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Principles Of Economics 6th Edition Robert H. Frank, Ben Bernanke Professor, Kate Antonovics, Ori Heffetz - Solutions
Why do proponents of legalized drugs remain silent?That addictive drugs like heroin, cocaine, and methamphetamines cause enormous harm is not a matter of dispute. The clear intent of laws that ban commerce in these drugs is to prevent that harm. But the laws also entail costs. By making the drugs
Why do opponents of the death penalty often remain silent?Quite apart from the question of whether execution of convicted criminals is morally legitimate, there are important practical arguments against capital punishment. For one thing, it is extremely expensive relative to the alternative of life
Why do many clients seem to prefer lawyers who wear expensive suits?You’ve been unjustly accused of a serious crime and are looking for an attorney. Your choice is between two lawyers who appear identical in all respects except for the things they buy. One of them wears a cheap polyester suit and
Why do many companies care so much about elite educational credentials?Microsoft is looking for a hardworking, smart person for an entry-level managerial position in a new technical products division. Two candidates, Cooper and Duncan, seem alike in every respect but one: Cooper graduated with the
Why do firms insert the phrase “As advertised on TV” when they advertise their products in magazines and newspapers?Company A sponsors an expensive national television advertising campaign on behalf of its compact disc player, claiming it has the clearest sound and the best repair record of any
Who will sell a used car for what the naive buyer is willing to pay?Continuing with the previous example: If you were the owner of a good used car, what would it be worth to you? Would you sell it to a naive buyer? What if you owned a lemon?
How would your answer to the question posed in Example 11.8 differ if the proportion of new cars that are lemons had been 20 percen
How much will a naive buyer pay for a used car?Consider a world with only two kinds of cars: good ones and lemons. An owner knows with certainty which type of car she has, but potential buyers cannot distinguish between the two types. Ten percent of all new cars produced are lemons. Good used cars
Should you buy your aunt’s car?You want to buy a used Honda Accord. Your Aunt Germaine buys a new car every four years, and she has a four-year-old Accord that she’s about to trade in. You believe her report that the car is in good condition, and she’s willing to sell it to you for $10,000,
Will Jane sell her car to Tom?Jane’s 2010 Mazda Miata has 70,000 miles on the odometer, but most of these are highway miles driven during weekend trips to see her boyfriend in Toronto. (Highway driving causes less wear and tear on a car than city driving.) Moreover, Jane has maintained the car
Refer to the apartment search example above. Suppose you visit another apartment and discover it, too, is one that rents for $400. If you are risk-neutral, should you visit a third apartment?
Should you search further for an apartment?You have arrived in San Francisco for a one-month summer visit and are searching for a one-bedroom sublet for the month. There are only two kinds of one-bedroom apartments in the neighborhood in which you wish to live, identical in every respect except
Consider a gamble in which you win $4 if you flip a fair coin and it comes up heads and lose $2 if it comes up tails. What is the expected value of this gamble?Would a risk-neutral person accept it?
Why did Rivergate Books, the last bookstore in Lambertville, New Jersey, go out of business?Small independent bookstores often manage to survive competition from large chains like Barnes and Noble by offering more personalized service. Janet Holbrooke, the proprietor of Rivergate Books, followed
Who should expect to search longer for a good price on a used piano?Both Tom and Tim are shopping for a used upright piano. To examine a piano listed in the classified ads, they must travel to the home of the piano’s current owner. If Tom has a car and Tim does not and both are rational, which
Apart from its possible contribution to free-rider problems, how is increased access to the Internet likely to affect total economic surplus?
Should a person living in Paris, Texas, spend more or less time searching for an apartment than someone living in Paris, France?Suppose that rents for one-bedroom apartments in Paris, Texas, vary between $300 and$500 per month, with an average rent of $400 per month. Rents for similar one-bedroom
Why is finding a knowledgeable salesclerk often difficult?People can choose for themselves whether to bear the extra cost of retail shopping.Those who value advice and convenience can pay slightly higher prices, while those who know what they want can buy for less from a mail-order house. True or
How should a consumer decide which pair of skis to buy?You need a new pair of skis, but the technology has changed considerably since you bought your last pair and you don’t know which of the current brands and models would be best for you. Skis R Us has the largest selection, so you go there and
Discuss how advertising, conspicuous consumption, statistical discrimination, and other devices are responses to asymmetric information problems.
Define asymmetric information and describe how it leads to the lemons problem.
Use the concept of rational search to find the optimal amount of information market participants should obtain.
Explain how middlemen add value to market transactions.
A village has six residents, each of whom has accumulated savings of $100. Each villager can use this money either to buy a government bond that pays 15 percent interest per year or to buy a year-old llama, send it onto the commons to graze, and sell it after 1 year. The price the villager gets for
Suppose the supply curve of portable radio rentals in Golden Gate Park is given by P 5 5 1 0.1 Q , where P is the daily rent per unit in dollars and Q is the volume of units rented in hundreds per day. The demand curve for portable radios is 20 2 0.2 Q . (LO3)a. If each portable radio imposes $3
Phoebe keeps a bee farm next door to an apple orchard. She chooses her optimal number of beehives by selecting the honey output level at which her private marginal benefit from beekeeping equals her private marginal cost. (LO3)a. Assume that Phoebe’s private marginal benefit and marginal cost
Determine whether the following statements are true or false, and briefly explain why: (LO3)a. A given total emission reduction in a polluting industry will be achieved at the lowest possible total cost when the cost of the last unit of pollution curbed is equal for each firm in the industry.b. In
Refer to Problem 3. Barton decides to buy a full-sized grand piano. The new payoff matrix is as follows: (LO2)a. If Statler has the legal right to peace and quiet and Barton and Statler can negotiate at no cost, will Barton install and maintain soundproofing? Explain. Is this outcome socially
Barton and Statler are neighbors in an apartment complex in downtown Manhattan. Barton is a concert pianist, and Statler is a poet working on an epic poem. Barton rehearses his concert pieces on the baby grand piano in his front room, which is directly above Statler’s study. The following matrix
John and Karl can live together in a two-bedroom apartment for $500 per month, or each can rent a single-bedroom apartment for $350 per month. Aside from the rent, the two would be indifferent between living together and living separately, except for one problem: John leaves dirty dishes in the
Suppose the law says that Jones may not emit smoke from his factory unless he gets permission from Smith, who lives downwind. The relevant costs and benefits of filtering the smoke from Jones’s production process are as shown in the following table. If Jones and Smith can negotiate with one
Explain why the wearing of high-heeled shoes might be viewed as the result of a positional externality.(LO5)
Why does the Great Salt Lake, which is located wholly within the state of Utah, suffer lower levels of pollution than Lake Erie, which is bordered by several states and Canada? (LO3)
How would you explain to a friend why the optimal amount of freeway congestion is not zero? (LO3)
Why are shared milkshakes consumed too quickly?Sara and Susan are identical twins who have been given a chocolate milkshake to share. If each has a straw and each knows that the other is self-interested, will the twins consume the milkshake at an optimal rate?
Why do blackberries in public parks get picked too soon?Wild blackberries grow profusely at the edge of a wooded area in a crowded city park. The blackberries will taste best if left to ripen fully, but they still taste reasonably good if picked and eaten a few days early. Will the blackberries be
How much will the right to control the village commons sell for?Suppose the five villagers face the same investment opportunities as before, except that this time they decide to auction off the right to use the commons to the highest bidder.Assuming that villagers can borrow as well as lend at an
How would your answers to Examples 10.9 and 10.10 change if the interest rate were 11 percent per year rather than 13 percent?
As in Examples 10.6 and 10.7, Ann and Betty can live together in a two-bedroom apartment for $600 per month or separately in 2 one-bedroom apartments, each for $400 per month. Ann would pay up to $250 per month rather than moderate her telephone habits, and Betty would pay up to $150 per month to
What is the highest rent Betty would be willing to pay for the two-bedroom apartment?In Example 10.6, Betty’s alternative is to live alone, which would mean paying $400 per month, her reservation price for a living arrangement with no phone problem. Since the most she would be willing to pay to
Will Ann and Betty share an apartment?Ann and Betty can live together in a two-bedroom apartment for $600 per month, or separately in 2 one-bedroom apartments, each for $400 per month. If the rent paid were the same for both alternatives, the two women would be indifferent between living together
Will Abercrombie dump toxins in the river? (Part 3)Suppose the law says that Abercrombie may not dump toxins in the river unless he has Fitch’s permission. If the relevant costs and benefits of filtering the toxins are as shown in Table 10.2 , and if Abercrombie and Fitch can negotiate with one
In Example 10.4, what is the largest whole-dollar amount by which Fitch could compensate Abercrombie for operating with a filter and still be better off than before?
Will Abercrombie dump toxins in the river? (Part 2)Suppose the costs and benefits of using the filter are as in the previous example except that Abercrombie and Fitch can now communicate with one another at no cost. Even though the law does not require him to do so, will Abercrombie use a filter?
Will Abercrombie dump toxins in the river? (Part I)Abercrombie’s factory produces a toxic waste by-product. If Abercrombie dumps it in the river, he causes damage to Fitch, a fisherman located downstream. The toxins are shortlived and cause no damage to anyone other than Fitch. At a cost,
Does the honeybee keeper face the right incentives? (Part 2)As in Example 10.1, Phoebe earns her living as a keeper of honeybees. But now her neighbors are not apple growers but an elementary school and a nursing home. The more hives Phoebe keeps, the more students and nursing home residents will
Does the honeybee keeper face the right incentives? (Part I)Phoebe earns her living as a keeper of honeybees. Her neighbors on all sides grow apples.Because bees pollinate apple trees as they forage for nectar, the more hives Phoebe keeps, the larger the harvests will be in the surrounding
Illustrate the tragedy of the commons, and show how private ownership is a way of preventing it.
Explain how the effects of externalities can be remedied and discuss why the optimal amount of an externality is almost never zero.
Imagine yourself sitting in your car in a campus parking lot that is currently full, waiting for someone to pull out so that you can park your car. Somebody pulls out, but at the same moment a driver who has just arrived overtakes you in an obvious attempt to park in the vacated spot before you
The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be able to earn elsewhere) and still earn an economic profit
Consider the following “dating game,” which has two players, A and B, and two strategies, to buy a movie ticket or a baseball ticket. The payoffs, given in points, are as shown in the matrix below. Note that the highest payoffs occur when both A and B attend the same event.Assume that players A
Jill and Jack both have two pails that can be used to carry water down from a hill.Each makes only one trip down the hill, and each pail of water can be sold for $5.Carrying the pails of water down requires considerable effort. Both Jill and Jack would be willing to pay $2 each to avoid carrying
Two airplane manufacturers are considering the production of a new product, a 150-passenger jet. Both are deciding whether to enter the market and produce the new planes. The payoff matrix is as follows (payoff values are in millions of dollars):The implication of these payoffs is that the market
Newfoundland’s fishing industry has recently declined sharply due to overfishing, even though fishing companies were supposedly bound by a quota agreement. If all fishermen had abided by the agreement, yields could have been maintained at high levels. (LO2)a. Model this situation as a
In studying for his economics final, Sam is concerned about only two things: his grade and the amount of time he spends studying. A good grade will give him a benefit of 20; an average grade, a benefit of 5; and a poor grade, a benefit of 0. By studying a lot, Sam will incur a cost of 10; by
Blackadder and Baldrick are rational, self-interested criminals imprisoned in separate cells in a dark medieval dungeon. They face the prisoner’s dilemma displayed in the matrix.Assume that Blackadder is willing to pay $1,000 for each year by which he can reduce his sentence below 20 years. A
Consider the following game. Harry has four quarters. He can offer Sally from one to four of them. If she accepts his offer, she keeps the quarters Harry offered her and Harry keeps the others. If Sally declines Harry’s offer, they both get nothing ($0).They play the game only once, and each
Consider the following game, called matching pennies, which you are playing with a friend. Each of you has a penny hidden in your hand, facing either heads up or tails up (you know which way the one in your hand is facing). On the count of “three,” you simultaneously show your pennies to each
Suppose General Motors is trying to hire a small firm to manufacture the door handles for Buick sedans.The task requires an investment in expensive capital equipment that cannot be used for any other purpose.Why might the president of the small firm refuse to undertake this venture without a
Why did Warner Brothers make a mistake by waiting until the filming of Analyze This was almost finished before negotiating with Tony Bennett to perform in the final scene? (LO3)
Describe the commitment problem that narrowly selfinterested diners and waiters would confront at restaurants located on interstate highways. Given that in such restaurants tipping does seem to ensure reasonably good service, do you think people are always selfish in the narrowest sense? (LO2)
How is your incentive to defect in a prisoner’s dilemma altered if you learn that you will play the game not just once but rather indefinitely many times with the same partner? (LO2)
Explain why a military arms race is an example of a prisoner’s dilemma. (LO2)
A traveler dines at a restaurant far from home. Both he and the waiter who serves him are rational and self-interested in the narrow sense. The waiter must first choose between providing good service and bad service, whereupon the diner must choose whether or not to leave a tip. The payoffs for
Will Sylvester leave a tip when dining on the road?Sylvester has just finished a $100 steak dinner at a restaurant that is 500 miles from where he lives. The waiter provided good service. If Sylvester cares only about himself, will he leave a tip?
Smith and Jones are playing a game in which Smith has the first move at A in the decision tree shown below. Once Smith has chosen either the top or bottom branch at A, Jones, who can see what Smith has chosen, must choose the top or bottom branch at B or C . If the payoffs at the end of each branch
Should the business owner open a remote office?The owner of a thriving business wants to start up an office in a distant city. If she hires someone to manage the new office, she can afford to pay a weekly salary of $1,000—a premium of $500 over what the manager would otherwise be able to
GM and Chrysler must both decide whether to invest in a new process. Games 1 and 2 below show how their profits (in millions of dollars) depend on the decisions they might make. Which of these games is a prisoner’s dilemma? Don't invest Game I Chrysler Invest Don't invest Game 2 Chrysler Invest 4
What should United and American do if their payoff matrix is modified as follows? Raise ad spending American Leave Raise ad spending spending the same $3,000 for United $4,000 for United $8,000 for American $5,000 for American United Leave spending the same $8,000 for United $5,000 for United
Suppose United Airlines and American Airlines are the only carriers that serve the Chicago–St. Louis market. Their payoff matrix for advertising decisions is shown in Table 9.2 . Does United have a dominant strategy? Does American? If each firm does the best it can, given the incentives facing
Explain games in which the timing of players’ choices matters.
Identify and explain the prisoner’s dilemma and how it applies to real-world situations.
List the three basic elements of a game.Recognize and discuss the effects of dominant strategy choices and dominated strategy choices.
Suppose you are a monopolist in the market for a specific video game. Your demand curve is given by P 5 80 2 Q y2; your marginal cost curve is MC 5 Q . Your fixed costs equal $400. ( LO3 , LO4 )a. Graph the demand and marginal cost curves.b. Derive and graph the marginal revenue curve.c. Calculate
Suppose that the University of Michigan Cinema is a local monopoly whose demand curve for adult tickets on Saturday night is P 5 12 2 2 Q , where P is the price of a ticket in dollars and Q is the number of tickets sold in hundreds. The demand for children’s tickets on Sunday afternoon is P 5 8 2
Find the profit-maximizing price and level of output for a monopolist with the demand curve P 5 12 2 Q and the marginal cost curve MC 5 2 Q , where P is the price of the product in dollars per unit and Q is output in units per week.
Beth is a second-grader who sells lemonade on a street corner in your neighborhood.Each cup of lemonade costs Beth 20 cents to produce; she has no fixed costs.The reservation prices for the 10 people who walk by Beth’s lemonade stand each day are listed in the following table.Beth knows the
Serena is a single-price, profit-maximizing monopolist in the sale of her own patented perfume, whose demand and marginal cost curves are as shown. (LO4, LO5)a. Relative to the consumer surplus that would result at the socially optimal quantity and price, how much consumer surplus is lost from her
Refer back to Problem 7 and answer the following questions. (LO3, LO5)a. Suppose George is permitted to charge two prices. He knows that customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them. At what level
TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. The
Explain why price discrimination and the existence of slightly different variants of the same product tend to go hand in hand. Give an example from your own experience. ( LO5 )
What is the socially desirable price for a natural monopoly to charge? Why will a natural monopoly that attempts to charge the socially desirable price invariably suffer an economic loss? ( LO4 )
If a monopolist could perfectly price-discriminate: ( LO1 , LO4 )a. The marginal revenue curve and the demand curve would coincide.b. The marginal revenue curve and the marginal cost curve would coincide.c. Every consumer would pay a different price.d. Marginal revenue would become negative at some
A single-price, profit-maximizing monopolist: ( LO3 )a. Causes excess demand, or shortages, by selling too few units of a good or service.b. Chooses the output level at which marginal revenue begins to increase.c. Always charges a price above the marginal cost of production.d. Also maximizes
State whether the following statements are true or false, and explain why.( LO1 , LO2 )a. In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping.b. Perfectly competitive firms have no control over the price they charge for their
Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $10,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000, calculate the average production cost for each company. On the basis of these costs, which company’s market share do you
True or false: Because a natural monopolist charges a price greater than marginal cost, it necessarily earns a positive economic profit. ( LO3 )
Why is marginal revenue always less than price for a monopolist but equal to price for a perfectly competitive firm? ( LO1 )
True or false: A firm with market power can sell whatever quantity it wishes at whatever price it chooses. ( LO1 )
In Example 8.7, how much should Carla charge in each submarket if she knows that only those students whose reservation prices are below $34 will use rebate coupons?
For the monopolist with the demand and marginal cost curves shown, find the profit-maximizing price and level of output. 8 MC CO P ($/unit) 4 2 D I I 0 2 4 6 8 Q (units/week)
Calculate marginal revenue for the monopolist in Figure 8.3 as it expands output from 3 to 4 units per week, and then from 4 to 5 units per week. Price ($/unit) 65 2 3 D Quantity (units/week) 8 FIGURE 8.3 The Monopolist's Benefit from Selling an Additional Unit. The monopolist shown receives $12
Why does Intel sell the overwhelming majority of all microprocessors used in personal computers?
How big will Playstation’s unit cost advantage be if it sells 2,000,000 units per year, while Nintendo sells only 200,000?
Discuss public policies that are often applied to natural monopolies.
Explain why the profitmaximizing output level for a monopolist is too small from society’s perspective.
Apply the concepts of marginal cost and marginal revenue to find the output level and price that maximize a monopolist’s profit.
Identify the five sources of market power and describe why economies of scale are the most enduring of the various sources of monopoly power.
Distinguish among three types of imperfectly competitive industries(monopoly, oligopoly, and monopolistic competition) and describe how imperfect competition differs from perfect competition.
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