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microeconomics

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

2. Name and describe three barriers to entry to a market.
1. When does a firm have market power?
5. Consider a firm in a perfectly competitive market with total costs given by TC = Q 3 – 15 Q 2 + 100Q + 30a. What is this firm’s marginal cost function? Over what range of output are the firm’s marginal costs decreasing? Increasing?b. Suppose that the market price is $52. What is this
4. Suppose a firm faces the inverse demand curve P = 600 Q – 0.5 . The firm has the total cost curve TC = 1,000 + 0.5 Q 1.5 . Find the firm’s profitmaximizing output, price, and profit.
3. Suppose that American Borax is a monopolist and that the worldwide demand for borax is Q = 100 – P where Q is tons of borax and P is the price per ton. The total cost function for American Borax is TC = 10Q + 0.5 Q 2 .a. Write out the firm’s total revenue as a function of Q.b. What is the
2. Suppose a firm faces demand of Q = 300 – 2P and has a total cost curve of TC = 75Q + Q 2 .a. What is the firm’s marginal revenue?b. What is the firm’s marginal cost?c. Find the firm’s profit-maximizing quantity where MR = MC.d. Find the firm’s profit-maximizing price and profit.
1. Find marginal revenue for the firms that face the following demand curves:a. Q = 1,000 – 5Pb. Q = 100 P –2
20. Assume that the ice cream industry is perfectly competitive. Each firm producing ice cream must hire an operations manager. There are only 50 operations managers that display extraordinary talent for producing ice cream; there is a potentially unlimited supply of operations managers with
19. Suppose that the market for eggs is initially in long-run equilibrium. One day, enterprising and profit-hungry egg farmer Atkins has the inspiration to fit his laying hens with rose-colored contact lenses. His inspiration is true genius — overnight his egg production rises and his costs
18. Suppose that the restaurant industry is perfectly competitive. All producers have identical cost curves, and the industry is currently in long-run equilibrium, with each producer producing at its minimum long-run average total cost of $8.a. If there is a sudden increase in demand for restaurant
17. The canola oil industry is perfectly competitive.Every producer has the following long-run total cost function: LTC = 2 Q 3 – 15 Q 2 + 40Q, where Q is measured in tons of canola oil. The corresponding marginal cost function is given by LMC = 6 Q 2 – 30Q + 40.a. Calculate and graph the
16. Martha is one producer in the perfectly competitive jelly industry. Last year, Martha and all of her competitors found themselves earning economic profits.a. If entry and exit from the jelly industry are free, what do you expect to happen to the number of suppliers in the industry in the long
15. For the past nine months, Iliana has been producing artisanal ice creams from her small shop in Chicago. She’s been just breaking even (earning zero economic profit) that entire time. This morning, the state Board of Health informed her that they are doubling the annual fee for the dairy
14. Consider Minnie the pearl producer with cost curves as shown below. Minnie produces 1,000 pearls when the price of pearls is $100.a. What is the area of producer surplus earned by Minnie if the price of pearls is $100?b. Explain why areas ADI and ADLM must be equal. Price & cost (S/unit) A $100
13. The graphs below depict supply curves for John, Paul, and George, who are three producers in the perfectly competitive songwriting industry.a. If the price of songs is $1,000, how many songs will John write? Paul? George? The three combined?b. If the price of songs is $2,000, how many songs
12. Consider the following graph, which depicts the cost curves of a perfectly competitive seller of potatoes.Potatoes currently sell for $3 per pound.a. To maximize profit, how many pounds of potatoes should this seller produce?Suppose that the potato grower’s bank ratchets up the interest rate
11. Marty sells flux capacitors in a perfectly competitive market. His marginal cost is given by MC = Q. Thus, the first capacitor Marty produces has a marginal cost of $1, the second has a marginal cost of $2, and so on.a. Draw a diagram showing the marginal cost of each unit that Marty
10. Consider the diagram below that depicts the cost curves for a perfectly competitive firm. The market price (and marginal revenue) faced by this firm is $7.a. The owner of the firm finds that marginal cost and marginal revenue are equal at 11 units of output. If the owner produces 11 units, what
9. True or False: “In the short run, if a firm is not earning a profit, it should shut down.” Explain your answer.
*8. Minnie is one producer in the perfectly competitive pearl industry. Minnie’s cost curves are shown below. Pearls sell for $100, and in maximizing profits, Minnie produces 1,000 pearls per month.a. Find the area on the graph that illustrates the total revenue from selling 1,000 units at $100
*7. Hack’s Berries faces a short-run total cost of production given by TC = Q 3 – 12 Q 2 + 100Q + 1,000.a. What is the level of Hack’s fixed cost?b. What is Hack’s short-run average variable cost of producing berries? (Express AVC as a function of Q.)c. If the price of berries is $60, how
6. Heloise and Abelard produce letters in a perfectly competitive industry. Heloise is much better at it than Abelard: On average, she can produce letters for half the cost of Abelard’s. True or False: If Heloise and Abelard are both maximizing profit, the last letter that Heloise produces will
5. Josie’s Pussycats sells ceramic kittens. The marginal cost of producing a particular kitten depends on how many kittens Josie produces, and is given by the formula MC = 0.8Q. Thus, the first kitten Josie produces has a marginal cost of$0.80, the second has a marginal cost of $1.60, and so on.
4. The diagram below depicts the revenues and costs of a firm producing vodka.a. What will the firm’s profit be if it decides to produce 20 units of output? 120 units?b. Suppose the firm is producing 70 units of output and decides to cut output to 60. What will happen to the firm’s profit as a
3. The egg industry is comprised of many firms producing an identical product. Demand and supply conditions are indicated in the left-hand panel of the figure below; the long-run cost curves of a representative egg producer are shown in the right-hand panel. Currently, the market price of eggs is
*2. The graph below depicts the market for aloe vera gel. The left-hand panel depicts market demand and industry supply; the right-hand panel depicts the long-run cost curves for a representative firm in the industry.a. Are the firms in the industry earning economic profits or losses? How can you
*1. Nancy sells beeswax in a perfectly competitive market for $50 per pound. Nancy’s fixed costs are $15, and Nancy is capable of producing up to 6 pounds of beeswax each year. Use that information to fill in the table below. (Hint: Total variable cost is simply the sum of the marginal costs up
13. Perfectly competitive firms earn zero economic profits in the long run. How can a firm earn zero economic profits and still yield positive economic rents?
12. Economic rents are returns to scarce inputs above what firms paid for them. When will a firm earn economic rents?
11. When do economists say that a market is in a long-run competitive equilibrium?
10. Perfectly competitive industries have free entry and exit in the long run. When will firms decide to enter an industry? When will a firm exit an industry?
9. Define producer surplus. What is the relationship between profit, producer surplus, and fixed costs?
8. What happens to short-run industry supply when firms’ fixed costs change?
7. How do we use firms’ short-run supply curves to create the industry short-run supply curve?
6. What is a perfectly competitive firm’s short-run supply curve?
5. A firm operating at a loss will decide whether to shut down based on the relationship between the market price and the firm’s average variable cost. When will a firm choose to operate? Why does a firm ignore its fixed cost when making this decision?
4. What is the relationship between the market price and marginal cost when a perfectly competitive firm is maximizing its profit?
3. Define a firm’s profit.
2. Why does a perfectly competitive firm face a horizontal demand curve?
1. Economists categorize an industry by three criteria:the number of firms in the industry, the type of product sold, and barriers to entry. Using these three criteria, describe a perfectly competitive industry.
20. In the short run, your firm can vary only the amount of labor it employs. Labor can be hired for $5 per unit, and your firm’s fixed costs are $25. Your firm’s short-run production function is given in the table below:a. Compute the marginal and average product of each worker. What shape
19. Suppose that a firm has the following Cobb –Douglas production function: Q = 12K 0.75 L 0.25 .a. What must its long-run total cost curve look like? Its long-run average total cost curve?b. How do your answers to part (a) change if the firm’s production function is Q = KL?
18. Mike’s Bicycle Factory builds specialty bicycles with the following long-run cost function: TC =2.5( Q 3 ). Plot Mike’s ATC and MC curves for quantities 1 through 5.a. For which quantities does Mike’s Bicycle Factory exhibit economies of scale?b. For which quantities does it exhibit
17. A builder of custom motorcycles has a choice of operating out of one garage or two. When it operates out of one garage, its average total cost of production is given by ATC 1 = Q 2 – 6Q + 14.If it operates out of two garages, its average total cost of production is given by ATC 2 =Q 2 – 10Q
16. Digging trenches requires two types of labor: unskilled labor (aka workers) and skilled labor(aka supervisors). Unskilled labor can be hired for$50 per day, and skilled labor can be hired for $100 per day. If, by hiring another unskilled laborer, K&B Construction Company can dig another 20 feet
15. Suppose an increase in the minimum wage alters the cost of producing fast-food hamburgers.Show what happens to McDonald’s long-run expansion path as a result of this wage increase.
14. How does a firm’s short-run ATC curve differ from its long-run ATC curve? Explain your answer.
13. You are the CEO of a major producer of funnel cakes. Your cost accountant has provided you with a table describing your cost structure, but you have inadvertently dripped cooking grease on it and most of the table is illegible. Reconstruct the table below, given the remaining legible numbers.
12. Suppose a firm has the following production function: Q = 2KL. The marginal product of capital for this production function is 2L, and the marginal product of labor is 2K. If capital rents for $100 per unit per day, labor can be hired for $200 per unit per day, and the firm is minimizing
11. Derive formulas for average fixed cost, average variable cost, average total cost, and marginal cost for the following cost function:TC = 100 + 10Q
10. Daniel’s Midland Archers (DMA) makes children’s wooden practice arrows. Draw a set of representative short-run cost curves for DMA.Include average variable cost, average fixed cost, average total cost, and marginal cost.a. Suppose that Congress imposes a 39-cent excise tax on each
*9. Consider the costs for Catherine’s cupcake business:Re-create the above table with columns showing Catherine’s variable cost, average total cost, average fixed cost, and average variable cost. Quantity (batches) Fixed Cost ($) Total Cost ($) 1 50 75 2 50 85 3 50 102 4 50 127 5 50 165 6 50
8. Complete the cost table below: Average Total Total Quantity Cost ($) Cost ($) Marginal Cost ($) 0 0 1 35 2 3 5 115 28 25 40
7. Philo T. Farmsworth is a corn farmer with a 40-acre tract of land. Each acre can produce 100 bushels of corn. The cost of planting the tract in corn is $20,000, and the cost of harvesting the corn is $10,000. In May, when corn is selling for $10 per bushel, Philo plants his crop. In September
6. A Toyota Camry costs $19,600 and has an average gas mileage of 27 mpg. A Toyota Prius costs $23,000 and has an average gas mileage of 50 mpg. Assuming gas costs $4 per gallon, generate total cost equations as a function of miles driven for each of these cars and identify the fixed and variable
*5. Amanda owns a toy manufacturing plant with the production function Q = 100L – 3,000, where L is hired labor hours. If the wage rate that Amanda pays her laborers is $7 per hour, what is her cost function?
4. Kyle recently opened a bar & grill. The costs associated with his new business are as follows:a. $300,000 to build the restaurantb. $30,000 for a liquor licensec. $50,000 on furniture and kitchenwared. 2 cooks who will each be paid $5,000 per monthe. 5 waiters who will each be paid $3 per hour
*3. Indicate whether the following statements are true or false, and then briefly explain your reasoning.a. It is possible for accounting and economic costs to be equal, but it is never possible for economic costs to be less than accounting costs.b. It is possible for a firm to show an economic
2. Casey is an expert poker player and can make$35 an hour playing poker online. On Saturday Casey goes to a local tournament with a $15 entry fee. He plays for four hours and wins first place, taking home the $150 prize. Did Casey make an economic profit at the tournament?
1. Jenny is considering starting a new business selling organic groceries. It would cost her $350,000 a year to rent store space and buy the groceries from a wholesaler, and she would have to quit her current job and give up a $70,000 annual salary.a. What is Jenny’s opportunity cost of starting
11. When does a producer face economies of scope?When does a producer face diseconomies of scope?
10. Describe the conditions under which a firm has economies of scale, diseconomies of scale, and constant economies of scale.
9. Why is a firm’s short-run total cost greater than its long-run total cost? Explain why this is also true for a firm’s short-run and long-run average costs.
8. Why does a firm’s fixed cost not affect its marginal cost of producing an additional unit of a product?
7. Name the three measures that examine a firm’s per-unit cost at a given level of output.
6. Why is a fixed cost curve horizontal? Why does a variable cost curve have a positive slope?
5. Describe the relationship between fixed, variable, and total costs.
4. Provide some examples of unavoidable fixed costs. How are these related to sunk costs? Describe why a firm should not consider sunk costs when making decisions.
3. What is the sunk cost fallacy?
2. Define opportunity cost. How does a firm’s opportunity cost relate to its economic cost?
1. What is the difference between a firm’s accounting and economic costs? How do these costs relate to a firm’s accounting and economic profits?
3. A firm has a production function given by Q = 10K 0.25 L 0.25 . Suppose that each unit of capital costs R and each unit of labor costs W.a. Derive the long-run demands for capital and labor.b. Derive the total cost curve for this firm.c. Derive the long-run average and marginal cost curves.d.
2. Margarita Robotics has a daily production function given by Q = K 0.5 L 0.5 , where K is the monthly number of hours of use for a precision lathe (capital) and L is the monthly number of machinist hours (labor). Suppose that each unit of capital costs$40, and each unit of labor costs $10.a. In
1. A firm has a production function of Q = 0.25KL 0.5 , the rental rate of capital is $100, and the wage rate is $25. In the short run, K− − is fixed at 100 units.a. What is the short-run production function?b. What is the short-run demand for labor?c. What are the firm’s short-run total cost
20. Suppose that the production function for Alfred Barbuda, a producer of fine violins, is given by the following: Q = 10 K 0.5 L 0.5 .a. Suppose that Alfred is currently using 1 unit of capital. If he hires 4 workers, how many violins will they produce?b. Suppose that Alfred is currently using
19. Determine whether each of the production functions below displays constant, increasing, or decreasing returns to scale:a. Q = 10 K 0.75 L 0.25e. Q = K + L + KLb. Q = ( K 0.75 L 0.25 ) 2f. Q = 2 K 2 + 3 L 2c. Q = K 0.75 L 0.75 g. Q = KLd. Q = K 0.25 L 0.25 h. Q = min(3K, 2L)
18. Mad Max’s Road Warriors fix potholes in interstate highways. Max’s road crews fill potholes using workers and shovels in 1 to 1 correspondence.A worker with 1 shovel can fill 10 potholes in a day. A worker with 2 shovels can still only fill 10 potholes, as can 2 workers with 1 shovel.a.
17. A young college student on a tight budget is campaigning for an open city council seat. A friend in her economics class estimates that voters are influenced by TV and newspaper ads according to the following function: Votes =300T V 0.6 N P 0.2 , where TV represents the number of television ads
16. With the production function Q = 2 min(K, L)and the cost function C = 2K + 3L, what combination of inputs minimizes costs for Q = 10?Show this solution graphically.
15. You are the CEO of large-scale corporate farms, and your managers run two farms in neighboring counties. Your chief financial officer reports that in both Rice and Reno counties, farm labor can be hired for $7.36 per hour, farm equipment can be rented for $433 per hour, and land can be rented
14. Suppose that the production function for iPods is Q = 20 K 0.5 L 0.5 . The marginal product of labor is 10(K/L ) 0.5 , and the marginal product of capital is 10(L/K ) 0.5 .a. Suppose that labor can be hired for $6, and capital can be hired for $9. When the firm is producing 49 units at lowest
13. Baldor, Inc. measures the marginal rate of technical substitution (MRTS) at M P L /M P K = 3.The prices of labor and capital faced by Baldor are such that currently W/R = 4.a. Is Baldor minimizing its costs?b. What can Baldor do to improve its situation?
12. Suppose that Gloucester Old Bank’s customers can complete their transactions at a teller’s window(involving labor) or at an ATM (involving capital). The production function for the bank’s services is given as follows: Q = 4K + 6L, where Q is the number of customers served, K is the number
11. Use a diagram to explain the following: In the case of perfect substitutes, if the ratio of input prices equals the MRTS, will a unique solution to the firm’s cost-minimization problem exist?In the case of perfect substitutes, if the ratio of input prices does not equal the MRTS, where will
10. Jake and Paul run a paper company. Each week they need to produce 1,000 reams of paper to ship to their customers. The paper plant’s longrun production function is Q = 4 K 0.75 L 0.25 , where Q is the number of reams produced, K is the quantity of capital rented, and L is the quantity of
9. Consider the production and cost information depicted below:a. Suppose that capital can be hired for $24 per hour. Label each of the isocost lines with the appropriate total expenditure for the firm.b. Suppose that labor can be hired for $36 per hour. Label the horizontal intercept of each
8. A jeweler can potentially use two inputs in her handcrafted jewelry: copper or bronze. She finds that when she minimizes her costs, she uses either copper or bronze, but never both. What must her isoquants look like?
*7. Suppose that Manny, Jack, and Moe can hire workers for $12 per hour, or can rent capital for$7 per hour.a. Write an expression for Manny, Jack, and Moe’s total cost as a function of how many workers they hire and how much capital they employ.b. Assume that Manny, Jack, and Moe wish to hold
*6. Contrast the production functions given below:a. Suppose that the production function faced by a 30-weight ball bearing producer is given by Q = 4 K 0.5 L 0.5 , where M P K = 2 K – 0.5 L 0.5 and M P L = 2 K 0.5 L – 0.5 . Do both labor and capital display diminishing marginal products?Does
5. Fetzer valves can be made in either China or the United States, but because labor in the United States is more skilled, on average, than labor in China, the production technologies differ. Consider the two production isoquants in the figure.Each represents either the production technology for
4. Suppose that a firm’s production function is given by Q = K 0.33 L 0.67 , where M P K = 0.33 K – 0.67 L 0.67 and M P L = 0.67 K 0.33 L – 0.33 .a. As L increases, what happens to the marginal product of labor?b. As K increases, what happens to the marginal product of labor?c. Why would the
3. Complete the table below: Labor Total Marginal Average Input Product Product Product 0 0 - 70 135 2 3 4 5 6 366 63 51 60
2. The table below represents the production function for Hawg Wild, a small catering company specializing in barbecued pork. The numbers in the cells represent the number of customers that can be served with various combinations of labor and capital.a. Is this production function a short-run or
*1. Consider the production function presented in the table below:a. If the firm decides to employ 6 units of capital and 1 worker, what is its output?b. What other combinations of capital and labor could be used to produce the same level of output you found in (a)?c. Plot the combinations you
12. What is an expansion path and how does it relate to a firm’s total cost curve?
11. How does technological change affect a firm’s output?
10. When is a production function said to have constant returns to scale, increasing returns to scale, or decreasing returns to scale?
9. How will a firm react to an increase in the price of one input relative to another?
8. What is an isocost line? What does its slope tell us about the relative cost of labor and capital?
7. What does the curvature of an isoquant imply about the two inputs, capital and labor?

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