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microeconomics principles applications

Microeconomics 4th Edition R. Glenn Hubbard, Anthony Patrick O’Brien - Solutions

Rank the following four goods from lowest income elasticity of demand to highest income elasticity of demand.Briefly explain your ranking.a. Breadb. Pepsic. Mercedes-Benz automobilesd. Laptop computers
[Related to the Chapter Opener on page 171] During the spring of 2008, gasoline prices increased sharply in the United States. According to a newspaper article, rising gas prices had the following impact in the car market:Sales of Toyota’s subcompact Yaris increased 46 percent, and Honda’s tiny
Are the cross-price elasticities of demand between the following pairs of products likely to be positive or negative?Briefly explain.a. Iced coffee and iced teab. French fries and ketchupc. Steak and chickend. Blu-ray players and Blu-ray discs
In the graph on the next page, the demand for hot dog buns has shifted outward because the price of hot dogs has fallen from $2.20 to $1.80 per package. Calculate the cross-price elasticity of demand between hot dogs and hot dog buns. Price (dollars per package of buns) $1.40 1.20 S D2 D 0 10,000
When lettuce prices doubled, from about $1.50 per head to about $3.00, the reaction of one consumer was quoted in a newspaper article: “I will not buy [lettuce] when it’s $3 a head,” she said, adding that other green vegetables can fill in for lettuce. “If bread were $5 a loaf we’d still
Define the income elasticity of demand. Use income elasticity to distinguish a normal good from an inferior good.Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity good?
Define the cross-price elasticity of demand. What does it mean if the cross-price elasticity of demand is negative?What does it mean if the cross-price elasticity of demand is positive?
[Related to the Making the Connection on page 184]A publisher was quoted as saying the following about the pricing of e-books: “We may introduce [an e-book] at$14.95 for a year and then move the book to $9.99 when we would have put out the trade paperback edition. I suspect you’re going to see
The Delaware River Joint Toll Bridge Commission increased the toll on the bridges on Route 22 and Interstate 78 from New Jersey to Pennsylvania from $0.50 to $1.00. Use the information in the following table to answer the questions.(Assume that besides the toll change, nothing occurred during the
In November 2008, parking rates were increased substantially for the “Big Blue Deck” at Detroit’s Metro Airport.According to an article in a local newspaper, “In December,. . . after parking rates jumped from $10 to $16 a day . . . fewer cars used the Big Blue Deck compared to the previous
Consider the following description of a pricing decision by an academic book publisher:A publisher may have issued a monograph several years ago, when both costs and book prices were lower, and priced it at $19.95.The book is still selling reasonably well and would continue to do so even at $29.95.
[Related to Solved Problem 6.3 on page 184] If a firm increases the price of its product and its total revenue increases, will further increases in its price necessarily lead to further increases in its total revenue? Briefly explain.
[Related to Solved Problem 6.3 on page 184] Briefly explain whether you agree or disagree with Manager 2’s reasoning:Manager 1: ”The only way we can increase the revenue we receive from selling our frozen pizzas is by cutting the price.”Manager 2: ”Cutting the price of a product never
A sportswriter makes the following observation: “The Yankees slashed some ticket prices. . . . Only the Yankees know exactly how much money this will cost them, but it makes sense that they’re working to fill the empty seats around home plate.” Is this sportswriter correct that the Yankees
Use the graph at the top of the next column for Yolanda’s Frozen Yogurt Stand to answer the questions.a. Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C andthe price elasticity of demand for D2 between point A and point B. Which demand curve
According to an article in the New York Times, in 2011 the Port Authority of New York and New Jersey was planning to increase the tolls on the bridges and tunnels crossing the Hudson River by as much as 50 percent. According to the article, “Revenue from the . . . higher tolls would raise an
Economists’ estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and
The price of organic apples falls, and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic?
If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue received by orange juice sellers?
The entrance fee into Yellowstone National Park in northwestern Wyoming is “$25 for a private, noncommercial vehicle; $20 for each snowmobile or motorcycle; or $12 for each visitor 16 and older entering by foot, bike, ski, etc.” The fee provides the visitor with a seven-day entrance permit into
According to an article in the Wall Street Journal, in 1999, when the average price of a gallon of gasoline was $1.19, the average household spent 4.0 percent of its income on gasoline.In 2008, when the average price of gasoline had risen to$4.06 per gallon, the average household spent 11.5 percent
The price elasticity of demand in the United States for crude oil has been estimated to be -0.061 in the short run and -0.453 in the long run. Why would the demand for crude oil be more price elastic in the long run than in the short run?Based on John C. B. Cooper, “Price Elasticity of Demand for
[Related to the Making the Connection on page 181]One study found that the price elasticity of demand for soda is -0.78, while the price elasticity of demand for Coca-Cola is -1.22. Coca-Cola is a type of soda, so why isn’t its price elasticity the same as the price elasticity for soda as a
Briefly explain whether the demand for each of the following products is likely to be elastic or inelastic.a. Milkb. Frozen cheese pizzac. Colad. Prescription medicine
What are the key determinants of the price elasticity of demand for a product? Which determinant is the most important?
Is the demand for most agricultural products elastic or inelastic? Why?
[Related to the Don’t Let This Happen to You on page 178]The publisher of a magazine gives his staff the following information:He tells the staff, “Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to
In 1916, the Ford Motor Company sold 500,000 Model T Fords at a price of $440 each. Henry Ford believed that he could increase sales of the Model T by 1,000 cars for every dollar he cut the price. Use this information to calculate the price elasticity of demand for Model T Fords. Use the midpoint
In the fall of 2006, Pace University in New York raised its annual tuition from $24,751 to $29,454. Freshman enrollment declined from 1,469 in the fall of 2005 to 1,131 in the fall of 2006. Assuming that the demand curve for places in the freshman class at Pace did not shift between 2005 and 2006,
[Related to Solved Problem 6.1 on page 175] You own a hot dog stand that you set up outside the student union every day at lunchtime. Currently, you are selling hot dogs for a price of $3 each, and you sell 30 hot dogs a day. You are considering cutting the price to $2. The following graph shows
The following table gives data on the price of rye and the number of bushels of rye sold in 2010 and 2011:a. Calculate the change in the quantity of rye demanded divided by the change in the price of rye. Measure the quantity of rye in bushels.b. Calculate the change in the quantity of rye demanded
In the 2010 holiday season, Steve Richardson decided to cut the prices of his hand-crafted wooden puzzles to increase sales. According to a newspaper account, “the number of orders at Stave Puzzles Inc., his Norwich, Vt., business, hasn’t been enough to offset the price cuts.” Is the demand
Draw a graph of a perfectly inelastic demand curve. Think of a product that would have a perfectly inelastic demand curve. Explain why demand for this product would be perfectly inelastic.
What is the midpoint method for calculating price elasticity of demand? How else can you calculate the price elasticity of demand? What is the advantage of the midpoint method?
If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in the number of boxes of Cheerios demanded, what is the price elasticity of demand for Cheerios? Is the demand for Cheerios elastic or inelastic?
Write the formula for the price elasticity of demand. Why isn’t elasticity just measured by the slope of the demand curve?
Define price elasticity of supply and understand its main determinants and how it is measured.
Define cross-price elasticity of demand and income elasticity of demand and understand their determinants and how they are measured.
Define price elasticity of demand and understand how to measure it.
William Easterly in The White Man’s Burden shares the following account by New York University Professor Leonard Wantchekon of how Professor Wantchekon’s village in Benin, Africa, managed the local fishing pond when he was growing up:To open the fishing season, elders performed ritual tests at
In the early 1800s, more than 60 million American bison(commonly known as the buffalo) roamed the Great Plains. By the late 1800s, the buffalo was nearly extinct.Considering the four categories of goods discussed in the chapter, why might it be that hunters nearly killed buffalo to extinction but
Deer-hunting clubs in southeast Virginia impose a fine on anyone harvesting a buck with antlers below a certain size on land where those clubs have exclusive rights to hunt.The hunt clubs, however, do not impose a fine for harvesting a buck with small antlers on land where several clubs have the
Explain whether you agree or disagree 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 of the economy will be negatively
Put each of these goods or services into one of the boxes in Figure 5.7 on page 154. That is, categorize them as private goods, public goods, quasi-public goods, or common resources.a. A television broadcast of the World Seriesb. Home mail deliveryc. Education in a public schoold. Education in a
The more frequently bacteria are exposed to antibiotics, the more quickly the bacteria will develop resistance to the antibiotics.An article from MayoClinic.com includes the following statement regarding the responsibility of antibiotic users:Antibiotic resistance is a pressing, global health
Nancy Folbre, an economist at the University of Massachusetts, Amherst, argued: “We must take responsibility for governing the commons—not just the quaint old-fashioned village green, but things that cannot easily be privatized—[such as] clean air.” Do you agree that clean air is like a
Commercial whaling has been described as a modern example of the tragedy of the commons. Briefly explain whether you agree or disagree.
[Related to Solved Problem 5.4 on page 157] Suppose that Jill and Joe are the only two people in the small town of Andover. Andover has land available to build a park of no more than 9 acres. Jill and Joe’s demand schedules for the park are as follows:The supply curve is as follows:Price Number
What is the tragedy of the commons? How can it be avoided?
What is a public good? What is free riding? How is free riding related to the tendency of a public good to create market failure?
Define rivalry and excludability and use these terms to discuss the four categories of goods.
[Related to the Making the Connection on page 152]As discussed in this chapter, a system of tradable permits was very successful in efficiently reducing emissions of sulfur dioxide in the United States. Why have some economists proposed a similar system of tradable permits to reduce carbon dioxide
[Related to the Chapter Opener on page 137] According to an article on the position of managers of power plants on the EPA’s proposed new air-quality regulations,“Some of them [managers] are willing to accept tougher air pollution limits than EPA has established, so long as they get certainty
The following graph illustrates the situation in the dry cleaning market. In contrast to problem 3.8, the marginal social cost of the pollution rises as the quantity of items cleaned per week increases. In addition, there are two demand curves, one for a smaller city, DS, and the other for a larger
In a paper written for the Harvard Project on International Climate Agreements, the authors state that while a majority of developed nations are enacting significant regulations to mitigate climate change, “Developing countries typically place greater priority on economic development than on
In 2007, Governor Deval Patrick of Massachusetts proposed that criminals would have to pay a “safety fee” to the government. The size of the fee would be based on the seriousness of the crime (that is, the fee would be larger for more serious crimes).a. Is there an economically efficient amount
[Related to the Making the Connection on page 149]Draw a graph for the market for sweetened soda and assume that consumption of sweetened soda causes a negative externality by raising medical costs. Draw both the actual demand curve representing the marginal private benefits and the demand curve
[Related to Solved Problem 5.3 on page 148] The fumes from dry cleaners can contribute to air pollution. Suppose the following graph illustrates the situation in the dry cleaning market:a. Explain how a government can use a tax on dry cleaning to bring about the efficient level of production.What
Writing in the New York Times, Michael Lewis argued:“Good new technologies are a bit like good new roads: Their social benefits far exceed what any one person or company can get paid for creating them.” Does this observation justify the government subsidizing the production of new
Draw a graph showing the deadweight loss from a negative externality in production and illustrate how a Pigovian tax eliminates the deadweight loss. Draw another graph showing the deadweight loss from a positive externality in consumption and illustrate how a Pigovian subsidy eliminates the
Many antibiotics that once were effective in eliminating infections no longer are because bacteria have evolved to become resistant to them. Some bacteria are now resistant to all but one or two existing antibiotics. Some policymakers have argued that pharmaceutical companies should receive
The federal government’s nutrition guidelines urge adults to eat at least five cups of fruits and vegetables each day.Does consuming fruits and vegetables have a positive externality?Should the government subsidize the consumption of fruits and vegetables? Briefly explain.
Why do most economists prefer tradable emissions allowances to the command-and-control approach to pollution?
What does it mean for a producer or consumer to internalize an externality? What would cause a producer or consumer to internalize an externality?
What is a Pigovian tax? At what level must a Pigovian tax be set to achieve efficiency?
[Related to the Making the Connection on page 145]We know that owners of apple orchards and owners of beehives are able to negotiate private agreements. Is it likely that as a result of these private agreements, the market supplies the efficient quantities of apple trees and beehives?Are there any
According to the Coase theorem, why would a steel plant that creates air pollution agree to curtail production (and therefore pollution) if it were not legally liable for the damage the pollution was causing? Must the property right to clean air be assigned to the victims of air pollution to get
[Related to the Don’t Let This Happen to You on page 145]Briefly explain whether you agree or disagree with the following statement: “Sulfur dioxide emissions cause acid rain and breathing difficulties for people with respiratory problems. The total benefit to society is greatest if we
[Related to the Making the Connection on page 142] In the first years following the passage of the Clean Air Act in 1970, air pollution declined sharply, and there were important health benefits, including a decline in infant mortality.Should the government take action to reduce air pollution
In discussing the reduction of air pollution in the developing world, Richard Fuller of the Blacksmith Institute, an environmental organization, observed, “It’s the 90/10 rule.To do 90 percent of the work only costs 10 percent of the money. It’s the last 10 percent of the cleanup that costs
Discuss the factors that determine the marginal cost of reducing crime. Discuss the factors that determine the marginal benefit of reducing crime. Would it be economically efficient to reduce the amount of crime to zero? Briefly explain.
If the marginal cost of reducing a certain type of pollution is zero, should all that type of pollution be eliminated?Briefly explain.
Is it ever possible for an increase in pollution to make society better off? Briefly explain, using a graph like Figure 5.3 on page 143.
What are transactions costs? When are we likely to see private solutions to the problem of externalities?
What is the Coase theorem? Why do the parties involved in an externality have an incentive to reach an efficient solution?
What do economists mean by “an economically efficient level of pollution”?
In an article in the agriculture magazine Choices, Oregon State University economist JunJie Wu made the following observation about the conversion of farmland to urban development:Land use provides many economic and social benefits, but often comes at a substantial cost to the environment. Although
The following information regarding cable television is from the Federal Communications Commission (FCC)Web site:In general, a cable television operator has the right to select the channels and services that are available on its cable system. With the exception of certain channels like local
Tom and Jacob are college students. Each of them will probably get married later and have two or three children.Each knows that if he studies more in college, he’ll get a better job and earn more money than if he doesn’t study.Earning more will enable them to spend more on their future
In a study at a large state university, students were randomly assigned roommates. Researchers found that, on average, males assigned to roommates who reported drinking alcohol in the year before entering college had GPAs one-quarter point lower than those assigned to nondrinking roommates. For
John Cassidy, a writer for the New Yorker magazine, wrote a blog post arguing against New York City’s having installed bike lanes. Cassidy complained that the bike lanes had eliminated traffic lanes on some streets as well as some on-street parking. A writer for the Economist magazine disputed
Yellowstone National Park is in bear country. The National Park Service, at its Yellowstone Web site, states the following about camping and hiking in bear country:Do not leave packs containing food unattended, even for a few minutes. Allowing a bear to obtain human food even once often results in
A neighbor’s barking dog can be both a positive externality and a negative externality. Under what circumstances would the barking dog serve as a positive externality? Under what circumstances would the barking dog be a negative externality?
The chapter states that your consuming a Big Mac does not create an externality. But suppose you arrive at your favorite McDonald’s at lunchtime and get in a long line to be served.By the time you reach the counter, there are 10 people in line behind you. Because you decided to have a Big Mac for
Briefly explain the relationship between property rights and the existence of externalities.
What is economic efficiency? How do externalities affect the economic efficiency of a market equilibrium?
When will the private cost of producing a good differ from the social cost? Give an example. When will the private benefit from consuming a good differ from the social benefit?Give an example.
What is an externality? Give an example of a positive externality, and give an example of a negative externality.
Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources.
Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality.
Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency.
Construct a table like the one in this appendix on page 134, but assume that the rent ceiling is $1,200 rather than$1,000.
The following graph shows a market in which a price floor of $3.00 per unit has been imposed. Calculate the values of each of the following:a. The deadweight lossb. The transfer of producer surplus to consumers or the transfer of consumer surplus to producersc. Producer surplus after the price
Suppose that you are the vice president of operations of a manufacturing firm that sells an industrial lubricant in a competitive market. Further suppose that your economist gives you the following demand and supply functions:Demand: QD = 45 - 2P Supply: QS = -15 + P What is the consumer surplus in
The following graphs illustrate the markets for two different types of labor. Suppose an identical minimum wage is imposed in both markets. In which market will the minimum wage have the largest impact on employment? Why? Wage $4.50 S D Wage $4.50 Labor (number of workers per year) S 0 D Labor
Suppose that you have been hired to analyze the impact on employment from the imposition of a minimum wage in the labor market. Further suppose that you estimate the demand and supply functions for labor, where L stands for the quantity of labor (measured in thousands of workers) and W stands for
Consumer surplus is used as a measure of a consumer’s net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit.4A.4 Why would economists use the term deadweight loss to describe the impact on consumer surplus and producer surplus from a price control?
Suppose you were assigned the task of choosing a price that maximizes economic surplus in a market. What price would you choose? Why?
In a linear demand equation, what economic information is conveyed by the intercept on the price axis? Similarly, what economic information is conveyed by the intercept on the price axis in a linear supply equation?
[Related to the Making the Connection on page 119]Suppose the government imposes a payroll tax of $1 per hour of work and collects the tax from employers. Use a graph for the market for labor to show the effect of the payroll tax, assuming the special case of a vertical supply curve of labor. By

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