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Microeconomics 8th Global Edition Jeffrey Perloff - Solutions

Regardless of the sport, the owners of professional sports teams are local monopolists. Many people argue that increasing attendance (and revenue) at sporting events should be a key objective of any sports club. Can a monopolist maximize both profit and revenue?
A 2011 report by the management consulting firm O'Rourke Group Partners indicated that a generic \$14 polo shirt sold in Canada and made in Bangladesh actually costs a retailer only \(\$ 5.67\) (Maclean's, 2013; Ecouterre, n.d.). Assuming a constant marginal cost, calculate the retailer's
Introduced in the nineteenth century, bicycles are the principal means of transportation in many parts of the world. Suppose there is a \(60 \%\) markup on the marginal cost of a bicycle tire that sells for \(₹ 1,400\). What is the firm's Lerner Index? If the firm is a profit-maximizing monopoly,
Suppose that a monopoly faces the short-run cost function \(C=1,000+2 Q^{2}\) and the inverse demand curve \(p=500-0.5 Q\). How does charging the monopoly a per-unit tax of \(t=100\) affect the monopoly optimum and its profits? If a profits tax were instead imposed, would it affect the monopoly
A monopoly with a constant marginal cost \(m\) has a profit-maximizing price of \(p_{1}\). It faces a constant elasticity demand curve with elasticity . After the government applies a specific tax of \(\$ 1\), its price is \(p_{2}\). What is the price change \(p_{2}-p_{1}\) in terms of ? How much
Consider the inverse demand curve \(p=210-3 Q\) and the cost function \(C=100+2 Q^{2}\). If the market were competitive, calculate the incidence of a specific tax, \(t=7\), that would fall on consumers. Calculate the incidence of the same tax if the market were instead a monopoly.
In the Application "Botox Patent Monopoly," consumer surplus, triangle \(A\), equals the deadweight loss, triangle \(C\). Show that this equality is a result of the linear demand and constant marginal cost assumptions.
Once the copyright runs out on a book or musical composition, the work can legally be posted on the Internet for anyone to download. U.S. copyright law protects the monopoly for 95 years after the original publication. But in Australia and Europe, the copyright holds for only 50 years. Thus, an
Electric utilities are often natural monopolies. Due to the extensive and costly infrastructure needed to generate, transmit, and deliver electricity, one firm can produce the total output of the market at a lower cost than could several firms. Regulatory authorities such as the Central Electricity
Based on the information in the Application "Botox Patent Monopoly," what would happen to the optimum price and quantity if the government had set a price ceiling of \(\$ 200\) per vial of Botox? What welfare effects would such a restriction have?
International trade benefits countries by increasing total production and the quantity of goods and services available to consumers. However, not everyone wins. While trade creates new jobs for firms that export products to foreign markets, companies that are less efficient may shut down and jobs
A firm is considering selling a new good at an introductory price that is less than the monopoly price. By doing so, it hopes to create a critical mass of users and benefit from an increased future demand generated by a positive network externality for the product. The marginal cost of production
Does the Challenge Solution change if the entry of the generic causes a parallel shift to the left of the patent monopoly's linear demand curve?
A patent grants the holder the exclusive right to use or sell an invention for the duration of the term of the patent. The Agreement on Trade Related Aspects of Intellectual Property Rights was signed on April 15, 1994, by 123 nations to protect intellectual property rights. Article 33 of that
How does welfare change if the movie theater described in Table 12.1 goes from charging a single price to perfectly price discriminating? Table 12.1 A Theater's Profit Based on the Pricing Method Used (a) No Extra Customers from Price Discrimination Pricing Uniform, $5 Uniform, $10 Price
I estimated that Warner faced inverse demand functions for its Harry Potter and the Deathly Hallows, Part 2 DVD of \(p_{A}=57-4.8 Q_{A}\) in the United States and \(p_{B}=77-19 Q_{B}\) in the United Kingdom. Given that the marginal cost is 1 in both countries, solve for Warner's optimal prices and
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 observed price ratio, \(p_{A} / p_{B}\).
A monopoly book publisher with a constant marginal cost (and average cost) of \(M C=1\) sells a novel in only two countries and faces a linear inverse demand curve of \(p_{1}=6-\frac{1}{2} Q_{1}\) in Country 1 and \(p_{2}=9-Q_{2}\) in Country 2. What price would a profit-maximizing monopoly charge
A firm that sells word processing and spreadsheet programs has four potential customers with the following reservation prices:The firm's cost of production is zero, so maximizing its profit is equivalent to maximizing its revenue. To maximize its profit, should the firm charge separate prices for
Many governments provide social housing to families with low or modest incomes. The rent charged for an accommodation is set according to the renter's income and rent increases are limited to keep it affordable. Explain why governments behave this way.
Australian citizens aged 60 or over who are not working more than 20 hours per week are eligible for a free Seniors Card. Issued by individual state governments, the card provides government concessions, business discounts, and special offers on a range of goods and services including travel,
The European Youth Card offers discounts on culture, travel, accommodation, shopping, and services in most European countries. Anyone under the age of 30 or 26 , depending on the country, can purchase one for under \(€ 20\). Typically effective for one year, there are three versions: a classic
Goods often sell for different prices in different countries. Suppose the inverse demand curves in two countries are \(p_{1}=40-3 Q_{1}\) and \(p_{2}=90-2 Q_{2}\), and a monopoly produces at constant marginal cost, \(M C=10\). What is the profit maximizing price and quantity in each country? Will
Renting an economy car in Munich and Berlin costs about the same, €19 per day. However, the rental price for a full size car is \(€ 10\) euros per day more in Munich (€36) than in Berlin (€26). Is the difference in the rental prices of economy and full-size cars in those two locations
Suppose that the cost function curve for a natural monopoly is \(C(Q)=48+6 Q\) and the inverse demand function it faces is \(p=38-2 Q\). What are the firm's maximum profits if it cannot price discriminate? Compare that result with the firm's profits if it can price discriminate perfectly. Does the
Founded in 1998, eBid is one of the oldest and largest online auction websites. It operates in 23 countries, has over two million registered users, and offers a huge array of items for auction. Does eBay engage in price discrimination? If so, what type?
Group price discrimination (also called third-degree price discrimination) is the most common type of price discrimination. Under it, a firm charges each group of customers a different price, but it does not charge different prices within the group. If the two countries were instead two different
There are two distinct groups of customers in the market for a firm's product. Their inverse demand curves are \(p_{1}=5-Q_{1}\) and \(p_{2}=10-Q_{2}\). The monopoly's constant marginal cost of production is zero.a. If the monopoly can price discriminate, what is its total profit?b. If the monopoly
Does a monopoly's ability to price discriminate between two groups of consumers depend on its marginal cost curve? To answer this, compare the situation for the monopolist when it engages in group price discrimination with the situation in which it has a higher constant marginal cost equal to 5 .
Suppose a monopoly sells its product in two countries and resale is not possible. The inverse demand curves in the two countries are \(p_{1}=200-10 Q_{1}\) and \(p_{2}=122-5 Q_{2}\). The marginal cost of production in the first country is constant at 20 but is higher by 2 in the second country due
In Solved Problem 12.4, calculate the firm's profit with and without a ban against shipments between the two countries.Data From Solved Problem 12.4:-A monopoly book publisher with a constant marginal cost (and average cost) of \(M C=1\) sells a novel in only two countries and faces a linear
Limited-time offers are a powerful marketing tool. Good ones are billed as the "best ever," create a sense of urgency (for example, "while supplies last"), provide incentives (for example, free shipping or gifts) for purchases exceeding a certain amount, and focus on how much the customer is saving
The price of a cappuccino at any given coffee shop can be more than double the price of a regular coffee with milk that is in a container of the same size. The basic ingredients of both products are identical, but the milk in the cappuccino will have been frothed up with pressurized steam. Is this
Under a single-rate electricity tariff for households and small businesses in Australia, a flat usage rate is charged for "blocks" of electricity consumed. The rate for the first block is higher than that for the second, and the lowest rate applies to electricity usage in excess of the second
Access to certain golf courses such as Golf de Morfontaine, north of Paris, France, is restricted to members and their guests. In addition to the membership fee, there is a charge (greens fee) to play each round of golf on private golf courses. Suppose the golf course sells memberships to two
A tennis club with a good reputation for providing high-quality programs is considering changing the way it charges its customers for lessons. Elena, one of those customers, is keen on improving her tennis skills. Her inverse demand curve for tennis lessons is \(p=100-4 q\), where \(q\) is the
As described in the Application "iTunes for a Song," Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing, charging an annual access fee and a low price per song, it would raise its profit by about \(30 \%\) relative to what it would earn using uniform or variable pricing.
Some people purchase expensive water conditioners to reduce the mineral content in their water, enhance the effectiveness of soaps and detergents, and reduce deposits in plumbing systems. A manufacturer of a certain brand will often designate a single plumbing company to be its sole supplier in a
An Indian restaurant has four potential customers with the following reservation prices:a. Calculate the profit-maximizing prices and the revenue when the firm prices each course separately.b. Is the profit-maximizing combination price and resulting revenue higher? Main course Dessert Combination
Using a graph similar to Figure 12.7, explain why a firm might not want to spend \(A\) on advertising, even though it shifts the firm's demand curve to the right.Figure 12.7:- p. $ per unit P2 P B Thy 82 MR1 MR Q Q MC = AC D D Q, Units per year
Google AdWords is a way for businesses to promote their products online; for example, when people are searching for resort packages, tours, or flights for a trip or vacation. Displaying products to customers at the time that they are looking for related content is called intent-based marketing.
How might a natural disaster, violence, rising crime rates, or health alerts affect the optimal amount of advertising a tourism business chooses to purchase for the region affected, and why? Use a diagram to explain your answer.
When it is first released, a novel by a best-selling author is typically published as a hardcover book with a paper dust jacket covering it, and the paper used to print it is of a relatively high quality. However, after a few months, hardcover copies that have not been sold will be heavily
Derive United Airlines’ best-response function if its marginal cost falls to \(\$ 99\) per unit due to a government subsidy. Given that American's marginal cost does not change, what is the new Nash-Cournot equilibrium? \({ }^{16}\)
Intel and Advanced Micro Devices (AMD) are the only two firms that produce central processing units (CPUs)-the brains-for personal computers. Both because the products differ physically and because Intel's "Intel Inside" advertising campaign has convinced some consumers of its superiority,
Which market structure best describes (a) mobile network operators in a country, (b) plumbers in a small town, (c) farms that grow mangoes, and (d) city waste management? Why?
As the aggregate profit of a cartel can exceed the combined profits of the same firms acting independently, firms have an incentive to form cartels and behave like a monopoly. However, cartels often fail for economic reasons. Why is this the case?
Suppose there are \(n\) firms selling a homogeneous product at a constant marginal cost, \(m=5\), in a Cournot market. The inverse market demand curve is \(p=20-Q\), where \(Q=n q\). What is the output of each firm and the market quantity and price when the number of firms is \(1,2,14\), and 60 ?
Duopoly quantity-setting firms face the inverse market demand curve, \(p=100-5 Q\), where \(Q=q_{1}+q_{2}\). Each firm has a constant marginal cost of 10 per unit.a. What is the Nash-Cournot equilibrium?b. What is the Nash-Stackelberg equilibrium when Firm 1 moves first?
Instead of two firms, as in Question 4.1, three firms now face the inverse market demand curve, \(p=100-5 Q\), where \(Q=q_{1}+q_{2}+q_{3}\), and each of the firms has a constant marginal cost of 10 per unit. What is the Nash-Stackelberg equilibrium when Firm 1 moves first and both of the other two
Solved Problem 13.4 shows that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity. Does this result depend upon whether firms produce identical or differentiated products? Why?Data From Solved Problem 13.4:-Show that a monopolistically
The national government and some state governments in India provide incentives to entice new business ventures for less developed areas of the country to increase employment. Subsidies may be offered to reduce the cost of transportation, investment in plant and machinery, and loans relating to new
Many countries provide funding for small companies to start or expand their businesses. In the European Union, subsidies take the form of grants, loans, and guarantees. In Question 4.1, duopoly quantity-setting firms face the inverse market demand curve, \(p=100-5 Q\), where \(Q=q_{1}+q_{2}\), and
Suppose there are two firms, each headquartered in a different country, that are competing in the world market for business aircraft. The inverse market demand curve is \(p=1-Q\), where \(Q=q_{1}+q_{2}\), and each firm has the same constant marginal and average cost, \(M C=A C=0.4\). Equilibrium in
Maureen loves apple pie à la mode (a slice of pie with a scoop of vanilla ice cream on top) but she doesn't like apple pie by itself or vanilla ice cream by itself (panel b of Figure 4.4). That is, she views apple pie and vanilla ice cream as perfect complements. At the initial prices, she
Suppose that the job in Question 5.5 that pays \(w^{*}\) and has no restriction on hours is the higher-paying job. How do Jerome's budget constraint and behavior change?Data From Question 5.5:-Jerome moonlights: He holds down two jobs. The higher-paying job pays w, but he can work at most eight
Does the marginal rate of technical substitution vary along the isoquant for the firm that produced potato salad using Idaho and Maine potatoes? What is the MRTS at each point along the isoquant?
China, Japan, and South Korea have the top three shipbuilding industries in the world. Each of these countries also has a vibrant tourism industry. Of the two, which industry has the longer short run? Which has the shorter long run? Explain.
If the marginal product of labor is 2 units of output per day per worker for the first five workers and 0 units of output for the sixth worker onward, draw the total product curve, the average product of labor curve, and the marginal product of labor curve.
Suppose that the production function is \(q=L^{0.75} K^{0.25}\).a. What is the average product of labor, holding capital fixed at \(\bar{K}\) ?b. What is the marginal product of labor? Calculate how much \(q\) changes as \(L\) increases by 1 unit for a particular pair of \(K\) and \(L\) or use
What is the law of diminishing marginal returns? Will a firm experience diminishing marginal returns in the short run if its production function is:a. \(q=K+L\) ?b. \(q=K L\) ?c. \(q=K L^{0.5}\) ?
Suppose that a firm cannot substitute capital for labor in production, and to produce every two units of output, it must use one unit of capital and two units of labor. Draw the isoquants for this production function as well as the total product curve, the average product of labor curve, and the
Suppose that capital and labor are perfect substitutes in production, and a firm is presently using two units of capital and two units of labor to produce four units of output. What is the firm's production function?
Under what conditions do the following production functions exhibit decreasing, constant, or increasing returns to scale?a. \(q=L+K\)b. \(q=L^{a} K^{b}\)c. \(q=L+L^{a} K^{b}+K\)
What are returns to scale? Under what conditions (that is, for what values of the parameters \(a\) and \(b)\) does the Cobb-Douglas production function, \(q=K^{a} L^{b}\), exhibit constant and increasing returns to scale?
The Application "Returns to Scale in Various Industries" provides estimated parameter values for the Cobb-Douglas production function, \(q=L^{a} K^{b}\), for firms in various industries. Use the estimates for the Danish food and beverages firm, the Japanese rubber firm, and the New Zealand mining
If a new type of capital is introduced into a production process such that a firm can use fewer workers and still produce the same level of output, what type of technological progress is this? Suppose that the firm uses the Cobb-Douglas production function, \(q=(\beta K)^{0.5} L^{0.5}\), where
Different firms respond to recessions in different ways. Some will reduce their workforce and produce less in response to a fall in the demand for their product. Others may continue to produce at prerecession levels of output but store output they cannot sell immediately. Consider two identical
Meredith's firm sends her to a conference for managers and has paid her registration fee. Included in the registration fee is free admission to a class on how to price derivative securities such as options. She is considering attending, but her most attractive alternative opportunity is to attend a
Use the tangency rule to determine the cost-minimizing bundles of labor and capital for a general Cobb-Douglas production function, \(q=A L^{a} K^{b}\), and for the specific beer production function that underlies Figure 7.5, \(q=1.516 L^{0.6} K^{0.4}\), where \(w=24\) and \(r=8\).Data From Figure
What is the long-run cost function for a fixed-proportions production function (Chapter 6) when it takes one unit of labor and one unit of capital to produce one unit of output? Describe the long-run cost curve.
The Danish company Maersk Line is the largest shipping container company in the world, with \(15-16 \%\) of the global container market. According to an article in Shipping Watch (Kristiansen, 2012), the trade imbalance between Europe and Asia causes Maersk Line to spend about \(\$ 1\) billion
Erik is under contract with a textbook publisher to provide interesting and current examples to reinforce key theoretical concepts. He makes \(€ 50\) per hour for doing this work. Erik also wants to repaint a number of rooms in his house. A professional painter estimated the cost of this work to
The only variable input a janitorial service firm uses to clean offices is workers who are paid a wage, \(w\), of \(\$ 8\) an hour. Each worker can clean four offices in an hour. Use math to determine the variable cost, the average variable cost, and the marginal cost of cleaning one more office.
A firm has the cost curve \(C(q)=100+150 q-\) \(46 q^{2}+5 q^{3}\). What are the equations of the firm's marginal cost, average variable cost, and average cost curves? What are the minimum values of marginal cost, average variable cost, and average cost, and at what levels of output do they occur?
A firm in Saudi Arabia uses capital and labor in its production process. The hourly cost of labor is SR30 and the initial rental rate of capital is SR60 per hour. What is the firm's isocost line? How does the slope of its isocost line change if the rental rate of capital falls to SR40 per hour? If
Canada removed all duties and quotas on imports from Bangladesh in 2003. Since that time, Bangladesh has become the second largest source (after India) of Canadian merchandise imports from South Asia. Totalling over \(\mathrm{C} \$ 1\) billion, the vast majority of these imports are garments and
A firm is looking to locate its production facilities in one of two countries. The wage rate in Country 1 is 10 and the cost of capital is also 10 . The wage rate in Country 2 is \(20 \%\) higher, but the rental rate of capital is \(20 \%\) lower. The firm's production function is \(q=K^{0.2}
While processes differ somewhat among the three main manufacturers of cricket balls in international matches, all top-quality cricket balls are handcrafted to exacting specifications and standards. Their cork cores are tightly wound with layers of yarn and covered with a leather case with a
Governments may use, and have used, wage subsidies to reduce unemployment in times of economic recession. For example, from January to August 2009, Mexico provided wage subsidies to certain firms in eligible industries; they reduced work schedules rather than lay workers off in response to the fall
If a firm's long-run average cost function is \(A C(q)=2 / q\), what happens to average cost as \(q\) increases? What is this relationship between average cost and returns to scale called? If the firm also learns by doing, what happens to average cost as \(q\) increases? How would learning by doing
Suppose that a firm's learning curve-that is, the relationship between its average cost, \(A C\), and cumulative output, \(Q\)-is \(A C=10+2 Q^{a}\), where \(a \leq 0\). If \(a=0\) and cumulative output increases from 1 to 2,000 units, what can you say about average cost and the firm's ability to
According to Haskel and Sadun (2012), the United Kingdom started regulating the size of grocery stores in the early 1990s, and today the average size of a typical U.K. grocery store is roughly half the size of a typical U.S. store and two-thirds the size of a typical French store. What implications
The harvesting of many crops can be done manually or by using a combination of machines and labor. Suppose that a crew of 15 workers using one machine produces as much output as a crew of 25 workers. If these two technologies are perfect substitutes, what is the equation of an isoquant? If the
Divit enjoys watching team sports and considers tickets to kabaddi and badminton games to be perfect substitutes. Show his preference map. What is his utility function?
Whenever Aliza buys a flashlight, she also always buys exactly two batteries along with it. Any more than two batteries will serve no purpose, because she will not be able to use them in the flashlight.Any more flashlights will not be useful either, because there will not be enough batteries for
State governments in India levy a value-added tax on the sale of goods. The rate of this sales tax varies by type of good and by state. In Maharashtra, the general rate of sales tax is \(12.5 \%\), and in the bordering state of Karnataka, it is \(14.5 \%\). This difference in tax rates can lead to
Suppose that, to support domestic employment, the government imposes a \(33.3 \%\) tariff on imports of clothing. Fareeha spends ₹8,000 on dresses each month. Before the tariff, the price of a dress produced domestically is ₹ 400 and the price of a foreign-made dress is ₹300. Use an
Give as many reasons as you can why we believe that indifference curves are convex and explain.
Does the utility function V(Z, B) = α + [U(Z, B)]2 give the same ordering of bundles as does U(Z, B)? it, they are less sensitive to price changes and hence less likely to trade than would be predicted by the standard economic model. Consumers sometimes ignore sales taxes when making purchasing
What is the effect of a quota of 13 thousand gallons of water per month on the opportunity set of the consumer in Solved Problem 4.2?Data From Solved Problem 4.2:-Water rationing is common during droughts. In recent years, water quotas have been imposed in areas of California, Texas, Oklahoma,
Suppose that consumers in Bangladesh pay twice as much per unit for mangoes as they pay for bananas, whereas consumers in Indonesia pay half as much for mangoes as they pay for bananas. Assuming that consumers maximize their utility, which country's consumers have a higher marginal rate of
Under a new Australian law, large foreign businesses are required to register with the Australian Taxation Office to collect the goods and services \(\operatorname{tax}\) (GST, a \(10 \%\) value-added tax) on all the goods they sell. Prior to July 2017, online sales of imported products worth up to
The household saving rate in Poland is low relative to other OECD countries, and Poland's population is aging. In 2016, the Polish government announced significant reforms to its pension system to help ensure that Poles will have adequate income in their retirement as numbers grow. It is also hoped
On their weekly visits to a local restaurant, Bram and Mila usually buy one slice of appeltaart (Dutch apple pie) to share and two cups of coffee each. However, the restaurant offers a special discount for the month of April to celebrate Koningsdag (King's Day): buy one slice of appeltaart and get
Daniela enjoys eating cabbage rolls and often has them with her meals. She also likes polenta, and while making it, she uses the recipe that her grandmother and mother used. Daniela views cabbage rolls and polenta as imperfect substitutes, so her indifference curves for the two goods are convex. If
A dry spell in Kenya reduced the water level at the Ndakaini Dam in Kenya by \(75 \%\) of its capacity in April 2017, resulting in water rationing in Nairobi and calls for the public to use water sparingly. A typical resident of Nairobi normally uses about 1.5 cubic meters of water per week.
Studies put the cost of raising a child up to the age of 18 at about \(€ 9,000\) per year, so when a child is born, parents may have to make some sacrifices. Before having their first child, Ivan and Emma would often go out for dinner at fancy restaurants. However, dining out now involves extra
Under the Healthy Start scheme, low-income women in the United Kingdom who are pregnant or have a child under 4 years of age can get free vouchers every week to spend on milk, fruit and vegetables, and infant formula milk. If the vouchers were instead sold at a subsidized rate (for example, \(20
Under the Healthy Start scheme, low-income women in the United Kingdom who are pregnant or have a child under 4 years of age can get free vouchers every week to spend on milk, fruit and vegetables, and infant formula milk. They may also get housing subsidies under Housing Benefit to help pay their

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