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microeconomics principles applications
Microeconomics 5th Global Edition R. Glenn Hubbard; Anthony Patrick O'Brien - Solutions
Mercedes has repeatedly stated that it offers its customers a premium-brand experience, rather than just providing the consumers with cars. Briefly explain what you can infer from this particular communication strategy?What would such a statement imply about the Mercedes’marketing strategy.
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
Draw a graph that shows the effect on a firm’s profits when it increases spending on advertising but the increased advertising has no effect on the demand for the firm’s product.
Why are many companies so concerned about brand management?roblems and pplications
[elated to the Making the Connection on page 486]According to Peter Thiel: “For a company to own its market, it must have some combination of brand, scale cost advantages, network effects, or proprietary technology.”Thiel has invested in the NJOY e-cigarette firm.a. What does Thiel mean by a
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 a profit 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.”roblems and pplications
Briefly explain what the implications of monopolistically competitive firms having excess capacity are.
Are long run profits equal to zero only when firms charge a price equal to their marginal cost, and produce an average total cost-minimizing quantity of output? Explain.
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
Yoko wants to start a business in your town. At the moment there is only one bakery, so she thinks it could be profitable to open another one. Yoko notices that the existing bakery only offers bread and apple pies. She decides to serve a number of other products (such as mince pies and chicken
[elated to the Chapter Opener on page 473] 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 483] h.h.gregg 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
[Related to the Making the Connection on page 482]An article in Forbes magazine in 2013 discussed the reasons for the ability of Starbucks to remain profitable despite competition. The author argued the most important reason for the firm’s success was “Right market segmentation. The company has
A columnist for the Wall Street Journal made the following observation: “The [oil] refining business is just too competitive, which is great for consumers, but not shareholders.” Briefly explain why the high level of competition in the oil refining industry is good for consumers but bad for the
[Related to the Don’t Let This Happen to You on page 480] A student remarks:If firms in a monopolistically competitive industry are earning economic profits, new firms will enter the industry. Eventually, a representative firm will find that its demand curve has shifted to the left, until it is
Suppose Lesedi opens a comic book store in her home town in Africa. Use the graph below, showing the demand and costs for Lesedi’s comic book store, to answer the following questions.a. How many comic books should Lesedi sell per day, and at what price, in order to maximize her profits? Briefly
Would a perfectly competitive market prove more stable than a monopolistically competitive one in the long run? What happens to their profits in the long run?Problems and Applications
Why does the entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left and to become more elastic?
What effect does the entry of new firms have on the economic profits of existing firms?
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
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,
William Germano previously 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
During the last three months of 2011, the Abercrombie &Fitch clothing chain cut the prices of many of its products.During that period, its profits per item of clothing declined, and its total profits declined by 79 percent.An article discussing Abercrombie’s situation had the headline:
[elated to Solved Problem 13.2 on page 478] Suppose a firm producing table lamps has the following costs:Quantity Average Total Cost 1,000 $15.00 2,000 9.75 3,000 8.25 4,000 7.50 5,000 7.75 6,000 8.50 7,000 9.75 8,000 10.50 9,000 12.00 Ben and Jerry are managers at the company, and they have this
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
Do you think a monopolistically competitive firm would be able to make positive profits by producing a quantity that ensures that its marginal revenue equals its marginal cost?
Wolfram bakes birthday cakes in his patisserie, currently 15 each day generating total revenue of €450; the total cost is €250. Producing 16 cakes would increase the revenue to€480, but the total cost would rise to €300. Briefly explain whether this would increase or decrease Wolfram’s
Sally runs a vegetable stand. She is selling 100 pounds of heirloom tomatoes per week, at a price of $3.75 per pound.If she lowers the price to $3.70, she will sell 101 pounds of heirloom tomatoes. What is the marginal revenue of the 101st pound of heirloom tomatoes?
In the following figure, 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 denotes the output effect, and what is the dollar value of the output effect? What area in the graph denotes the price
Suppose that you are analyzing a market with a large number of active firms. What would you look for in order to determine whether those firms face a downward sloping demand curve or a horizontal demand curve?
A student makes the following argument:When a firm sells another unit of a good, the additional revenue the firm receives is equal to the price: If the price is $10, the additional revenue is also $10. Therefore, this chapter is incorrect when it says that marginal revenue is less than price for a
Complete the following table, which shows the demand for guitar lessons per day. Is marginal revenue equal to the price?
In 2013, 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
Think about the various flavors of chocolate blocks: dark, mint, ginger, and chilli. Suppose that the price of all the mint chocolate blocks goes up. Would this affect the sales of that type of chocolate?
Consider a situation where you have a revolutionary idea within the music industry. You have been successful in producing electric guitars, which are capable of replicating the characteristics and the sounds of some the most expensive musical instruments existing in the market. The cost of these
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 notes: “Blockbusters … often have thousands of visual effects shots. Even dramas and comedies today can include
[elated to Solved Problem 12.6 on page 461] In 2013, Sony announced that it had suffered losses selling televisions for the ninth straight year. 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? Briefly
[elated to Solved Problem 12.6 on page 461] Suppose you read the following item in a newspaper article, under the headline “Price Gouging Alleged in Pencil Market”:Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils.
[elated to Solved Problem 12.6 on page 461] Do you think it is reasonable to assume that consumers would be able to grasp the benefits of new technologies in all markets? Briefly explain the reasons for your answer.
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?roblems and pplications
Suppose that some soybean farmers experience losses over a long period and therefore decide to exit the market. What effect will this exit have on the market supply of soybeans? How will the change in supply affect the market price of soybeans and the ability of farmers remaining in the soybean
[elated to the Chapter Opener on page 439] If in the long run vegetable growers who sell in farmers’ markets make no greater rate of return on their investment than vegetable growers who sell to supermarkets, why did a significant number of vegetable growers switch from selling to supermarkets to
Suppose that the laptop computer industry is perfectly competitive and that the firms that assemble laptops do not also make the displays, or screens. Suppose that the laptop display industry is also perfectly competitive.Finally, suppose that because the demand for laptop displays is currently
In 2011, National Public Radio ran a story about the market for gold. It reported:The price of gold in the international market is steadily rising: more than fivefold in the past decade alone. It’s currently selling for about $1,500 an ounce, paving the way for a new gold rush. Ten old mines have
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 stay
[elated to the Making the Connection on page 460]Is it possible to define the length of a long term strategy in a perfectly competitive market? After how many years is it reasonable to assume that a perfectly competitive market is at its long run equilibrium? Would it be possible to assume that
For a given decrease in demand, will more firms exit a constant-cost industry or an increasing-cost industry?Briefly explain.
In panel (b) of Figure 12.9 on page 458, Sacha Gillette reduces her output from 8,000 to 5,000 boxes of carrots when the price falls to $7. At this price and this output level, she is operating at a loss. Why doesn’t she just continue charging the original $10 and continue producing 8,000 boxes
Briefly explain whether you agree with the following statement: “The products for which demand is the greatest will also be the products that are most profitable to produce.”
Why does the entry of firms into an industry decrease the economic profits of the existing firms? Why does the exit of firms from an industry increase the economic profits of the existing firms?
Suppose that Joanne, a senior lecturer of a British university earning £37,000 per year, decides to quit her job to start writing books. She also sells £200,000 worth of stocks, which earned 5percent per year, to finance a holiday in the countryside to find inspiration. At the end of the year,
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
Explain the implications of economic profit and accounting profit on the long term equilibrium of a perfectly competitive market.
[elated to Solved Problem 12.4 on page 452] Imagine that you are the guitar player who was mentioned in question 4.8. Now suppose that you decided to conclude the first tour of the Midnight Free Riders, and then participated in four other such tours. These four tours didn’t achieve much success,
[elated to Solved Problem 12.4 on page 452] Suppose that you are the lead guitar player of the Midnight Free Riders, a band that has just produced its first album and is about to start a promotional tour. In order to improve the quality of your sound, you decide to buy a new guitar;you spend
Look again at the Making the Connection on page 450 that discusses the U.S. solar panel industry. According to an article in the New York Times, interest payments on bank loans make up more than half the costs of a typical solar panel manufacturer. The owner of a firm that imports solar panels made
Matthew 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
Edward Scahill produces table lamps in the perfectly competitive desk lamp market.a. Fill in the missing values in the following table:Output per Week Total Cost AFC AVC ATC MC 0 $100 1 150 2 175 3 190 4 210 5 240 6 280 7 330 8 390 9 460 10 540b. Suppose the equilibrium price in the desk lamp
How is the market supply curve derived from the supply curves of individual firms?Problems and Applications
What is the difference between a firm’s shutdown points 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 profits?b. How much profit will she earn?c. Suppose Marguerite decides to shut down. What would her loss be?
[elated to the Making the Connection on page 450]Suppose that the price of oil doubles, raising the cost of home-heating oil and electricity. What effect would this development have on U.S. firms manufacturing solar panels? Illustrate your answer with two graphs: one showing the situation in the
A newspaper article discussed the financial results for Texas Instruments Inc., a semiconductor manufacturer, during the first quarter of 2013. “First quarter profit jumped 37 percent to $362 million, or 32 cents per share, but revenue declined 6.8 percent to $2.89 billion from a year
[elated to the Don’t Let This Happen to You on page 449] A student guesses the quantity at which a firm maximizes profits looking at the graph below: “I think that the firm maximizes profits by either producing A or C, because the price is equal to the marginal cost. It would also be profitable
[elated to Solved Problem 12.3 on page 447] Given that the price of basketballs rises to $50.00, how many basketballs will Andy be able to produce? How much profit will he make? Will Andy be able to make marginal cost equal to marginal revenue? Briefly explain why.
[elated to Solved Problem 12.3 on page 447] Frances sells earrings in the perfectly competitive earrings market.Her output per day and her costs are as follows:Output per Day Total Cost 0 $1.00 1 2.50 2 3.50 3 4.20 4 4.50 5 5.20 6 6.80 7 8.70 8 10.70 9 13.00a. If the current equilibrium price in
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
In Table 12.3 on page 445, 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 12.3 on page 445. Suppose that the marginal cost of wheat is $0.50 higher for every bushel of wheat produced. For example, the marginal cost of producing the eighth bushel of wheat is now $9.50. Assume that the price of wheat remains $7 per bushel. Will this increase in marginal cost
Refer to Table 12.3 on page 445. 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.
Would you be able to demonstrate a parallel between how firms maximize their profits and how consumers make optimal decisions at the margin (refer to Chapter 10)?
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.roblems and pplications
The financial writer Andrew Tobias described an incident that occurred when he was a student at the Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent
[elated to the Don’t Let his Happen to You on page 442] Explain whether you agree with the following remark: “In a perfectly competitive market each firm faces a horizontal demand curve. This means that the firm will be unable to sell its product at a price higher than the market price, because
Why are consumers usually price takers when they buy most goods and services, while relatively few firms are price takers?
Briefly explain why a firm in a perfectly competitive market would generally face a horizontal demand curve.What implications do you think this has for the price of its product?roblems and pplications
Swift Ellis, Inc. manufactures running shoes. The following graph illustrates the combination of capital and labor(point A) that minimizes the firm’s cost of producing 5,000 pairs of shoes. Suppose both the wage rate and the rental price of machinery doubles.a. Draw a new isocost line to reflect
[elated to the Making the Connection on page 434]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
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
Draw an isoquant–isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for$2,000 per week and hire workers for $1,000 per week.She can minimize the cost of producing 20,000 pizzas per week by using 5 ovens and 10 workers, at a total cost of$20,000. She can
Use the following graph to answer the following questions about Jill Johnson’s isoquant curve.a. Which combination of inputs yields more output: combination A (3 ovens and 2 workers) or combination B (2 ovens and 3 workers)?b. What will determine whether Jill selects A, B, or some other point
Draw an isoquant–isocost line graph to illustrate the following situation and the change that occurs: Jill Johnson can rent pizza ovens for $2,000 per week and hire workers for $1,000 per week. Currently, she is using 5 ovens and 10 workers to produce 20,000 pizzas per week and has total costs of
[elated to Solved Problem 11A.1 on page 433] 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
[elated to Solved Problem 11A.1 on page 433]Consider the information in the following table for Jill Johnson’s restaurant:Marginal product of capital 4,000 Marginal product of labor 100 Wage rate $10 Rental price of pizza ovens $500 Briefly explain whether Jill is minimizing costs. If she is not
[elated to the Making the Connection on page 431]During the eighteenth century, the American colonies had much more land per farmer than did Europe. As a result, the price of labor in the colonies was much higher relative to the price of land than it was in Europe. Assume that Europe and the
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 $2,000, 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 $1,000, 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 20,000 pizzas per week and has total costs of $4,000. Make sure to label your
How do firms choose the optimal combination of inputs?roblems and pplications
[elated to the Don’t Let This Happen to You on page 418] Explain whether you agree with the following statement: “Henry Ford expected to be able to produce cars at a lower average cost at his River Rouge plant. Unfortunately, because of diminishing returns, his costs were actually higher.”
[elated to the Chapter Opener on page 399] Suppose that the economies of scale in using fracking methods in drilling for oil are greater than when using conventional drilling methods. What would the likely consequences be for the number of firms drilling for oil in the United States?
[elated to the Making the Connection on page 417]Suppose that Henry Ford had continued to experience economies of scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.
[elated to Solved Problem 11.6 on page 415] At one point, Time Warner and the Walt Disney Company discussed merging their news operations. Time Warner owns Cable News Network (CNN) and Disney owns ABC News.After analyzing the situation, the companies decided that a combined news operation would
[elated to Solved Problem 11.6 on page 415] 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
[elated to Solved Problem 11.6 on page 415] An article in the Wall Street Journal discussed the purchase of the small Zipcar rental car firm by the much larger Avis.The article predicted that the purchase would be successful because of the “efficiencies gained by putting the two companies
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