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microeconomics principles

Questions and Answers of Microeconomics Principles

Uber has long been criticized for its use of surge pricing, setting prices based on current supply and demand factors, which, at times, results in a sudden and drastic increase in prices. In a Wall
On December 17th, 2015, tickets for Adele’s highly anticipated U.S. concert tour went on sale at Ticketmaster on a first come, first served basis. Throughout the day, a record 10 million people
Streaming music services have changed the way we listen to music. Spotify, Pandora, Tidal, and Google Play are some of the more popular services. These companies offer free access to music. For a
Assume that due to a decrease in demand, the average domestic airline fare decreased from $371.72 in the third quarter of 2015 to $362.56 in the fourth quarter of the same year, a decrease of $9.16.
In 2016 the price of oil fell to a 12-year low. For drivers, the cost of driving fell significantly as gasoline prices plunged. For the airline industry, the cost of operation also fell significantly
In each of the following, what is the mistake that underlies the statement? Explain the mistake in terms of supply and demand and the factors that influence them.a. Consumers are illogical because
Fans of music often bemoan the high price of concert tickets. One rock superstar has argued that it isn’t worth hundreds, even thousands, of dollars to hear him and his band play. Let’s assume
A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as
In October 2015, Hurricane Joaquin caused massive destruction to North and South Carolina, New York, and Florida. Catastrophic flooding occurred with hundreds of people requiring rescue, 25 killed,
Mateo’s room overlooks, from some distance, a major league baseball stadium. He decides to rent a telescope for $50.00 a week and charge his friends and classmates to use it to peep at the game for
In 2014, Time Warner and Comcast announced their intention to merge. This prompted questions of monopoly because the combined company would supply cable access to an overwhelming majority of
The Application “Welfare Effects of Allowing Fracking” says that allowing fracking resulted in a loss in producer surplus and an increase in consumer surplus and welfare in the natural gas
Before the late 1990s, people bought air tickets from a travel agent. When airline deregulation in the late 1970s led U.S. air travel to more than triple between 1975 and 2000, the number of travel
Redraw Figure 8.9 to show the situation where the short-run plant size is too large, relative to the optimal long-run plant size.
What is the effect on firm and market equilibrium of the U.S. law requiring a firm to give its workers six months’ notice before it can shut down its plant?
In June 2005, Eastman Kodak announced that it no longer would produce black-and-white photographic paper—the type used to develop photographs by a traditional darkroom process. Kodak based its
The last of California’s operating gold mines closed after World War II because mining had become unprofitable when the price of gold was $34.71 an ounce (about $446 in current dollars). However,
In the summer of 2012, due to plentiful lobsters, the price of lobster in Maine fell to $1.25 a pound, which was 70% below normal and nearly a 30-year low. According to Bill Adler, head of the
According to the Application “Fracking and Shutdowns,” conventional oil wells have lower shutdown points than those that use fracking. Use figures to compare the supply curves of firms with
If only one competitive firm receives a specific subsidy (negative tax) of s, how should that firm change its output level to maximize its profit, and how does its maximum profit change? Use a graph
The government imposes a specific tax of t = 2 on laundry. Acme Laundry’s pre-tax cost function is C(q) = 10 + 10q + q2. How much should the firm produce to maximize its after-tax profit if the
The cost function for Acme Laundry is C(q) = 10 + 10q + q2, where q is tons of laundry cleaned. What q should the firm choose to maximize its profit if the market price is p? How much does it produce
A marginal cost curve may be U-shaped. As a result, the MC curve may hit the firm’s demand curve or price line at two output levels. Which is the profit maximizing output? Why?
Mercedes-Benz of San Francisco advertises on the radio that the same family has owned and operated the firm in the same location for half a century. It then makes two claims: first, that it has lower
Based on Roberts and Schlenker (2013), the corn demand elasticity is ε = -0.3, and the supply elasticity is η = 0.15. According to the 2007 Census of Agriculture, the United States has 347,760 corn
A U.S. synthetic rubber manufacturer is considering moving its production to a Japanese plant. Its estimated production function is q = 10L0.5K0.5 (Flath, 2011). In the United States, w = 10 = r. At
What can you say about Laura’s economies of scope if her time is valued at $10 an hour and her production possibility frontier is PPF1 in Figure 7.10?
See the Application “3D Printing.” When fully incorporated by firms, how will 3D printing affect the shape of short-run and long-run cost curves?
For a Cobb-Douglas production function, how does the expansion path change if the wage increases while the rental rate of capital stays the same?
Derive the long-run cost function for the constant elasticity of substitution production function q = (Lp + Kp)d/p.
What is the long-run cost function if the production function is q = L + K? M
Look at the Application “The Sharing Economy and the Short Run.” How does the sharing economy affect variable and fixed costs in the short run?
A Japanese synthetic rubber manufacturer’s production function is q = 10L0.5K0.5 (Flath, 2011). Suppose that its wage, w, is $1 per hour and the rental cost of capital, r, is $4. a. Draw an
A Chinese high technology firm has a production function of q = 10L0.28K0.66 (Zhang et al., 2012). It faces factor prices of w = 10 and r = 20. What are its short-run marginal and average variable
Nicolas has purchased a streaming audio service for $8.00 per month. As he now listens to more songs in a month, he spreads this fixed cost over a larger quantity, q. Derive an algebraic formula for
If a firm lays off workers during a recession, how will the firm’s marginal product of labor change?
Does it follow that, because we observe that the average product of labor is higher for Firm 1 than for Firm 2, Firm 1 is more productive in the sense that it can produce more output from a given
Haskel and Sadun (2012) estimated the production function for U.K. supermarkets is Q = L0.23K0.10M0.66, where L is labor, K is capital, and M is materials. What kind of returns to scale do these
At L = 4 and K = 4, the marginal product of labor is 2 and the marginal product of capital is 3. What is the marginal rate of technical substitution?
What is the production function if L and K are perfect substitutes and each unit of q requires 1 unit of L or 1 unit of K (or a combination of these inputs that equals 1)?
Based on the information in the Application “Malthus and the Green Revolution,” how did the average product of labor in corn production change over time?
If the Cobb-Douglas production function is q = L0.75 K0.25, and K = 16, what is the elasticity of output with respect to labor?
Are firms with limited liability likely to be larger than other firms? Why?
The government collects a specific tax of t for each hour worked. Thus, a worker whose wage is w keeps w - t after taxes and supplies H(w - t) hours of work. The government wants to know if its tax
As of 2015, at least 41 countries—including most of the formerly centrally planned economies of Central and Eastern Europe and Eurasia—use a flat personal income tax. Show that if each person is
Today, most developed countries have progressive income taxes. Under such a taxation program, is the marginal tax higher than, equal to, or lower than the average tax?
Governments increasingly use educational vouchers in various parts of the United States. Suppose that the government offers poor people $5,000 education vouchers that they may use only to pay for
Federal housing choice vouchers ($19 billion in 2015) and food stamps ($74 billion in 2014) are two of the largest in-kind transfer programs for the poor. Many poor people are eligible for both
Marcia spends her money on coffee and sugar, which she views as perfect complements. She adds one tablespoon of sugar to each cup of coffee. A cup of coffee costs $1. Use graphs to show her
Redraw Figure 5.5 for an inferior good. Use your diagram to compare the relative sizes of CV, ΔCS, and EV.
In the Challenge Solution, suppose that housing was relatively less expensive and food was relatively more expensive in London than in Seattle, so that the LL budget line cuts the LS budget line from
The Application “Reducing the CPI Substitution Bias” discusses the new inflation index, the C-CPI, which averages the Laspeyres and Paasche indexes. Give an example of circumstances such that the
Alix consumes only coffee and coffee cake and only consumes them together (they are perfect complements). If we calculate a CPI using only these two goods, by how much will this CPI differ from the
Remy views ice cream and fudge sauce as perfect complements. Is it possible that either of these goods or both of them are Giffen goods?
Draw a figure to illustrate the answer given in Solved Problem 4.5. Use math and a figure to show whether applying an ad valorem tax rather than a specific tax changes the analysis.
The New York state cigarette tax applies equally to low-quality (generic) and high-quality cigarettes. However, the state cannot collect the tax on sales on Indian reservations. DeCicca et al. (2014)
Use a figure to illustrate the effect of a change in the price of alcohol in the Application “Substituting Alcohol for Marijuana.” Label the figure using the numbers for a typical female from the
Given the answer to Exercise 2.4, what effect does a U.S. quota on steel of Q̅ > 0 have on the equilibrium in the U.S. steel market? (The answer depends on whether the quota binds: is low enough
According to the U.S. Consumer Expenditure Survey for 2014, Americans with the lowest 20% of incomes spend 41% of their income on housing. What are the limits on their income elasticities of housing
Manufactured diamonds have become as big and virtually indistinguishable from the best natural diamonds (Hemali Chhapia Shah, “Pick Your Diamond, Get It Lab-Baked,” Times of India, April 28,
Until 2012, California, Pennsylvania, and Texas required firms to collect sales taxes for online sales only if the chain had a physical presence (a “brick” store as opposed to a “click”
For the utility function U(q1, q2) = q1p + q2p , solve for the optimal q1 and q2 as functions of the prices, p1 and p2, and income, Y.
Salvo and Huse (2012) found that roughly one-fifth of flexible-fuel (cars that can run on a mix of ethanol and gasoline) car owners choose gasoline when the price of gas is 20% above that of ethanol
West Virginians who live near the border with other states can shop on either side of the border. When a 6% food tax was imposed in West Virginia, if West Virginians bought food in West Virginia,
Suppose the Challenge Solution were changed so that Max and Bob still have identical tastes, but have the usual-shaped indifference curves. Use a figure to discuss how the different slopes of their
Why would a consumer’s demand for a supermarket product change when the product price is quoted inclusive of taxes rather than before tax? Is the same effect as likely for people buying a car?
Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90°. Suppose that the prices change, so the slope of the budget line through the
Given that Kip’s utility function is U(qc, qm) = qc 0.5 + qm 0.5, what is his expenditure function? (See Solved Problem 3.8.)
Some of the largest import tariffs, the tax on imported goods, are on shoes. Strangely, the cheaper the shoes, the higher the tariff. The highest U.S. tariff, 67%, is on a pair of $3 canvas sneakers,
What is the MRS for the CES utility function (which is slightly different from the one in the text) U(q1, q2) = (aq1p + [1 - a]q2p )1/p?
Arthur spends his income on bread and chocolate. He views chocolate as a good but is neutral about bread, in that he doesn’t care if he consumes it or not. Draw his indifference map.
Explain why economists assume that the more-is-better property holds and describe how these explanations relate to the results in the Application “You Can’t Have Too Much Money.”
The estimated demand function for coffee is Q = 12 - p (Equation 2.3), and the estimated supply function is Q = 9 + 0.5p (Equation 2.7). a. Write equations for the equilibrium price and quantity
The United Kingdom has a drinking problem. British per-capita consumption of alcohol rose 19% between 1980 and 2007, compared with a 13% decline in other developed countries. Worried about excessive
Solved Problem 2.5 claims that a new war in the Persian Gulf could shift the world oil supply curve to the left by 24 million barrels a day or more, causing the world price of oil to soar regardless
Based on information in the Application “The Demand Elasticities for Google Play and Apple Apps,” the demand function for mobile applications at the Apple App Store is QA = 1.4p-2 and the demand
Due to a recession that lowered incomes, the market prices for last-minute rentals of U.S. beachfront properties were lower than usual. Suppose that the demand function for renting a beachfront
The demand function is Q = 220 - 2p, and the supply function is Q = 20 + 3p - 20r, where r is the rental cost of capital. How do the equilibrium price and quantity vary with r?
Production of ethanol, a fuel made from corn, increased more than 8.5 times from 1,630 million gallons in 2000 to 14,340 million gallons in 2014 (http://www.ethanolrfa.org/pages/statistics). Use a
The estimated demand function (Moschini and Meilke, 1992) for Canadian processed pork is Q = 171 - 20p + 20pb + 3pc + 2Y, where Q is the quantity in million kilograms (kg) of pork per year, p is the
Using the estimated demand function for processed pork from Question 1.1, show how the quantity demanded at a given price changes as per capita income, Y, increases by $100 a year.
Suppose that the demand function for movies is Q1 = 120 - p for college students and Q2 = 60 - 0.5p for other town residents. What is the town’s total demand function (Q = Q1 + Q2 as a function of
The food and feed demand curves used in the Application “Aggregating Corn Demand Curves” were estimated by McPhail and Babcock (2012) to be Qfood = 1,487 - 22.1p and Qfeed = 6,247.5 - 226.7p,
Based on information in the Application “The Demand Elasticities for Google Play and Apple Apps,” the demand function for mobile applications at the Apple App Store is QA = 1.4p-2 and the demand
The estimated supply function (Moschini and Meilke, 1992) for processed pork in Canada is Q = 178 + 40p - 60ph, where quantity is in millions of kg per year and the prices are in Canadian dollars per
If the U.S. supply function for corn is Qa = 10 + 10p and the supply function of the rest of the world for corn is Qr = 5 + 20p, what is the world supply function?
The estimated Canadian processed pork demand function (Moschini and Meilke, 1992) is Q = 171 - 20p + 20pb + 3pc + 2Y (see Exercise 1.1), and the supply function is Q = 178 + 40p - 60ph (see Exercise
Use a figure to explain the fisher’s comment about the effect of a large catch on the market price in the cartoon about catching lobsters in this chapter. What is the supply shock?
Differences in productivity are usually the major force behind differences in wages and unit labor costs. Suppose that a single unskilled worker at a pottery factory in Mexico can produce 1 mug per
Mexico has daily (rather than hourly) minimum wage laws. In 2013, the daily minimum wage in Mexico was about 60 pesos per day, and the exchange rate between Mexican pesos and U.S. dollars was about
True or False. The MB = MC level of immigration is likely to be achieved if we simply let in every person who wishes to immigrate to the United States.
True or False. Research indicates that immigration causes large decreases in the average American wage.
Migration between North Korea and South Korea has been prohibited since the end of the Korean War in 1953. South Korea is now much richer than North Korea and has a much higher marginal product of
True or False. Because older adults have more human capital, they are more likely to migrate to another country than younger adults.
The primary reason people immigrate to the United States is:a. To escape political or religious oppression back home.b. To reunite with family members.c. To improve earnings and living
Each year, the number of legal immigrants to the United States is ___________ the number of illegal immigrants.a. Less than.b. Equal to.c. Greater than.d. Less than, but only in
What was the single most important reason for the decline in illegal immigration between 2007 and 2009? What other factors were at play? Going forward, why might people think it more likely that
Preventive care is not always cost effective. Suppose that it costs $100 per person to administer a screening exam for a particular disease. Also suppose that if the screening exam finds the disease,
The Federal tax code allows businesses but not individuals to deduct the cost of health insurance premiums from their taxable income. Consider a company named HeadBook that could either spend $5000
Suppose that the price elasticity for hip replacement surgeries is 0.2. Further suppose that hip replacement surgeries are originally not covered by health insurance and that at a price of $50,000

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