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microeconomics principles applications
Microeconomics 4th Edition R. Glenn Hubbard, Anthony Patrick O’Brien - Solutions
[Related to the Making the Connection on page 440]As McDonald’s began to increase its competition with Starbucks, Starbucks attempted to fight back with a new advertising campaign. According to an article in the Wall Street Journal, one ad proclaimed: “If your coffee isn’t perfect, we’ll
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 438]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 Angelica opens a small store near campus, selling beef brisket sandwiches. Use the graph in the next column, which shows the demand and cost for Angelica’s beef brisket sandwiches, to answer the questions that follow.a. If Angelica wants to maximize profits, how many beef brisket
Is it possible for a monopolistically competitive firm to continue to earn economic profits as new firms enter the market?
What is the difference between zero accounting profit and zero economic profit?
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?
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 2008, clothing retailer J. Crew cut the prices of many of its products. During that period, its profits per item of clothing declined, and it suffered a loss of $13.5 million. Does this information show that J. Crew’s decision to cut prices was not a
According to an article in USA Today, American Airlines lost $436 million in the first quarter of 2011 compared with a loss of $69 million in the previous quarter. The article states, “Revenue rose 9.2%, to $5.53 billion, as passenger traffic improved modestly and fares rose since December.”a.
[Related to Solved Problem 13.2 on page 436] 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 has the following information on demand and costs:a. To maximize profit, how many loaves of ciabatta bread should Maria sell per hour, what price should she charge, and how much profit will she make?b. What is the marginal revenue
Should a monopolistically competitive firm take into account its fixed costs when deciding how much to produce?Briefly explain.
If Daniel sells 350 Big Macs at a price of $3.25 each, and his average cost of producing 350 Big Macs is $3.00 each, what is his profit?
Stephen runs a pet salon. He is currently grooming 125 dogs per week. If instead of grooming 125 dogs, he grooms 126 dogs, he will add $68.50 to his costs and $60.00 to his revenues. What will be the effect on his profit of grooming 126 dogs instead of 125 dogs?
Why doesn’t a monopolistically competitive firm produce where P = MC, as a perfectly competitive firm does?
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 figure below, 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
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 many Starbucks coffeehouses. Why, then, does a Starbucks coffeehouse face a downward-sloping demand curve, while a wheat farmer faces 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 snow skiing lessons per day: Total Revenue Average Revenue Marginal Revenue (P) (TR PXQ) (AR=TR/Q) (MR = ATR/AQ) Snow Skiing Lessons per Day (Q) Price 0 $80.00 1234567 75.00 70.00 65.00 60.00 55.00 50.00 45.00 40.00
In 2010, Domino’s launched a new advertising campaign admitting that its pizzas had not tasted very good, but claiming that they had developed a new recipe that greatly improved the taste. If Domino’s 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 Pounder? If McDonald’s raises the price of Quarter Pounders above the prices charged by other fast-food restaurants, 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.
Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.
Explain how a monopolistically competitive firm maximizes profit in the short run.
Analyze the situation of a monopolistically competitive firm in the long run.
Compare the efficiency of monopolistic competition and perfect competition.
Define marketing and explain how firms use marketing to differentiate their products.
Identify the key factors that determine a firm’s success.
Although New York State is second only to Washington State in production of apples, its production has been declining during the past 20 years. The decline has been particularly steep in counties close to New York City. In 1985, there were more than 11,000 acres of apple orchards in Ulster County,
[Related to Solved Problem 12.6 on page 418] In 2011, Sony announced that it had lost money selling televisions for the seventh 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
[Related to Solved Problem 12.6 on page 418] 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.
[Related to Solved Problem 12.6 on page 418] 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?
[Related to the Chapter Opener on page 395] 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
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 July 2011, National Public Radio ran a story about the new gold rush. 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
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
[Related to the Making the Connection on page 416]Ethan Nicholas developed his first game while still working as a programmer for Sun Microsystems. After his first game was a success, he quit Sun to form his own company—with himself as the only employee. How did Nicholas’s quitting Sun to work
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 414, 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
Consider the following statement: “The products for which demand is the greatest will also be the products that are most profitable to produce.” Briefly explain whether you agree with this statement.
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 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.
Would a firm earning zero economic profit continue to produce, even in the long run?
[Related to Solved Problem 12.4 on page 408] An article in the Wall Street Journal discussed problems some shopping malls were having retaining stores. According to the article, some stores that were currently losing money were considering not “sticking around once their leases expire.” If the
[Related to Solved Problem 12.4 on page 408] 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
A report issued by the University of Illinois predicted large cost increases for inputs, including fertilizer, seed, insurance, and utilities, for soybean growers in 2009. According to the report, “Significantly higher costs will occur in 2009, leading to higher break-even prices for . . .
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. Price and cost MC ATC
Matthew Rafferty produces hiking boots in the perfectly competitive hiking boot market.a. Fill in the missing values in the following table:b. Suppose the equilibrium price in the hiking boot market is $100. How many boots should Rafferty produce, what price should he charge, and how much profit
Edward Scahill produces table 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 table lamps should Scahill produce, and how much profit will he make?c. If next week the
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?
[Related to the Making the Connection on page 407]Suppose the medical screening firms had run an effective advertising campaign that convinced a large number of people that yearly CT scans were critical for good health.How would this have changed the fortunes of these firms? Illustrate your answer
CarMax, a nationwide retailer of used cars, announced that its total profit for the fourth quarter of 2008 fell by 10 percent, or $26.8 million, compared to the fourth quarter of 2007. At the same time, its profit per used car increased by $325. If the profit per used car increased, how could total
[Related to the Don’t Let This Happen to You on page 406]A student examines the following graph and argues, “I believe that a firm will want to produce at Q1, not Q2.At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its profit.”
[Related to Solved Problem 12.3 on page 404] Review Solved Problem 12.3 and then answer the following: Suppose the equilibrium price of basketballs falls to $2.50.Now how many basketballs will Andy produce? What price will he charge? How much profit (or loss) will he make?
[Related to Solved Problem 12.3 on page 404] 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 in a perfectly competitive market that is operating at a loss. 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 in a perfectly competitive market that is making a profit. 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, what are Farmer Parker’s fixed costs? Suppose that his fixed costs increase by $1. Will this increase in fixed cost change the profit-maximizing level of production for Farmer Parker? Briefly explain. How much profit will Farmer Parker make now?
Refer to Table 12.2 and Table 12.3. 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 $7.50. Assume that the price of wheat remains $4 per bushel. Will this increase in marginal
Refer to Table 12.2 on page 400 and Table 12.3 on page 401.Suppose the price of wheat rises to $7.00 per bushel. How many bushels of wheat will Farmer Parker produce, and how much profit will he make? Briefly explain.
Why don’t firms maximize revenue rather than profit? If a firm decided to maximize revenue, would it be likely to produce a smaller or larger quantity than if it were maximizing profit? Briefly explain.
A student argues: “To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling.” Briefly explain whether you agree
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC.
Explain why if the difference between TR and TC is at its maximum positive value, then MR must equal MC.
Explain why it is true that for a firm in a perfectly competitive market, P = MR = AR.
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
[Related to the Don’t Let This Happen to You on page 398]Explain whether you agree or disagree with the following remark:According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can’t be true: When the price of wheat rises, the quantity
Explain whether each of the following is a perfectly competitive market. For each market that is not perfectly competitive, explain why it is not.a. Corn farmingb. Retail booksellingc. Automobile manufacturingd. New home construction
Draw a graph showing the market demand and supply for corn and the demand for the corn produced by one corn farmer. Be sure to indicate the market price and the price received by the corn farmer.
What is a price taker? When are firms likely to be price takers?
What are the three conditions for a market to be perfectly competitive?
Explain how perfect competition leads to economic efficiency.
Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run.
Explain why firms may shut down temporarily.
Explain how a firm maximizes profit in a perfectly competitive market.
Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve.
[Related to the Making the Connection on page 390]If Cade Massey and Richard Thaler are correct, should the team that has the first pick in the draft keep the pick or trade it to another team for a lower pick? Briefly explain.Does the 2011 agreement that limits the salaries of drafted players
Jill Johnson is minimizing the costs of producing pizzas.The rental price of one of her ovens is $2,000 per week, and the wage rate is $600 per week. The marginal product of capital in her business is 12,000 pizzas. What must be the marginal product of her workers?
In Brazil, a grove of oranges is picked using 20 workers, ladders, and baskets. In Florida, a grove of oranges is picked using 1 worker and a machine that shakes the oranges off the trees and scoops up the fallen oranges. Using an isoquant–isocost line graph, illustrate why these two different
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
[Related to the Making the Connection on page 387]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
[Related to Solved Problem 11A.1 on page 389] 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
[Related to Solved Problem 11A.1 on page 389]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
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
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