Microeconomics 7th Edition Jeffrey M. Perloff - Solutions

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5.3 In the application “Aggregating the Demand for Broadband Service” (based on Duffy-Deno, 2003), the demand function is Qs = 5.97p-0.563 for small firms and Ql = 8.77p-0.296 for larger ones. As the graph in the application shows, the two demand functions cross. What are the elasticities of
5.2 Calculate the elasticity of demand, if the demand function isa. Q = 120 - 2p + 4Y, at the point where p = 10, Q = 20,b. Q = 10p-2. (Hint: See Solved Problem 2.2.) M
5.1 The U.S. Tobacco Settlement Agreement between the major tobacco companies and 46 states caused the price of cigarettes to jump 45¢ (21%) in November 1998. Levy and Meara (2006) find only a 2.65%drop in prenatal smoking 15 months later. What is the elasticity of demand for prenatal smokers? M
4.8 Suppose the demand function for carpenters is Q = 100 - w, and the supply curve is Q = 10 + 2w - T, where Q is the number of carpenters, w is the wage, and T is the test score required to pass the licensing exam. By how much do the equilibrium quantity and wage vary as T increases?5.
4.7 Given the answer to Exercise 2.3, what effect does a U.S. quota on steel of Q 7 0 have on the equilibrium in the U.S. steel market? (Hint: The answer depends on whether the quota binds: is low enough to affect the equilibrium.)
c. With the specific tax in place, calculate the equilibrium price and quantity of cigarettes as a function of wholesale price. How does the presence of the quantity tax affect dQ*/dpw? M
b. Now suppose that New York City and State each impose a $1.50 specific tax on each pack of cigarettes, for a total of $3.00 per pack on all cigarettes possessed for sale or use in New York City. The retailers pay the tax. Using both math and a graph, show how the introduction of the tax shifts
a. Assume that the New York retail market for cigarettes is competitive. Calculate the equilibrium price and quantity of cigarettes as a function of the wholesale price. Let Q* represent the equilibrium quantity. Find dQ*/dpw.
4.6 Lewit and Coate (1982) estimated that the price elasticity of demand for cigarettes is -0.42. Suppose that the daily market demand for cigarettes in New York City is Q = 20,000p-0.42 and that the inverse market supply curve of cigarettes in the city is p = 1.5pw, where pw is the wholesale price
b. Use a supply-and-demand analysis to show the effect of decreased income on the equilibrium price of rental homes. That is, find dp/dY. Does a decrease in median income lead to a decrease in the equilibrium rental price? (Hint: See Solved Problem 2.1.) M
a. Derive the equilibrium price, p, and quantity, Q, in terms of Y.
4.5 Due to a recession that lowered incomes, the 2008 market prices for last-minute rentals of U.S. beachfront properties were lower than usual. Suppose that the inverse demand function for renting a beachfront property in Ocean City, New Jersey, during the first week of August is p = 1,000 - Q +
4.4 Using calculus, determine the effect of an increase in the price of beef, pb, from $4 to $4.60 on the equilibrium price and quantity in the Canadian pork example. (Hint: Conduct an analysis that differs from that in Solved Problem 2.1 in that the shock is to the demand curve rather than to the
4.3 The supply function is Q = 20 + 3p - 20r, and the demand function is Q = 220 - 2p, where r is the rental cost of capital. How do the equilibrium price and quantity vary with r? (Hint: See Solved Problem 2.1.) M
4.2 Ethanol, a fuel, is made from corn. Ethanol production increased more than 8.5 times from 1,630 million gallons in 2000 to 13,900 million gallons in 2011 (www.ethanolrfa.org/pages/statistics). Use a supply-and-demand diagram to show the effect of this increased use of corn for producing ethanol
4.1 The 9/11 terrorist attacks caused the U.S. airline travel demand curve to shift left by an estimated 30% (Ito and Lee, 2005). Use a supply-anddemand diagram to show the likely effect on price and quantity (assuming that the market is competitive).Indicate the magnitude of the likely equilibrium
4. Shocking the equilibrium: Comparative Statics
3.3 Green, Howitt, and Russo (2005) estimate the supply and demand curves for California processing tomatoes. The supply function is ln Q = 0.2 + 0.55 ln p, where Q is the quantity of processing tomatoes in millions of tons per year and p is the price in dollars per ton. The demand function is ln Q
2.3 Between 1971 and 2006, the United States from time to time imposed quotas or other restrictions on importing steel. A quota says that no more than Q 7 0 units of steel can be imported into the country.Suppose both the domestic supply curve of steel, Sd, and the foreign supply curve of steel for
2.2 If the U.S. supply function of corn is Qa = 10 + 10p and the supply function of the rest of the world is Qr = 5 + 20p, what is the world supply function?(Hint: Note that there is a kink in the world supply function.)
2.1 Given the pork supply function in Equation 2.6, how does the supply function that is only a function of price, Equation 2.7, change if the price of hogs doubles to $3 per kg? M
4. Explain why. The reason consumers must absorb the entire tax is that firms will not supply the good at a price that is any lower than they received before the tax, p1. Thus, the price must rise enough that the price suppliers receive after tax is unchanged. As consumers do not want to consume as
3. Compare the before- and after-tax equilibria. The specific tax causes the equilibrium quantity to fall from Q1 to Q2, the price firms receive to remain at p1, and the equilibrium price consumers pay to rise from p1 to p2 = p1 + 1. The entire incidence of the tax falls on consumers:p =p2 -
We’ve already seen that firms are able to pass on some or all of the tax collected from them to consumers. We now show that, if the tax is collected from consumers, they can pass the producers’ share back to the firms.2.6 Effects of a Sales Tax
Our third question is, “Does the equilibrium or the incidence of the tax depend on whether the tax is collected from producers or consumers?” Surprisingly, in the supply-and-demand model, the equilibrium and the incidence of the tax are the same regardless of whether the government collects the
2. Show how the tax shifts the supply curve and determine the new equilibrium.A specific tax of $1 shifts the pretax supply curve, S1, upward by $1 to S2, which is horizontal at p1 + 1. The intersection of D and S2 determines the after-tax equilibrium, e2, where the price consumers pay is p2 = p1 +
1. Determine the equilibrium in the absence of a tax. Before the tax, the perfectly elastic supply curve, S1 in the graph, is horizontal at p1. The downward- sloping linear demand curve, D, intersects S1 at the pretax equilibrium, e1, where the price is p1 and the quantity is Q1.
3. Do the equilibrium price and quantity depend on whether the tax is assessed on consumers or on producers?
2. Is it true, as many people claim, that taxes assessed on producers are passed along to consumers? That is, do consumers pay for the entire tax, or do producers pay part of it?
1. What effect does a sales tax have on a product’s equilibrium price and quantity?
6.3 Adrienne, a manager of a large firm, must decide whether to launch a new product or make a minor change to an existing product. The new product has a 30% chance of being a big success and generating profits of $20 million, a 40% chance of being fairly successful and generating profits of$5
6.2 In 2012, Hewlett-Packard Co. announced that its new chief executive, Meg Whitman, would receive a salary of $1 and about $16.1 million in stock options, which are valuable if the stock does well(marketwatch.com, February 3, 2012). How would you feel about this compensation package if you were a
6.1 In the Challenge Solution, show that shareholders’expected earnings are higher with the new compensation scheme than with the original one.
5.2 In the contract choice example in the chapter, what are the implications for risk bearing of the fixed-fee and contingent contract if the sales revenue varies with market conditions? Will a worker’s attitude toward risk affect which contract the worker chooses?
4.2 Fourteen states have laws that limit conditions under which a franchisor (such as McDonald’s)can terminate a franchise agreement. Franchisees typically pay the franchisor a fixed fee or a share of revenues. What effects would such laws have on production efficiency and risk bearing? (Hint:
4.1 List as many ways as possible that a principal can reassure an agent that it will avoid opportunistic behavior.
3.6 When rental cars are sold on the used car market, they are sold for lower prices than cars of the same model and year that were owned by individual owners. Does this price difference reflect adverse selection or moral hazard? Could car rental companies reduce this problem by carefully
3.5 As of 2008, Medicare stopped covering the costs of a surgeon leaving an instrument in a patient, giving a patient transfusions of the wrong blood type, certain types of hospital-acquired infections, and other“preventable” mistakes (Liz Marlantes, “Medicare Won’t Cover Hospital Mistakes:
3.4 Explain why full employment may be inconsistent with no shirking.
3.3 In the previous question, suppose that for each extra $1,000 of bonding that the firm requires a worker to post, the firm must pay that worker $10 more per period to get the worker to work for the firm. What is the minimum bond that deters stealing?(Hint: See Solved Problem 20.5.) A
3.2 In Solved Problem 20.5, a firm calculated the optimal level of monitoring to prevent stealing. If G = $500 and θ = 20%, what is the minimum bond that deters stealing? A
3.1 Many law firms consist of partners who share profits.On being made a partner, a lawyer must post a bond, a large payment to the firm that will be forfeited on bad behavior. Why?
2.12 Suppose now that the textbook publisher in the previous question faces a downward-sloping demand curve. The revenue is R(Q), and the publisher’s cost of printing and distributing the book is C(Q).Compare the equilibria for the following compensation methods in which the author receives the
2.11 Suppose that a textbook author is paid a royalty ofα share of the revenue from sales where the revenue is R = pq, p is the competitive market price for textbooks, and q is the number of copies of this textbook (which is similar to others on the market)sold. The publisher’s cost of printing
2.10 In the National Basketball Association (NBA), the owners share revenue but not their costs. Suppose that one team, the LA. Clippers, sells only generaladmission seats to a home game with the visiting Philadelphia 76ers (Sixers). Suppose that the inverse demand for the Clippers-Sixers tickets
2.9 Jack and Jill live in different cities. Regardless of which one chooses to fly to visit the other, they agree to split the cost of the flight equally. What is the implication of this fee-sharing arrangement?(Hint: See Solved Problem 20.4.)
2.8 In Solved Problem 20.4, does joint profit increase, decrease, or remain the same as the share of revenue going to Ann increases?
2.7 Zhihua and Pu are partners in a store in which they do all the work. They split the store’s business profit equally (ignoring the opportunity cost of their own time in calculating this profit). Does their business profit-sharing contract give them an incentive to maximize their joint economic
2.6 Patrick, the owner, makes the same offer to the manager at each of his stores: “At the end of the year, pay me a lump-sum of $100,000, and you can keep any additional profit.” Astrid, a manager at one of the stores, gladly agrees, knowing that the total profit at the store will
2.5 In the situation described in the previous question, how do your answers change if Arnie’s first contract changes so that he receives a basic fixed wage of 10 and, in addition, a bonus equal to 80% of any net income?
2.4 Priscilla hires Arnie to manage her store. Arnie’s effort is given in the left column of the table. Each cell shows the net profit to Priscilla (ignoring Arnie’s cost of effort).Arnie’s personal cost of effort is 0 at low effort, 10 at medium effort, and 30 at high effort. It is equally
2.3 Traditionally, doctors have been paid on a fee-forservice basis. Now doctors are increasingly paid on a capitated basis (they get paid for treating a patient for a year, regardless of how much treatment is required), though a patient may still have to pay a small fee each visit. In this
2.2 A health insurance company tries to prevent the moral hazard of “excessive” dentist visits by limiting the visits per person per year to a specific number. How does such a restriction affect moral hazard and risk bearing? Show these results in a graph. (Hint: See Solved Problem 20.2.)
2.1 Padma has the rights to any treasure on the sunken ship the Golden Calf. Aaron is a diver who specializes in marine salvage. If Padma is risk averse and Aaron is risk neutral, does paying Aaron a fixed fee result in efficiency in risk bearing and production?Does your answer turn on how
1.8 Sarah, the manager of a bank, can make one of two types of loans. She can loan money to local firms, and have a 75% probability of earning $100 million and a 25% probability of earning $80 million. Alternatively, she can loan money to oil speculators, and have a 25% probability of earning$400
1.7 A study by Jean Mitchell found that urologists in group practices that profit from tests for prostate cancer order more of them than doctors who send samples to independent laboratories. Doctors’groups that perform their own lab work bill Medicare for analyzing 72% more prostate tissue
1.6 According to a flyer from one of the world’s largest brokers, “Most personal investment managers base their fees on a percentage of assets managed.We believe this is in your best interest because your manager is paid for investment management, not solely on the basis of trading commissions
1.5 Some sellers offer to buy back a good later at some prespecified price. Why would a firm make such a commitment to deal with moral hazard concerns?
1.4 California set up its own earthquake insurance program.Because the state agency in charge has few staff members, it pays private insurance carriers to handle claims for earthquake damage. These insurance firms receive 9% of each approved claim. Is this compensation scheme likely to lead to
1.3 A promoter arranges for many different restaurants to set up booths to sell Cajun-Creole food at a fair.The promoter provides appropriate music and other entertainment. Customers can buy food using only “Cajun Cash,” which is scrip with the same denominations as actual cash sold by the
1.2 In 2012, a California environmental group found that 14 plum and ginger candies imported from Asia contained 4 to 96 times the level of lead allowed under California law (Stephanie M. Lee,“Lead Found in Asian Candies,” San Francisco Chronicle, August 14, 2012). Some observers predicted that
1.1 Sometimes a group of hungry students will go a restaurant and agree to share the bill at the end regardless of who orders what. What is the implication of this fee-sharing arrangement on the size of the overall bill? Why?
In the aftermath of the financial crisis of 2007–2009, most economists and government officials concluded that banks and many other firms in the financial sector had taken on excessive risks. In Solved Problem 20.1, we answered the first question in our Challenge as to why bankers take on
Workers post bonds of B that are forfeited if they are caught stealing (but no other punishment is imposed). Each extra unit of monitoring, M, raises the probability that a firm catches a worker who steals, θ, by 5%. A unit of M costs $10. A worker can steal a piece of equipment and resell it for
Gary’s demand for doctor visits depends on his health. Half the time his health is good and his demand is D1 in the figure. When his health is poor, his demand is D2. Gary is risk averse. Without medical insurance, he pays $50 a visit. With full insurance, he pays a fixed fee at the beginning of
Traditionally the Las Vegas Home Bank made only prime loans—providing mortgages just to people who were very likely to repay the loans. However, Leonardo, a senior executive at the bank, is considering offering subprime loans—mortgages to speculators and other less creditworthy borrowers. If he
6.2 What is the minimum fine that the government could levy on firms that do not invest in safety that would lead to a Nash equilibrium in which both firms invest?
6.1 Can you change the payoffs in the table in the Challenge Solution so that the firms choose to invest in safety? Explain. A
5.8 Some firms are willing to hire only high school graduates.On the basis of past experience or statistical evidence, these companies believe that high school graduates perform better than nongraduates, on average. How does this hiring behavior compare to statistical discrimination by employers on
5.7 When is statistical discrimination privately inefficient?When is it socially inefficient? Does it always harm members of the discriminated-against group?
5.6 In the ability signaling model, suppose that firms can pay c* to have a worker’s ability determined through a test. Does it pay for a firm to make this expenditure?
5.5 Certain universities do not give letter grades. One rationale is that eliminating the letter-grade system reduces the pressure on students, thus enabling them to do better in school. Why might this policy help or hurt students?
5.4 In Questions 5.2 and 5.3, describe the equilibrium if cl … ch.
5.3 In Question 5.2, under what conditions is a pooling equilibrium possible? A
5.2 Education is a continuous variable, where eh is the years of schooling of a high-ability worker and el is the years of schooling of a lower-ability worker.The cost per period of education for these types of workers is ch and cl, respectively, where cl 7 ch.The wages they receive if employers
5.1 Suppose that you are given wh, wl, and θ in the signaling model in the chapter. For what value of c are both a pooling equilibrium and a separating equilibrium possible? For what value of c are both types of equilibria possible and do high-ability workers have higher net earnings in a
4.2 The Federal Trade Commission objected to the California Dental Association’s prohibitions against its members engaging in advertising about prices, calling them restraints on trade. What effect should such restraints have on equilibrium prices?
4.1 In Solved Problem 19.3, if the vast majority of all consumers know the true prices at all stores and only a few shoppers have to incur a search cost to learn the prices, would firms set a single-price equilibrium price at the monopoly level, pm?
3.3 Sometimes a firm sells the same product under two brand names at different prices. For example, although the Chevy Tahoe and the GMC Yukon are virtually twins, the 2014 Yukon sells for $1,355 more than the 2014 Tahoe. Give an asymmetric information explanation as to why the firm might use pairs
3.2 The “Reducing Consumers’ Information” Application notes that a food manufacturer may sell a national brand product for more than an identical private-label product. Is the firm a noisy monopoly(or oligopoly)?
3.1 Explain how a monopoly firm can price discriminate by advertising sales in newspapers or magazines that only some of its customers see. Is it a noisy monopoly?
2.4 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.
2.3 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?
2.2 The state of 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
2.1 Some states prohibit insurance companies from using car owners’ home addresses to set auto insurance rates. Why do insurance companies use home addresses? What are the efficiency and equity implications of forbidding such practices?
1.12 In the world of French high cuisine, a threestar rating from the Michelin Red Guide is a widely accepted indicator of gastronomic excellence.French consumers consider Gault Milleau, another restaurant guide, not as authoritative as the Michelin guide because Gault Milleau, unlike Michelin,
1.11 It costs $12 to produce a low-quality electric stapler and $16 to produce a high-quality stapler.Consumers cannot distinguish good staplers from poor staplers when they make their purchases. Four firms produce staplers. Consumers value staplers at their cost of production and are risk neutral.
1.10 In Solved Problem 19.2, would any of the firms produce high-quality wallets if the cost of producing a higher-quality wallet was only $11?Explain. A
1.9 In Solved Problem 19.2, show that, if all the other firms were producing a high-quality wallet, it would pay for one firm to start producing a lowquality wallet. A
1.8 Suppose that the buyers in the previous question incur a transaction cost of $800 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium? Is it possible that no cars are sold? (Hint: See Solved Problem 19.1.) A
1.7 Many 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 potentially
1.6 What are the answers to Solved Problem 19.1 if customers are willing to pay $10,000 for a good used car?
1.5 Use the lemons model to explain why restaurants that cater to tourists are likely to serve low-quality meals. Tourists will not return to this area, and they have no information about the relative quality of the food at various restaurants, but they can determine the relative price by looking
1.4 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 the lemons model to give one explanation for why.
1.3 You want to determine whether the market for single-engine airplanes has a lemons problem. 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 resoldb. The fraction of planes resold in each
1.2 Suppose that half the population is healthy and the other half is unhealthy. If an insured healthy person gets sick, the full cost to the insurance company is$1,000. If an insured unhealthy person gets sick, the cost to the insurance company is $10,000. In a given year, any one person (healthy
1.1 According to a 2007 study by the Federal Trade Commission, 4.8 million U.S. consumers were victims of weight-loss fraud, ranging from a tea that promised to help people shed pounds to fraudulent clinical trials and fat-dissolving injections. Do these frauds illustrate adverse selection or moral
In the Challenge at the beginning of the chapter, we asked two questions: Does a firm underinvest in safety if it knows how dangerous a job is but potential employees do not? Can the government intervene to improve this situation?
Suppose that everyone in our used car example is risk neutral, and potential car buyers value lemons at $4,000 and good used cars at $8,000. The reservation price of lemon owners is $3,000 and the reservation price of owners of high-quality used cars is $7,000. The share of current owners who have
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?

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Microeconomics 7th Edition Jeffrey M. Perloff - Solutions

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