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microeconomics

Microeconomics 1st Edition Austan Goolsbee, Steven Levitt, Chad Syverson - Solutions

2. In Problem 1, we discovered that imperfect information about the quality of used cars caused fewer plums and more lemons to be offered for sale. Thinking in discrete steps,a. How does this revision of the expected value affect the proportion of lemons to plums offered for sale by sellers?b. How
1. Consider the market for used cars shown in the figure below. The top panel (a) shows the market for low-quality cars (lemons); the bottom panel (b) shows the market for high-quality cars(plums). If all buyers and sellers had full information about the quality of automobiles being offered for
12. Name two examples of signals other than education.How do these examples reduce asymmetric information?
11. How can education be used as a signal in the job market?
10. How can signaling be used to reduce asymmetric information in a market?
9. How can principals reduce the problems associated with principal – agent relationships?
8. What market characteristics can create problems in a principal – agent relationship?
7. How can insurance providers use incentives to reduce moral hazard in the insurance market?
6. What is moral hazard? Describe the example of moral hazard in the insurance market.
5. How can insurance companies mitigate the problems of adverse selection?
4. How can warranties reduce the lemons problem in an economic market?
3. Define adverse selection. Why does the lemons problem result in adverse selection?
2. What characteristics of a market can create the lemons problem?
1. Contrast market situations with complete and asymmetric information. What is an example of a market with complete information?
20. Consider the production possibilities frontier depicted below, which shows the different combinations of guns and roses an economy can produce when it uses all its inputs efficiently.a. If the MRT at point A is 2.0, and the marginal product of labor in the gun industry is 12, what must the
19. Consider the production contract curve in the graph below which illustrates efficient allocations of labor and capital to the production of two goods, guns and roses.a. Use the information in the production contract curve to draw the production possibilities frontier for guns and roses. Put
18. On a small tropical island, two firms draw on the same supply of labor and capital. The first firm produces fish, and in the fishing industry the marginal product of labor is 8 and the marginal product of capital is 5. The second firm produces coconut, and in the coconut industry the marginal
17. The Edgeworth box below shows how castaways Tom and Hank are allocating labor and capital to the production of two goods, food and clothing.The economy is currently at point A.a. How many units of labor and capital are being used in the production of each good?b. How many units of food are
16. Bill and Ted like apples and oranges. Bill is always willing to substitute 1 apple for 1 orange.Ted is always willing to substitute 1 apple for 2 oranges.a. Assume that there are 10 apples and 10 oranges to split between Bill and Ted. Construct an appropriately sized Edgeworth box for them.b.
15. Chris and Pat like both beer and pizza. Chris views pizza and beer as perfect one-to-one substitutes.Pat believes that beer and pizza are perfect complements, and always consumes them in one-to-one proportions.a. Construct an Edgeworth box for Chris and Pat.b. Derive the contract curve for
14. Consider the following Edgeworth box diagram that illustrates the preferences of Ed and Peggy for fish and chips.Draw the consumption contract curve corresponding to these preferences. (Hint: You may need to add some indifference curves to the diagram.) Ed's chips Ugl UPA Up3 Ed's fish Peggy's
13. Johnny and June are divorcing and must divide their music collection, which contains two types of music: country and folk. A mediator suggests an initial division of the collection. Given the initial division, Johnny’s MRS between folk and country is 3, and June’s MRS is 1.a. Use an
12. Consider the Edgeworth box below, which represents the amount of tea and crumpets available to Eliza and Henry.a. Suppose that Eliza and Henry are currently at point A. How many servings of tea and how many crumpets are each enjoying?b. Suppose that while Eliza is using the powder room, Henry
11. Consider the Edgeworth box diagram below, which illustrates the amount of peaches and cream in the refrigerator of Billy Joe and Bobby Sue.a. How many peaches do Billy Joe and Bobby Sue have in their fridge?b. How much cream do Billy Joe and Bobby Sue have in their fridge?c. Suppose that Billy
10. Abel, Baker, and Charlie are identical triplets with identical tastes. The utility they get from consuming various amounts of bacon, eggs, and cheese is summarized in the following table:Thus, if Abel has 4 pieces of bacon and 3 eggs, his total utility will be 190 + 150, or 340.a. Suppose that
9. Al has found $1,000 and has decided to divide it between his children, Bud and Kelly.a. If Al believes that a fair division means giving equal amounts of cash to everyone, how much should he give to Bud and Kelly?b. Suppose that Bud is rich and Kelly is poor.Assume that the marginal utility
8. Bob, Carol, and Ted are residents of a tiny commune in darkest Peru. Bob currently has a utility level ( U b ) of 55 utils, Carol’s utility ( U c ) is 35 utils, and Ted’s utility ( U t ) is 10 utils. Alice, the benevolent ruler of the commune, has discovered a policy that will allow her to
7. You are a USDA pork analyst, charged with keeping up to date on developments in the market for “the other white meat.” Recently, the demand for beef decreased.a. Explain how pork and beef might be linked on the demand side of the market.b. Explain how pork and beef might be linked on the
6. In the central United States, farm ground is devoted to corn and beans as far as the eye can see. The supply of beans (in millions of bushels)is given by Q b s= 2P b – P c . The supply of corn is given by Q c s= 2 P c – P b . Let the demand for beans be given by Q b d = 30 – P b , and the
5. Suppose that lettuce and tomatoes are goods that are related on the demand side of the market, and that both markets are in equilibrium.George and Janet are analyzing the effect of an increase in the demand for tomatoes. George is using a partial equilibrium framework, and Janet is using a
4. Consider the wine and cheese problem you solved in Problem 3. Suppose the demand for wine changes so that at every price, 10 fewer bottles are demanded.a. Hold the price of cheese constant, and calculate the partial equilibrium effects of the change in the demand for wine. What happens to the
*3. The following statements describe supply and demand conditions in the markets for cheese and wine, respectively.• The demand for cheese is given by Q c d = 30 – P c – P w , where Q c d is the quantity of cheese demanded each week in ounces, P c is the price of a pound of cheese, and P w
*2. Following a renewable fuels mandate in 2005, the demand for yellow corn, the key ingredient in ethanol, skyrocketed.a. What is the immediate effect of the increase in demand on the price and quantity of yellow corn?b. Yellow corn and white corn (the key ingredient in corn tortillas) are
1. Peanut butter has always been thought to be a delicious, wholesome food. That is, until the FDA releases its Food Defect Guidelines that set maximum allowable amounts of rodent excreta that may be present in every jar (surprisingly, the maximum is not zero!). Following this release, the demand
12. What does the Second Welfare Theorem predict?
11. What conditions are required for the First Welfare Theorem to hold?
10. How does the production possibilities frontier relate to the marginal rate of transformation?
9. How does the production contract curve relate to Pareto efficiency?
8. What does input efficiency imply about the relationship between the marginal rate of technical substitution and input prices? How can this relationship be seen in an Edgeworth box?
7. How does the consumption contract curve relate to Pareto efficiency?
6. What is the relationship between consumers’marginal rates of substitution and the goods’prices in an efficient market? How can this relationship be seen in an Edgeworth box?
5. What can the Edgeworth box be used to examine?What does an Edgeworth box plot?
4. What are the three requirements of an efficient market?
3. How do economists generally define efficiency in a market?
2. Social welfare functions combine the utility levels of everyone in society into a single index.List three types of social welfare functions and discuss what they mean.
1. Describe the two branches of general equilibrium analysis.
20. Danielle is a farmer, with a utility function of U = I 0.5, where U is Danielle’s utility and I is her income. If the weather is good, she will earn$100,000. If there is a hailstorm, she will earn only $50,000. The probability of a hailstorm in any given year is 30%.a. What is Danielle’s
19. Speedy Steve is a traveling salesman. His utility function is given by U = I 0.5 , where U is his utility and I is his income. Steve’s income is $900 each week, but if Steve is caught speeding while making his rounds, he will receive a hefty fine.There is a 50% chance he will be caught
18. Using diagrams of the market for capital, determine the effect of the following events on market interest rates:a. Consumers increase their saving rate.b. Advances in nanotechnology reduce firms’costs and increase estimates of future profits.c. Congress eliminates the tax deductibility of
17. You are considering the purchase of an old fire station, which you plan to convert to an indoor playground. The fire station can be purchased for $200,000, and the playground will generate lifetime profits (excluding the cost of the building)of $700,000. (Assume that those profits are all
16. You are romantically interested in Chris, but have always wanted to date the president of the Economics Club. As it turns out, Chris is battling Pat for control of the Econ Club. That battle should be decided in a year, and you estimate the odds of Chris winning at 60%. Attracting Chris and
15. Mel is a risk-neutral investor concerned about the future availability of gas. He is considering purchasing a gallon of gas today and placing it in storage for 10 years as a hedge against future gas price increases.a. If today’s price of gas is $4.00 per gallon, and the future price of gas is
14. You have $832.66 in a savings account that offers a 5.25% interest rate.a. If you leave your money in that account for 20 years, how much will you have in the account?b. Suppose that inflation is expected to run at 3.25% for the next 20 years. Use the real interest rate to calculate the
13. You are currently driving a gas-guzzling Oldsmobuick that you expect to be able to drive for the next five years. A recent spike in gas prices to $5 per gallon has you considering a trade to a fuelefficient hybrid Prius. Your Oldsmobuick has no resale value, and gets 15 miles per gallon. A new
12. Marian currently makes $40,000 a year as a librarian.She is considering a career change: For a current expenditure of $30,000, she can obtain her florist’s license and become a flower arranger. If she makes that career change, her earnings will rise to $48,000 per year. Marian has five years
11. Ralph is considering purchasing an ostrich, which he can graze for free in his backyard.Once the ostrich reaches maturity (in exactly three years), Ralph will be able to sell it for$2,000. The ostrich costs $1,500.a. Suppose that interest rates are 8%. Calculate the net present value of the
10. Consider the following two bonds: a Treasury bill that will pay you $1,000 in 1 year, and a zero-coupon Treasury bond that will pay you$1,000 in 30 years.a. Calculate the value of each of these bonds today if interest rates are 4%.b. Suppose interest rates rise to 8%. What will happen to the
9. As a New Year’s gift to yourself, you buy your roommate’s 1976 Ford Pinto. She has given you the option of two payment plans. Under Plan A, you pay $500 now, plus $500 at the beginning of each of the next two years. Under Plan B, you would pay nothing down, but $800 at the beginning of each
8. Many college graduates feel as if their student loan payments drag on forever. Suppose that the government offers the following arrangement: It will pay for your college in its entirety, and in return you will make annual payments until the end of time.a. Suppose the government asks for $6,000
7. You have just purchased a Kia with a $20,000 price tag. The dealer offers to let you pay for your car in five equal annual installments, with the first payment due in a year.a. If the dealer finances your purchase at an interest rate of 10%, how much will your annual payment be?b. How much would
6. A state lottery makes the following announcement:“Frederick Carbuncle has just won$100 million! We’ll pay Frederick $10 million each year for the next 10 years!”a. Has Frederick really won $100 million?Explain.b. Many state lotteries allow winners to choose a single payment instead of a
*5. You are writing the great American novel, and have signed a contract with the world’s most prestigious publisher. To keep you on schedule, the publisher promises you a $100,000 bonus when the first draft is complete, and another$100,000 following revisions. You believe that you can write the
4. On your 20th birthday, a dear aunt sends you a lovely card and an IOU for $1,000, to be paid on your 21st birthday. Eager to lay your hands on the cash (after all, the Spice Girls only have a reunion tour every decade or so), you try to sell your aunt’s IOU to your sister.a. If interest rates
3. Suppose that when you were one year old, your grandmother gave you a shiny silver dollar.Your parents put that silver dollar in a savings account with a guaranteed 9% interest rate, and then promptly forgot about it.a. Use the Rule of 72 to estimate how much that account will grow to by the time
2. Imagine that you have $100 of ill-gotten gains stashed in an offshore bank account. Lest the IRS get too nosey, you plan to leave that account idle until your retirement in 45 years.a. If your bank pays you 3% annual interest, what will your account balance be upon retirement?b. If your bank
*1. You are a bunny rancher.a. Suppose that you have 100 bunnies, and that because of your successful animal husbandry, your stock of bunnies grows by 20% each year. How many bunnies will you have at the end of this year?b. Suppose that you have 120 bunnies, and that because of your successful
12. Define the risk-free interest rate. How does it relate to the interest rate on a risky investment?
11. Why do we consider diversification a key function of insurance markets?
10. What is the value of insurance to a risk-averse consumer?
9. How can expected value be used to evaluate risky investments?
8. How is the equilibrium interest rate determined in the market for capital? Who are the suppliers and demanders of capital?
7. What is the approximate relationship between an investment’s nominal interest rate and its real interest rate?
6. What advantage does net present value analysis have over the use of payback periods to evaluate investment decisions?
5. When will an investment’s net present value be positive? Given its sign, should you invest in this project?
4. Describe the two main parts that make up a bond’s payment stream.
3. How can you calculate the interest rate associated with a given set of assets?
2. What is the benefit of using present discounted value analysis?
1. Provide an example of an investment.
20. In the 1960s, tobacco producers engaged in fierce battles for market share. The major weapon in that war was advertising — advertising that was designed not to attract new smokers, but to lure smokers away from competing brands. Consider the following scenario: There are two tobacco sellers,
19. Refer to Problem 18. It seems realistic to assume that the game could continue indefinitely — after all, the world will need otters 50 years from now just as badly as it does today. But time is money, so a dollar of profit a year from now is only valued as much as $d received today, where d
18. You are one of two member nations of OOEC: the Organization of Otter Exporting Countries, a cartel designed to artificially restrict otter output in an attempt to generate monopoly profits. Demand conditions are such that various combinations of output yield the profits in the payoff matrix
17. There are two ice cream vendors, Ben and Jerry, on a crowded strip of beach. There are five permissible locations for ice cream vendors to locate, cleverly named positions 1, 2, 3, 4, and 5. Position 1 is at the far north end of the beach, Position 5 at the far south end, and Position 3 in the
16. Assume that two clothing manufacturers, Lands’ End and L.L. Bean, market their goods strictly by mail order. Each produces an essentially identical field coat. The cost of producing such a coat is exactly $100.Because the field coats are perfect substitutes, customers will flock to the seller
15. In a dry, dusty desert town, only two people (Antoinette and August) have water wells. Each day, they begin their morning by pumping water, which they then bring to the town square to sell. Pumping water costs them essentially nothing, but time is such that each can afford to make only one trip
14. Bonnie and Clyde are players in a classical prisoner’s dilemma. Captured by police, they are separated and each is offered the following deal: If nobody talks, there is enough evidence to convict them on a lesser charge, and each will get 3 years in jail. If one sells out the other on the
13. A Democratic president and a Republican Congress are at odds over two pieces of legislation.One is a welfare bill and the other is a farm subsidy.Congress loves the subsidy and hates the welfare bill; the president loves the welfare bill and hates the subsidy. Congress must originate any
12. Jen suspects that Brad is having an affair with Angie, and wants to divorce him. Her prenuptial agreement specifies that if she files for divorce, she receives $60,000, but that her award will double if she can provide solid evidence of an affair. Jen’s lawyer can prove the affair only if he
11. Crazy Eddie and Loopy Larry are two electronics merchants, who sell plasma TVs at either a high price or a low price. If they both charge a high price, they will each earn high profits. If one charges a high price while the other charges a low price, the low-price seller will get all the
10. Your little twin sisters (whom you lovingly refer to as Thing 1 and Thing 2) are driving you crazy! You’ve baked them a lovely birthday cake, but they won’t stop fighting over who gets the biggest slice. To settle the dispute, you draw on a time-honored ritual: You ask Thing 1 to cut the
9. Each day, you and a friend play odds/evens to see who gets the last doughnut. On command, you each extend either one or two fingers. If the sum of the fingers is odd, you get the doughnut.If the sum of the fingers is even, your friend gets the doughnut.a. Let the payoffs from winning be 1, and
8. Two oligopolistic aluminum manufacturers are engaged in bitter competition with one another.The biggest firm, Big Aluminum Giant (BAG), is deciding whether to expand capacity or hold the line. The smallest firm, Little Aluminum Giant(LAG), is also considering expansion. The table below shows
7. Consider the situation the economics professor faces in Problem 6, but now let’s suppose that Dave makes you the following offer: “Let’s really soak this guy. I’ll pass on turns 2 and 4 if you’ll go halves on the 500 bucks with me.”Should this offer fundamentally alter the outcome of
6. You and a classmate (let’s call him Dave) discover that your economics teacher has been secretly talking about notions such as “love,”“fairness,” and “decency.” Desperate to preserve his reputation in the community of economists, he tries to buy your silence in the following
5. Consider the game below:a. What is the Nash equilibrium in this game?b. Explain why this game might reasonably end up at a non-equilibrium outcome. Whose play is likely to be responsible for that happening? Ethel Left Right Up 100,50 130,8 Fred Down 150,6 -10,000,4
4. Use best-response analysis (the check method)to find the Nash equilibrium or equilibria (if any) in each of the following games.a. a. Fred Opera Bowling Opera 5,2 0,0 Wilma Bowling 0,0 2,5 b. Chuck Straight Swerve Straight 0,0 3,1 Ren Swerve 1,3 2,2
3. For each of the following games, use dominance to find the Nash equilibrium. Each game contains only one Nash equilibrium. a. b. C. MacBeth Clean Listen Spot to Wife Slay King 10,2 8,4 MacDuff Roll Head 6,4 4,5 Ferris Twist Shout Bump 4,8 6,6 Elvis Grind 2,4 4,3 Eagle Take It Take It to Easy the
2. For each player in the following games, find the dominant strategy, if any. a. Coyote Anvil Dynamite Beep 6,2 4,5 Roadrunner Run 7,3 6,8 b. C. Bart Pout Whine Lay Finger on 6,8 11,3 Butterfinger Maggie Ignore 2,6 9,5 Butterfinger Martha Red White Steak 5,2 8,4 Julia Chicken 6,1 7,3
*1. Consider the game below:a. Who are the players in this game?b. What strategies are available to Duvall?c. If Earl plays Hammer and Duvall plays Roll, then what is Earl’s payoff?d. If Earl plays Stirrup and Duvall plays Drop, what is Duvall’s payoff? Duvall Stop Drop Roll Hammer 4,14 9,6 5,3
12. What are some ways in which a company uses its reputation to its advantage?
11. Describe the relationship between credibility and entry deterrence to a market.

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