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microeconomics principles applications
Microeconomics 2nd Canadian Edition R Glenn Hubbard; Anthony Patrick O’Brien; Apostolos Serletis; Jason Childs - Solutions
The late Nobel Prize—winning economist George Stigler once wrote, “the most common and most important criticism of perfect competition. . . [is] that it is unrealistic.”Since few firms sell identical products in markets where there are no barriers to entry, why do economists believe that the
Explain whether you agree with the following remark: According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can’t be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the
Why are consumers usually price takers when they buy most goods and services, while relatively few firms are price takers?
How does perfect competition lead to allocative and productive efficiency?
What is meant by allocative efficiency? What is meant by productive efficiency? Briefly discuss the difference between these two concepts.
Why are consumers so powerful in a market system?
Discuss the shape of the long-run supply curve in a perfectly competitive market. Suppose that a perfectly competitive market is initially at long-run equilibrium and then there is a permanent decrease in the demand for the product. Draw a graph showing how the market adjusts in the long run.
Would a firm earning zero economic profit continue to produce, even in the long run?
When are firms likely to enter an industry? When are they likely to exit an industry?
How is the market supply curve derived from the supply curves of individual firms?
What is the relationship between a perfectly competitive firm’s marginal cost curve and its supply curve?
What is the difference between a firm’s shutdown point in the short run and in the long run? Why are firms willing to accept losses in the short run but not in the long run?
Draw a graph showing a firm that is operating at a loss in a perfectly competitive market. Be sure your graph includes the firm’s demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve and make sure to indicate the area representing
Draw a graph showing a firm that is making a profit in a perfectly competitive market. Be sure your graph includes the firm’s demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve and make sure to indicate the area representing the
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC.
Explain why at the level of output where the difference between TR and TC is at its maximum positive value, MR must equal MC.
Explain why it is true that for a firm in a perfectly competitive market, P = MR = AR.
Draw a graph showing the market demand and supply curves for corn and the demand curve for the corn produced by one corn farmer. Be sure to indicate the market price and the price the corn farmer receives.
What is a price taker? When are firms likely to be price takers?
What are the three conditions for a market to be perfectly competitive?
Draw a graph showing the market demand and supply curves for corn and the demand curve for the corn produced by one corn farmer. Be sure to indicate the market price and the price the corn farmer receives.
What is a price taker? When are firms likely to be price takers?
What are the three conditions for a market to be perfectly competitive?
Swift Ellis, Inc., manufactures running shoes. The following graph illustrates the combination of capital and labour (point A) that minimizes the firm’s cost of producing 5000 pairs of shoes. Suppose both the wage rate and the rental price of machinery doubles.a. Draw a new isocost line to
[Related to the Making the Connection on page 255] If Cade Massey and Richard Thaler are correct, should the team that has the first pick in the draft keep the pick or trade it to another team for a lower pick? Briefly explain. Does the 2011 agreement that limits the salaries of drafted players
Jill Johnson is minimizing the costs of producing pizzas. The rental price of one of her ovens is $2000 per week, and the wage rate is $600 per week. The marginal product of capital in her business is 12 000 pizzas. What must be the marginal product of her workers?
In Brazil, a grove of oranges is picked using 20 workers, ladders, and baskets. In Florida, a grove of oranges is picked using 1 worker and a machine that shakes the oranges off the trees and scoops up the fallen oranges. Using an isoquant-isocost line graph, illustrate why these two different
[Related to the Making the Connection on page 252] Draw an isoquant—isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for $2000 per week and hire workers for $1000 per week. She can minimize the cost of producing 20 000 pizzas per week by using 5 ovens
Draw an isoquant—isocost line graph to illustrate the following situation and the change that occurs: Jill Johnson can rent pizza ovens for $2000 per week and hire workers for $1000 per week. Currently, she is using 5 ovens and 10 workers to produce 20 000 pizzas per week and has total costs of
Draw an isoquant—isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for $200 per week and hire workers for $100 per week. Currently, she is using 5 ovens and 10 workers to produce 20 000 pizzas per week and has total costs of $2000. Jill’s marginal
Consider the information in the following table for Jill Johnson’s restaurant: Marginal product of capital $4000 Marginal product of labour 100 Wage rate 10 Rental price of pizza ovens 500 Briefly explain whether Jill is minimizing costs. If she is not minimizing costs, explain whether she should
During the eighteenth century, the American colonies had much more land per farmer than Europe. As a result, the price of labour in the colonies was much higher relative to the price of land than it was in Europe. Assume that Europe and the colonies had access to the same technology for producing
Use the following graph to answer the questions.a. If the wage rate and the rental price of ovens are both $100 and total cost is $2000, is the cost-minimizing point A, B, or C? Briefly explain.b. If the wage rate is $25, the rental price of ovens is $100, and total cost is $1000, is the
Draw an isoquant-isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for $400 per week and hire workers for $200 per week. She is currently using 5 ovens and 10 workers to produce 20000 pizzas per week and has total costs of $4000. Make sure to label your
How do firms choose the optimal combination of inputs?
What is an isocost line? What is the slope of an isocost line?
What is an isoquant? What is the slope of an isoquant?
Review the discussion in the Inside Look about the oil sands industry in Canada. Suppose that industry executives put more capital into steam extraction. What would be some of the risks with this strategy?
An account of the difficulties of Japanese mobile phone manufacturers argues that these firms made a mistake by concentrating on selling in high-income countries while making little effort to sell in low-income countries: The main growth in the wireless industry overall is in emerging markets,
Suppose that Jill Johnson has to choose between building a smaller restaurant and building a larger restaurant. In the following graph, the relationship between costs and output for the smaller restaurant is represented by the curve ATCV and the relationship between costs and output for the larger
Factories for producing computer chips are called “fabs.” As the semiconductors used in computer chips have become smaller and smaller, the machines necessary to make them have become more and more expensive. According to an article in The Economist magazine: To reach the economies of scale
Explain how the events listed in parts (a) through (d) would affect the following costs at Air Canada: 1. Marginal cost 2. Average variable cost 3. Average fixed cost 4. Average total costa. Air Canada signs a new contract that requires the airline to increase wages for its flight attendants.b. The
In the ancient world, a book could be produced either on a scroll or as a codex, which was made of folded sheets glued together, something like a modern book. One scholar has estimated the following variable costs (in Greek drachmas) of the two methods: Scroll Codex Cost of Writing 11.33 drachmas
(This problem is somewhat advanced.) Using symbols, we can write that the marginal product of labour is equal to AQ/AL. Marginal cost is equal to ATC/AQ. Because fixed costs by definition don’t change, marginal cost is also equal to A VCj AQ. If Jill Johnson’s only variable cost (VC) is labour
Is Jill Johnson correct when she says the following? “I am currently producing 20 000 pizzas per month at a total cost of $75 000. If I produce 20 001 pizzas, my total cost will rise to $75 002. Therefore, my marginal cost of producing pizzas must be increasing.” Illustrate your answer with a
Is Jill Johnson correct when she says the following? “I am currently producing 10 000 pizzas per month at a total cost of $50 000. If I produce 10 001 pizzas, my total cost will rise to $50,011. Therefore, my marginal cost of producing pizzas must be increasing.” Draw a graph to illustrate your
Santiago Delgado owns a copier store. He leases two copy machines for which he pays $20 each per day. He cannot increase the number of machines he leases without giving the office machine company six weeks’ notice. He can hire as many workers as he wants, at a cost of $40 per day per worker.
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Sally looks at her university transcript and says to you, “How is this possible? My grade point average for this semester’s courses is higher than my grade point average for last semester’s courses, but my cumulative grade point average still went down from last semester to this semester.”
Briefly explain whether you agree with the following argument: Adam Smith’s idea of the gains to firms from the division of labour makes a lot of sense when the good being manufactured is something complex like automobiles or computers, but it doesn’t apply in the manufacturing of less complex
A student looks at the data in Table 9.3 and draws this conclusion: The marginal product of labour is increasing for the first two workers hired, and then it declines for the next four workers. I guess each of the first two workers must have been hard workers. Then Jill must have had to settle for
Use the numbers from problem 3.1 to draw one graph that shows how total output increases with the quantity of workers hired and a second graph that shows the marginal product of labour and the average product of labour.
Suppose Jill Johnson operates her pizza restaurant in a building she owns in the centre of the city. Similar buildings in the neighbourhood rent for $4000 per month. Jill is considering selling her building and renting space in the suburbs for $3000 per month. Jill decides not to make the move.
Suppose that Bill owns an automobile collision repair shop. The table below shows how the quantity of cars Bill can repair per month depends on the number of workers that he hires. Assume that he pays each worker $4000 per month and his fixed cost is $6000 per month. Using the information provided,
For Jill Johnson’s pizza restaurant, explain whether each of the following is a fixed cost or a variable cost.a. The payment she makes on her fire insurance policyb. The payment she makes to buy pizza doughc. The wages she pays her workersd. The lease payment she makes to the landlord who owns
Many firms consider their wage costs to be variable costs. Why, then, do publishers usually consider their wage and salary costs to be fixed costs? Are the costs of utilities always fixed, are they always variable, or can they be both? Briefly explain.
An article in Forbes discussed an estimate that the cost of materials in Apple’s iPhone 5 with 64 gigabytes of memory was $230. Apple was selling the iPhone 5 for $849 (most phone carriers made payments to Apple that reduced the price to consumers to $399). Can we conclude from this information
The 7-Eleven chain of convenience stores in Japan reorganized its system for supplying its stores with food. This led to a sharp reduction in the number of trucks the company had to use, while increasing the amount of fresh food on store shelves. Someone discussing 7-Eleven’s new system argues,
Which of the following are examples of a firm experiencing positive technological change?a. A fall in oil prices leads Air Canada to lower its ticket prices.b. A training program makes a firm’s workers more productive.c. An exercise program makes a firm’s workers more healthy and productive.d.
Briefly explain whether you agree with the following observation: “Technological change refers only to the introduction of new products, so it is not relevant to the operations of most firms.”
Why can short-run average cost never be less than longrun average cost for a given level of output?
What are diseconomies of scale? What is the main reason that a firm eventually encounters diseconomies of scale as it keeps increasing the size of its store or factory?
What are economies of scale? What are four reasons that firms may experience economies of scale?
What is the difference between total cost and variable cost in the long run?
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost?
As the level of output increases, what happens to the value of average fixed cost?
Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum.
W hat are im plicit costs? How are they different from explicit costs?
times per month. They pay a price per expected visit of more than $14, even though a $10-per-visit fee is also available. Why would these consumers choose a monthly contract when they lose money on it?
Data from health clubs show that members who choose a contract with a flat monthly fee over $70 attend, on average,
In an article in the Quarterly Journal of Economics, Ted O ’Donoghue and Matthew Rabin make the following observation: “People have self-control problems caused by a tendency to pursue immediate gratification in a way that their ‘long-run selves’ do not appreciate.” What do they mean by
Briefly explain whether you agree with the following statement: “If people were more realistic about their future behaviour, the demand curve for potato chips would shift to the left.”
After owning a used car for two years, you start having problems with it. You take it into the shop, and a mechanic tells you that repairs will cost $4000. What factors will you take into account in deciding whether to have the repairs done or to junk the car and buy another one? Will the price
Someone who owns a townhouse wrote to a real estate advice columnist to ask whether he should sell his townhouse or wait and sell it in the future when he hoped that prices would be higher. The columnist replied: “Ask yourself: would you buy this townhouse today as an investment? Because every
Economist Richard Thaler first used the term endowment effect to describe placing a higher value on something already owned than would be placed on the object if not currently owned. According to an article in Tlie Economist: Dr. Thaler, who recently had some expensive bottles of wine stolen,
Suppose your little brother tells you on Tuesday that one of his friends offered him $80 for his Connor McDavid rookie hockey card, but your brother decides not to sell the card. On Wednesday, your brother loses the card. Your parents feel sorry for him and give him $80 to make up the loss. Instead
Suppose that latest installment of Star Wars comes out, and hundreds of people arrive at a theatre only to discover that the movie is already sold out. Meanwhile, the theatre is also showing a boring movie in its third week of release in a mostly empty theatre. Why would this firm charge the same
Las Vegas is one of the most popular tourist destinations in the United States. In November 2008, the Rio Hotel and Casino in Las Vegas dropped the price of its breakfast buffet to $5.99 for local residents, while keeping the regular price of $14.99 for nonlocals. When setting the price for a meal,
Sidney Crosby is a star NHL centre who knows more than most consumers about hockey and hockey-related products. However, he does not necessarily know more than consumers about cell phones or coffee. Consider the model of utility-maximizing behaviour described in this chapter. For Tim Hortons’s
When asked, most survey respondents claim that celebrity endorsements do not influence their buying decisions. Marketing strategist Marc Babej has argued that these survey responses are unreliable because advertisements appeal to the subconscious as well as the conscious mind. Explain what Babej
In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu “Giffen behaviour is most likely to be found among a range of households that are poor (but not too poor or too rich).”a. What do Jensen and M iller mean by “ Giffen
Suppose the market for ice-cream cones is made up of three consumers: Josh, Jon, and Tim. Use the information in the following table to construct the market demand curve for ice-cream cones. Show the information in a table and in a graph. Q u a n tity D e m a n d e d (cones p e r w e e k) Price
When the price of pizza falls in the Grey Cup party example, both the income effect and the substitution effect cause you to want to consume more pizza. If pizza were an inferior good, how would the analysis be changed? In this case, is it possible that a lower price for pizza might lead you to
Joe has $16 to spend on Smarties and chocolate chip cookies. Smarties have a price of $1 per box, and cookies have a price of $2 per pack. Use the information in the following graphs to determine the number of Smarties boxes and the number of cookie packs Joe should buy to maximize his utility.
You have six hours to study for two exams tomorrow. The following table shows the relationship between hours of study and test scores: E co n o m ics P sych o lo g y H o u rs Score H o u rs Score 0 54 0 54 1 62 1 60 2 69 2 65 3 75 3 69 4 80 4 72 5 84 5 74 6 87 6 75a. Use the rule for determining
Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.
What is meant by a consumer’s budget constraint? What is the rule of equal marginal utility per dollar spent?
What is the definition of marginal utility? What is the law of diminishing marginal utility? Why is marginal utility more useful than total utility in consumer decision making?
What is the economic definition of utility? Is utility measurable?
The Trans-Pacific Partnership was agreed to in the middle of the campaign for the 2015 federal election. The Conservative Party led the government that agreed to the deal. The Liberal government (as of late 2016) has promised to sign the agreement but ratification will depend on a vote in
Suppose you are explaining the benefits of free trade and someone states, “I don’t understand all the principles of comparative advantage and gains from trade. I just know that if I buy something produced in Canada, I create a job for a Canadian, and if I buy something produced in Brazil, I
One of the arguments for keeping Canada out of the Trans-Pacific Partnership is that it includes countries with labour standards much lower than those in Canada. Some politicians have even suggested that labour standards should be part of any trade agreement between Canada and developing
Suppose that Canada currendy both produces kumquats and imports them. The Canadian government then decides to restrict international trade in kumquats by imposing a quota that allows imports of only 6 million kilograms of kumquats into Canada each year. The figure shows the results of imposing the
Suppose China decides to pay large subsidies to any Chinese company that exports goods or services to Canada. As a result, these companies are able to sell products in Canada at far below their cost of production. In addition, China decides to bar all imports from Canada. The dollars that Canada
A student makes the following argument: Tariffs on imports of foreign goods into Canada will cause the foreign companies to add the amount of the tariff to the prices they charge in Canada for those goods. Instead of putting a tariff on imported goods, we should ban importing them. Banning imported
\Which Canadian firm are mostly likely to be unfavourably affected by the Trans-Pacific Partnership? Why?
Canada produces beef and also imports beef from other countries.a. Draw a graph showing the demand and supply of beef in Canada. Assume that Canada can import as much as it wants at the world price of beef without causing the world price of beef to increase. Be sure to indicate on the graph the
In 2016 the world saw an increase in the number of highprofile politicians around the world arguing for populist policies including protectionism. Examples include Donald Trump and Bernie Sanders in the US; Jeremy Corbin (Labour Party leader) and some proponents of Brexit in the UK; and Marine Le
Public opinion on “free trade” is always divided, particularly when it involves countries with much lower standards of living than Canada. The TPP trade deal would likely receive a lot less public support if it included China. What is “free trade”? Do you believe a free trade agreement
Proponents of the Trans-Pacific Partnership or any new trade agreement often promote such deals as “win-win” for both (or all) countries involved. Is everyone in both countries likely to win from a trade agreement that reduces tariffs and increases international trade? Briefly explain.
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