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intermediate microeconomics

Microeconomics With Calculus 3rd Global Edition Jeffrey M. Perloff - Solutions

3.3 Many potential buyers value high-quality used cars at the full-information market price of p1 and lemons at p2. A limited number of potential sellers value high-quality cars at v1 … p1 and lemons at v2 … p2. Everyone is risk neutral. The share of lemons among all the used cars that might
3.2 Use Akerlof’s lemons model to explain why restaurants that cater to tourists are likely to serve lowquality meals. Tourists will not return to the area, and they have no information about the relative quality of the food at various restaurants, but they can determine the relative price by
3.1 If you buy a new car and try to sell it in the first year—indeed, in the first few days after you buy it—the price that you get is substantially less than the original price. Use your knowledge about signaling and Akerlof’s lemons model to explain this much-lower price.
2.3 According to Edelman (2011), the widely used online “trust” authorities issue certifications without adequate verification, giving rise to adverse selection. Edelman finds that TRUSTe certified sites are more than twice as likely to be untrustworthy as uncertified sites. Explain why.3. how
2.2 You want to determine whether there is a lemons problem in the market for single-engine airplanes.Can you use any of the following information to help answer this question? If so, how?a. Repair rates for original-owner planes versus planes that have been resold,b. The fraction of planes resold
5. Problems arising from Ignorance When hiring.Companies use signaling and screening to try to eliminate information asymmetries in hiring. Where prospective employees and firms share common interests—such as assigning the right worker to the right task—everyone benefits from eliminating the
4. Market Power from Price Ignorance. If consumers do not know how prices vary across firms, a firm can raise its price without losing all its customers. As a consequence, consumers’ ignorance about price creates market power. In a market that would be competitive with full information, consumer
1.5 While self-employed workers have the option to purchase private health insurance, many— especially younger—workers do not, due to adverse selection.Suppose that half the population is healthy and the other half is unhealthy. The cost of getting exeRCISeS = exercise is available on
1.4 A grocery advertises a low price on its milk as a“loss leader” to induce customers to shop there. It finds that some people buy only milk there and do their other grocery shopping elsewhere. Is that an example of adverse selection or moral hazard?
1.3 A firm spends a great deal of money in advertising to inform consumers of the brand name of its mushrooms. Should consumers conclude that its mushrooms are likely to be of higher quality than unbranded mushrooms? Why or why not?
1.2 California set up its own earthquake insurance program for homeowners. The rates vary by zip code, depending on the proximity of the nearest fault line.However, critics claim that the people who set the rates ignored soil type. Some houses rest on bedrock;others sit on unstable soil. What are
7.2 In the Challenge Solution, where there is no pollution as in panel a of the figure, how do we know that winners from trade can compensate losers and still have enough left over to benefit themselves?
6.13 Anna and Bess are assigned to write a joint paper within a 24-hour period about the Pareto optimal provision of public goods. Let A denote the number of hours that Anna contributes to the project and B the number of hours that Bess contributes.The numeric grade that Anna and Bess earn is a
6.12 In the analysis of the optimal level of a public good, suppose that each person’s utility function is quasilinear: Ui(G) + Pi. Show that the optimal G is unique and independent of P1 and P2 if society has adequate resources. (Hint: See Solved Problem 17.3.) M
6.11 Two tenants of a mall are protected by the guard service, q. The number of guards per hour demanded by the electronics store is q1 = a1 + b1p, where p is the price of one hour of guard services. The icecream store’s demand is q2 = a2 + b2p. What is the social demand for this service? M
6.10 Guards patrolling a mall protect the mall’s two stores. The electronics store’s demand curve for guards is greater at all prices than that of the icecream parlor. The marginal cost of a guard is $10 per hour. Use a diagram to show the equilibrium, and compare that to the socially optimal
6.8 Vaccinations help protect the unvaccinated from disease. Boulier et al. (2007) find that the marginal externality effect can be greater than one case of illness prevented among the unvaccinated. Is vaccination a public good? If so, what might the government do to protect society optimally?652
6.6 You and your roommate have a stack of dirty dishes in the sink. Either of you would wash the dishes if the decision were up to you; however, neither will do it, in the expectation (hope?) that the other will deal with the mess. Explain how this example illustrates the problem of public goods
b. In the social optimum, which groups of drivers will cross? That is, which collection of groups crossing will maximize the sum of the drivers’ utilities? M
a. If the price of crossing equals a driver’s marginal private cost—the price in a competitive market—how many cars per minute will cross?Which groups will cross?
6.5 There are 240 automobile drivers per minute who are considering using the E-ZPass lanes of the Interstate 78 toll bridge over the Delaware River that connects Easton, Pennsylvania, and Phillipsburg, New Jersey. With that many autos, and a 5 mph speed restriction through the E-ZPass sensors,
6.2 Are heavily used bridges, such as the Bay Bridge, Brooklyn Bridge, and Golden Gate Bridge, commons?If so, what can be done to mitigate externality problems?
5.3 To the dismay of business travelers, airlines discretely cater to families with young children who fly first class(Rosman, Katherine, “Frequent Criers,” Wall Street Journal, May 20, 2005, W1). Suppose a family’s value is $4,500 from traveling in first class and $1,500 from traveling in
5.2 Analyze the following statement. Is garbage a positive or a negative externality? Why is a market solution practical here?Since the turn of the twentieth century, hog farmers in New Jersey fed Philadelphia garbage to their pigs. Philadelphia saved $3 million a year and reduced its garbage mound
4.2 In the following, use the model in Exercise 3.7.a. What is the unregulated monopoly equilibrium?b. How could you optimally regulate the monopoly?What is the resulting (socially optimal)equilibrium? (Hint: See Solved Problem 17.2.) M 5. allocating Property Rights to Reduce externalities
4.1 Suppose that the only way to reduce pollution from paper production is to reduce output. The government imposes a tax on the monopoly producer that is equal to the marginal harm from the pollution.Show that the tax may raise welfare. (Hint: See Solved Problem 17.2.)Exercises 651
3.10 Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively high or a relatively low MB curve, so its expected MB curve is the same as the one in Figure
3.9 If global warming occurs, output of three of the major U.S. cash crops could decline by as much as 80% according to Roberts and Schenkler (2010).Crop yields increase on days when the temperature rises above 50°, but fall precipitously on days when it is above 86°. Given this relationship
3.8 Connecticut announced that commercial fleet operators would get a tax break if they converted vehicles from ozone-producing gasoline to what the state said were cleaner fuels such as natural gas and electricity. For every dollar spent on the conversion of their fleets or building alternative
3.7 Suppose that the inverse demand curve for paper is p = 200 - Q, the private marginal cost (unregulated competitive market supply) is MCp = 80 + Q, and the marginal harm from gunk is MCg = Q.a. What is the unregulated competitive equilibrium?b. What is the social optimum?c. What specific tax
3.6 In Figure 17.3, the government may optimally regulate the paper market by taxing output. Given that the output tax remains constant, what are the welfare implications of a technological change that drives down the private marginal cost of production?
3.5 In Figure 17.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?
3.4 In the paper mill example in this chapter, what are the optimal emissions fee and the optimal tax on output (assuming that only one fee or tax is applied)?
3.3 In 1998, the National Highway Traffic Safety Administration distributed the film Without Helmet Laws, We All Pay the Price. Two reasons for this title are that some injured motorcyclists are treated at public expense (Medicaid) and that the dependents of those killed in accidents receive public
3.2 Markowitz (2012) found that limiting the number of liquor stores reduces crime. To maximize welfare taking into account the harms associated with alcohol sales, how should a regulatory agency set the number of liquor licenses? Should the profit maximizing owner of a liquor store lobby for or
3.1 Australia required that incandescent light bulbs be phased out by 2010 in favor of the more fuelefficient compact fluorescent bulbs. Ireland’s ban started in 2009, and the United States started phasing out incandescent bulbs in 2012. These restrictions were designed to reduce carbon and
2.4 Applying the model in Exercise 2.3, use calculus to determine the optimal level of H. M 3. Regulating externalities
2.3 Let H = G - G be the amount that gunk, G, is reduced from the competitive level, G. The benefit of reducing gunk is B(H) = AH. The cost is C(H) = H. If the benefit is increasing but at a diminishing rate as H increases, and the cost is rising at an increasing rate, what are the possible
2.2 In Figure 17.1, explain why area D + E + H is the externality cost difference between the social optimum and the private equilibrium.650 ChapTEr 17 Externalities and Public Goods
2.1 Why isn’t zero pollution the best solution for society?Can there be too little pollution? Why or why not?
1.5 According to the digital media company Captivate Network, employees viewing the 2012 Olympics instead of working caused a $1.38 billion loss in productivity for U.S. companies. Is this productivity loss an example of a negative externality?Explain.2. The Inefficiency of Competition with
1.3 In 2009, when the world was worried about the danger of the H1N1 influenza virus (swine flu), Representative Rosa DeLauro and Senator Edward Kennedy proposed the Healthy Families Act in exeRCISeS = exercise is available on MyEconLab; * = answer appears at the back of this book; M =
1.2 When Star Wars Episode III: Revenge of the Sith opened at 12:01 a.m., Thursday, May 19, 2005, the most fanatical Star Wars fans paid $50 million for tickets to stay up until 3:00 to 4:00 a.m. Businesses around the country, especially those tied to high-tech industries, suffered reduced
1.1 According to a study in the New England Journal of Medicine, your friendships or “social networks” are more likely than your genes to make you obese (Jennifer Levitz, “Can Your Friends Make You Fat?”Wall Street Journal, July 26, 2007, D1). If it is true that people who have overweight
6.1 Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash were as high as the frequency in 2001, 0.00000077? Use a graph to illustrate why a risk-averse person might buy unfair insurance. Show on the graph the risk
5.5 Is someone who acts as described in prospect theory always more likely or less likely to take a gamble than someone who acts as described by expected utility theory? Why? Are there conditions (such as on the weights) where you can answer this question definitively?6. Flight Insurance
5.1 Before reading the rest of this exercise, answer the following two questions about your preferences:a. You are given $5,000 and offered a choice between receiving an extra $2,500 with certainty or flipping a coin and getting $5,000 more if heads or $0 if tails. Which option do you prefer?b. You
4.5 In Solved Problem 16.6, advertising increases the probability of high demand to 80%. What is the minimum probability of high demand resulting from advertising such that Gautam decides to invest and advertise? m 5. Behavioral economics and Uncertainty
4.4 Robert Green repeatedly and painstakingly applied herbicides to kill weeds that would harm his beet crops in 2007. However, in 2008, he planted beets genetically engineered to withstand Monsanto’s Roundup herbicide. Roundup destroys weeds but leaves the crop unharmed, thereby saving a farmer
4.3 Use a decision tree to illustrate how a kidney patient would decide whether to have a transplant operation.The patient currently uses a dialysis machine, which lowers her utility. If the operation is successful, her utility will return to its level before the onset of her kidney disease.
4.2 Use a decision tree to illustrate how a risk-neutral plaintiff in a lawsuit decides whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 60%. If the plaintiff
4.1 Andy and Kim live together. Andy may invest$10,000 (possibly by taking on an extra job to earn the additional money) in Kim’s MBA education this year. This investment will raise the current value of Kim’s earnings by $24,000. If they stay together, they will share the benefit from the
3.5 After Hurricane Katrina in 2005, the government offered subsidies to people whose houses were destroyed. How does the expectation that subsidies will be offered again for future major disasters affect the probability that risk-averse people will buy insurance and the amount they buy? Use a
3.4 An insurance agent (interviewed in Jonathan Clements,“Dare to Live Dangerously: Passing on Some Insurance Can Pay Off,”Wall Street Journal, July 23, 2005, D1) states, “On paper, it never makes sense to have a policy with low deductibles or carry collision on an old car.” But the agent
3.3 Jill possesses $160,000 worth of valuables. She faces a 0.2 probability of a burglary, where she would lose jewelry worth $70,000. She can buy an insurance policy for $15,000 that would fully reimburse the$70,000. Her utility function is U(X) = 4X0.5.a. What is the actuarially fair price for
3.2 Helen, the owner of Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn’t sued, the firm expects to earn a profit of 100, but if it is successfully sued, its profit will be 10. Helen believes that the probability of a successful suit is 5%. If fair
3.1 Lori, who is risk averse, has two pieces of jewelry, each worth $1,000. She plans to send them to her sister’s firm in Thailand to be sold there. She is concerned about the safety of shipping them. She believes that the probability that any box shipped will not reach its destination is . Is
b. Compare Carolyn’s willingness-to-pay to Sanjay’s.Why do they differ? Include a comparison Outcome A Outcome B Probability Earnings Probability Earnings Job 1 0.5 20 0.5 40 Job 2 0.3 15 0.7 45 Job 3 1 30 Exercises 617 of their Arrow-Pratt measures of risk aversion.(Hint: See Solved Problem
a. What is the largest amount that Carolyn is willing to pay to park her car in a garage? What is the maximum amount that Sanjay is willing to pay?
2.13 Carolyn and Sanjay are neighbors. Each owns a car valued at $10,000. Neither has comprehensive insurance(which covers losses due to theft). Carolyn’s wealth, including the value of her car is $80,000.Sanjay’s wealth, including the value of his car is$20,000. Carolyn and Sanjay have
2.11 Joanna is considering three possible jobs. The following table shows the possible incomes she might get in each job.For each job, calculate the expected value, the variance and the standard deviation. If Joanna is averse to risk (as measured by variance), what can you predict about her job
2.10 Lisa just inherited a vineyard from a distant relative.In good years (when there is no rain or frost during harvest season), she earns $100,000 from the sale of grapes from the vineyard. If the weather is poor, she loses $20,000. Lisa’s estimate of the probability of good weather is 60%.a.
2.8 Mary’s utility function is U(W) = W0.33, where W is wealth. Is she risk averse? Mary has an initial wealth of $27,000. How much of a risk premium would she require to participate in a gamble that has a 50% probability of raising her wealth to $29,791 and a 50% probability of lowering her
2.7 Hugo has a concave utility function of U(W) = W0.5. His only asset is shares in an Internet start-up company. Tomorrow he will learn the stock’s value. He believes that it is worth $144 with probability 23 and $225 with probability 13. What is his expected utility? What risk premium would he
2.4 Suppose that an individual is risk averse and has to choose between $100 with certainty and a risky option with two equally likely outcomes: $100 - x and $100 + x. Use a graph (or math) to show that this person’s risk premium is smaller, the smaller x is (the less variable the gamble is).
2.3 Jen, in Exercise 2.2, may buy Stock A or Stock B.Stock A has a 50% chance of being worth $100 and 50% of being worth $200. Stock B’s value is $50 with a change of a half or $250 with a probability of 50%. Show that the two stocks have an equal expected value but different variances. Show that
2.2 Jen’s utility function with respect to wealth is U(W) = 2W. Plot her utility function. Use your figure and calculus to show that Jen is risk averse.(Hint: You can also use calculus to see if she is risk averse by determining the sign of the second derivative of the utility function.) m
1.7 Suppose that most people will not speed if the expected fine is at least $500. The actual fine for speeding is $800. How high must the probability of being caught and convicted be to discourage speeding?m 616 CHApTer 16 Uncertainty 2. attitudes Toward Risk
1.6 To discourage people from breaking the traffic laws, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the fine for speeding. Explain why either method can be used to discourage speeding. Which approach is a
1.4 The EZ Construction Company is offered a$20,000 contract to build a new deck for a house.The company’s profit if they do not have to sink piers (vertical supports) down to bedrock will be$4,000. However, if they have to sink the piers, they exeRCISeS = exercise is available on MyEconLab; * =
1.3 By next year, your stock has a 25% chance of being worth $400 and a 75% probability of being worth$200. What are the expected value and the variance?
1.2 Asa buys a painting. There is a 20% probability that the artist will become famous and the painting will be worth $1,000. There is a 10% probability that the painting will be destroyed by fire or another disaster and become worthless. If the painting is not destroyed and the artist does not
1.1 In a neighborhood with 1,000 houses, 5 catch fire(but are not damaged by high winds), 7 are damaged by high winds (but do not catch fire), and the rest are unharmed during a one-year period. What is the probability that a house is harmed by fire or high winds? m
3. Calculate the amount of fair insurance Scott buys if the tax is collected only if there is no fire. If the tax is collected only if no fire occurs, Scott pays the insurance company 96 and receives 480 if a fire occurs. If there is no fire, Scott’s wealth is 500 - 96 - 20 = 384. If a fire
2. Calculate the amount of fair insurance Scott buys if the tax is always collected.Because Scott is risk averse, he wants to be fully insured so that the after-tax value of his home is the same in both states of nature. If the tax is always collected, Scott pays the insurance company 100. If no
1. Determine the after-tax expected value of the house without insurance. If the tax is always collected, the house is worth 480 = 500 - 20 if it does not burn and -20 if it does burn. Thus, the expected value of the house is 380 = [0.2 * (-20)] + [0.8 * 480].If the tax is collected only if the
3. Calculate his gain from perfect information as the difference between his expected earnings with perfect information and his expected earnings with imperfect information.Gregg’s gain from perfect information is the difference between the expected earnings with perfect information, 7.5, and the
2. Determine how much Gregg would expect to earn before he learns with certainty what the weather will be. Gregg knows that he’ll make 15 with a 50%probability 1 = 12 2 and 0 with a 50% probability, so his expected value, given that he’ll receive perfect information in time to act on it, is
1. Determine how much Gregg would earn if he had perfect information in each state of nature. If Gregg knew with certainty that it would rain at the time of the concert, he would not book the band, so he would make no loss or profit: V = 0.If Gregg knew that it would not rain, he would hold the
4.4 In 2012, the Clarkson Community Schools in Clarkson, Michigan paid its starting teachers $38,087 employees with a bachelor’s degree and $41,802 with a master’s degree. (For simplicity, assume that these salaries stay constant and do not increase with experience.) Suppose you know that you
4.2 At current interest rates, it pays for Bob to go to college if he graduates in four years. If it takes an extra year to graduate from college, does going to college still pay? Show how the figure in the Challenge Solution changes. Illustrate how the present value calculation changes using a
3.3 Trees, wine, and cattle become more valuable over time and then possibly decrease in value. Draw a Exercises 584 CHApTer 15 Factor Markets figure with present value on the vertical axis and years (age) on the horizontal axis and show this relationship. Show in what year the owner
3.2 If all the coal in the ground, Q, is to be consumed in two years and the demand for coal is Qt = A(pt) in each year t where is a constant demand elasticity, what is the price of coal each year? M
3.1 You can sell a barrel of oil today for p dollars.Assuming no inflation and no storage cost, how high would the price have to be next year for you to sell the oil next year rather than now? M
2.20 In the figure in Solved Problem 15.5, suppose that the government’s demand curve remains constant at D1g but the government starts to tax private earnings, collecting 1% of all interest earnings. How does the capital market equilibrium change? What is the effect on private borrowers?3.
2.18 To virtually everyone’s surprise, the Washington Nationals baseball team earned a pretax profit of$20 million in 2005, compared to a $10 million loss when the team was the Montreal Expos in 2004(Heath, Thomas, “Nationals’ Expected ’05 Profit Is $20 Million,” Washington Post, June 21,
2.17 As discussed in Solved Problem 15.3, Lewis Wolff and his investment group bought the Oakland A’s baseball team for $180 million in 2005. Reportedly, Hall-of-Famer Reggie Jackson offered $25 million more but was rebuffed (Forbes, 2005). How would the calculations in Solved Problem 15.3 change
2.16 Your gas-guzzling car gets only 10 miles to the gallon and has no resale value, but you are sure that it will last five years. You know that you can always buy a used car for $8,000 that gets 20 miles to the gallon. A gallon of gas costs $2 and you drive 18“In Other Words . . .” San
2.15 Many retirement funds charge an administrative fee equal to 0.25% on managed assets. Suppose that Alexx and Spenser each invest $5,000 in the same stock this year. Alexx invests directly and earns 5%a year. Spenser uses a retirement fund and earns 4.75%. After 30 years, how much more will
2.14 Dell Computer makes its suppliers wait 37 days on average to be paid for their goods; however, Dell is paid by its customers immediately. Thus, Dell earns interest on this float, the money that it is implicitly borrowing. If Dell can earn an annual interest rate of 4%, what is this float worth
2.13 With the end of the Cold War, the U.S. government decided to downsize the military. Along with a pink slip, the government offered ex-military personnel their choice of $8,000 a year for 30 years or an immediate lump-sum payment of $50,000. The lump-sum option was chosen by 92% of enlisted
2.12 A firm is considering an investment in which its cash flow is 1 = $1 (million), 2 = -$12, 3 = $20, and t = 0 for all other t. The interest rate is 7%.Use the net present value rule to determine whether the firm should make the investment. Can the firm use the internal rate of return rule
2.9 Discussing the $350 price of a ticket for one of her concerts, Barbra Streisand said, “If you amortize the money over 28 years, it’s $12.50 a year. So is it worth $12.50 a year to see me sing? To hear me 583 sing live?”18 Under what condition is it useful for an individual to apply Ms.
2.8 You are buying a new $20,000 car and have the option to pay for the car with a 0% loan or to receive $500 cash back at the time of the purchase.With the loan, you pay $5,000 down when you purchase the car and then make three $5,000 payments, one at the end of each year of the loan. You
2.7 Two different teams offer a professional basketball player contracts for playing this year. Both contracts are guaranteed, and payments will be made even if the athlete is injured and cannot play. Team A’s contract would pay him $1 million today. Team B’s contract would pay him $500,000
2.5 You plan to buy a used refrigerator this year for$200 and to sell it when you graduate in two years.Assuming that you can get $100 for the refrigerator at that time, there is no inflation, and the interest rate is 5%, what is the true cost (your current outlay minus the resale value in current
2.4 Pacific Gas and Electric sent its customers a comparison showing that a person could save $80 per year in gas, water, and detergent expenses by replacing a traditional clothes washer with a new tumble-action washer. Suppose that the interest rate is 5%. You expect your current washer to die in
2.2 If you buy a car for $100 down and $100 a year for two more years, what is the present value of these payments at a 5% interest rate? If the interest rate is i? M
1.15 An economic consultant explaining the effect on labor demand of increasing health care costs, interviewed for the Wall Street Journal’s Capital column(Wessel, David, “Health-Care Costs Blamed for Hiring Gap,” March 11, 2004, A2), states, “Medical costs are rising more rapidly than
1.7 The estimated Cobb-Douglas production function for a U.S. tobacco products firm is q = L0.2K0.3(“Returns to Scale in U.S. Manufacturing” application, Chapter 6). Derive the marginal revenue product of labor for this firm. M Exercises 582 CHApTer 15 Factor Markets

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