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microeconomics principles
Microeconomics 4th Edition Paul Krugman, Robin Wells - Solutions
2. Use the four properties of indifference curves for ordinary goods illustrated in Figure 10A-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:
1. 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
• How to use marginal analysis to find the optimal consumption bundle • What income and substitution effects are
• Why the principle of diminishing marginal utility applies to the consumption of most goods and services
• Why consumers make choices by maximizing utility, a measure of satisfaction from consumption
• How consumers choose to spend their income on goods and services
13. Hiro owns and operates a small business that provides economic consulting services. During the year he spends $57,000 on travel to clients and other expenses. In addition, he owns a computer that he uses for business. If he didn’t use the computer, he could sell it and earn yearly interest
12. You have been hired as a consultant by a company to develop the company’s retirement plan, taking into account different types of predictably irrational behavior commonly displayed by employees. State at least two types of irrational behavior employees might display with regard to the
11. In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited.a. Kookie’s best friend likes to give her gift cards that Kookie can use at her favorite stores. Kookie, however, often forgets to use the cards before their
10. 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 shoppers 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
9. 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. Quantity of hours worked Total benefit Total cost 0 $0 $0 1 30 10 2 55 21 3 75 34
8. 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
7. 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
6. 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
5. 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.Quantity of lawns mowed Amy’s total cost Bill’s total cost Carla’s total cost 0 $0 $0 $0 1 20 10 2 2 35 20 7 3 45
4. 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
3. 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
2. 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
1. Jackie owns and operates a website design business. To keep up with new technology, she spends $5,000 per year upgrading her computer equipment. 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
• Why governments often engage in trade protection and how international trade agreements counteract this
• How tariffs and import quotas cause inefficiency and reduce total surplus
• Who gains and who loses from international trade, and why the gains exceed the losses
• The sources of international comparative advantage
• How comparative advantage leads to mutually beneficial international trade
15. 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
14. 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
13. 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.
12. 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
11. 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
10. 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
9. 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
8. 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.Price of pizza Quantity of pizza demanded Quantity of pizza supplied $10 0 6 9 1 5 8 2 4 7 3 3 6 4 2 5 5 1 4 6 0 3 7 0 2 8
7. 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
6. 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
5. 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
4. All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $0.40 per gallon of gasoline. In 2013, gasoline sales in California totaled 18.4 billion gallons. What was California’s tax revenue from the
3. 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.Price of car (thousands of dollars) Quantity of cars (thousands) D
2. 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
1. The United States imposes an excise tax on the sale of domestic airline tickets. Let’s assume that in 2013 the total excise tax was $6.10 per airline ticket (consisting of the $3.60 flight segment tax plus the $2.50 September 11 fee). According to data from the Bureau of Transportation
• The structure of the U.S. tax system
• The difference between progressive and regressive taxes and the trade-off between tax equity and tax efficiency
• The costs and benefits of taxes, and why taxes impose a cost that is greater than the tax revenue they raise
• What determines who really bears the burden of a tax
• The effects of taxes on supply and demand
17. Nile.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Nile.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how
16. According to data from the U.S. Department of Energy, sales of the fuel-efficient Toyota Prius hybrid fell from 158,574 vehicles sold in 2008 to 139,682 in 2009. Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline fell
15. 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
14. 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
13. 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
12. 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
11. 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 nonTaiwanese chip manufacturer
10. 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
9. 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
8. 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
7. 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. Price of T-shirt Quantity of T-shirts demanded when average tourist income is $20,000 Quantity of T-shirts demanded when
6. Take a linear demand curve like that shown in Figure 6-5, where the range of prices for which demand is elastic and inelastic is labeled. In each of the following scenarios, the supply curve shifts. Show along which portion of the demand curve (that is, the elastic or the inelastic portion)
5. What can you conclude about the price elasticity of demand in each of the following statements?a. “The pizza delivery business in this town is very competitive. I’d lose half my customers if I raised the price by as little as 10%.”b. “I owned both of the two Jerry Garcia autographed
4. The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Cross-price elasticities of demand Air-conditioning units and
3. The accompanying table gives part of the supply schedule for personal computers in the United States. Price of computer Quantity of computers supplied $1,100 12,000 900 8,000a. Calculate the price elasticity of supply when the price increases from $900 to $1,100 using the midpoint method. Is
2. In the United States, 2013 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded.
1. Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answer.a. Other car manufacturers, such as General Motors, decide to make and sell SUVs.b. SUVs produced in
• What factors influence the size of these various elasticities
• Why the price elasticity of supply is an important indicator of producer behavior in response to changes in price
• Why the price elasticity of demand, the income elasticity of demand, and the crossprice elasticity of demand are important indicators of consumer behavior in response to changes in prices and income
• Why economists use elasticity to measure responsiveness to changes in prices or incomes
9. In Maine, you must have a license to harvest lobster commercially; these licenses are issued yearly. The state of Maine is concerned about the dwindling supplies of lobsters found off its coast. The state fishery department has decided to place a yearly quota of 80,000 pounds of lobsters
8. The waters off the North Atlantic coast were once teeming with fish. But because of overfishing by the commercial fishing industry, the stocks of fish became seriously depleted. In 1991, the National Marine Fishery Service of the U.S. government implemented a quota to allow fish stocks to
7. For the last 80 years the U.S. government has used price supports to provide income assistance to American farmers. To implement these price supports, at times the government has used price floors, which it maintains by buying up the surplus farm products. At other times, it has used target
6. In many European countries high minimum wages have led to high levels of unemployment and underemployment, and a two-tier labor system. In the formal labor market, workers have good jobs that pay at least the minimum wage. In the informal, or black market for labor, workers have poor jobs and
5. European governments tend to make greater use of price controls than does the U.S. government. For example, the French government sets minimum starting yearly wages for new hires who have completed le bac, certification roughly equivalent to a high school diploma. The demand schedule for new
4. The accompanying table shows hypothetical demand and supply schedules for milk per year. The U.S. government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. So it implements a price floor of $1 per pint by
3. The U.S. Department of Agriculture (USDA) administers the price floor for butter, which the 2008 Farm Bill set at $1.05 per pound. At that price, according to data from the USDA, the quantity of butter supplied in 2010 was 1.7 billion pounds, and the quantity demanded was 1.6 billion pounds. To
2. In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price.a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor?b. What kinds of inefficiencies were likely to have
1. In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and therefore cost the same. The accompanying table shows the demand and supply schedules for taxi rides. Quantity of
3. Predict the effect on Medallion Financial’s business if New York City eliminates restrictions on the number of taxis. That is, if the quota is removed
2. What will be the effect on Medallion Financial if New York companies resume widespread use of limousine services for their employees? What is the economic motivation that prompts companies to offer this perk to their employees? (Note that it is very difficult and expensive to own a personal car
1. How does Medallion Financial benefit from the restriction on the number of New York taxi medallions?
• Who benefits and who loses from market interventions, and why they are used despite their well-known problems
• Why the predictable side effects of intervention in markets often lead economists to be skeptical of its usefulness
• What deadweight loss is
• How price and quantity controls create problems and can make a market inefficient
• The meaning of price controls and quantity controls, two kinds of government intervention in markets
11. Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will receive 10% of the revenue from every video rental of a movie they authored. They have no such agreement for movies shown on on-demand television.a. When the new writers’ agreement comes into
10. In 2010, a New York district judge ruled in a copyright infringement lawsuit against the popular filesharing website LimeWire and in favor of the 13 major record companies that had brought the lawsuit. The record companies, including Sony, Virgin, and Warner Brothers, had alleged that the
9. The accompanying diagram illustrates a taxi driver’s individual supply curve (assume that each taxi ride is the same distance). 80 Price of taxi ride Quantity of taxi rides 40 S 0 $8 4a. Suppose the city sets the price of taxi rides at $4 per ride, and at $4 the taxi driver is able to sell as
8. You are the manager of Fun World, a small amusement park. The accompanying diagram shows the demand curve of a typical customer at Fun World.a. Suppose that the price of each ride is $5. At that price, how much consumer surplus does an individual consumer get? (Recall that the area of a right
7. On Thursday nights, a local restaurant has a pasta special. Ari likes the restaurant’s pasta, and his willingness to pay for each serving is shown in the accompanying table. Quantity of pasta (servings) Willingness to pay for pasta (per serving) 1 $10 2 8 3 6 4 4 5 2 6 0a. If the price of a
6. The accompanying table shows the supply and demand schedules for used copies of the third edition of this textbook. The supply schedule is derived from offers at Amazon.com. The demand schedule is hypothetical. Price of book Quantity of books demanded Quantity of books supplied $55 50 0 60 35 1
5. Assume that due to an increase in demand, the average domestic airline fare increased from $319.85 in the fourth quarter of 2013 to $328.12 in the first quarter of 2014, an increase of $8.27. The number of passenger tickets sold in the fourth quarter of 2013 was 151.4 million. Over the same
4.a. In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the larger the number of bidders, the higher the sales price. For example,
3. There are six potential consumers of computer games, each willing to buy only one game. Consumer 1 is willing to pay $40 for a computer game, consumer 2 is willing to pay $35, consumer 3 is willing to pay $30, consumer 4 is willing to pay $25, consumer 5 is willing to pay $20, and consumer 6 is
2. Determine the amount of producer surplus generated in each of the following situations.a. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price, of $75. After five days of bidding, the final high bid is exactly $75. He accepts the
1. Determine the amount of consumer surplus generated in each of the following situations.a. Leon goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to $10. He picks out one he likes with a price tag of exactly $10. When he is paying for it, he learns that the
• Why markets typically lead to efficient outcomes despite the fact that they sometimes fail
• Why property rights and prices as economic signals are critical to smooth functioning of a market
• What total surplus is and how it can be used both to measure the gains from trade and to illustrate why markets work so well
• What producer surplus is and its relationship to the supply curve
19. The accompanying table gives the annual U.S. demand and supply schedules for pickup trucks. Price of truck Quantity of trucks demanded (millions) Quantity of trucks supplied (millions) $20,000 20 14 25,000 18 15 30,000 16 16 35,000 14 17 40,000 12 18a. Plot the demand and supply curves using
18. Draw the appropriate curve in each of the following cases. Is it like or unlike the curves you have seen so far? Explain.a. The demand for cardiac bypass surgery, given that the government pays the full cost for any patientb. The demand for elective cosmetic plastic surgery, given that the
17. Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his “Blue Period.” Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States.a. Draw a supply curve for Picasso
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