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microeconomics
Microeconomics 9th Edition Robert Pindyck, Daniel Rubinfeld - Solutions
=+8. Can an isoquant ever slope upward? Explain.
=+the number of customers that can be served by that worker in a given time period. Joe has been employing one worker, but is considering hiring a second and a third.
=+1. The menu at Joe’s coffee shop consists of a variety of coffee drinks, pastries, and sandwiches. The marginal product of an additional worker can be defined as
=+13. Suppose that output q is a function of a single input, labor (L). Describe the returns to scale associated with each of the following production functions:(a) q = L/2 (b) q = L2 + L (c) q = log (L).
=+9. Explain the term “marginal rate of technical substitution.” What does a MRTS = 4 mean?
=+8. Can an isoquant ever slope upward? Explain.
=+ Are you more concerned with the average product of labor or the marginal product of labor for the last person hired?
=+4. You are an employer seeking to fill a vacant position on an assembly line
=+output. Increasing returns to scale occurs when output more than doubles when inputs are doubled; decreasing returns to scale applies when output less than doubles.
=+9. In long-run analysis, we tend to focus on the firm’s choice of its scale or size of operation. Constant returns to scale means that doubling all inputs leads to doubling
=+in which inputs are perfect substitutes to one in which the proportions of inputs to be used are fixed (a fixedproportions production function).
=+8. The possibilities for substitution among inputs in the production process range from a production function
=+7. The standard of living that a country can attain for its citizens is closely related to its level of labor productivity. Decreases in the rate of productivity growth in developed countries are due in part to the lack of growth of capital investment.
=+The marginal rate of technical substitution of labor for capital (MRTS) is the amount by which the input of capital can be reduced when one extra unit of labor is used so that output remains constant.
=+6. Isoquants always slope downward because the marginal product of all inputs is positive. The shape of each isoquant can be described by the marginal rate of technical substitution at each point on the isoquant.
=+production function can be represented by a series of isoquants associated with different levels of output.
=+5. An isoquant is a curve that shows all combinations of inputs that yield a given level of output. A firm’s
=+4. According to the law of diminishing marginal returns, when one or more inputs are fixed, a variable input(usually labor) is likely to have a marginal product that eventually diminishes as the level of input increases.
=+the marginal product of labor (which measures the additional output as labor is increased by 1 unit).
=+3. Production with one variable input, labor, can be usefully described in terms of the average product of labor(which measures output per unit of labor input) and
=+2. In the short run, one or more inputs to the production process are fixed. In the long run, all inputs are potentially variable.
=+1. A production function describes the maximum output that a firm can produce for each specified combination of inputs.
17. The utility that Meredith receives by consuming food F and clothing C is given by U(F,C) = FC. Suppose that Meredith’s income in 1990 is$1200 and that the prices of food and clothing are $1 per unit for each. By 2000, however, the price of food has increased to $2 and the price of clothing to
16. Julio receives utility from consuming food (F) and clothing (C) as given by the utility function U(F,C) = FC. In addition, the price of food is $2 per unit, the price of clothing is $10 per unit, and Julio’s weekly income is $50.a. What is Julio’s marginal rate of substitution of food for
15. Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In addition, the price of a day spent traveling domestically is $100, the price of a day spent traveling in
14. Connie has a monthly income of $200 that she allocates among two goods: meat and potatoes.a. Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget constraint.b. Suppose also that her utility function is given by the equation U(M, P) = 2M + P. What combination of meat and
13. Brenda wants to buy a new car and has a budget of $25,000. She has just found a magazine that assigns each car an index for styling and an index for gas mileage. Each index runs from 1 to 10, with 10 representing either the most styling or the best gas mileage. While looking at the list of
12. Ben allocates his lunch budget between two goods, pizza and burritos.a. Illustrate Ben’s optimal bundle on a graph with pizza on the horizontal axis.b. Suppose now that pizza is taxed, causing the price to increase by 20 percent. Illustrate Ben’s new optimal bundle.c. Suppose instead that
10. Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces that there will be a 10 percent increase in the price of new books and a 5 percent increase in the price of used books, Antonio’s father
9. Debra usually buys a soft drink when she goes to a movie theater, where she has a choice of three sizes: the 8-ounce drink costs $1.50, the 12-ounce drink $2.00, and the 16-ounce drink $2.25. Describe the budget constraint that Debra faces when deciding how many ounces of the drink to purchase.
8. Anne has a job that requires her to travel three out of every four weeks. She has an annual travel budget and can travel either by train or by plane.The airline on which she typically flies has a frequent-traveler program that reduces the cost of her tickets according to the number of miles she
7. The price of DVDs (D) is $20 and the price of CDs (C) is $10. Philip has a budget of $100 to spend on the two goods. Suppose that he has already bought one DVD and one CD. In addition, there are 3 more DVDs and 5 more CDs that he would really like to buy.a. Given the above prices and income,
6. Suppose that Jones and Smith have each decided to allocate $1000 per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods. However, they differ substantially in
5. Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridget’s preferences are represented by the utility function U(F,C) = 10FC, while Erin’s preferences are represented by the utility function U(F,C) = .20F2C2.a. With food on the horizontal axis and
4. Janelle and Brian each plan to spend $20,000 on the styling and gas mileage features of a new car. They can each choose all styling, all gas mileage, or some combination of the two. Janelle does not care at all about styling and wants the best gas mileage possible. Brian likes both equally and
2. Draw indifference curves that represent the following individuals’ preferences for hamburgers and soft drinks. Indicate the direction in which the individuals’ satisfaction (or utility) is increasing.a. Joe has convex indifference curves and dislikes both hamburgers and soft drinks.b. Jane
1. In this chapter, consumer preferences for various commodities did not change during the analysis. In some situations, however, preferences do change as consumption occurs. Discuss why and how preferences might change over time with consumption of these two commodities:a. cigarettes.b. dinner for
14. Explain why the Paasche index will generally under-state the ideal cost-of-living index.
13. The price of computers has fallen substantially over the past two decades. Use this drop in price to explain why the Consumer Price Index is likely to overstate substantially the cost-of-living index for individuals who use computers intensively.
12. Describe the equal marginal principle. Explain why this principle may not hold if increasing marginal utility is associated with the consumption of one or both goods.
11. Based on his preferences, Bill is willing to trade four movie tickets for one ticket to a basketball game. If movie tickets cost $8 each and a ticket to the basketball game costs $40, should Bill make the trade? Why or why not?
10. Draw a budget line and then draw an indifference curve to illustrate the satisfaction-maximizing choice associated with two products. Use your graph to answer the following questions.a. Suppose that one of the products is rationed. Explain why the consumer is likely to be worse off.b. Suppose
8. What is the difference between ordinal utility and cardinal utility? Explain why the assumption of cardinal utility is not needed in order to rank consumer choices.
4. Jon is always willing to trade one can of Coke for one can of Sprite, or one can of Sprite for one can of Coke.a. What can you say about Jon’s marginal rate of substitution?b. Draw a set of indifference curves for Jon.c. Draw two budget lines with different slopes and illustrate the
2. Can a set of indifference curves be upward sloping? If so, what would this tell you about the two goods?
1. What are the four basic assumptions about individual preferences? Explain the significance or meaning of each.
12. The table below shows the retail price and sales for instant coffee and roasted coffee for 1997 and 1998.a. Using these data alone, estimate the short-run price elasticity of demand for roasted coffee. Derive a linear demand curve for roasted coffee.b. Now estimate the short-run price
11. Refer to Example 2.10 (page 59), which analyzes the effects of price controls on natural gas.a. Using the data in the example, show that the following supply and demand curves describe the market for natural gas in 2005–2007:Also, verify that if the price of oil is $50, these curves imply a
10. Example 2.9 (page 54) analyzes the world oil market. Using the data given in that example:a. Show that the short-run demand and competitive supply curves are indeed given byb. Show that the long-run demand and competitive supply curves are indeed given byc. In Example 2.9 we examined the impact
9. In Example 2.8 (page 52), we discussed the recent increase in world demand for copper, due in part to China’s rising consumption.a. Using the original elasticities of demand and supply (i.e. ES =1.5 and ED = −0.5), calculate the effect of a 20-percent increase in copper demand on the price
8. In Example 2.8 we examined the effect of a 20-percent decline in copper demand on the price of copper, using the linear supply and demand curves developed in Section 2.6. Suppose the long-run price elasticity of copper demand were -0.75 instead of -0.5.a. Assuming, as before, that the
7. In 1998, Americans smoked 470 billion cigarettes, or 23.5 billion packs of cigarettes. The average retail price was $2 per pack. Statistical studies have shown that the price elasticity of demand is -0.4, and the price elasticity of supply is 0.5. Using this information, derive linear demand and
6. The rent control agency of New York City has found that aggregate demand is QD = 160 − 8P. Quantity is measured in tens of thousands of apartments. Price, the average monthly rental rate, is measured in hundreds of dollars. The agency also noted that the increase in Q at lower P results from
5. Much of the demand for U.S. agricultural output has come from other countries. In 1998, the total demand for wheat was Q = 3244 − 283P. Of this, total domestic demand was QD = 1700 − 107P, and domestic supply was QS = 1944 + 207P. Suppose the export demand for wheat falls by 40 percent.a.
4. A vegetable fiber is traded in a competitive world market, and the world price is $9 per pound. Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows:a. What is the equation for
3. Refer to Example 2.5 (page 38) on the market for wheat. In 1998, the total demand for U.S. wheat was Q = 3244 − 283P and the domestic supply was QS = 1944 + 207P. At the end of 1998, both Brazil and Indonesia opened their wheat markets to U.S. farmers. Suppose that these new markets add 200
2. Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows:a. Calculate the price elasticity of demand when the price is $80 and when the price is $100.b. Calculate the price elasticity of supply when the price is $80 and when
1. Suppose the demand curve for a product is given by Q = 300 − 2P + 4I, where I is average income measured in thousands of dollars. The supply curve is Q = 3P − 50.a. If I = 25, find the market-clearing price and quantity for the product.b. If I = 50, find the market-clearing price and
13. Suppose the demand for natural gas is perfectly inelastic. What would be the effect, if any, of natural gas price controls?
11. Suppose the demand curve for a product is given by Q = 10 − 2P + PS where P is the price of the product and PS is the price of a substitute good. The price of the substitute good is $2.00.a. Suppose P = $1.00. What is the price elasticity of demand? What is the cross-price elasticity of
10. In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic. As evidence, she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number nor quality of students applying has
9. The city council of a small college town decides to regulate rents in order to reduce student living expenses. Suppose the average annual market-clearing rent for a two-bedroom apartment had been $700 per month and that rents were expected to increase to $900 within a year. The city council
8. Suppose the government regulates the prices of beef and chicken and sets them below their market-clearing levels. Explain why shortages of these goods will develop and what factors will determine the sizes of the shortages. What will happen to the price of pork? Explain briefly.
7. Are the following statements true or false? Explain your answers.a. The elasticity of demand is the same as the slope of the demand curve.b. The cross-price elasticity will always be positive.c. The supply of apartments is more inelastic in the short run than the long run.
6. Why do long-run elasticities of demand differ from short-run elasticities? Consider two goods: paper towels and televisions. Which is a durable good? Would you expect the price elasticity of demand for paper towels to be larger in the short run or in the long run? Why? What about the price
5. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity.
4. Explain the difference between a shift in the supply curve and a movement along the supply curve.
2. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: (a) an increase in the price of margarine; (b) an increase in the price of milk; (c) a decrease in average income levels.
1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level?
3. At the time this book went to print, the minimum wage was $5.85. To find the current value of the CPI, go to http://www.bls.gov/cpi/home.htm.Click on Consumer Price Index-All Urban Consumers (Current Series) and select U.S. All items. This will give you the CPI from 1913 to the present.a. With
2. The following table shows the average retail price of butter and the Consumer Price Index from 1980 to 2000, scaled so that the CPI = 100 in 1980.a. Calculate the real price of butter in 1980 dollars. Has the real price increased/decreased/stayed the same from 1980 to 2000?b. What is the
1. Decide whether each of the following statements is true or false and explain why:a. Fast-food chains like McDonald’s, Burger King, and Wendy’s operate all over the United States. Therefore, the market for fast food is a national market.b. People generally buy clothing in the city in which
5. Suppose that the Japanese yen rises against the U.S. dollar—that is, it will take more dollars to buy a given amount of Japanese yen. Explain why this increase simultaneously increases the real price of Japanese cars for U.S. consumers and lowers the real price of U.S. automobiles for Japanese
4. In Example 1.3, what economic forces explain why the real price of eggs has fallen while the real price of a college education has increased?How have these changes affected consumer choices?
3. Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma. Do you think there would be an opportunity for arbitrage (i.e., that firms could buy gas in Oklahoma and then sell it at a profit in New Jersey)? Why or why not?
2. Which of the following two statements involves positive economic analysis and which normative? How do the two kinds of analysis differ?a. Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is poor social policy because it interferes
1. It is often said that a good theory is one that can be refuted by an empirical, data-oriented study. Explain why a theory that cannot be evaluated empirically is not a good theory.
What Is a Market?
=+events will affect the investor’s budget line and the proportion of stocks in her portfolio:
=+11. A moderately risk-averse investor has 50 percent of her portfolio invested in stocks and 50 percent in riskfree Treasury bills. Show how each of the following
=+Would it make good public policy to permit such insurance?
=+c. (For discussion) What if drivers could insure themselves against the risk of parking fines?
=+How would your answer to (a) change?
=+Which of the three options should you choose?Explain.
=+for family wealth (W) is specified by the relationship U(W) = 1W. The probability of a summer drought is 0.30, while the probability of summer rain is 0.70.
=+in revenues. As a third choice, you can purchase AgriCorp drought-resistant summer corn at a cost of$250,000 that will yield $500,000 in revenues at harvest if there is rain, and $350,000 in revenues if there is a drought. You are risk averse, and your preference
=+planting summer corn. Planting costs $200,000, with a six-month time to harvest. If there is rain, planting summer corn will yield $500,000 in revenues at harvest. If there is a drought, planting will yield $50,000
=+d. Laura has the utility function U = 5I 2. Which investment will she choose?
=+b. Jill has the utility function U = 5I, where I denotes the payoff. Which investment will she choose?
=+c. In (b), would Natasha be willing to buy insurance to protect against the variable income associated with the new job? If so, how much would she be willing to pay for that insurance? (Hint: What is the risk premium?)
=+take a new job that offers a .6 probability of earning $44,000 and a .4 probability of earning $33,000.Should she take the new job?
=+b. Suppose that Natasha is currently earning an income of $40,000(I = 40) and can earn that income next year with certainty. She is offered a chance to
=+policy premium on any subsequent proposal to Sam? Based on his information, would Sam accept?
=+the insurance. Assume that Sam tells you SCAM is only six months away from perfecting its mayonnaise substitute and that you know what you know about the Japanese. Would you raise or lower your
=+c. Suppose you found out that the Japanese are on the verge of introducing their own mayonnaise substitute next month. Sam does not know this and has just turned down your final offer of $1000 for
=+sandwich industry will pay top dollar to the first inventor to patent such a mayonnaise substitute. Sam’s SCAM seems like a very risky proposition to you. You
=+working on a low-fat, low-cholesterol mayonnaise substitute for the sandwich-condiment industry. The
=+how you would determine the smallest amount for which he would be willing to sell all 1000 tickets.
=+c. Richard has been given 1000 lottery tickets. Discuss
=+What is the variance?
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