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business
microeconomics principles
Microeconomics 4th Edition Paul Krugman, Robin Wells - Solutions
1. Why do you think it was profitable for Li & Fung to go beyond brokering exports to becoming a supply chain manager, breaking down the production process and sourcing the inputs from various suppliers across many countries?
3. How did Amazon’s tax strategy distort its business behavior? What measures would eliminate these distortions?
2. Suppose sales tax is collected on all online book sales. From the evidence in this case, what do you think is the incidence of the tax between seller and buyer? What does this imply about the elasticity of supply of books by book retailers? (Hint: Compare the pre-tax prices of the book.)
1. What effect do you think the difference in state sales tax collection has on Amazon’s sales versus BarnesandNoble.com’s sales?
4. Use an elasticity concept to explain under what conditions the airline industry will be able to maintain its high profitability in the future. Explain.
3. Using the concept of elasticity, explain why airlines have imposed fees on things such as checked bags. Why might they try to hide or disguise fees?
2. Using the concept of elasticity, explain why airlines would create such great variations in the price of a ticket depending on when it is purchased and the day and time the flight departs. Assume that some people are willing to spend time shopping for deals as well as fly at inconvenient times,
3. Draw a diagram to show the effect of resellers on the allocation of consumer surplus and producer surplus in the market for concert tickets. What are the implications of the internet for all such exchanges?
2. Explain how the rise of the internet has disrupted this exchange.
1. Use the concepts of consumer surplus and producer surplus to analyze the exchange between The Boss and his fans. Draw a diagram to illustrate.
3. How does Uber’s surge pricing solve the problem described in the previous question? Assess Kalanick’s claim that the price is set to leave as few people possible without a ride.
2. What accounts for the fact that during good weather there are typically enough taxis for everyone who wants one, but during snowstorms there typically aren’t enough?
1. Before Uber, how were prices set in the market for rides in New York City? Was it a competitive market?
1. Explain how each of the twelve principles of economics is illustrated in this case study.
3. Explain the nature of the problem that undermined MySpace relative to Facebook. Is it unique to MySpace or common to all social media sites?
2. Assume that there are two competing social media websites. Explain why it is likely that one will come to dominate. Explain why the decline of a site is likely to be swift, with a cascade of departures.
1. Describe the nature of the externality in social media websites.
1. Using the concepts you learned in this chapter, explain the economic incentives behind the huge losses in Kenyan wildlife.
3. How would the incentives of people like Wiggo Dalmo be affected if Norwegian health care was means-tested instead of available to all?
2. This case suggests that government-paid health care helps entrepreneurs. How does this relate to the arguments for social insurance in the text?
1. Why does Norway have to have higher taxes overall than the United States?
• What common resources are, and why they are overused • What artificially scarce goods are, and why they are underconsumed
• What public goods are, and why markets fail to supply them
• A way to classify goods that predicts whether or not a good is a private good—a good that can be efficiently provided by markets
• What common resources are, and why they are overused
• What public goods are, and why markets fail to supply them
• A way to classify goods that predicts whether or not a good is a private good—a good that can be efficiently provided by markets
4. According to a report from the U.S. Census Bureau, “the average [lifetime] earnings of a full-time, year round worker with a high school education are about $1.2 million compared with $2.1 million for a college graduate.” This indicates that there is a considerable benefit to a graduate from
3. Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain. The 33/50 program started by the Environmental
• What makes network externalities an important feature of high-tech industries
• Why some government policies to deal with externalities, like emissions taxes, tradable emissions permits, or Pigouvian subsidies, are efficient and others, like environmental standards, are not
• The importance of the Coase theorem, which explains how private individuals can sometimes remedy externalities
• How negative, positive, and network externalities differ
• What externalities are and why they can lead to inefficiency and government intervention in the market
11. The accompanying table shows the Herfindahl– Hirschman Index (HHI) for the restaurant, cereal, movie, and laundry detergent industries as well as the advertising expenditures of the top 10 firms in each industry. Use the information in the table to answer the following questions. Industry HHI
• The economic significance of advertising and brand names
• The meaning of monopolistic competition
11. Let’s revisit the fisheries agreement introduced in Problem 5 stating that to preserve the North Atlantic fish stocks, only two fishing fleets, one from the United States and the other from the European Union (EU), can fish in those waters. The accompanying table shows the market demand
6. Untied and Air “R” Us are the only two airlines operating flights between Collegeville and Bigtown. That is, they operate in a duopoly. Each airline can charge either a high price or a low price for a ticket. The accompanying matrix shows their payoffs, in profits per seat (in dollars), for
5. To preserve the North Atlantic fish stocks, it is decided that only two fishing fleets, one from the United States and the other from the European Union (EU), can fish in those waters. Suppose that this fisheries agreement breaks down, so that the fleets behave noncooperatively. Assume that the
4. In France, the market for bottled water is controlled by two large firms, Perrier and Evian. Each firm has a fixed cost of �1 million and a constant marginal cost of �2 per liter of bottled water (�1 = 1 euro). The following table gives the market demand schedule for bottled water in
1. The accompanying table presents market share data for the U.S. breakfast cereal market. Company Market Share Kellogg 28% General Mills 28 PepsiCo (Quaker Oats) 14 Kraft 13 Private Label 11 Other 6a. Use the data provided to calculate the Herfindahl– Hirschman Index (HHI) for the market.b.
• The meaning of oligopoly, and why it occurs
17. Consider an industry with the demand curve (D) and marginal cost curve (MC) shown in the accompanying diagram. There is no fixed cost. If the industry is a single-price monopoly, the monopolist’s marginal revenue curve would be MR. Answer the following questions by naming the appropriate
16. Walmart is the world’s largest retailer. As a consequence, it has sufficient bargaining power to push its suppliers to lower their prices so it can honor its slogan of “Always Low Prices” for its customers.a. Is Walmart acting like a monopolist or monopsonist when purchasing goods from
15. The 2014 announcement that Time Warner Cable and Comcast intended to merge prompted questions of monopoly because the combined company would supply cable access to an overwhelming majority of Americans. It also raised questions of monopsony since the combined company would be virtually the
14. Explain the following situations.a. In Europe, many cell phone service providers give away for free what would otherwise be very expensive cell phones when a service contract is purchased. Why might a company want to do that?b. In the United Kingdom, the country’s antitrust authority
8. Download Records decides to release an album by the group Mary and the Little Lamb. It produces the album with no fixed cost, but the total cost of creating a digital album and paying Mary her royalty is $6 per album. Download Records can act as a single-price monopolist. Its marketing division
5. Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel’s
4. Jimmy’s room overlooks a major league baseball stadium. He decides to rent a telescope for $50.00 a week and charge his friends to use it to peep at the games for 30 seconds. He can act as a single-price monopolist for renting out “peeps.” For each person who takes a 30-second peep, it
• How policy makers address the problems posed by monopoly
• The difference between monopoly and perfect competition, and the effects of that difference on society’s welfare
• The significance of monopoly, where a single monopolist is the only producer of a good
13. Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with
11. The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S. Department of Agriculture about wheat production in the United States back in 2013.a. The average variable
4. Consider Bob’s Blu-ray company described in Problem 4. Assume that Blu-ray production is a perfectly competitive industry. For each of the following questions, explain your answers.a. What is Bob’s break-even price? What is his shutdown price?b. Suppose the price of a Blu-ray is $2. What
3. Bob produces Blu-ray movies for sale, which requires a building and a machine that copies the original movie onto a Blu-ray. Bob rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying
2. 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
1. For each of the following, is the business a price-taking producer? Explain your answers.a. A cappuccino café in a university town where there are dozens of very similar cappuccino cafésb. The makers of Pepsi-Colac. One of many sellers of zucchini at a local farmers’ market
• What determines the industry supply curve in both the short run and the long run
• Why industries behave differently in the short run and the long run
• How to assess whether or not a producer is profitable and why an unprofitable producer may continue to operate in the short run
• How a price-taking producer determines its profit-maximizing quantity of output
• What a perfectly competitive market is and the characteristics of a perfectly competitive industry
16. The accompanying table shows a car manufacturer’s total cost of producing cars. Quantity of cars TC 0 $500,000 1 540,000 2 560,000 3 570,000 4 590,000 5 620,000 6 660,000 7 720,000 8 800,000 9 920,000 10 1,100,000a. What is this manufacturer’s fixed cost?b. For each level of output,
15. Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW’s long-run average total cost. Quantity of cars LRATC of car 1 $30,000 2 20,000 3 15,000 4 12,000 5 12,000 6 12,000 7 14,000 8 18,000a. For which levels of output does WW experience increasing returns to scale?b. For
14. True or false? Explain your reasoning.a. The short-run average total cost can never be less than the long-run average total cost.b. The short-run average variable cost can never be less than the long-run average total cost.c. In the long run, choosing a higher level of fixed cost shifts the
13. Consider Don’s concrete-mixing business described in Problem 12. 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
12. 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
11. 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
10. You produce widgets. Currently you produce four 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
9. 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. Quantity of labor (workers) Quantity of
8. 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 minimumcost output.c. An increase
7. You have the information shown in the accompanying table about a firm’s costs. Complete the missing data. Quantity of output TC MC ATC AVC 0 $20 — — $20 1 ? ? ? 10 2 ? ? ? 16 3 ? ? ? 20 4 ? ? ? 24 5 ? ? ?
6. 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
5. Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 0.8% in 2013, compared to 2012.a. When labor costs increase, what happens to average total cost and marginal cost? Consider a case in which
4. 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,
3. 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
2. 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
1. Changes in the price of key commodities have a significant impact on a company’s bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industries—such as those that produce beef, chicken, high-fructose corn syrup and
• How the firm’s technology of production can generate increasing returns to scale
• Why a firm’s costs may differ in the short run versus the long run
• The various types of costs a firm faces and how they generate the firm’s marginal and average cost curves
• Why production is often subject to diminishing returns to inputs
• The importance of the firm’s production function, the relationship between quantity of inputs and quantity of output
17. 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
16. The Japanese Ministry of Internal Affairs and Communications collects data on the prices of goods and services in the Ku-area of Tokyo, as well as data on the average Japanese household’s monthly income. The accompanying table shows some of this data. (¥ denotes the Japanese currency the
15. Carmen consumes nothing but cafeteria meals and music albums. Her indifference curves exhibit the four general properties of indifference curves. Cafeteria meals cost $5 each, and albums cost $10. Carmen has $50 to spend.a. Draw Carmen’s budget line and an indifference curve that illustrates
14. 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
13. 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
12. 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
11. Gus spends his income on gas for his car and food. The government raises the tax on gas, thereby raising the price of gas. But the government also lowers the income tax, thereby increasing Gus’s income. And this rise in income is just enough to place Gus on the same indifference curve as the
10. 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
9. Sabine can’t tell the difference between Coke and Pepsi—the two taste exactly the same to her.a. What is Sabine’s marginal rate of substitution of Coke in place of Pepsi?b. Draw a few of Sabine’s indifference curves for Coke and Pepsi. Place Coke on the horizontal axis and Pepsi on the
8. 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
7. Raul has 4 Cal Ripken and 2 Nolan Ryan baseball cards. The prices of these baseball cards are $24 for Cal and $12 for Nolan. Raul, however, would be willing to exchange 1 Cal card for 1 Nolan card.a. What is Raul’s marginal rate of substitution of Cal Ripken in place of Nolan Ryan baseball
6. Kory has an income of $50, which she can spend on two goods: music albums and cups of hot chocolate. Both are normal goods for her. Each album costs $10, and each cup of hot chocolate costs $2. For each of the following situations, decide whether this is Kory’s optimal consumption bundle. If
5. How many restaurant meals can she buy if she spends all her money on them? 5. 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
4. 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
3. The four properties of indifference curves for ordinary goods illustrated in Figure 10A-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.a.
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