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Microeconomics And Behavior 7th Edition Robert Frank - Solutions

4. Does the equilibrium in the Cournot model satisfy the definition of a Nash equilibrium?
3. What is the difficulty with the tit-for-tat strategy as a possible solution to the oligopoly collusion problem?
2. How is the problem of oligopoly collusion similar in structure to the prisoner’s dilemma?
1. What is the fundamental difference among the Cournot, Bertrand, and Stackelberg models of oligopoly?
15. An author has signed a contract in which the publisher promises to pay her $10,000 plus 20 percent of gross receipts from the sale of her book. True or false: If both the publisher and the author care only about their own financial return from the project, then the author will prefer a higher
*14. Crazy Harry, a monopolist, has a total cost curve given by TC 5Q 15. He sets two prices for his product, a regular price, PH, and a discount price, PL. Everyone is eligible to purchase the product at PH. To be eligible to buy at PL, it is necessary to present a copy of the latest Crazy
13. The New York Times, a profit-maximizing newspaper, faces a downward-sloping demand schedule for advertisements. When advertising for itself in its own pages (for example, an ad saying “Read Maureen Dowd in the Sunday Times”), is the opportunity cost of a given-size ad simply the price it
12. Suppose the government imposed a price ceiling on a monopolist (an upper bound on the price the monopolist can charge). Let denote the price ceiling, and suppose the monopolist incurs no costs in producing output. True or false: If the demand curve faced by the monopolist is inelastic at the
11. A monopolist’s price is $10. At this price the absolute value of the elasticity of demand is 2. What is the monopolist’s marginal cost?
10. If you have ever gone grocery shopping on a weekday afternoon, you have probably noticed some elderly shoppers going slowly down the aisles checking their coupon book for a coupon that matches each of their purchases. How is this behavior explained by the hurdle model of price discrimination?
9. During the Iran–Iraq war, the same arms merchant often sold weapons to both sides of the conflict. In this situation, a different price could be offered to each side because there was little danger that the country offered the lower price would sell arms to its rival to profit on the
8. The demand by senior citizens for showings at a local movie house has a constant price elasticity equal to 4. The demand curve for all other patrons has a constant price elasticity equal to 2. If the marginal cost per patron is $1 per showing, how much should the theater charge members of each
7. Suppose a perfectly discriminating monopolist faces market demand P 100 10Q and has constant marginal cost MC 20 (with no fixed costs). How much does the monopolist sell? How much profit does the monopolist earn? What is the maximum per-period license fee the government could charge the
6. Now suppose the monopolist in Problem 2 has a long-run marginal cost curve of MC 20. Find the monopolist’s profit-maximizing quantity and price. Find the efficiency loss from this monopoly.
5. Now suppose the monopolist in Problem 2 also has access to a foreign market in which he can sell whatever quantity he chooses at a constant price of 60. How much will he sell in the foreign market? What will his new quantity and price be in the original market?
4. Now suppose the monopolist in Problem 2 has a total cost curve given by TC 16 4Q2. The corresponding marginal cost curve is now MC 8Q, and fixed costs are back to the original level. Find the monopolist’s profit-maximizing quantity and price. How much economic profit does the monopolist
3. Now suppose the monopolist in Problem 2 has a total cost curve given by TC 32 Q2. The corresponding marginal cost curve is still MC 2Q, but fixed costs have doubled.Find the monopolist’s profit-maximizing quantity and price. How much economic profit does the monopolist earn?
2. A monopolist has a demand curve given by P 100 Q and a total cost curve given by TC 16 Q2. The associated marginal cost curve is MC 2Q. Find the monopolist’s profit-maximizing quantity and price. How much economic profit will the monopolist earn?
1. You are a self-employed profit-maximization consultant specializing in monopolies. Five single-price, profit-maximizing monopolies are currently seeking your advice, and although the information they have supplied to you is incomplete, your expert knowledge allows you to go back and make a
11. How does the hurdle method of price discrimination mitigate both the efficiency and fairness problems associated with monopoly?
10. What forces work against X-inefficiency in privately owned monopolies?
9. True or false: If a monopolist faces a perfectly horizontal demand curve, then the dead-weight loss to the economy is zero.
8. True or false: A lump-sum tax on a monopolist will always increase the price charged by the monopolist and lower the quantity of output sold.
7. Suppose the elasticity of demand is 3. By how much will a profit-maximizing monopolist’s price exceed marginal cost? How does this markup of price over marginal cost compare with perfect competition?
6. What effect will the imposition of a 50 percent tax on economic profit have on a monopolist’s price and output decisions?(Hint: Recall that the assumed objective is to choose the level of output that maximizes economic profit.)
5. Why is an output level at which MR intersects MC from below never the profit-maximizing level of output?
4. Why does a profit-maximizing monopolist never produce on an inelastic portion of the demand curve? Would a revenue-maximizing monopolist ever produce on the inelastic portion of the demand curve?
3. When is marginal revenue less than price for a monopolist?Explain.
2. If the United States has thousands of cement producers but a small town has only one, is this cement producer a monopolist? Explain.
1. What five factors give rise to monopoly? In the long run, why is economies of scale the most important factor?
18. An Australian researcher has discovered a drug that weakens a sheep’s wool fibers just above the sheep’s skin. The drug sharply reduces the cost of shearing (cutting the wool off) sheep because the entire coat pulls off easily in one piece. The world wool market is reasonably close to the
17. The domestic supply and demand curves for Jolt coffee beans are given by P 10 Q and P 100 2Q, respectively, where P is the price in dollars per bushel, and Q is the quantity in millions of bushels per year. The United States produces and consumes only a trivial fraction of world Jolt
16. Suppose a representative firm in a perfectly competitive, constant-cost industry has a cost function TC 4Q2 100Q 100.a. What is the long-run equilibrium price for this industry?b. If market demand is given by the function Q 1000 P, where P denotes price, how many firms will operate in
15. Suppose that bicycles are produced by a perfectly competitive, constant-cost industry.Which of the following will have a larger effect on the long-run price of bicycles: (1) a government program to advertise the health benefits of bicycling, or (2) a government program that increases the demand
14. The demand for gasoline is P 5 0.002Q and the supply is P 0.2 0.004Q, where P is in dollars and Q is in gallons. If a tax of $1/gal is placed on gasoline, what is the incidence of the tax? What is the lost consumer surplus? What is the lost producer surplus?
13. A firm in a competitive industry has a total cost function of TC 0.2Q2 5Q 30, whose corresponding marginal cost curve is MC 0.4Q 5. If the firm faces a price of 6, what quantity should it sell? What profit does the firm make at this price? Should the firm shut down?
12. In the short run, a perfectly competitive firm produces output using capital services (a fixed input) and labor services (a variable input). At its profit-maximizing level of output, the marginal product of labor is equal to the average product of labor.a. What is the relationship between this
11. You are the owner/manager of a small competitive firm that manufactures house paints.You and all your 1000 competitors have total cost curves given by and the industry is in long-run equilibrium.Now you are approached by an inventor who holds a patent on a process that will reduce your costs by
10. Merlin is like all other managers in a perfectly competitive industry except in one respect:Because of his great sense of humor, people are willing to work for him for half the going wage rate. All other firms in the industry have short-run total cost curves given by(see footnote 16), where M
9. Now suppose that the city council of Metropolis decides to curb congestion in the downtown area by limiting the number of taxis to 6. Applicants participate in a lottery, and the six winners get a medallion, which is a permanent license to operate a taxi in Metropolis. What will the equilibrium
8. The marginal and average cost curves of taxis in Metropolis are constant at $0.20/mile.The demand curve for taxi trips in Metropolis is given by P 1 0.00001Q, where P is the fare, in dollars per mile, and Q is measured in miles per year. If the industry is perfectly competitive and each cab
7. Same as Problem 6, except now Could any firm actually have this particular LTC curve? Why or why not?
6. All firms in a competitive industry have long-run total cost curves given by where Q is the firm’s level of output. What will be the industry’s long-run equilibrium price? (Hint: Use either calculus or a graph to find the minimum value of the associated long-run average cost curve.) What
5. A perfectly competitive firm faces a price of 10 and is currently producing a level of output at which marginal cost is equal to 10 on a rising portion of its short-run marginal cost curve. Its long-run marginal cost is equal to 12. Its short-run average variable cost is equal to 8. The minimum
4. Assuming the aflatoxin outbreak in Problem 3 persists, will the long-run loss in producer and consumer surplus be larger than, smaller than, or the same as the short-run loss?
3. Each of 1000 identical firms in the competitive peanut butter industry has a short-run marginal cost curve given by SMC = 4+ Q. If the demand curve for this industry is 2Q P 10- 1000' what will be the short-run loss in producer and consumer surplus if an outbreak of afla- toxin suddenly makes it
2. If the short-run marginal and average variable cost curves for a competitive firm are given by SMC 2 4Q and AVC 2 2Q, how many units of output will it produce at a market price of 0? At what level of fixed cost will this firm earn zero economic profit?
1. A competitive firm has the cost structure described in the following table. Graph the marginal cost, average variable cost, and average total cost curves. How many units of output will it produce at a market price of 32? Calculate its profits and show them in your graph. Q ATC AVC MC I 44 4 8 2
12. Would you expect a firm that adopts cost-saving innovations faster than 80 percent of all firms in its industry to earn economic profits? If so, will there be any tendency for these profits to be bid away?
11. Why are pecuniary economies and diseconomies said to be the exception rather than the rule?
10. True or false: Consumer surplus is the area between the demand curve and the price line. For a perfectly competitive firm the demand curve equals the price line. Thus, a perfectly competitive industry produces no consumer surplus.
9. Suppose all firms in a competitive industry are operating at output levels for which price is equal to long-run marginal cost. True or false: This industry is necessarily in long-run equilibrium.
8. True or false: In a constant-cost industry, a tax of a constant, fixed amount on each unit of output sold will not affect the amount of output sold by a perfectly competitive firm in the long run. Explain.
7. What do economists mean when they say that the shortrun competitive equilibrium is efficient?
6. True or false: If marginal cost lies below average fixed cost, the firm should shut down in the short run. Explain.
5. Does the fact that a business manager may not know the definition of marginal cost contradict the theory of perfect competition?
4. A firm’s total revenue curve is given by TR aQ 2Q2. Is this a perfectly competitive firm? Explain why or why not.
3. Would the market for dry cleaning be perfectly competitive in large cities such as San Francisco or New York City? Why or why not? How about in a small city such as Athens, Ohio, or Meredith, New Hampshire?
2. Under what conditions will we expect firms to behave as price takers even though there are only a small number of other firms in the industry?
1. What is the difference between economic profit and accounting profit, and how does this difference matter for actual business decisions?
*13. For the long-run total cost function LTC1Q2 = Q2 + 10, sketch ATC, AVC, AFC, and MC.
*12. A firm has a long-run total cost function:LTC1Q2 Q3 20Q2 220Q.Derive expressions for long-run average cost and marginal cost, and sketch these curves.
11. If a firm’s LMC curve lies above its SMC curve at a given level of output, what will be the relationship between its ATC and LAC curves at that output level?
10. A firm employs a production function Q F(K, L) for which only two values of K are possible, K1 and K2. Its ATC curve when K K1 is given by ATC1 Q2 4Q 6.The corresponding curve for K K2 is ATC2 Q2 8Q 18. What is this firm’s LAC curve?
9. A firm with the production function Q F(K, L) is producing an output level Q* at minimum cost in the long run. How will its short-run marginal cost when K is fixed compare with its short-run marginal cost when L is fixed?
8. A firm has a production function Q F(K, L) with constant returns to scale. Input prices are r 2 and w 1. The output-expansion path for this production function at these input prices is a straight line through the origin. When it produces 5 units of output, it uses 2 units of K and 3 units
7. A firm purchases capital and labor in competitive markets at prices of r 6 and w 4, respectively. With the firm’s current input mix, the marginal product of capital is 12 and the marginal product of labor is 18. Is this firm minimizing its costs? If so, explain how you know. If not,
6. A firm finds that no matter how much output it produces and no matter how input prices vary, it always minimizes its costs by buying half as many units of capital as of labor. Draw this firm’s isoquant map.
5. A firm uses two inputs, K and L, in its production process and finds that no matter how much output it produces or how input prices vary, it always minimizes its costs by buying only one or the other of the two inputs. Draw this firm’s isoquant map.
4. A firm has access to two production processes with the following marginal cost curves:MC1 0.4Q and MC2 2 0.2Q.a. If it wants to produce 8 units of output, how much should it produce with each process?b. If it wants to produce 4 units of output?
3. When the average product of labor is the same as the marginal product of labor, how will marginal cost compare with average variable cost?
2. Sketch the short-run TC, VC, FC, ATC, AVC, AFC, and MC curves for the production function where K is fixed at 2 units in the short run, with r 3 and w 2.
1. The Preservation Embalming Company’s cost data have been partially entered in the table below. Following the sudden and unexpected death of the company’s accountant, you are called on to fill in the missing entries. Bodies embalmed Total Fixed Variable cost cost cost ATC AVC AFC MC 0 24 16 I
6. Why should the production of a fixed amount of output be allocated between two production activities so that the marginal cost is the same in each?
5. If the LAC curve is rising beyond some point, what can we say about the degree of returns to scale in production?
4. Why does the short-run MC curve cut both the ATC and AVC curves at their minimum points?
3. In which production process is fixed cost likely to be a larger percentage of short-run total costs, book publishing or landscape gardening?
2. What is the relationship between the law of diminishing returns and the slope of the short-run marginal cost curve?
1. What is the relationship between the law of diminishing returns and the curvature of the variable cost curve?
11. When Paul Samuelson switched from physics to economics, Robert Solow is said to have remarked that the average IQ in both disciplines went up. A bystander responded that Solow’s claim must be wrong because it implies that the average IQ for academia as a whole (which is a weighted average of
10. Identify the regions of increasing, constant, and decreasing returns to scale on the isoquant map shown. K G 14 12 F Q=950 E 10 Q=900 D 8 C 6 B 4 Q = 800 2=800 Q = 500 Q = 300 A 2 Q= 200 0 Q=100 1 2 3 4 5 6 L 7
9. Suppose capital is fixed at 4 units in the production function Q KL. Draw the total, marginal, and average product curves for the labor input.
8. Each problem on an exam is worth 20 points. Suppose that from the last seconds you devoted to Problem 10 on the exam you earned 2 extra points, while from the last seconds devoted to Problem 8 you earned 4 extra points. The total number of points you earned on these two problems were 8 and 6,
7. A firm’s short-run production function is given bya. Sketch the production function.b. Find the maximum attainable production. How much labor is used at that level?c. Identify the ranges of L utilization over which the marginal product of labor is increasing and decreasing.d. Identify the
6. Suppose a crime wave hits West Philadelphia, so that the marginal product and average product of police officers are now 60 arrests per hour for any number of police officers. What is the optimal allocation of 500 police officers between the two areas now?
5. The Philadelphia Police Department must decide how to allocate police officers between West Philadelphia and Center City. Measured in arrests per hour, the average product, total product, and marginal product in each of these two areas are given in the table below.Currently the police department
4. The following table provides partial information on total product, average product, and marginal product for a production function. Using the relationships between these properties, fill in the missing cells. Labor Total product Average product Marginal product 0 0 I 180 140 2 3 420 4 120
3. Suppose the marginal product of labor is currently equal to its average product. If you were one of ten new workers the firm was about to hire, would you prefer to be paid the value of your average product or the value of your marginal product? Would it be in the interests of an employer to pay
2. Do the two production functions in Problem 1 obey the law of diminishing returns?
1. Graph the short-run total product curves for each of the following production functions if K is fixed at K0 4.a. Q F(K, L) 2K 3L.b. Q F(K, L) K2L2.
9. Currently, 2 units of labor and 1 unit of capital produce 1 unit of output. If you double both the inputs (4 units of labor and 2 units of capital), what can you conclude about the output produced under constant returns to scale? Decreasing returns to scale? Increasing returns to scale?
8. A factory adds a worker and subsequently discovers that the average product of its workers has risen. True or false:The marginal product of the new worker is less than the average product of the plant’s workers before the new employee’s arrival.
7. True or false: If the marginal product is decreasing, then the average product must also be decreasing. Explain.
6. Distinguish between diminishing returns to a variable input and decreasing returns to scale.
5. How is an isoquant map like an indifference map? In what important respect do the two constructs differ?
4. A wag once remarked that when a certain government official moved from New York to California, the average IQ level in both states went up. Interpret this remark in the context of the average-marginal relationships discussed in the chapter.
3. Why should a person in charge of hiring productive inputs care more about marginal products than about average products?
2. Give an example of production in which the short run lasts at least 1 year.
1. List three examples of production that a noneconomist might not ordinarily think of as production.
6. Suppose you are a baseball pitcher with two pitches, fastball and curve. Your opponents’batting averages against these two pitches are as shown in the diagram below. If your goal is to minimize your opponents’ overall batting average, what is the optimal proportion of fastballs? At this

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