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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
“Firms that make a pro t have increased the value of the resources they used; their actions created wealth. In contrast, the actions of rms that make losses reduce wealth. The discovery and undertaking of pro t-making opportunities are key ingredients of economic progress.” Evaluate the
Economics students often confuse (a) diminishing returns related to the variable factors of production and (b) diseconomies of scale. Explain the difference between the two, and give one example of each.
Which of the following are relevant to a rm’s decision to increase output: (a) short-run average total cost, (b) short-run marginal cost, (c) long-run average total cost? Justify your answer.
Explain the factors that cause a rm’s short-run average total costs initially to decline but eventually to increase as the rate of output rises.
What are some of the advantages of the corporate business structure of ownership for large business rms? What are some of the disadvantages? Is the corporate form of business ownership cost ef cient? In a market economy, how would you tell whether the corporate structural form was ef cient?
*“If a rm maximizes pro t, it must minimize the cost of producing the pro t-maximizing output.” Is this statement true or false? Explain your answer.
What is the principal–agent problem? When will the principal–agent problem be most severe? Why might there be a principal–agent problem between the stockholder owners and the managers of a large corporation?
Suppose a rm produces bicycles. Will the rm’s accounting statement re ect the opportunity cost of the bicycles? Why or why not? What costs would an accounting statement reveal? Should current decisions be based on accounting costs?Explain.
Which of the following statements do you think re ect sound economic thinking? Explain your answer.a. “I paid $400 for this economics course. Therefore, I’m going to attend the lectures even if they are useless and boring.”b. “Because we own rather than rent, and the house is paid for,
The owners of a rm are residual income claimants. How does their property right to the residual income affect their incentive to (a) produce ef ciently and keep cost low and(b) supply goods that consumers value highly relative to cost?Why is this important?
Suppose Erin, the owner-manager of a local hotel projects the following demand for her rooms:a. Calculate the price elasticity of demand between $90 and $110.b. Is the price elasticity of demand between $90 and $110 elastic, unit elastic, or inelastic?c. Will Erin’s total revenue rise if she
*Jill’s Sausage Dog Stand projects the following demand for Jill’s sausage dogs:a. Calculate the price elasticity of demand between $2 and $4. Is demand in this range elastic or inelastic?b. Calculate the price elasticity of demand between $4 and $6. Is demand in this range elastic or
*Sue loves ice cream but cannot stand frozen-yogurt desserts.In contrast, Carole likes both foods and can hardly tell the difference between the two. Who will have the more elastic demand for yogurt?
*Respond to the following questions: If you really like pizza, should you try to consume as much pizza as possible? If you want to succeed, should you try to make the highest possible grade in your economics class?
Are the following statements true or false? Explain your answers.a. A 10 percent reduction in price that leads to a 5 percent increase in the amount purchased indicates a price elasticity of more than 1.b. A 10 percent reduction in price that leads to a 2 percent increase in total expenditures (or
Most systems of medical insurance substantially lower the out-of-pocket costs consumers have to pay for additional units of physician services and hospitalization. Some reduce these costs to zero. How does this method of payment affect the consumption levels of medical services? Might this method
What are the major determinants of a product’s price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic. Why?
*People who are wealthy are widely believed to have more leisure time than people who are poor. However, even though we are a good deal wealthier today than our great-grandparents were 100 years ago, we appear to live more hectic lives and have less free time. Can you explain why?
Estimates presented in Exhibit 5 show that Android users have a higher price elasticity of demand for apps in the Google Play Store than do iPhone users in the Apple App Store. Why might Android users tend to be more sensitive to app prices than iPhone users? What categories or types of apps (for
Is this consumer maximizing his or her utility? Would you suggest that he buy more jeans and fewer T-shirts, or more T-shirts and fewer jeans?
A consumer is currently purchasing three pairs of jeans and ve T-shirts per year. The price of jeans is $30, and T-shirts cost $10. At the current rate of consumption, the marginal utility of jeans is 60, and the marginal utility of T-shirts is
*Recent research con rms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions
*A bus ticket between two cities costs $150 and the trip will take 25 hours, whereas an airplane ticket costs $450 and takes ve hours. Kathy values her time at $12 per hour, and Rachel values her time at $18 per hour. Will Kathy take the bus or the plane? Which will Rachel take? Explain.
Suppose that, in an attempt to raise more revenue, Nowhere State University (NSU) increases its tuition. Will this necessarily result in more revenue? Under what conditions will revenue (a) rise, (b) fall, or (c) remain the same? Explain this, focusing on the relationship between the increased
The Federal Drug Administration will not approve new pharmaceutical products unless the developer can prove that its product is both safe and effective as a remedy for speci ed ailments. Do you think the “safe and effective” criterion would be a good one for Congress to adopt for the passage of
The United States imposes highly restrictive sugar import quotas that result in a domestic price that is generally two or three times the world price. The quotas bene t sugar growers at the expense of consumers. Given that there are far more sugar consumers than growers, why aren’t the quotas
If a senator trades his or her vote on an issue for a $10,000 payment, would you consider this corruption? If a senator votes a certain way in “exchange” for a $10,000 contribution to his or her political campaign, would you consider this corruption? Is there a major difference between the two?
“Because government-operated rms do not have to make a pro t, they can usually produce at a lower cost and charge a lower price than privately owned enterprises.” Evaluate this view.
*“Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries such as airlines, railroads, and trucking will charge excessive prices;products will be unsafe; and the rich will oppress the
What is the shortsightedness effect? How does it in uence the attractiveness of government borrowing? Explain.
If a project is ef cient (its total bene ts exceed its total costs), would it be possible to allocate the cost of the project in a manner that would provide net bene ts to each voter? Why or why not? Explain. Will ef cient projects necessarily be favored by a majority of voters? Explain.
“Government action is based on majority rule, whereas market action is based on mutual consent. The market allows for proportional representation of minorities, but minorities must yield to the views of the majority when activities are undertaken through government.” In your own words, explain
“The average person is more likely to make a well-informed choice when purchasing a personal computer than when voting for a congressional candidate.” Is this statement true?Why or why not?
What is rent-seeking? When is it likely to be widespread?How does it in uence economic ef ciency? Explain.
*“The political process sometimes leads to economic inef- ciency because we elect the wrong people to political of ce.If the right people were elected, a democracy governed by majority rule would allocate resources ef ciently.” Evaluate this statement.
*“The government can afford to take a long view when it needs to, while a private rm has a short-term outlook. Corporate of -cers, for example, typically care about the next 3 to 6 months, not the next 50 to 100 years. Government, not private rms, should own things like forests, which take
Are voters likely to be well informed on issues and the positions of candidates? Why or why not?
Apply the economic ef ciency criterion to the role of government.When would a government intervention be considered economically ef cient? When would a government intervention be considered economically inef cient?
What is market failure? If market failure is present, does this imply that government intervention will lead to a more ef cient allocation of resources? Why or why not?
What are the necessary conditions for economic ef ciency?In what four situations might a market fail to achieve ideal economic ef ciency?
What are external costs? When are they most likely to be present?When external costs are present, what is likely to be the relationship between the market output of a good and the output consistent with ideal economic ef ciency?
*If sellers of toasters were able to organize themselves, reduce their output, and raise their prices, how would economic ef- ciency be affected? Explain.
“Unless quality and price are regulated by government, travelers would have no chance for a fair deal. Local people would be treated well, but the traveler would have no way to know, for example, who offers a good night’s lodging at a fair price.”Is this true or false? Explain.
“If it’s worth doing, it’s worth doing to the best of your ability.”What is the economic explanation for why this statement is frequently said but rarely followed in practice? Explain.
English philosopher John Locke argued that the protection of each individual’s person and property (acquired without the use of violence, theft, or fraud) was the primary function of government. Why is this protection important to the ef cient operation of an economy?
Explain in your own words what is meant by external costs and external bene ts. Why may market outcomes be less than ideal when externalities are present?
Which of the following are public goods? Explain, using the de nition of a public good.a. an antimissile system surrounding Washington, D.C.b. a re departmentc. tennis courtsd. Yellowstone National Parke. elementary schools
What are the distinguishing characteristics of “public goods”?Give two examples of a public good. Why are public goods dif cult for markets to allocate ef ciently?
In response to the terrorist attacks of September 11, 2001, airline security screening increased dramatically. As a result, the travel time of airline passengers has increased substantially.Would it make economic sense to devote enough resources to completely prevent any such future attacks? Why or
Suppose the government subsidizes the production and sale of spinach. What impact would this have on the price and output of spinach? Who would bene t and who would lose from this subsidy?
*Should policy makers seek to set the tax on an economic activity at a rate that will maximize the revenue derived from the tax? Why or why not? Explain.
“We should impose a 20 percent luxury tax on expensive automobiles (those with a sales price of $50,000 or more)in order to collect more tax revenue from the wealthy.” Will the burden of the proposed tax fall primarily on the wealthy?Why or why not?
*Suppose Congress were to pass legislation requiring that businesses employing workers with three or more children pay these employees at least $20 per hour. How would this legislation affect the employment level of low-skilled workers with three or more children? Do you think some workers with
What is the nature of the deadweight loss accompanying taxes? Why is it often referred to as an “excess burden”?
What impact do government grants and loans to college students have on the cost of going to college? Are students the primary bene ciary of these subsidies? Discuss.
What is meant by the incidence of a tax? Explain why the statutory and actual incidence of a tax often differ.
What is a black market? What are some of the main differences in how black markets operate relative to legal markets?
Analyze the impact of an increase in the minimum wage from the current level to $15 per hour. How would the following be affected?a. employment of people previously earning less than$15 per hourb. the unemployment rate of teenagersc. the availability of on-the-job training for low-skilled workersd.
The tax on cigarettes in New York City is one of the highest in the nation––$5.85 per pack. Does this tax raise a lot of revenue for New York City? Why or why not? What are some of the secondary effects of this tax?
*To be meaningful, a price ceiling must be below the market price. Conversely, a meaningful price oor must be above the market price. What impact will a meaningful price ceiling have on the quantity exchanged? What impact will a meaningful price oor have on the quantity exchanged? Explain.
What is the difference between a price ceiling and a price oor? If a price ceiling for a good is set below the market equilibrium, what will happen to the quality and future availability of the good? Explain.
Suppose that college students in your town persuaded the town council to enact a law setting the maximum price for rental housing at $400 per month. Will this help or hurt college students who rent housing? In your answer, address how this price ceiling will affect (a) the quality of rental
*How will a substantial increase in demand for housing affect the wages and employment of carpenters, plumbers, and electricians?
Do business rms operating in competitive markets have a strong incentive to serve the interest 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.
What is the invisible hand principle? Does it indicate that selfinterested behavior within markets will result in actions that are bene cial to others? What conditions are necessary for the invisible hand to work well? Why are these conditions important?
*What’s wrong with this way of thinking? “Economists claim that when the price of something goes up, producers increase the quantity supplied to the market. But last year, the price of oranges was really high and the supply of them was really low. Economists are wrong!”
What must an entrepreneur do to earn a pro t? How do the actions of rms earning pro ts in uence the value of resources?What happens to the value of resources when losses are present?If a rm making losses goes out of business, is this bad?Why or why not?
*“Production should be for people and not for pro t.” Answer the following questions concerning this statement:a. If production is pro table, are people helped or harmed?Explain.b. Are people helped more if production results in a loss than if it leads to pro t? Is there a con ict between
What factors determine the cost of producing a good or service?Will producers continue to supply a good or service if consumers are unwilling to pay a price suf cient to cover the cost?
*“The future of our industrial strength cannot be left to chance.Somebody has to develop notions about which industries are winners and which are losers.” Is this statement by a newspaper columnist true? Who is the “somebody”?
How is the market price of a good determined? When the market for a product is in equilibrium, how will consumers value an additional unit compared to the opportunity cost of producing that unit? Why is this important?
De ne consumer surplus and producer surplus. What is meant by economic ef ciency, and how does it relate to the gains of consumers and producers?
What is being held constant when the supply curve is constructed for a speci c good like pizza or automobiles?Explain why the supply curve for a good slopes upward to the right.
*Are prices an accurate measure of a good’s total value?Are prices an accurate measure of a good’s marginal value?What’s the difference? Can you think of a good that has high total value but low marginal value? Use this concept to explain why professional wrestlers earn more than nurses,
What is the law of supply? How many of the following“goods” do you think conform to the general law of supply?Explain your answer in each case.a. gasolineb. cheating on examsc. political favors from legislatorsd. the services of heart specialistse. childrenf. legal divorces
What is being held constant when a demand curve for a speci c product (shoes or apples, for example) is constructed?Explain why the demand curve for a product slopes downward to the right.
*Which of the following do you think would lead to an increase in the current demand for beef?a. higher pork pricesb. higher consumer incomec. higher prices of feed grains used to feed cattled. widespread outbreak of mad cow or hoof-and-mouth diseasee. an increase in the price of beef
This question pertains to the addendum to Chapter 2.The following tables show the production possibilities for two hypothetical countries, Italia and Nire. Which country has the comparative advantage in producing butter? Which country has the comparative advantage in producing guns? What would be a
*As the skill level (and therefore earnings rate) of, say, an architect, computer specialist, or chemist increases, what happens to his or her opportunity cost of doing other things?How is the time spent on leisure likely to change?
During the last four decades, entrepreneurs like Steve Jobs, Sam Walton, and Elon Musk have earned billions of dollars. Do you think the average American is better or worse off as the result of the economic activities of these individuals? Explain your response.
In this chapter, it was stated that a private property right also involves having the right to transfer or exchange what you own with others. However, selling your organs is a violation of federal law, a felony punishable by up to ve years in prison or a $50,000 ne. In fact, eBay intervened when
Consider the following questions:a. Do you think that your work effort is in uenced by whether there is a close link between personal output and personal compensation (reward)? Explain.b. Suppose the grades in your class were going to be determined by a random drawing at the end of the course.How
Two centuries ago, there were more buffalo than cattle in the United States. Even though millions of cattle are killed for beef consumption each year, the cattle population continues to grow while the buffalo are virtually extinct. Why?
*In many states, ticket scalping, or reselling tickets to entertainment events at prices above the original purchase price, is prohibited.Who is helped and who is hurt by such prohibitions? How can owners who want to sell their tickets get around the prohibition?Do you think it would be a good idea
Chick- l-A’s “Eat Mor Chikin” advertising campaign features three cows holding signs that say things like “Save the cows, eat more chicken.” If consumers began eating more chicken and less beef, would the cattle population increase or decrease? Explain.
Why is exchange important to a nation’s prosperity? How does trade in uence the quantity of output that trading partners are able to produce? In a market economy, will there be a tendency for both resources and products to be supplied by low-cost producers?Why or why not? Does this matter?
*Does a 60-year-old tree farmer have an incentive to plant and care for Douglas r trees that will not reach optimal cutting size for another 50 years?
What is the law of comparative advantage? According to the law of comparative advantage, what should be the distinguishing characteristics of the goods a nation produces? What should be the distinguishing characteristics of the goods a nation imports? How will international trade in uence
If you have a private-ownership right to something, what does this mean? Does private ownership give you the right to do anything you want with the things that you own? Explain. How does private ownership in uence the incentive of individuals to (a) take care of things, (b) conserve resources for
“If Jones trades a used car to Smith for $5,000, nothing new is created. Thus, there is no way the transaction can improve the welfare of people.” Is this statement true? Why or why not?
Suppose that in an effort to help low-skill workers the government raises the permissible minimum wage to $15 per hour.Can you think of any unintended secondary effects that will result from this action? Will all low-skill workers be helped by the minimum wage law?
Why can’t we consume as much of each good or service as we would like? If we become richer in the future, do you think we will eventually be able to consume as much of everything as we would like? Why or why not?
Which of the following are positive economic statements and which are normative?a. The speed limit should be lowered to 55 miles per hour on interstate highways.b. Higher gasoline prices cause the quantity of gasoline that consumers buy to decrease.c. A comparison of costs and bene ts should not be
*“I examined the statistics for our basketball team’s wins last year and found that, when the third team played more, the winning margin increased. If the coach played the third team more, we would win by a bigger margin.” Evaluate this statement.
Self-interest is a powerful motivator. Does this necessarily imply that people are sel sh and greedy? Do self-interest and sel shness mean the same thing?
*In recent years, the child tax credit has been increased in the United States. According to the basic principles of economics, how will the birthrate be affected by policies that reduce the taxes imposed on those with children?
a. What method is used to ration goods in a market economy?How does this rationing method in uence the incentive of individuals to supply goods, services, and resources to others?b. How are grades rationed in your economics class? How does this rationing method in uence student behavior?Suppose the
Indicate how each of the following changes would in uence the incentive of a decision-maker to undertake the action described.a. A reduction in the temperature from 80° to 50° on one’s decision to go swimmingb. A change in the meeting time of the introductory economics course from 11:00 A.M. to
How does the federal ownership of our national parks influence the incentive to manage them efficiently?
How can the government use market-like policies to reduce the cost of environmental policy?
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