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microeconomics

Microeconomics 8th Global Edition Jeffrey Perloff - Solutions

A study of 13 main arterial roads in Delhi, India, in June 2017 by the Centre for Science and Environment found that "rush hour" is every day from 8 A.M. to 8 P.M., with average speeds not exceeding \(30 \mathrm{~km}\) per hour \(92 \%\) of the time. Are these roads common property resources? Can
Two competitive retail stores are located next to one another. The demand curve for security services for the first store is \(q_{1}=24-0.5 p_{1}\) and for the second store is \(q_{2}=24-p_{2}\). The marginal cost of security services is \(M C=€ 36\) per hour. Compare the private equilibrium
A city government is considering a proposal to build a footbridge over a waterway that will benefit the residents and firms situated in the neighborhoods adjacent to the footbridge on both sides of the river. If the demand for this public good for each of \(n=20,000\) identical individuals in the
Purchasing a franchise provides access to an established company's brand name. It also means that franchisees can benefit from brand promotion. Accordingly, franchisees are typically required to pay an advertising fee, which may be fixed or a percentage of sales to the franchisor who then spends
It costs \(\$ 10\) to produce a low-quality wallet and \(\$ 20\) to produce a high-quality wallet. Consumers cannot distinguish between the products before purchase, they do not make repeat purchases, and they value the wallets at the cost of production. The five firms in the market produce 100
Initially, the market has many souvenir shops, each of which charges \(p_{m}\) (because consumers do not know the shops' prices), and buyers' search costs are \(c\). If the government pays for half of consumers' search costs, is a single-price equilibrium at a price less than \(p_{m}\) possible?
For what values of \(\theta\) is a pooling equilibrium possible in general? In particular, if \(c=\$ 15,000, w_{b}=\$ 40,000\), and \(w_{l}=\$ 20,000\), for what values of \(\theta\) is a pooling equilibrium possible?
If a retailer pays a salesperson a set hourly wage and that salesperson puts forth less effort and takes longer breaks than if compensation had been tied to performance, is this an example of adverse selection or moral hazard?
You want to determine whether or not buying stock in a certain company is a good investment. Can you use the following information to help answer this question? If so, how would it help you determine if the purchase has a lemons problem?a. The company's annual reportb. The past performance of the
People expect the value of houses they buy to appreciate over time. New cars, on the other hand, depreciate over time. The depreciation rate is highest during the first year (about \(20 \%\) on average). Part of first-year depreciation is normal; just like any capital asset, cars wear out over
Use the lemons model to explain why shops that cater to tourists might be likely to sell low-quality merchandise.
What are the answers to Solved Problem 19.1 if customers are willing to pay \(\$ 10,000\) for a good used car?Data From Solved Problem 19.1:-Suppose that everyone in our used car example is risk neutral, and potential car buyers value lemons at \(\$ 4,000\) and good used cars at \(\$ 8,000\). The
In its 2017 report on the second-hand economy, Kijiji estimated the value of used goods sales in Canada to be about \(\mathrm{C} \$ 29\) billion (or \(1.4 \%\) of GDP). Most exchanged goods fall into the category of used clothing, shoes, and accessories. Suppose that buyers of good-quality used
Suppose that potential used-car buyers value high quality used cars at \(€ 8,000\) and low-quality used cars at \(€ 3,000\). Owners of high-quality used cars have a reservation price of \(€ 6,500\), while the reservation price for owners of low-quality used cars is \(€ 2,000\). Everyone is
In Solved Problem 19.2, show that, if all the other firms were producing a high-quality wallet, it would pay a firm to start producing a low-quality wallet.Data From Solved Problem 19.2:-It costs \(\$ 10\) to produce a low-quality wallet and \(\$ 20\) to produce a high-quality wallet. Consumers
It is illegal in Australia to drive without insurance to cover bodily injuries to third parties. Other types of insurance, for example, to cover damage to vehicles due to collision, fire, or theft, are optional. A person may have to pay higher car insurance premiums in Australia if they are under
Earthquake insurance is not mandatory in Canada, nor is coverage for earthquakes typically included in a standard home insurance policy. However, some insurance companies require it for certain areas of the country where the risk of an earthquake causing significant damage is particularly high.
Life insurance premiums are typically lower for non-smokers than for smokers. Life insurance companies require a clear urine test to confirm a person's status. If you smoke cigarettes only occasionally (for example, at parties once a month), you are likely to be treated as a smoker. If you are a
Multi-branding is marketing of two or more similar and competing products under different brand names by the same firm. Unilever, the Dutch-British transnational consumer goods company, produces several worldwide brands, including detergents, deodorants, soaps, and toothpastes. One of their washing
In Solved Problem 19.3, if the vast majority of all consumers know the true prices at all stores and only a few shoppers have to incur a search cost to learn the prices, would firms set a single-price equilibrium price at the monopoly level, \(p_{m}\) ?Data From Solved Problem 19.3:-Initially, the
The Bar Council of India, a statutory body created by the Indian Parliament, prescribes standards of professional conduct for lawyers in the country. One of these standards is that law firms and lawyers are prohibited from soliciting work or advertising their services in any manner (although a 2017
Suppose that high-ability workers have a \(40 \%\) share of the workforce \((\theta=0.4)\), the output that a high-ability worker produces for a firm is worth \(w_{h}=£ 450,000\) over a career, the output of a low ability worker is worth \(w_{l}=£ 300,000\), and the present value of the cost of a
In Question 5.2, under what conditions is a pooling equilibrium possible?Data From Question 5.2:-Education is a continuous variable, where \(e_{b}\) is the years of schooling of a high-ability worker and \(e_{l}\) is the years of schooling of a lower-ability worker. The cost per period of education
In Questions 5.2 and 5.3, describe the equilibrium if \(c_{l} \leq c_{b}\).Data From Question 5.2:-Education is a continuous variable, where \(e_{b}\) is the years of schooling of a high-ability worker and \(e_{l}\) is the years of schooling of a lower-ability worker. The cost per period of
Universities in India tend to use different grading systems. For example, in one, a grade of more than \(90 \%\) for distinction may have its minimum passing mark at \(60 \%\). In another, a grade of more than \(70 \%\) may signify distinction, while the minimum passing mark is \(45 \%\). This
All citizens of the European Union are entitled to equal treatment in employment and training irrespective of racial or ethnic origin, religion or belief, sexual orientation, gender, disability, or age. A 2010 OECD study of low-income workers found that signals such as old age and immigrant status
Two manufacturing firms are debating whether or not to increase their spending on regular equipment inspections and training to improve safety and reduce the chances of injury to workers. They have the following payoff matrix. Does either firm have a dominant strategy? What is the Nash equilibrium
Traditionally the Las Vegas Home Bank made only prime loans-providing mortgages only to people who were very likely to repay the loans. However, Leonardo, a senior executive at the bank, is considering offering subprime loans-mortgages to speculators and other less creditworthy borrowers. If he
Penny, the owner of a store, makes a deal with Arthur, her manager, that at the end of the year, she receives two-thirds of the store's profit and he gets one-third. If Arthur is interested in maximizing his earnings, will Arthur act in a manner that maximizes the store's total profit (which both
Peter, the owner of a firm, pays his salesperson, Ann, a commission on her sales (revenue). Thus, Ann has an incentive to maximize revenue. The graph shows how revenue and profit vary with output. Show that if she succeeds in maximizing revenue, she does not maximize the firm's profit. Revenue,
Workers post bonds of \(B\) that are forfeited if they are caught stealing (but no other punishment is imposed). Each unit of monitoring, \(M\), raises the probability that a firm catches a worker who steals, \(\theta\), by \(5 \%\). A unit of \(M\) costs \(\$ 10\). A worker can steal a piece of
Under a fee-splitting arrangement, the charge for professional services is shared with the party who made the referral. Many countries consider such arrangements to represent a conflict of interest for the client since the client may not receive the services most appropriate for his or her
The European Food Safety Authority provides scientific advice on questions related to food and feed safety, animal health and welfare, plant health, nutrition, and related environmental issues, and communicates its findings publicly. When public health risks are detected in food, information is
In June 2016, The Telegraph reported that some doctors in the United Kingdom were receiving payments from pharmaceutical companies for recommending that their drugs should be prescribed to patients in the National Health Service. Does this represent a conflict of interest? Explain.
The Government of India introduced a crop insurance scheme in February 2016 to provide financial support to farmers in the event of crop failure due to natural calamities, pests, and disease. Insurance coverage is compulsory for some farmers but voluntary for others. Part of the premium rate is
Many university bookstores will buy back used textbooks. Depending on the bookstore's present stock and which textbooks are required for upcoming courses both on campus and on campuses elsewhere, a student could receive as much as \(50 \%\) of the retail purchase price after a course ends. Why
While there are many types of mutual funds, they all pool money provided by individual investors to purchase and manage securities. Investors are charged a management fee to pay for the time and expertise of the fund manager in selecting securities and managing the portfolio in keeping with the
A study published in April 2015 in the Academic Emergency Medical journal found that \(85 \%\) of doctors surveyed admitted that they ordered tests not because they were necessary for medical reasons but to ensure that they did not overlook something that would help them diagnose their patients
Insurance companies that enter into contracts with employers to provide dental coverage limit the frequency of certain services such as regular checkups or tooth cleaning. How do such restrictions affect moral hazard and risk bearing? Show these results in a graph.
Health care coverage in Australia is provided through Medicare, which is administered by the national government. Doctors are paid mostly on a fee-for-service basis but sometimes also through incentives for enhanced services such as after-hours care, managing patients with chronic conditions, and
One firm (the contractee) may contract with another firm (the contractor) to provide a product or component that is unique to the contractee. As it is unique, it cannot be sold by the contractor to third parties. Suppose the contractee subsequently refuses to accept the product on the basis that it
In Solved Problem 20.4, does joint profit increase, decrease, or remain the same as the share of revenue going to Ann increases?Data From Solved Problem 20.4:- Peter, the owner of a firm, pays his salesperson, Ann, a commission on her sales (revenue). Thus, Ann has an incentive to maximize revenue.
Diego runs a store for Mateo, the owner. Suppose that the inverse demand curve for the store's product is \(p=160-0.1 Q\), where \(Q\) is the quantity demanded and \(p\) is the price per unit. The cost to Diego of running the store is given by the function \(C(Q)=20 Q\).a. If Mateo and Diego share
In Solved Problem 20.5, a firm calculated the optimal level of monitoring to prevent stealing. If \(G=\$ 500\) and \(\theta=20 \%\), what is the minimum bond that deters stealing?Data From Solved Question 20.5:-Workers post bonds of \(B\) that are forfeited if they are caught stealing (but no other
To strengthen the incentive for hospitals to avoid making mistakes, public hospitals in Australia received no funding after July 1, 2017, for sentinel events (for example, operating on the wrong body part, incompatible blood transfusions, medication errors leading to the death of a patient,
Should a franchisee fail to meet the terms of a franchise agreement, the franchisor may want to terminate the agreement early to avoid damaging the reputation of the entire franchise system or to recover the trust of its customers. The default and termination provisions of the franchise agreement
In the Challenge Solution, show that shareholders' expected earnings are higher with the new compensation scheme than with the original one.
Hannah manages a store for which she receives \(20 \%\) of any profit earned, so she does well when the store does well and earns nothing if the store incurs a loss. Hannah and the store's owner are both risk neutral. At present, the store is making an annual profit of 500. Would Hannah bring a new
How does the joint production possibility frontier for Jane and Denise in panel c of Figure 10.6 change if they can also trade with Harvey, who can produce 5 piles of wood, 5 candy bars, or any linear combination of wood and candy in a day?
Both Omar and Zaid have an initial endowment of the same two goods. Omar has relatively more of Good 1 and his indifference curves are convex to the origin. In contrast, Zaid's indifference curves are concave to the origin. Can both Omar and Zaid benefit from voluntary trade? If so, will their
Society uses various rules to decide which allocations are better than others. What rules does the generalized utilitarian welfare function use? If the generalized utilitarian welfare function were to be applied to two groups in society-the rich and the poor-instead of to individuals, how might
In 2016, Microsoft's Surface Pro 4 laptop and tablet sold for $735. Its marginal cost was about \(\$ 470 .{ }^{15}\) What was its Lerner Index? If it was operating at the shortrun profit-maximizing level, what was the elasticity of demand for the Surface Pro?
A firm that delivers \(Q\) units of water to households has a total cost of \(C(Q)=\) \(m Q+F\). If any entrant would have the same cost, does this market have a natural monopoly?
Suppose that the government sets a price, \(p_{2}\), that is below the socially optimal level, \(p_{1}\), but above the monopoly's minimum average cost. How do the price, the quantity sold, the quantity demanded, and welfare under this regulation compare to those under optimal regulation?
How does the presence of pirated, 3D toys affect the price that Disney charges for a Frozen or Inside Out toy? Assume that Disney has a constant marginal cost MC. It faces a large number of identical, higher-cost rivals-the competitive fringe-which acts like (competitive) price takers so that their
If a monopolist produces its product in two factories, it must determine how to allocate production among those locations to minimize its total costs of production and thereby maximize its profits. It will do this by producing more at the factory with the lower marginal cost of production until the
If the inverse demand curve for rides at the Yamit Water Park located in the city of Holon, near Tel Aviv, Israel, is \(p=200-Q / 50\), where \(p\) is the price of admission in shekels and \(Q\) is the number of visitors per day, what is the revenue-maximizing price? If Holon estimates that local
Malaysia's monopoly auto manufacturer produces the Proton, which is protected from imports by a specific tariff, \(t\), on imported goods. The monopoly's profit-maximizing price is \(p^{*}\). The world price of the good (comparable autos) is \(p_{w}\), which is less than \(p^{*}\). Because the
Alexx's monopoly currently sells its product at a single price. What conditions must be met so that he can profitably price discriminate?
How would the analysis in Solved Problem 12.3 change if \(m=7\) or if \(m=4\) ?Data From Solved Problem 12.3:- What U.S. and U.K. elasticities did Warner Brothers believe it faced for its Harry Potter and the Deathly Hallows, Part 2 DVD? Check that these elasticities are consistent with the
What is the monopolistically competitive airline equilibrium if each firm has a fixed cost of \(\$ 3\) million?
In April 2011, the European Commission found Procter \& Gamble, Unilever, and Henkel, the leading producers of washing powder in Europe, guilty of operating a cartel from 2002 to 2005 in eight European Union countries to stabilize market positions and coordinate prices. Henkel received immunity for
A 2016 study on 14 Dutch cartels that had an average duration of about five years and were fined by the Netherlands Authority for Consumers and Markets between 2007 and 2012 found that these cartels implemented a number of informal internal rules. One was that compensation for violating agreed-upon
On March 29, 2017, the European Commission blocked a \(£ 21\) billion merger between the London Stock Exchange and the Deutsche Börse on the grounds that the deal would create a de facto monopoly in the area of fixed-income instruments (The Guardian, 2017). The London and Frankfurt exchanges had
A hub-and-spoke cartel is a collusive relationship between a group of competitors (the spokes) and one (or more) of their common suppliers or customers (the hub). In August 2011, the former Office of Fair Trading in the United Kingdom found that the country's big supermarkets and certain dairy
In May 2017, The Weekend Australian reported that New Zealand's two largest newspaper networks would appeal a decision by the country's Commerce Commission to block them from merging. The newspaper networks disagree that their merger would likely lessen competition for advertising and readers,
Suppose there are \(n\) firms selling a homogeneous product at a constant marginal cost in a Cournot market. The market demand curve is \(Q=100 / p\), where \(Q=n q\). What is the market elasticity of demand? What happens to the equilibrium price and market power when either marginal cost rises or
How would the Intel-AMD equilibrium in Solved Problem 13.2 change if AMD faced the same demand function as Intel, Equation 13.10?Equation 13.10:-Data From Solved Problem 13.2:-Intel and Advanced Micro Devices (AMD) are the only two firms that produce central processing units (CPUs)-the brains-for
Draw a figure to illustrate the Intel-AMD NashCournot equilibrium in Solved Problem 13.2. At what quantities do the best-response functions hit the axes?Data From Solved Problem 13.2:-Intel and Advanced Micro Devices (AMD) are the only two firms that produce central processing units (CPUs)-the
Suppose you live on the second floor of a twostory building that you own. You have managed to get the ground floor zoned for commercial use and are presently advertising the space to prospective tenants. Both a convenience store and the retail outlet of a wireless communications company have
A country's competition regulator decides to allow the merger of the only two firms in a market reasoning that, while there would be a lessening of competition, the potential efficiency gains would position the combined company so that it can deal with the threat of multinationals and compete
Suppose there are initially two identical firms that serve a market with constant marginal and average costs, \(M C=A C=6\), per unit of output. Firm 1 gains a first-mover advantage from an opportunity to purchase an input at a lower cost than is available to Firm 2. This reduces Firm 1's constant
Suppose that a market for toothpaste has two sellers, each of which says its product has the best combination of ingredients to protect against tooth decay and to control plaque, tartar, and gum disease. Each of the profit-maximizing oligopolists faces the same constant marginal cost, \(M C=1\).
Consider the two toothpaste producers in Question 5.4. If instead of undertaking an advertising campaign, Firm 1 convinced Firm 2 to form a cartel, would it have been better off? Assume that both firms also face a constant average cost, \(A C=1\).Data From Question 5.4:-Suppose that a market for
Intel and AMD are the dominant central processing unit manufacturers. Assume they play the following game once and act simultaneously. Their profits are symmetric (which is consistent with the estimates of Salgado, 2008). If both choose low levels of advertising, Intel's profit, \(\pi_{I}\), and
Mimi wants to support her son Jeff if he looks for work but not otherwise. Jeff (unlike most young people) wants to look for a job only if his mother will not support his life of indolence. Their payoff matrix isIf Jeff and Mimi choose actions simultaneously, what are the pure- or mixed strategy
Show that if American and United Airlines know that they will play the game just described repeatedly for exactly \(T\) periods that the firms are unlikely to cooperate.
Use the following game tree to demonstrate that an incumbent faced with potential entry may invest in new equipment even when the investment does not lower its cost. In the first stage of the game, the incumbent firm decides whether to invest in new robotic equipment, which lowers its marginal cost
In the first stage of a game between an incumbent and a potential rival, the incumbent builds its plant using either an inflexible technology that allows it to produce only a (large) fixed quantity, or a flexible technology that allows it to produce small or large quantities. In the second stage,
Derive and plot Olivia's Engel curve for pie if she eats pie only à la mode and does not eat either pie or ice cream alone (pie and ice cream are perfect complements).
Change the answer given in the Challenge Solution for the short run rather than for the long run.
Use the numbers for the alcohol and tobacco category from the table in the Application "Goods with a Large Consumer Surplus Loss from Price Increases" to draw a figure that illustrates the roles that the revenue and the elasticity of demand play in determining the loss of consumer surplus due to an
Because many consumers choose between coffee and tea, the coffee and tea demand functions depend on both prices. Suppose the demand curves for coffee and tea arewhere \(Q_{c}\) is the quantity of coffee, \(Q_{t}\) is the quantity of tea, \(p_{c}\) is the price of coffee, and \(p_{t}\) is the price
Are allocations \(a\) and \(g\) in Figure 10.4 part of the contract curve?Data From Figure 10.4:- 60 80 50 160 30 12. 20 20 Jane's wood 40 40 Denise's candy Od 20 Contract curve Denise's wood 20 218 B 12 30 Oj 20 40 Jane's candy a 50 50 80 Endowment, e Trade New Allocation, f Wood Candy Wood Candy
People who qualify for affordable housing in Sydney, Australia, have their rent capped at \(30 \%\) of their gross annual income. People who live in private rental properties in the city are not subject to rent control. Sydney's goal is to designate \(7.5 \%\) of all housing in the local area as
Governments use wage subsidies to maintain employment in times of economic recession, to encourage firms to hire and train specific groups of workers such as low-income workers, women, and students and to stimulate employment in certain regions or sectors of the economy. What effect would a wage
Municipalities in Belgium levy surtaxes on the personal income tax payable by their residents. Rates vary from \(0 \%\) to \(9 \%\), with the average rate being about \(7 \%\). Suppose the rate of surtax on wage income is initially \(5 \%\) in two neighboring municipalities; one municipality then
Suppose that a given quantity of milk is used to produce both cheese and protein powder. Cheese is made using curd from the milk, while the leftover whey is used to make protein powder, used by many people as part of their regular exercise routine. If the number of people exercising regularly and
In a pure exchange economy with two goods, \(G\) and \(H\), the two traders have Cobb-Douglas utility functions. Amos' utility is \(U_{a}=\left(G_{a}\right)^{\alpha}\left(H_{\alpha}\right)^{1-\alpha}\) and Elise's is \(U_{e}=\left(G_{e}\right)^{\beta}\left(H_{e}\right)^{1-\beta}\). What are their
Adrienne and Sarah consume pizza, \(Z\), and cola, \(C\). Adrienne's utility function is \(U_{A}=Z_{A} C_{A}\), and Sarah's is \(Z_{D}^{0.5} C_{D}^{0.5}\). Adrienne's marginal utility of pizza is \(M U_{A}^{Z}=C_{A}\). Similarly, \(M U_{C}^{A}=Z_{A}, M U_{Z}^{D}=\) \(\frac{1}{2} Z_{D}^{-0.5}
Modify Solved Problem 10.4 to show that the PPF more closely approximates a quarter of a circle if there are five people rather than three. One of the two new people, Bill, can produce five piles of wood, or four candy bars, or any linear combination. The other, Helen, can produce four piles of
Several countries produce many of the same goods. Suppose that there are two countries, each of which produces the same two goods. Country 1 has 300 workers and Country 2 has 900 workers. The following table shows how many workers are necessary in each country to produce one unit of each good, and
Six people are getting together for dinner but are having trouble deciding where to go. Three of them prefer French to Indian to Thai food, two favor Thai to Indian to French food, and one prefers Indian to Thai to French food. If they decide to vote on the restaurant they will dine at, what would
Initially, a good sells in a competitive market at a single price, but a local government then restricts the quantity of the good that its citizens can buy. What happens to the equilibrium price of the good and to the equilibrium quantity in that part of the market subject to the quota and the part
Derive the marginal revenue curve when the monopoly faces the linear inverse demand function,in Figure 11.2. How does the slope of the marginal revenue curve compare to the slope of the inverse demand curve?Figure 11.2:- p = 24-Q, (11.2)
When the iPad was introduced, Apple's constant marginal cost of producing its top-of-the-line iPad was about \(\$ 220\), its fixed cost was \(\$ 2,000\) million ( \(\$ 2\) billion), and we estimate that its inverse demand function was \(p=770-11 Q\), where \(Q\) is the millions of iPads purchased.
In the linear example in panel a of Figure 11.3, how does charging the monopoly a specific tax of \(t=\$ 8\) per unit affect the monopoly optimum and the welfare of consumers, the monopoly, and society (where society's welfare includes the tax revenue)? What is the incidence of the tax on
According to a January 5, 2017, article in The Guardian, consumer spending in Britain on subscription streaming services for movies and TV shows grew by \(23 \%\) between 2015 and 2016 to \(£ 1.3\) billion and, for the first time, exceeded sales of DVDs and Blu-ray discs, which fell by \(17 \%\)
With a seating capacity of 99,354 at present, Camp Nou is the largest association football stadium in Europe and the second largest in the world. It is the home stadium for, and owned by, Futbol Club Barcelona (FC Barcelona). Its seating capacity has changed over the years from 93,000 when it first
If a monopolist faces the linear demand curve \(p=12-Q\), what is its level of output, revenue, and the elasticity of demand when \(M R=0\) ? If a monopolist were to decrease its output from 4 to 2 units, what would happen to its revenue, and what is its marginal revenue and the elasticity of

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