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microeconomics principles applications

Microeconomics 5th Global Edition R. Glenn Hubbard; Anthony Patrick O'Brien - Solutions

[elated to Solved Problem 7.3 on page 264] An article in the Economist magazine contains the following description of the “classic adverse selection spiral”: “because[health insurance] premiums go higher, healthy people become even less likely to buy insurance, which drives premiums higher
[elated to Solved Problem 7.3 on page 264] An article in the Economist magazine argues that the real problem with health insurance is:The healthy people who decide not to buy insurance out of rational self-interest, and who turn out to be right. By not buying insurance, those (largely young)
According to a study by Douglas Lundin, a health economist, moral hazards can be an issue in health insurance, when physicians have to decide what version of a drug(trade-name or generic) to prescribe to their patients. Can you explain why moral hazards would be an issue in this particular
[elated to the Don’t Let This Happen to You on page 263]While teaching the concepts of asymmetric information, a professor asked his students for examples of adverse selection or moral hazard in marriage. One of the students, who happened to be married, replied: “Your spouse doesn’t bring you
[elated to the Don’t Let This Happen to You on page 263]Briefly explain whether you agree with the following statement:“The reluctance of healthy young adults to buy health insurance creates a moral hazard problem for insurance companies.”
Under the Social Security retirement system, the federal government collects a tax on most people’s wage income and makes payments to retired workers above a certain age who are covered by the system. (The age to receive full Social Security retirement benefits varies based on the year the worker
Think about the answer you provided for question 3.6.Now suppose you are the owner of a health insurance company. You want to avoid adverse selection problems that arise in such situations. What measures would you adopt to safeguard your company’s prospects?
Illustrate the concept “market for lemons” with the help of two examples.
Suppose you see a 2010 Volkswagen Jetta GLS Turbo Sedan advertised in the campus newspaper for $10,000.If you knew the car was reliable, you would be willing to pay $12,000 for it. If you knew the car was unreliable, you would be willing to pay $8,000 for it. Under what circumstances should you buy
What is an externality? Are there externalities in the market for health care? Briefly explain.roblems and pplications
How do health insurance companies deal with asymmetric information problems?
Briefly explain what an asymmetric information problem is. Describe the market for “lemons” as described in this chapter.
Two health care analysts argue that in the United States,“we have arrived at a moment where we are making little headway in defeating various kinds of diseases. Instead, our main achievements today consist of devising ways to marginally extend the lives of the very sick.”a. Should “marginally
Think about the classification of goods among normal goods (luxury goods and necessities) and inferior goods.Under which category would you classify health care?Briefly explain the reasons for your answers.
According to an article in the Economist about the health care system in the United Kingdom: “A defining principle of the National Health Service is that it is ‘free at the point of delivery’.” What does “free at the point of delivery” mean? Is health care actually free to residents of
Why do you think it would be difficult to compare health care outcomes of your country with another country? List the reasons and briefly explain why each of them complicates cross-country comparisons when considering health-care outcomes.roblems and pplications
Briefly compare the health care systems in Canada, Japan, and the United Kingdom with the health care system in the United States.
Between 1830 and 1890, the height of the average adult male in the United States declined by about two inches at the same time that average incomes more than tripled. Did the standard of living in the United States increase during this period? What insight into the health and well-being of the U.S.
The widespread acceptance in the late nineteenth century that bacteria causes diseases helped lead to a public health movement in the late nineteenth and early twentieth centuries. This movement eventually brought sewers, clean drinking water, and garbage removal to all U.S. cities.What effect did
Briefly explain why you can see the existence of a virtuous circle between health conditions and income, i.e. production. What are the reasons for an increase in income and production of a country following improvements in the health conditions of its population?
How can improvements in health increase a country’s total income? How can increases in a country’s total income improve health?roblems and pplications
List the reasons mentioned in this chapter for the longterm improvements in U.S. health. How can developing countries benefit from this experience?
Use the following graph of the market for basketball tickets at State University to answer these questions:a. What is the price elasticity of supply?b. Suppose the basketball team at State University goes undefeated in the first half of the season, and the demand for basketball tickets increases.
On most days, the price of a rose is $1, and 8,000 roses are purchased. On Valentine’s Day, the price of a rose jumps to$2, and 30,000 roses are purchased.a. Draw a demand and supply graph that shows why the price jumps.b. Based on this information, what do we know about the price elasticity of
Suppose that the Malaysian government were to reconsider its decision to not utilize nuclear energy or construct nuclear power plants within the borders of the country.What would be the immediate change in the supply of nuclear physicists? Would things change after ten years?Please disregard
Think about perfectly elastic supply and perfectly inelastic supply. Give at least one example for each case and briefly explain your choice, with illustrations. Is it realistic to assume that a perfectly elastic/inelastic supply can be maintained in the real world?
Use the midpoint formula for calculating elasticity to calculate the price elasticity of supply between point A and point B for each panel of Figure 6.5 on page 241.
[Related to the Making the onnection on page 238]Refer again to the first graph in the Making the Connection on page 238. Suppose that demand had stayed at the level indicated in the graph, with the equilibrium price of oil remaining at $140 per barrel. Over long periods of time, high oil prices
With reference to question 6.1, what would you consider while determining the price elasticity of the supply of beans?roblems and pplications
Define the concept of price elasticity of supply. Think about the supply of beans: do you think that the supply of beans can be very price-elastic in the short-term? How will the price elasticity of supply for beans be affected in the longer run, i.e., for one year or more?
Review the concept of economic efficiency from Chapter 4 before answering the following question: Will there be a greater loss of economic efficiency from a price ceiling when demand is elastic or inelastic? Illustrate your answer with a demand and supply graph.
The head of the United Kumquat Growers Association makes the following statement:The federal government is considering implementing a price floor in the market for kumquats. The government will not be able to buy any surplus kumquats produced at the price floor or to pay us any other subsidy.
Corruption has been a significant problem in Iraq. Opening and running a business in Iraq usually requires paying multiple bribes to government officials. We can think of there being a demand and supply for bribes, with the curves having the usual shapes: The demand for bribes will be downward
on page 236] Suppose that the long-run price elasticity of demand for gasoline is-0.55. Assume that the price of gasoline is currently $4.00 per gallon, the quantity of gasoline is 140 billion gallons per year, and the federal government decides to increase the excise tax on gasoline by $1.00 per
[Related to Solved Problem
[elated to Solved Problem 6.5 on page 236] According to a study by the U.S. Centers for Disease Control and Prevention, the price elasticity of demand for cigarettes is -0.25.Americans purchase about 360 billion cigarettes each year.a. If the federal tax on cigarettes were increased enough to cause
The demand for agricultural products is inelastic, and the income elasticity of demand for agricultural products is low. How do these facts help explain the decline of the family farm in the United States?Problems and Applications
Consider firms selling three goods—one firm sells a good with an income elasticity of demand less than zero, one firm sells a good with an income elasticity of demand greater than zero but less than one, and one firm sells a good with an income elasticity of demand greater than one. In a
[elated to the Making the Connection on page 234]The elasticities reported in this Making the Connection were calculated using price data for many brands of beer.Why might price elasticity estimates for a product be less reliable if they use data for only one brand of that product?
Find two examples for each of the following category of goods: normal goods, inferior goods, necessities, and luxury goods. Briefly explain what permits you to divide goods into those four categories.
[elated to the Chapter Opener on page 219] During the spring of 2008, gasoline prices increased sharply in the United States. According to a newspaper article, rising gas prices had the following effect on the car market:Sales of Toyota’s subcompact Yaris increased 46 percent, and Honda’s tiny
The graph below illustrates the effect of an increase in the price of cappuccinos from €2.00 to €2.50, on the demand for croissants. What is the relationship between these two goods? Answer by calculating the cross-price elasticity of demand between croissants and cappuccinos.
When lettuce prices doubled, from about $1.50 per head to about $3.00, the reaction of one consumer was quoted in a newspaper article: “I will not buy [lettuce] when it’s$3 a head,” she said, adding that other green vegetables can fill in for lettuce. “If bread were $5 a loaf we’d still
Define the income elasticity of demand. Use income elasticity to distinguish a normal good from an inferior good.Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity good?roblems and pplications
Define the cross-price elasticity of demand. What does it mean if the cross-price elasticity of demand is negative? What does it mean if the cross-price elasticity of demand is positive?
The Delaware River Joint Toll Bridge Commission increased the toll from $0.50 to $1.00 on the bridges on Route 22 and Interstate 78 from New Jersey to Pennsylvania.Use the information in the following table to answer the questions. (Assume that besides the toll change, nothing occurred during the
After parking rates were increased substantially from $10 to $16 per day at the “Big Blue Deck” at Detroit’s Metro Airport, parking revenue increased from the previous December. Use the information in the following table to calculate the price elasticity of demand for parking spaces at the
According to an article in the Wall Street Journal, some small publishers have argued that Amazon has been increasing the prices it sells their books for on its Web site. Amazon was increasing the prices by reducing the discount it offered consumers on the retail prices of the books. One small
[Related to Solved Problem 6.3 on page 231] Briefly explain the relationship between the price elasticity of a good and the total revenue obtained by the firm producing that good.
[Related to Solved Problem 6.3 on page 231] Briefly explain whether you agree with Manager 2’s reasoning:Manager 1: “The only way we can increase the revenue we receive from selling our frozen pizzas is by cutting the price.”Manager 2: “Cutting the price of a product never increases the
In a small town there is only one music shop selling guitars. Feeling confident due to the lack of competition, the owner increases the prices of all guitars by 25percent. After one month, however, the owner realizes that demand for guitars has dropped dramatically, and so have total revenues. What
Use the following graph for Yolanda’s Frozen Yogurt Stand to answer the questions.a. Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C and the price elasticity of demand for D2 between point A and point B. Which demand curve is more elastic,
It has become customary for Transport for London(TFL)—which is the local government body responsible for the transport system in town—to introduce new fares for transport services at the beginning of each year. In the last decade all increases have constantly been higher than the inflation
Economists’ estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and
[Related to the hapter Opener on page 219] The Energy Information Administration estimated that in 2012 American consumers spent 4 percent of their incomes on gasoline. Would the elasticity of demand likely be greater or less if consumers had spent 8 percent of their incomes on gasoline? Briefly
The price of organic apples falls, and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic?roblems and pplications
If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue orange juice sellers receive?
The entrance fee into Yellowstone National Park in northwestern Wyoming is “$25 for a private, noncommercial vehicle; $20 for each snowmobile or motorcycle; or $12 for each visitor 16 and older entering by foot, bike, ski, etc.” The fee provides the visitor with a seven-day entrance permit into
[Related to the hapter Opener on page 219] An article in the Dallas Morning News discussed the market for green cars—hybrid gasoline and electric cars, electric cars, and diesel cars. One factor the article mentioned as affecting the market for green cars was the increasing gas mileage of
The price elasticity of demand for crude oil in the United States has been estimated to be -0.06 in the short run and-0.45 in the long run. Why would the demand for crude oil be more price elastic in the long run than in the short run?Source: John C. B. Cooper, “Price Elasticity of Demand for
[Related to the Making the onnection on page 228]According to the estimates of short-run price elasticities of demand reported in table 6.2, goods like cigarettes and cocaine have extremely low price elasticities. On the other hand, the price elasticity for books and DVDs is very high(in absolute
Explain the effect of the following events on price elasticity of milk:a. Soymilk becomes common in shopsb. Doctors say milk consumption is goodc. Tickets for a rock concert are immediately availabled. Goat milk becomes harder to find
What are the key determinants of the price elasticity of demand for a product? Which determinant is the most important?roblems and pplications
Is the demand for most agricultural products elastic or inelastic? Briefly explain.
[Related to the Don’t Let This Happen to You on page 226] The publisher of a magazine gives his staff the following information:Current price $2.00 per issue Current sales 150,000 copies per month Current total costs $450,000 per month He tells the staff, “Our costs are currently $150,000 more
In 1916, the Ford Motor Company sold 500,000 Model T Fords at a price of $440 each. Henry Ford believed that he could increase sales of the Model T by 1,000 cars for every dollar he cut the price. Use this information to calculate the price elasticity of demand for Model T Fords. Use the midpoint
[Related to Solved Problem 6.1 on page 223] Imagine that you play in a local rock band called The Midnight Free Riders; you are trying to decide the price of the tickets for your next show. The last time you played, 50 persons decided to pay €10 to attend the concert. You are considering lowering
Suppose that the following table gives data on the price of rye and the number of bushels of rye sold in 2013 and 2014:Year Price (dollars per bushel) Quantity (bushels)2013 $3.00 8 million 2014 2.00 12 milliona. Calculate the change in the quantity of rye demanded divided by the change in the
Suppose that a candy shop offers a wide range of chocolate bars, all located in the same part of the shop. One day the shop owner decides to raise the price of the mint-flavored chocolate bars; he decides to keep the prices of the rest of the chocolate bars unchanged. Do you think that this will
Explain what it means to face a unit-elastic demand.Would you say that unit-elasticity of demand is an elastic demand or an inelastic one?roblems and pplications
If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in the number of boxes of Cheerios demanded, what is the price elasticity of demand for Cheerios? Is the demand for Cheerios elastic or inelastic?
William Easterly in The White Man’s Burden shares the following account by New York University Professor Leonard Wantchekon of how Professor Wantchekon’s village in Benin, Africa, managed the local fishing pond when he was growing up:To open the fishing season, elders performed ritual tests at
In the early 1800s, more than 60 million American bison (commonly known as the buffalo) roamed the Great Plains. By the late 1800s, the buffalo was nearly extinct.Considering the four categories of goods discussed in this chapter, why might it be that hunters nearly killed buffalo to extinction but
Do you think it possible to consider public transportation services to be public goods? Briefly explain why free riding is frequently mentioned as one of the problems affecting public transport services in an economy?
How do private goods differ from public goods with regard to the construction of their respective market demand curves? Discuss with appropriate examples.
Put each of these goods or services into one of the boxes in Figure 5.7 on page 203. That is, categorize them as private goods, public goods, quasi-public goods, or common resources.a. A television broadcast of baseball’s World Seriesb. Home mail deliveryc. Education in a public schoold.
The more frequently bacteria are exposed to antibiotics, the more quickly the bacteria will develop resistance to the antibiotics. An article from MayoClinic.com includes the following about antibiotic use:If antibiotics are used too often for things they can’t treat—like colds, flu or other
Three researchers have recently proposed (Costello et al.2012) to put a price on killing whales. This would in turn allow conservationists and whalers alike to bid on the right to take them. Do you think that this proposal should be taken seriously?Source: C. Costello, S. Gaines, and L.R. Gerber,
Commercial whaling has been described as a modern example of the tragedy of the commons. Briefly explain whether you agree.
[elated to Solved Problem 5.4 on page 206] Suppose that Jill and Joe are the only two people in the small town of Andover. Andover has land available to build a park of no more than 9 acres. Jill and Joe’s demand schedules for the park are as follows:Joe Price per Acre Number of Acres$10 0 9 1 8
What is the tragedy of the commons? How can it be avoided?roblems and pplications
What is free riding? How is free riding related to the tendency of a public good to create market failure?
[elated to the Making the onnection on page 201]Think about the economically efficient level of pollution reduction, which has been mentioned in this Chapter in relation to the global warming problem.a. Is it possible for us to fully understand the costs that are related to global warming?b. Why
[elated to the hapter Opener on page 185] According to an article in the New York Times: “Top economists agree a tax on fuels and the carbon they spew into the atmosphere would be the cheapest way to combat climate change.” Why would a carbon tax be a cheaper way to reduce carbon dioxide
The following graph illustrates the situation in the dry cleaning market assuming that the marginal social cost of the pollution increases as the quantity of items cleaned per week increases. The graph includes two demand curves: one for a smaller city, DS, and the other for a larger city, DL.a.
A few years ago, Governor Deval Patrick of Massachusetts proposed that criminals would have to pay a “safety fee” to the government. The size of the fee would be based on the seriousness of the crime (that is, the fee would be larger for more serious crimes).a. Is there an economically
[elated to the Making the onnection on page 196]Eric Finklestein, an economist at Duke University, has argued that the external costs from being obese are larger than the external costs from smoking because “the mortality effect for obesity is much smaller than it is for smoking and the costs
[elated to Solved Problem 5.3 on page 198] Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and lakes, causing substantial environmental damage.Suppose the following graph illustrates the situation in the toilet paper
[elated to Solved Problem 5.3 on page 198] The fumes from dry cleaners can contribute to air pollution. Suppose the following graph illustrates the situation in the dry cleaning market.a. Explain how a government can use a tax on dry cleaning to bring about the efficient level of production.What
[elated to Solved Problem 5.3 on page 198] Solved Problem 5.3 contains the statement: “Of course, the government actually collects the tax from sellers rather than from consumers, but we get the same result whether the government imposes a tax on the buyers of a good or on the sellers.”
Is government intervention (for instance in the form of subsidies) always justified in the case of positive externalities? Is the fact that all activities create benefits that may not be appropriable by their creators a debatable statement? Briefly discuss the reasons for your answer.
A newspaper article has the headline: “Should We Tax People for Being Annoying?”a. Do annoying people cause a negative externality?Should they be taxed? Do crying babies on a bus or plane cause a negative externality? Should the babies(or their parents) be taxed?b. Do people who plant flowers
Many antibiotics that once were effective in eliminating infections no longer are because bacteria have evolved to become resistant to them. Some bacteria are now resistant to all but one or two existing antibiotics. Some policymakers have argued that pharmaceutical companies should receive
The British government has recently started to consider the introduction of a 20 percent tax on sugary drinks. Why has this been positively received by the National Health Service?Source: “Sugary drinks tax ‘effective public health measure’, ” BBC News health, November 1, 2013.
The author of a newspaper article remarks that many economists “support Pigovian taxes because, in some sense, we are already paying them.” In what sense might consumers in a market be “paying” a Pigovian tax even if the government hasn’t imposed an explicit tax?Source: Adam Davidson,
Why do most economists prefer tradable emission allowances to the command-and-control approach to pollution?roblems and pplications
[elated to the Making the onnection on page 193]We know that owners of apple orchards and beehives are able to negotiate private agreements. Is it likely that as a result of these private agreements, the market supplies the efficient quantities of apple trees and beehives? Are there any real-world
Think about the Coase theorem. Assume that a polluting plant is only damaging one farmer, who has fields all around the plant. There are no transaction costs; both the plant owner and the farmer have perfect knowledge about the negative externality that is being caused by the plant. Can the plant
[elated to the Don’t Let his Happen to You on page 193] Briefly explain whether you agree or disagree with the following statement: “Sulfur dioxide emissions cause acid rain and breathing difficulties for people with respiratory problems. The total benefit to society is greatest if we
[elated to the Making the onnection on page 190]In the first years following the passage of the Clean Air Act in 1970, air pollution declined sharply, and there were important health benefits, including a decline in infant mortality. According to an article in the Economist magazine, however,

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