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Economics 2nd Edition Daron Acemoglu - Solutions

Outsourcing business processes has become increasingly common with globalization. The immediate gain it offers a transnational company is a reduction in the use of domestic labor in the production function, which leads to an increase in the goods’ competitiveness in the world market. What do you
How does the relationship between the domestic equilibrium price and the world price of a good explain whether a country is an importer or an exporter of that good?
Explain the impact, if any, of each of the following on the PPC.a. Brazil’s population suffers from water shortages even though the country has about a fifth of the water reserves of the world.b. China’s one-child policy was planned to reduce the country’s population and limit the demand for
What do the points to the left, right, and on a production possibilities curve (PPC) signify? Which of these points are attainable, and why?
What is meant by complete specialization? How does it affect the total level of output produced by both trading partners?
Can a country have comparative advantage in producing all goods and services? Can it have an absolute advantage in producing all goods and services?
Consider the figure at the right. The blue line shows how many units of goods A and B a worker in Taiwan can produce, and the tan line shows the number of units of goods A and B that a worker in Korea can produce. Does this figure indicate anything about either worker having a comparative or
Ashley is willing to pay $7, Bill is willing to pay $5, and Carrie is willing to pay $1.a. Sketch the demand curve.b. Write out the demand schedule for each integer price up to $8 ($0, $1, $2, . . . , $8).c. Find the consumer surplus if the price is $2.d. What if another buyer shows up who is
According to reports in the Chinese media, commuters in Beijing are facing a somewhat paradoxical situation:they find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen. Governmentdetermined
The equilibrium rent in a town is $500 per month, and the equilibrium number of apartments is 100. The city now passes a rent control law that sets the maximum rent at$400. The diagram that follows summarizes the supply and demand for apartments in this city.500 Price Quantity 400 IIII VVI II IV 60
Suppose a market for cheap sunglasses is in a long-run competitive equilibrium and that the price is $10. Every producer of sunglasses sells 5,000 pairs. A cloudy summer decreases the demand for sunglasses, which causes the market price to change. As a consequence, in the short run, will each firm
Masumi is a Japanese company producing 10,000 pairs of chopsticks every month in Madagascar at the average total cost of $0.8. The manager of the company has found that while the average total cost of producing 3,000 pairs of chopsticks in Japan is $1.2, the average total cost of producing 7,000
The following tables show a small firm’s long-run average cost of manufacturing a good at two different plants:
Compared to the market for cars, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for cars than in the vintage button market. Is it then correct to assume that the outcome in the car market is Pareto efficient while in the vintage
The market for electric drills in a certain country is characterized by a large number of buyers and sellers, and every buyer who wants a drill and can afford one has bought one. In other words, the market for drills is in equilibrium.a. Does this also mean that the market is Pareto efficient?
Sara and Jim are going to lunch together and rank the restaurant options in the following way. Which restaurant choices would be Pareto efficient?
Suppose the market for electric cars is competitive.a. Show that the equilibrium price in this market is $40,000.b. Which firms will produce an electric car if the price is $40,000?c. Which consumers will buy an electric car when the price is $40,000?d. Calculate consumer surplus, producer surplus,
Let us continue with the electric car example from Problem
There are four consumers willing to pay the following amounts for an electric car:
Suppose the market for live lobsters is perfectly competitive. After the lobsters are caught, the fishermen have to sell them as soon as they can before the lobsters die.Assume that no one buys dead lobsters from the fishermen, and therefore, the price of dead lobsters is zero.Explain the price
The following diagram shows the market demand and market supply for sweaters. Calculate consumer surplus, producer surplus, and social surplus in this market. Price $100 90 88 80 70 60 Supply 50 40 Demand 30 20 10 100 Quantity
Are there real-world markets that resemble double oral auctions? Suppose you had to organize a double oral auction for a good that has perfectly elastic demand.Do you expect prices to approach the competitive equilibrium?
Is the introduction of unemployment insurance a policy to increase efficiency or equity? Explain.
Sofia, a political science student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her? Explain
Suppose the need for babysitters increases in all countries. How does it cause different consequences in the market economies and the planned economies?
There are always debates on minimum wages between policymakers and economists. While policymakers may support the raise of minimum wage, economists usually object to it. What are the rationales behind them?
What could explain why South Korea’s GDP per capita increased so much faster since the 1970s than North Korea’s GDP per capita?
Can the government do a good job of the invisible hand?Explain your answer with the case of Korea discussed in the chapter.
How will the social surplus change if the quantity sold is restricted below the equilibrium quantity?
How will the invisible hand move corn prices in response to:a. a flood that destroys a great deal of the corn crop?b. a rise in the price of wheat (a substitute for corn)?c. a change in consumer tastes away from corn dogs toward hot dogs?d. an increase in the number of demanders in the corn market?
How do economic profits and losses allocate resources in an economy?
All else being equal, does an elastic or inelastic demand curve result in higher social surplus? How does elasticity of supply affect social surplus?
Suppose a firm is described by the following: Market demand is P = 50 - Q; ATC = 20 + 4Q; and MC = 30 + 5Q.a. Find the profit maximizing price and quantity.b. What is the firm’s profit?c. Suppose that the firm incurs additional costs and now needs to produce at the quantity where price equals
The following table shows the long-run total costs of four different firms:Output Firm A Firm B Firm C Firm D Total costs ($)10 90 100 100 70 12 120 108 96 120 25 200 175 225 225 40 280 320 280 320a. Calculate the ATC for these firms and explain if they experience economies or diseconomies of
Larry Krovitz is a salesman who works at a used-car showroom in Sydney, Australia. It’s the last week of July, but he has not yet met his sales target for the month. A customer, Harold Kumar, who wants to buy a Ford Fiesta, walks into the showroom. After taking one of the cars for a test drive,
This problem asks you to think carefully about sunk costs.a. The International Space Station (ISS) is a habitable satellite that was launched by NASA and space agencies of other countries. In 2009, NASA was considering shutting down the ISS within the next 5 to 6 years. Among those who were opposed
Daniel sells 500 hotdogs in a perfectly competitive market every week. The weekly fixed cost of his shop is $1,000 and the variable cost is $500. If the price of each hotdog is $2, explain whether Daniel is making a profit or a loss, and whether he should continue to operate his shop or shut it
For the Olympic Games, the demand to watch the sporting event live is always greater than the number of seats available. After the event is sold out officially, people start to trade in the secondary markets. However, the tickets sold through secondary sources are usually much more expensive than
There are many identical firms with a simple cost structure: Total cost for Q = 0 is $6 and total cost for Q = 1 is$8. Each firm is incapable of producing anything more; in other words, total cost is infinite for any Q larger than 1.a. What is the fixed cost? What is the marginal cost of the first
You are one of five identical firms (i.e., you all have the same costs) that sell widgets. Each day you have a fixed cost of $9 to operate. The marginal costs of your first through fifth widgets are $1, $2, $3, $7, and $8, respectively. You have a capacity constraint of 5, and you can only produce
Jeremy worked at a bank with a monthly salary of $1,500.He decided to quit his job and open a bookstore in his neighborhood. He now pays $500 in rent, $80 in utilities, and $120 in wages every month.a. Suppose Jeremy sells 100 books at the price of $30 every month.i. What is the monthly total
Fill in the ATC and MC columns in the following table:Output Total Cost Average Total Cost Marginal Cost 0 $14 1 15 2 18 3 24 4 36a. Use the MC curve to determine how many units this firm would supply if the market price were $10.b. Assuming free entry and exit of other firms, based on the ATC
The following table gives you information on the total cost of Mac’s ice cream production:Quantity of Ice Cream (liter) Total Cost 0 $50 10 $90 20 $110 30 $140 40 $190 50 $260 60 $350a. Is Mac producing ice cream in the short run or the long run? Explain.b. Compute the average total cost at each
Ethanol has become one of the most important alternative fuels of the world. It is produced mainly from grains and provides energy efficiency and independence. Assume that a small ethanol plant from Illinois recorded good production over the past year. During the year, the plant’s fixed and
Fixing up old houses requires plumbing and carpentry work. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber but is not particularly good at either. He can fix up two houses in a year if he does all the carpentry and plumbing himself. His wage is
If some sellers exit a competitive market, how will this affect equilibrium?
Explain the concept of zero profits in the long run with an example.
The following graph shows the long-run ATC cost curve for a perfectly competitive firmRefer to points A, B, and C on the graph, and identify where the firm would experience economies of scale, constant returns to scale, and diseconomies of scale. Price A B Long-run ATC Quantity
In each of the following cases, identify whether a competitive firm’s producer surplus will increase, decrease, or remain unchanged.i. The demand for the product increases.ii. The firm’s MC of production increases.iii. The market price of the product falls.
What is meant by sunk costs? Are fixed costs or variable costs considered as sunk costs in the short run?
Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?
The following graph shows three supply curves with varying degrees of price elasticity:Identify the perfectly elastic, perfectly inelastic, and unitelastic supply curves.
Define explicit and implicit costs with examples of each.
How does a firm in a competitive market decide what level of output to produce in order to maximize its profit?
Why is it that the industry demand curve slopes downward when the demand curves faced by individual firms in perfectly competitive markets are horizontal?
Use a graph to show the relationship between the MC curve and the ATC curve for a competitive firm. What can you conclude about ATC when MC is less than ATC?
How does the marginal product change as a firm increases the number of workers employed? Explain your answer.
Do you think sellers in a perfectly competitive market can price their goods differently? Explain your answer.
How can you describe a price-taker? If a farmer raises cattle, can he be considered a price-taker? What would happen if all cattle farmers decide to raise sheep? Explain.
Consider indifference curves for goods X and Y. Suppose we plot the quantity of good Y on the y-axis and the quantity of good X on the x-axis.
Explain the income and substitution effects of an increase in the price of one good on an individual’s consumption choice.
What is an indifference curve? Can two indifference curves intersect? Explain your answer.
Suppose demand is given by QD = 6 - P.a. Graph the demand curve.b. If the price is $2, what is the consumer surplus?c. If the price goes up to $4, what is the new consumer surplus? This new surplus should be lower; explain why
Examine the following statements and determine how price elasticity of demand changes:a. Applebee has decided to raise the price of burgers while keeping the price for pizzas and pastas the same.b. Tom wants to buy a house, but the price just increased by 10 percent.c. Facebook shares have fallen
Starbucks and Dunkin’ Donuts are two of the largest eatery chains that specialize in coffee. Despite being founded 20 years after Dunkin’ Donuts, Starbucks has grown aggressively and is now a substantially larger company. Examine the following statements and identify the ones that could explain
Three years after graduating from college you get a promotion and a 20 percent raise. Your consumption habits change accordingly. Use the following information to determine your income elasticity of demand, and state whether the good is a normal good, an inferior good, or a luxury good.a. You
Calculate the cross-price elasticities in case of a decrease in the price of cabbages with 20 percent, an increase in the demand for tomatoes with 15 percent and a decrease in the demand for artichokes with 10 percent. Comment on whether tomatoes and artichokes can substitute or complement the
Consider Sophia and Marcus’s total expenditure on sandwiches:Price Total expenditure (per month)Sophia Marcus$5 $90 $50$4 $80 $60a. Use the midpoint formula to calculate the price elasticity of demand for Sophia when the price of sandwiches increases from $4 to $5.b. Use the midpoint formula to
The total benefit for burgers and beers is given below.Burgers cost $10 and beers cost $20.Total Benefit(Burgers)Total Benefit(Beers)1 15 30 2 30 50 3 45 60 4 60 65a. What is the marginal benefit of a third beer?b. What is the “bang for the buck” of a second burger?c. Using the “bang for the
Kira will be attending university soon for which she needs new pairs of jeans (j) and shirts (s). Her budget constraint is given by $40j + $20s = $120.a. What are the bundles of her budget constraint? Draw a table with her possibilities and a diagram.b. What is the opportunity cost of jeans in
Suppose Gia has $800 to spend on art books and design books. The price of an art book is $40 and the price of a design book is $50.a. Draw the budget constraint and show its slope.b. Suppose the price of a design book is $40. Draw the budget constraint and explain the changes.c. Suppose the price
Thomas has an income of $500, and he consumes two goods: rods and baits. The price of a rod is $100, and the price of bait is $50.a. Suppose Thomas receives a prize of 4 rods. Draw Thomas’s budget set.b. Now suppose Thomas lost $100. Draw Thomas’s new budget set.
Jean has a budget of $100, which she wants to spend on pens that are priced at $5 per pen and paper that is priced at $10 per bundle of 100 sheets.a. Draw Jean’s budget constraint. Find its slope and the opportunity cost of buying pens and bundles of paper.b. If Jean’s budget set is $100, what
Elisa earns $2,500 per month and spends her income on flowers and vegetables. Suppose the price of flowers is$80 and the price of vegetables is $120.a. Draw a diagram for Elisa’s budget constraint, identifying its slope and intercepts.b. Suppose the price of the flowers falls to $60, Elisa’s
Each school-week night you can play video games, talk on the phone, or watch a movie. You have a total of five nights to spend doing one of these three things?a. Fill out the marginal benefit columns.b. Your friend tells you to play video games for two nights and talk on the phone for the other
Examine the accuracy of the following statement: “Given that healthcare services are considered luxury goods based on income elasticity, fewer people can afford to receive assistance to cure their diseases.”
If a good is considered to be a luxury good, does it mean that the Law of Demand does not hold?
Examine the accuracy of the following statement: “Though Apple iPhones and Samsung mobiles are substitute goods, if the price of an iPhone increases, consumers will still buy them because of brand preference.”
What does a negative income elasticity of demand mean?
How is cross-price elasticity of demand used to determine whether two goods are substitutes or complements?
How does the number of available substitutes determine the price elasticity of demand?
Can a price increase lead to lower revenue? Suppose a bookstore sells 15 books a day. The price of one book increases from $10 to $12. At this price, the store sells 10 books a day. Discuss the revenue of the store in this case.
Assume that the price of a beverage, Cola, doubles. As a result, the quantity demanded for Cola falls as consumers switch to a less-expensive alternative, Spritzer. What type of elasticity is seen in this situation? What are the other forms of elasticity?
Can consumer surplus be negative? Explain your answer.
What happens to consumer surplus when price decreases? Explain with an example and supplement it with a diagram.
Consider the following supply and demand diagram:Identify which of the three areas labeled A, B, and C represents consumer surplus in this market. P S A B C D Q
What is meant by consumer surplus? How is it calculated?
Why is a consumer’s satisfaction maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good?
Consider the following figures in which the light blue line is the original budget constraint for a consumer and the dark blue line is the new one. Examine each case and explain what could have caused the change. Quantity of good Y Quantity of good Y Quantity of good X (a) Quantity of good X (b)
The buyer’s problem states that consumers spend money to maximize their benefits, which depend on tastes and preferences, and consider trade-offs to achieve it. Is a consumer’s buying decision based on her budget set or budget constraint?
What are the three necessary ingredients that help a consumer decide what to buy?
Note: This problem requires some basic algebra. The demand for ice cream is QD = 70 - 4P, and the supply of ice cream is QS = 10 + 2P, where P is the price of ice cream.a. Find the equilibrium price and quantity of ice cream.b. Suppose consumers’ income increases and ice cream is considered as a
The equilibrium price of coffee in an economy, measured in dollars, is about $2,000 per ton. To help the coffee farmers earn a higher income, the government set the price to $2,500 per ton.a. How will this affect the demand and supply of coffee in the coffee market?b. Construct a diagram for coffee
As part of U.S. sugar policy (in 2013), the government offered to buy raw sugar from domestic sugarcane mills at an average price of 18.75 cents per pound. This government offer was made for as much raw sugar as the sugarcane mills produced. Any raw sugar purchased by the government was not sold in
Lobsters are plentiful and easy to catch in August but scarce and difficult to catch in November. In addition, vacationers shift the demand for lobsters further to the right in August than in any other month. Compare the equilibrium price and quantity of lobsters in August to the equilibrium price
New York decides to reduce the consumption of sugary soda by imposing a minimum price of $2.50 per soda.The current equilibrium price is $1.50. Sketch the supply and demand for soda and show the effect of this policy.Clearly label the excess supply in your diagram.
Suppose one of your friends offered the following argument: a rightward shift in demand will cause an increase in price. The increase in price will cause a rightward shift of the supply curve, which will lead to an offsetting decrease in price. Therefore, it is impossible to tell what effect an
A freshwater aqua farm in Singapore can breed tiger prawns and tilapia. Recently, it was found that there may be a risk of contracting a type of disease from the consumption of tiger prawns—this discovery has led to fear among its consumers. How will this affect the equilibrium price and quantity
For each of the following situations, sketch the demand curve as accurately as possible.a. Appendectomy is a life-saving operation that some people need. Regardless of the price, the quantity demand is 300,000 every year.b. For any price above $5 absolutely nobody will buy your lemonade, but for
Suppose the energy supply in your country is primarily provided by nuclear reactors. Your country is both sunny and windy at the same time and, therefore, many people have decided to set up sun collectors and wind farms as a cheaper alternative to obtaining electricity. Explain how this might

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