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microeconomics
Microeconomics 9th Edition Robert Pindyck, Daniel Rubinfeld - Solutions
=+5. A firm is considering two policies to increase worker output. The first policy would involve an increased wage described as an incentive for workers to increase their effort. The second policy is to announce a voluntary bonus
=+How has the “rule of thumb” behavior affected the elasticity of demand for e-books?
=+is given by Q = 10 if P 6 10 and Q = 0 if P Ú 10).Draw the resulting total demand curve for e-books.
=+4. Suppose there are two types of e-book consumers: 100“standard” consumers with demand Q = 20 - P and 100 “rule of thumb” consumers who buy 10 e-books only if the price is less than $10. (Their demand curve
=+3. There have been some claims in recent years that the increase in law school tuition (and the perceived value of a law school education) is a bubble. Do you agree with this statement? Why or why not?
=+2. Petroleum firms drill for oil in the Gulf Coast.Accidents on oil rigs that cause spills impose a negative externality on the inhabitants of the Gulf Coast states. Identify two ways oil drilling and its harmful effects could be reduced using your knowledge of externalities and behavioral
=+c. Does this change in the demand curve affect Uber’s profits during weekend nights? If so, what is the overall gain or loss?
=+b. Now imagine that Uber riders are only willing to pay up to $40 instead of $50 during surge hours.Explain the reasoning behind this consumer behavior and draw the new demand curve for weekend nights. Can Uber still charge the surge price of $50?
=+a. Graph the demand curves and determine the quantity of rides demanded during weekdays and on weekend nights based on the above prices. Label the graph with the prices and quantities.
=+during weekend nights the demand for rides increases dramatically and thus the new demand curve is:Q = 100 - P. As a result, Uber implements a surge price that is twice the price of an average ride, or $50.
=+1. The demand curve for Uber weekday rides in a certain city is described by the following equation:Q = 50 - P. An average ride costs $25. However,
=+8. What behavioral economic concept underpins the idea of a bubble? Explain your reasoning.
=+7. You are searching for a mutual fund in which to invest. You limit your search to those managers that generated above-average returns for the past three years on the theory that three successes in a row makes it very likely that the managers will have another successful year. What is wrong
=+6. Shopping at the local supermarket, you see a sign that offers a can of Campbell’s soup for $.79 per can. Later you notice a new sign that says “Limit of 5 per person.” How would you expect the new sign to affect purchasing behavior? What behavioral economics concept is involved?
=+ticket counter you see another sign saying: “Suggested admission is $25.” Subsequently, you change your mind and decide to pay $25 for admission. Identify the behavioral economic concept illustrated in this example and explain how it influenced your decision.
=+5. At a museum you see a sign that says the following:“The amount you pay for a ticket for admission is up to you.” As a result, you decide to pay $10 for a ticket as that seems to be a fair price. However, once you reach the
=+4. A retail store offers a marketing program in which they suggest that consumers try the product for 30 days and, if they don’t like it, send it back. What behavioral economic concept is at issue here? Explain.
=+3. What is a “rule of thumb”? Does the practice of restaurant tipping provide an illustration? Explain.
=+1. You walk into your local grocery store and see two packages of ground beef that are identical aside from their labeling. One is labeled “80% lean,” and the other is labeled “20% fat.” Which package are you more likely to buy, and what behavioral economic concept does this example
=+c. Draw a diagram illustrating the private and social MC curves and the demand curve. Point out the private market quantity, the socially optimal quantity, and the social welfare cost.
=+b. If cigarettes generate a marginal external cost of MEC = .1Q, what is the socially optimal level of cigarettes?
=+a. What is the quantity of cigarettes sold in equilibrium?
=+13. The demand for cigarettes is given by P = 500 -.2Q.Cigarettes are manufactured at a constant marginal cost of 50 and sold in a competitive market.
=+b. If the U.S. government can restrict the number and distribution of the boats, how many should be allocated to each zone? What will be the gross value of the catch? Assume the total number of boats remains at 100.
=+where X2 is the number of boats fishing in Zone 2. The marginal fish catch MFC in each zone can be represented as MFC1 = 200 - 41X12 MFC2 = 100 - 21X22
=+where X1 is the number of boats fishing there. Zone 2 has fewer fish per mile but is larger, and diminishing returns are less of a problem. Its daily fish catch is F2 = 1001X22 - 1X222
=+11. Reconsider the common resource problem given in Example 18.6. Suppose that crawfish popularity continues to increase, and that the demand curve shifts from C = 0.401 - 0.0064F to C = 0.50 - 0.0064F. How
=+cost of $10 per acre of trees.Beekeeping has a marginal cost MC = 10 + 5Q, where Q is the number of beehives. Each hive yields$40 worth of honey.
=+because the bees come to the orchard without his having to do anything. Because there are not enough bees to pollinate the entire orchard, the orchard owner must complete the pollination by artificial means, at a
=+8. Refer back to Example 18.4 on global warming. Table 18.3 (page 698) shows the annual net benefits from a policy that reduces GHG emissions by 1 percent per year. At what discount rate is the NPV of this policy just equal to zero?
=+the price per 100-pound lot. Currently there is no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost (MEC) associated with the production of paper is given by the curve MEC = 0.0006QS.
=+6. The market for paper in a particular region in the United States is characterized by the following demand and supply curves:QD = 160,000 - 2000P and QS = 40,000 + 2000P where QD is the quantity demanded in 100-pound lots, QS is the quantity supplied in 100-pound lots, and P is
=+are a smoker and you wish to continue smoking despite tougher anti-smoking laws, describe the effect of the following legislative proposals on your behavior.As a result of these programs, do you, the individual smoker, benefit? Does society benefit as a whole?a. A bill is proposed that would
=+5. Medical research has shown the negative health effects of “secondhand” smoke. Recent social trends point to growing intolerance of smoking in public areas. If you
=+chemicals dumped in the river. As a policy adviser for a regional planning organization, how would you compare and contrast the following options for dealing with the harmful effect of the effluent:
=+adversely affects the quality of swimming for homeowners who live downstream. These people can build swimming pools to avoid swimming in the river, and the firms can purchase filters that eliminate harmful
=+Benefits of abating (reducing) emissions: MB = 500 - 20A Costs of abating emissions: MC = 200 + 5A where A is the quantity abated in millions of tons and the benefits and costs are given in dollars per ton.
=+3. Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions:
=+eastern portion. Each firm produces the same product and in the process emits noxious fumes that adversely affect the residents of the community.
=+1. A number of firms have located in the western portion of a town after single-family residences took up the
=+15. Classify each of the following as a rival or nonrival good and as an exclusive or nonexclusive good.Explain.a. Clothingb. Cable televisionc. Congested non-toll roadd. National defense
=+Explain each of these terms and show clearly how they differ from each other.
=+10. Public goods are both nonrival and nonexclusive.
=+8. An emissions fee is paid to the government, whereas an injurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of victims might you expect to arise under these two arrangements?
=+dog is causing the damage, so if economic efficiency is to be achieved, it is necessary that Stan pay to put up a fence around his yard to confine the dog. Do you agree or disagree? Explain.
=+4. Consider a market in which a firm has monopoly power. Suppose in addition that the firm produces under the presence of either a positive or a negative externality. Does the externality necessarily lead to a greater misallocation of resources?
=+When is such intervention unlikely to be necessary?
=+3. When do externalities require government intervention?
=+2. Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain: (a) an emissions fee, (b) an emissions standard, and (c) a system of transferable emissions permits.
=+What type of loans will the lending institution choose to make? What is the expected cost to the government?
=+11. A firm’s short-run revenue is given by R = 10e - e2,
=+compensation or the exact state of demand. You do see the firm’s profit, however.Of the three alternative compensation packages below, which do you as chairman of ASP Industries prefer? Why?Package 1: Pay the CEO a flat salary of $575,000 per year Package 2: Pay the CEO a fixed 6 percent of
=+You must design a compensation package for the CEO that will maximize the firm’s expected profit. While the firm is risk neutral, the CEO is risk averse. The CEO’s utility function is Utility = W.5 when making low effort Utility = W.5 - 100 when making high effort where W is the CEO’s
=+10. As chairman of the board of ASP Industries, you estimate that your annual profit is given by the table below. Profit 1Π2 is conditional upon market demand and the effort of your new CEO. The probabilities of each demand condition occurring are also shown in the table.Market DeMaND low
=+Harry has an idea: He will offer a bumper-to-bumper warranty for all cars that he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Lew tries to offer the same warranty, it will cost Lew $1000Y on average.
=+on average for Harry’s cars and only $7000 on average for Lew’s cars.Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50–50 chance of ending up with a high-quality car and are thus willing to pay $8500
=+to buy and service each car that it sells. The second dealership, Lew’s Motors, always sells lower-quality cars. On average, it costs Lew’s only $5000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $10,000
=+9. Two used car dealerships compete side by side on a main road. The first, Harry’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Harry’s $8000
=+8. You have seen how asymmetric information can reduce the average quality of products sold in a market, as low-quality products drive out high-quality products. For those markets in which asymmetric information is prevalent, would you agree or disagree with each of the following? Explain
=+(ii) complete coverage above and beyond a $10,000 deductible, and (iii) 90 percent coverage of all losses. Which policy is more likely to create moral hazard problems?
=+7. An insurance company is considering issuing three types of fire insurance policies: (i) complete insurance coverage,
=+How does truth in advertising promote competition?
=+6. To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully.
=+5. Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (e.g., a seven-year warranty on all parts and labor associated with mechanical problems).
=+and the university. Should he be allowed to continue exclusively with research? Discuss with reference to the principal–agent problem.
=+show up for his classes. It seems he is devoting all his time to research rather than to teaching. Jones argues that his research will bring prestige to the department
=+4. Professor Jones has just been hired by the economics department at a major university. The president of the board of regents has stated that the university is committed to providing top-quality education for undergraduates. Two months into the semester, Jones fails to
=+above, is this a good policy? Discuss this policy with respect to the problem of moral hazard.
=+from the pressures of flunking out. The university states that it wants all its students to get As and Bs.If the goal is to raise overall grades to the B level or
=+a long credit history. Nonetheless, the bank has a long history of financing cars for recent college graduates. Is this information useful in Gary’s case? If so, how?
=+b. You are a loan officer in a bank. After selecting a car, Gary comes to you seeking a loan. Because he has only recently graduated, he does not have
=+8. How can the principal–agent model be used to explain why public enterprises, such as post offices, might pursue goals other than profit maximization?
=+6. Joe earned a high grade-point average during his four years of college. Is this achievement a strong signal to Joe’s future employer that he will be a highly productive worker? Why or why not?
=+5. Why might a seller find it advantageous to signal the quality of a product? How are guarantees and warranties a form of market signaling?
=+b. Determine the production possibilities curve for each country, both graphically and algebraically.(Label the pretrade production point PT and the post-trade point P.)
=+a. Which country has a comparative advantage in the production of each good? Explain.
=+11. Suppose that country A and country B both produce wine and cheese. Country A has 800 units of available labor, while country B has 600 units. Prior to trade, country A consumes 40 pounds of cheese and 8 bottles of wine, and country B consumes 30 pounds of cheese and 10 bottles of wine.country
=+10. In the context of our analysis of the Edgeworth production box, suppose that a new invention changes a constant-returns-to-scale food production process into one that exhibits sharply increasing returns.How does this change affect the production contract curve?
=+b. Consider two cases of production extremes:(i) Acme produces zero units of Alpha initially, or(ii) Acme produces zero units of Beta initially. If Acme always tries to stay on its production possibility frontier, describe the initial positions of cases(i) and (ii). What happens as the Acme
=+9. The Acme Corporation produces x and y units of goods Alpha and Beta, respectively.a. Use a production possibility frontier to explain how the willingness to produce more or less Alpha depends on the marginal rate of transformation of Alpha or Beta.
=+ How would your answer change if the monopsonist in the labor market were also a monopolist in the output market?
=+8. A monopsonist buys labor for less than the competitive wage. What type of inefficiency will this use of monopsony power cause?
=+6. In the analysis of an exchange between two people, suppose both people have identical preferences. Will the contract curve be a straight line? Explain. Can you think of a counterexample?
=+5. Fill in the missing information in the following tables. For each table, use the information provided to identify a possible trade. Then identify the final allocation and a possible value for the MRS at the efficient solution. (Note: There is more than one correct answer.) Illustrate your
=+d. Assuming that labor is the only input, if the opportunity cost of producing a yard of cloth is 3 bushels of wheat per yard, then wheat must require 3 times as much labor per unit produced as cloth.
=+a. If it is possible to exchange 3 pounds of cheese for 2 bottles of wine, then the price of cheese is 2/3 the price of wine.
=+12. A consumer faces the following decision: She can buy a computer for $1000 and $10 per month for Internet access for three years, or she can receive a $400 rebate on the computer (so that its cost is $600) but agree to pay$25 per month for three years for Internet access. For simplification,
=+11. Suppose you can buy a new Toyota Corolla for $20,000 and sell it for $12,000 after six years. Alternatively, you can lease the car for $300 per month for three years and return it at the end of the three years. For simplification, assume that lease payments are made yearly instead of
=+10. Reexamine the capital investment decision in the disposable diaper industry (Example 15.4) from the point of view of an incumbent firm. If P&G or KimberlyClark were to expand capacity by building three new plants, they would not need to spend $60 million on R&D before start-up. How does
=+8. Suppose your uncle gave you an oil well like the one described in Section 15.8. (Marginal production cost is constant at $50.) The price of oil is currently $80 but is controlled by a cartel that accounts for a large fraction of total production. Should you produce and sell all your oil now or
=+7. Ralph is trying to decide whether to go to graduate school. If he spends two years in graduate school, paying $15,000 tuition each year, he will get a job that will pay $60,000 per year for the rest of his working life. If he does not go to school, he will go into the workforce immediately.
=+5. Equation (15.5) (page 586) shows the net present value of an investment in an electric motor factory. Half of the$10 million cost is paid initially and the other half after a year. The factory is expected to lose money during its first two years of operation. If the discount rate is 4
=+4. A bond has two years to mature. It makes a coupon payment of $100 after one year and both a coupon payment of $100 and a principal repayment of $1000 after two years. The bond is selling for $966. What is its effective yield?
=+3. Suppose the interest rate is 10 percent. What is the value of a coupon bond that pays $80 per year for each of the next five years and then makes a principal repayment of $1000 in the sixth year? Repeat for an interest rate of 15 percent.
=+2. You are offered the choice of two payment streams:(a) $150 paid one year from now and $150 paid two years from now; (b) $130 paid one year from now and$160 paid two years from now. Which payment stream would you prefer if the interest rate is 5 percent? If it is 15 percent?
=+Paid two years from now? Paid five years from now?
=+10. Suppose you are deciding whether to invest $100 million in a steel mill. You know the expected cash flows for the project, but they are risky—steel prices could rise or fall in the future. How would the CAPM help you select a discount rate for an NPV calculation?
=+2. How do investors calculate the net present value of a bond? If the interest rate is 5 percent, what is the present value of a perpetuity that pays $1000 per year forever?
=+How would your answer change if the firm had leased a factory instead of buying one? Is its output measured as a flow or a stock? What about its profit?
=+9. Using the same information as in Exercise 8, suppose now that the only labor available is controlled by a monopolistic labor union that wishes to maximize the rent earned by union members. What will be the quantity of labor employed and the wage rate? How does your answer compare with your
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