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microeconomics principles applications

Microeconomics 4th Edition R. Glenn Hubbard, Anthony Patrick O’Brien - Solutions

[Related to the Don’t Let This Happen to You on page 522]A state law in California makes it illegal for businesses to charge men and women different prices for dry cleaning, laundry, tailoring, or hair grooming. The state legislator who introduced the law did so after a dry cleaner charged her
In 2011, the New York Times charged $828 to receive the newspaper delivered to your home every day for a year.Journalist Timothy Noah discovered, however, that when he called up the newspaper and threatened to end his subscription, he was offered a 50 percent discount. He became convinced that
Political columnist Michael Kinsley wrote, “The infuriating[airline] rules about Saturday night stayovers and so on are a crude alternative to administering truth serum and asking, ‘So how much are you really willing to pay?’”Would a truth serum—or some other way of knowing how much
An article on the AMC movie theater chain contained the following:In July, [AMC] announced plans to offer steeply discounted movie tickets to shows on Friday, Saturday and Sunday mornings.“Seventy-five percent of the revenue comes from the weekend,” Mr. Brown [AMC’s CEO] said. His recent
According to an article in the Wall Street Journal:Airlines have increased restrictions on cheap fares by raising overnight requirements, upping what had commonly been only a onenight stay requirement to two and three nights.The overnights can be weeknights, so those tickets aren’t as onerous as
During a particular week, US Airways charged $498 for a round-trip ticket on a flight from New York to San Francisco, provided that the ticket was purchased at least 14 days in advance. The price of the same ticket purchased two days in advance was $833. Why does US Airways use this pricing
[Related to Solved Problem 16.1 on page 521] Suspicions of arbitrage have a long history. For example, Valerian of Cimiez, a Catholic bishop who lived during the fifth century, wrote, “When something is bought cheaply only so it can be retailed dearly, doing business always means cheating.”
[Related to Solved Problem 16.1 on page 521] Suppose California has many apple trees, and the price of apples there is low. Nevada has few apple trees, and the price of apples there is high. Abner buys low-priced California apples and ships them to Nevada, where he resells them at a high price. Is
The following table contains the actual prices four Web sites charged for a Blu-ray of the movie X-Men: First Class in September 2011:Amazon ............................ $24.99 Wal-Mart .......................... 24.96 OrlandsBricks .................. 21.58 ranch_records .................. 17.75 On
A newspaper article contains the following description of New York consumers avoiding the state’s 8.375 percent sales tax by shopping in New Jersey:For years, shoppers from New York City have played a game of retail arbitrage, traveling to the many malls in northern New Jersey, a state where
Explain how some firms increase their profits through the use of odd pricing, cost-plus pricing, and two-part tariffs.
Explain how a firm can increase its profits through price discrimination.
Define the law of one price and explain the role of arbitrage.
[Related to the Making the Connection on page 507]The U.S. Department of Justice stated that it looked seriously at the benefits AT&T and T-Mobile described in their proposed merger. The Department of Justice concluded, however, that AT&T did not demonstrate that the deal “promised any
According to a column in the New York Times by Austan Goolsbee of the University of Chicago, the French National Assembly approved a bill:. . . that would require Apple Computer to crack open the software codes of its iTunes music store and let the files work on players other than the iPod. . . .
The following table gives the market shares of the companies in the U.S. carbonated soft drink industry during 2008:Company Market Share Coca-Cola 42%PepsiCo 30 Dr Pepper Snapple 16 Other 12 Use the information in the section “The Department of Justice and FTC Merger Guidelines,” which begins
The table on the next page shows the market shares during the last three months of 2010 for companies in the U.S. personal computer (PC) market, which includes deskbased PCs, mobile PCs, such as mini-notebooks, but not media tablets, such as the iPad:Company
In October 2008, Delta Air Lines completed its acquisition of Northwest Airlines. The newly merged company is the largest airline in the world. The following statement regarding the merger is from a Justice Department press release:After a thorough, six-month investigation, during which the
Look again at the section “The Department of Justice and FTC Merger Guidelines,” which begins on page 505. 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. Are
Before they merged in 2008, Sirius Satellite Radio and XM Satellite Radio were the only two satellite radio firms. In announcing that it would not oppose the merger, the Justice Department said that “evidence developed in the investigation did not support defining a market limited to the two
The following phone call took place in February 1982 between Robert Crandall, the chief executive officer of American Airlines, and Howard Putnam, the chief executive officer of Braniff Airways. Although Crandall didn’t know it, Putnam was recording the call:Crandall: I think it’s dumb . . . to
Draw a graph like Figure 15.6 on page 505 that shows a merger lowering costs. On your graph, show producer surplus and consumer surplus before a merger and consumer surplus and producer surplus after a merger.
Consider the natural monopoly shown in Figure 15.7 on page 508. Assume that the government regulatory agency sets the regulated price, PR, 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
Use the graph for a monopoly on the next page to answer the questions:a. What quantity will the monopoly produce, and what price will the monopoly charge?b. Suppose the government decides to regulate this monopoly and imposes a price ceiling of $18 (in otherwords, the monopoly can charge less than
Use the following graph for a monopoly to answer the questions:a. What quantity will the monopoly produce, and what price will the monopoly charge?b. Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic efficiency, what price should it require the monopoly to
What is the difference between a horizontal merger and a vertical merger? Which type of merger is more likely to increase the market power of a newly merged firm?
Review the concept of externalities on page 138 in Chapter 5. If a market is a monopoly, will a negative externality in production always lead to production beyond the level of economic efficiency? Use a graph to illustrate your answer.
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 gallon. 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
Review Figure 15.5 on page 501 on the inefficiency of monopoly. Will the deadweight loss due to monopoly be larger if the demand is elastic or if it is inelastic? Briefly explain.
Explain why market power leads to a deadweight loss. Is the total deadweight loss from market power for the economy large or small?
Suppose that a perfectly competitive industry becomes a monopoly. Describe the effects of this change on consumer surplus, producer surplus, and deadweight loss.
When home builders construct a new housing development, they usually sell to a single cable television company the rights to lay cable. As a result, anyone buying a home in that development is not able to choose between competing cable companies. Some cities have begun to ban such exclusive
[Related to the Don’t Let This Happen to You on page 499]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
Does a monopolist have a supply curve? Briefly explain.(Hint: Look again at the definition of a supply curve in Chapter 3 on page 78 and consider whether this applies to a monopolist.)
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 situation
[Related to Solved Problem 15.3 on page 498] Use the information in Solved Problem 15.3 to answer the following questions.a. What will Comcast 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
[Related to Solved Problem 15.3 on page 498] 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:a. Fill in the remaining values in the table.b. If Scahill wants to maximize profits, what price
Draw a graph that shows a monopolist earning a profit. Be sure your graph includes the monopolist’s demand, marginal revenue, average total cost, and marginal cost curves. Be sure to indicate the profit-maximizing level of output and price.
[Related to the Making the Connection on page 492]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
The German company Koenig & Bauer has 90 percent of the world market for presses that print currency. Discuss the factors that would make it difficult for new companies to enter this market.
Just as a new product or a new method of making a product receives patent protection from the government, books, articles, and essays receive copyright protection. Under U.S. law, authors have the exclusive right to their writings during their lifetimes—unless they sell this right, as most
Patents are granted for 20 years, but pharmaceutical companies can’t use their patent-guaranteed monopoly powers for anywhere near this long because it takes several years to acquire FDA approval of drugs. Should the life of drug patents be extended to 20 years after FDA approval?What would be
The U.S. Postal Service (USPS) is a monopoly because the federal government has blocked entry into the market for delivering first-class mail. Is the USPS also a natural monopoly?How can we tell? What would happen if the law preventing competition in this market were removed?
If patents reduce competition, why does the federal government grant them?
[Related to the Making the Connection on page 488]Why is access to YouTube by other search engines such as Yahoo and Bing relevant to the question of whether Google has a monopoly in the Internet search engine market?
[Related to the Making the Connection on page 488] 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
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life, he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb’s point of view, was the local electric company a monopoly?
Is monopoly a good name for the game Monopoly? What aspects of the game involve monopoly? Explain briefly, using the definition of monopoly.
OpenTable is a Web site and smartphone application that allows people to make restaurant reservations online.OpenTable charges participating restaurants a fee for each reservation. As business writer James Stewart wrote in the Wall Street Journal, “You simply go to the site, choose your
Discuss government policies toward monopoly.
Use a graph to illustrate how a monopoly affects economic efficiency.
Explain how a monopoly chooses price and output.
Define monopoly.
The market for electronic readers consists of relatively few firms, including Amazon, Sony, and Plastic Logic. In an interview, Walter Mossberg of the Wall Street Journal asked Rich Archuleta, CEO of Plastic Logic, what price the company would be charging for a new electronic reader that it was
According to an article in the New York Times:On Tuesday, Google will release a free Web browser called Chrome that the company said would challenge Microsoft’s Internet Explorer, as well as the Firefox browser.The browser is a universal doorway to the Internet, and the use of Internet software
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?”
List the competitive forces in the five competitive forces model.
[Related to the Chapter Opener on page 459] This chapter describes how firms can create barriers to deter firms from entering an industry:One factor firms consider in pricing a new product is the effect different prices have on the likelihood that competitors will enter the market.A high price
[Related to Solved Problem 14.3 on page 472] Bradford 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
Refer to Figure 14.5 on page 470. 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
DemandTec is a firm that provides software to retailers, such as department stores, that allow the firms to make better decisions about when to increase or cut prices, given changes in demand, changes in costs, and other factors.DemandTec and firms selling similar software have allowed smaller
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
[Related to the Making the Connection on page 468] Until the late 1990s, airlines would post proposed changes in ticket prices on computer reservation systems several days before the new ticket prices went into effect. Then the federal government took action to end this practice. Now airlines can
[Related to the Making the Connection on page 468]Airlines often find themselves in price wars. Consider the following game: Delta and United are the only two airlines flying the route from Houston to Omaha. Each firm has two strategies: Charge a high price or charge a low price.a. What (if any) is
[Related to the Making the Connection on page 468]The following appeared in an article in the Wall Street Journal:“Last week, true to discount roots dating to 1971, Southwest[Airlines] launched a summer fare sale on domestic flights, with one-way prices as low as $49. As in the past, major
Soldiers in battle may face a prisoner’s dilemma. If all soldiers stand and fight, the chance that the soldiers, as a unit, will survive is maximized. If there is a significant chance that the soldiers will lose the battle, an individual soldier may maximize his chance of survival by running away
Baseball players who hit the most home runs relative to other players usually receive the highest pay. Beginning in the mid-1990s, the typical baseball player became significantly stronger and more muscular. As one baseball announcer put it, “The players of 20 years ago look like stick figures
Under “early decision” college admission plans, students apply to a college in the fall and, if they are accepted, they must enroll in that college. According to an article in BusinessWeek, Yale president Richard Levin argues that early decision plans put too much pressure on students to decide
Alfred Chandler, who was a professor at Harvard Business School, 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!” The
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. Costs LRAC LRAC2 0 Quantity
The graph at the top of the next page 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
Thomas McCraw, a professor at 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 gain from creating
In 2009, some analysts of the smartphone industry argued that Apple would be likely to offer a variety of iPhones, each with different features. One observer objected to this argument, though, arguing, “ Selling models differentiated by hardware seems unlikely. Different iPhones with very
Michael Porter has argued, “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 structure
Give an example of a government-imposed barrier to entry.Why would a government be willing to erect barriers to entering an industry?
An article in the New York Times notes that in buying mutual fund shares, “Investors have . . . [a] problem . . . : determining whether good returns come from skill or luck.” Is it ever easy to determine whether a firm making economic profits is doing so because of the skills of the firm’s
[Related to the Making the Connection on page 447]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.
In 2006, Wal-Mart closed its stores in South Korea and Germany. According to an article in the New York Times:Wal-Mart’s most successful markets, like Mexico, are those in which it started big. There, the company bought the country’s largest and bestrun retail chain, Cifra, and has never looked
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 . .
According to an article in the Wall Street Journal:In early January last year, after a disappointing Christmas season and amid worries about competition from discount retailers, Zale Corp. decided to shake things up: The selfproclaimed jeweler to Middle America was going to chase upscale customers.
How might a monopolistically competitive firm continually earn economic profit greater than zero?
What are the key factors that determine the profitability of a firm in a monopolistically competitive market?
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 e-mail. Think of other cases of companies failing to protect their brand names.What can companies
The National Football League (NFL) has a trademark on the name “Super Bowl” for its championship game. Advertisers can use the words Super Bowl in their advertising only if they pay the NFL a fee. Many companies attempt to get around this trademark by using the phrase “the big game”in their
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.
[Related to the Making the Connection on page 444]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?
Before the fall of Communism, most basic consumer products in Eastern Europe and the Soviet Union were standardized.For example, government-run stores would offer for sale only one type of bar soap or one type of toothpaste. Soviet economists often argued that this system of standardizing basic
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
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?
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 is a largely
In 2011, some Starbucks stores in New York City began putting metal plates over electric outlets to limit the time people could sit at tables using laptop computers.A spokesman for Starbucks stated that individual stores could make the decision whether to cover up power outlets.Why might some
[Related to the Chapter Opener on page 431] John Quelch, a marketing professor at the Harvard Business School, commented on the situation facing Starbucks:“Starbucks is fundamentally selling an experience, but by no means is coffee the only part of the experience.” Why might Starbucks have
Michael Korda was, for many years, editor-in-chief at the Simon & Schuster book publishing company. He has written about the many books that have become bestsellers by promising to give readers financial advice that will make them wealthy, by, for example, buying and selling real estate.Korda is
[Related to Solved Problem 13.3 on page 441] hhgregg has been successful in retailing appliances and electronics by combining high prices with excellent customer service.In late 2008, Saks Fifth Avenue tried a new strategy in retailing luxury clothing. Saks decided to slash prices on designer

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