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business
microeconomics principles

Microeconomics 2nd Edition Paul Krugman, Robin Wells - Solutions

For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and exit, explain your answers.a. Aspirinb. Alicia Keys concertsc. SUVs
Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW’s long-run average total cost.a. For which levels of output does WW experience increasing returns to scale?b. For which levels of output does WW experience decreasing returns to scale?c. For which levels of output does WW
Consider Don’s concrete-mixing business described in Problem 13.Assume that Don purchased 3 trucks, expecting to produce 40 orders per week.a. Suppose that, in the short run, business declines to 20 orders per week. What is Don’s average total cost per order in the short run? What will his
Don owns a small concrete-mixing company. His fixed cost is the cost of the concrete-batching machinery and his mixer trucks. His variable cost is the cost of the sand, gravel, and other inputs for producing concrete; the gas and maintenance for the machinery and trucks; and his workers. He is
In your economics class, each homework problem set is graded on the basis of a maximum score of 100.You have completed 9 out of 10 of the problem sets for the term, and your current average grade is 88.What range of grades for your 10th problem set will raise your overall average? What range will
You produce widgets. Currently you produce 4 widgets at a total cost of $40.a. What is your average total cost?b. Suppose you could produce one more (the fifth) widget at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be? Has your average total cost
Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is $2,000 per month. They can hire workers for $1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table.a. For each quantity of labor, calculate average
Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it.a. A decreasing marginal product tells us that marginal cost must be rising.b. An increase in fixed cost increases the minimum-cost output.c. An increase in
Magnificent Blooms is a florist specializing in floral arrangements for weddings, graduations, and other events.Magnificent Blooms has a fixed cost associated with space and equipment of $100 per day. Each worker is paid $50 per day. The daily production function for Magnificent Blooms is shown in
Labor costs represent a large percentage of total costs for many firms. According to a September 1, 2007, Wall Street Journal article, U.S. labor costs were up 0.9% during the preceding three months and 0.8% over the three months preceding those.a. When labor costs increase, what happens to average
The accompanying table shows a car manufacturer’s total cost of producing cars.a. What is this manufacturer’s fixed cost?b. For each level of output, calculate the variable cost (VC).For each level of output except zero output, calculate the average variable cost (AVC), average total cost
The production function for Marty’s Frozen Yogurt is given in Problem 2.The costs are given in Problem 3.a. For each of the given levels of output, calculate the average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) per cup of frozen yogurt.b. On one diagram, draw
The production function for Marty’s Frozen Yogurt is given in Problem 2.Marty pays each of his workers $80 per day. The cost of his other variable inputs is $0.50 per cup of yogurt. His fixed cost is $100 per day.a. What is Marty’s variable cost and total cost when he produces 110 cups of
Marty’s Frozen Yogurt is a small shop that sells cups of frozen yogurt in a university town. Marty owns three frozen-yogurt machines. His other inputs are refrigerators, frozen-yogurt mix, cups, sprinkle toppings, and, of course, workers. He estimates that his daily production function when he
Carmen consumes nothing but cafeteria meals and CDs. Her indifference curves exhibit the four general properties of indifference curves. Cafeteria meals cost $5 each, and CDs cost $10. Carmen has $50 to spend.a. Draw Carmen’s budget line and an indifference curve that illustrates her optimal
For Crandall, cheese cubes and crackers are perfect complements: he wants to consume exactly 1 cheese cube with each cracker. He has $2.40 to spend on cheese and crackers. One cheese cube costs 20 cents, and 1 cracker costs 10 cents.Draw a diagram, with crackers on the horizontal axis and cheese
Katya commutes to work. She can either use public transport or her own car. Her indifference curves obey the four properties of indifference curves for ordinary goods.a. Draw Katya’s budget line with car travel on the vertical axis and public transport on the horizontal axis. Suppose that Katya
Pam spends her money on bread and Spam, and her indifference curves obey the four properties of indifference curves for ordinary goods. Suppose that, for Pam, Spam is an inferior, but not a Giffen, good; bread is a normal good. Bread costs $2 per loaf, and Spam costs $2 per can. Pam has $20 to
Tyrone is a utility maximizer. His income is $100, which he can spend on cafeteria meals and on notepads. Each meal costs $5, and each notepad costs $2. At these prices Tyrone chooses to buy 16 cafeteria meals and 10 notepads.a. Draw a diagram that shows Tyrone’s choice using an indifference
For Norma, both nachos and salsa are normal goods. They are also ordinary goods for Norma. The price of nachos rises, but the price of salsa remains unchanged.a. Can you determine definitively whether she consumes more or fewer nachos? Explain with a diagram, placing nachos on the horizontal axis
Ralph and Lauren are talking about how much they like going to the gym and how much they like eating out at their favorite restaurant and they regularly do some of each. A session at the gym costs the same as a meal at the restaurant.Ralph says that, for his current consumption of gym sessions and
Answer the following questions based on two assumptions:(1) Inflation increases the prices of all goods by 20%.(2) Ina’s income increases from $50,000 to $55,000.a. Has Ina’s budget line become steeper, less steep, or equally as steep?b. Has Ina’s budget line shifted outward, inward, or not
Restaurant meals and housing (measured by the number of rooms) are the only two goods that Neha can buy. She has income of $1,000, and the price of each room is $100. The relative price of 1 room in terms of restaurant meals is
The four properties of indifference curves for ordinary goods illustrated in Figure 11-4 rule out certain indifference curves.Determine whether those general properties allow each of the following indifference curves. If not, state which of the general principles rules out the curves.
Use the four properties of indifference curves for ordinary goods illustrated in Figure 11-4 to answer the following questions.a. Can you rank the following two bundles? If so, which property of indifference curves helps you rank them?Bundle A: 2 movie tickets and 3 cafeteria meals Bundle B: 4
For each of the following situations, draw a diagram containing three of Isabella’s indifference curves.a. For Isabella, cars and tires are perfect complements, but in a ratio of 1:4; that is, for each car, Isabella wants exactly four tires. Be sure to label and number the axes of your diagram.
According to data from the U.S. Department of Energy, the average retail price of regular gasoline rose from $0.93 in 1985 to $1.81 in 2005, a 95% increase.a. Other things equal, describe the effect of this price increase on the quantity of gasoline demanded. In your explanation, make use of the
Margo’s marginal utility of one dance lesson is 100 utils per lesson. Her marginal utility of a new pair of dance shoes is 300 utils per pair. The price of a dance lesson is $50 per lesson. She currently spends all her income, and she buys her optimal consumption bundle. What is the price of a
Scott finds that the higher the price of orange juice, the more money he spends on orange juice. Does that mean that Scott has discovered a Giffen good?
Restaurant meals and housing (measured in the number of rooms) are the only two goods that Neha buys. She has income of $1,000. Initially, she buys a consumption bundle such that she spends exactly half her income on restaurant meals and the other half of her income on housing. Then her income
In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why?a. Ed spends a large portion of his income on his children’s education. Because tuition fees rise, one of his children has to
Sven is a poor student who covers most of his dietary needs by eating cheap breakfast cereal, since it contains most of the important vitamins. As the price of cereal increases, he decides to buy even less of other foods and even more breakfast cereal to maintain his intake of important nutrients.
She tells him that she likes watching movies much more than going to the gym. In fact, she says that if she had to give up seeing 1 movie, she would need to go to the gym twice to make up for the loss in utility from not seeing the movie. A movie takes 2 hours, and a gym visit also lasts 2 hours.
Anna Jenniferson is an actress, who currently spends several hours each week watching movies and going to the gym. On the set of a new movie she meets Damien, the consumer in Problem
Damien Matthews is a busy actor. He allocates his free time to watching movies and working out at the gym. The accompanying table shows his utility from the number of times per week he watches a movie or goes to the gym.Damien has 14 hours per week to spend on watching movies and going to the gym.
Cal “Cool” Cooper has $200 to spend on cell phones and sunglasses.a. Each cell phone costs $100 and each pair of sunglasses costs $50. Which bundles lie on Cal’s budget line? Draw a diagram like Figure 10-4 in which both the marginal utility per dollar spent on cell phones and the marginal
For each of the following situations, decide whether the bundle Lakshani is considering optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on.a. Lakshani has $200
Bruno, the consumer in Problem 5, is best friends with Bernie, who shares his love for notebooks and Beyoncé CDs.The accompanying table shows Bernie’s utilities from notebooks and Beyoncé CDs.The price of a notebook is $5, the price of a CD is $10, and Bernie has $50 of income to spend.a. Which
Bruno can spend his income on two different goods: BeyoncéCDs and notebooks for his class notes. For each of the following three situations, decide if the given consumption bundle is within Bruno’s consumption possibilities. Then decide if it lies on the budget line or not.a. CDs cost $10 each,
Brenda, the consumer in Problem 3, now has to make a decision about how many bagels and how much coffee to have for breakfast. She has $8 of income to spend on bagels and coffee. Use the information given in the table in Problem 3 to answer the following questions.a. Bagels cost $2 each, and coffee
Brenda likes to have bagels and coffee for breakfast. The accompanying table shows Brenda’s total utility from various consumption bundles of bagels and coffee.Suppose Brenda knows she will consume 2 cups of coffee for sure. However, she can choose to consume different quantities of bagels: she
Use the concept of marginal utility to explain the following:Newspaper vending machines are designed so that once you have paid for one paper, you could take more than one paper at a time. But soda vending machines, once you have paid for one soda, dispense only one soda at a time.
For each of the following situations, decide whether Al has increasing, constant, or diminishing marginal utility.a. The more economics classes Al takes, the more he enjoys the subject. And the more classes he takes, the easier each one gets, making him enjoy each additional class even more than
The drug company Pfizer is considering whether to invest in the development of a new cancer drug. Development will require an initial investment of $10 million now; beginning one year from now, the drug will generate annual profits of $4 million for three years.a. If the interest rate is 12%,
You have won the state lottery. There are two ways in which you can receive your prize. You can either have $1 million in cash now, or you can have $1.2 million that is paid out as follows: $300,000 now, $300,000 in one year’s time, $300,000 in two years’ time, and $300,000 in three years’
According to a report in the St. Louis (Missouri) PostDispatch, that city’s main thoroughfare, Interstate 64, will be completely closed to traffic for two years, from January 2008 to December 2009, for reconstruction at a cost of $535 million. If the construction company were to keep the highway
Assume De Beers is the sole producer of diamonds. When it wants to sell more diamonds, it must lower its price in order to induce consumers to buy more. Furthermore, each additional diamond that is produced costs more than the previous one due to the difficulty of mining for diamonds. De Beers’s
Patty delivers pizza using her own car, and she is paid according to the number of pizzas she delivers. The accompanying table shows Patty’s total benefit and total cost when she works a specific number of hours.a. Use marginal analysis to determine Patty’s optimal number of hours worked.b.
In 2007, the online medical journal Circulation published a study that analyzed the cost-effectiveness of standard-dosage versus high-dosage amounts of statins, drugs designed to lower cholesterol. Patients of approximately 60 years of age were divided into two groups: ACS, or acute coronary
The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole population against the smallpox virus because the vaccination has undesirable, and sometimes fatal, side effects. Suppose the accompanying table gives the data that are available about the effects of a
Georgia and Lauren are economics students who go to a karate class together. Both have to choose how many classes to go to per week. Each class costs $20. The accompanying table shows Georgia’s and Lauren’s estimates of the marginal benefit that each of them gets from each class per week.a. Use
You are the manager of a gym, and you have to decide how many customers to admit each hour. Assume that each customer stays exactly one hour. Customers are costly to admit because they inflict wear and tear on the exercise equipment.Moreover, each additional customer generates more wear and tear
Amy, Bill, and Carla all mow lawns for money. Each of them operates a different lawn mower. The accompanying table shows the total cost to Amy, Bill, and Carla of mowing lawns.a. Calculate Amy’s, Bill’s, and Carla’s marginal costs, and draw each of their marginal cost curves.b. Who has
You have bought a $10 ticket in advance for the college soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to $20. After you have bought the ticket, you hear that there will be a professional baseball post-season game at the same time.
Suppose you have just paid a nonrefundable fee of $1,000 for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening.a. You are offered a part-time job in a restaurant where you can eat for free each evening. Your parents say that you should eat dinner in
You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you$100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and
Jackie owns and operates a web-design business. Her computing equipment depreciates by $5,000 per year. She runs the business out of a room in her home. If she didn’t use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn’t run her own
Hiro owns and operates a small business that provides economic consulting services. During the year he spends$55,000 on travel to clients and other expenses, and the computer that he owns depreciates by $2,000. If he didn’t use the computer, he could sell it and earn yearly interest of $100 on
Producers in import-competing industries often make the following argument: “Other countries have an advantage in production of certain goods purely because workers abroad are paid lower wages. In fact, American workers are much more productive than foreign workers. So import-competing industries
In World Trade Organization (WTO) negotiations, if a country agrees to reduce trade barriers (tariffs or quotas), it usually refers to this as a concession to other countries. Do you think that this terminology is appropriate?
The United States is highly protective of its agricultural industry, imposing import tariffs, and sometimes quotas, on imports of agricultural goods. This chapter presented three arguments for trade protection. For each argument, discuss whether it is a valid justification for trade protection of
As the United States has opened up to trade, it has lost many of its low-skill manufacturing jobs, but it has gained jobs in high-skill industries, such as the software industry. Explain whether the United States as a whole has been made better off by trade.
The accompanying diagram illustrates the U.S. domestic demand curve and domestic supply curve for beef.The world price of beef is PW. The United States currently imposes an import tariff on beef, so the price of beef is PT.Congress decides to eliminate the tariff. In terms of the areas marked in
Suppose that the world price of oranges is $0.30. The United States introduces an import quota of 3,000 oranges and assigns the quota rents to foreign orange exporters.a. Draw the domestic demand and supply curves.b. What will the domestic price of oranges be after introduction of the quota?c. What
The U.S. domestic demand schedule and domestic supply schedule for oranges was given in Problem
The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange.a. Draw the U.S. domestic supply curve and domestic demand curve.b. With free trade, how many oranges will the United States import or
The accompanying table indicates the U.S. domestic demand schedule and domestic supply schedule for commercial jet airplanes. Suppose that the world price of a commercial jet airplane is $100 million.a. In autarky, how many commercial jet airplanes does the United States produce, and at what price
Before the North American Free Trade Agreement (NAFTA)gradually eliminated import tariffs on goods, the autarky price of tomatoes in Mexico was below the world price and in the United States was above the world price. Similarly, the autarky price of poultry in Mexico was above the world price and
Shoes are labor-intensive and satellites are capital-intensive to produce. The United States has abundant capital. China has abundant labor. According to the Heckscher–Ohlin model,which good will China export? Which good will the United States export? In the United States, what will happen to the
Compare the data for U.S. imports of hats and caps from China in 2006 that you found in Problem 5, with the same data for the year 2000. Repeat the steps outlined in Problem 5, but in step (viii) select “December” and “2000.”a. What has happened to the value of U.S. imports of hats and caps
The U.S. Census Bureau keeps statistics on U.S. imports and exports on its website. The following steps will take you to the foreign trade statistics. Use them to answer the questions below.(i) Go to the U.S. Census Bureau’s website at www.census.gov(ii) Under the heading “Business &
For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries.a. The United States exports software to Venezuela, and Venezuela exports oil to the United States.b. The United States exports airplanes to China, and China
Both Canada and the United States produce lumber and music CDs with constant opportunity costs. The United States can produce either 10 tons of lumber and no CDs, or 1,000 CDs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no CDs, or 400 CDs and no
The production possibilities for the United States and Saudi Arabia are given in Problem 1.Suppose now that each country specializes in the good in which it has the comparative advantage, and the two countries trade. Also assume that for each country the value of imports must equal the value of
Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in the accompanying table.a. What is the opportunity cost of producing a car in Saudi Arabia? In the United States? What is the opportunity cost of producing a barrel of oil in Saudi Arabia? In the
You work for the Council of Economic Advisers, providing economic advice to the White House. The president wants to overhaul the income tax system and asks your advice. Suppose that the current income tax system consists of a proportional tax of 10% on all income and that there is one person in the
In Transylvania the basic income tax system is fairly simple. The first 40,000 sylvers (the official currency of Transylvania)earned each year are free of income tax. Any additional income is taxed at a rate of 25%. In addition, every individual pays a social security tax, which is calculated as
Each of the following tax proposals has income as the tax base. In each case, calculate the marginal tax rate for each level of income. Then calculate the percentage of income paid in taxes for an individual with a pre-tax income of $5,000 and for an individual with a pre-tax income of $40,000.
You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual’s income. Under proposal A, all citizens pay exactly the same lump-sum tax, regardless of income. Under
Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle.a. A tax on gasoline that finances maintenance of state roadsb. An 8% tax on imported goods valued in excess of $800 per household brought in on passenger flightsc. Airline-flight landing
Assume that the demand for gasoline is inelastic and supply is relatively elastic. The government imposes a sales tax on gasoline.The tax revenue is used to fund research into clean fuel alternatives to gasoline, which will improve the air we all breathe.a. Who bears more of the burden of this tax,
The state needs to raise money, and the governor has a choice of imposing an excise tax of the same amount on one of two previously untaxed goods: the state can tax sales of either restaurant meals or gasoline. Both the demand for and the supply of restaurant meals are more elastic than the demand
Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza.$10 0 6 91 5 82 4 73 3 64 2 55 1 46 0 37 0 28 0 19 0 Price of pizza Quantity of pizza demanded Quantity of pizza supplied 40
The accompanying diagram shows the market for cigarettes.The current equilibrium price per pack is $4, and every day 40 million packs of cigarettes are sold. In order to recover some of the health care costs associated with smoking, the government imposes a tax of $2 per pack. This will raise the
In each of the following cases involving taxes, explain: (i)whether the incidence of the tax falls more heavily on consumers or producers, (ii) why government revenue raised from the tax is not a good indicator of the true cost of the tax, and (iii) how deadweight loss arises as a result of the
In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax
All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $0.18 per gallon of gasoline. In 2005, gasoline sales in California totaled 15.6 billion gallons. What was California’s tax revenue from the
In 1990, the United States began to levy a tax on sales of luxury cars. For simplicity, assume that the tax was an excise tax of$6,000 per car. The accompanying figure shows hypothetical demand and supply curves for luxury cars.a. Under the tax, what is the price paid by consumers? What is the
The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported
The United States imposes an excise tax on the sale of domestic airline tickets. Let’s assume that in 2006 the total excise tax was$5.80 per airline ticket (consisting of the $3.30 flight segment tax plus the $2.50 September 11 fee). According to data from the Bureau of Transportation Statistics,
According to a Honda press release on October 23, 2006, sales of the fuel-efficient four-cylinder Honda Civic rose by 7.1%from 2005 to 2006. Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline rose from $2.27 per gallon to
The U.S. government is considering reducing the amount of carbon dioxide that firms are allowed to produce by issuing a limited number of tradable allowances for carbon dioxide(CO2) emissions. In an April 25, 2007, report, the U.S.Congressional Budget Office (CBO) argues that “most of the cost of
A recent report by the U.S. Centers for Disease Control and Prevention (CDC), published in the CDC’s Morbidity and Mortality Weekly Report, studied the effect of an increase in the price of beer on the incidence of new cases of sexually transmitted disease in young adults. In particular, the
Worldwide, the average coffee grower has increased the amount of acreage under cultivation over the past few years.The result has been that the average coffee plantation produces significantly more coffee than it did 10 to 20 years ago. Unfortunately for the growers, however, this has also been a
There is a debate about whether sterile hypodermic needles should be passed out free of charge in cities with high drug use. Proponents argue that doing so will reduce the incidence of diseases, such as HIV/AIDS, that are often spread by needle sharing among drug users. Opponents believe that doing
Taiwan is a major world supplier of semiconductor chips. A recent earthquake severely damaged the production facilities of Taiwanese chip-producing companies, sharply reducing the amount of chips they could produce.a. Assume that the total revenue of a typical non-Taiwanese chip manufacturer rises
Use an elasticity concept to explain each of the following observations.a. During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores.b. Cement is the primary building
In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii)elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram.a. An increase in demand this summer for luxury cruises
A recent study determined the following elasticities for Volkswagen Beetles:Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning.a. A 10% increase in the price
The accompanying table shows the price and yearly quantity sold of souvenir T-shirts in the town of Crystal Lake according to the average income of the tourists visiting.a. Using the midpoint method, calculate the price elasticity of demand when the price of a T-shirt rises from $5 to $6 and the

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