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microeconomics principles applications
Microeconomics 4th Edition R. Glenn Hubbard, Anthony Patrick O’Brien - Solutions
What is the Sarbanes-Oxley Act? Why was it passed?
The Securities and Exchange Commission requires that every firm that wishes to issue stocks and bonds to the public make available its balance sheet and income statement.Briefly explain how information useful to investors can be found in these financial statements.
Dane decides to give up a job earning $100,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for $20,000 a year.) His direct expenses include $50,000 per year paid to his assistants and $10,000 per year for utilities.Fans
Paolo and Alfredo are twins who both want to open pizza restaurants. Their parents have always liked Alfredo best, and they buy two pizza ovens and give both to him. Unfortunately, Paolo must buy his own pizza ovens. Does Alfredo have a lower cost of producing pizza than Paolo does because Alfredo
Paolo currently has $100,000 invested in bonds that earn him 10 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the $100,000 to start his restaurant or borrowing the $100,000 from a bank, which would charge him an annual interest
Would a business be expected to survive in the long run if it earned a positive accounting profit but a negative economic profit? Explain.
Distinguish between a firm’s explicit costs and its implicit costs and between a firm’s accounting profit and its economic profit.
What is the difference between a firm’s balance sheet and a firm’s income statement?
What is the difference between a firm’s assets and its liabilities?Give an example of an asset and an example of a liability.
[Related to the Making the Connection on page 248] The following table shows information from August 26, 2011, about the stock price of Starbucks Corporation:a. How much did the price of Starbucks stock go up or down from the day before?b. Did the Starbucks stock price vary much during the day’s
[Related to the Making the Connection on page 248]Loans from banks are the most important external source of funds to businesses because most businesses are too small to borrow in financial markets by issuing stocks or bonds. Most investors are reluctant to buy the stocks or bonds of small
[Related to the Don’t Let This Happen to You on page 246]Briefly explain whether you agree or disagree with the following statement: “The total value of the shares of Microsoft stock traded on the NASDAQ last week was$250 million, so the firm actually received more revenue from stock sales than
The following appeared in an article in the Wall Street Journal about the bond market in high-income (or “developed”)countries (that is, the United States and countries in Europe) and the emerging-market countries (that is, Latin American and Asian countries):“In the developed markets, it’s
The French government issues bonds with 50-year maturities.Would such bonds be purchased only by very young investors who expect to still be alive when the bond matures?Briefly explain.
What effect would the following events be likely to have on the price of Google’s stock?a. A competitor launches a search engine that’s just as good as Google’s.b. The corporate income tax is abolished.c. Google’s board of directors becomes dominated by close friends and relatives of its
[Related to the Making the Connection on page 244] The following is from an article in the Wall Street Journal:Moody’s Investors Service. . . . said it was cutting Japan’s government bond rating to Aa3 from Aa2, citing “large budget deficits and the build-up in Japanese government debt since
[Related to the Chapter Opener on page 237] The owners of Facebook have had several opportunities to sell the company to larger firms or to make the firm a public corporation by selling stock. In 2009, the value of Facebook was estimated to be somewhere between $2 billion and$5 billion. So, selling
If you deposit $20,000 in a savings account at a bank, you might earn 1 percent interest per year. Someone who borrows$20,000 from a bank to buy a new car might have to pay an interest rate of 6 percent per year on the loan.Knowing this, why don’t you just lend your money directly to the car
Suppose you originally invested in a firm when it was small and unprofitable. Now the firm has grown to be large and profitable. Would you be better off if you had bought the firm’s stock or the firm’s bonds? Explain.
Suppose that a firm in which you have invested is losing money. Would you rather own the firm’s stock or the firm’s bonds? Explain.
How do the stock and bond markets provide information to businesses? Why do stock and bond prices change over time?
Why is a bond considered to be a loan but a share of stock is not? Why do corporations issue both bonds and shares of stock?
What is the difference between direct finance and indirect finance? If you borrow money from a bank to buy a new car, are you using direct finance or indirect finance?
An article in BusinessWeek states that members of boards of directors believe that, in general, the compensation of CEOs is too high. However, most board members believe that the compensation of the CEO of their firm is appropriate.The article concludes: “Given this and that they work for the
[Related to Solved Problem 8.2 on page 242] The members of many corporate boards of directors have to be reelected by the firm’s stockholders every year. Some corporations, though, have staggered elections for their boards of directors, with only one-half or one-third of the members being up for
[Related to Solved Problem 8.2 on page 242] Briefly explain whether you agree with the following argument:“The separation of ownership from control in large corporations and the principal–agent problem mean that top managers can work short days, take long vacations, and otherwise slack off.”
Sales personnel, whether selling life insurance, automobiles, or magazine subscriptions, typically get paid on commission instead of a straight hourly wage. How does paying a commission help solve the principal–agent problem between the owner of a business and the sales force?
The principal–agent problem in a public corporation between ownership and top management results from asymmetric information. What information, if known, would prevent this principal–agent problem?
The principal–agent problem arises almost everywhere in the business world, and it also crops up even closer to home. Discuss the principal–agent problem that exists in the college classroom. Who is the principal? Who is the agent? What potential conflicts in objectives are there between this
Why is it important for a board of directors to have outside directors, as opposed to only inside directors?
How is the separation of ownership from control related to the principal–agent problem?
What does it mean to say that there is a separation of ownership from control in large corporations?
[Related to the Making the Connection on page 240]Why might large existing firms be more likely to focus on improving existing goods and services than on introducing new ones? Why might small new firms take the opposite approach?
According to an article in the Economist magazine, historian David Faure has argued that the Chinese economy failed to grow rapidly during the nineteenth century because“family-run companies . . . could not raise sufficient capital to exploit the large-scale opportunities tied to the rise of the
Evaluate the following argument:I would like to invest in the stock market, but I think that buying shares of stock in a corporation is too risky. Suppose I buy $10,000 of General Electric stock, and the company ends up going bankrupt. Because as a stockholder I’m part owner of the company, I
How would the establishment of limited liability for the owners of corporations affect the production possibilities frontier of a country over time?
Suppose that shortly after graduating from college, you decide to start your own business. Will you be likely to organize the business as a sole proprietorship, a partnership, or a corporation? Explain your reasoning.
Why is limited liability more important for firms trying to raise funds from a large number of investors than for firms trying to raise funds from a small number of investors?
What is limited liability? Why does the government grant limited liability to the owners of corporations?
What are the three major types of firms in the United States? Briefly discuss the most important characteristics of each type.
Discuss the role that corporate governance problems may have played in the financial crisis of 2007–2009.
Explain how firms raise the funds they need to operate and expand.
Describe the typical management structure of corporations and understand the concepts of separation of ownership from control and the principal–agent problem.
[Related to the Making the Connection on page 227]How are the state insurance exchanges with the Small Business Health Option Program (SHOP) intended to help small businesses with their problem of limited risk pooling when buying health insurance for their employees?What is the adverse selection
[Related to the Chapter Opener on page 205] Why do small firms face more of a problem with risk pooling when buying insurance than do large firms?
[Related to the Making the Connection on page 225]How can providers of some medical services charge hundreds or thousands of dollars more than competitors and remain in business? Why don’t patients go to the providers that charge the lower price for the same medical service?
Nobel Laureate Robert Fogel of the University of Chicago has argued, “Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective.”a. If Fogel is correct, should policymakers be concerned by
Ross Douthat, a political columnist, offers the following observations about the Medicare program:Certainly telling seniors to buy all their own health care is a complete political (and ethical)non-starter. But telling seniors to pay for more of their own health care—well, it’s hard to see how
Some economists and policymakers have argued that one way to control federal government spending on Medicare is to have a board of experts decide whether new medical technologies are worth their higher costs. If the board decides that they are not worth the costs, Medicare would not pay for them.
Figure 7.7 on page 223 shows that the Congressional Budget Office forecasts that only about 10 percent of the PPACA-related increase in spending on Medicare as a percentage of GDP will be due to the aging of the population.What factors explain the other 90 percent of the increase?
What arguments do economists and policymakers make who believe that market-based reforms are the key to improving the health care system criticize the PPACA?
What arguments do economists and policymakers make who believe that the federal government should have a larger role in the health care system criticize the PPACA?
Briefly discuss how economists explain the rapid increases in health care spending.
In the United States, what has been the trend in health care spending as a percentage of GDP? Compare the increases in health care spending per person in the United States with the increases in health care spending per person in other high-income countries. What implications do current trends in
What is the Patient Protection and Affordable Care Act(PPACA)? Briefly list its major provisions.
[Related to the Making the Connection on page 218]Explain whether you agree with the following statement:Providing health care is obviously a public good.If one person becomes ill and doesn’t receive treatment, that person may infect many other people. If many people become ill, then the output
[Related to the Making the Connection on page 218]Is health care a public good? Briefly explain. Why does the government directly provide health care in some countries, such as the United Kingdom, but not in others?
An article in the Economist magazine contains the following description of the “classic adverse selection spiral”: “because[health insurance] premiums go higher, healthy people become even less likely to buy insurance, which drives premiums higher yet, and so on until the whole thing winks
[Related to Solved Problem 7.3 on page 217] An article in the Economist magazine argues that the real problem with health insurance is:The healthy people who decide not to buy insurance out of rational self-interest, and who turn out to be right. By not buying insurance, those (largely young)
A newspaper editorial observes:Doctors complain that high malpractice awards drive up their insurance premiums and that they are forced to practice “defensive medicine,”ordering unnecessary tests and procedures to protect themselves from possible lawsuits.Is there another economic explanation
[Related to the Don’t Let This Happen to You on page 216]Briefly explain whether you agree with the following statement:“The reluctance of healthy young adults to buy medical insurance creates a moral hazard problem for insurance companies.”
Under the Social Security retirement system, the federal government collects a tax on most people’s wage income and makes payments to retired workers above a certain age who are covered by the system. (The age to receive full Social Security retirement benefits varies based on the year the worker
Michael Kinsley, a political columnist, observes, “The idea of insurance is to share the risks of bad outcomes.” In what sense does insurance involve sharing risks? How does the problem of adverse selection affect the ability of insurance to provide the benefit of sharing risk?From Michael
What is the “lemons problem”? Is there a lemons problem with health insurance? Briefly explain.
Suppose you see a 2006 Volkswagen Jetta GLS Turbo Sedan advertised in the campus newspaper for $10,000. If you knew the car was reliable, you would be willing to pay $12,000 for it. If you knew the car was unreliable, you would only be willing to pay $8,000 for it. Under what circumstances should
What is an externality? Are there externalities in the market for health care? Briefly explain.
What are the asymmetric information problems in the market for health insurance?
Two health care analysts argue that in the United States,“we have arrived at a moment where we are making little headway in defeating various kinds of diseases. Instead, our main achievements today consist of devising ways to marginally extend the lives of the very sick.”a. Should “marginally
Why do comparisons in health care outcomes across countries often concentrate on measures such as life expectancy and infant mortality? Are there other measures of the quality of health care systems? Briefly explain.
If health care is a normal good, would we expect that spending on health care would increase or decrease over time? Briefly explain.
What is meant by the phrase “health care outcome”? How do health care outcomes in the United States compare with those of other high-income countries? What problems arise in attempting to compare health care outcomes across countries?
Briefly compare the health care systems in Canada, Japan, and the United Kingdom with the health care system in the United States.
What are the main sources of health insurance in the United States?
How was the public health movement in the United States in the late nineteenth and early twentieth centuries like a technological advance to the country’s production possibilities frontier?
In The Elusive Quest for Growth, William Easterly describes the bottom poor in Malawi as “the stunted poor, with thin bodies, short stature . . . , who experience frequent illnesses and a severe lack of food.” He reports that “In the poorest nations like Burundi, Madagascar, and Uganda,
In what sense have improvements in the health of the average American caused the U.S. production possibilities frontier to shift out? Panel (a) in Figure 7.2 on page 208 indicates that life expectancy in the United States declined between 1916 and 1918. What effect did this decline in life
Consider the following statement: “To some economists, nutritional status—measured for example by heights—suffers as a measure of living standards because height is not normally seen . . . as something that can be bought.”a. What is meant by “nutritional status”?b. Is income per person
How can improvements in health increase a country’s total income? How can increases in a country’s total income improve health?
How can changes over time in the average height of the people in a country be a measure of the country’s living standards?
Briefly describe changes over time in the health of the average person in the United States.
Briefly discuss the ways in which the market for health care is different from and the ways in which it is similar to the markets for other goods and services.
Explain the major issues involved in the debate over health care policy in the United States.
Discuss how information problems and externalities affect the market for health care.
Compare the health care systems and health care outcomes in the United States and other countries.
Discuss trends in U.S. health over time.
On most days, the price of a rose is $1, and 8,000 roses are purchased. On Valentine’s Day, the price of a rose jumps to$2, and 30,000 roses are purchased.a. Draw a demand and supply graph that shows why the price jumps.b. Based on this information, what do we know about the price elasticity of
Consider an increase in the demand for petroleum engineers in the United States. How would the supply of these engineers respond in the short run and in the long run? Conversely, consider a decrease in demand for lawyers. How would the supply of lawyers respond in the short run and in the long run?
Briefly explain whether you agree with the following statement:“The longer the period of time following an increase in the demand for apples, the greater the increase in the equilibrium quantity of apples and the smaller the increase in the equilibrium price.”
Use the midpoint formula for calculating elasticity to calculate the price elasticity of supply between point A and point B for each panel of Figure 6.5 on page 194.
[Related to the Making the Connection on page 191]Refer again to the first graph in the Making the Connection on page 191. Suppose that demand had stayed at the level indicated in the graph, with the equilibrium price of oil remaining at $140 per barrel. Over long periods of time, high oil prices
What is the main determinant of the price elasticity of supply?
Write the formula for the price elasticity of supply. If an increase of 10 percent in the price of frozen pizzas results in a 9 percent increase in the quantity of frozen pizzas supplied, what is the price elasticity of supply for frozen pizzas? Is the supply of pizzas elastic or inelastic?
Review the concept of economic efficiency from Chapter 4 before answering the following question: Will there be a greater loss of economic efficiency from a price ceiling when demand is elastic or inelastic? Illustrate your answer with a demand and supply graph.
The head of the United Kumquat Growers Association makes the following statement:The federal government is considering implementing a price floor in the market for kumquats.The government will not be able to buy any surplus kumquats produced at the price floor or to pay us any other subsidy.
Corruption has been a significant problem in Iraq. Opening and running a business in Iraq usually requires paying multiple bribes to government officials. We can think of there being a demand and supply for bribes, with the curves having the usual shapes: The demand for bribes will be downward
[Related to Solved Problem 6.5 on page 189] Suppose that the long-run price elasticity of demand for gasoline is-0.55. Assume that the price of gasoline is currently $4.00 per gallon, the quantity of gasoline is 140 billion gallons per year, and the federal government decides to increase the excise
[Related to Solved Problem 6.5 on page 189] According to a study by the U.S. Centers for Disease Control and Prevention, the price elasticity of demand for cigarettes is -0.25.Americans purchase about 360 billion cigarettes each year.a. If the federal tax on cigarettes were increased enough to
The demand for agricultural products is inelastic, and the income elasticity of demand for agricultural products is low. How do these facts help explain the decline of the family farm in the United States?
Consider firms selling three goods—one firm sells a good with an income elasticity of demand less than zero, one firm sells a good with an income elasticity of demand greater than zero but less than one, and one firm sells a good with an income elasticity of demand greater than one. In a
[Related to the Making the Connection on page 187] Is the cross-price elasticity of demand between wine and spirits likely to be positive or negative? Can you think of reasons why the income elasticity of demand for wine is so much higher than the income elasticity of demand for spirits?
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