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Principles Of Economics 2nd Edition Steven A. Greenlaw: University Of Mary Washington, David Shapiro: Pennsylvania State University - Solutions
How is intellectual property different from other property?
What is predatory pricing?
What is a legal monopoly?
What is a natural monopoly?
What is a barrier to entry? Give some examples.
How is monopoly different from perfect competition?
Imagine a monopolist could charge a different price to every customer based on how much he or she were willing to pay. How would this affect monopoly profits?
Suppose demand for a monopoly’s product falls so that its profit-maximizing price is below average variable cost.How much output should the firm supply? Hint: Draw the graph.
If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?
Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity. What do you anticipate would happen to prices?
Classify the following as a government-enforced barrier to entry, a barrier to entry that is not governmentenforced, or a situation that does not involve a barrier to entry.a. A city passes a law on how many licenses it will issue for taxicabsb. A city passes a law that all taxicab drivers must
Classify the following as a government-enforced barrier to entry, a barrier to entry that is not governmentenforced, or a situation that does not involve a barrier to entry.a. A patented inventionb. A popular but easily copied restaurant recipec. An industry where economies of scale are very small
A computer company produces affordable, easy-touse home computer systems and has fixed costs of $250.The marginal cost of producing computers is $700 for the first computer, $250 for the second, $300 for the third, $350 for the fourth, $400 for the fifth, $450 for the sixth, and $500 for the
Perfectly competitive firm Doggies Paradise Inc.sells winter coats for dogs. Dog coats sell for $72 each.The fixed costs of production are $100. The total variable costs are $64 for one unit, $84 for two units,$114 for three units, $184 for four units, and $270 for five units. In the form of a
The AAA Aquarium Co. sells aquariums for $20 each. Fixed costs of production are $20. The total variable costs are $20 for one aquarium, $25 for two units, $35 for the three units, $50 for four units, and$80 for five units. In the form of a table, calculate total revenue, marginal revenue, total
In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost
Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?
Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?
Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?
Many firms in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?
Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?
Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product?
Can you name five examples of perfectly competitive markets? Why or why not?
Finding a life partner is a complicated process that may take many years. It is hard to think of this process as being part of a very complex market, with a demand and a supply for partners. Think about how this market works and some of its characteristics, such as search costs. Would you consider
Will a perfectly competitive market display allocative efficiency? Why or why not?
Will a perfectly competitive market display productive efficiency? Why or why not?
What price will a perfectly competitive firm end up charging in the long run? Why?
Do entry and exit occur in the short run, the long run, both, or neither?
Why does exit occur?
Why does entry occur?
What two lines on a cost curve diagram intersect at the shutdown point?
How does the average variable cost curve help a firm know whether it should shut down immediately?
Should a firm shut down immediately if it is making losses?
What two lines on a cost curve diagram intersect at the zero-profit point?
How does the average cost curve help to show whether a firm is making profits or losses?
What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.
How does a perfectly competitive firm calculate total revenue?
What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
How does a perfectly competitive firm decide what price to charge?
What is a “price taker” firm?
What are the four basic assumptions of perfect competition? Explain in words what they imply for a perfectly competitive firm.
A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How “small” is “small”?
Explain how the profit-maximizing rule of setting P = MC leads a perfectly competitive market to be allocatively efficient.
Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them “perfect.” How would you use these two concepts to analyze other market structures and label them “imperfect?”
A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?
If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?
A firm’s marginal cost curve above the average variable cost curve is equal to the firm’s individual supply curve.This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the
Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue.
Suppose that the market price increases to $6, as shown in Table 8.14. What would happen to the profitmaximizing output level?
Look at Table 8.13. What would happen to the firm’s profits if the market price increases to $6 per pack of raspberries?
Would independent trucking fit the characteristics of a perfectly competitive industry?
Firms in a perfectly competitive market are said to be “price takers”—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the
A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: lots of labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To
Compute the average total cost, average variable cost, and marginal cost of producing 60 and 72 haircuts.Draw the graph of the three curves between 60 and 72 haircuts.
Return to Figure 7.3. What is the marginal gain in output from increasing the number of barbers from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns?
A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow.Should the firm make the investment? Show your work.
Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?
How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect the long-run average cost curve of a firm? Can you draw the old curve and the new one on the same axes? How might such an improvement affect other firms in the industry?
It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.
Average cost curves (except for average fixed cost)tend to be U-shaped, decreasing and then increasing.Marginal cost curves have the same shape, though this may be harder to see since most of the marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same
How does fixed cost affect marginal cost? Why is this relationship important?
A common name for fixed cost is “overhead.” If you divide fixed cost by the quantity of output produced, you get average fixed cost. Supposed fixed cost is$1,000. What does the average fixed cost curve look like? Use your response to explain what “spreading the overhead” means.
Small “Mom and Pop firms,” like inner city grocery stores, sometimes exist even though they do not earn economic profits. How can you explain this?
Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?
What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?
What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?
What is a long-run average cost curve?
In choosing a production technology, how will firms react if one input becomes relatively more expensive?
What is a production technology?
What shapes would you generally expect each of the following cost curves to have: fixed costs, variable costs, marginal costs, average total costs, and average variable costs?
How is each of the following calculated: marginal cost, average total cost, average variable cost?
Which costs are measured on per-unit basis: fixed costs, average cost, average variable cost, variable costs, and marginal cost?
What are diminishing marginal returns as they relate to costs?
Are fixed costs also sunk costs? Explain.
Are there fixed costs in the long-run? Explain briefly.
What is the difference between fixed costs and variable costs?
What is the difference between accounting and economic profit?
Would an interest payment on a loan to a firm be considered an explicit or implicit cost?
What are explicit and implicit costs?
Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen
Suppose the cost of machines increases to $55, while the cost of labor stays at $40. How would that affect the total cost of the three methods? Which method should the firm choose now?
Return to the problem explained in Table 7.4 and Table 7.5. If the cost of labor remains at $40, but the cost of a machine decreases to $50, what would be the total cost of each method of production? Which method should the firm use, and why?
Based on your answers to the WipeOut Ski Company in Exercise 7.3, now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of $25 each.a. What will be the company’s profits or losses?b. How can you tell at a glance whether the company is making or losing
The WipeOut Ski Company manufactures skis for beginners. Fixed costs are $30. Fill in Table 7.7 for total cost, average variable cost, average total cost, and marginal cost.
Continuing from Exercise 7.1, the firm’s factory sits on land owned by the firm that could be rented out for$30,000 per year. What was the firm’s economic profit last year?
A firm had sales revenue of $1 million last year. It spent $600,000 on labor, $150,000 on capital and $200,000 on materials. What was the firm’s accounting profit?
If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?
Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers.Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility
What assumptions does the model of intertemporal choice make that are not likely true in the real world and would make the model harder to use in practice?
What do you think accounts for the wide range of savings rates in different countries?
Visit the BLS website and determine if education level, race/ethnicity, or gender appear to impact labor versus leisure choices.
What would be the substitution effect and the income effect of a wage increase?
Think about the backward-bending part of the labor supply curve. Why would someone work less as a result of a higher wage rate?
In the labor-leisure choice model, what is the price of leisure?
Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?
The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington monument.” When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility
Think back to a purchase that you made recently.How would you describe your thinking before you made that purchase?
As a general rule, is it safe to assume that a lower interest rate will encourage significantly lower financial savings for all individuals? Explain.
According to the model of intertemporal choice, what are the major factors which determine how much saving an individual will do? What factors might a behavioral economist use to explain savings decisions?
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