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microeconomics

Questions and Answers of Microeconomics

The total utility of your consumption of widgets is 40; it changes by 2 with each change in widgets consumed.The total utility of your consumption of wadgets is also 40 but changes by 3 with each
Early Classical economists found the following “diamond/water” paradox perplexing: “Why is water, which is so useful and necessary, so cheap, when diamonds, which are so useless and
State the law of demand and explain how it relates to the principle of rational choice.
Suppose a small cheese pizza costs $10 and a calzone costs $5. You have $40 to spend. The marginal utility(MU) that you derive from each is as follows:a. How many of each would you buy?b. Suppose the
Your study partner tells you that if you are compensated for the impact on your budget of a rise in the price of a good, your purchase choices won’t change. Is he right?Explain.
State the law of supply and explain how it relates to opportunity cost.
If the supply curve is perfectly inelastic, what is the opportunity cost of the supplier?
There is a small but growing movement known as “voluntary simplicity,” which is founded on the belief in a simple life of working less and spending less. Do Americans who belong to this movement
According to Thorstein Veblen, what is the purpose of conspicuous consumption? Does the utility derived from the consumption of these goods come from their price or functionality? Give an example of
Say that the ultimatum game described in the chapter was changed so that the first individual could keep the money regardless of whether the offer was accepted by the second individual or not.a. What
The book seems to suggest that all decisions are economic decisions.a. Would you agree?b. How would tithing fit into the decision-making calculus? (Religious)
In his book Why Perestroika Failed: The Politics and Economics of Socialist Transformation, Austrian economist Peter Boettke argues that Soviet-style socialist countries had to fail because they
This textbook discusses the issue of decision making in reference to the individual, but generally households, not individuals, make decisions.a. How do you think decisions are actually made about
Often, people buy a good to impress others and not because they want it.a. What implications would such actions have for the application of economic analysis?b. How many goods are bought because
Most people believe that marginal utility diminishes with each additional dollar of income (or one more dollar is worth more to a poor person than a rich one).a. If that is true, how would you design
How would the world be different than it is if the principle of diminishing marginal utility seldom held true?
True or false? It is sometimes said that an economist is a person who knows the price of everything but the value of nothing. Why?
Assign a measure of utility to your studying for various courses. Do your study habits follow the principle of rational choice?
Explain your motivation for four personal decisions you have made in the past year, using economists’ model of individual choice.
Nobel Prize–winning economist George Stigler explains how the famous British economist Phillip Wicksteed decided where to live. His two loves were fresh farm eggs, which were more easily obtained
Although the share of Americans who say they are “very happy” hasn’t changed much in the last five decades, the number of products produced and consumed per person has risen tremendously. How
Give an example of a recent purchase for which you used a rule of thumb in your decision-making process. Did your decision follow the principle of rational choice? Explain.
Economic experiments have found that individuals prefer an outcome where no one is made better off to an outcome where the welfare of only some is improved if that improvement in welfare is unequally
You are buying your spouse, significant other, or close friend a ring. You decide to show your reasonableness and buy a cubic zirconium ring that sells at 1⁄50 the cost of a mined diamond and that
Joseph Gallo, the founder of the famous wine company that bears his name, said that when he first started selling wine right after Prohibition (laws outlawing the sale of alcohol), he poured two
If the total utility curve is a straight line—that is, does not exhibit diminishing marginal utility—what will the marginal utility curve look like?
True or false? Consuming more of a good generally increases its marginal utility. Why?
Which is the rational choice:watching one hour of CNN that gives you 20 units of utility or watching a two-hour movie that gives you 30 units of utility?
True or false? You are maximizing total utility only when the marginal utility of all goods is zero.Explain your answer.
If you are initially in equilibrium and the price of one good rises, how would you adjust your consumption to return to equilibrium?
What are two effects that generally cause the quantity demanded to fall when the price rises?
Use the principle of rational choice to explain how you would change your quantity of work supplied if your employer raised your wage by $1 per hour.
If the opportunity cost of consuming good x is greater than the opportunity cost of consuming good y, which good has the higher marginal utility per dollar?
True or false? Bounded rationality violates the principle of rational choice.
Using the principle of rational choice, explain why a change in tastes will shift the demand curve.
Define the prisoner’s dilemma game.a. What assumptions lead to the dilemma?b. What creates the possibility of escaping it?c. What does the standard model say about your answer to b? What does
In the following payoff matrix, Player A announces that she will cooperate.a. How is this likely to change the outcome compared to when neither cooperates?b. What does your answer to a suggest about
Is the solution to the prisoner’s dilemma game a Nash equilibrium?Why?
If a player does not have a dominant strategy, can the game still have a Nash equilibrium?
Two firms have entered an agreement to set prices. The accompanying payoff matrix shows profit for each firm in a market depending upon whether the firm cheats on the agreement by reducing its
Two people are arrested and charged with the same crime.Each is given the opportunity to accuse the other of the crime. The payoff matrix shows how much time each will serve depending on who rats out
For each of the following, state whether Player A and Player B have a dominant strategy and, if so, what each player’s dominant strategy is. a. Player A X Y A: $5 A: $2 X Player B A: $10 B: $5 A:
Would the results of the prisoner’s dilemma game be different if it were a sequential rather than a simultaneous game?
State whether each of the following situations is a simultaneous or sequential game. Explain your answer.a. A congressional vote by roll call.b. The ultimatum game.c. The Civil War.d. The segregation
Can a player have a rollback strategy in a simultaneous move game?
True or false? If a game has a Nash equilibrium, that equilibrium will be the equilibrium that we expect to observe in the real world.
Why might the multiple-play ultimatum game have a different result than the single-play ultimatum game?
Why do sellers generally prefer a Vickrey auction to a regular sealed bid if sellers don’t receive the highest bid in the Vickrey auction?
Say that you are bidding in a sealed-bid auction and that you really want the item being auctioned. Winning it would be worth $250 to you. Say you expect the nexthighest bidder to bid $100.a. In a
When consumers were given the opportunity to select a package of ground beef labeled “75% lean” or a package of ground beef labeled “25% fat,” most consumers chose“75% lean.” Why? What
Why does it take just a few people to act rationally for the standard model to hold?
Do you believe people with religious training will arrive at different outcomes than others in a strategic game?Why? Which interaction is preferable? (Religious)
Austrian economist Ludwig von Mises defined economics as “the science of human action.” Does game theory or standard supply/demand analysis better fit with that definition? Why? (Austrian)
Do you believe that women will arrive at different outcomes than men when playing a strategic game? Why?Which is preferable? (Feminist)
How does game theory demonstrate the importance of institutions?(Institutionalist)
In the opening to this chapter, the author describes a scene in the movie A Beautiful Mind. What is disturbing about that scene? Is John Nash representative of economic sensibility? (Feminist)
How do the findings of behavioral economics undermine the assumptions of the standard model as to the nature of human beings? (Radical)
How is the fact that employers look to see that applicants took difficult courses in college, even though the subject matter has no bearing on the work they will likely do, an example of screening?
How is investing in the stock market similar to playing the two-thirds game?
In 1950, economists Merrill Flood and Melvin Dresher devised an experiment to challenge the Nash equilibrium.They presented the following payoff matrix to two economists and asked them to play the
In 1970 economist Martin Shubik proposed a game that involved auctioning off a one-dollar bill with the following rules: 1. The highest bidder wins the dollar bill and pays his bid. 2. The
Suppose the two-thirds game described in the chapter were changed to the “average” game, so that the class had to guess a number between 0 and 100, and the person who wins is the person who
Say that 90 percent of the people in a market demonstrate the endowment effect and 10 percent are “rational.” Say that, initially, all people have equal wealth.a. How would you expect the wealth
In a Vickrey auction how would a person’s bid differ if she knew that the seller had someone at the auction submitting a bid for the seller?
True or false? Game theory is inconsistent with supply/demand analysis.Explain your answer.
In the payoff matrix in Figure 20-1, what is B’s best strategy if A confesses? FIGURE 20-1 Prisoner's Dilemma This payoff matrix illustrates the prisoner's dilemma. If the prisoners could agree not
In the payoff matrix in Figure 20-1, what is B’s best strategy if A does not confess? FIGURE 20-1 Prisoner's Dilemma This payoff matrix illustrates the prisoner's dilemma. If the prisoners could
In the payoff matrix in Figure 20-1, if Prisoners A and B are in love and care for each other as they care for themselves, what is the expected outcome of the prisoner’s dilemma game? FIGURE 20-1
In formal game theory, should cheap talk influence the results?
In a single-play ultimatum game, what is the optimal strategy for the first player?
What is the Nash equilibrium in the two-thirds game?
How does a Vickrey auction differ from a standard sealed-bid auction?
If a firm wants to increase the number of employees who participate in a savings plan, should the enrollment form ask whether the employee wants an automatic withdrawal from a paycheck to retirement
If 90 percent of people operate as behavioral economics suggests, does that mean that the standard economic model is no longer applicable?
Why do economists rely more on empirical evidence today than they did 100 years ago?
What does it mean to “let the data speak”?
What is a regression?
True or false? Models provide both theorems and precepts.Explain your answer.
State whether each of the policy recommendations is an example of a modern economist’s precepts or a traditional economist’s precepts.a. More goods are preferred to fewer goods.b. Banks ought to
How might modeling itself frame an economist’s analysis, making the economist unable to see basic truths about the way in which society subjugates women? (Feminist)
Was Mother Teresa rational? (Religious)
It is sometimes said that modern economists pose little questions that can be answered while sociologists pose large questions that cannot be answered. How might that description be related to the
The book talks as if modern economists have made a large break from traditional assumptions; many heterodox economists see the two as simply minor modifications of the same approach. In what way is
If modern economics focuses on empirical models, does that mean that those aspects of life that cannot be quantified are shortchanged? (Institutionalist)
Is the supply/demand model a path-dependent model?Why or why not?
What is the glue that holds modern economics together?
Are modern economists more likely to use inductive models than were earlier economists?
If an economist argues that people tend to be purposeful and follow their enlightened self-interest, would you most likely characterize that economist as a behavioral or a traditional economist?
Can adding a constraint on people make them better off?
Which are better—models based on traditional building blocks or models based on behavioral building blocks?
Does the author’s tendency to wear Velcro shoes demonstrate that he is beyond social pressures?
Why are economists very hesitant to base knowledge on heuristic models?
True or false? Debates in modern economics will be resolved by letting the data speak.
Is the supply and demand model a path-dependent model?
If a model tells you that price controls will reduce people’s welfare, does it follow that economists will advise governments not to impose price controls?
What is a coordination mechanism? Give an example.
True or false? For a market to have a coordination mechanism, money must be exchanged. Explain.
True or false? Only money prices affect incentives;shadow prices do not. Explain.
What is the incentive compatibility problem? Give an example.
What is the primary task of a mechanism design economist?

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