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business
microeconomics

Questions and Answers of Microeconomics

Suppose the firms in a real-world market do not sell a homogeneous product. Does it necessarily follow that the market is not perfectly competitive?
If a firm produces the quantity of output at which MR5MC, does it necessarily earn profits?
In the short run, if a firm finds that its price (P) is less than its average total cost (ATC ), should it shut down its operation?
The layperson says that a firm maximizes profits when total revenue (TR) minus total cost (TC) is as large as possible and positive. The economist says that a firm maximizes profits when it produces
Why are market supply curves upward sloping?
If firms in a perfectly competitive market are earning positive economic profits, what will happen?
If firms in a perfectly competitive market want to produce more output, is the market in long-run equilibrium?
If a perfectly competitive market in long-run equilibrium witnesses an increase in demand, what will happen to price?
Two firms produce computer software. Firm A employs a software genius at the same salary that firm B employs a mediocre software engineer. Will the firm that employs the software genius earn higher
In a perfectly competitive market, do higher costs mean higher prices?
If you see a product advertised on television, does it follow that the product cannot be produced in a perfectly competitive market?
Person 1: When it comes to understanding markets, it is important to remember that, just as there are two teams in football that work against each other, there are two teams in markets. There are
Suppose all firms in a perfectly competitive market are in long-run equilibrium. Illustrate what a perfectly competitive firm will do if market demand rises.
“There are always some close substitutes for the product any firm sells; therefore, the theory of monopoly (which assumes no close substitutes) cannot be useful.” Comment.
How is a movie superstar like a monopolist?
Why does the monopolist’s demand curve lie above its marginal revenue curve?
Is a monopolist guaranteed to earn profits?
Why do you think a monopolist is called a price searcher? What is it searching for?
What are some of the costs, or shortcomings, of monopoly?
What is the deadweight loss of monopoly?
Why must a seller be a price searcher (among other things) before he can price discriminate?
Businesses often price discriminate, charging different customers different prices for the same good. It is usually the case that the customer who pays the higher price is subsidizing the customer
How is a monopolistic competitor like a monopolist? How is it like a perfect competitor?
“Firms have an incentive to form a cartel, but once it is formed, they have an incentive to cheat.” What is the specific incentive to form the cartel? What is the incentive to cheat on the cartel?
Is an oligopolistic firm a price taker or a price searcher? Explain your answer.
You often hear that grade inflation exits in colleges today. Today’s college students receive an A− or B+ for the same work that would have earned them a C+ or C, say, 25 years ago. But I’m not
Why does it matter whether a market is defined broadly or narrowly for purposes of antitrust policy?
Suppose that 20 firms are in an industry and that each firm has a 5 percent market share. What is the four-firm concentration ratio for this industry? What is the Herfindahl index?
What is the advantage of the Herfindahl index over the fourand eight-firm concentration ratios? Explain your answer
State one criticism of average cost pricing.
State the essence of the capture theory of regulation.
Are economists for or against regulation?
Person 1: “Business needs to be regulated. If business firms were not regulated, then prices would be higher, quality would be lower, employees would be treated poorly, and who knows what
When a perfectly competitive firm employs one worker, it produces 20 units of output, and when it employs two workers, it produces 39 units of output. The firm sells its product for $10 per unit.
What is the difference between marginal revenue product (MRP) and value marginal product (VMP)?
How much labor should a firm purchase?
The demand for labor is a derived demand. What could cause a firm’s demand curve for labor to shift rightward?
Suppose the coefficient of elasticity of demand for labor is 3.What does this mean?
What does this mean?
Why are wage rates higher in one competitive labor market than in another? In short, why do wage rates differ?
If the absolute (or money) price of good A is \($40\) and the absolute price of good B is \($60,\) what is the relative price of each good?
If more people want to move from California to Texas than want to move from Texas to California, might U-Haul rates reflect this difference? Explain your answer.
Why might median house prices be higher in one city than in another?
If a subsidy is provided for the consumption of good X, and the subsidy is different for different units of good X (e.g.,\($40\) subsidy on the first unit of good X and \($32\) on the second unit of
Suppose a subsidy is provided to the buyers of solar panels. What is likely to happen to the price of solar panels? Explain your answer.
The demand rises for admission to a university, but both the tuition and the number of openings in the entering class remain the same. Will this change affect the admission standards of the
Administrators and faculty at state colleges and universities often say that their standards of admission are independent of whether there is a shortage or surplus of openings at the university. Do
Suppose food insurance exists. You pay the food insurance company a certain dollar amount each month, and then you purchase all the food you want from your local grocery store. The grocery store
In Exhibit 4(a), suppose that the price a person has to pay for medical care is between P1 and zero. Where would the demand for X-rays in panel(b) be in relationship to D1 and D2?
Give an example to illustrate that someone may “pay” for clean air in much the same way that she “pays” for good weather.
If the equilibrium price is \($400\) for an aisle seat and \($350\) for a middle seat but an airlines company charges \($350\) for each seat, we would expect a shortage to appear in the aisle seat
Suppose the supply of aisle, middle, and window seats is each 100 seats but the demand for aisle seats is greater than the demand for window seats, which, in turn, is greater than the demand for
University X is a large school with a major football team.A new field house and track were just added to the campus.How is this addition related to the discussion in this application?
Sometimes it is argued that, if colleges paid student athletes, the demand for college sports would decline. In other words, the demand for college sports is as high as it is because student athletes
If lowering lending standards can indirectly raise housing prices, can increasing lending standards lower housing prices? Explain.
Suppose anyone who buys a house in a certain year gets to pay \($1,000\) less in income taxes (assuming that the tax owed is greater than \($1,000).\) Would the tax credit affect house prices?
Speculators can benefit themselves and others at the same time. Do you agree or disagree with this statement? Explain your answer with an example.
The price of a given good is likely to be less variable with than without speculators. Explain.
In Exhibit 8, at what price is there a surplus of freeway space at 8 a.m.?
Explain why subsidizing the purchase of good X could end up raising the price of good X.
Explain diagrammatically why a good whose consumption is subsidized is likely to sell for a higher price than a good whose consumption is not subsidized.
On Tuesday, the price and quantity demanded are \($7\) and 120 units, respectively. Ten days later, the price and quantity demanded are \($6\) and 150 units, respectively. What is the price
What does a price elasticity of demand of 0.39 mean?
Identify what happens to total revenue as a result of each of the following:a. Price rises and demand is elastic.b. Price falls and demand is inelastic.c. Price rises and demand is unit elastic.d.
Alexi says, “When a seller raises his price, his total revenue rises.” What is Alexi implicitly assuming?
If good X has 7 substitutes and demand is inelastic, then if there are 9 substitutes for good X, will demand be elastic? Explain your answer.
Price elasticity of demand is predicted to be higher for which good of the following combinations of goods?a. Dell computers or computersb. Heinz ketchup or ketchupc. Perrier water or water Explain
What does an income elasticity of demand of 1.33 mean?
What does perfectly inelastic supply signify?
Why will government raise more tax revenue if it applies a tax to a good with inelastic demand than if it applies the tax to a good with elastic demand?
Under what condition would a per-unit tax placed on the sellers of computers be fully paid by the buyers of computers?
• Statement 1: Businesses always want to sell their products at higher prices, this way they take in greater revenue.• Statement 2: If wages go up on average then the workers, the people who earn
State and solve the diamond–water paradox.
What does falling total utility imply for marginal utility? Give an arithmetical example to illustrate your answer.
When would a good’s total utility and marginal utility be the same?
Alessandro purchases two goods, X and Y, and the utility gained for the last unit purchased of each is 16 utils and 23 utils, respectively. The prices of X and Y are \($1\) and \($1.75,\)
In a two-good world (goods A and B), what does it mean to be in consumer disequilibrium?
Brandon’s grandmother is very cautious about spending money. Yesterday, she gave Brandon a gift of \($100\) for his birthday. Brandon also received a gift of \($100\) from his father, who isn’t
Summarize David Friedman’s explanation of the endowment effect.
The town adjacent to my own has just implemented tighter pollution standards. It turns out that, as a result, the air quality is better in that town than in the town I live in. I think that people
Will individuals form teams or firms in all settings?
Suppose everything about two people is the same except that currently one person earns a high salary and the other person earns a low salary. Which person is more likely to start his or her own
Is accounting profit or economic profit larger? Why?
When can a business owner be earning a profit but not covering costs?
If the short run is six months, does it follow that the long run is longer than six months? Explain your answer.
“As we add more capital to more labor, eventually the law of diminishing marginal returns will set in.” What is wrong with this statement?
Suppose an MC curve falls when output is in the range from 1 unit to 10 units. Then it flattens out and remains constant over an output range from 10 units to 20 units, after which it rises over a
Identify two ways to compute average total cost (ATC ).
Would a business ever sell its product for less than cost? Explain your answer.
What happens to unit costs as marginal costs rise? Explain your answer.
Do changes in MPP influence unit costs? Explain your answer.
What would the LRATC curve look like if there were always constant returns to scale? Explain your answer.
Firm A charged \($4\) per unit when it produced 100 units of good X, and it charged \($3\) per unit when it produced 200 units. Furthermore, the firm earned the same profit per unit in both cases.
The economist hears someone say:Business firms are all about maximizing revenue. If a firm is currently earning \($10\) million in total revenue, and it can sell 10 more units of whatever it is that
When would total costs equal fixed costs?
When will total cost equal total variable cost?
The United States is losing jobs manufacturing jobs to other countries. The number of manufacturing jobs has fallen in the United States in recent years. If the current trend in manufacturing jobs
As Sandi’s income rises, her demand for popcorn rises. As Mark’s income falls, his demand for prepaid telephone cards rises. What kinds of goods are popcorn for Sandi and telephone cards for Mark?
Why are demand curves downward sloping?
Give an example that illustrates how to derive a market demand curve.

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