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Microeconomics Theory and Applications 12th edition Edgar K. Browning, Mark A. Zupan - Solutions

Explain how the residual demand curve confronting the dominant firm in the dominant firm model is derived. In this derivation, what is assumed regarding how the output of other firms is determined? How does it differ from the Cournot assumption?
Explain how equilibrium is determined in the dominant firm model. If market demand increases, how will a new equilibrium be determined?
Because firms in any industry can always make greater profits by colluding, there is an inevitable tendency for competitive industries to become cartels over time. Is the first part of this statement correct? Is the second part? Explain.
What problems usually make cartels collapse? How was OPEC able to avoid this fate, at least through the mid-1980s?
Consider the dominant firm model and treat OPEC as the dominant firm. Explain how OPEC would determine the price of oil and the level of output produced by the cartel. How would OPEC’s price and output be affected by new discoveries of oil that shift the supply curve of oil for non-OPEC members
Suppose that Iran and Iraq are Cournot duopolists in the crude oil market and face the following market demand function: P = 100 – (q1 + q2),where q i represents the output levels of the two countries with Iran being 1 and Iraq being 2, and P is the per- barrel price. The marginal revenue
Suppose that Iraq is the Stackelberg leader in the preceding problem. What will be each country’s reaction function? How much will each country produce, and what will its profits be?
Suppose that the market for Web search engines can best be characterized as monopolistically competitive. If this is the case, should firms that operate in the market such as Yahoo and Google be prosecuted by antitrust authorities on account of the potential inefficiency of the market outcome?
It is the not-too-distant future and all important human needs have been eliminated. Thanks to the firm Bioeconotek, a miracle drug, Needless, has been invented that genetically suppresses a patient’s desire to think in terms of having needs. The drug stimulates the patient’s cognitive ability
Explain the relationship between the demand elasticity and the excess capacity that occurs for a monopolistic competitor.
How does the Stackelberg model differ from the Cournot model? Which model predicts that output will be higher?
“There is no general theory of oligopoly.” Explain this statement.
Under which oligopoly model does the outcome most nearly resemble that obtained with pure monopoly? Under which oligopoly model does the outcome most nearly resemble that obtained with perfect competition?
In an analysis of the automobile industry, what factors would you consider in determining whether to use the competitive model, the monopoly model or one of the oligopoly models?
Suppose that there were three identical firms instead of only two under the cost and market demand conditions out-lined in Section 13.2. What would be the Cournot equilibrium in terms of each firm’s output as well as the total market out-put? If there were four identical firms sharing the market?
In a two-firm Stackelberg model of oligopoly, can both firms be “leaders”? Explain why or why not.
College textbooks have been increasing in price at a rate greater than the general price level over the past several decades. The reason for this phenomenon appears to be that publishers have realized that by having authors revise their texts more frequently, competition from used texts is reduced.
Assume that Intel can be treated as the dominant firm in the market for computer chips. What three basic factors determine the elasticity of demand confronted by Intel? Explain whether increases or decreases in these three factors will increase Intel’s elasticity of demand, and provide an
Historically, officials from 23 elite northeastern colleges with selective admissions policies and high tuition met each spring to compare financial aid packages for more than 10,000 common applicants. The meetings, known as “Overlap,” were designed to eliminate any differences in the financial
What is a prisoner’s dilemma game? Why is it relevant in evaluating the likelihood of cheating in a cartel?
Construct a payoff matrix to examine the determination of outputs in the Cournot duopoly model. What type of equilibrium exists for this model? Does the game- theoretic approach make this model any more plausible?
Why do you think that game theory has become the preferred method of analyzing oligopolistic markets? What advantages does it have over simply assuming, say, Cournot behavior?
What is adverse selection in insurance markets and how does it relate to the lemons model?
How does the moral hazard problem differ from the adverse selection problem in markets for medical insurance?
Why don’t consumers become fully informed about the prices different firms charge? If consumers are not fully informed, why is a firm likely to possess some degree of market power?
How does advertising affect the demand curve confronting a single firm? How does the outcome depend on whether other firms also advertise? If all firms in an industry advertise, how will this shift the industry demand curve for the product?
A considerable number of initial public offerings (IPOs) of stock in a company evidence a substantial run-up in price during early trading. Explain why asymmetric information between the investment banks organizing the offerings and prospective investors may be the reason for such a phenomenon.
In multi-division corporations where division heads are allocated an annual budget, explain why the “use-it-or-lose-it” “use-it-or-lose-it” phenomenon occurs and is a reflection of a prisoner’s dilemma.
If there is asymmetric information between the owners of a baseball team for which a given player plays and other teams’ owners, would you predict that players who opt to become free agents and end up getting traded to another team will spend more days on the disabled list, after being traded,
In 1994, Congress passed legislation exempting aircraft from product liability claims in court if they were older than 18 years and had fewer than 20 seats. The probability that such aircraft would be involved in an accident declined in the wake of the passage of the legislation. Given what you
Suppose that a college town has a large number of firms selling a homogeneous product—pizza—and that there are two types of consumers in the town. The town’s permanent residents are fully informed about the prices charged by all firms and always shop at the firm or firms with the lowest
What is a dominant- strategy equilibrium? What is a Nash equilibrium? Is it possible for a Nash equilibrium to exist where neither player has a dominant strategy?
Tables 14.1 and 14.4 both involve two firms each choosing between low and high outputs, but only one of the tables illustrates the prisoner’s dilemma. Explain why the nature of the market in which firms interact may sometimes produce a prisoner’s dilemma and sometimes not.
Is a repeated-or single-period game more appropriate for the study of oligopolies? In which setting is collusion more likely to be a stable outcome? Explain your answer.
In the lemons model, there is only one price even though the products differ in quality. Why is that? What factors deter-mine that price? How does the price affect the quantities traded of the different quality goods?
Explain why a certain triangular area is a measure of the deadweight loss of monopoly. What information do you require in order to calculate the size of this triangle?
Studies have concluded that the deadweight loss of monopoly power in the United States is less than 0.5 percent of GNP. From your knowledge of the determinants of the dead-weight loss, explain why such a small figure is plausible.
“If a business sells a product that wears out in a month, you will have to buy 12 a year, and the business will make 12 times as much money as it would selling a product that lasts a year.” Evaluate this statement. Why don’t businesses sell products that wear out in a day? In an hour?
Businesses frequently own patents on a number of products they do not produce and sell. This is sometimes cited as evidence that businesses suppress inventions. Is it?
Use a diagram to illustrate the “hoped for” result of natural monopoly regulation that attempts to set a price equal to average cost. What are the difficulties in achieving this out-come? Would an unregulated natural monopoly be preferable to a regulated natural monopoly?
Two companies each own property (and mineral rights) in an oil field. Each firm therefore has the legal right to drill for oil on its land and take out as much oil as it can. The problem, of course, is that one company’s actions affect how much oil the other can produce. The following matrix
Economist Bill Samuelson suggests a problem centering around three air carriers competing for passengers on a given city-pair route. Namely, the fare that can be charged on the route is fixed at $ 225, while the size of the market is fixed at 2,000 passengers per day. There are three competing
Compare the effects of a $ 1-per-unit excise subsidy when applied to a monopoly and to a competitive industry with the same cost and demand conditions. In which case will price fall more? In which case will output increase more?
Explain what natural monopoly is in terms of the relation-ship between cost curves and the demand curve. If the market is left to itself, what price and output will result?
If the latest computer chip produced by Intel has twice the storage capacity as the previous-generation chip, Intel would find it advantageous to market the new chip even though its sales of the old chip would plummet. True or false? Explain why. Would your answer change if Intel operated in a
Some have argued that the distribution of cable television service in a community is subject to economies of scale. Namely, it is cheaper to have just one company supply every household in the community with the service than to have several providers, each having to string separate cables
What factors (other than the wage rate) affect the amount of labor a firm that operates in perfectly competitive output markets will hire? How will a change in each of these factors affect the firm’s demand curve for labor?
“The law of demand does not apply to professional base-ball players. Since each team already has the maximum number of players allowed on its squad, a reduction in the wage rate that must be paid for baseball players would not lead to any more being hired.” Evaluate this statement.
“College teachers are no more productive today than they were 50 years ago, yet they are paid three times as much today. They are obviously not being paid according to their marginal productivity.” Discuss.
Explain why an output market monopoly will employ more of an input when its price is lower in terms of the substitution and output effects of the lower input price.
Per capita income is 600 percent higher in the United States than in Mexico. No other two countries sharing a border have a wider disparity in income levels. Explain why this leads to immigration of workers from Mexico to the United States. Is such immigration beneficial, on net, to the United
Studies find that controlling for other factors, university professors’ earnings tend to decline with experience. In other words, the more seniority a faculty member has with a particular institution, the lower his or her salary after accounting for other factors such as productivity, degree, and
Distinguish between the short-run and the long-run supply curves of geologists to the domestic economy. Which curve will be more inelastic? Why?
Rank the following labor supply curves in terms of their elasticities. How does your answer depend on whether you consider short-run or long-run supply curves? Explain your answer.a. The supply of economists to the federal government. b. The supply of taxi drivers to Chicago. c. The supply of
Discuss the determination of equilibrium input price and employment by a competitive industry. Concerning the equilibrium, firms would prefer to pay less for an input; why don’t they? Input owners would prefer to receive a higher price; why don’t they refuse to supply the input unless the price
“Recently, the demand for DVD players has increased rapidly, while the demand for radios has hardly budged. Therefore, the fact that workers are better paid in the DVD player industry is not surprising.” Would you be surprised if the assertion about wages turned out to be correct? Support your
“If Mexicans are allowed to immigrate to the United States, they will take jobs away from U.S. citizens.” Evaluate this statement.
What is a monopsony? Graphically, what distinguishes a monopsony from a competitive employer of inputs? What does this difference imply for the relative levels of employment and input prices under monopsony versus competition?
Bad Breath, Inc., sells its output at $ 1 per unit into competitive markets. Bad Breath’s factory is the only employer of labor in Gilroy, California (garlic capital of the world). It faces a supply from competitive workers of QL = w, where QL is the number of workers hired per year and w is the
Suppose that firms in an industry use two inputs, labor and capital. If the price of labor increases, then the firms will demand less labor and more capital. True, false or uncertain? Explain your answer.
Economists Ross Eckert and Richard Leftwich have noted that in the early 1950s, over 60 percent of MBA graduates from leading business schools took their first jobs in manufacturing and 10 percent in investment banking and consulting. Nowadays, no more than 20 percent of MBA graduates from leading
Edie chooses to work 90 hours per week when the wage rate is $ 16 per hour. If she is offered time-and-a-half ($ 24 per hour) for “overtime work” (i. e., hours in excess of 90 per week), will she choose to work longer hours? Support your results with a diagram.
Discuss the three reasons for equilibrium wage rate differences given in the text. Which one, or more, accounts for differences in wage rates between engineers and elementary school teachers? College professors and high school teachers? Basket-ball superstars and basketball coaches? Doctors and
In equilibrium, the interest rate equates the willingness of people to give up present goods in return for future goods and the ability of the economy to transform present goods into future goods. Explain.
How does the interest rate serve to equalize the desired rate of saving and the desired rate of investment? Would this function be served if the government placed an upper limit on the interest rate lenders could charge? How would such a law affect the amount of investment undertaken?
“Kevin (a highly skilled businessman) earns $ 150,000 a year. If he were to return to his native New Guinea (where there are more limited business opportunities), Kevin would be able to earn only $ 5,000 a year. This proves both that Kevin doesn’t deserve his high salary and that wages are
In general the aggregate demand for and the supply of labor increases over time. Can we predict what will happen to real wage rates and employment over time? What factors are responsible for the shift in the demand curve? In the supply curve?
What do we mean when we say that capital is productive? How do we measure this productivity? What does productivity have to do with the investment demand curve?
On average, television news reporters are better looking than newspaper reporters. Explain why this might be the case, relying on the discussion in Section 17.4 regarding wage differences.
Workers in countries such as Sweden and Germany work fewer hours per week, on average, than do workers in the United States. Does this mean that Swedes and Germans are lazier than Americans? Explain how laziness could be interpreted in the context of the work–leisure choice model developed in
“Proponents of minimum wage laws stress society’s obligation to act through its elected representatives to ensure an adequate standard of living for all working citizens.” Evaluate the extent to which minimum wage laws achieve this goal.
Why does economic theory imply that the most harmful effects of the minimum wage law will fall on the most disadvantaged and least productive workers?
As the owner of a retail store, you would like to be able to pay your sales people lower wages. What problems would you confront if you attempt to establish a cartel among employers to force down wage rates?
Articulate and defend your position regarding paying college athletes. What is the role played by positive analysis versus value judgments in your argument?
In terms of the cost to employees, it would make no difference regarding the extent to which the financing of national health insurance was underwritten through various possible shares of the required tax being formally assigned to employers. True, false or uncertain? Explain.
Explain why the Social Security program reduces before-tax wage rates and why this effect is greater over the long run than in the short run.
Suppose that all employers in a perfectly competitive industry do not have a preference for discriminating against African Americans but that all the employees at one firm do. Describe what will happen to the profit- maximizing output level of this firm in the long run if the employees’ racial
Explain why it is more difficult to organize and maintain an input buyers’ cartel than an output sellers’ cartel.
What do economists mean when they say markets are mutually interdependent? Give an example to support your explanation.
The domestic computer chip manufacturing industry argues that permitting free trade will cost the jobs of thousands of computer chip workers. How does general equilibrium analysis help in responding to this argument?
What factors determine whether a particular economic issue can be adequately analyzed by using a partial rather than a general equilibrium approach?
Most former communist governments of Eastern Europe subsidized food production ( both in absolute terms and rela-tive to any subsidies provided other goods). Explain the effect of this policy on the relationship between the typical Eastern European consumer’s marginal rate of substitution between
What does the contract curve in an Edgeworth production box signify? Why do competitive markets generate equilibriums that lie on the contract curve?
Explain why, when all markets are competitive and in equilibrium, all three conditions for efficiency are satisfied. Does this result indicate that society’s welfare is maximized?
If Cisco has a monopoly in the server market, what efficiency condition is violated? Would the regulation of Cisco and the elimination of Cisco’s profit lead to a more efficient allocation of resources? Will all members of society benefit?
“Using efficiency as a criterion biases the analysis in favor of the status quo, since any change is certain to harm someone.” Discuss.
In each of the cases below, state whether one of the conditions for economic efficiency is violated. “Uncertain” is an acceptable response. If one of the efficiency conditions is violated, indicate which one and whether the resources in question are overused or underused. a. The Rapid Transit
Under marketing orders instituted during the 1930s and administered by the U. S. Department of Agriculture, orange growers in California and Arizona have been successful in behaving as a cartel in the fresh orange market. Despite the ability of California and Arizona growers to rely on marketing
Suppose that the United States limits the amount of steel that can be imported from other countries. Using a PPF that puts units of steel on the horizontal axis and units of another good, such as food, on the vertical axis, explain how such a steel import quota will affect production of food and
What two characteristics define a public good? Which of the following are public goods: parks, police services, welfare payments to the poor, production of energy, space exploration?
Education is sometimes cited as a source of external benefits. In what way, if at all, does your receiving a college education benefit other people?
Should entrance fees be charged at our national parks? Explain why or why not.
The Copenhagen Accord of 2009 required most industrial nations to reduce their carbon dioxide and other greenhouse-gas emissions during the ensuing decade by 5 to 40 percent, depending on the country. The United States and Canada, for example, committed to reducing emission by 17 percent while
As of the late 1990s, there had been instances of Russians shooting at Japanese, Tunisians shooting at Italians, and Portuguese shooting at Spaniards. This is just a partial list of the heated conflicts occurring on the high seas between aggressive fishing fleets and well-armed navy and coast guard
Why will private markets produce an inefficient output of a public good? Explain how the efficient level of a public good is determined.
What is meant by the free-rider problem? How does it relate to the provision of public goods? How can it be over-come?
Suppose there are three consumers—two “hawks” and one “dove.” The dove receives negative benefits from (i.e., is harmed by) national defense, but the hawks value defense. Show graphically how an efficient output of defense is deter-mined in this case.
“External costs are bad, and government intervention to reduce them is justified. External benefits, however, are good, and there is no reason for government intervention in this case.” Evaluate these statements.
A piece of state legislation proposes banning smoking in nearly all public facilities and private businesses. The major argument for the bill is that it “is needed to protect nonsmokers from the health hazards of cigarettes.” Prepare an evaluation of the economic case for this legislation.
In an otherwise competitive economy there is an externality in the form of pollution. Show what the private market equilibrium implies in terms of where we are on (or inside of) the welfare frontier.

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