-per-hour reduction in speed, will the isoquant be convex? Support your answer by
Suppose that the number of points on an economics mid-term (P) can be characterized by the following production function:P = 5H – 4B,Where H is the number of hours spent studying for the exam and B is the number of beers consumed the week before the exam. Does the law of diminishing returns apply
Suppose that you estimated a production function for various professional tennis players. The measure of output is the percentage of matches played by a player that are won by the player. Inputs include the average number of hours per week spent practicing tennis. Suppose that your results indicate
Nineteenth-century British economist Thomas Malthus reasoned that because the amount of land is fixed, as population grows and more labor is applied to land, the productivity of labor in food production would decline, leading to widespread famine. This prediction is what led economics to be called
In the early days of People Express‚ the top management team at the airline was personally involved in the training and selection of employees. This participation was key to instilling spirit and dedication among the staff‚ and the organizational culture that resulted led to the airline’s
A fellow student states that it is best to stop studying once you reach the point of diminishing returns with regard to the number of hours spent studying. Assess the validity of her statement.
No Pain No Gain (NPNG), Inc., is a dental practice advocating a “natural†approach to dentistry. Namely, NPNG specializes in providing root canal operations without the administration of pain-killing drugs such as Novocain. If output (q) is measured as the number of root canals
Using the data from Question, construct the following relationships: (a) the average amount of labor used per unit of output at each level of output, and (b) the additional amount of labor required for each additional unit of output. Show these relationships as curves, with labor per unit of output
In Figure 8.4b, assume that the firm is currently producing six units of output at point B on isoquant IQ6. Suppose now that the firm plans to expand output to nine units by hiring more workers while continuing to use K2 units of capital (capital is assumed to be a fixed input in the short run).
“Every point on Ford’s long-run cost curve corresponds to a point on some short-run cost curve, but not every point on one of Ford’s short-run cost curves corresponds to a point on the long-run cost curve.” Explain.
Suppose that Marriott’s production function is characterized by constant returns to scale at all output levels. What will the firm’s long- run total, average, and marginal cost curves look like?
If the cubic total cost function described in the text applies to the production of output by a firm, and a = 0, b = 400, c = – 50, and d = 5, what are the equations for the firm’s TFC, TVC, MC, AFC, AVC, and ATC?
Suppose that a firm’s total cost is best described by the following quadratic cost function: TC = a + bq + cq2.What are the equations for the firm’s TFC, TVC, MC, AFC, AVC, and ATC?
If the long-run marginal cost curve is-shaped, must the long-run average cost curve also be-shaped?
What is the significance of a tangency between an isoquant and an isocost line?
Why do we assume that the prices of inputs are constant when we draw a firm’s cost curves? How does a change in the price of an input affect the AC and MC curves?
What are the four assumptions of the perfectly competitive model? Critics are fond of pointing out that few, if any, real- world markets satisfy all four conditions, implying that the competitive model has little relevance for real- world markets. How would you respond to these critics?
How can consumers of apartments in Atlanta have a downward-sloping demand curve for apartments, and yet each Atlanta rental property owner face a horizontal demand curve?
“IBM should never sell its product for less than it costs to produce.” If “costs to produce” is interpreted to mean IBM’s average total cost, is this correct? If it is interpreted to mean average variable cost, is the statement correct? If it is interpreted to mean marginal cost, is the
In Table 9.1, suppose that variable input prices increase by 50 percent. Will the firm’s profit-maximizing output level change? Illustrate your answer with a graph.
Starting from a long-run equilibrium, trace the effects of an unanticipated reduction in demand for(a) A constant-cost industry(b) An increasing-cost industry.This process is just the reverse of our derivation of the supply curves in Section 9.8, but it is very good practice to think through the
Assume that the MBA education industry is constant- cost and is in long-run equilibrium. Demand increases, but due to strict accreditation standards, new firms are not permitted to enter the market. Analyze the determination of a new long-run equilibrium, showing the effects for a representative
How would each of the following phenomena affect the long-run supply curve of apples? a. Workers in the apple industry form a union. b. Consumers find out that apples cause cancer. c. Hard-to-control bugs that eat apples invade from Mexico. d. The government passes a law requiring apple trees to be
Suppose that the gasoline retailing industry is perfectly competitive, constant-cost, and in long-run equilibrium. If the government unexpectedly levies a 5-cent tax on every gallon sold by gasoline retailers, depict what will happen to the representative firm’s cost curves. What will the effects
“If Conagra is a competitive firm, it will never operate at an output where its average total cost curve is downward sloping.” True or false? Explain.
Suppose that through laziness and/ or sheer stupidity, Densa Inc. always falls 10 percent short of producing the profit- maximizing output. Would a higher product price lead to greater output? Would an increase in input prices lead to a reduction in output? Does this result suggest why economists
In a constant-cost industry each firm’s MC curve is upward sloping, yet all the firms together—the industry—have a hor-zontal supply curve. Explain why there is no contradiction.
Can all schools in the MBA education market face constant returns to firm scale and yet the industry has an upward-sloping long- run supply curve? If the MBA education industry is constant- cost, what, if anything, does this imply about the returns to scale faced by the industry’s individual
The American Red Cross is a supplier to the perfectly competitive domestic blood market. Unlike the other suppliers, however, the Red Cross is strictly nonprofit—its goal is to sell as much blood as possible without making a profit. Given this goal, is the Red Cross supply curve equal to its
“In a competitive industry‚ high prices in response to a positive demand shock prevent higher prices.” Explain whether this statement is true‚ false or uncertain in the context of the competitive industry model developed in this chapter. To help your analysis‚ think what would happen if
What is producer surplus? What is consumer surplus? What is total surplus? Explain how each is shown in a supply and demand graph.
Using long- run supply and demand curves, analyze the effects of an ad valorem excise tax equal to 20 percent of the market (selling) price of gasoline. How do the effects differ from those of the per- unit excise tax discussed in the text?
How would each of the following affect the operation of a regulated taxi market and the price of a medallion? a. A reduction in the maximum fare cabs can charge. b. An increase in the fares on subways and buses. c. An increase in parking fees in the downtown area. d. A police crackdown on the
Suppose that the gasoline industry is competitive and constant-cost. Suppose also that, due to an unexpected increase in demand, the industry’s firms are making short-run economic profits. Using graphs depict what would happen in the short and the long run if the government imposed a 50 percent
Suppose that the low-skill job market is perfectly competitive and that the equilibrium wage and monthly output in the market absent government interference are $ 4.50 per hour and 1,000,000 hours, respectively. Assume that the demand and supply elasticity equal two and one, respectively. If the
“Consumers understandably like lower prices, but they should understand there is a great difference between a lower price produced by a government price ceiling and a lower price that comes about through normal market channels; one benefits the consumer, the other may not.” How does our
In the Figure situation, assume that P3 – P1 equals 10 cents per pound and that the cost of transporting sugar from RoW to the United States is equal to 1 cent per pound. Explain the determination of equilibrium in this case.
Using Figure, show the effect on consumer and producer surplus of the sugar import quota (relative to free trade). Also show the changes in consumer and producer surplus in RoW.
Suppose that sugar imports are completely prohibited by the U.S. government in Figure. What will be the new equilibrium in the United States and RoW? Show the effect on consumer and producer surplus of the prohibition on imports (relative to free trade). Also show the changes in consumer and
Ghana is a producer and exporter of crude oil. Since Ghana is a relatively small crude-oil-producing country, its actions do not affect world prices; as an exporter, Ghana faces a foreign demand curve that is perfectly elastic at a price of $ 15 per barrel. The equation for the domestic demand
Why is it not inconsistent to say that airline fares, as regulated by the CAB, were above the competitive level and yet airlines did not realize economic profits?
In the market for organs for transplant, such as kidneys and hearts, the price is constrained to equal zero. Opposition to any type of remuneration for donating organs has been all but absolute from physicians and legislators. Reliance on altruism, however, does not appear to be working. The number
Using a pair of graphs like those in Figure 10.10, illustrate a situation in which the United States would be an exporter of the good in question, and identify the equilibrium.
If bad weather causes the supply of sugar in RoW to fall, how will this affect the U. S. market if the import quota described by Figure is in place? Does this explain why the U. S. and world prices can differ greatly from year to year?
Explain how an excise tax levied on a constant- cost industry produces a deadweight loss. Use a graph to show the loss in consumer and producer surplus from the excise tax. Is the loss in total surplus the same as the deadweight loss? If not, show the deadweight loss in the graph and explain the
“Because a monopoly is the only source of supply, consumers are entirely at its mercy. There is no limit to the price the monopoly can charge.” Evaluate this statement.
When a ski resort with some monopoly power is maximizing profit, price is greater than marginal cost. Thus, consumers are willing to pay more for additional lift tickets than the tickets cost to produce. So why does the ski resort not charge a lower price per lift ticket and increase output?
Draw a diagram to show the deadweight loss of a monopoly with a marginal cost curve that is vertical at the profit-maximizing output level.
Suppose that the MC faced by Skechers is a constant $ 10 per shoe. If the demand elasticity for Skechers shoes is also constant and is equal to 5, what price should Skechers charge for its shoes?
Calculate the Lerner index for the monopoly described in Question 11.14. How would the value of this index change when the tax described in Question 11.15 is imposed on the monopolist? If the subsidy in Question 11.16 is imposed instead?
Suppose that the Berkeley City Council takes 10 years to award its first cable television franchise for the sake of ensuring that the price the franchised operator charges is as close to average cost as possible. Explain why such a strategy may do less to promote consumer surplus than the
The prices of seats on major financial exchanges have plummeted dramatically in recent years. For example, at the Chicago Board of Trade, the world’s biggest futures exchange, a membership seat sold for $ 300,000 in 2012, down 65 percent from a record of $ 858,000 in 1997. Explain, using a graph,
At the profit-maximizing output the price of Tommy jeans is twice as high as marginal cost. What is the elasticity of demand? Discuss.
Why will Disneyland never set its admission price at a level where its demand curve is inelastic? Use the total revenue and total cost curves to illustrate your answer.
“A competitive firm will never operate where marginal cost is declining, but a monopoly may.” True or false? Explain.
Suppose that there is a single seller of gasoline in a particular town. Suppose that policymakers, outraged by the prices charged by this monopoly seller, impose a price ceiling. Will the seller’s output increase? Explain your answer.
Suppose that in the preceding problem, the government levies an excise tax of $ 5 per dose on the monopolist. What would happen to the monopolist’s profit- maximizing output and price? What would happen to consumer and producer surplus? How much money would the government collect due to the tax?
Address all the questions in the preceding problem but assume that instead of a tax of $ 5 per dose the government offers a subsidy of $ 5 per unit.
Explain the determinants of a firm’s monopoly power. How can a firm have monopoly power if it is not the sole supplier of a product?
Provide an example of a firm with a Lerner index value of (a) zero and (b) unity. Why does the Lerner index take on a value between these two extremes? Explain why the Lerner index measures a firm’s monopoly power.
Marin County Enterprises has a monopoly on the production of lunar-powered homes and has the normal U-shaped average cost curve. At its present profit-maximizing output and price, it is able to earn a positive economic profit. Graphically show the effects in the product market (output, price,
The City of Berkeley is currently considering alternative ways of providing cable service to its citizens. Based on an econometric analysis of several recently awarded cable franchises in other cities, economists have determined that the total cost, TC, and inverse demand curves for a cable company
Assume that all consumers have identical demand curves for local telephone service, and the producer of such service is a monopoly. Compare price, output, profit, and consumer surplus when (a) the monopoly sets a uniform price for the product; and (b) the monopoly uses a two- part tariff.
What is peak-load pricing? How is it similar to price discrimination? How is it distinguished from price discrimination? Discuss.
The text states that if conditions are appropriate, peak-load pricing arises naturally under competitive conditions. Explain why peak-load pricing will emerge, starting from a point where all firms are charging a uniform price.
Assume that the marginal cost to a grocery of selling a bottle of salad dressing to customers who use coupons versus those who don’t is identical and equal to $ 1.50. If the elasticity of demand of coupon users is 5 versus 1.25 for noncoupon users, how much of a per-unit discount should the store
You run a rather plush ride concession at an amusement park. It costs you $ 500 per day to have the ride available to patrons of the park. For each rider you have, the incremental cost is $ 1. The patrons of the park appear to fall into two groups. Members of the first group are not concerned with
In Figure, how will the profit realized by raising the price and reducing the entry fee be affected if Donald’s demand curve is only slightly greater than Martha’s (instead of twice as large, as shown in the graph)? In Figure, how will the profit realized by reducing the price and increasing
“Suppose that Cornell University faces a downward-sloping linear demand curve for the undergraduate education that it provides. If Cornell is able to engage in perfect, first-degree price discrimination (through obtaining detailed financial information from each prospective student and offering
In the preceding problem, suppose that the club can employ a two- part pricing scheme but must charge all members the same annual membership (entry) fee. What entry fee and per- round price should the club charge?
A video game producer has costs of $ 25,000 per month that are fixed with regard to output. The firm’s marginal cost is $ 5 per unit of output for output between 1 and 15,000 units. Information available from the market research group indicates that 15,000 units could be sold each month in the
What are the assumptions of the theory of monopolistic competition? In what way do these assumptions differ from those of the perfectly competitive model?
Explain how, in the Cournot model, the output of one firm depends on the output of other firms. Specifically, in Figure, what will be the output of Artesia if Utopia produces 32 units? If Utopia produces 48? If Utopia produces 64?
Starting from the Cournot equilibrium in Figure, suppose that the marginal and average total cost curves (which are the same for both firms) shift downward. Explain how the firms adjust to a new Cournot equilibrium.
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