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microeconomics

Questions and Answers of Microeconomics

Are there any activities in a family that you believe should be allocated by a market? What characteristics do those activities have?
What is the difference between socialism in theory and socialism in practice?
Into what three sectors are market economies generally broken up?
If the cost of textbooks were included in tuition, what would likely happen to their prices? Why?
True or false? In the United States, the invisible hand ensures that only socially valuable businesses are started. Why?
Are most businesses in the United States corporations? If not, what are most businesses?
What are the two largest expenditure categories for the federal government?
If there is an externality, does that mean that the government should intervene in the market to adjust for that externality?
If the United States chooses not to follow a World Court decision, what are the consequences?
A newspaper recently lowered its price from $5.00 to$3.00. As it did, the number of newspapers sold increased from 240,000 to 280,000.a. What was the newspaper’s elasticity of demand?b. Given that
University of Richmond Professor Erik Craft analyzed the states’ pricing of vanity plates. He found that in California, where vanity plates cost an average of $28.75, the elasticity of demand was
How is elasticity related to the revenue from a sales tax?
Suppose average movie ticket prices are $8.50 and attendance is 1.2 billion. The price of tickets rises to$9.50 and attendance rises to 1.4 billion.a. What happened to total revenue?b. If you were to
Which of the following producers would you expect to support a tax on beer? Which would not? Explain your answer. a. Producers of hard liquor. Cross-price elasticity with beer: −0.11.b. Producers
For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good.Explain your answers.a. Vodka.d. Perfume.b. Table salt.e. Beer.c. Furniture.f. Sugar.
For each of the following pairs of goods, state whether the cross-price elasticity is likely positive, negative, or zero.Explain your answers.a. Lettuce, carrots.b. Housing, furniture.c. Nike
When determining the effect of a shift factor on price and quantity, in which of the following markets could you likely assume that other things will remain constant?1. Market for eggs.2. Labor
Why is the fallacy of composition relevant for macroeconomic issues?
In the late 1990s, the television networks were given$70 billion worth of space on public airways for broadcasting high-definition television rather than auctioning it off.a. Why do airways have
True or false? If supply rises, price will rise.
Say a hormone has been discovered that increases cows’ milk production by 20 percent. Demonstrate graphically what effect this discovery would have on the price and quantity of milk sold in a
In some states and localities “scalping” is against the law, although enforcement of these laws is spotty.a. Using supply/demand analysis and words, demonstrate what a weakly enforced
If both demand and supply shift in to the left, what happens to price and quantity?
What is the effect of the price ceiling, Pc, shown in the graph below on price and quantity? Price Pc Supply Quantity Demand
In 1938 Congress created a Board of Cosmetology in Washington, D.C., to license beauticians. To obtain a license, people had to attend a cosmetology school. In 1992 this law was used by the board to
If price and quantity both fell, what would you say was the most likely cause?
Suppose oil production in Libya is interrupted by political unrest. At the same time, the demand for oil by China continues to rise. (LO5-1)a. Demonstrate the impact on the quantity of oil bought and
What is the effect of the price ceiling, Pc, shown in the graph below on price and quantity? Price Pc Quantity Supply Demand
Airlines and hotels have many frequent-flyer and frequent-visitor programs in which individuals who fly the airline or stay at the hotel receive bonuses that are the equivalent to discounts.a. Give
What is the effect of the price floor, Pf, shown in the graph below, on price and quantity? Price P Supply Quantity Demand
In 2014, a drought in the Midwest raised grain prices, leading to a decline in the size of cattle herds. Ultimately, the price of ground beef rose from about $3 a pound to over $4 by 2015.
Your study partner, Umar, has just stated that a tax on demanders of$2 per unit will raise the equilibrium price consumers pay from $4 to $6.How do you respond?
What is the effect of the quantity restrictions, QR, shown in the graph below, on equilibrium price and quantity? Price QR Quantity D S
Supply/demand analysis states that equilibrium occurs where quantity supplied equals quantity demanded, but in U.S. agricultural markets quantity supplied almost always exceeds quantity demanded. How
Nobel Prize–winning economist Bill Vickrey suggested that automobile insurance should be paid as a tax on gas, rather than as a fixed fee per year per car. How would that change likely affect the
The United States imposes substantial taxes on cigarettes but not on loose tobacco. When the tax went into effect, what effect did it likely have for cigarette rolling machines?
The text tells us that there are long-run elasticities and short-run elasticities.a. How long is the long run and how long is the short run?b. What meaning do the elasticity measures have if you
In the box “Geometric Tricks for Estimating Price Elasticity,”there are three statements about the elasticities of straight-line supply curves. One of those statements is that supply curves
Determine the price elasticity of demand if, in response to an increase in price of 10 percent, quantity demanded decreases by 20 percent. Is demand elastic or inelastic?
If when price rises by 4 percent,quantity supplied rises by 8 percent,what is the price elasticity of supply?
In this chapter, we learn that most new cars aren’t sold at their list price but are sold at a discount and that this allows dealerships to charge more to customers with inelastic demand. At the
In the 1960s, coffee came in 1-pound cans. Today, most coffee comes in 11-ounce cans.a. Can you think of an explanation why?b. Can you think of other products besides coffee whose standard size has
If price elasticity of demand is greater than 1, what would we call demand:elastic or inelastic?
A firm has just increased its price by 5 percent over last year’s price, and it found that quantity sold remained the same.a. What is its price elasticity of demand?b. How would you calculate it?c.
Early economists made a distinction between needs and wants. Needs were economists’ concern; wants were of far less importance.a. Is such a distinction useful?b. Would making such a distinction
Why would an economist be more hesitant about making an elasticity estimate of the effect of an increase in price of 1 percent than an increase in price of 50 percent?
What is the approximate elasticity between points A and B on the graph below? Price 432- 1 A B 2 4 6 8 10 12 14 16 Quantity
In the chapter, you saw that an increase in Vermont’s minimum wage stimulated a small quantity response.a. What does this tell you about the nature of the labor market in Vermont? (Hint: Think
When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increased from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what
A major cereal producer decides to lower price from$3.60 to $3 per 15-ounce box.a. If quantity demanded increases by 18 percent, what is the price elasticity of demand?b. If, instead of lowering its
Your study partner, Nicole, has just stated that a straight-line demand curve is inelastic. How do you respond?
One football season Domino’s Pizza, a corporate sponsor of the Washington Redskins (a football team), offered to reduce the price of its $8 medium-size pizza by $1 for every touchdown scored by the
Economists have estimated the demand elasticity for motor fuel to be between 0.4 and 0.85.a. If the price rises 10 percent and the initial quantity sold is 10 million gallons, what is the range of
If elasticities are constantly changing as the time period gets longer, how do managers use a measure of elasticity of demand to determine the price they charge? If they don’t use elasticities, how
What are four important factors affecting the number of substitutes a good has?
Which has greater elasticity: a supply curve that goes through the origin with slope of 1 or a supply curve that goes through the origin with slope of 4?
Price elasticity is not just a technical economic concept. It also reflects the distribution of economic power—the bargaining power and economic opportunities of buyers and sellers.a. When
Demand for “prestige” college education is generally considered to be highly inelastic. What does this suggest about tuition increases at prestige schools in the future?Why don’t colleges raise
In the long run, would you expect demand to be more or less elastic?
Calculate the elasticity of the designated ranges of supply and demand curves on the following graph.
In 2004, Congress allocated over $20 billion to fight illegal drugs. About 60 percent of the funds was directed at reducing the supply of drugs through domestic law enforcement and interdiction. Some
If demand is inelastic and a firm raises price, what happens to total revenue?
Which of the pairs of goods would you expect to have a greater price elasticity of demand? a. Cars, transportation.b. Housing, leisure travel.c. Rubber during World War II, rubber during the entire
In the discussion of elasticity and raising and lowering prices, the text states that if you have an elastic demand, you should hesitate to raise your price, and that lowering price can possibly
If a good’s consumption increases with an increase in income, what type of good would you call it?
Colleges have increasingly used price sensitivity to formulate financial aid. The more eager the student, the less aid he or she can expect to get. Use elasticity to explain this phenomenon. Is this
If there were only two goods in the world, can you say whether they would be complements or substitutes?Explain your answer.
Label each of the following goods as a luxury, necessity, or inferior good. Income elasticity is given for each.a. Dental services: 1.6b. Beer: 0.8c. Baloney: −0.15
Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why the elasticities differ.a. Elasticity of demand for buses is 0.23 during peak hours
Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage drinking
A firm faces an elastic demand for its product. It has come to an economist to advise it on whether to lower its price. The answer she gives is: Maybe.Why is this the right answer?
Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book’s price? Why?
Demonstrate graphically the likely effect of an increase in the price of gas on the equilibrium quantity and price of hybrid cars.
Because of the negative incentive effect that taxes have on goods with elastic supply, in the late 1980s Margaret Thatcher (then prime minister of Great Britain) changed the property tax to a poll
Many of the buildings in Paris have Mansard roofs, such as those shown in the photograph on page 147.a. What property tax structure would bring this about?b. Could you imagine a change in the
Demonstrate the welfare loss of a tax when the supply is highly elastic and the demand is highly inelastic.
How is elasticity related to the revenue from a sales tax?
Do Pierre, a software engineer earning $200,000 a year, and Sally, a single mother whose welfare benefits are about to expire, get equal weight in the measure of consumer surplus? (Institutionalist)
Can you suggest a tax system that led to this building style, which was common in old Eastern European cities? Courtesy of David Colander
If a person has a highly elastic demand, will he likely bear a large or small percentage of the burden of a tax?
Minneapolis Federal Reserve Bank economist Edward Prescott estimates the elasticity of the U.S. labor supply to be 3. Given this elasticity, what would be the impact of funding the Social Security
How much of a $100 tax would a consumer pay if elasticity of demand is 0.2 and elasticity of supply is 1.8?
The Pure Food and Drug Act of 1906 is known as“Dr. Wiley’s Law.” It is generally regarded by non-economic historians as representing the triumph of consumer interests over producer interests.a.
The elasticity of the supply of labor in part determines who bears the burden of Social Security taxes. Those taxes are typically levied in matching 6.2 percent shares on workers’ wages and wages
When the price of ketchup rises by 18 percent, the demand for hot dogs falls by 2 percent.a. Calculate the cross-price elasticity of demand.b. Are the goods complements or substitutes?c. In the
Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer.
Why isn’t the combination of consumer and producer surplus maximized if there is either excess demand or supply?
The quotation from Calvin Coolidge at the beginning of the chapter equates taxation to robbery.a. Is that a reasonable position to take?b. What alternatives to taxation could a country consider to
If price moves from disequilibrium to equilibrium, what happens to the combination of producer and consumer surplus in the market?
Why does nearly every purchase you make provide you with consumer surplus?
The chapter frames the issue of the effects of taxation in terms of its effects on producer and consumer surplus.a. What does that framework leave out of the analysis?b. How might one frame the
Use the graph below that shows the effect of a$4 per-unit tax on suppliers to answer the following questions:a. What are equilibrium price and quantity before the tax? After the tax?b. What is
Given this elasticity, what would be the impact of funding the Social Security program with tax increases on the number of hours worked and on the amount of taxes collected to fund Social Security?
God sees all individuals as equal, and that what one does to the least of God’s children, one does to all. How does that approach to thinking about issues fit with the economic analysis that
The president of Lebanon Valley College proposed the following tuition program: provide a 50 percent tuition reduction for those graduating in the top 10 percent of their high school class, 33
Demonstrate the welfare loss of: (LO7-2)a. A restriction on output when supply is perfectly elastic.b. A tax t placed on suppliers.c. A subsidy s given to suppliers.d. A restriction on output when
If Social Security taxes were paid only by employees, what would likely happen to workers’ pretax pay?
In 2004, the University of California education system drastically cut enrollment due to significant state budget cuts and asked 7,600 applicants to defer enrollment for two years after completing
Demonstrate the effect of an effective price ceiling on producer and consumer surplus when both supply and demand are highly inelastic.
Would a firm’s research and development expenditures be classified as rent seeking?

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