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microeconomics principles applications
Microeconomics Private And Public Choice 16th Edition James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson - Solutions
*Will political of cials be more likely to channel funds into wealth-creating projects than private investors and entrepreneurs?Why or why not? Discuss.
“In a world of uncertainty, it is important that entrepreneurs be able to introduce new products and try out innovative ideas. But it is also important that unproductive projects be brought to a halt.” Evaluate this statement.
*Suppose that you are considering whether to enroll in a summer computer-training program that costs $2,500. If you take the program, you will have to give up $1,500 of earnings from your summer job. You gure that the program will increase your earnings by $500 per year for each of the next ten
Suppose you are moving into a new apartment you expect to rent for ve years. The owner of the apartment offers to provide you with a used refrigerator for free and promises to maintain and repair the refrigerator during the next ve years.You also have the option of buying a new energy-ef cient
*According to a news item, the owner of a lottery ticket paying$3 million over twenty years is offering to sell the ticket for $1.2 million cash now. “Who knows?” the ticket owner explained. “We might not even be here in 20 years, and I do not want to leave it to the dinosaurs.”a. If the
*Some countries with very low incomes per capita are unable to save very much. Are people in these countries helped or hurt by people in high-income countries with much higher rates of saving?
*Alicia’s philosophy of life is summed up by the proverb “A penny saved is a penny earned.” She plans and saves for the future. In contrast, Mike’s view is “Life is uncertain; eat dessert rst.” Mike wants as much as possible now.a. Who has the highest rate of time preference?b. Do
Suppose you are contemplating the purchase of a commercial lawn mower at a cost of $10,000. The expected lifetime of the machine is three years. You can lease the asset to a local business for $4,000 annually (payable at the end of each year)for three years. The lessee is responsible for the upkeep
*If the money rate of interest on a low-risk government bond is 10 percent and the in ation rate for the last several years has been steady at 4 percent, what is the estimated real rate of interest?
The interest rates charged on outstanding credit card balances are generally higher than the interest rate that banks charge customers with a good credit rating. Why do you think the credit card rate is so high? Should the government impose an interest rate ceiling of, say, 10 percent? If it did,
*Over long periods of time, the rate of return of an average investment in the stock market has exceeded the return on high-quality bonds. Is the higher return on stocks surprising?Why or why not?
In a market economy, investors have a strong incentive to undertake pro table investments. What makes an investment pro table? Do pro table investments create wealth? Why or why not? Do all investments create wealth? Discuss.
*A lender made the following statement to a borrower:“You are borrowing $1,000, which is to be repaid in twelve monthly installments of $100 each. Your total interest charge is $200, which means your interest rate is 20 percent.” Is the effective interest rate on the loan really 20 percent?
How are human and physical capital investment decisions similar? How do they differ? What determines the pro tability of a physical capital investment? Do human capital investors make pro ts? If so, what is the source of the pro t? Explain.
What is capital investment? Why do business rms often use machinery and other capital assets to produce goods and services?
*How would the following changes in uence the rate of interest in the United States?a. an increase in the share of the population in age groups with a high saving rateb. an increase in government borrowing to nance budget de citsc. an increase in domestic in ationd. increased uncertainty about a
If an individual is motivated primarily by the desire to make money, will he or she have an incentive to be helpful to others?Will he or she have an incentive to develop skills that others value highly? Why or why not?
“Technological change eliminates thousands of jobs every year. Unless something is done to slow the growth of technology, ordinary workers will face a bleak future of low wages and high unemployment.” Explain why you either agree or disagree with this statement.
*Consider two occupations (A and B) in which people have the same skills and abilities. When employed, workers in the two occupations work the same number of hours per day. In occupation A, employment is stable throughout the year, whereas employment in B is characterized by seasonal layoffs. In
Other things being constant, how will the following in uence the hourly earnings of employees? Explain your answer.a. The employee must work the midnight to 8:00 .. shift.b. The job involves split shifts (work three hours, off two hours, work three additional hours, and so on).c. The employer
*“If individuals had identical abilities and opportunities, earnings would be equal.” Is this statement true or false?
People who have invested heavily in human capital (for example, lawyers, doctors, and even college professors) generally have higher wages, but they also generally work more hours than other workers. Can you explain why?
“If Jones has a skill that is highly valued, she will be able to achieve high market earnings. In contrast, Smith may work just as hard or even harder and still earn only a low income.”a. Does hard work necessarily lead to a high income?b. Why are the incomes of some workers high and others
*“Jobs are the key to economic progress. Unless we create more jobs, our standard of living will fall.” Is this statement true or false? Explain.
Is there a relationship between the growth of productivity and changes in wage rates? Can higher earnings be achieved without higher productivity? Why or why not? Discuss.
a. If minority employees are discriminated against, how will this affect their earnings? Use supply and demand analysis to explain your answer.b. If the average earnings differ between two groups of employees (for example, whites and blacks), does this mean that the group with the lower earnings is
Indicate the major sources of earnings differences between(a) a lawyer and a minister; (b) an accountant and an elementary school teacher; (c) a business executive and a social worker;(d) a country lawyer and a Wall Street lawyer; (e) an experienced, skilled craftsperson and a 20-year-old high
*Why are real wages in the United States higher than in other countries? Is the labor force itself responsible for the higher wages of American workers? Explain.
Why do some people earn higher wages than others? Why are wages in some occupations higher than in others? How do wage differentials in uence the allocation of resources?Explain.
A recent yer on a university campus stated that consumers should boycott sugar due to the low wages earned by laborers on sugar cane farms in Florida. Using the notion of derived demand, what impact would a boycott on sugar have on the wages of the farm laborers in the short run? In the long run?
Leisure Times, Inc., employs skilled workers and capital to install hot tubs. The capital includes the tools and equipment workers use to construct and install the tubs. The installation services are sold in a competitive market for $1,200per hot tub. Leisure Times is able to hire workers for
*The following chart provides information on a rm that hires labor competitively and sells its product in a competitive market.a. Fill in the missing columns.b. How many units of labor would be employed if the market wage rate were $40? Why?c. What would happen to employment if the wage rate rose
Other things constant, what impact will a highly elastic demand for a product have on the elasticity of demand for the resources used to produce the product? Explain.
“The earnings of engineers, doctors, and lawyers are high because lots of education is necessary to practice in these elds.” Evaluate this statement.
A rm is considering moving from the United States to Mexico. The rm pays its U.S. workers $12 per hour. Current U.S. workers have a marginal product of forty, whereas the Mexican workers have a marginal product of ten. How low would the Mexican wage have to be for the rm to reduce its wage cost
*A dressmaker uses labor and capital (sewing machines) to produce dresses in a competitive market. Suppose the last unit of labor hired cost $1,000 per month and increased output by 100 dresses. The last unit of capital hired (rented) cost$500 per month and increased output by 80 dresses. Is the
Suppose that you were the manager of a large retail store that was currently experiencing a shoplifting problem.Every hour, approximately $15 worth of merchandise was being stolen from your store. Suppose that a security guard would completely eliminate the shoplifting in your store. If you were
*Many school districts pay teachers on the basis of their highest degree earned and number of years of service (seniority).They often nd it quite easy to ll the slots for English and history teachers, but very dif cult to nd the required number of math and science teachers. Can you explain why?
Are the following statements both correct? Are they inconsistent with each other? Explain.a. “Firms will hire a resource only if they can make money by doing so.”b. “In a market economy, each resource will tend to be paid according to its marginal product. Highly productive resources will
*Are productivity gains the major source of higher wages?If so, how does one account for the rising real wages of barbers, who, by and large, have used the same techniques for a half-century? (Hint: Do not forget opportunity cost and supply.)
*Use the information in Exhibit 4 of this chapter to answer the following:a. How many employees (operators) would Compute-Accounting hire at a weekly wage of $250 if it were attempting to maximize pro ts?b. What would the rm’s maximum pro t be if its xed costs were $1,500 per week?c. Suppose
How does a rm decide whether or not to employ an additional unit of a resource? What determines the combination of skilled and unskilled workers employed by a rm?
“The demand for resources is a derived demand.” What is meant by that statement? Why is the employment of a resource inversely related to its price?
The accompanying diagram shows demand and long-run cost conditions in an industry.a. Explain why the industry is likely to be monopolized.b. Indicate the price that a pro t-maximizing monopolist would charge and label it P.c. Indicate the monopolist’s output level and label it Q.d. Indicate the
Suppose that you produce and sell children’s tables in a local market. Past experience enables you to estimate your demand and marginal cost schedules. This information is presented in the accompanying table.a. Fill in the missing revenue and cost schedules.b. Assuming you are currently charging
Gouge-em Cable Company is the only cable television service company licensed to operate in Backwater County. Most of its costs are access fees and maintenance expenses. These xed costs total $640,000 monthly. The marginal cost of adding another subscriber to its system is constant at $2 per
*“My uncle just bought 1,000 shares of Apple, one of the largest and most pro table companies in the United States. Given Apple’s high pro t rate, he will make a bundle from this purchase.”Evaluate this statement. Is it necessarily true? Explain.
*Historically, the real costs of transporting both goods and people have declined substantially. What impact do lower transportation costs have on the market power of individual producers? Do you think the U.S. economy is more or less competitive today than it was 100 years ago? Explain.
We have a theory to explain the equilibrium price and output for monopoly, but not for oligopoly. Why? How can game theory help us understand the decisions made by oligopolists?
Historically, in many cities, taxi fares were often way above the market equilibrium rate, due to government licensing restrictions. In essence, these taxi cartels used government laws to earn excess pro ts by erecting barriers to entry. However, modern ride-sharing services such as Uber have found
*Why is oligopolistic collusion more dif cult when there is product variation than when the products of all rms are identical?
How will high entry barriers into a market in uencea. the long-run pro tability of the rms,b. the cost ef ciency of the rms in the industry,c. the likelihood that some inef cient (high-cost) rms will survive, andd. the incentive of entrepreneurs to develop substitutes for the product supplied by
Is a monopolist subject to any competitive pressures?Explain. Would an unregulated monopolist have an incentive to operate and produce ef ciently? Why or why not?
Does economic theory indicate that an ideal regulatory agency that forces a monopolist to charge a price equal to either marginal or average total cost will improve economic ef -ciency? Explain. Does economic theory suggest that a regulatory agency will in fact regulate in a manner consistent with
Compare the price and output policy of a purely competitive industry with the policy that would be established by a pro t-maximizing monopolist or cartel. Who bene ts and who is hurt? Construct the appropriate graphs to illustrate your answer.
*Do monopolists charge the highest prices for which they can sell their products? Do they maximize their average pro t per sale? Are monopolistic rms always pro table? Why or why not?
“Monopoly is good for producers but bad for consumers. The gains of the former offset the losses of the latter. On balance, there is no reason to think that monopoly is bad for the economy.”Is this statement true? Why or why not?
“Barriers to entry are crucial to the existence of long-run pro ts, but they cannot guarantee the existence of pro ts.”Evaluate.
Rod N. Reel owns a dealership that sells shing boats in an open, price-searcher market. To develop his pricing strategy, Rod hired an economist to estimate his demand curve.Columns (1) and (2) of the chart on the next page provide the data for the expected weekly quantity demanded for Rod’sshing
The accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry.a. What level of output will maximize the rm’s prot level?b. What price will the rm charge?c. How much revenue will the rm receive in this situation?How much is total
“The superiority of the competitive market is the positive stimuli it provides for constantly improving ef ciency, innovating, and offering consumers diversity of choice.” This quotation is from Alfred Kahn, the architect of transportation deregulation during the 1970s. Evaluate the statement.
*What keeps McDonald’s, Walmart, General Motors, or any other business rm from raising prices, selling shoddy products, and providing lousy service?
What is the primary requirement for a market to be competitive?Is competition necessary for markets to work well? Why or why not? How does competition in uence the following:(a) the cost ef ciency of producers, (b) the quality of products, and (c) the discovery and development of new products?
*“When competition is intense, only the big rms survive. The little guy has no chance.” True or false? Explain.
Is price discrimination harmful to the economy? How does price discrimination affect the total amount of gains from exchange?Explain. Why do colleges often charge students different prices based on their family income?
*Suppose that a group of investors wants to start a business operated out of a popular Utah ski area. The group is considering either building a new hotel complex or starting a new local airline serving that market. Each new business would require about the same amount of capital and personnel
Would our standard of living be higher if the government“bailed out” troubled businesses? If a rm goes out of business, what happens to the rm’s assets, workers, and customers?Are business failures bad for the economy? Why or why not?
*a. What determines whether corporations, individual proprietorships, employee-owned rms, consumer cooperatives, or some other form of business structure will dominate in a market?b. What determines whether small rms, medium-size rms, or large rms will dominate in a market?
Suppose that a price searcher is currently charging a price that maximizes the rm’s total revenue. Will this price also maximize the rm’s pro t? Why or why not? Explain.
Is quality and style competition as important as price competition?Would you like to live in a country where government regulation restricted the use of quality and style competition?Why or why not? Do you think you would get more or less for your consumer dollar under restrictions like these?
What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure?
What do competitive price searchers have to do to make economic pro t?
*What determines the variety of styles, designs, and sizes of different products? Why do you think there are only a few different varieties of toothpicks but lots of different types of napkins on the market?
Because price searchers can set their prices, does this mean that their prices are unaffected by market conditions? In price-searcher markets with low barriers to entry, will the rms be able to make economic pro t in the long run? Why or why not?
Price searchers can set the prices of their products. Does this mean that they will charge the highest possible price for their products? Why or why not?
In the accompanying table, you are given information about two rms that compete in a price-taker market. Assume thatxed costs for each rm are $20.a. Complete the table.b. What is the lowest price at which rm A will produce?c. How many units of output will it produce at that price?(Assume that it
*The accompanying table presents the expected cost and revenue data for the Tucker Tomato Farm. The Tuckers produce tomatoes in a greenhouse and sell them wholesale in a price-taker market.a. Fill in the rm’s marginal cost, average variable cost, average total cost, and prot schedules.b. If the
A combination of high crude oil prices and government subsidies for ethanol have led to a sharp increase in the demand for corn in recent years. How will this increase in demand for corn in uence (a) the price of corn; (b) the quantity of corn supplied;(c) the cost of producing soybeans and wheat,
Do business rms in competitive markets have a strong incentive to serve the interests of consumers? Are they motivated by a strong desire to help consumers? Are “good intentions”necessary if individuals are going to engage in actions that are helpful to others? Discuss.
Why is competition in a market important? Is there a positive or negative effect on the economy when strong competitive pressures drive various rms out of business? Discuss.
*During 2011, drought conditions throughout much of Europe substantially reduced the size of the corn, wheat, and soybean crops, three commodities for which demand is inelastic.Use the price-taker model to determine how the drought affected (a) prices of the three commodities, (b) revenue from the
Will rms in a price-taker market be able to earn pro ts in the long run? Why or why not? What determines pro tability?Discuss.
*How does competition among rms affect the incentive of each rm to (a) operate ef ciently (produce at a low per-unit cost) and (b) produce goods that consumers value? What happens to rms that fail to do these two things?
Why does the short-run market supply curve for a product slope upward to the right? Why does the long-run market supply curve generally slope upward to the right? Why is the long-run market supply curve generally more elastic than the short-run supply curve?
“When the rms in the industry are just able to cover their cost of production, economic pro t is zero. Therefore, if demand falls, causing prices to go down even a little bit, all of the rms in the industry will be driven out of business.” True or false?Explain.
*Suppose that the development of a new drought-resistant hybrid seed corn leads to a 50 percent increase in the average yield per acre without increasing the cost to the farmers who use the new technology. If the producers in the corn production industry were price takers, what would happen to the
If coffee suppliers are price takers, how will an unanticipated increase in demand for their product affect each of the following, in a market that was initially in long-run equilibrium?a. the short-run market price of the productb. industry output in the short runc. pro tability in the short rund.
Suppose the government of a large city levies a 5 percent sales tax on hotel rooms. How will the tax affect (a) prices of hotel rooms, (b) the pro ts of hotel owners, and (c) gross expenditures(including the tax) on hotel rooms?
“In a price-taker market, if a business operator produces ef ciently—that is, if the cost of producing the good is minimized—the operator will be able to make at least a normal pro t.” True or false? Explain.
*If the rms in a price-taker market are making short-run pro ts, what will happen to the market price in the long run?Explain.
Farmers are often heard to complain about the high costs of machinery, labor, and fertilizer, suggesting that these costs drive down their pro ts. Does it follow that if, for example, the price of fertilizer fell by 10 percent, farming (a highly competitive industry with low barriers to entry)
Fill in the blanks in the accompanying table shown at the bottom of page and answer the following questions:a. What happens to total product when marginal product is negative?b. What happens to average product when marginal product is greater than average product?c. What happens to average product
*Investors seeking to take over a rm often bid a positive price for the business even though it is currently experiencing losses. Why would anyone ever bid a positive price for a rm operating at a loss?
*Consider a machine purchased one year ago for $12,000. The machine is being depreciated $4,000 per year over a threeyear period. Its current market value is $5,000, and the expected market value of the machine one year from now is $3,000.If the interest rate is 10 percent, what is the expected
What are implicit costs? Do implicit costs contribute to the opportunity cost of production? Should an implicit cost be counted as cost? Give three examples of implicit costs.Does the rm’s accounting statement take implicit costs into account? Why or why not?
What is shirking? If the managers of a rm are attempting to maximize its pro ts, will they have an incentive to limit shirking?How might they go about doing so?
*Draw a U-shaped, short-run ATC curve for a rm. Construct the accompanying MC and AVC curves.
Why do economists consider normal returns to capital to be a cost? How does economic pro t differ from normal pro t?
*What is the opportunity cost of (a) borrowed funds and (b)equity capital? Under current tax law, rms can record as an expense the opportunity cost of borrowed funds, but not equity capital. How does this tax law affect the amount of debt the rm wants to incur, compared with the amount of money it
*Is pro t maximization consistent with the self-interest of corporate owners? Is it consistent with the self-interest of corporate managers? Is there a con ict between the self-interests of owners and those of managers?
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