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business
microeconomics principles
Questions and Answers of
Microeconomics Principles
What are The special dilemmas information goods pose for antitrust policy
5. A new company providing cellular telephone service, Springulizon, has identified 10 million potential subscribers to its new cellular telephone network. The network operates on a new standard that
4. Explain the following situations.a. In Europe, many cell phone service providers give away for free what would otherwise be very expensive cell phones when a service contract is purchased. Why
1.3. British Biotech is developing a new cancer drug. The demand schedule for the drug, once the drug has been developed, is shown in Table 3a. If British Biotech can act as a monopolist, its
2. Werck, a pharmaceutical company, is developing a new AIDS drug. The demand schedule for the drug, once it has been developed, is shown in Table 2a. If Werck can act as a monopolist, its marginal
1. Information goods are characterized by high fixed cost and very low or zero marginal cost. Suppose the government grants the producer of an information good a patent so that the producer is the
1. As described in the For Inquiring Minds on page 531, America Online (AOL), the biggest Internet service provider in the United States, was at one time the subject of antitrust scrutiny of its
2. Suppose there are two competing companies in an industry that has critical mass effects. Explain why the market is likely to tip to the company that can sustain the largest initial losses.
1. For each of the following goods explain the nature of the network externality present.a. Appliances using a particular voltage, such as 110 volt versus 220 voltb. 81⁄2-by-11-inch paper versus
2. It is often said that “bigger is better” in industries in which the good has the characteristics of an information good. Explain this statement.
1. Which of the following are information goods? Which are not? Explain your answer.a. A premium cable show delivered to cable viewersb. A winter coat made from a newly developed high-tech fabricc. A
➤ Why information goods can lead to critical mass effects, in which a market suddenly explodes in size, or to tipping, in which the market swings to favor one good over another
➤ How the economics of information goods differs from that of other goods
10. In the city of Notchingham, each worker is paid a wage rate of $10 per hour. Notchingham administers its own unemployment benefit, which is structured as follows: If you are unemployed (that is,
9. The country of Marxland has the following income tax and social insurance system. Each citizen’s income is taxed at an average tax rate of 100%. A social insurance system then provides transfers
8. In the city of Metropolis, there are 100 residents, each of whom lives until age 75. Residents of Metropolis have the following incomes over their lifetime: Through age 14, they earn nothing.From
7. You work for the Council of Economic Advisers, providing economic advice to the White House. The president wants to overhaul the income tax system and asks your advice. Suppose that the current
6. In Transylvania the basic income tax system is fairly simple.The first 40,000 sylvers (the official currency of Transylvania)earned each year are free of income tax. Any additional income is taxed
5. Each of the following tax proposals has income as the tax base. In a diagram with the tax base—income, ranging from$0 to $50,000—on the horizontal axis and the taxes paid on the vertical axis,
4. You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual’s
3. Consider the following deductions, which reduce the amount of income tax an individual must pay. Can they be justified on the basis of the ability-to-pay principle?a. Amount of charitable
2. Assess the following three taxes in terms of the benefits principle versus the ability-to-pay principle.a. A tax on gasoline that finances maintenance of state roadsb. An 8% tax on imported goods
1. Assume that the demand for gasoline is inelastic. The government imposes a sales tax on gasoline. The tax revenue is used to fund research into clean fuel alternatives to gasoline, which will
2. Describe the trade-off between equity and efficiency in the following programs:a. A program that supplements the income of farmers during poor crop yearsb. A program that pays rent for low-income
1. Suppose that the government offered free health care to families with incomes of less than$15,000 per year, but no health care assistance for families with incomes of $15,000 per year or more.a.
3. The current U.S. poverty rate is no lower than it was in 1973 despite the fact that the poverty line has not been adjusted to take into account the long-term rise in the standard of living in the
2. Do you think that the introduction of a negative income tax makes it more or less likely that unemployed low-income adults will become employed? Explain.
1. Explain why the poverty rate has fallen for Americans over 65 since 1973 but has risen for Americans under 18.
2. Classify the following programs according to whether they redistribute income or provide social insurance.a. Natural disaster emergency reliefb. Heating cost assistance for low-income familiesc.
1. Unemployment insurance is financed by taxes on employed workers, who collect benefits if they become unemployed. Suppose that workers in Alaska are unemployed and workers in Florida are employed
2. When comparing households at different income levels, economists find that consumption spending grows more slowly than income. Assume that when income grows by 50%, from$10,000 to $15,000,
1. A wealth tax taxes 1% of the first $10,000 of wealth and 2% on all wealth above $10,000.Show that the average rate is smaller than the marginal rate for someone with wealth of$20,000.
1. Assess each of the following taxes in terms of the benefits principle versus the ability-to-pay principle. What, if any, actions are distorted by the tax? Assume for simplicity in each case that
➤ What income inequality is and why there is a policy debate about it
➤ Why designing a tax system involves a trade-off between equity and efficiency
10. In developing a vaccine for a new virus called SARS, a pharmaceutical company incurs a very high fixed cost. The marginal cost of delivering the vaccine to patients, however, is negligible
9. Butchart Gardens is a very large garden in Victoria, British Columbia, renowned for its beautiful plants. It is so large that it could hold many times more visitors than currently visit it.The
3. In many planned communities, various aspects of community living are subject to regulation by a homeowners’ association.These rules can regulate house architecture; require snow removal from
1. Xena is a software program produced by Xenoid. Each year Xenoid produces an upgrade that costs $300,000 to produce. It costs nothing to allow customers to download it from the company’s website.
1. The town of Centreville, population 16, has two types of residents, Homebodies and Revelers.Using the accompanying table, the town must decide how much to spend on its New Year’s Eve party. No
2. Which of the goods in Question 1 will be provided by a competitive market? Which will not be? Explain.
➤ Why finding the right level of government intervention is difficult
9. Fishing for sablefish has been so intensive that sablefish were threatened with extinction. After several years of banning such fishing, the government is now proposing to introduce tradable
7. Draw a diagram of the supply and demand curves for telephone service. The marginal cost of connecting another household to the telephone network is increasing, as it is more costly to connect
6. Getting a flu shot reduces not only your chance of getting the flu but also the chance that you will pass it on to someone else.a. Draw a diagram showing the supply and demand curves of
4. The accompanying table shows the total social benefit from steel production and the total cost to steel producers of producing steel. Producing a ton of steel imposes a marginal external cost of
3. Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal wastes. (One cow can produce up to 2
1. What type of externality (positive or negative) is described in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the
2. Explain the following:a. Why an emissions tax smaller than or greater than the marginal social cost at QOPT reduces total surplusb. Why a system of tradable emissions permits that sets the total
➤ Why some government policies to deal with externalities, such as emissions taxes, tradable permits, or Pigouvian subsidies, are efficient, although others, like environmental standards, are
13. Kory owns a house that is worth $300,000. If the house burns down, she loses all $300,000. If the house does not burn down, she loses nothing. Her house burns down with a probability of 0.02.
12. For each of the following situations, do the following: First describe whether it is a situation of moral hazard or of adverse selection. Then explain what inefficiency can arise from this
11. You own a company that produces chairs, and you are thinking about hiring one more employee. Each chair produced gives you revenue of $10. There are two potential employees, Fred Ast and Sylvia
7. Hugh’s income is currently $5,000. His utility function is shown in the accompanying table.a. Calculate Hugh’s marginal utility of income. What is his attitude toward risk?b. Hugh is thinking
1. In which of the following circumstances would you be more likely to buy car insurance?a. You must work to pay your living expenses, and you need a car to get to work.b. Your parents are wealthy
1.14. Producers in import-competing industries often make the following argument: “Other countries have an advantage in production of certain goods purely because workers abroad are paid lower
1.13. In World Trade Organization (WTO) negotiations, if a country agrees to reduce trade barriers (tariffs or quotas), it usually refers to this as a concession to other countries. Do you think that
1.12. The United States is highly protective of its agricultural industry, imposing import tariffs, and sometimes quotas, on imports of agricultural goods. The chapter has presented three arguments
1.11. As the United States has opened up to trade, it has lost many of its low-skill manufacturing jobs, but it has gained jobs in high-skill industries, such as the software industry. Explain
1.10. The accompanying diagram illustrates the U.S. domestic demand curve and domestic supply curve for beef.The world price of beef is PW. The United States currently imposes an import tariff on
1.9. The U.S. domestic demand schedule and domestic supply schedule for oranges was given in Problem 8. Suppose that the world price of oranges is $0.30. The United States introduces an import quota
1.8. The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange.a. Draw the U.S. domestic
1.7. The accompanying table indicates the U.S. domestic demand schedule and domestic supply schedule for commercial jet airplanes.Suppose that the world price of a commercial jet airplane is $100
1.6. Before the North American Free Trade Agreement (NAFTA)gradually eliminated import tariffs on goods, the autarky price of tomatoes in Mexico was below the world price and in the United States was
1.5. Shoes are labor-intensive and satellites are capital-intensive to produce. The United States has abundant capital. China has abundant labor. According to the Heckscher–Ohlin model, which good
1.4. For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries.a. The United States exports software to Venezuela, and
1.3. Both Canada and the United States produce lumber and music CDs with constant opportunity costs. The United States can produce either 10 tons of lumber and no CDs, or 1,000 CDs and no lumber, or
1.2. Over the years, the WTO has increasingly found itself adjudicating trade disputes that involve not just tariffs or quota restrictions but also restrictions based on quality, health, and
1.1. In 2002 the U.S. imposed tariffs on steel imports, which are an input in a large number and variety of U.S. industries. Explain why political lobbying to eliminate these tariffs is more likely
1.2. Suppose the government imposes an import quota rather than a tariff on butter. What quota limit would generate the same quantity of imports as a tariff of $0.50 per pound?
1.1. Suppose that the world price of butter is $0.50 per pound and the domestic price in autarky is $1.00 per pound. Use a diagram similar to Figure 17-9 to show the following:a. If there is free
1.2. What effect do you think these events have on Mexican grape producers? Mexican grape pickers? Mexican grape consumers? U.S. grape pickers?
1.12. McDonald’s spends millions of dollars each year on legal protection of its brand name, thereby preventing any unauthorized use of it. Explain what information this conveys to you as a
1.11. In each of the following cases, explain how the advertisement functions as a signal to a potential buyer. Explain what information the buyer lacks that is being supplied by the advertisement
1.10. For each of the following situations, decide whether advertising is directly informative about the product or simply an indirect signal of its quality. Explain your reasoning.a. Golf champion
1.9. The market for clothes has the structure of monopolistic competition.What impact will fewer firms in this industry have on you as a consumer? Address the following issues:a. Variety of clothesb.
1.8. “In both the short run and in the long run, the typical firm in monopolistic competition and a monopolist each make a profit.” Do you agree with this statement? Explain your reasoning.
1.7. “In the long run, there is no difference between monopolistic competition and perfect competition.” True, false, or ambiguous?Discuss this statement with respect to the following:a. The
1.6. Magnificent Blooms is a florist in a monopolistically competitive industry. It is a successful operation, producing the quantity that minimizes its average total cost and making a profit. The
1.5. The local hairdresser industry has the structure of monopolistic competition. Your hairdresser boasts that he is making a profit and that if he continues to do so, he will be able to retire in
1.4. The structure of the local gas station industry is monopolistic competition. Suppose that currently each gas station incurs a loss. Draw a diagram for a typical gas station to show this
1.2. You are thinking of setting up a coffee shop. The market structure for coffee shops is monopolistic competition. There are three Starbucks shops, and two other coffee shops very much like
1.1. Use the three conditions for monopolistic competition discussed in the chapter to decide which of the following firms are likely to be operating as monopolistic competitors. If they are not
2. You must determine which of two types of market structure best describes an industry, but you are allowed to ask only one question about the industry. What question should you ask to determine if
1. Each of the following goods and services are differentiated products. Which are differentiated as a result of monopolistic competition and which are not? Explain.a. Laddersb. Soft drinksc.
➤ How prices and profits are determined in monopolistic competition in the short run and the long run
11. The industry for small, single-engine airplanes is oligopolistic, and it has achieved tacit collusion. Each firm currently sells 10 airplanes at a price of $200,000 each. Each firm believes that
10. Suppose you are an economist working for the Antitrust Division of the Department of Justice. In each of the following cases you are given the task of determining whether the behavior warrants an
9. Over the last 30 years the Organization of Petroleum Exporting Countries (OPEC) has had varied success in forming and maintaining its cartel agreements. Explain how the following factors may
7. Suppose that Coke and Pepsi are the only two producers of cola drinks, so they are duopolists. Both companies have zero marginal cost and a fixed cost of $100,000.a. Assume first that consumers
5. Suppose that the fisheries agreement in Problem 4 breaks down, so that the fleets behave noncooperatively. Assume that the U.S. and the EU each can send out either one or two fleets.Also assume
4. To preserve the North Atlantic fish stocks, it is decided that only two fishing fleets, one from the United States and the other from the European Union (EU) can fish in those waters.The
1. The accompanying table shows the demand schedule for vitamin D. Suppose that the marginal cost of producing vitamin D is zero.a. Assume that BASF is the only producer of vitamin D and acts as a
1. Which of the following factors are likely to support the conclusion that there is tacit collusion in this industry? Which are not? Explain.a. For many years the price in the industry has changed
12. A monopolist knows that if it expands the quantity of output it produces from 8 to 9 units, that will lower the price of its output from $2 to $1. Calculate the quantity effect and the price
➤ What price discrimination is, and why it is so prevalent when producers have market power
10. The table shows how much total Jeremy and John Stuart experience from various amounts of income.a. There are $6 that we can distribute between Jeremy and John Stuart. Suppose that Jeremy and John
4. In the town of Rockport, only two goods are produced: left shoes and right shoes. And this economy produces on the production possibility frontier. That is, there is no way of producing more left
3. A city block with 25 residents has a garden in the center. Some of the residents are very busy, but others have lots of leisure time. And their preferences also differ: some enjoy yard work,
➤ Why an economy consisting of many perfectly competitive markets is typically, but not always, efficient
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