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microeconomics principles applications

Microeconomics Theory And Applications With Calculus 4th Global Edition Jeffrey M. Perloff - Solutions

3.12 Spam imposes significant negative externalities on e-mail users (see the Application “Spam: A Negative Externality”). If the sender had to pay a small fee for each e-mail, would the extent and impact of this negative externality decline? What effect would such a charge have on the net
*3.11 Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively high or a relatively low MB curve, so its expected MB curve is the same as the one in Figure
3.10 If global warming occurs, output of three of the major U.S. cash crops could decline by as much as 80% according to Roberts and Schlenker (2012).Crop yields increase on days when the temperature rises above 50°, but fall precipitously on days when it is above 86°. Given this relationship
3.9 Connecticut announced that commercial fleet operators would get a tax break if they converted vehicles from ozone-producing gasoline to what the state said were cleaner fuels such as natural gas and electricity. For every dollar spent on the conversion of their fleets or building alternative
*3.8 Suppose that the inverse market demand curve for cloth is p = 150 - 2Q, the private marginal cost (unregulated competitive market supply) is MCp = 75 + Q, and the private marginal damage from pollution is MCd = 2Q.a. What is the unregulated competitive equilibrium quantity and price?b. What is
3.7 In Figure 17.3, the government may optimally regulate the paper market by taxing output. Given that the output tax remains constant, what are the welfare implications of a technological change that drives down the private marginal cost of production?
3.6 In Figure 17.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?
*3.5 In the paper mill example in this chapter, what are the optimal emissions fee and the optimal tax on output (assuming that only one fee or tax is applied)?
3.4 In 1998, the National Highway Traffic Safety Administration distributed the film Without Helmet Laws, We All Pay the Price. Two reasons for this title are that some injured motorcyclists are treated at public expense (Medicaid) and that the dependents of those killed in accidents receive public
3.3 The European Union (EU) emissions trading system is a cap-and-trade system for reducing industrial greenhouse gas emissions (negative externalities) to combat climate change. The cap limits the amount of certain greenhouse gases that can be emitted and is reduced over time so that total
3.2 Markowitz (2012) found that limiting the number of liquor stores reduces crime. To maximize welfare taking into account the harms associated with alcohol sales, how should a regulatory agency set the number of liquor licenses? Should the profit maximizing owner of a liquor store lobby for or
3.1 Various countries including Australia, Ireland, and the United States require that firms sell more fuelefficient light bulbs (such as compact fluorescent bulbs) instead of incandescent light bulbs. These restrictions were designed to reduce carbon and global warming. What alternative approaches
2.5 More than four times as many antibiotics are used to promote growth and prevent disease in animals than for human use (Teillant and Laxminarayan, 2015).The extensive use of antibiotics in livestock contributes to the increase in drug-resistant pathogens in animals that might be transmitted to
2.4 Applying the model in Exercise 2.3, use calculus to determine the optimal level of H. M
2.3 Let H = G - G be the amount that gunk, G, is reduced from the competitive level, G. The benefit of reducing gunk is B(H) = AHα. The cost is C(H) = Hβ. If the benefit is increasing but at a diminishing rate as H increases, and the cost is rising at an increasing rate, what are the possible
2.2 In Figure 17.1, explain why area D + E + H is the externality cost difference between the social optimum and the private equilibrium.
2.1 Why isn’t zero pollution the best solution for society? Can society have too little pollution? Why or why not?
1.5 Sporting events like the Tour de France, the FIFA World Cup, or the Jungfrau Marathon distract employees from the work at hand. In this context, would these events be examples of negative externalities that affect productivity? Explain.
1.4 Other sports teams benefit financially from playing a team with a superstar whom fans want to see. Do such positive externalities lower social welfare? If not, why not? If so, what could the teams do to solve that problem?
1.3 In 2009, when the world was worried about the danger of the H1N1 influenza virus (swine flu), Representative Rosa DeLauro and Senator Edward Kennedy proposed the Healthy Families Act in Congress to guarantee paid sick days to all workers (Ellen Wu and Rajiv Bhatia, “A Case for Paid Sick
1.2 When Star Wars Episode III: Revenge of the Sith opened at 12:01 a.m., Thursday, May 19, 2005, the most fanatical Star Wars fans paid $50 million for tickets to stay up until 3:00 to 4:00 a.m. Businesses around the country, especially those tied to hightech industries, suffered reduced
1.1 According to a study in the New England Journal of Medicine, your friendships or “social networks”are more likely than your genes to make you obese(Jennifer Levitz, “Can Your Friends Make You Fat?”Wall Street Journal, July 26, 2007, D1). If it is true that people who have overweight
6.1 Suppose EuroGas contracts LifeLine, who will be fully liable for damages from any oil spills, to construct a €800 million pipeline. The legal liabilities are€1,600 million, and the probability of an oil spill is δ.a. What value of δ would make a risk-neutral LifeLine indifferent between
5.5 Is someone who acts as described in prospect theory always more likely or less likely to take a gamble than someone who acts as described by expected utility theory? Why? What conditions (such as on the weights), if any, allow you to answer this question definitively?
5.4 Evan is risk-seeking with respect to gains and riskaverse with respect to losses. Louisa is risk-seeking with respect to losses and risk-averse with respect to gains.Illustrate both utility functions. Which person’s attitudes toward risk are consistent with prospect theory?
5.3 Draw an individual’s utility curve to illustrate that the person is risk-averse with respect to a loss but is risk-preferring with respect to a gain.
5.2 What are the major differences between expected utility theory and prospect theory?
5.1 Before reading the rest of this exercise, answer the following two questions about your preferences:a. You are given $5,000 and offered a choice between receiving an extra $2,500 with certainty or flipping a coin and getting $5,000 more if heads or $0 if tails. Which option do you prefer?b. You
4.5 In Solved Problem 16.6, advertising increases the probability of high demand to 80%. What is the minimum probability of high demand resulting from advertising such that Gautam decides to invest and advertise? M
4.4 Robert Green repeatedly and painstakingly applied herbicides to kill weeds that would harm his beet crops in 2007. However, in 2008, he planted beets genetically engineered to withstand Monsanto’s Roundup herbicide. Roundup destroys weeds but leaves the crop unharmed, thereby saving a farmer
4.3 Use a decision tree to illustrate how a kidney patient would decide whether to have a transplant operation.The patient currently uses a dialysis machine, which lowers her utility. If the operation is successful, her utility will return to its level before the onset of her kidney disease.
4.2 Use a decision tree to illustrate how a risk-neutral plaintiff in a lawsuit decides whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 60%. If the plaintiff
*4.1. Andy and Kim live together. Andy may invest $10,000(possibly by taking on an extra job to earn the additional money) in Kim’s MBA education this year. This investment will raise the current value of Kim’s earnings by $24,000. If they stay together, they will share the benefit from the
3.6 How does the expectation that the government will offer subsidies for future major disasters affect the probability that risk-averse people will buy insurance and the amount they buy? Let the utility function for a risk-averse person be U(W) = 3W0.6 and the probability of a house being
3.5 Using information in the Application “Flight Insurance,” show how to calculate the price of fair insurance if the probability of being in a crash were as high as the frequency in 2001, 0.00000077? Use a graph to illustrate why a risk-averse person might buy unfair insurance. Show on the
3.4 An insurance agent (interviewed in Jonathan Clements, “Dare to Live Dangerously: Passing on Some Insurance Can Pay Off,” Wall Street Journal, July 23, 2005, D1) states, “On paper, it never makes sense to have a policy with low deductibles or carry collision on an old car.” But the agent
3.3 Angus bought a £3,500 home theater system and is considering purchasing an extended warranty to insure it fully against defects for an additional three years. If the probability that his system will malfunction during the extended period is 5%, his utility function is U(W) = 2W0.5, and the
3.2 Helen, the owner of Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn’t sued, the firm expects to earn a profit of 100, but if it is successfully sued, its profit will be 10. Helen believes that the probability of a successful suit is 5%.If fair
3.1 Lori, who is risk averse, has two pieces of jewelry, each worth $1,000. She plans to send them to her sister’s firm in Thailand, which will sell it there. She is concerned about the safety of shipping them. She believes that the probability that any box shipped will not reach its destination
2.14 Based on the information in the Application “Gambling,” provide at least three reasons why many riskaverse people gamble in casinos.
2.13 Carolyn and Sanjay are neighbors. Each owns a car valued at $10,000. Neither has comprehensive insurance (which covers losses due to theft). Carolyn’s wealth, including the value of her car is $80,000.Sanjay’s wealth, including the value of his car is$20,000. Carolyn and Sanjay have
2.12 Suppose that Irma’s utility function with respect to wealth is U(W) = 100 + 100W - W2. Show that for W 6 10, Irma’s Arrow-Pratt risk-aversion measure increases with her wealth. (Hint: See Solved Problem 16.4.) M
2.11 Andrew is between terms at school and is considering three options for a short-term job: doing yard work in an affluent neighborhood, doing yard work in a less affluent neighborhood, and being a sales associate at a local grocery store. Given the possible incomes he might get in each job, as
2.10 Lisa just inherited a vineyard from a distant relative.In good years (with no rain or frost during harvest season), she earns $100,000 from the sale of grapes from the vineyard. If the weather is poor, she loses$20,000. Lisa’s estimate of the probability of good weather is 60%.a. Calculate
2.9 Would risk-neutral people ever buy insurance that was not fair (that was biased against them)? Explain.
2.8 Mary’s utility function is U(W) = W0.33, where W is wealth. Is she risk averse? Mary has an initial wealth of $27,000. How much of a risk premium would she require to participate in a gamble that has a 50%probability of raising her wealth to $29,791 and a 50% probability of lowering her
*2.7 Hugo has a concave utility function of U(W) = W0.5.His only asset is shares in an Internet start-up company. Tomorrow he will learn the stock’s value. He believes that it is worth $144 with probability 2 3 and$225 with probability 1 3. What is his expected utility?What risk premium would he
2.6 In Solved Problem 16.3, what is Jen’s risk premium if her utility function were ln(W)? M
*2.5 Given the information in Solved Problem 16.2, Irma prefers to buy the stock. Show graphically how high her certain wealth would have to be for her to choose not to buy the stock.
2.4 Suppose Adriana is risk-averse and has a concave utility function U(W) = 2W, where W is wealth.She is offered €10,000 for an original painting she owns. Before agreeing to sell it, she has decided to have an expert appraise its value. The appraiser’s estimate may have two equally likely
*2.3 Jen, in Exercise 2.2, may buy Stock A or Stock B.Stock A has a 50% chance of being worth $100 and 50% of being worth $200. Stock B’s value is $50 with a chance of a half or $250 with a probability of 50%. Show that the two stocks have an equal expected value but different variances. Show
2.2 Jen’s utility function with respect to wealth is U(W) = 2W. Plot her utility function. Use your figure and calculus to show that Jen is risk averse.(Hint: You can also use calculus to see if she is risk averse by determining the sign of the second derivative of the utility function.) M
2.1 Guojun offers to bet Kristin that if a six-sided die comes up with one or two dots showing, he will pay her $3, but if it comes up with any other number of dots, she’ll owe him $2. Is that a fair bet for Kristin? M
1.7 Suppose that most people will not speed if the expected fine is at least $500. The actual fine for speeding is$800. How high must the probability of being caught and convicted be to discourage speeding? M
*1.6 To discourage people from breaking the traffic laws, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the fine for speeding. Explain why either method can be used to discourage speeding. Which approach is a
1.4 The EZ Construction Company is offered a $20,000 contract to build a new deck for a house. The company’s profit if they do not have to sink piers (vertical supports) down to bedrock will be $4,000. However, if they have to sink the piers, they will lose $1,000.The probability they will have
*1.3 Tarini wants to buy an apartment for investment purposes. It has an 80% chance of being worth 1,700,000 rupees ($25,400) within a year and a 20% probability of it being worth 1,600,000 rupees($23,906). What are the expected value and the variance of the purchase? M
*1.2 Asa buys a painting. With a 20% probability, the artist will become famous and the painting will be worth $1,000. With a 10% probability, a fire will destroy the painting so that it becomes worthless. If the painting is not destroyed and the artist does not become famous, it will be worth
1.1 Georg travels regularly (260 times per year) from the center of the city where he works to his home in an outlying area. When the traffic lights “cooperate” (all show green), it takes him only 23 minutes to arrive at his destination, but it can take as long as 1 hour if they do not. Over
4.4 In 2012, the Clarkson Community Schools in Clarkson, Michigan, paid its starting teachers$38,087 with a bachelor’s degree and $41,802 with a master’s degree. (For simplicity, assume that these salaries stay constant and do not increase with experience.) Suppose you know that you want to
4.3 Which is worth more to you: (a) a $10,000 payment today or (b) a $1,000-per-year higher salary for as long as you work? At what interest rate would (a)be worth more to you than (b)? Does your answer depend on how many years you expect to work?
4.2 At current interest rates, it pays for Bob to go to college if he graduates in four years. If it takes an extra year to graduate from college, does going to college still pay? Show how the figure in the Challenge Solution changes. Illustrate how the present value calculation changes using a
4.1 If the interest rate is near zero, should an individual go to college, given the information in the figure in the Challenge Solution? State a simple rule for determining whether this individual should go to college in terms of the areas labeled “Benefit” and “Cost”in the figure.
3.3 Trees, wine, and cattle become more valuable over time and then possibly decrease in value. Draw a figure with present value on the vertical axis and years(age) on the horizontal axis and show this relationship. Show in what year the owner should “harvest”such a good assuming that the cost
3.2 If all the coal in the ground, Q, is to be consumed in two years and the demand for coal is Qt = A(pt)e in each year t where e is a constant demand elasticity, what is the price of coal each year? M
3.1 You can sell a barrel of oil today for p dollars.Assuming no inflation and no storage cost, how high would the price have to be next year for you to sell the oil next year rather than now? M
2.20 In the figure in Solved Problem 15.5, suppose that the government’s demand curve remains constant at Dg 1 but the government starts to tax private earnings, collecting 1% of all interest earnings. How does the capital market equilibrium change? What is the effect on private borrowers?
2.19 If the government bars foreign lenders from loaning money to its citizens, how does the capital market equilibrium change?
2.18 Suppose a group of investors is considering purchasing a Norwegian firm for 650 million krone. The net income of the firm in 2016 was 20 million krone and financial analysts expect this level of profitability (adjusted for inflation) to continue indefinitely.Calculate the internal rate of
2.17 What would the net present value be in Solved Problem 15.3 if the interest rate were 3% instead of 2%? M
*2.16 Your gas-guzzling car gets only 10 miles to the gallon and has no resale value, but you are sure that it will last five years. You know that you can always buy a used car for $8,000 that gets 20 miles to the gallon. A gallon of gas costs $2 and you drive 6,000 miles a year. If the interest
2.15 According to the Associated Press, in 2015, Max Scherzer became the highest-paid right-handed pitcher in major league history by agreeing to a“$210 million, seven-year contract” with the Washington Nationals that includes a “record $50 million signing bonus.” Reportedly, he will be
2.14 Dell Computer makes its suppliers wait 37 days on average to be paid for their goods; however, Dell is paid by its customers immediately. Thus, Dell earns interest on this float, the money that it is implicitly borrowing. If Dell can earn an annual interest rate of 4%, what is this float worth
2.13 Suppose you work for a company that is downsizing its operations in order to increase its profitability. As part of this process, the company decides to offer an incentive to some of its employees to take early retirement. Specifically, for employees who have been with the company for at least
*2.12 A firm is considering an investment in which its cash flow is π1 = $1 (million), π2 = -$12, π3 = $20, and πt = 0 for all other t. The interest rate is 7%.Use the net present value rule to determine whether the firm should make the investment. Can the firm use the internal rate of return
2.11 At a 10% interest rate, do you prefer to buy a phone for $100 or to rent the same phone for $10 a year?Does your answer depend on how long you think the phone will last? M
2.10 If you spend $4 a day on a latte (in real dollars) for the rest of your life (essentially forever), what is your present discounted value at a 3% interest rate? M
2.9 If a person were to say that the total cost of tuition to complete a university education is about £ 20,000, or £ 5,000 per year for each of 4 years, what could you deduce about this person’s discount rate?
2.8 You are buying a new $20,000 car and have the option to pay for the car with a 0% loan or to receive $500 cash back at the time of the purchase.With the loan, you pay $5,000 down when you purchase the car and then make three $5,000 payments, one at the end of each year of the loan. You
*2.7 A contractor is deciding whether to work for Firm A or Firm B. Firm A is offering €20,000 for her services, which she will receive one year from today when the work has been completed.Firm B is offering to pay €11,000 in one year and another €9,400 in two years. If the discount rate is
2.6 You want to buy a room air conditioner. The price of one machine is $200. It costs $20 a year to operate.The price of another air conditioner is $300, but it costs only $10 a year to operate. Assuming that both machines last 10 years, which is a better deal? (Do you need to do extensive
2.5 You plan to buy a used refrigerator this year for$200 and to sell it when you graduate in two years.Assuming that you can get $100 for the refrigerator at that time, the rate of inflation is zero, and the interest rate is 5%, what is the true cost (your current outlay minus the resale value in
2.4 Many new products being produced today use less electricity than in the past. Suppose you are told that you could save 2,630 pesos per year by using less electricity if you replace your current refrigerator, which you expect to last another six years, with a new model. The cost of the new model
2.3 How much money do you have to put into a bank account that pays 10% interest compounded annually to receive annual payments of $200? M
2.2 Igor wants to lease a new Lada car. He pays 10,000 rubles upfront and 5,000 rubles each year for two years. What is the present value of these payments at a 3% rate of interest? What is the present value if the interest rate is 2%? Compare the two calculations. M
*2.1 How does an individual with a zero discount rate compare current and future consumption? How does your answer change if the discount rate is infinite?
1.15 An economic consultant explaining the effect on labor demand of increasing health care costs, interviewed for the Wall Street Journal’s Capital column(David Wessel, “Health-Care Costs Blamed for Hiring Gap,” March 11, 2004, A2), states, “Medical costs are rising more rapidly than
1.14 In Solved Problem 15.2, show how the results change if the share of workers killed by the Black Death was one-half.
1.13 What is a monopoly’s demand for labor if it uses a fixed-proportions production function in which each unit of output takes one unit of labor and one unit of capital?
1.12 Does a shift in the supply curve of labor have a greater effect on wages if the output market is competitive or if it is monopolistic? Explain.
1.11 How does a monopoly’s demand for labor shift if a second firm enters its output market and the result is a Cournot duopoly equilibrium?
1.9 Suppose that a firm’s production function is q = L + K. Can it be a competitive firm? Why?1.10 A monopoly with a Cobb-Douglas production function, Q = (Lρ + Kρ)1/ρ, faces a constant elasticity demand curve. What is its marginal revenue product of labor? M
*1.8 A competitive firm has a constant elasticity production function, q = (Lρ + Kρ)1/ρ. What is its marginal revenue product of labor? q = (Lρ + Kρ)1/ρ
1.6 Show that the quantity of labor or capital that a firm demands decreases with a factor’s own factor price and increases with the output price when the production function is Cobb-Douglas as in Equations 15.12 and 15.13. M 1.7 If the Cobb-Douglas production function for a European firm is q =
1.5 Georges, the owner of Maison d’Ail, earned his coveted Michelin star rating by smothering his dishes in freshly minced garlic. Georges knows that he can save labor costs by using less garlic, albeit with a reduction in quality. If Georges puts g garlic cloves in a dish, the dish’s quality,
1.4 Oil companies, prompted by improvements in technology and increases in oil prices, are drilling in deeper and deeper water. Using a marginal revenue product and marginal cost diagram of drilling in deep water, show how improvements in drilling technology and increases in oil prices result in
1.3 How does a fall in the rental price of capital affect a firm’s demand for labor in the long run?
*1.2 If a local government starts collecting an ad valorem tax of α on the revenue of a competitive firm (and all other firms are located outside this jurisdiction), what happens to the firm’s demand curve for labor?(Hint: See Solved Problem 15.1.)
7.2 Using the Challenge Solution’s mathematical model, how much does Firm 1’s profit (ignoring the subsidy)change as the subsidy, s, increases?
7.1 In the Challenge Solution’s mathematical model, how much does Firm 1’s best-response curve shift as the subsidy, s, increases?

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