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macroeconomics principles
Macroeconomics In Context 4th Edition Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras - Solutions
3. What is an English auction?
2. What is the difference between an open-outcry auction and a sealed bid auction?
1. How do auctions help in price discovery?
11. Suppose there are 1,001 sellers with used cars that they value at (i.e., their willingness to accept is) $0, $100, $200, $300, . . . , $9,900, $10,000. There are many buyers who place a higher value on each car than the current owners: $1,000 higher, to be exact. For example, a car worth
10. The government wants to reduce white-collar crime.a. Suppose for the moment that innocent people are never wrongly convicted of a crime. Explain why the Becker model of crime and punishment suggests that we increase the fines people pay if they are convicted instead of hiring more people to
9. Janet Yellen, the Chair of the Federal Reserve, is married to the Nobel Prize-winning economist George A. Akerlof. When they hired babysitters in the 1980s, they decided to pay wages that were higher than the going wage for babysitters. If they could get a babysitter at a lower wage, what could
8. The problem of public goods provision (discussed earlier in the textbook) can also be thought of as a problem of asymmetric information. Suppose there is a house with five roommates. Each roommate places the following value on having a communal fridge, which costs $500. Given that the total
7. Steven Levitt and Chad Syverson compared instances of home sales in which real estate agents were hired by others to sell a home to instances in which an agent sold his or her own home. They found that homes owned by real estate agents sold for 3.7 percent more than other houses and stayed on
6. The U.S. government, like many governments throughout the world, bailed out large financial institutions that were thought to be “too big to fail” during the 2008 financial crisis. Some critics of the bailouts argued that these policies created a moral hazard problem: banks would undertake
5. Suppose some workers are capable and others are extraordinary. Firms are willing to pay capable workers a salary of $12,000 and extraordinary workers a salary of $15,000. Workers know if they are capable or extraordinary but firms do not—that is, ability is private information. It would
4. All used cars are lemons or peaches. Owners know whether or not their car is a lemon, but buyers do not— that is, the quality of a car is private information. There are many more buyers than sellers. Buyers value a peach at $4,000 and a lemon at $200; owners value a peach at $3,000 and a lemon
3. Consider used mattresses. There are three types: “likenew” (value of $600), “lightly-used” (value of $300), and “bed-bug-infested” (value of $0). Only the seller knows the type.a. Suppose the price of used mattresses is $400. Which sellers would attempt to sell? Based on this
2. There are fifty low-risk people in a town and fifty highrisk people. A low-risk person has an average of $1,000 in medical expenses each year and is willing to pay $1,200 for medical insurance (because his expenses could be much greater than $1,000 and he is risk averse). A highrisk person has
1. Your new car is stolen just days after you buy it. You purchased it for $20,000 but the insurance company believes it is worth only $16,000.a. Why would the insurance company believe it is only worth $16,000?b. Is it worth more than $16,000 to you given your private information on the car?
10. How can crime and punishment be modeled as a principal– agent problem? What does the model suggest about crime prevention?
9. Explain the potential costs of high-powered incentives by considering the case of providing incentives to police officers. Would it be a good idea to pay higher wages to police officers if they make more arrests?
8. How might unemployment benefits create a moral hazard problem?
7. Does the presence of asymmetric information necessarily imply that governments should intervene in a market?
6. When do firms pay efficiency wages? What is the relationship between moral hazard and efficiency wages?
5. Explain the following terms:a. Principal–agent relationshipb. Moral hazard
4. How do third-party certifications and warranties solve the adverse selection problem in the used car market? Explain your answer.
3. Why does adverse selection occur in the health insurance market?
2. Explain why “bad cars drive out the good ones” in the market for used cars.
1. What is asymmetric information? What are the two kinds of asymmetric information?
12. Assume the interest rate is 50 percent. What is the present value of a payment of $60 paid 1 year from now? How about the present value of $60 paid today and $60 paid a year from now? Challenge question: What about $60 paid today, plus $60 paid a year from now, plus $60 paid the year after
11. You are a venture capitalist who has just purchased a stake in a small company. You believe that a year from now this company may no longer exist, in which case your stake is worthless; there is an 80 percent chance of this happening. However, there is a 10 percent chance your stake will be
10. Your house is worth $400,000, and you have $300,000 in a savings account. There is a 1 percent chance of a fire in your house during the next year. If the fire occurs, there will be $300,000 in damage.a. Suppose you do not have fire insurance. If the fire occurs, you will have to pay $300,000
9. You are considering playing a card game. The rules of the game are such that you pick a card from a standard deck of fifty-two cards and if the card is a diamond, you win $30. The catch is, you have to pay the dealer a fee of $10 to play this game. What is the expected value of this gamble?
8. Say whether or not each of the following statements assumes independence between events:a. “There is no such thing as a ‘hot hand’: A basketball player is just as likely to make her next shot regardless of whether she made her last shot.”b. “I notice that when one student scores above
7. This chapter talked about the idea of independent events.a. Suppose you draw a card from a standard deck of cards, you put that card back in the deck, and draw a second card. Are the events “Draw a diamond the first time” and “Draw a diamond the second time” independent events?b.
6. You observe a banker give $75 for a bond that pays out $100 in one year. Based on this observation, what do you conclude about the interest rate? Suppose that the price of this bond today suddenly increases to $80. Now what do you conclude about the interest rate? (Remember even though the price
5. Stafford loans are student loans that the federal government provides to graduate and undergraduate students to fund their education. Since Stafford loans can be extended up to 30 years, the Congressional Budget Office calculates the cost of these loans by discounting the future cash flows
4. You are considering purchasing a new piece of equipment for your factory. The equipment will cost $3,000 right now and can be used for 3 years. If you purchase it, the machine will generate earnings of $1,100 at the end of its first year of operation, $1,210 at the end of its second year of
3. Suppose you won the Powerball lottery on January 1, 2017. You can choose to receive the entire amount of $400 million either as a lump sum on January 1, 2017, or you can receive four equal annual payments of $102 million paid on January 1 in 2017, 2018, 2019, and 2020. Assume that your lottery
2. When you were born, your parents deposited $10,000 in the bank. The bank offered a fixed interest rate of 4 percent. On your eighteenth birthday, your parents decide to withdraw the money that they deposited to pay for your college tuition. How much money can they expect to withdraw? Assume
1. The “Rule of 70” is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling time, in years. For example, 70/4 = 17.5; thus it takes about 17.5 years for a bank account to double in
11. Why might it make sense to avoid paying for extended warranties on TVs and small home appliances?
10. What is meant by expected value? How is it calculated?
9. When are outcomes said to be independent? What is meant by the gambler’s fallacy?
8. How is the probability of an event defined?
7. When is an outcome risky?
6. What is meant by a preference reversal?
5. What is meant by present bias?
4. The greater your discount weight, the more your current decisions are driven by the future consequences of those decisions. Do you agree? Explain.
3. How is net present value used to decide whether a project should be undertaken?
2. How is the present value of a future payment calculated?
1. Is $1,000 received today worth as much as $1,000 received 1 year from now? Explain your answer.
13. A firm in a monopolistically competitive environment discovers that in the long run it faces inverse demand P = 10 - 11>22Q, which means its marginal revenue is MR = 10 - Q. The firm’s marginal cost is a constant MC = $4.a. Sketch these three curves on a graph.b. Based on the
12. Suppose all you know about Boeing and Airbus is that Boeing sells about 40 percent of all comercial aircraft, while Airbus sells around 25 percent.a. Based on this information, what is the largest the Herfindahl-Hirschman Index (HHI) might be? (Hint: Assume there is just one other firm in the
11. Suppose there are five firms in an industry. Their sales (that is, total revenue) are as follows: • Firm 1: $90 million • Firm 2: $50 million • Firm 3: $36 million • Firm 4: $14 million • Firm 5: $10 million Compute the Herfindahl-Hirschman Index (HHI) for this industry.
10. Suppose the world demand schedule for oil is as follows: Price per Barrel Quantity Demanded $50 40 $75 30 $125 20 There are two oil-producing countries, A and B. Each will produce either 10 or 20 barrels of oil. To keep things simple, assume they can produce this oil at zero cost.a. There are
9. Telesource and Belair are two of the largest firms in the wireless carrier market in a certain country. Together, these firms account for more than 80 percent of the market.a. Given that both firms differentiate their products, how is a Nash equilibrium achieved in this market?b. Suppose both
8. Major league baseball teams have imposed what is commonly called the “luxury tax” on themselves. A team is subject to the tax if its payroll exceeds a specified level. The annual threshold for the luxury tax is $189 million for 2014–16. A team that exceeds the threshold must pay 17.5 to
7. Coke and Pepsi each choose one of two prices: “Low” 1P = $22 or “High” 1P = $32. There are 50 buyers who will pick the lowest price option. However, if the prices are the same, 25 will buy from Coke and 25 from Pepsi. For simplicity, assume there are no costs, so profit is just price
6. Tobacco companies have often argued that they advertise to attract more people who already smoke and not to persuade more people to begin smoking. Suppose there were just two cigarette manufacturers, Jones and Smith. Each can either advertise or not advertise. If neither advertises, they each
5. Make three copies of the following diagram and label them (i), (ii) and (iii). Add three different residual demand curves faced by a monopolist: (i) very steep (inelastic), (ii) relatively flat (elastic), and (iii) horizontal (perfectly elastic). Draw the residual demand such that a monopolist
4. The diagram below shows the short-run demand curve (D), marginal revenue curve (MR), average total cost curve (ATC), and marginal cost curve (MC) for a firm in a monopolistically competitive market.a. What level of output should this firm produce?b. What price should this firm charge?c. Will
3. Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price equal to the marginal cost (MC). But what happens if the the two firms have unequal marginal costs? Suppose that Dogwood has MC =
2. With the growth of the Internet, there are many online retailers and many buyers who shop online.a. Why, given the growth of the Internet, would you expect to find that different firms would charge very similar prices for the same good?b. Despite the logic of the first part of this question,
1. Acme is currently the only grocery store in town. Bi-Rite is thinking of entering this market. They will play the following game. First, Bi-Rite will decide whether or not to enter. If it does not enter, then the game ends, Acme earns a payoff of 50, and Bi-Rite earns a payoff of 0. If Bi-Rite
13. Decide whether each of the following statements is true or false for each of three different types of markets: perfect competition, monopoly, and monopolistic competition.a. Firms equate price and marginal cost.b. Firms equate marginal revenue and marginal cost.c. Firms earn economic profits
12. Suppose the refrigerator industry has an HHI of 2,500 while the aluminum industry’s HHI is 6,850. Is this information sufficient to conclude that the aluminum market is more concentrated than the market for refrigerators? Explain your answer.
11. When is a collusive agreement between two firms likely to break down?
10. Suppose there are four firms in a market and each of them sells differentiated products. Does it make sense for these firms to engage in a price war? Why or why not?
9. How do oligopolistic firms that sell differentiated products determine their prices?
8. In the model of an oligopoly with identical (homogeneous) products, what is the price likely to be?
7. Consider a noncollusive duopoly model with both firms supplying bottled drinking water. The firms choose prices simultaneously. The marginal cost for each firm is $1.50. The market demand is shown by the figure given below.a. Find the residual demand curves for each of the firms.b. What pricing
6. What happens in a monopolistically competitive market with the entry of new firms?
5. Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market?
4. Will a monopolistically competitive firm continue to operate in the short run despite earning negative economic profit? Explain your answer.
3. Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?
2. How is a monopolistically competitive market similar to a perfectly competitive market? Do monopolistically competitive markets and monopolies share any common features?
1. How are the products sold by a monopolistically competitive firm different from the products sold in a perfectly competitive market?
13. Two competing firms must choose their quantity of production simultaneously. Each firm can choose either a High quantity of 3 or a Low quantity of 2. The price for both firms is 9 − Q, where Q is the sum of both quantities. Costs are zero; the profit is simply price times quantity. For
12. Pat’s and Geno’s are two rival cheesesteak restaurants in Philadelphia, Pennsylvania, that are located across the street from each other. Since they serve almost the same food, they are fiercely competitive. With the weather in Philly improving, sales at both firms are expected to increase
11. While at the airport, you hear over the loudspeaker an offer to be bumped off your current flight in exchange for $100 travel credit. After it becomes clear nobody will take this offer, the offer is increased to $200. A few minutes later, the airline offers $300; then $400, and so on.
10. Jones TV and Smith TV are the only two stores in your town that sell flat-panel TV sets. First, Jones will choose whether to charge high prices or low prices. Smith will see Jones’s decision and then choose high or low prices. If they both choose High, each earns $10,000. If they both choose
9. Consider a game with two players, 1 and 2. They play the extensive-form game summarized in the following game tree:a. Suppose Player 1 is choosing between Green and Red for his second move. Which will he choose if: i. Green, Green has been played. ii. Red, Red has been played.b. Suppose Player 2
8. Two gas stations, A and B, are locked in a price war. Each player has the option of raising its price (R) or continuing to charge the low price (C). They will choose strategies simultaneously. If both choose C, they will both suffer a loss of $100. If one chooses R and the other chooses C, (i)
7. Use a matrix to model a two-player game of rock-paperscissors with a payoff of 1 if you win, –1 if you lose, and 0 if you tie.a. Draw the payoff matrix for this game.b. Is there an equilibrium in this game where players use pure strategies?c. Why should you use a mixed strategy to play this
6. We might suppose a soccer player has three options when taking a penalty kick: Kick right (KR), kick left (KL), or kick down the center (KC). The goalie can choose to dive right (DR), dive left (DL), or stand in the center (SC). Assume the goalie blocks the kick whenever he guesses correctly
5. A Beautiful Mind, a movie about John Nash, fails to properly demonstrate a Nash equilibrium. It attempts to do so in a bar scene where men at a bar (Nash and his friends) plan to ask women to dance. There is one beautiful woman that the men consider the most attractive, as well as several other
4. It is possible for two-player games to be quite asymmetric: Each player might have a different set of options, and the payoffs may be quite different. Consider the following example between a large firm and a small firm (the first number in each box denotes the large firm’s payoff, the
3. In the movie The Princess Bride, the hero disguised as the pirate Westley is engaged in a game of wits with the villain Vizzini. Westley puts poison in either his own glass of wine or in Vizzini’s glass. Vizzini will choose to drink from his own glass or from Westley’s; Westley drinks from
2. Suppose Russia is deciding to Invade or Not Invade its neighbor Ukraine. The United States has to decide to Be Tough or Make Concessions. They will make their decisions simultaneously. Their payoffs are as follows: United States/ Russia Not Invade Invade Be Tough United States gets 5 United
1. Suppose the cable TV companies Astounding Cable and Broadcast Cable are in your city. They both must decide on a high advertising budget, a moderate advertising budget, or a low advertising budget. They will make their decisions simultaneously. Their payoffs are as follows: Astounding/
12. The trust game shown in Exhibit 13.15 is a sequential prisoners’ dilemma; as the payoff matrix shows, the outcome of the game is not socially efficient. What factors could cause this equilibrium to be different in real life?
11. What is meant by the first-mover advantage? How does commitment matter in a game with a first-mover advantage?a. Some games have a first-mover advantage and other games do not. Suppose you were playing rock-paper scissors as an extensive-form game. First you choose rock, paper, or scissors, and
10. When can backward induction be used to arrive at the equilibrium for a game?
9. Although there are many examples of game theory in the real world, how well do you think specifics like payoff matrices, Nash equilibria, and dominant strategies translate to reality?
8. Suppose that a player has a dominant strategy. Would she choose to play a mixed strategy (such as playing two strategies, each with probability 50-50)? Why or why not?
7. What is the difference between a pure strategy and a mixed strategy?
6. What is a zero-sum game? Can you think of any zero-sum games in real life?
5. How can the tragedy of the commons be modeled as a prisoners’ dilemma game?
4. What is a Nash equilibrium? How is a Nash equilibrium different from a dominant strategy equilibrium?
3. What is meant by the “prisoners’ dilemma”? Do the players in the prisoners’ dilemma game have a dominant strategy?
2. Is a player’s best response in a game the same as his dominant strategy? Explain.
1. What is a dominant strategy equilibrium?
1. 5. Mat ea concept in Column A with an example in Column B.Column A Column Ba. Negative externality 1. You should spend more time studying economics b.An essential economic activity2. A fair and just societyc. A final goal 3.If you spend more time studying economics, you will have less time
1. 4. Suppose that society could produce the following combinations of pizzas and books:Alternativeantity of pizzasantity of books A50 0B 40 10 C30 18 D20 24 E10 28 F0 30a. Using graph paper (or a computer program), draw the PPF for pizza and books, being as exact and neat as possible. (Put
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