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intermediate microeconomics

Microeconomics 7th Edition Jeffrey M. Perloff - Solutions

1.14 You rent an apartment for two years. You owe a payment of f ∼ today and another equal nominal payment next year. If the inflation rate is γ and the real interest rate is i, what is the present value of these rental payments? A
1.13 How much money do you have to put into a bank account that pays 10% interest compounded annually to receive perpetual annual payments of $200 in today’s dollars if the rate of inflation is 5%? A
1.12 Horizon Ford advertises that it will sell you a Taurus for $24,000 or lease it to you. To lease it, you must make a down payment of $3,000 and agree to pay $3,000 at the end of each of the next two years. After the last lease payment, you may buy the car for $20,000. If you plan to keep the
1.11 How much money do you have to put into a bank account that pays 10% interest compounded annually to receive annual payments of $200 forever? A
1.10 What is the present value of a stream of payments of f per year for t years that starts T years from now if the interest rate is i? A
1.9 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
1.8 What is the present value of $100 paid a year from now and another $100 paid two years from now if the interest rate is i? A
1.7 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% rate of interest? A
1.6 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 sing live?”19 Under what condition is it useful for an individual to apply Ms.
1.5 How does an individual with a zero discount rate weight current and future consumption? How does your answer change if the discount rate is infinite?
1.4 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
1.3 The Web site www.timetravelfund.com discusses investing $1 at 5% interest, which it says will be worth $39,323,261,827.22 in 500 years. Is its calculation correct, and, if so, for what frequency of compounding? If you wish, you may also discuss how good an investment you think this site
1.2 What is the effect of a usury law that limits the market rate of interest if some potential lenders, hoping that the authorities do not catch them, are still willing to loan money at illegally high rates?
1.1 Some past and current civilizations, believing that interest should not be charged, passed usury laws forbidding it. What are the private and social benefits or costs of allowing interest to be charged?
I have often thought that if there had been a good rap group around in those days, I would have chosen a career in music instead of politics. —Richard Nixon Probably the most important human capital decision you’ve had to make was whether to attend college. If you opted to go to college solely
Melody Toyota advertises that it will sell you a Corolla for $14,000 or lease it to you.To lease it, you must make a down payment of $1,650 and agree to pay $1,800 at the end of each of the next two years. After the last lease payment, you may buy the car for $12,000. If you plan to keep the car
4.1 The Challenge points out that if a ball club raises a player’s salary, it increases its fixed cost but not its variable cost. Use a figure to show what effect such an increase has if (a) the firm is competitive or (b) the firm is a monopoly.
3.13 In 2012, the U.S. Department of Justice (DOJ)alleged that eBay and Intuit had an agreement that “barred either firm from soliciting each other’s employees, and for over a year barred at least eBay from hiring any employees from Intuit at
3.12 What effect does a price support have on a monopsony?In particular, describe the equilibrium if the price support is set at the price where the supply curve intersects the demand curve. (Hint: See Solved Problem 15.4.)
3.11 What happens to the monopsony equilibrium if the minimum wage is set slightly above or below the competitive wage? (Hint: See Solved Problem 15.4.)
3.10 Compare welfare in a market where a firm is both a monopsony and a monopoly (as in Question 3.6)to welfare in markets in which the firm has a monopsony in the input market but acts as a price taker in the output market.
3.9 If the monopsony faces a supply curve of p = 10 + Q and has a demand curve of p = 50 - Q, what are the equilibrium quantity and price? How does this equilibrium differ from the competitive equilibrium? A
3.8 Compare the equilibrium quantity and price in two markets: one in which a firm is both a monopsony and a monopoly (as in Question 3.6) and one in which the firm buys inputs competitively but has a monopoly in the output market.
3.7 Compare the equilibrium in a market in which a firm is both a monopoly and a monopsony(as in the previous question) to the competitive equilibrium.
3.6 A firm is a monopoly in the output market and a monopsony in the input market. Its only input is the finished good, which it buys from a competitive market with an upward-sloping supply curve. The firm sells the same good to competitive buyers in the output market. Determine its
3.5 Suppose that a modern plague (AIDS, SARS, Ebola virus, avian flu) wipes out or incapacitates a major share of a small country’s work force.If this country’s labor market is monopsonistic, what effect will this disaster have on wages in this country? Compare your answer to that in Question
3.4 Firms are taxed to pay for workers’ medical care.How is the incidence of a specific tax per worker shared between competitive firms and workers?How does your answer change if the firm is a monopsony?
3.3 Suppose that the original labor supply curve, S1, for a monopsony shifts to the right to S2 if the firm spends $1,000 in advertising. Under what condition should the monopsony engage in this advertising?(Hint: See the monopoly advertising analysis in Chapter 12.)
3.2 A monopsony faces a supply curve of p = 10 + Q.What is its marginal expenditure curve? A
3.1 Can a monopsony exercise monopsony power—profitably setting its price below the competitive level—if the supply curve it faces is horizontal?
2.10 The U.S. Department of Justice (DOJ) accused Apple and five publishers of colluding to fix e-book prices, which Apple wanted to sell for viewing on its iPad. The publishers settled with the DOJ and Apple was found guilty in 2013. Apple’s standard arrangement with book publishers and others
2.9 Apple sold its iPhone to AT&T, which in turn sold it to the final consumers. Suppose that the consumers’constant elasticity demand function for the iPhone was Q = Ap-ε, Apple’s marginal cost of production was m, and AT&T’s marginal cost of reselling the phone wasc. If both Apple and AT&T
2.8 For the first five years after the iPhone was introduced, Apple sold it in the United States with the requirement that it be used only on the AT&T cell phone network. Indeed, Apple took a series of steps to prevent customers from “unlocking” the phone so that it could be used on other
2.7 Can a merger of an upstream and a downstream monopoly help consumers? Explain. (Hint: See Solved Problem 15.3.)
2.6 Many grocery stores charge manufacturers a slotting fee: a one-time fee to place a given good on the shelf. Although stores sometimes claim that these fees are to cover their transaction costs of relabeling shelves and updating their computer files, the fees are too large—$50,000 or
2.5 In 1998, four television networks (including ESPN) agreed to pay $17.6 billion for eight years of National Football League broadcast rights. In three of the deals, the price was more than double that of the previous contracts. What effect would you expect this deal to have on advertising rates
2.4 What is a monopoly’s demand for labor if it uses a fixed-proportions production function in which each unit of output takes one unit of labor and one of capital?
2.3 If a monopoly has a Cobb-Douglas production function, Q = LαKβ, and faces an inverse demand function of p = Q-b, what is its marginal revenue product of labor? (Hint: Use Appendix 6C, and note that the monopoly’s marginal revenue function is MR = [1 - b]Q-b = [1 - b]p.) A
2.2 Does a shift in the supply curve of labor have a greater effect on wages if the output market is competitive or if it is monopolistic?
2.1 How does a monopoly’s demand for labor shift if a second firm enters its output market and the result is a Cournot duopoly equilibrium?
1.10 Suppose that a firm’s production function is q =L + K. Can it be a competitive firm? Explain.
1.9 Oil companies, prompted by improvements in technology and increases in oil prices, are drilling in deeper and deeper water. Using a marginal revenue product and marginal cost diagram of drilling in deep water, show how improvements in drilling technology and increases in oil prices result in
1.8 Suppose that a modern plague (AIDS, SARS, Ebola virus, avian flu) wipes out or incapacitates a major share of a small country’s work force. If this country’s labor market is competitive, what effect will this disaster have on wages in this country?
1.7 If the firm uses a fixed-proportion production process where one unit of labor and one unit of capital produce one unit of output, what is the marginal revenue product of labor?
1.6 How does a fall in the rental price of capital affect a firm’s demand for labor in the long run?
1.5 What effect does an ad valorem tax of α on the revenue of a competitive firm have on that firm’s demand for labor? (Hint: See Solved Problem 15.2.)
1.4 A competitive firm’s production function is q = 2LK. What is its marginal revenue product of labor? (Hint: MPL = 2K and see Solved Problem 15.1.) A
1.3 The Cobb-Douglas production function for a U.S.tobacco products firm is q = L0.2K0.3 (“Returns to Scale in Various Industries” Application, Chapter 6). Derive the marginal revenue product of labor for this firm. (Hint: Use Appendix 6C and see Solved Problem 15.1.) A
1.1 What does a competitive firm’s labor demand curve look like at quantities of labor such that the marginal product of labor is negative? Why?
A paper firm’s short-run Cobb-Douglas production function is q = ALαKβ, where K is the fixed amount of capital. What is its short-run labor demand function? The estimated Cobb-Douglas production function for the paper firm is3 q = L0.6K 0.2. (15.2)That is, A = 1, α = 0.6, and β = 0.2. In the
6.3 Most major electric car manufacturers are split into two rival camps. Each group uses one of two incompatible technologies to charge their cars at recharging stations (similar to gas stations). Both technologies use direct current to charge car batteries to 80% of capacity in less than 20
6.2 How would the analysis in the Challenge Solution change if the Other firms could have picked their standard before Amazon chose?
6.1 Create an example to illustrate the Nash equilibria for the battle of the sexes game described in footnote 13. Discuss whether this game and equilibrium concept make sense for analyzing a couple’s decisions. How might you change the game’s rules so that it makes more sense? (Hint: In this
5.2 A prisoners’ dilemma game is played for a fixed number of periods. The fully rational solution is for each player to defect in each period. However, in experiments with students, players often cooperate for a significant number of periods if the total number of repetitions is fairly large
5.1 Draw a game tree that represents the ultimatum game in which the proposer is a first mover who decides how much to offer a responder and the responder then decides to accept or reject the offer. The total amount available is $50 if agreement is reached, but both players get nothing if the
4.3 Suppose that Firm 1, Firm 2, and Firm 3 are the only three firms interested in the lot at the corner of First Street and Glendon Way. The lot is being auctioned by a second-price sealed-bid auction. Suppose Firm 1 values the lot at v1 = $20,000, Firm 2 at $18,500, and Firm 3 at $16,800. Each
4.2 At the end of performances of his Broadway play“Cyrano de Bergerac,” Kevin Kline, who starred as Cyrano, the cavalier poet with a huge nose, auctioned his prosthetic proboscis, which he and his costar, Jennifer Garner, autographed (Dan Mitchell,“This Time, Santa Has Been Too Naughty,”
4.1 Charity events often use silent auctions. A donated item, such as a date with a movie star (Colin Firth and Scarlett Johansson in 2008) or a former president(Bill Clinton in 2013), is put up for bid. In a silent auction, bidders write down bids and submit them. Some silent auctions use secret
3.15 Show an example of an extensive-form game where a player who moves second has a higher payoff than one who moves first in the subgame perfect Nash equilibrium.
3.14 A gas station at a rest stop along the highway can pay the owner of the rest stop $40,000 to prevent a second station from opening. Without entry, the incumbent gas station’s profit is πi = $100,000.With entry, its duopoly profit would be $45,000 and the entrant would earn a profit of
3.13 Before entry, the incumbent earns a monopoly profit of πm = $10 (million). If entry occurs, the incumbent and entrant each earn the duopoly profit, πd = $3. Suppose that the incumbent can induce the government to require all firms to install pollution-control devices that cost each firm
3.12 Suppose that an incumbent can commit to producing a large quantity of output before the potential entrant decides whether to enter. The incumbent chooses whether to commit to produce a small quantity, qi, or a large quantity. The rival then decides whether to enter. If the incumbent commits to
3.11 A monopoly manufacturing plant currently uses many workers to pack its product into boxes. It can replace these workers with an expensive set of robotic arms. Although the robotic arms raise the monopoly’s fixed cost substantially, they lower its marginal cost because it no longer has to
3.10 Salgado (2008) found that AMD’s cost of manufacturing computer chips was about 12% higher than Intel’s cost because AMD had less learning by doing (Chapter 7) as it had produced fewer units.The more an incumbent firm produces in the first period, the lower its marginal cost in the second
3.9 In 2007, Italy announced that an Italian journalist, Daniel Mastrogiacomo, who had been held hostage for 15 days by the Taliban in Afghanistan, had been ransomed for 5 Taliban prisoners. Governments in many nations denounced the act as a bad idea because it rewarded terrorism and encouraged
3.8 A thug wants the contents of a safe and is threatening the owner, the only person who knows the code, to open the safe. “I will kill you if you don’t open the safe, and let you live if you do.”Should the information holder believe the threat and open the safe? The table shows the value
3.7 Suppose that Panasonic and Zenith are the only two firms that can produce a new type of 3D highdefinition television. The following matrix shows the payoffs (in millions of dollars) from entering this product market:a. If both firms move simultaneously, does either firm have a dominant
3.6 Levi Strauss and Wrangler are planning newgeneration jeans and must decide on the colors for their products. The possible colors are white, black, and violet. The payoff to each firm depends on the color it chooses and the color chosen by its rival, as the profit matrix shows:a. Given that the
3.5 Suppose that Question 1.4 were modified so that GM has no subsidy but does have a head start over Toyota and can move first. What is the Nash equilibrium?Explain.
3.4 In Solved Problem 14.1, suppose that Mimi can move first. What are the equilibria, and why(use an extensive-form diagram)? Now repeat your analysis if Jeff can move first.
3.3 Solve for the Stackelberg subgame perfect Nash equilibrium for the following game tree. What is the joint-profit maximizing outcome? Why is that not the outcome of this game? Leader Sets Output Follower Profits Sets Output (, 2) 48 (64.9, 64.8) 180 64 Firm 2 (54.0, 72.0) 96 (32.4, 64.8) 48
3.2 How does your analysis in the previous question change if the government imposes a lump-sum franchise tax of 40 on each firm (that is, the payoffs in the matrix are all reduced by 40). Now explain how your analysis would change if the firms have an additional option of shutting down and
3.1 Two firms are planning to sell 10 or 20 units of their goods and face the following profit matrix:a. What is the Nash equilibrium if both firms make their decisions simultaneously?b. Draw the game tree if Firm 1 can decide first.What is the outcome? Why?c. Draw the game tree if Firm 2 can
2.2 In the repeated-game airline example in Solved Problem 14.2, what happens if the players know the game will last only five periods? What happens if the game is played forever but the managers of one or both firms care only about current profit?
2.1 In a repeated game, how does the outcome differ if firms know that the game will be (a) repeated indefinitely, (b) repeated a known, finite number of times, and (c) repeated a finite number of times but the firms are always unsure whether the current period will be the last? (Hint: See Solved
1.16 Show that advertising is a dominant strategy for both firms in both panels of Table 14.4. Explain why that set of strategies is a Nash equilibrium.
1.15 Lori employs Max. She wants him to work hard rather than to loaf. She considers offering him a bonus or not giving him one. All else the same, Max prefers to loaf.If they choose actions simultaneously, what are their strategies? Why does this game have a different type of equilibrium than the
1.14 Modify the payoff matrix in the game of chicken in the previous question so that the payoff is -2 if neither driver swerves. How does the equilibrium change? (Hint: See Solved Problem 14.1.) A
1.13 Two guys suffering from testosterone poisoning drive toward each other in the middle of a road.As they approach the impact point, each has the option of continuing to drive down the middle of the road or to swerve. Both believe that if only one driver swerves, that driver loses face (payoff =
1.12 Two firms face the following payoff matrix:Given these profits, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price. Does either firm have a dominant strategy?Does this game have a unique, pure-strategy Nash equilibrium? Identify all pure- and
1.11 Suppose that you and a friend play a “matching pennies” game in which each of you uncovers a penny. If both pennies show heads or both show tails, you keep both. If one shows heads and the other shows tails, your friend keeps them. Show the payoff matrix. What, if any, is the pure-strategy
1.10 Takashi Hashiyama, president of the Japanese electronics firm Maspro Denkoh Corporation, was torn between having Christie’s or Sotheby’s auction the company’s $20 million art collection, which included a van Gogh, a Cézanne, and an early Picasso (Carol Vogel, “Rock, Paper, Payoff,”
1.9 In their study of cigarette advertising, Roberts and Samuelson (1988) found that the advertising of a particular brand affects overall market demand for cigarettes but does not affect the brand’s share of market sales. Suppose the demand for brand i is qi = a + b(Ai + Aj)0.5, where Ai is
1.8 Modify the previous question so that if Firm 1 chooses High and Firm 2 chooses Low (the upper right corner), Firm 1 receives 1 rather than 3. How does that change your answer?
1.7 Firm 1 and Firm 2 manufacture blankets. They compete in quality. Given their payoff matrix, identify each firm’s best response to its rival’s actions.What is the Nash equilibrium? Low 1 Low 1 Firm 1 Medium 2 High 3 Firm 2 Medium 3 High 3 2 4 6 6 S 3 2 5 4 8 5
1.6 Suppose Procter & Gamble (PG) and Johnson &Johnson (JNJ) are simultaneously considering new advertising campaigns. Each firm may choose a high, medium, or low level of advertising. What are each firm’s best responses to its rival’s strategies?Does either firm have a dominant
1.5 Two stars—the 100-meter gold medalist and the 200-meter gold medalist—agree to a 150-meter duel. Before the race, each athlete decides whether to improve his performance by taking anabolic steroids.If one athlete takes steroids and the other doesn’t, the first athlete will win. Each
1.3 Two firms face the following profit matrix:Is it true that, given this profit matrix, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price? Does either firm have a dominant strategy? What is the Nash equilibrium in this game? Explain. Firm 2 Low Price High
1.2 Two firms compete by advertising. Given the payoff matrix to this advertising game, identify each firm’s best response to its rival’s possible actions.Does either firm have a dominant strategy? What is the Nash equilibrium? Firm 2 Do Not Advertise Firm 1 Do Not Advertise Advertise 1
1.1 Show the payoff matrix and explain the reasoning in the prisoners’ dilemma example where Larry and Duncan, possible criminals, will get one year in prison if neither talks; if one talks, one goes free and the other gets five years; and if both talk, both get two years. (Note: The payoffs are
We can use all the methods that we’ve covered in this chapter to analyze the Challenge questions posed at the beginning of the chapter about a game where e-book reader manufacturers choose e-book standards. We’ll start by answering the question about the outcome if firms had engaged in a
In the first stage of a game between an incumbent and a potential rival, the incumbent builds its plant using either an inflexible technology that allows it to produce only a(large) fixed quantity, or a flexible technology that allows it to produce small or large quantities. In the second stage,
Mimi wants to support her son Jeff if he looks for work but not otherwise. Jeff(unlike most young people) wants to try to find a job only if his mother will not support his life of indolence. Their payoff matrix isIf Jeff and Mimi choose actions simultaneously, what are the pure- or mixed-strategy
7.2 Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of government intervention, the market has a Nash-Cournot equilibrium. Suppose demand is linear, p = 1
7.1 Using our duopoly airlines example, (falsely)assume that the corporation that owns United Airlines is located in one country and American’s is located in another.a. If only United’s government provides a $48 per passenger subsidy, determine the equilibrium prices, quantities, and profits.b.
6.6 An incumbent firm, Firm 1, faces a potential entrant, Firm 2, with a lower marginal cost. The market demand curve is p = 120 - q1 - q2. Firm 1 has a constant marginal cost of $20, while Firm 2’s is $10.a. What are the Nash-Cournot equilibrium price, quantities, and profits if the government
6.5 In a monopolistically competitive market, the government applies a specific tax of $1 per unit of output.What happens to the profit of a typical firm in this market? Does the number of firms in the market change? Why? (Hint: See Solved Problem 13.5.)
6.4 Does an oligopolistic or a monopolistically competitive firm have a supply curve? Why or why not?(Hint: See the discussion in Chapter 11 of whether a monopoly has a supply curve.)
6.3 In the monopolistically competitive airlines model, what is the equilibrium if firms face no fixed costs?
6.2 In 2010 and 2011, the government gave incentives to new businesses. A new firm could write off $10,000 in startup costs, they could write off new capital investment, investors who invested in startups and small businesses would be exempt from capital gains tax if they sold their stakes for a

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