Microeconomics 4th Edition Paul Krugman, Robin Wells - Solutions

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11. Governments often adopt certain policies in order to promote desired behaviour among their citizens. For each of the following policies, determine what the incentive is and what behaviour the government wishes to promote. In each case, why do you think that the government might wish to change
10. Discuss the efficiency and equity implications of each of the following. How would you go about balancing the concerns of equity and efficiency in these areas?a. The government pays the full tuition for every post-secondary student to study whatever subject he or she wishes.b. When people lose
9. For each of the following, explain whether you think the situation is efficient or not. If it is not efficient, why not? What actions would make it efficient?a. Electricity is included in the rent at your dorm. Some residents in your dorm leave lights, computers, and appliances on when they are
8. Which of the following situations describes an equilibrium? Which does not? If the situation does not describe an equilibrium, what would an equilibrium look like?a. Many people regularly commute from the suburbs to downtown Pleasantville. Due to traffic congestion, the trip takes 30 minutes via
7. The Duguay family lives on the east side of Shediac Bay, and the Legault family lives on the west side. Each family’s diet consists of lobster and potatoes, and each is self-sufficient, trapping their own lobsters and growing their own potatoes. Explain the conditions under which each of the
6. This morning you made the following individual choices: you bought a bagel and coffee at the local café, you drove to school in your car during rush hour, and you typed your course notes for your roommate because she was texting in class—in return for which she will do your laundry for a
5. For the following examples, state how you would use the principle of marginal analysis to make a decision.a. Deciding how many days to wait before doing your laundryb. Deciding how much time to spend researching before writing your term paperc. Deciding how many bags of chips to eatd. Deciding
4. Use the concept of opportunity cost to explain the following.a. More people choose to get graduate degrees when the job market is poor.b. More people choose to do their own home repairs when the economy is slow and hourly wages are down.c. There are more parks in suburban than in urban areas.d.
3. Liza needs to buy a textbook for the next economics class. The price at the university bookstore is $65. One website offers it for $55, and another site, for $57. All prices include sales tax. The accompanying table indicates the typical shipping and handling charges for the textbook ordered
2. Describe some of the opportunity costs when you decide to do the following.a. Attend college or university instead of taking a jobb. Watch a movie instead of studying for an examc. Ride the bus instead of driving your car
1. In each of the following situations, identify which of the twelve principles is at work.a. You choose to purchase your textbooks online through Chegg or Textbookrental.ca school rather than paying a higher price for the same books through your bookstore.b. On your spring break trip, your budget
15. You have $1,000 that you can invest. If you buy General Motors stock, then, in one year’s time: with a probability of 0.4 you will get $1,600; with a probability of 0.4 you will get $1,100; and with a probability of 0.2 you will get $800. If you put the money into the bank, in one year’s
14. Kory owns a house that is worth $300,000. If the house burns down, she loses all $300,000. If the house does not burn down, she loses nothing. Her house burns down with a probability of 0.02. Kory is risk-averse.a. What would a fair insurance policy cost?b. Suppose an insurance company offers
13. For each of the following situations, do the following: first describe whether it is a situation of moral hazard or of adverse selection. Then explain what inefficiency can arise from this situation and explain how the proposed solution reduces the inefficiency.a. When you buy a second-hand
12. You own a company that produces chairs, and you are thinking about hiring one more employee. Each chair produced gives you revenue of $10. There are two potential employees, Fred Ast and Sylvia Low. Fred is a fast worker who produces ten chairs per day, creating revenue for you of $100. Fred
11. You are considering buying a second-hand Volkswagen. From reading car magazines, you know that half of all Volkswagens have problems of some kind (they are “lemons”) and the other half run just fine (they are “plums”). If you knew that you were getting a plum, you would be willing to
10. LifeStrategy Conservative Growth and Energy are two portfolios constructed and managed by the Vanguard Group of mutual funds, comprised of stocks of conservatively managed U.S. companies and stocks of U.S. energy companies. The accompanying table shows historical annualized return from the
9. Suppose you have $1,000 that you can invest in Ted and Larry’s Ice Cream Parlor and/or Ethel’s House of Cocoa. The price of a share of stock in either company is $100. The fortunes of each company are closely linked to the weather. When it is warm, the value of Ted and Larry’s stock rises
8. Eva is risk-averse. Currently she has $50,000 to invest. She faces the following choice: she can invest in the stock of a dot-com company, or she can invest in IBM stock. If she invests in the dot-com company, then with probability 0.5 she will lose $30,000, but with probability 0.5 she will
7. Hugh’s income is currently $5,000. His utility function is shown in the accompanying table. Income Total utility (utils) $0 0 1,000 100 2,000 140 3,000 166 4,000 185 5,000 200 6,000 212 7,000 222 8,000 230 9,000 236 10,000 240a. Calculate Hugh’s marginal utility of income. What is his
6. From 1990 to 2013, 1 in approximately every 277 cars produced in the United States was stolen. Beth owns a car worth $20,000 and is considering purchasing an insurance policy to protect herself from car theft. For the following questions, assume that the chance of car theft is the same in all
5. Wilbur is an airline pilot who currently has income of $60,000. If he gets sick and loses his flight medical certificate, he loses his job and has only $10,000 income. His probability of staying healthy is 0.6, and his probability of getting sick is 0.4. Wilbur’s utility function is given in
4. You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you
3. Vicky N. Vestor’s utility function was given in Problem 2. As in Problem 2, Vicky currently has income of $4,000. She is considering investing in a startup company, but the investment now costs $4,000 to make. If the company fails, Vicky will get nothing from the company. But if the company
2. Vicky N. Vestor is considering investing some of her money in a startup company. She currently has income of $4,000, and she is considering investing $2,000 of that in the company. There is a 0.5 probability that the company will succeed and will pay out $8,000 to Vicky (her original investment
1. For each of the following situations, calculate the expected value.a. Tanisha owns one share of IBM stock, which is currently trading at $80. There is a 50% chance that the share price will rise to $100 and a 50% chance that it will fall to $70. What is the expected value of the future share
4. Cite an example of adverse selection from the case. What was the source of the private information?
3. What are the examples of moral hazard in the case? For each example, explain who committed the moral hazard and against whom and identify the source of the private information.
2. What did AIG assume about the probabilities of defaults by different homeowners in the U.S. housing market? Were they wrong or right?
1. Did AIG accurately assess the default risk that it insured? Why or why not?
• The special problems posed by private information—when some people know things that other people do not
• How exposure to risk can be reduced through diversification and pooling
• How risk can be traded—the riskaverse can pay others to assume part of their risk
• Why diminishing marginal utility makes people risk-averse and determines the premium they are willing to pay to reduce risk
• That risk is a key feature of the economy and that most people are risk-averse
5. Tamara has 80 hours per week that she can allocate to work or leisure. Her job pays a wage rate of $20 per hour, but Tamara is being taxed on her income in the following way. On the first $400 that Tamara makes, she pays no tax. That is, for the first 20 hours she works, her net wage—what she
4. Over the past fifty years the average American’s leisure time has increased by between 4 and 8 hours a week. some economists think that this increase is primarily driven by a rise in wage rates.a. Use the income and substitution effects to describe the labor supply for the average American.
3. Wendy works at a fast-food restaurant. When her wage rate was $5 per hour, she worked 30 hours per week. When her wage rate rose to $6 per hour, she decided to work 40 hours. But when her wage rate rose further to $7, she decided to work only 35 hours.a. Draw Wendy’s individual labor supply
2. Florence is a highly paid fashion consultant who earns $100 per hour. She has 16 hours per day that she can allocate to work or leisure, and she decides to work for 12 hours.a. Draw Florence’s time allocation budget line for a typical day, and illustrate the indifference curve at her optimal
12. Patty’s Pizza Parlor has the production function per hour shown in the accompanying table. The hourly wage rate for each worker is $10. Each pizza sells for $2. Quantity of labor (workers) Quantity of pizza 0 0 1 9 2 15 3 19 4 22 5 24a. Calculate the marginal product of labor for each worker
7. Kendra is the owner of Wholesome Farms, a commercial dairy. Kendra employs labor, land, and capital. In her operations, Kendra can substitute between the amount of labor she employs and the amount of capital she employs. That is, to produce the same quantity of output she can use more labor
4. Jameel runs a driver education school. The more driving instructors he hires, the more driving lessons he can sell. But because he owns a limited number of training automobiles, each additional driving instructor adds less to Jameel’s output of driving lessons. The accompanying table shows
2. Marty’s Frozen Yogurt has the production function per day shown in the accompanying table. The equilibrium wage rate for a worker is $80 per day. Each cup of frozen yogurt sells for $2. Quantity of labor (workers) Quantity of frozen yogurt (cups) 0 0 1 110 2 200 3 270 4 300 5 320 6 330a.
1. In 2013, national income in the United States was $14,542.4 billion. In the same year, 137 million workers were employed, at an average wage, including benefits, of $64,667 per worker per year.a. How much compensation of employees was paid in the United States in 2013?b. Analyze the factor
3. President Obama, as his speech indicated, would like to encourage more companies to adopt a high-wage strategy. Other politicians would like to do the same. What are the possible positive and negative effects if this becomes official government policy?
2. How does the Costco story fit into our discussion of the reasons similar workers may end up being paid different wages?
• How labor supply arises from a worker’s decision about time allocation
• About the sources of wage disparities and the role of discrimination
• How the demand for factors leads to the marginal productivity theory of income distribution
• How factors of production— resources like land, labor, physical capital and human capital—are traded in factor markets, determining the factor distribution of income
10. In a private insurance market, there are two different kinds of people: some who are more likely to require expensive medical treatment and some who are less likely to require medical treatment and who, if they do, require less expensive treatment. One health insurance policy is offered,
9. The American National Election Studies conducts periodic research on the opinions of U.S. voters. The accompanying table shows the percentage of people, in selected years from 1952 to 2008, who agreed with the statement “There are important differences in what the Republicans and Democrats
8. The accompanying table shows data on the total number of people in the United States and the number of all people who were uninsured, for selected years from 1999 to 2011. It also shows data on the total number of poor children in the United States—those under 18 and below the poverty
7. In the city of Notchingham, each worker is paid a wage rate of $10 per hour. Notchingham administers its own unemployment benefit, which is structured as follows: If you are unemployed (that is, if you do not work at all), you get unemployment benefits (a transfer from the government) of $50 per
5. The country of Marxland has the following income tax and social insurance system. Each citizen’s income is taxed at an average tax rate of 100%. A social insurance system then provides transfers to each citizen such that each citizen’s after-tax income is exactly equal. That is, each citizen
4. There are 100 households in the economy of Equalor. Initially, 99 of them have an income of $10,000 each, and one household has an income of $1,010,000.a. What is the median income in this economy? What is the mean income? Through its poverty programs, the government of Equalor now redistributes
3. The accompanying table presents data from the U.S. Census Bureau on median and mean income of male workers for the years 1972 and 2012. The income figures are adjusted to eliminate the effect of inflation. Year Median income Mean income (in 2012 dollars) 1972 $36,547 $42,383 2012 33,904 49,915
2. In the city of Metropolis, there are 100 residents, each of whom lives until age 75. Residents of Metropolis have the following incomes over their lifetime: Through age 14, they earn nothing. From age 15 until age 29, they earn 200 metros (the currency of Metropolis) per year. From age 30 to age
1. The accompanying table contains data on the U.S. economy for the years 1983 and 2013. The second column shows the poverty threshold. The third column shows the consumer price index (CPI), a measure of the overall level of prices. And the fourth column shows U.S. gross domestic product (GDP) per
3. What explains the popularity of the Dollar Shave Club? What dilemma do Schick and Gillette face in their decisions about whether to maintain their older, simpler razor models? What does this indicate about the welfare value of the innovation in razors?
2. Why is the razor business so profitable? What explains the size of the advertising budgets of Schick and Gillette?
1. What explains the complexity of today’s razors and the pace of innovation in their features?
2. How would you determine whether illegal behavior actually occurred? What might explain these events other than illegal behavior?
1. Explain why Virgin Atlantic and British Airlines might collude in response to increased oil prices. Was the market conducive to collusion or not?
2. What are the various sources of market power here? What is at risk for the various parties?
1. What is the source of surplus in this industry? Who generates it? How is it divided among the various agents (author, publisher, and retailer)?
3. Why are some retailers responding by having manufacturers make exclusive versions of products for them? Is this trend likely to increase or diminish?
2. What effect is the introduction of mobile shopping apps having on competition in the retail market for electronics? On the profitability of brick-andmortar retailers like Best Buy? What, on average, will be the effect on the consumer surplus of purchasers of these items?
1. From the evidence in the case, what can you infer about whether or not the retail market for electronics satisfied the conditions for perfect competition before the advent of mobile-device comparison price shopping? What was the most important impediment to competition?
3. How would a “robot-for-hire” program affect your answer to Question 2? Explain.
2. Predict the pattern of off-holiday sales versus holiday sales that would induce a retailer to keep a human-based system. Predict the pattern that would induce a retailer to move to a robotic system.
1. Assume that a firm can sell a robot, but that the sale takes time and the firm is likely to get less than what it paid. Other things equal, which system, human-based or robotic, will have a higher fixed cost? Which will have a higher variable cost? Explain.
4. Predict how the shift in the location of Toyota’s production from Japan to the United States is likely to alter the pattern of comparative advantage in automaking between the two countries.
3. Before lean manufacturing innovations, Japan mostly sold consumer electronics to the United States. How did lean manufacturing innovations alter Japan’s comparative advantage vis-à-vis the United States?
2. Explain how lean manufacturing improves the economy’s efficiency in allocation.
1. What is the opportunity cost associated with having a worker wander across the factory floor from task to task or in search of tools and parts?
15. 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. Consumption bundle Quantity of bagels Quantity of coffee (cups) Total utility (utils) 0 0 0 0 2 28 0 4 40 1 2 48 1 3 54 2 0 28 2 2
14. According to data from the U.S. Department of Energy, the average retail price of regular gasoline rose from $1.16 in 1990 to $3.24 in 2012, a 180% increase.a. Other things equal, describe the effect of this price increase on the quantity of gasoline demanded. In your explanation, make use of
13 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
12. 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?
11. 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
10. 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
9. 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
8. 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 7. She tells him that she likes watching movies much more than going to the gym. In fact, she says that if she had
7. 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.Quantity of gym visits per week Utility from gym visits (utils) Quantity of
6. 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
5. For each of the following situations, decide whether the bundle Lakshani is considering is 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
4. Bruno, the consumer in Problem 3, is best friends with Bernie, who shares his love for notebooks and Beyoncé MP3s. The accompanying table shows Bernie’s utilities from notebooks and Beyoncé MP3s.Quantity of Notebooks Utility from Notebooks (utils) Quantity of MP3s Utility from MP3s (utils) 0
3. Bruno can spend his income on two different goods: Beyoncé MP3s 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. MP3s cost $2
2. 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.
1. For each of the following situations, decide whether Al has diminishing marginal utility. Explain.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 one
3. What do you think accounts for McDonald’s success? Relate this to concepts discussed in the chapter.
2. To induce fast-food customers to eat more healthful meals, what alternatives are there to bans? Do you think these alternatives would work? Why or why not?
1. Give an example of a normal good and an inferior good mentioned in this case. Cite examples of substitution effects and income effects from the case.
3. What purpose does Walmart’s price-match guarantee serve? What do you predict would happen if it dropped this policy? Would you predict its competitors— say, the local supermarket or K-Mart—would adopt the same policy?
2. Give an example of a type of irrational decision making illustrated by this case and explain your choice.
1. Give an example of a type of rational decision making illustrated by this case and explain your choice.
4. What is the source of Li & Fung’s success? Is it based on human capital, on ownership of a natural resource, or on ownership of capital?
3. Why do you think a retailer prefers to have Li & Fung arrange international production of its jeans rather than purchase them directly from a jeans manufacturer in mainland China?
2. What principle do you think underlies Li & Fung’s decisions on how to allocate production of a good’s inputs and its final assembly among various countries?

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Microeconomics 4th Edition Paul Krugman, Robin Wells - Solutions

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