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microeconomics principles applications
Microeconomics 15th Canadian Edition Campbell R. Mcconnell, Stanley L. Brue, Sean M. Flynn, Thomas P. Barbiero - Solutions
1. What is meant by technological advance, as broadly defined?How does technological advance enter into the definition of the very long run? Which of the following are examples of technological advance, and which are not: an improved production process; entry of a firm into a profitable perfectly
LO14.7 Show how technological advance enhances productive efficiency and allocative efficiency.
LO14.6 Discuss the role of market structure in promoting technological advance.
LO14.5 Relate why firms can benefit from their innovation even though rivals have an incentive to imitate it.
LO14.4 Discuss how technological change can increase profits by raising revenues or lowering costs.
LO14.3 Summarize how a firm determines its optimal amount of research and development (R&D).
LO14.2 Explain how entrepreneurs and other innovators further technological advance.
LO14.1 Differentiate among invention, innovation, and technological diffusion.
3. Examine the following game tree. Fred and Sally are planning on running competing restaurants. Each must decide whether to rent space or buy space. Fred goes first at decision node F.Sally goes second at either decision node S1 or decision node S2 (depending on what Fred chose to do at decision
2. Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible(believable). Look back at Figure 13-3. Imagine that the two firms will play this game twice in sequence and that each firm claims the following policy. Each says that if both it
1. Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 13-3. Suppose that if one firm sets a low price while the other sets a high price, the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars
9. Look back at Figure 13-8. Suppose that the two firms switch places—the firm that was the follower now gets to go first while the firm that was the leader now has to go second. The new subgame perfect Nash equilibrium will lead to terminal node [LO13.6]a. Ab. Bc. Cd. D
8. Look back at Figure 13-7. Suppose that the payouts at terminal node B change to (13, 12) while everything else in the game stays the same. The new subgame perfect Nash equilibrium will consist of the two line segments [LO13.6]a. Build at BB followed by Build at HB1b. Build at BB followed by
7. Property developers who build shopping malls like to have them “anchored” with the outlets of one or more famous national retail chains, like Hudson’s Bay Company or Canadian Tire. Having such anchors is obviously good for the mall developers because anchor stores bring a lot of foot
6. True or False? Potential rivals may be more likely to collude if they view themselves as playing a repeated game rather than a one-time game. [LO13.6]
5. Collusive agreements can be established and maintained by [LO13.6]a. Credible threatsb. One-time gamesc. Empty threatsd. First-mover advantage
4. Some analysts consider oligopolies to be potentially less efficient than monopoly firms because at least monopoly firms tend to be regulated. Arguments in favour of a more benign view of oligopolies include: [LO13.5]a. Oligopolies are self-regulating.b. Oligopolies can be kept in line by foreign
3. In an oligopoly, each firm’s share of the total market is typically determined by [LO13.4]a. Scarcity and competitionb. Payoff matricesc. Homogeneous products and import competitiond. Product development and advertising
2. Consider an oligopoly industry whose firms have identical demand and cost conditions. If the firms decide to collude, then they will want to collectively produce the amount of output that would be produced by [LO13.3]a. A monopolistic competitorb. A perfect competitorc. A monopolistd. None of
1. Which of the following apply to oligopoly industries? Select one or more answers from the choices shown. [LO13.1]a. A few large producersb. Many small producersc. Strategic behaviourd. Price taking
12. Can backward induction be readily applied when a sequential game is presented as a payoff matrix? Discuss. [LO13.
11. Are the subgames of a sequential game visible when the entire game is presented in strategic form? Explain. [LO13.6]
10. Advanced Analysis Suppose you are playing a game in which you and one other person each picks a number between 1 and 100, with the person closest to some randomly selected number between 1 and 100 winning the jackpot.(Ask your instructor to fund the jackpot.) Your opponent picks first. What
9. Refer to the payoff matrix below. [LO13.6]Assuming this is a sequential game with no collusion, what is the outcome if firm A moves first to build a new type of commercial aircraft? Explain why first-mover strategies in the real world are only as good as the profit projections on which they are
8. Refer to the payoff matrix in Discussion Question 3. First, assume this is a one-time game. Explain how the $60/$57 outcome might be achieved through a credible threat. Next, assume this is a repeated game, not a one-time game, such that the interaction between the two firms occurs
7. Is the game shown in Figure 13-3 a zero-sum game or a positive-sum game? How can you tell? Are there dominant strategies in this game? If so, what are they? What cell represents a Nash equilibrium and why? Explain why it is so difficult for Uptown and RareAir to achieve and maintain a more
6. Advanced Analysis Construct a game theory matrix involving two firms and their decisions on high versus low advertising budgets and the effects of each decision on profits. Show a circumstance in which both firms select high advertising budgets even though both would be more profitable with low
5. Why is there so much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? Why might it be excessive at times? [LO13.4]
4. Why might price collusion occur in oligopolistic industries?Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate why price leadership is legal in Canada, whereas price fixing is not. [LO13.3]
3. Explain the general meaning of the following payoff matrix for oligopolists X and Y. All profit figures are in thousands.[LO13.2]
2. Answer the following questions, which relate to measures of concentration: [LO13.1]a. What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of concentration ratios as measures of monopoly power?b. Suppose that the five firms in industry A
1. Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition? [LO13.1]
Question Why have tech firms with near-monopolies in their own sectors sought to compete with tech firms that have extremely strong, near-monopoly positions in other sectors?
LO13.5 Discuss the efficiency of oligopoly from society’s standpoint and whether it is more or less efficient than monopoly.LO13.6 Utilize additional game-theory terminology and demonstrate how to find Nash equilibriums in both simultaneous and sequential games.
LO13.4 Contrast the potential positive and potential negative effects of advertising.
LO13.3 Explain the two main models of oligopoly pricing and output: collusive pricing and price leadership.
LO13.2 Discuss how game theory relates to oligopoly.
LO13.1 Describe the characteristics of oligopoly.
3. Suppose that an monopolistically competitive restaurant is currently serving 230 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $12 per meal. What is the size of this firm’s profit or loss? Will there be entry or exit? Will
2. Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers in your area? In that same situation, what
1. Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold) 23, 22, 18, 12, 11, 8, and 6 percent. What is the four-firm concentration ratio of the hamburger industry in this town? What is the Herfindahl index
3. Which of the following best describes the efficiency of monopolistically competitive firms? [LO12.3]a. Allocatively efficient but productively inefficientb. Allocatively inefficient but productively efficientc. Both allocatively efficient and productively efficientd. Neither allocatively
2. In the small town of Geneva, there are 5 firms that make watches. The firms’ respective output levels are 30 watches per year, 20 watches per year, 20 watches per year, 20 watches per year, and 10 watches per year. The four-firm concentration ratio for the town’s watch-making industry is
1. There are 10 firms in an industry, and each firm has a market share of 10 percent. The industry’s Herfindahl index is [LO12.1]a. 10b. 100c. 1000d. 10,000
5. Critically evaluate and explain the following statements:[LO12.2]a. “In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid reason to criticize the performance and efficiency of such industries.”b. “In the long run,
4. “Competition in quality and service may be just as effective as price competition in giving buyers more for their money.” Do you agree? Why? Explain why monopolistically competitive firms frequently prefer nonprice competition to price competition. [LO12.2]
3. “Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point.” Explain. [LO12.2]
2. Compare the elasticity of a monopolistic competitor’s demand with that of a perfectly competitive firm and a monopolist.Assuming identical long-run costs, compare graphically the prices and outputs that would result in the long run under perfect competition and under monopolistic competition.
1. How does monopolistic competition differ from perfect competition in its basic characteristics? From monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn,
4. Which of the following pairs are both competition-like elements in monopolistic competition?a. Price exceeds MR (standardized product).b. Entry is relatively easy (only a normal profit in the long run).c. Price equals MC at the profit-maximizing output(economic profits are likely in the long
3. The firm represented by Figure 12-2c isa. Making a normal profitb. Incurring a loss, once opportunity costs are consideredc. Producing at the same level of output as a perfectly competitive firmd. Producing a standardized product(p. 18)
2. Price exceeds ATC ina. Graph (a) onlyb. Graph (b) onlyc. Graphs (a) and (b) onlyd. Graphs (a), (b), and (c)(p. 18)
LO12.4 Relate how the ability of monopolistic competition to deliver product differentiation helps to compensate for its failure to deliver economic efficiency.
LO12.3 Explain why monopolistic competition delivers neither productive nor allocative efficiency.
LO12.2 Explain why monopolistic competitors earn only a normal profit in the long run.
LO12.1 List the characteristics of monopolistic competition.
5. Suppose you have been tasked with regulating a single monopoly firm that sells 50-kilogram bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of $1 per bag no matter how many bags are produced.[LO11.7]a. If this firm kept on increasing its output level, would
4. A new production technology for making vitamins is invented by a university professor who decides not to patent it. Thus, it is available for anybody to copy and put into use. The TC per bottle for production up to 100,000 bottles per day is given in the following table. [LO11.6]
3. Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs included a normal profit. [LO11.6]a. What is ATC per unit
2. Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers. The first group is described by the demand and revenue data that you developed for Problem 1. The demand and revenue data for the second group of buyers is shown in the table below. Assume that MC
1. Suppose a monopolist is faced with the demand schedule shown below and the same cost data as the competitive producer discussed in Problem 4 at the end of Chapter 9. Calculate the missing total-revenue and marginal-revenue amounts, and determine the profit-maximizing price and profit-maximizing
7. The main problem with imposing the socially optimal price(P = MC) on a monopoly is that the socially optimal price is that it [LO11.7]a. May be so low that the regulated monopoly can’t break evenb. May cause the regulated monopoly to engage in price discriminationc. May be higher than the
6. The socially optimal price (P = MC) is socially optimal because [LO11.7]a. It reduces the monopolist’s profitb. It yields a normal profitc. It minimizes ATCd. It achieves allocative efficiency
5. Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices.In order to maximize profit, the monopolist should charge a higher price to the group that has [LO11.66]a. The higher elasticity of demandb. The lower elasticity of demandc.
4. How often do perfectly competitive firms engage in price discrimination? [LO11.656]a. Neverb. Rarelyc. Oftend. Always
3. Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot the demand, total-revenue, and marginal-revenue curves, and explain the relationships among them. Explain why the marginal revenue of the fourth unit of output is $3.50, even though its
2. The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is [LO11.345]a. Also horizontalb. Upslopingc. Downslopingd. It depends
1. Which of the following could explain why a firm is a monopoly? Select one or more answers from the choices shown. [LO11.236]a. Patentsb. Economies of scalec. Inelastic demandd. Government licensese. Downsloping market demand
9. It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. Is this proposal as socially desirable as
8. Explain in words and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginal-cost) pricing and (b) fair-return (average-total-cost) pricing. What is the“dilemma of regulation”? [LO11.76]
7. U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, including Canada, depending on elasticity of demand and governmentimposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing the re-importation of drugs
6. Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text. Will the author and the publisher want to charge the same price for the text? Explain. [LO11.569]
5. Critically evaluate and explain the following statements:[LO11.574]a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.b. The monopolist seeks the output that will yield the greatest per-unit
4. Assume that a monopolist and a perfectly competitive firm have the same unit costs. Contrast the two with respect to(a) price, (b) output, (c) profits, (d) allocation of resources, and(e) impact on income transfers. Since both monopolists and competitive firms follow the MC = MR rule in
3. How does the demand curve faced by a monopolistic seller differ from that confronting a perfectly competitive firm? Why does it differ? Of what significance is the difference? Why is the monopolist’s demand curve not perfectly inelastic?[LO11.369]
2. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly.Which barriers, if any, do you believe give rise to monopoly that is socially justifiable? [LO11.214]
1. “No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then monopoly does not exist.” Do you agree? Explain. How might you use Chapter 6’s concept of cross elasticity of demand to judge whether monopoly exists? [LO11.16]
4. At this monopolist’s profit-maximizing outputa. Price equals marginal revenueb. Price equals marginal costc. Price exceeds marginal costd. Profit per unit is maximized(p. 18)
3. This monopolista. Charges the highest price it can getb. Earns only a normal profit in the long runc. Restricts output to create an insurmountable entry barrierd. Restricts output to increase its price and total economic profit(p. 18)
2. The area labelled “Economic profit” can be found by multiplying the difference between P and ATC by quantity. It also can be found bya. Dividing profit per unit by quantityb. Subtracting total cost from total revenuec. Multiplying the coefficient of demand elasticity by quantityd.
1. The MR curve lies below the demand curve in this figure becausea. The demand curve is linear (a straight line)b. The demand curve is highly inelastic throughout its full lengthc. The demand curve is highly elastic throughout its full lengthd. The gain in revenue from an extra unit of output is
LO11.7 Distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly?
LO11.6 Describe why a monopolist might prefer to charge different prices in different markets.
LO11.5 Discuss the economic effects of monopoly.
LO11.4 Explain how a monopolist sets its maximizing output and price.
LO11.3 Explain how demand is seen by a monopolist.
LO11.2 List and explain the barriers to entry that shield monopolies from competition.
LO11.1 List the characteristics of monopoly.
3. There are 300 farms in the perfectly competitive local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested. What is their percentage rate of return? The other two dairies have a cost structure that generates profits of $22 for
2. A firm in a perfectly competitive industry is currently producing 1000 units per day at a total cost of $450. If it produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275. What is the firm’s ATC per unit at these three
1. A firm in a perfectly competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders. What is its percentage rate of return? Is it earning an economic profit? If so, how large? Will this
5. Suppose that firms in a perfectly competitive industry producing cashews discover that P exceeds MC. Is their combined output of cashews too little, too much, or just right to achieve allocative efficiency? In the long run, what will happen to the supply of cashews and the price of cashews? Use
4. Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium. Assuming constant costs, employ these diagrams to show how (a) an increase and (b) a decrease in market demand will upset that long-run equilibrium. Trace graphically and describe in
3. Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases.If the mobile phone industry features perfect competition, we would expect the long-run supply curve for mobile phones to be [LO10.374]a. Upslopingb. Downslopingc. Horizontald.
2. Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you
1. When discussing perfect competition, the term long run refers to a period of time long enough to allow [LO10.16]a. Firms already in an industry to either expand or contract their capacitiesb. New firms to enter or existing firms to leavec. Both (a) and (b)d. None of the above
6. “Ninety percent of new products fail within two years—so you shouldn’t be so eager to innovate.” Do you agree? Explain why or why not. [LO10.547]
5. The basic model of perfect competition reviewed in this chapter finds that in the long run all firms in a perfectly competitive industry will earn normal profits. If all firms will only earn a normal profit in the long run, why would any firms bother to develop new products or lower-cost
4. In long-run equilibrium, P = minimum ATC = MC. Of what significance for economic efficiency is the equality of P and minimum ATC? The equality of P and MC? Distinguish between productive efficiency and allocative efficiency in your answer. [LO10.43]
3. How do the entry and exit of firms in a perfectly competitive industry affect resource flows and long-run profits and losses? [LO10.269]
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