Macroeconomics 5th edition Stephen d. Williamson - Solutions

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During the summer of 2009 at the European Union’s headquarters in Brussels, dairy farmers across Europe protested low milk prices caused by the EU’s move away from farm crop subsidy programs toward more heavy reliance on market-determined prices for agricultural products. The Wall Street
EverKleen Pool Services provides weekly swimming pool maintenance in Atlanta. Dozens of firms provide this service. The service is standardized; each company cleans the pool and maintains the proper levels of chemicals in the water. The service is typically sold as a four-month summer contract. The
Airline industry experts generally believe that because of the “highly competitive” nature of U.S. airline markets, it is usually impossible to pass on higher jet fuel prices to passengers by raising ticket prices. a. What factors do you suppose contribute to making U.S. airline markets
Legendary for his business and investment acumen, Warren Buffett is frequently called the “Oracle of Omaha” after his birthplace in Omaha, Nebraska. As one of the world’s wealthiest business owner-investors, business executives are always interested in any insight or opinion Mr. Buffett might
The MidNight Hour, a local nightclub, earned $100,000 in accounting profit last year. This year the owner, who had invested $1 million in the club, decided to close the club. What can you say about economic profit (and the rate of return) in the night-club business?
HoneyBee Farms, a medium-size producer of honey, operates in a market that fits the competitive market definition relatively well. However, honey farmers are assisted by support prices above the price that would prevail in the absence of controls. The owner of HoneyBee Farms, as well as some other
The New York City Parks Department doubled the annual fee for the hot-dog pushcart that had the exclusive license for the spot just south of the Metropolitan Museum of Art to $288,000. Why would anyone pay almost $300,000 for a pushcart license? Who is obtaining the economic rent for the obviously
During a coffee-room debate among several young M.B.A.s who had recently graduated, one of the young executives flatly stated, “The most this company can lose on its Brazilian division is the amount it has invested (its fixed costs).” Not everyone agreed with this statement. In what sense is
Higher unemployment caused by the recession and higher gasoline prices have contributed to a substantial reduction during 2008 in the number of vehicles on roads, bridges, and in tunnels. According to The Wall Street Journal (April 28, 2009), the reduction in demand for toll bridge and tunnel
QuadPlex Cinema is the only movie theater in Idaho Falls. The nearest rival movie theater, the Cedar Bluff Twin, is 35 miles away in Pocatello. Thus QuadPlex Cinema possesses a degree of market power. Despite having market power, QuadPlex Cinema is currently suffering losses. In a conversation with
The El Dorado Star is the only newspaper in El Dorado, New Mexico. Certainly, the Star competes with The Wall Street Journal, USA Today, and the New York Times for national news reporting, but the Star offers readers stories of local interest, such as local news, weather, high-school sporting
Antitrust authorities at the Federal Trade Commission are reviewing your company’s recent merger with a rival firm. The FTC is concerned that the merger of two rival firms in the same market will increase market power. A hearing is scheduled for your company to present arguments that your firm
You own a small bank in a state that is now considering allowing interstate banking. You oppose interstate banking because it will be possible for the very large money center banks in New York, Chicago, and San Francisco to open branches in your bank’s geographic market area. While proponents of
The Ali Baba Co. is the only supplier of a particular type of Oriental carpet. The estimated demand for its carpets isQ = 112,000 − 500P + 5Mwhere Q = number of carpets, P = price of carpets (dollars per unit), and M = consumers’ income per capita. The estimated average variable cost function
Dr. Leona Williams, a well-known plastic surgeon, has a reputation for being one of the best surgeons for reconstructive nose surgery. Dr. Williams enjoys a rather substantial degree of market power in this market. She has estimated demand for her work to be Q = 480 − 0.2Pwhere Q is the number of
A firm with two factories, one in Michigan and one in Texas, has decided that it should produce a total of 500 units to maximize profit. The firm is currently producing 200 units in the Michigan factory and 300 units in the Texas factory. At this allocation between plants, the last unit of
In a recent “earnings call,” a teleconference call to shareholders in which the CEO reports and discusses quarterly earnings per share, Coca-Cola’s CEO Muhtar Kent bragged about “winning” market share from rival beverage company PepsiCo. However, rising sugar costs in 2011 are forcing
In a Wall Street Journal article titled “Sparing Fliers Even Higher Airfares,” Scott McCartney claims that jet fuel hedging by Southwest Airlines resulted in lower airfares for passengers on all airlines: “Without (the fuel hedging) windfall, (Southwest) likely would have had to jack up fares
Tots-R-Us operates the only day-care center in an exclusive neighborhood just outside of Washington, D.C. Tots-R-Us is making substantial economic profit, but the owners know that new day-care centers will soon learn of this highly profitable market and attempt to enter the market. The owners
The Wall Street Journal reported that businesses are aggressively pushing consumers to pay bills electronically. Numerous banks dropped their monthly fees for online bill paying, and many merchants are offering incentives for customers to sign up for online bill payment. Aside from the direct cost
Even if the firms in a monopolistically competitive market collude successfully and fix price, economic profit will still be competed away if there is unrestricted entry. Explain. Will price be higher or lower under such an agreement in long-run equilibrium than would be the case if firms didn’t
For the demand and cost conditions in equations (1) and (2), respectively, of the appendix, derive the output and prices under perfect competition and under monopoly and verify the output and price relations in equations (9) and (10), respectively.
Doctors Smith and Jones, two rival ophthalmologists, plan to enter the market for laser corrective eye surgery in a medium-size community in Illinois. Smith and Jones both utilize the same laser technology and face constant long-run costs of $1,000 per patient (LMC = LAC = $1,000). For planning
Two firms, A and B, produce goods A and B, respectively. The linear demands for the two goods are, respectively, QA = 100 − 4PA + 1.5PBQB = 120 − 2PB + 0.5PAProduction costs are constant but not equal: LACA = LMCA = $2LACB = LMCB = $3a. Using calculus, derive the equations for the best-response
When McDonald’s Corp. reduced the price of its Big Mac by 75 percent if customers also purchased French fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn’t. Within two weeks sales had fallen.
Some states have had laws restricting the sale of most goods on Sunday. Consumers, by and large, oppose such laws because they find Sunday afternoon a convenient time to shop. Paradoxically, retail trade associations frequently support the laws. Discuss the reasons for merchants’ supporting these
Thomas Schelling, an expert on nuclear strategy and arms control, observed in his book The Strategy of Conflict (Cambridge, MA: Harvard University Press, 1960), “The power to constrain an adversary depends upon the power to bind oneself.” Explain this statement using the concept of strategic
When he retired as CEO of American Airlines, a position he held for 18 years, Robert Crandall was described in a Newsweek article (June 1, 1998) as “one tough [expletive].” Other nicknames Crandall garnered during his career included Fang, Bob the Butcher, and Wretched Robert. Newsweek noted
The well-known nationally syndicated coluanist David Broder reported the recent findings of two academic political scientists. These scholars found that voters are quite turned off by “negative campaigns” of politicians. Many people went as far as not voting because of this. Nevertheless, the
Dell Computer Corp., the world’s largest personal-computer maker, is keenly aware of everything its rival PC manufacturers decide to do. Explain why Dell usually reacts more quickly and more substantially to pricing, product design, and advertising decisions made by Hewlett-Packard and Gateway
Many economists argue that more research, development, and innovation occur in the oligopolistic market structure than in any other. Why might this conclusion be true?
The secretary-general of OPEC, Ali Rodriquez, stated that it would be easier for OPEC nations to make future supply adjustments to fix oil prices that are too high than it would be to rescue prices that are too low. Evaluate this statement.
A church signboard offers the following advice: “Live every day as if it were your last.” Taken literally, could this advice encourage “bad” behavior? Explain.
In 1999 Mercedes-Benz USA adopted a new pricing policy, which it called NFP (negotiation-free process), that sought to eliminate price negotiations between customers and new-car dealers. An article in The New York Times (August 29, 1999) reported that a New Jersey Mercedes dealer who had his
Recently one of the nation’s largest consumer electronics retailers began a nationwide television advertising campaign kicking off its “Take It Home Today” program, which is designed to encourage electronics consumers to buy today rather than continue postponing a purchase hoping for a lower
When Advanta Corp. decided that it wished to begin charging a fee to holders of its credit cards for periods during which the card is not used and for closing the account, it first “signaled” its intentions to hike fees by publicly announcing its plans in advance. The company notified its
Economists believe terrorists behave rationally: If country A (America) increases security efforts while country B (Britain) remains complacent, terrorists will focus their attacks on targets in the relatively less well-protected country B. Suppose the following payoff table shows the net benefits
The two largest diner chains in Kansas compete for weekday breakfast customers. The two chains, Golden Inn and Village Diner, each offer weekday breakfast customers a “breakfast club” membership that entitles customers to a breakfast buffet between 6:00 A.M. and 8:30 A.M. Club memberships are
Samsung wants to prevent Whirlpool from entering the market for high-period, front-load washing machines. Front-load washing machines clean clothes better and use less water than conventional top-load machines. Even though front-load machines are more costly to manufacture than top-loaders Samsung
STIHL, Inc., manufactures gasoline-powered chain saws for professional, commercial, farm, and consumer markets. To “better serve” their customers, STIHL offers its chain saws in four different quality lines and associated price ranges: occasional use, midrange, professional, and arborist. Under
Price discrimination sounds like a socially “bad” thing. Can you think of any reasons why price discrimination could be viewed as a socially “good” thing?
In the mid-1990s, long before September 11, 2001, airlines began requiring photo identification to check baggage and board flights, claiming their fervent commitment to secure and safe air travel. Do you think the airlines implemented this policy because they could foresee the coming terrorist
“Declining block pricing is a crude form of perfect price discrimination.” In what sense is this statement correct? In what important way is it wrong?
The Financial Herald, a weekly newspaper specializing in corporate financial news, is purchased by both businesspeople and students. A marketing research firm has estimated the two linear demand and marginal revenue functions shown in the following figure. MR B is the estimated marginal revenue
EZ Sharp Industries, Inc., manufactures the Keen Edge™ line of diamond-abrasive cutlery sharpeners for home use. EZ Sharp holds a patent on its unique design and can earn substantial economic profit if it prices its Keen Edge™ products wisely. EZ Sharp sells two models of its Keen Edge™
Berkley Golf & Tennis Club offers golf and tennis memberships. Marketing analysis of the local neighborhood served by Berkley Golf & Tennis Club shows that there are two types of families that might join the club: golf-oriented families, which are primarily interested in golf but enjoy
Airlines practice price discrimination by charging leisure travelers and business travelers different prices. Different customers pay varying prices for essentially the same coach seat because some passengers qualify for discounts and others do not. Since the discounts are substantial in many
A woman complained to “Dear Abby” that a laundry charged $1.25 each to launder and press her husband’s shirts, but for her shirts—the same description, only smaller—the laundry charged $3.50. When asked why, the owner said, “Women’s blouses cost more.” Abby suggested sending all the
A bar offers female patrons a lower price for a drink than male patrons. The bar will maximize profit by selling a total of 200 drinks (a night). At the current prices, male customers buy 150 drinks, while female customers buy 50 drinks. At this allocation between markets, the marginal revenue from
As markets for some products and services experience greater global competition, what is the likely consequence for the incidence of price discrimination? Do you think global competition fosters or impedes price discrimination? Can you give any examples from your own work experience?
Although there is relatively little difference in the cost of producing hardcover and paperback books, these books sell for very different prices. Explain this pricing behavior.
The Wall Street Journal once reported on dating services, noting that the fees were $300 for men and $250 for women. The owner of the service said that the difference in fees was to compensate for inequalities in pay scales for men and women. Can you suggest any alternative reasons for this
Consider a firm that is deciding whether to operate plants only in the United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new capital (OINC) tax credit for U.S. firms that operate plants outside the country. If Congress passes OINC
A portfolio manager needs to pick winners—assets or securities with high expected returns and low risk. What is wrong with this statement?
Remox Corporation is a British firm that sells high-fashion sportswear in the United States. Congress is currently considering the imposition of a protective tariff on imported textiles. Remox is considering the possibility of moving 50 percent of its production to the United States to avoid the
Return to Applied Problem 1 and suppose the managers of the firm decide on the following subjective probabilities of congressional action on OINC: ProbabilityOINC passes ........ 40%OINC fails ........ 10OINC stalls ......... 50a. Compute the expected profits for all three
Using the information in Applied Problem 4, what decision would Remox make using each of the following rules if it had no idea of the probability of a tariff? a. Maximax b. Maximin c. Minimax regret d. Equal probability criterion
Evaluate this statement: “The only time that a change in resource allocation clearly increases social welfare is when the change represents a ’win-win’ situation.”
What is wrong with this statement: “Whenever an industry fails to achieve allocative efficiency by producing too little output, a shortage arises.”
How does a price ceiling undermine the rationing function of market-determined prices? How could rationing coupons insure that consumers with the highest values get the limited amount of a good supplied when government price ceilings create shortages?
Consider the following data on real GDP per capita in the United States:Year U.S. Real GDP Per Capita (2005 dollars)1950 …………………………………
In Figure, does unemployment change more rapidly when it is increasing, or when it is decreasing? Based on previous experience, when will the unemployment rate again reach 4% after the 2008–2009 recession?
Figure shows that the inflation rate and the money growth rate increased on trend until about 1980, and then decreased. What happened to the variability in the inflation rate and the variability in the money growth rate in the post-1980 period, relative to the pre-1980 period? Provide an
From Figures, determine and discuss how fluctuations in the nominal interest rate and inflation have contributed to fluctuations in the real interest rate from 2000 to 2012.
In Figure, discuss the severity of the 2008–2009 recession relative to previous recessions.
Determine how increases in the interest rate spread in figure match with recessions in figure. Does an increase in the interest rate spread always occur when there is a recession? Does a recession always occur when there is an increase in the interest rate spread? Comment.
Give an example of a model that is used in some area other than economics, other than the roadmap example explained in this chapter. What is unrealistic about this model? How well does the model perform its intended function?
In Figure, there were three periods prior to 2006–2012 when the relative price of housing declined. Determine the approximate magnitudes of the relative housing price decline in these earlier periods compared to the 2006–2012 decline, and comment.
Assume an economy where there are two producers: a wheat producer and a bread producer. In a given year, the wheat producer grows 30 million bushels of wheat of which 25 million bushels are sold to the bread producer at $3 per bushel, and 5 million bushels are stored by the wheat producer to use as
Assume an economy with a coal producer, a steel producer, and some consumers (there is no government). In a given year, the coal producer produces 15 million tons of coal and sells it for $5 per ton. The coal producer pays $50 million in wages to consumers. The steel producer uses 25 million tons
Assume an economy with two firms. Firm A produces wheat and firm B produces bread. In a given year, firm A produces 50,000 bushels of wheat, sells 20,000 bushels to firm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and stores 5,000 bushels as inventory. Firm A pays $50,000 in wages
In year 1 and year 2, there are two products produced in a given economy, computers and bread. Suppose that there are no intermediate goods. In year 1, 20 computers are produced and sold at $1,000 each, and in year 2, 25 computers are sold at $1,500 each. In year 1, 10,000 loaves of bread are sold
Assume an economy in which only broccoli and cauliflower are produced. In year 1, 500 million pounds of broccoli are produced and consumed and its price is $0.50 per pound, while 300 million pounds of cauliflower are produced and consumed and its price is $0.80 per pound. In year 2, 400 million
Consider an economy with a corn producer, some consumers, and a government. In a given year, the corn producer grows 30 million bushels of corn and the market price for corn is $5 per bushel. Of the 30 million bushels produced, 20 million are sold to consumers, 5 million are stored in inventory,
In some countries, price controls exist on some goods, which set maximum prices at which these goods can be sold. Indeed, the United States experienced a period of wage and price controls when the Nixon administration introduced wage and price controls in 1971. Sometimes the existence of price
In this chapter, we learned that the quantity of U.S. currency outstanding was $3,490 in March 2012. Suppose that we were to try to use this number to estimate the amount of output produced in the underground economy in the United States during 2009. Discuss how we would use this information on the
Part of Gross Domestic Product consists of production in the so-called FIRE. Sector (finance, insurance, and real estate). Value added is notoriously difficult to measure in the FIRE sector, as it is hard to determine exactly what the inputs and outputs are. For example, banks are included in the
In the United States, a large fraction of transactions among banks takes place over Fedwire, which is an electronic payments system operated by the Federal Reserve System.6 During 2008, on an average day, 521,000 payments were made over Fedwire, with a total value of $2.7 trillion. The median value
Consider the identitySp – I = CA + D,where Sp is private sector saving, I is investment, CA is the current account surplus, and D is the government deficit. (a) Show that the above identity holds.(b) Explain what the above identity means.
Let Kt denote the quantity of capital a country has at the beginning of period t. Also, suppose that capital depreciates at a constant rate d, so that dKt of the capital stock wears out during period t. If investment during period t isdenoted by It, and the country does not trade with the rest of
Suppose that the government deficit is 10, interest on the government debt is 5, taxes are 40, government expenditures are 30, consumption expenditures are 80, net factor payments are 10, the current account surplus is – 5, and national saving is 20. Calculate the following (not necessarily in
Suppose that the unemployment rate is 5%, the total working-age population is 100 million, and the number of unemployed is 2.5 million. Determine: (i) the participation rate; (ii) the labor force; (iii) the number of employed workers; and (iv) the employment/population ratio.
In Figure, if we had only the data from 1980 to 2012 to go on, what would we conclude about the relationship between the nominal money supply and real GDP? Explain the significance of this.
Average labor productivity tends to be a coincident variable. Examine Figure 3.16 carefully. During the 1991–1992, 2001, and 2008–2009 recessions, how do you observe average labor productivity behaving relative to GDP? Comment on this, and explain what this has to do with the Macroeconomics in
Consumption of durables is more variable relative to trend than is consumption of nondurables and consumption of nondurables is more variable relative to trend than is consumption of services. Speculate on why we observe these phenomena, and relate this to the key business cycle facts in Tables.
In Figure, after the 1981-1982 recession, does the price level appear to be procyclical, countercylical, or acyclical? Why is this important?
The Great Moderation in part refers to the moderate variability in real GDP that occurred after the 1981-1982 recession and before the 2008-2009 recession. In Figure what do you observe about the behavior of the deviations from tend in the price level over the period 1947-2007? Relate this to the
Using a diagram show that if the consumer prefers more to less, then indifference curves cannot cross.
In this chapter, we showed an example in which the consumer has preferences for consumption with the perfect complements property. Suppose, alternatively, that leisure and consumption goods are perfect substitutes. In this case, an indifference curve is described by the equationi = al + bC,where a
Consider the consumer choice example in this chapter, where consumption and leisure are perfect complements. Assume that the consumer always desires a consumption bundle where the quantities of consumption and leisure are equal, that is, a = 1.(a) Suppose that w = 0.75, π = 0.8, and T = 6.
Suppose that the government imposes a proportional income tax on the representative consumer's wage income. That is, the consumer's wage income is w(1 – t)(h – l) where t is the tax rate. What effect does the income tax have on consumption and labor supply? Explain your results in terms of
Suppose, as in the federal income tax code for the United States, that the representative consumer faces a wage income tax with a standard deduction. That is, the representative consumer pays no tax on wage income for the first x units of real wage income, and then pays a proportional tax t on each
Suppose that the representative consumer’s dividend income increases, and his or her wage rate falls at the same time. Determine the effects on consumption and labor supply, and explain your results in terms of income and substitution effects.
Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours the consumer works, he or she receives a real wage rate of w1, and for hours worked more than q he or she receives w2, where w2 > w1. Suppose that the consumer pays no taxes and receives no
Show that the consumer is better off with a lump-sum tax rather than a proportional tax on wage income (as in question) given that either tax yields the same revenue for the government. You must use a diagram to show this.
Recall that leisure time in our model of the representative consumer is intended to capture any time spent not working in the market, including production at home such as yard work and caring for children. Suppose that the government were to provide free day care for children and, for the purpose
Suppose that a consumer cannot vary hours of work as he or she chooses. In particular, he or she must choose between working q hours and not working at all, where q > 7 0. Suppose that dividend income is zero, and that the consumer pays a tax T if he or she works, and receives a benefit b when
Suppose that the government imposes a producer tax. That is, the firm pays t units of consumption goods to the government for each unit of output it produces. Determine the effect of this tax on the firm’s demand for labor.
Suppose that the government subsidizes employment. That is, the government pays the firm s units of consumption goods for each unit of labor that the firm hires. Determine the effect of the subsidy on the firm’s demand for labor.
Suppose that the firm has a minimum quantity of employment, N*, that is, the firm can produce no output unless the labor input is greater than or equal to N*. Otherwise, the firm produces output according to the same production function as specified in this chapter. Given these circumstances,

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Macroeconomics 5th edition Stephen d. Williamson - Solutions

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