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microeconomics principles applications
Microeconomics 2nd Canadian Edition R Glenn Hubbard; Anthony Patrick O’Brien; Apostolos Serletis; Jason Childs - Solutions
The table below shows the market share for companies in the Canadian smartphone market. Company Market Share (%) Apple 38.3% Samsung 32.4% Blackberry 8.9% Google 5.3% Others 15.2% Use the information in the section “The Competition Bureau and Merger Guidelines” to predict whether the
Look again at the section “The Competition Bureau and Merger Guidelines.” Evaluate the following situations.a. A market initially has 20 firms, each with a 5 percent market share. Of the firms, 4 propose to merge, leaving a total of 17 firms in the industry. Is the Competition Bureau likely to
Consider the natural monopoly shown in Figure 13.7. Assume that the government regulatory agency sets the regulated price at the level of average total cost at which the demand curve intersects the ATC curve. If the firm knows that it will always be able to charge a price equal to its average total
Most cities own the water system that provides water to homes and businesses. Some cities charge a flat monthly fee, while other cities charge by the litre. Which method of pricing is more likely to result in economic efficiency in the water market? Be sure to refer to the definition of economic
Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argued that when competition is weak, firms are under less pressure to adopt the best techniques or to hold down their costs. He referred to this effect
A student argues, “If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity the same and just increase his profit.” Do you agree? Use a graph to illustrate your answer.
Before inexpensive pocket calculators were developed, many science and engineering students used slide rules to make numerical calculations. Slide rules are no longer produced, which means nothing prevents you from establishing a monopoly in the slide rule market. Draw a graph showing the
Use the information in Solved Problem 13.2 to answer the following questions.a. What will Shaw do if the tax is $6.00 per month instead of $2.50? (Hint: Will its decision be different in the long run than in the short run?)b. Suppose that the flat per-month tax is replaced with a tax on the firm
Ed Scahill has acquired a monopoly on the production of baseballs (don’t ask how) and faces the demand and cost situation shown in the following table. Price Q u a n tity (p e r w e e k ) T o tal R e ve n u e M a rg in a l R e ve n u e T o t a l' C o st $20 15 000 $330 000 19 20 000 365 000 18 25
Suppose that the quantity demanded per day for a product is 90 units when the price is $35. The following table shows costs for a firm with a monopoly in this market: Q u a n tity (p e r day) T otal C ost 30 $1200 40 1400 50 2250 60 3000 Briefly explain whether this firm has a natural monopoly in
[Related to the Making the Connection on page 342] Why was De Beers worried that people might resell their old diamonds? How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds? How did De Beers’s strategy affect the demand curve for new
[R elated to the Making the Connection on page 341] Canadian copyrights on music expire 50 years after the death of the artist, but trademarks can be renewed indefinitely. This means that a band’s name can be protected long after the band’s music has entered the public domain and is free for
Patents are granted for 20 years, but pharmaceutical companies can’t use their patent-guaranteed market power for anywhere near this long because it takes several years to acquire Health Canada approval of drugs. Should the life of drug patents be extended to 20 years after Health Canada
[Related to the Making the Connection on page 339] Netflix started to stream original programs in 2011 with House of Cards. Instead of streaming programming owned by other companies, for which it had to pay, it was “airing” its own shows. What effect will streaming its own original programs
[Related to the Making the Connection on page 339] A newspaper article has the headline “Google Says It’s Actually Quite Small.” According to the article: Google rejects the idea that it’s in the search advertising business, an industry in which it holds more than a 70 percent share of
[Related to the Making the Connection on page 330] In the preface to the 2004 reprint of In Search of Excellence, Thomas Peters and Robert Waterman wrote: “Our main detractors point to the decline of some of the companies we featured. They miss the point. . . . We weren’t writing Forever
Movie studios split ticket revenues with the owners of the movie theatres that show the films. An article in the Wall Street Journal in 2015 discussed how the Disney studio was attempting to negotiate a larger share of the ticket revenue because it had a string of movies about to open that appeared
[R elated to the C hap ter O pener on page 312] When Apple first launched Apple Music, singer Taylor Swift refused to allow her album 1989, which had been the best-selling album of 2014, to be made available for the service because Apple did not intend to pay royalties on songs it streamed during
Michael Porter argued that in many industries, “strategies converge and competition becomes a series of races down identical paths that no one can win.” Briefly explain whether firms in these industries will likely earn economic profits. Based on Michael E. Porter, “What Is Strategy?"
Suppose that in the situation shown in Figure 12.8, Trulmage’s profits are $1.5 million if the firm accepts Dell’s contract offer of $20 per copy. Now will Dell offer Trulmage a contract of $20 per copy or a contract of $30 per copy? Briefly explain.
Refer to Figure 12.6 on page 324. Consider the entries in the row of the payoff matrix that correspond to Saudi Arabia choosing “Low Output.” Suppose the numbers change so that Nigeria’s profit is $15 million when Nigeria chooses “Low Output” and $10 million when it chooses “High
In June 2013, Microsoft announced that its new Xbox One video game console would have a price of $499. Sony then announced that its new PlayStation 4 video game console would have a price of $399. An article on the event where Microsoft introduced the new console noted that the Microsoft
Rockwood is a small town that currently has no fast-food restaurants. McDonald’s and Burger King are both considering entering this market. Burger King will wait until McDonald’s has made its decision before deciding whether to enter. McDonald’s will choose between building a large store and
Anheuser-Busch InBev is the foreign-owned company that produces Budweiser, which has a large market share in the North American beer industry. According to an article in the New York Times, “Anheuser-Busch (InBev) signals to its competitors that if they lower prices, it will start a vicious
Suppose there are four large manufacturers of toilet tissue. The largest of these manufacturers announces that it will raise its prices by 15 percent due to higher paper costs. Within three days, the other three large toilet tissue manufacturers announce similar price hikes. Would this decision
Finding dominant strategies is often a very effective way of analyzing a game. Consider the following game: Microsoft and Apple are the two firms in the market for operating systems. Each firm has two strategies: Charge a high price or charge a low price.a. What (if any) is the dominant strategy
Airlines sometimes find themselves in price wars. Consider the following game: Air Canada and Westjet are the only two airlines flying the route from Calgary to Toronto. Each firm has two strategies: Charge a high price or charge a low price.a. What (if any) is the dominant strategy for each
In 2015, the US Department of Justice was investigating whether the four major US airlines were colluding by restraining increases in capacity with the goal of avoiding price cutting. An airline industry analyst commented on the investigation, “I don’t sense that the executives talk to each
A student argues, “The prisoner’s dilemma game is unrealistic. Each player’s strategy is based on the assumption that the other player won’t cooperate. But if each player assumes that the other player will cooperate, the ‘dilemma’ disappears.” Briefly explain whether you agree with
In 2014, Walmart decided that it would begin a new policy in which its stores would match prices being charged by large web retailers such as Amazon. For example, if it was selling a 4K television for $899 and Amazon was selling it for $799, Walmart would match Amazon’s price. An economist
World War 1 began in August 1914 and quickly bogged down into trench warfare on the Western Front. In Belgium and northern France, British and French troops were dug into trenches facing German troops a few hundred yards away. The troops continued firing back and forth until a remarkable event
An economist argues that with respect to advertising in some industries, “gains to advertising firms are matched by losses to competitors” in the industry. Briefly explain the economist’s reasoning. If his reasoning is correct, why do firms in these industries advertise? Source: Craig L.
CocaCola and Pepsi both advertise aggressively, but would they be better off if they didn’t? Their commercials are usually not designed to convey new information about their products. Instead, they are designed to capture each other’s customers. Construct a payoff matrix using the following
Explain how collusion makes firms better off. Given the incentives to collude, briefly explain why every industry doesn’t become a cartel.
Bob and Tom are two criminals who have been arrested for burglary. The police put Tom and Bob in separate cells. They offer to let Bob go free if he confesses to the crime and testifies against Tom. Bob also is told that he will serve a 15-year sentence if he remains silent while Tom confesses. If
The late Thomas McCraw, while a professor at the Harvard Business School, wrote: “Throughout American history, entrepreneurs have tried, sometimes desperately, to create big businesses out of naturally small-scale operations. It has not worked.” What advantage would entrepreneurs expect to
Alfred Chandler, who was a professor at Harvard Business School, once observed: “Imagine the diseconomies of scale—the great increase in unit costs—that would result from placing close to one-fourth of the worlds production of shoes, or textiles, or lumber into three factories or mills!”
[Related to Making the Connection on page 317] The following graph contains two long-run average cost curves. Briefly explain which cost curve would most likely be associated with an oligopoly and which would most likely be associated with a perfectly competitive industry.
The following graph illustrates the average total cost curves for two automobile manufacturing firms: Little Auto and Big Auto. Under which of the following conditions would you expect to see the market composed of firms like Little Auto, and under which conditions would you expect to see the
Michael Porter has argued that “the intensity of competition in an industry is neither a matter of coincidence nor bad luck. Rather, competition in an industry is rooted in its underlying economic structure.” What does Porter mean by “economic structure”? What factors besides economic
Does the strength of each of the five competitive forces remain constant over time? Briefly explain.
Describe the five competitive forces model.
How are decision trees used to analyze sequential games?
What is a sequential game?
How is the result of the prisoner’s dilemma changed in a repeated game?
What is the difference between explicit collusion and implicit collusion? Give an example of each.
Why do economists refer to the pricing strategies of oligopoly firms as a prisoner’s dilemma game?
Why do economists refer to the methodology for analyzing oligopolies as game theory?
Give brief definitions of the following concepts:a. Game theoryb. Cooperative equilibriumc. Noncooperative equilibriumd. Dominant strategye. Nash equilibrium
Give an example of a government-imposed barrier to entry. Why would a government be willing to erect barriers to firms entering an industry?
What do barriers to entry have to do with the extent of competition in an industry? What is the most important reason that some industries, such as music streaming, are dominated by just a few firms?
In his review of a book, business writer Nick Schultz cited the following passage that refers to the market for high-speed Internet access: “There are two enormous monopoly submarkets—one for wireless and one for wired transmission. Both are dominated by two or three large companies.” Schultz
Wealthy investors often invest in hedge funds. Hedge fund managers use investors’ money to buy stocks, bonds, and other investments with the intention of earning high returns. But an article in the New York Times notes, “Even professionals have a problem in evaluating hedge fund performance,
A firm that is first to market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. For example, the ballpoint pens made by the Reynolds International Pen Company often leaked. What effect do such problems cause for the
7-Eleven, Inc. operates more than 20 000 convenience stores worldwide. Edward Moneypenny, 7-Eleven’s chief financial officer, was asked to name the biggest risk the company faced. He replied, “I would say that the biggest risk that 7-Eleven faces, like all retailers, is competition . . .
Some companies have done a poor job protecting the images of their products. For example, Hormel’s Spam brand name is widely ridiculed and is associated with annoying commercial messages received via email. Think of other cases of companies failing to protect their brand names. What can companies
For years, the Abercrombie & Fitch clothing stores received free advertising by placing the company logo prominently on the shirts, hoodies, and other clothing they sell. A news story indicated that in 2015, Abercrombie intended to remove its logos from its clothing. Why would Abercrombie give up
A skeptic says, “Marketing research and brand management are redundant. If a company wants to find out what customers want, it should simply look at what they’re already buying.” Do you agree with this comment? Explain.
Draw a graph that shows the impact on a firm’s profits when it increases spending on advertising and the increased advertising has no effect on the demand for the firm’s product.
How will the entry of firms such as Apple, Google, Amazon, Hulu, and Comcast into the business of streaming movies affect Netflix? Why do some analysts question whether Netflix can survive against these competitors? To survive, what must Netflix do?
In recent years, consumers have been less willing to buy packaged foods that contain gluten or high levels of fat and salt or soft drinks containing sugar. Firms such as General Mills, Kellogg, and Coca-Cola have responded by modifying many of their products by, for example, making them
Consider the following graph.a. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm? If so, explain how you are able to make this determination.b. Does the graph show a short-run equilibrium or a long-run equilibrium? Briefly explain.c.
A student makes the following comment: I can understand why a perfectly competitive firm will not earn profits in the long run because a perfectly competitive firm charges a price equal to marginal cost. But a monopolistically competitive firm can charge a price greater than marginal cost, so why
An article in the Wall Street Journal reported that Western European brewers such as Heineken, Carlsberg, and Anheuser-Busch InBev are increasing their production and marketing of nonalcoholic beer. The article quotes a Carlsberg executive for new-product development as saying: Nonalcoholic beer
In 2015, analysts at the Goldman Sachs investment bank were optimistic that Buffalo Wild Wings would increase its profits over the next few years. They cited two factors they saw as favourable to the chain’s profitability: The chain’s “greater pricing power allows them to easily implement
A news story describes Chipotle as “the restaurant chain that has come to symbolize the tastes of the millennial generation” and lists the sources of Chipotle’s success as including the restaurant’s allowing “their customers to tailor their meals, and still have them ready in a flash .
Suppose Angelica opens a small store near campus, selling beef brisket sandwiches. Use the graph, which shows the demand and cost for Angelicas beef brisket sandwiches, to answer the questions that follow.a. If Angelica wants to maximize profits, how many beef brisket sandwiches should she sell per
According to an article in the New York Times, in 2014 Chipode Mexican Grill, a fast-casual restaurant in the United States with more than 1800 restaurants (including more than 10 in Canada), experienced an increase in the cost of the beef used in its beef burritos. Draw a graph showing the effect
In 1916, Ford Motor Company produced 500 000 Model T Fords at a price of $440 each. The company made a profit of $60 million that year. Henry Ford told a newspaper reporter that he intended to reduce the price of the Model T to $360, and he expected to sell 800 000 cars at that price. Ford said,
Suppose a firm producing table lamps has the following costs: Ben and Jerry are managers at the company, and they have this discussion: Ben: We should produce 4000 lamps per month because that will minimize our average costs. Jerry: But shouldn’t we maximize profits rather than minimize costs?
Maria manages a bakery that specializes in ciabatta bread, and she has the following information on the bakery’s demand and costs: C ia b a tta B re ad S o ld p e r H o u r (Q) Price (P) T otal C o st (T Q 0 $6.00 $3.00 1 5.50 7.00 2 5.00 10.00 34.50 12.50 44.00 14.50 53.50 16.00 63.00 17.00
There are many wheat farms in the world, and there are also many Starbucks coffeehouses. Why, then, does a Starbucks face a downward-sloping demand curve, while a wheat farmer faces a horizontal demand curve?
Purell announced that the new chemical formula for its hand sanitizer was so effective that “just 1 squirt of Purell Advanced Hand Sanitizer kills as many germs as two squirts of any other national brand.” If Purell succeeds in convincing consumers that its claims are correct, would its demand
There are more than 120 wineries in British Columbia’s Okanagan Valley. Describe the reaction of consumers if the owner of one of the wineries raises the price of his wine by $5.00 per bottle, assuming the following:a. The industry is perfecdy competitive.b. The industry is monopolistically
Complete the table on the next page, which shows the demand for skiing lessons per day. Skiing Lessons per Day (Q) Price (P) 0 $80.00 1 75.00 2 70.00 3 65.00 4 60.00 5 55.00 6 50.00 7 45.00 8 40.00 Total Revenue Average Marginal Revenue Revenue (TR PXQ) (AR=TR/Q) (MR-ATR/AQ)
How might a monopolistically competitive firm continually earn an economic pro
D efine m a rke tin g . Is m arketing ju st another nam e for advertising?
Is it possible for a monopolistically com petitive firm to continue to earn economic profit as new firms enter the market?
W hat is the difference between zero accounting profit and zero economic profit?
If Daniel sells 350 Big Macs at a price o f $3.25 each, and his average cost o f producing 350 Big Macs is $3.00 each, what is his profit?
With a downward-sloping demand curve, why is average revenue equal to price? Why is marginal revenue less than prices?
Sony went a decade suffering losses selling televisions before finally earning a profit in 2014. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn’t Sony have been able to raise prices to earn a profit during that decade of losses? Briefly explain.
Discuss the following statement: “In a perfectly competitive market, in the long run consumers benefit from reductions in costs, but firms don’t.” Don’t firms also benefit from cost reductions because they are able to earn greater profits?
The chapter states, “Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them.” A student objects to this statement, arguing, “I doubt that firms will really do this. After all, firms are in business to make a
According to an article in the Wall Street Journal, in 2015, as a result of US consumers increasing their demand for beef, world beef prices increased. For example, according to the article, “Australian beef prices are up 40% this year, while New Zealand prices are 17% higher.” The article
Suppose that currently the market for gluten-free spaghetti is in long-run equilibrium at a price of $3.50 per box and a quantity of 4 million boxes sold per year. If the demand for gluten-free spaghetti permanently increases, which of the following combinations of equilibrium price and
[Related to the Making the Connection on page 280] According to a news story, the Boston-based game company Proletariat launched its first mobile game, World Zombination, after having “spent nearly 18 months and $2 million to develop it.” In the first three months following the game’s
Suppose an assistant professor of economics is earning a salary of $75 000 per year. One day she quits her job, sells $100 000 worth of bonds that had been earning 5 percent per year, and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit of $90 000 on her
Suppose you decide to open a copy store. You rent store space (signing a one-year lease to do so), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive
Matthew Rafferty produces hiking boots in the perfectly competitive hiking boot market,a. Fill in the missing values in the following table. O u tp u t p e r T o tal W e e k C o st AFC AVC ATC MC 0 $100.00 1155.70 2205.60 3253.90 4304.80 5362.50 6431.20 7515.10 8618.40 9745.30 10 900.00b. Suppose
Edward Scahill produces table lamps in the perfectly competitive desk lamp market.a. Fill in the missing values in the following table.b. Suppose the equilibrium price in the desk lamp market is $50. How many table lamps should Scahill produce, and how much profit will he make?c. If next week the
Suppose that the price of oil doubles, raising the cost of home-heating oil and electricity. What effect would this development have on Canadian firms manufacturing solar panels? Illustrate your answer with two graphs: one showing the situation in the market for solar panels and another graph
A news story discussed the financial results for Blackberry Limited, the Canadian smartphone and software company: “Revenue tumbled 32% from a year earlier to $658 million in the quarter ended May 30 from $966 million a year earlier. . . . Blackberry posted profit of $68 million . . . up from
[R elated to the Don’t Let This Happen to You on page 270] A student examines the following graph and argues, “I believe that a firm will want to produce at Qi, not at Q2. At Qi, the distance between price and marginal cost is the greatest. Therefore, at Qt, the firm will be maximizing its
Review Solved Problem 10.1 and then answer the following: Suppose the equilibrium price of hockey sticks falls to $2.50. Now how many hockey sticks will Andy produce? What price will he charge? How much profit (or loss) will he make?
Frances sells earrings in the perfectly competitive earrings market. Her output per day and her costs are as follows: O u tp u t per D ay T otal C ost 0 $1.00 1 2.50 2 3.50 4.20 4 4.50 55.20 66.80 78.70 10.70 913.00a. If the current equilibrium price in the market for earrings is $1.80, how many
In Table 10.3, what are Farmer Parker’s fixed costs? Suppose that his fixed costs increase by $10. Will this increase in fixed costs change the profit-maximizing level of production for Farmer Parker? Briefly explain. How much profit will Farmer Parker make now?
Refer to Table 10.3. Suppose the price of wheat falls to $5.50 per bushel. How many bushels of wheat will Farmer Parker produce, and how much profit will he make? Briefly explain.
Why don’t firms maximize revenue rather than profit? If a firm decided to maximize revenue, would it be likely to produce a smaller or larger quantity than if it were maximizing profit? Briefly explain.
A student argues: “To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling.” Briefly explain whether you
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