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Microeconomics 11th Edition David Colander - Solutions
In this chapter, we learn that most new cars aren’t sold at their list price but are sold at a discount and that this allows dealerships to charge more to customers with inelastic demand. At the same time, studies have shown that retail car dealerships systematically offer substantially better
In the 1960s, coffee came in 1-pound cans. Today, most coffee comes in 11-ounce cans.a. Can you think of an explanation why?b. Can you think of other products besides coffee whose standard size has shrunk? (Often the standard size is supplemented by a “supersize” alternative.)
If price elasticity of demand is greater than 1, what would we call demand:elastic or inelastic?
A firm has just increased its price by 5 percent over last year’s price, and it found that quantity sold remained the same.a. What is its price elasticity of demand?b. How would you calculate it?c. What additional information would you search for before you did your calculation?
Early economists made a distinction between needs and wants. Needs were economists’ concern; wants were of far less importance.a. Is such a distinction useful?b. Would making such a distinction change the nature of economic analysis?c. Does the fact that the book makes no distinction between
Why would an economist be more hesitant about making an elasticity estimate of the effect of an increase in price of 1 percent than an increase in price of 50 percent?
What is the approximate elasticity between points A and B on the graph below? Price 432- 1 A B 2 4 6 8 10 12 14 16 Quantity
In the chapter, you saw that an increase in Vermont’s minimum wage stimulated a small quantity response.a. What does this tell you about the nature of the labor market in Vermont? (Hint: Think carefully and critically about the conditions shaping worker options and their responses to changes in
When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increased from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what is the price elasticity of demand for the Dulles Airport Greenway?
A major cereal producer decides to lower price from$3.60 to $3 per 15-ounce box.a. If quantity demanded increases by 18 percent, what is the price elasticity of demand?b. If, instead of lowering its price, the cereal producer increases the size of the box from 15 to 17.8 ounces, what would you
Your study partner, Nicole, has just stated that a straight-line demand curve is inelastic. How do you respond?
One football season Domino’s Pizza, a corporate sponsor of the Washington Redskins (a football team), offered to reduce the price of its $8 medium-size pizza by $1 for every touchdown scored by the Redskins during the previous week. Until that year, the Redskins weren’t scoring many touchdowns.
Economists have estimated the demand elasticity for motor fuel to be between 0.4 and 0.85.a. If the price rises 10 percent and the initial quantity sold is 10 million gallons, what is the range of estimates of the new quantity demanded?b. In carrying out their estimates, they came up with different
If elasticities are constantly changing as the time period gets longer, how do managers use a measure of elasticity of demand to determine the price they charge? If they don’t use elasticities, how do they set price? (Post-Keynesian)
What are four important factors affecting the number of substitutes a good has?
Which has greater elasticity: a supply curve that goes through the origin with slope of 1 or a supply curve that goes through the origin with slope of 4?
Price elasticity is not just a technical economic concept. It also reflects the distribution of economic power—the bargaining power and economic opportunities of buyers and sellers.a. When suppliers (for example, landlords or energy companies) hold disproportionate power over buyers, or consumers
Demand for “prestige” college education is generally considered to be highly inelastic. What does this suggest about tuition increases at prestige schools in the future?Why don’t colleges raise tuition by amounts even greater than they already do?
In the long run, would you expect demand to be more or less elastic?
Calculate the elasticity of the designated ranges of supply and demand curves on the following graph.
In 2004, Congress allocated over $20 billion to fight illegal drugs. About 60 percent of the funds was directed at reducing the supply of drugs through domestic law enforcement and interdiction. Some critics of this approach argue that supply-side approaches to reduce the drug supply actually help
If demand is inelastic and a firm raises price, what happens to total revenue?
Which of the pairs of goods would you expect to have a greater price elasticity of demand? a. Cars, transportation.b. Housing, leisure travel.c. Rubber during World War II, rubber during the entire 20th century.
In the discussion of elasticity and raising and lowering prices, the text states that if you have an elastic demand, you should hesitate to raise your price, and that lowering price can possibly increase profits (total revenue minus total cost). Why is the word possibly used?
If a good’s consumption increases with an increase in income, what type of good would you call it?
Colleges have increasingly used price sensitivity to formulate financial aid. The more eager the student, the less aid he or she can expect to get. Use elasticity to explain this phenomenon. Is this practice justified?
If there were only two goods in the world, can you say whether they would be complements or substitutes?Explain your answer.
Label each of the following goods as a luxury, necessity, or inferior good. Income elasticity is given for each.a. Dental services: 1.6b. Beer: 0.8c. Baloney: −0.15
Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why the elasticities differ.a. Elasticity of demand for buses is 0.23 during peak hours and 0.42 during off-peak hours.b. Elasticity of demand for buses is 0.7 in the short run and 1.5 in
Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage drinking would fall by 28 percent and underage binge drinking would fall by 51 percent.a. What is the
A firm faces an elastic demand for its product. It has come to an economist to advise it on whether to lower its price. The answer she gives is: Maybe.Why is this the right answer?
Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book’s price? Why?
Demonstrate graphically the likely effect of an increase in the price of gas on the equilibrium quantity and price of hybrid cars.
Because of the negative incentive effect that taxes have on goods with elastic supply, in the late 1980s Margaret Thatcher (then prime minister of Great Britain) changed the property tax to a poll tax (a tax at a set rate that every individual must pay).a. Show why the poll tax is preferable to a
Many of the buildings in Paris have Mansard roofs, such as those shown in the photograph on page 147.a. What property tax structure would bring this about?b. Could you imagine a change in the property tax that would reduce the number of Mansard roofs built?c. Can you think of other design elements
Demonstrate the welfare loss of a tax when the supply is highly elastic and the demand is highly inelastic.
How is elasticity related to the revenue from a sales tax?
Do Pierre, a software engineer earning $200,000 a year, and Sally, a single mother whose welfare benefits are about to expire, get equal weight in the measure of consumer surplus? (Institutionalist)
Can you suggest a tax system that led to this building style, which was common in old Eastern European cities? Courtesy of David Colander
If a person has a highly elastic demand, will he likely bear a large or small percentage of the burden of a tax?
Minneapolis Federal Reserve Bank economist Edward Prescott estimates the elasticity of the U.S. labor supply to be 3. Given this elasticity, what would be the impact of funding the Social Security program with tax increases on the number of hours worked and on the amount of taxes collected to fund
How much of a $100 tax would a consumer pay if elasticity of demand is 0.2 and elasticity of supply is 1.8?
The Pure Food and Drug Act of 1906 is known as“Dr. Wiley’s Law.” It is generally regarded by non-economic historians as representing the triumph of consumer interests over producer interests.a. Why might an economist likely be somewhat wary of this interpretation?b. What evidence would a
The elasticity of the supply of labor in part determines who bears the burden of Social Security taxes. Those taxes are typically levied in matching 6.2 percent shares on workers’ wages and wages paid out by employers.Economists treat the two shares as one tax and then consider two cases. In
When the price of ketchup rises by 18 percent, the demand for hot dogs falls by 2 percent.a. Calculate the cross-price elasticity of demand.b. Are the goods complements or substitutes?c. In the original scenario, what would have to happen to the demand for hot dogs for us to conclude that hot dogs
Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer.
Why isn’t the combination of consumer and producer surplus maximized if there is either excess demand or supply?
The quotation from Calvin Coolidge at the beginning of the chapter equates taxation to robbery.a. Is that a reasonable position to take?b. What alternatives to taxation could a country consider to collect the revenue it needs to operate? (Austrian)
If price moves from disequilibrium to equilibrium, what happens to the combination of producer and consumer surplus in the market?
Why does nearly every purchase you make provide you with consumer surplus?
The chapter frames the issue of the effects of taxation in terms of its effects on producer and consumer surplus.a. What does that framework leave out of the analysis?b. How might one frame the analysis differently?c. If women are discriminated against and receive less income than men on average,
Use the graph below that shows the effect of a$4 per-unit tax on suppliers to answer the following questions:a. What are equilibrium price and quantity before the tax? After the tax?b. What is producer surplus when the market is in equilibrium before the tax? After the tax?c. What is consumer
Given this elasticity, what would be the impact of funding the Social Security program with tax increases on the number of hours worked and on the amount of taxes collected to fund Social Security?
God sees all individuals as equal, and that what one does to the least of God’s children, one does to all. How does that approach to thinking about issues fit with the economic analysis that focuses on consumer and producer surplus? (Religious)
The president of Lebanon Valley College proposed the following tuition program: provide a 50 percent tuition reduction for those graduating in the top 10 percent of their high school class, 33 percent reduction for those in the top 20 percent, and 25 percent reduction for those in the top 30
Demonstrate the welfare loss of: (LO7-2)a. A restriction on output when supply is perfectly elastic.b. A tax t placed on suppliers.c. A subsidy s given to suppliers.d. A restriction on output when demand is perfectly elastic.
If Social Security taxes were paid only by employees, what would likely happen to workers’ pretax pay?
In 2004, the University of California education system drastically cut enrollment due to significant state budget cuts and asked 7,600 applicants to defer enrollment for two years after completing two years at a community college.Tuition costs remained fixed by the state.a. Demonstrate the
Demonstrate the effect of an effective price ceiling on producer and consumer surplus when both supply and demand are highly inelastic.
Would a firm’s research and development expenditures be classified as rent seeking?
If the federal government wanted to tax a good and suppliers were strong lobbyists, but consumers were not, would government prefer supply or demand to be more inelastic? Why?
How can an increase in productivity harm suppliers?
What types of goods would you recommend that the government tax if it wants the tax to result in no welfare loss? Name a few examples.
If supply is perfectly inelastic, will price controls cause a large shortage?
Why do price controls tend to create ongoing shortages or surpluses in the long run?
If the demand for a good is perfectly elastic and the supply is elastic, who will bear the larger share of the burden of a tax on the good where the tax is paid by consumers?
What percentage of a tax will the demander pay if price elasticity of supply is 0.4 and price elasticity of demand is 0.6? What percentage will the supplier pay?
Which good would an economist normally recommend taxing if government wanted to minimize welfare loss and maximize revenue: a good with an elastic or inelastic supply? Why?
Should tenants who rent apartments worry that increases in property taxes will increase their rent? Does your answer change when considering the long run?
Calculate the percentage of the tax borne by the demander and supplier in each of the following cases:a. ED = 0.3, ES = 1.2b. ED = 3, ES = 2c. ED = 0.5, ES = 1d. ED = 0.5, ES = 0.5e. Summarize your findings regarding relative elasticity and tax burden.
Demonstrate how a price floor is like a tax on consumers and a subsidy to suppliers. Label the following: tax on consumers, transfer of surplus to suppliers, and welfare loss.a. Who gets the revenue in the case of a tax?b. Who gets the revenue in the case of a price floor?
Use the graph below to answer the following questions:a. What are equilibrium price and quantity?b. What is producer surplus when the market is in equilibrium?c. What is consumer surplus when the market is in equilibrium?d. If price were held at $12 a unit, what are consumer and producer surplus?
In which case would the shortage resulting from a price ceiling be greater: when supply is inelastic or elastic?Explain your answer.
Suppose government imposed a minimum wage above equilibrium wage.a. Assuming nothing else changes, what do you expect to happen to the resulting shortage of jobs as time progresses?b. What do you expect to happen to the producer surplus transferred to minimum wage earners as time progresses?
A political leader comes to you and wonders from whom she will get the most complaints if she institutes a price ceiling when demand is inelastic and supply is elastic.a. How do you respond?b. Demonstrate why your answer is correct.
Define rent seeking. Do firms have a greater incentive to engage in rent-seeking behavior when demand is elastic or when it is inelastic?
What is the general rule of political economy? Give an example from the real world.
State three reasons for a potentially beneficial role of government intervention.
What is the adverse selection problem?
Automobile insurance companies charge lower rates to married individuals than they do to unmarried individuals.What economic reason is there for such a practice?Is it fair?
An advanced degree is required to teach at most colleges.In what sense is this a form of restricting entry through licensure?
Who would benefit and who would lose if an informational alternative to licensing doctors were introduced?
What is the effect of the moral hazard problem on insurance premiums? Explain your answer.
The total cost of government regulations in the U.S. manufacturing sector was estimated by the National Association of Manufacturers to be about $2 trillion in 2012, or$15,400 per family.a. Do the findings mean that the United States had too many regulations?b. How would an economist decide which
When Ben wears his red shirt, it bothers Sally, who hates the color red. Since Ben’s wearing of a red shirt imposes a cost on Sally, it involves an externality. Would it therefore be correct to have the government intervene and forbid Ben to wear a red shirt?
True or false? Burning fossil fuels contributes to climate change. Thus, it makes sense for the government to place a tax on the burning of fossil fuels. Why?
If the opportunity cost of oil for food were the same for both the United States and Saudi Arabia, what should I.T. do?
In the 10th century B.C., King Solomon brought the Israelites into great economic wealth through specialization and trade. It was difficult when faced with the practices and beliefs of their trading partners, however, for Israel to maintain its identity as a people of one God. King Solomon, for
In what circumstances would a small country not get the larger percentage of the gains from trade?
What are four reasons for the difference between laypeople’s and economists’ views of trade?
Why has globalization caused employment and wages to decline in the manufacturing sector but not in the education, government, and health care sectors?
What are two likely adjustments that will reduce the trade deficit between China and the United States?
Show graphically the effect on the price of euros of an increase in the demand for dollars by Europeans.
If one dollar can be exchanged for more euros, has the dollar appreciated or depreciated?
If the world supply of goods is at the domestic price level, what will be the level of net imports? Explain your answer.
How can the discovery of a highly valuable resource lead to the appreciation of a currency and loss of comparative advantage in other goods?
How has the nature of U.S. imports from China changed in recent years?
Will a debtor nation necessarily be running a trade deficit?
How are tariffs like taxes?Demonstrate with a supply and demand curve.
Why do importers prefer a quota to a tariff? Why does government prefer a tariff?
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