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intermediate microeconomics

Microeconomics 7th Edition Jeffrey M. Perloff - Solutions

7.1 Redraw panel b of the Challenge Solution figure to show that it is possible for trade to increase welfare even when pollution is not taxed or otherwise regulated.
6.12 In Solved Problem 18.3, suppose that the firms will split the cost of a guard if they both vote to hire one. Show the new payoff matrix. Do they hire a guard?
6.11 Every dollar of collective advertising by the beef industry results in $5.67 in additional marginal revenue for producers (as discussed in the Application“What’s Their Beef?”). Is the industry advertising optimally (see Chapter 12)? Explain your answer.
6.10 Anna and Bess are assigned to write a joint paper within a 24-hour period about the Pareto optimal provision of public goods. Let tA denote the number of hours that Anna contributes to the project and tB the number of hours that Bess contributes.The numeric grade that Anna and Bess earn is a
6.9 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 and
6.8 Vaccinations help protect the unvaccinated from disease. Boulier et al. (2007) found 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?
6.7 Two tenants of a mall are protected by the guard service, q. The number of guards per hour demanded by the television store is q1 = a1 + b1p, where p is the price of one hour of guard services.The ice-cream store’s demand is q2 = a2 + b2p.What is the social demand for this service? A
6.6 Guards patrolling a mall protect the mall’s two stores. The television store’s demand curve for guards is strictly greater at all prices than that of the ice-cream parlor. The marginal cost of a guard is $10 per hour. Use a diagram to show the equilibrium, and compare that to the socially
6.5 To prevent overfishing, could one set a tax on fish or on boats? Explain and illustrate with a graph.
6.4 Do publishers sell the optimal number of intermediate microeconomics textbooks? Discuss in terms of public goods, rivalry, and exclusion.
6.3 Are broadcast television and cable television public goods? Is exclusion possible? If either is a public good, why is it privately provided?
6.2 Are heavily used bridges, such as the Brooklyn Bridge and the Golden Gate Bridge, common properties? If so, what can be done to mitigate externality problems?
6.1 List three examples of goods that do not fit neatly into the categories in Table 18.3 because they are not strictly rival or exclusive.
5.2 Suppose in the example in Table 18.2 that the two parties cannot negotiate. The government imposes a tax on the auto body shop equal to the marginal harm it does to the tea house. What is that tax schedule? Does it result in the welfare-maximizing outcome? How does the outcome change if the tax
5.1 List three specific examples where Coasian bargaining may result in the social optimum.
4.2 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? What specific tax(per
4.1 Suppose that the only way to reduce pollution from paper production is to reduce output. The government imposes a tax equal to the marginal harm from the pollution on the monopoly producer.Show that the tax may raise welfare.
3.9 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
3.8 The National Highway Traffic Safety Administration distributed a 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
3.7 Markowitz et al. (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
3.6 Using the numerical example in Appendix 18A, determine the social optimum if the marginal harm of gunk is MCg = 84 (instead of Equation 18A.3).Is there a shortcut that would allow you to solve this problem without algebra? A
3.5 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 (2012).Crop yields increase on days when the temperature rises above 50°, but fall precipitously on days when it is above 86°. Given this relationship
3.4 In Figure 18.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?
3.3 In Figure 18.2, the government may optimally regulate the paper market using a tax on output.A technological change drives down the private marginal cost of production. Discuss the welfare implications if the output tax is unchanged. (Hint:See Solved Problem 18.1.)
3.2 In the paper market example in this chapter, what are the optimal emissions fee and the optimal tax on output (assuming that only a single, constant fee or tax is applied)? (Hint: See Solved Problem 18.1.)
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. It is hoped that these restrictions will reduce carbon and
2.3 Northern Victoria, Australia, imposed a vomit tax on pubs in the Greater Shepparton area that remain open between 3:00 a.m. and 6:00 a.m. The tax was to be used to pay for cleaning up the mess left by drunks who get sick in the street. Pub owners objected that politicians assume that their
2.2 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 Congress to guarantee paid sick days to all workers. Although the Centers for Disease Control and Prevention
2.1 Why is zero pollution not the best solution for society?Can there be too little pollution? Why or why not?
1.4 When a visiting sports team with a superstar athlete plays a home team, the home team benefits financially(such as from selling extra tickets). Do such positive externalities lower social welfare? If not, why not? If so, what could the teams do to solve that problem?
1.3 Analyze the following statement. Is garbage a positive or 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
1.2 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.
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
In the Challenge at the beginning of the chapter, we asked whether free trade benefits a country if it does not regulate its domestic pollution. This issue is increasingly important as nations move toward free trade and trade expands
In a different mall, a stereo store and a television store each decide whether to hire one guard or none—extra guards provide no extra protection. A guard costs 20 per hour. The benefit to each store is 16 per hour. The stores play a game in which they act independently. The table shows their
For the market with pollution in Figure 18.1, what constant, specific tax, t, on output could the government set to maximize welfare?
6.1 Global Gas International offers to subcontract the Halidurton Heavy Construction Corporation to build an oil pipeline from Canada to New Orleans for $500 million. The probability that the oil pipeline will leak causing environmental damage is θ. If so, the legal liabilities will be$600
5.4 Joe has lost a substantial amount gambling at a racetrack today. On the last race of the day, he decides to make a large enough bet on a longshot so that, if he wins, he will make up for his earlier losses and break even on the day. His friend Sue, who won more than she lost on the day, makes
5.3 Draw a person’s utility curve and illustrate that the person is risk averse with respect to a loss but risk preferring with respect to a gain.
5.2 Evan is risk seeking with respect to gains and risk averse with respect to losses. Louisa is risk seeking with respect to losses and risk averse with respect to gains. Illustrate both utility functions. Which person’s attitudes toward risk are consistent with prospect theory? Which of these
5.1 First 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 are given $10,000 if you will make
4.6 In Solved Problem 17.4, advertising increases the probability of high demand to 80%. If all the other information in the Solved Problem stays the same, what is the minimum probability of high demand resulting from advertising such that Gautam decides to invest and advertise?
4.5 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
4.4 Use a decision tree to illustrate how a kidney patient would make a decision about 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
4.3 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
4.2 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 education this year. This investment will raise Kim’s future earnings by $24,000 (in present value terms—see Chapter 16). If they stay together, they will share
4.1 What is the difference—if any—between an individual’s gambling at a casino and buying a stock?What is the difference for society?
3.6 Using information from the Application “Flight Insurance,” calculate the price of fair insurance if the probability were as high as 0.00000077, the frequency in 2001 when many people died in the 9/11 disasters.
3.5 After Superstorm Sandy in 2012, the government offered subsidies to people whose houses were destroyed. How do these subsidies affect the probability that these people will buy insurance and the amount they buy? (Hint: Use a utility curve for a risk-averse person to illustrate your answer. See
3.4 Would risk-neutral people ever buy insurance that was not fair (that was biased against them)?Explain. (Hint: See Solved Problem 17.3.)
3.3 Consider a household that possesses $160,000 worth of valuables such as jewelry. This household faces a 0.2 probability of burglary, in which case it loses $70,000 worth of the valuables. Suppose it can buy an insurance policy for $15,000 that would fully reimburse the amount of loss from
3.2 Lucy, the manager of the medical test firm, Dubrow Labs, worries about being sued for botched results from blood tests. The firm expects to earn a profit of 100 if it is not sued, but only 10 if it is successfully sued. Lucy believes the probability of a successful suit is 5%. If fair insurance
3.1 Lori, who is risk averse, has two pieces of jewelry, each worth $1,000. She wants to send them to her sister in Thailand, but she is concerned about the safety of shipping them. She believes that the probability that the jewelry won’t arrive is θ. Is her expected utility higher if she sends
2.12 Farrell et al. (2000) estimated that the elasticity of demand for lottery tickets is about -1. If the U.K. National Lottery is running its game to make money (it gets a percentage of the total revenues), is it running the lottery optimally? Explain your answer.
2.11 Lisa just inherited a vineyard from a distant relative.In good years (without rain or frost during the 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.
2.10 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
2.9 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
2.8 What is the risk premium if, in Question 2.7, Laura’s utility function were ln W? (Hint: See Solved Problem 17.2.) A
2.7 Suppose that Laura has a utility function of U(W) = W0.5 and an initial wealth of W = $100.How much of a risk premium would she want to participate in a gamble that has a 50% probability of raising her wealth to $120 and a 50% probability of lowering her wealth to $80? (Hint: See Solved Problem
2.6 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).
2.5 Given the information in Solved Problem 17.2, Irma prefers to buy the stock. Show graphically how high her certain income would have to be for her to choose not to buy the stock. (Hint: See Solved Problem 17.2.)
2.4 Suppose that Laura’s utility function is U(W) = W0.5, where W is wealth. Is she risk averse? Show mathematically. C
2.3 Jen’s utility function with respect to wealth is U(W) = 2W. Plot this utility function and illustrate in your figure why Jen is risk averse.
2.2 Suppose that Maoyong’s utility function with respect to wealth is U(W) = ln W (where “ln W”means the natural logarithm of W). Plot this utility function and illustrate in your figure why Maoyong is risk averse.
2.1 Ryan offers to bet Kristin that if a six-sided die comes up with one or two dots showing, he will pay her $3, but if it comes up with any other number of dots, she’ll owe him $2. Is that a fair bet for Kristin? A
1.5 The EZ Construction Company is offered a$20,000 contract to build a new deck for a house.The company’s profit if it does not have to sink piers (vertical supports) down to bedrock will be$4,000. However, if it does have to sink the piers, it will lose $1,000. The probability it will have to
1.4 Tiffany plans to sell pies that she will buy this evening at a street fair tomorrow. If the weather is nice, she will earn $200; however, if it rains, she will lose$60, the amount she would pay for the pies that she won’t be able to sell. The weather forecast says that the chance of rain is
1.3 By next year, the stock you own has a 25% chance of being worth $400 and a 75% probability of being worth $200. What are the expected value and the variance? A
1.2 Asa buys a painting. The probability that the artist will become famous and the painting will be worth$1,000 is 20%. The probability that the painting will be destroyed by fire or some other disaster is 10%. If the painting is not destroyed and the artist does not become famous, it will be
1.1 In a neighborhood with 1,000 houses, 5 catch fire, 7 are damaged by high winds, and the rest are unharmed during a one-year period. What do you estimate is the probability that a house is harmed by fire or high winds? A
We now address the three questions raised in the Challenge: How does a cap on liability affect a firm’s willingness to make a risky investment or to invest less than the optimal amount in safety? How does a cap affect the amount of risk borne by the firm and by the rest of society? How does a cap
The local government collects a property tax of 20 on Scott’s store. If the tax is collected whether or not the store burns, how much fair insurance does Scott buy? If the tax is collected only if the store does not burn, how much fair insurance does Scott buy?
Suppose that Gregg could obtain perfect information so that he can accurately predict whether it will rain far enough before the concert that he could book the band only if needed. How much would he expect to earn, knowing that he will eventually have this perfect information? How much does he gain
5.4 In 2012, the Clarkson Community Schools in Clarkson, Michigan, paid starting teachers $38,087 if they had a bachelor’s degree and $41,802 if they had a master’s degree. (For simplicity, assume that these salaries stay constant and do not increase with experience.) Suppose you know that you
5.3 Which is worth more to you: (a) a $10,000 payment today or (b) a $1,000-per-year higher salary for as long as you work? At what interest rate would (a) be worth more to you than (b)? Does your answer depend on how many years you expect to work? A
5.2 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
5.1 If the interest rate is near zero, should an individual go to college, given the information in the Challenge Solution figure? State a simple rule for determining whether this individual should go to college in terms of the areas labeled Benefit and Cost in the figure.
4.2 In the figure in Solved Problem 16.4, 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? (Hint: See
4.1 If the government bars foreign lenders from loaning money to its citizens, how does the capital market equilibrium change?
3.3 If all the coal in the ground, Q, is to be consumed in two years and the demand for coal is Qt = A(pt)-εin each year t where ε is a constant demand elasticity, what is the price of coal each year?
3.2 Trees, wine, and cattle become more valuable over time and then possibly decrease in value. Draw a 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 should“harvest” such a good assuming that the cost
3.1 You have a barrel of oil that you can sell 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? A
2.18 A firm is considering an investment where its cash flow is π1 = $1 (million), π2 = -$12, π3 = $20, and πt = 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
2.17 A firm’s profit is π = revenue - labor costs -capital costs. Its capital cost can be stated as its internal rate of return on capital, irr, times the value of its capital, pKK, where pK is the price of a unit of capital and K is the number of units of capital. What is the firm’s implicit
2.16 A group that includes former Lakers star Magic Johnson bought the Los Angeles Dodgers for$2.15 billion in 2012. The Dodgers reported earnings of $11.3 million (John Gittelsohn and Nadja Brandt, “Dodgers Costing $2.15 Billion Hinges on Property Return,” businessweek.com, April 4, 2012).
2.15 According to Forbes, a typical National Basketball Association (NBA) franchise would sell for$372 million—though the Knicks were worth$600 million in 2007. NBA teams posted average earnings (before interest, taxes, depreciation, and amortization) of $9.8 million. Assuming that the team can
2.14 To virtually everyone’s surprise, the new Washington Nationals baseball team earned a pre-tax profit of $20 million in 2005, compared to a $10 million loss when the team was the Montreal Expos in 2004 (Thomas Heath, “Nationals’ Expected ’05 Profit Is $20 Million,” Washington Post,
2.13 As discussed in the previous question, 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 16.3
2.12 Lewis Wolff and his investment group bought the Oakland A’s baseball team for $180 million in 2005. Forbes magazine estimated that the team’s net income for that year was $5.9 million. If the new owners believed that they would continue to earn this annual profit (after adjusting for
2.11 An economic consultant explaining the effect on labor demand of increasing health care costs, interviewed for the Wall Street Journal’s Capital column(David Wessel, “Health-Care Costs Blamed for Hiring Gap,” March 11, 2004, A2), states, “Medical costs are rising more rapidly than
2.10 As a resident of New York City, you are considering purchasing a new Toyota Prius. The Prius sells for $20,000. Your annual expense of owning and driving the car is $3,000 (most of which is the cost of parking the car in a Manhattan garage). If you do not purchase the car, you will spend
2.9 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
2.8 Your gas-guzzling car gets only ten 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 $2.00 and you drive 6,000 miles a year. If the interest
2.7 Firms are increasingly offering retiring employees a choice of whether to take a lump-sum payment now or receive monthly payments for the rest of their lives (www.fidelity.com/viewpoints/personalfinance/lump-sum-or-monthly-pension). Discuss the benefits and drawbacks of accepting the lumpsum
2.6 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 a lump-sum payment of $50,000 immediately. The lump-sum option was chosen by 92% of
2.5 You want to buy a room air conditioner. The price of one machine is $200. It costs $20 a year to operate.The price of the other air conditioner is $300, but it costs only $10 a year to operate. Assuming that both machines last 10 years, which is a better deal? (Do you need to do extensive
2.4 You plan to buy a used refrigerator this year for$200 and to sell it when you graduate in two years.Assuming no inflation, you sell the refrigerator for$100 at graduation, and the interest rate is 5%, what is the true cost (your current outlay minus the resale value in current terms) of the
2.3 Pacific Gas & 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 tumbleaction washer. Suppose that the interest rate is 5%.You expect your current washer to die in five
2.2 At a 10% interest rate, do you prefer to buy a phone for $100 or to rent the same phone for $10 a year? Does your answer depend on how long you think the phone will last?
2.1 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

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