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microeconomics principles applications
Microeconomics 3rd Canadian Edition Hubbard, Glenn & O'Brien, Anthony Patrick & Serletis, Apostolos & Childs, Jason - Solutions
World War I 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 metres 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.
] Coca-Cola 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
[Related to Solved Problem
[Related to Don’t Let This Happen to You: Don’t Misunderstand Why Each Firm Ends Up Charging a Price of$9.99 ] 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
Bob and Tom are 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 Bob
What is a prisoner’s dilemma game? Is the outcome of the game likely to be different in a repeated game? Briefly explain.
What is the difference between explicit collusion and implicit collusion? Give an example of each. What is a cartel?
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 equilibriumf. Price leadership
A column on forbes.com discussed Google, Apple, Facebook, and Amazon, all of which operate in oligopolistic markets. The column argued that the concerns of some policymakers and economists about the market power of these firms may be overstated because “history teaches us that in a fast-moving
While a professor at the Harvard Business School, the late Thomas McCraw 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 gain
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 world’s production of shoes, or textiles, or lumber into three factories or mills!”
An article in Forbes described these characteristics of the airline industry: “Airlines aren’t like normal consumer businesses. . . . Infrastructure including aircraft, gates and runways takes years to put in place. Capacity rebalancing in response to demand shifts isn’t easy and idle
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
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?
What is an oligopoly? Give three examples of oligopolistic industries in Canada.
In 2008, Gogo became the first company to offer Wi-Fi service on commercial aircraft. It provides the service primarily through ground-based cellular towers. Many air travellers find the $30 price Gogo charges on a cross-country flight to be very high because the speeds offered are too slow to
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 a column in the Wall Street Journal noted that managers who earned a high return for a few years were “smart or
[Related to Apply the Concept: Is Being the First Firm in the Market a Key to Success? ] 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
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 . . .
How might a monopolistically competitive firm continually earn an economic profit?
What are the key factors that determine the profitability of a firm in a monopolistically competitive market?
JustFab is an online fashion retailer that analyzes information about customers obtained from its website to gauge the clothing they like most and the frequency of their purchases. This information has enabled the company to respond quickly to changes in fashion trends and to better control its
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
In 2016, Howard Schultz announced that he would step down as CEO of Starbucks to establish luxury coffee shops that would charge as much as $12 for a cup of coffee. Although some analysts questioned whether many consumers would be willing to pay such high prices for coffee, Erich Joachimsthaler, an
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 effect on a firm’s profit when it increases spending on advertising and the increased advertising has no effect on the demand for the firm’s product.
Why are many companies so concerned about brand management?
Define marketing. Is marketing just another name for advertising?
An article in the Wall Street Journal described the marketing philosophy of Whole Foods Market, a supermarket chain that sells many food products that have no preservatives or artificial sweeteners (Amazon.com acquired Whole Foods after this article was published):a. Explain why Whole Foods does
Consider the following graph:a. At the profit-maximizing level of output, how much economic profit is this firm earning? Briefly explain.b. Is this firm allocatively efficient? Is it productively efficient? Briefly explain.
[Related to Apply the Concept: One Way to Differentiate Your Restaurant? Become a Ghost! ] In Chicago, Green Summit appears to be running nine different restaurants, with names such as Butcher Block, Milk Money, and Leafage. In reality, all the food for these restaurants is cooked in one central
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 longrun equilibrium? Briefly explain.c. What
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
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? In your answer, be sure to define what you mean by“economic well-being.”
Why is a monopolistically competitive firm not allocatively efficient?
Why is a monopolistically competitive firm not productively efficient? In what sense does a monopolistically competitive firm have excess capacity?
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm?
[Related to Solved Problem 11.2] In recent years, McDonald’s has faced increased competition from other fastfood restaurants. In an attempt to differentiate itself from fastfood competitors, McDonald’s has responded by remodelling some restaurants to include kiosks that customers can use to pay
[Related to Solved Problem 11.2] At the end of 2016, as the company suffered losses, Red Robin CEO Denny Marie Post announced that the company was increasing the number of lower-priced items on its menus. In particular, the restaurant would increase the number of meals priced at $6.99 from one to
[Related to Apply the Concept: Is “Clean Food” a Sustainable Market Niche for Panera? ] In March 2017, an article in the Wall Street Journal discussed an announcement by Chipotle Mexican Grill that it had succeeded in changing its recipes with the goal of stripping “its burritos down to
[Related to Don’t Let This Happen to You: Don’t Confuse Zero Economic Profit with Zero Accounting Profit ] A student remarks:If firms in a monopolistically competitive industry are earning an economic profit, new firms will enter the industry. Eventually, a representative firm will find that
[Related to the Chapter Opener ] Panera Bread restaurants have been a very popular “fast-casual” dining option—with better food choices than fast-food restaurants like McDonald’s and with faster service and lower prices than traditional restaurants. Panera’s profit per restaurant is much
Suppose Angelica opens a small store near campus, selling beef brisket sandwiches. Use the graph, which shows the demand and cost for Angelica’s beef brisket sandwiches, to answer the questions that follow.a. If Angelica wants to maximize profit, how many beef brisket sandwiches should she sell
In the following graph, reproduced from the answer to Solved Problem 11.2, indicate the area representing the Red Robin restaurant’s profit when the demand curve is and the area representing its loss when the demand curve is .D1 D2
Under what circumstances might a monopolistically competitive firm continue to earn an economic profit as new firms enter its market?
What is the difference between zero accounting profit and zero economic profit?
What effect does the entry of new firms have on the demand curve of an existing firm in a monopolistically competitive market?
Use the following graph for Elijah’s Burgers to answer the questions.a. If Elijah produces at the profit-maximizing level of output, how much is his total revenue? How much is his total cost? Briefly explain your calculations.b. How much economic profit is Elijah earning? Briefly explain your
William Germano served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a book:It’s often asked why the publisher can’t simply raise the
[Related to the Chapter Opener ] According to an article in the Wall Street Journal, in 2015 and 2016 Panera suffered from lower profits in part because of the costs of implementing its“clean food” strategy. Draw a graph showing the effect of this cost increase on the price of Panera’s turkey
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,
[Related to Solved Problem 11.1] Suppose a firm producing table lamps has the following costs:Quantity Average Total Cost 1000 $15.00 2000 9.75 3000 8.25 4000 7.50 5000 7.75 6000 8.50 7000 9.75 8000 10.50 9000 12.00 Ben and Jerry are managers at the company, and they have this discussion:Ben: We
Maria manages a bakery that specializes in ciabatta bread, and she has the following information on the bakery’s demand and costs:Ciabatta Bread Sold per Hour (Q)Price(P)Total Cost(TC)0 $6.00 $ 3.00 121.00a. To maximize profit, how many loaves of ciabatta bread should Maria sell per hour, what
If Daniel sells 350 hamburgers at a price of $3.25 each, and his average cost of producing 350 hamburgers is $3.00 each, what is his profit?
Isabella runs a pet salon. She is currently grooming 125 dogs per week. If instead of grooming 125 dogs, she grooms 126 dogs, she will add $68.50 to her costs and $60.00 to her revenues. What will be the effect on her profit of grooming 126 dogs instead of 125 dogs?
Why doesn’t a monopolistically competitive firm produce where , as a perfectly competitive firm does?
In the following graph, consider the marginal revenue of the eleventh unit sold. When the firm cuts the price from $5.00 to $4.75 to sell the eleventh unit, what area in the graph shows the output effect, and what is the dollar value of the output effect? What area in the graph shows the price
Is it possible for marginal revenue to be negative for a firm selling in a perfectly competitive market? Is it possible for marginal revenue to be negative for a firm selling in a monopolistically competitive market? Briefly explain.
There are many wheat farms in the world, and there are also more than 30 000 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 claim is 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 perfectly competitive.b. The industry is monopolistically
Fill in the missing values in the following table, which shows the demand for snow-skiing lessons per day at a resort in Banff National Park:Snow Skiing Lessons per Day (Q)Price (P)Total Revenue Average Revenue Marginal 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
Suppose that Pizza Hut (a Canadian success story)launched a new advertising campaign admitting that its pizzas had not tasted very good, but claiming that a new recipe greatly improved the taste. If Pizza Hut succeeded in convincing consumers that its pizza was significantly better than competing
With a downward-sloping demand curve, why is average revenue equal to price? Why is marginal revenue less than price?
Why does a local McDonald’s face a downward-sloping demand curve for its Quarter Pounders? If McDonald’s raises the price of Quarter Pounders above the prices other fast-food restaurants charge for hamburgers, won't it lose all its customers?
What are the most important differences between perfectly competitive markets and monopolistically competitive markets?Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
An article in the Wall Street Journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article noted,“Blockbusters . . . often have thousands of visual effects shots.Even dramas and comedies today can include
[Related to Solved Problem 10.3] Sony suffered losses selling televisions from 2004 to 2013, before finally earning a small profit on this business from 2014 to 2016. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn’t Sony have been able to raise prices to earn a
[Related to Solved Problem 10.3] Suppose you read the following item in a newspaper article, under the headline “Price Do you believe such a law would be advisable in a situation like this? Explain.
The following graph represents the situation of Karl’s Kumquats, a kumquat grower.a. How much profit is Karl earning?b. Does the current situation of Karl’s firm illustrate productive efficiency or allocative efficiency? If so, briefly explain how.
[Related to Solved Problem 10.3] 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
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?
In 2015, cocoa prices rose 13 percent from the previous year, the fourth straight year in which prices increased.However, by the end of 2016, cocoa prices had fallen. Edward George, the head of research at Ecobank, commented,“Everyone’s like, wow. There’s a lot of cocoa out there.” Much of
[Related to Apply the Concept: In the Apple App Store, Easy Entry Makes the Long Run Pretty Short ] In 2017, Apple reported that since its iTunes App Store had opened in 2008, third-party app developers had earned more than $60 billion and currently employed 1.4 million people. Yet, as we’ve
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 equilibrium
[Related to the Chapter Opener ] The following questions are about long-run equilibrium in the market for cage-free eggs.a. As described in the Chapter Opener, in 2017 was the market for cage-free eggs in long-run equilibrium?Briefly explain.b. What would we expect to happen to the price of
A student in a principles of economics course makes the following remark:The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would
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
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.
Briefly explain whether a firm earning zero economic profit will continue to produce in the long run.
When are firms likely to enter an industry? When are they likely to exit an industry?
[Related to Solved Problem 10.2] 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
[Related to Solved Problem 10.2] A columnist for the Wall Street Journal discussed the fact that some firms were buying existing drilling operations in Canadian oil sands regions. These operations would not have been profitable to build from scratch but were profitable to operate given that they
The following graph represents the situation of a perfectly competitive firm.Indicate on the graph the areas that represent the following:a. Total costb. Total revenuec. Variable costd. Profit or loss Briefly explain whether the firm will continue to produce in the short run.
Matt Rafferty produces hiking boots in the perfectly competitive hiking boot market.a. Fill in the missing values in the following table.Output per Week Total Cost AFC AVC ATC MC 0 $100.00 1 155.70 2 205.60 3 253.90 4 304.80 5 362.50 6 431.20 7 515.10 8 618.40 9 745.30 10 900.00b. Suppose the
Ed Scahill produces desk 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 desk lamps should Ed produce, and how much profit will he make?c. If next week the equilibrium
Consider a firm in each of the following three situations.For each situation, carefully explain whether the firm will produce in the short run or shut down in the short run.Situation 1Situation 2Situation 3Price $ 10 $ 10 $ 10 Quantity 1000 1000 1000 Variable cost $5000 $5000 $11 000 Fixed cost
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?
The following graph represents the situation of Marguerite’s Caps, a firm selling caps in the perfectly competitive cap industry:a. How much output should Marguerite produce to maximize her profit?b. How much profit will she earn?c. Suppose Marguerite decides to quit the cap industry and shut
[Related to Apply the Concept: Losing Money in the Restaurant Business ] Suppose that most wheat farms are suffering losses. Now suppose that a new scientific study shows that eating four slices of whole wheat bread per day is an effective means of weight control, lowers blood pressure, and reduces
An article in the Wall Street Journal discussing the financial results for General Electric Co. (GE) for the first quarter of 2017 reported that, compared with the same quarter in the previous year, the firm’s revenue had fallen from $27.94 billion to $27.66 billion while its profit had increased
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