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intermediate microeconomics

Microeconomics Theory And Applications With Calculus 5th Global Edition Jeffrey Perloff - Solutions

1. 3.6 A health insurance company tries to prevent the moral hazard of “excessive” dentist visits by limiting the number of compensated visits that a patient can make in a year. How does such a restriction affect moral hazard and risk bearing? Show in a graph.(Hint: See Solved Problem 19.4.)4.
1. 3.5 Suppose now that the publisher in Exercise 2.7 faces a downward-sloping demand curve. The revenue is R(Q), and the publisher’s cost of printing and dis tributing the book is C(Q). Compare the equilibria for the following compensation methods in which the author receives the same total
1. 3.4 Louisa is an avid cyclist who is currently working on her business degree. She normally rides an $800 bike to class. If Louisa locks her bike carefully—locks both wheels—the chance of theft for the term is 5%, but this careful locking procedure is time consuming.If she is less
1. 3.3 If the terms of a franchise agreement are not met, it can damage the reputation of the business. In such a situation, the franchisor may seek to terminate the agreement to recover the trust of its customers and prevent further damage. What effect would a law that limited the ability of a
1. 3.2 Padma has the rights to any treasure on the sunken ship the Golden Calf. Aaron is a diver who special izes 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. 3.1 Traditionally, doctors were paid on a fee-for-service basis. Now doctors’ pay is on a capitated basis: They are paid for treating a patient for a year, regardless of how much treatment is required. In this arrange ment, doctors form a group and sign a capitation contract whereby they take
1. 2.13 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.How would you feel about this compensation pack age if you were a shareholder? What are the
1. 2.12 Now suppose that the owner of Topside Tiles in the previous question changes the manager’s compensa tion to a fixed share (15%) of profit: Y = 0.15π. The situation is otherwise the same as in Exercise 3.11. Are the interests of the owner and manager aligned or in conflict? Is there an
1. 2.11 Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is p = 50- 2Q, and its constant marginal cost is 10. The owner has delegated the decision of how much output to produce to the plant manager. The manager’s income, Y, is 10% of revenue: Y =
1. 2.10 Book retailers can return unsold copies to publishers.Effectively, retailers pay for the books they order only after they sell them. Dowell’s Books believes that it will sell, with 1 2 probability each, either zero or one copy of The Fool’s Handbook of Macroeconom ics. The bookstore
1. 2.9 Indira runs a textile store for Kamala, the owner. Sup pose that the inverse demand curve is p = 100 -0.004Q, where Q is the number of bolts of fabric sold and p is the price of a bolt. The cost Indira incurs in running the store is given by the function C(Q) = 10Q.a. What is the joint
1. 2.8 John manages Rachel’s used CD music store. To pro vide John with the incentive to sell CDs, Rachel offers him 50% of the store’s profit. John has the opportunity to misrepresent sales by fraudulently recording sales that actually did not take place. Let t represent his fraudulent profit.
1. 2.7 The author of a science fiction novel is paid a roy alty of b share of the revenue from sales, where the revenue is R = pq, p is the competitive market price for novels, and q is the number of copies of this book sold. The publisher’s cost of printing and distributing the book is C(q).
1. 2.6 In the duck-carving example with limited informa tion (summarized in the third and fourth columns of Table 19.1), is a fixed-fee contract efficient? If so, why? If not, what additional steps, if any, can Paula take to ensure efficiency?
1. *2.5 A promoter arranges for various restaurants to set up booths to sell Cajun-Creole food at a fair. Appro priate music and other entertainment are provided.Customers can buy food using only “Cajun Cash,”which is scrip that has the same denominations as actual cash and is sold by the fair
1. *2.4 In the duck-carving example with full information(summarized in the second column of Table 19.1), is a contract efficient if it requires Paula to give Arthur a fixed-fee salary of $168 and leaves all the decisions to Arthur? If so, why? If not, what additional steps, if any, can Paula take
1. 2.3 In Solved Problem 19.2, does joint profit increase, decrease, or remain the same as the share of revenue going to Arthur increases?
1. *2.2 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
1. *2.1 When I was in graduate school, I shared an apart ment with a fellow who was madly in love with a woman who lived in another city. They agreed to split the costs of their long-distance phone calls equally, regardless of who placed the calls. (In those days, long-distance calls were expensive
1. 1.7 The U.S. government provides home insurance for floods (see Chapter 16’s Application “Flooded by Insurance Claims”). The government will pay no matter how many times floods destroy a home. Does this policy create a moral hazard problem? Explain.2. Production Efficiency
1.1.6 A publication of a major clinical trial showed that a common knee operation does not improve outcomes for patients with osteoarthritis. Howard, David, and Hockenberry (2017) examined all these operations in Florida from 1998 to 2010. They discovered that after the publication of this article,
1. 1.5 On detecting public health risks in food, rapid information-sharing between member states in the European Union (EU) is an important tool for maintaining food safety. When a member country identifies a serious health risk, an alert notification, for example, is issued to take necessary
1. 1.4 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 Medi care for analyzing 72% more prostate tissue
1. 1.3 A flyer from one of the world’s largest brokers says,“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. *1.2 Some sellers offer to buy back a good later at some prespecified price. Why would a firm make such a commitment?
1.1.1 A government that contracts with a private insurer may compensate that insurer in alternative ways.Discuss which of the following schemes are more likely to lead to opportunistic behavior by insurance companies: the insurer receives a percentage of each approved claim; the insurer receives an
1. 6.2 Can you change the payoffs in the table in the Chal lenge Solution so that the firms choose to invest in safety? Explain.
1. 6.1 In the Challenge Solution, what is the minimum fine the government could levy on firms that do not invest in safety that would lead to a Nash equilib rium in which both firms invest?
1. 5.8 When is statistical discrimination privately inefficient?When is it socially inefficient? Does it always harm members of the discriminated-against group? Explain.6. Challenge
1. 5.7 In Exercises 4.5 and 4.6, describe the equilibrium if cl … ch. (Hint: See Solved Problem 18.4.) M
1. 5.6 In Exercise 4.5, under what conditions is a pooling equi librium possible? (Hint: See Solved Problem 18.4.) M
1. 5.5 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 low-ability worker. The cost per period of education for these types of work ers is ch and cl , respectively, where cl 7 ch. The wages they receive if
1. 5.4 Suppose that you are given wh, wl , and θ in the educa tion signaling model. For what value of c are both a pooling equilibrium and a separating equilibrium pos sible? For what value of c are both types of equilibria possible, and do high-ability workers have higher net earnings in a
1. 5.3 Some firms are willing to hire only high school gradu ates. Based on past experience or statistical evidence, these companies believe that, on average, high school graduates perform better than nongraduates. How does this hiring behavior compare to statistical discrimination by employers on
1. 5.2 Some universities do not give letter grades. One ratio nale is that eliminating the letter-grade system reduces pressure on students, thus enabling them to learn more.Does this policy help or hurt students? (Hint: Consider the role grades play in educating and signaling.)
1. 5.1 In the education signaling model, suppose that firms can pay c* to have a worker’s ability determined by a test. Does it pay for a firm to make this expenditure?
1.4.2 Plumbers, electricians, and professionals from other trades usually don’t advertise their prices. What effect is it likely to have on the equilibrium prices of the services offered by them? Explain.5. Problems Arising from Ignorance When Hiring
1. *4.1 In Solved Problem 18.3, if the vast majority of all consumers knows the true prices at all stores and only a few shoppers have to incur a search cost to learn the prices, is the equilibrium a single price at
1. 3.3 The advertising of prescription-only medicines direct to consumers is prohibited by the Therapeu tic Goods Act 1989 in Australia, but advertising to health professionals is permitted. What effect should such restraints have on equilibrium prices?4. Market Power from Price Ignorance
1. 3.2 Some food manufacturers sell a national brand prod uct for more than an identical private-label product.Is such a firm a noisy monopoly (or oligopoly)?
1. 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?
1. 2.7 The Application “Adverse Selection and Remanufac tured Goods” reports that, for electronic goods sold on eBay, higher seller feedback scores reduce the price dif ferential between new goods and remanufactured goods.Explain why this pattern is consistent with the theory of adverse
1. 2.6 Grocery stores, hotels, and other firms give their cus tomers free loyalty cards. A customer who uses the card receives a discount. Are these firms signaling, screening, price discriminating, or engaging in other activities?
1. 2.5 What actions do John Hancock Life Insurance and other insurance companies take to reduce adverse selec tion? (Hint: See the Application “Discounts for Data.”)
1. 2.4 According to Edelman (2011), the widely used online “trust” authorities issue certifications without adequate verification, giving rise to adverse selec tion. Edelman finds that TRUSTe certified sites are more than twice as likely to be untrustworthy as uncertified sites. Explain why.
1. *2.3 A firm spends a great deal of money in advertis ing 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. *2.2 In July 2016, China implemented its first earthquake insurance policy. It allows homeowners to buy insur ance from private Chinese insurers to cover loss and damage to residential property caused by earthquakes of magnitude of 4.7 Richter or over. The maximum payout is 1 million yuan.
1. 2.1 Some states prohibit insurance companies from using car owners’ home addresses to set auto insur ance rates. Why do insurance companies use home addresses? What are the efficiency and equity impli cations of forbidding such practices?
1. 1. 13 Many wineries in the Napa Valley region of California enjoy strong reputations for producing high-quality wines and want to protect those reputations. Fred T.Franzia, the owner of Bronco Wine Co., sold Napa brand wines that do not contain Napa grapes (Julia Flynn, “In Napa Valley,
1. 1. 12 In Solved Problem 18.2, will any of the firms pro duce high-quality wallets if the cost of producing a higher-quality wallet is only $11? Explain. M
1. 1. 11 In Solved Problem 18.2, show that, if all the other firms produce a high-quality wallet, it pays for one firm to start producing a low-quality wallet. M
1. 1. 8 Suppose that potential used-car buyers value high quality used cars at €10,000 and low-quality used cars at €3,000. Owners of high-quality used-cars have a reservation price of €8,600, while the reser vation price for owners of low-quality used cars is€2,000. Everyone is risk
1. 1. 5 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.
1. 1. 3 You want to determine whether a lemons problem occurs 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 resold planes.b. The fraction of planes resold in each year
1.1. 1 An insurance company insures many motorists, some who are very good drivers and some who are not so good. If it insures a motorist who then drives carelessly, is this an example of adverse selection or moral hazard?
1. *7. 1 Redraw panel b of the Challenge Solution figure to show that it is possible for trade to increase wel fare even when pollution is not taxed or otherwise regulated.
1. 6.17 In the United Kingdom, if a child is missing school without any good reason, local councils and schools can use various legal powers to enforce school attendance. They can, for example, order parents to attend parenting classes, issue a fine, or even jail par ents for up to three months.
1. 6.16 People who use AirBnb, a home-sharing platform, to rent apartments often leave reviews, which provides a means of tracking the number of times properties are rented. Alyakoob and Rahman (2018) found that if Airbnb activity (reviews per household) increases by 2%, Yelp restaurant reviews in
1. 6.15 In Solved Problem 17.3, 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?
1. 6.14 Patent trolls are firms that buy patents in the hope of bringing patent infringement lawsuits against major firms rather than producing goods themselves.Recently, 53 firms such as Google, Microsoft, Ford Motor Company, JP Morgan Chase, Solar City, and Uber have joined the LOT (License of
1. 6.12 In the analysis of the optimal level of a public good, suppose that each person’s utility function is quasi linear: 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 17.4.) M
1. 6.7 Do publishers sell the optimal number of intermedi ate microeconomics textbooks? Discuss in terms of public goods, rivalry, and exclusion.
1. 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
1. 6.5 The French autoroute network is composed of toll motorways with entrances marked as such. A motorist entering the network obtains a ticket from a toll booth and pays a toll when leaving the motorway. Given the number of vehicles traveling these routes, conges tion at both entrances and exits
1. 6.3 In 2020, during the coronavirus pandemic, London saw a surge in traffic as many who normally would have used public transport chose to drive instead.To prevent the roads from becoming unusably congested, the London Congestion Charge, a fee imposed on most vehicles entering the city center,
1. 6.1 List three examples of goods that do not fit neatly into the categories in Table 17.3 because they are not strictly rivalrous or exclusive.
1. 5.3 Austin is going on holiday with his infant daughter and has a first-class air ticket. He values being in first class instead of coach at $300. A CEO has the seat adjacent to him and is considering offering to pay Austin to move to one of the empty seats in coach.a. The CEO values quiet at
1. 5.2 Many European countries generate energy (steam, electricity, or hot water) by burning household and similar waste, reducing their reliance on fossil fuels and diverting waste from scarce landfill space. Accord ing to the Confederation of European Waste-to-energy Plants
1. 5.1 List three specific examples where Coasian bargain ing may result in the social optimum.
1. 4.1 Suppose that the only way to reduce pollution from paper production is to reduce output. The govern ment 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.)
1. 3.13 In 2018, fossil fuel subsidies in the European Union amounted to €50 billion. As a share of GDP, they ranged between 1% (Greece) and less than 0.1%(Luxembourg). Your friend believes that such sub sidies are not only costly to the public, but they also create inefficiency and undermine the
1. 3.9 To reduce emissions caused by households using obso lete heating sources and low-quality fuel, the Polish government launched a program “Clean Air’’, which offers co-financing for the replacement of obsolete sources of heat with thermo-modernization solutions.Depending on a
1. 3.6 In Figure 17.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?
1. 3.4 In Italy, all children and teenagers under the age of 14 must wear a helmet in all skiing areas. Older skiers and snowboarders are encouraged to wear a helmet too. Wearing a ski helmet is widely believed to significantly reduce the risk of head injuries.a. Does the purchase of skis or a
1. 3.2 Markowitz (2012) found that limiting the number of liquor stores reduces crime. To maximize wel fare, 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
1. 3.1 Various countries, including Australia, Ireland, and the United States, require that firms sell more fuel efficient light bulbs (such as compact fluorescent bulbs) instead of incandescent light bulbs. These restrictions were designed to reduce carbon and global warming. What alternative
1. 2.6 In 2009, when the world was worried about the danger of the H1N1 influenza virus (swine flu), Rep resentative Rosa DeLauro and Senator Edward Ken nedy proposed the Healthy Families Act in Congress to guarantee paid sick days to all workers. Although the Centers for Disease Control and
1. 2.5 More than four times as many antibiotics are used for promoting growth and preventing disease in ani mals than for human use (Teillant and Laxminarayan, 2015). The extensive use of antibiotics in live stock contributes to the increase in drug-resistant pathogens in animals that might be
1. 2.4 Applying the model in Exercise 2.3, use calculus to determine the optimal level of H. M
1. 2.3 Let H = G- G be the amount that gunk, G, is reduced from the competitive level, G. The ben efit of reducing gunk is B(H) = AHα. The cost is C(H) = Hβ. 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
1. 2.2 In Figure 17.1, explain why area D + E + H is the externality cost difference between the social opti mum and the private equilibrium.
1. 2.1 Why isn’t zero pollution the best solution for society?Can society have too little pollution? Why or why not?
1. 1. 5 Sporting events like the Tour de France, the FIFA World Cup, or the Jungfrau Marathon distract employees from the work at hand. In this context, would these events be examples of negative exter nalities that affect productivity? Explain.2. The Inefficiency of Competition with Externalities
1. 1. 4 Many of the Florida manatees have made a startling discovery: The warm water pouring out of power plants makes an excellent winter refuge. The warm water prevents them from dying from cold stress. As a result, manatees were reclassified from endangered to threatened in 2016. Do power plants
1. 1. 3 Other sports teams benefit financially from playing a team with a superstar whom fans want to see. Do such positive externalities lower social welfare? If not, why not? If so, what could the teams do to solve that problem?
1. 1. 2 In 2013, the British government reported that 1.4 million more people played sports at least once a week compared to 2005 when the bid to host the 2012 London Olympics was won. Is this an example of a positive externality of the Olympics? Explain.
1.1. 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
1. 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 pipe line will leak, causing environmental damage, is ˜. If so, the legal liabilities will be $600
1.5.5 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 the ory? Why? What conditions (such as on the weights), if any, allow you to answer this question definitively?6. Challenge
1. 5.4 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 atti tudes toward risk are consistent with prospect theory?
1. 5.3 Draw an individual’s utility curve to illustrate that the person is risk averse with respect to a loss but is risk preferring with respect to a gain.
1. 5.2 What are the major differences between expected utility theory and prospect theory?
1. 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.
1. 4.8 R&D investments are a major source of business uncertainty. Do all risk-averse managers fail to invest in R&D? Why or why not?5. Behavioral Economics and Uncertainty
1. 4.7 A risk-neutral firm believes that the probability of a harmful cyberattack (see Application “Risk of a Cyberattack”) is 25%. It expects to make a profit of $200 million if no attack occurs and $120 mil lion if it is attacked. The firm can spend $5 million to increase its electronic
1. 4.6 Because a state’s governor can substantially influence new laws, uncertainty about the outcome of a guber natorial election may affect whether firms make new investments. Shelton and Falk (2018) estimate that in a state with average partisan polarization, dou bling the electoral
1. 4.5 In Solved Problem 16.6, advertising increases the prob ability 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
1. 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 geneti cally engineered to withstand Monsanto’s Roundup herbicide. Roundup destroys weeds but leaves the crop unharmed, thereby saving a
1. 4.3 Use a decision tree to illustrate how a patient with kid ney disease 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
1. 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 set tle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 60%. If the

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