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microeconomics principles

Modern Principles Microeconomics 2nd Edition Tyler Cowen, Alex Tabarrok - Solutions

1.4. In Chapter 8, we analyzed a minimum wage in the usual way, as a price floor, and we showed that a minimum wage creates unemployment. Now suppose that firms must pay the minimum wage but they can adjust the working conditions, such as increasing the pace of work, reducing lunch breaks, cutting
1.3. In a market economy, firms with more workers can make and sell more output-that goes without saying. The marginal product oflabor tells you how much extra revenue each extra worker generates. Economists tend to use one particular equation to sum up the link between workers, revenue, and the
1.2. We mentioned that "a [college] degree signals ... something good about the job candidate, namely that they have enough intelligence, competence, and conscientiousness to earn a college degree." This view, put forward by Nobel laureate Michael Spence, i unsurprisingly known as the signaling
1.1. In the decades after the Civil War, most streetcar companies in the South discriminated against one class of citizens: smokers. Customers who wanted to smoke had to ride in the back of the car. Around 1900, many governments in the South passed laws mandating segregation by race instead. As
1.9. In the United States, it's legal to work for free:We call this an "unpaid internship."a. Why will college students take these zero-wage jobs when they could get a minimum wage job instead?b. Which idea in this chapter does this sound like?c. Just for thought: Why do you think federal law
1.8. One way that Jim Crow segregation laws operated was by providing worse government Labor Markets • CHAPTER 17 • 341 schools for black students. This widened the human capital gap between black workers and white workers (this human capital gap has narrowed dramatically since the successes of
1.7. True or false? Morticians are paid lower wages than other workers because very few people want to work with dead bodies.
1.6.a. The average person doesn't like working the night shift. According to the theory of compensating differentials, are night-shift wages probably higher or lower than day shift wages?b. Most companies do their high-skilled work during the day shift: The big meetings, the ma jor deliveries, the
1.5. Suppose that we tax CEO salaries very highly, as some are proposing in the United States.What is your prediction about CEO perks such as jets and in-house chefs?
1.4. As we saw, unions can raise wages in a sector of the economy by restricting the number of workers in that sector. Let's see what tends to happen to the workers who don't get jobs in those favored unionized sectors. We'll recycle the computer programmer data to illustrate:Number of Programmers
1.3. We've seen what happens whenjob safety regulations are imposed. Now let' see what happens when they're taken away.a. If a radical free-market, antiregulation government comes to power in the land ofPelerania, and it begins dismantling job safety regulations, what will this tend to do to the
1.Let's look at 100 computer programmers who are trying to decide whether to work for one of two companies: Robotron or Korrexia. To keep things simple, assume that both companie are equally fun to work for, so you don't need to worry about compen ating differentials here.The marginal product of
1.2. One way to think about wages for different job is to see it as another application of the law of one price. W e came across this law when we discussed speculation in Chapter 7, and it came up again when we discussed international trade in Chapter 9. The basic idea is that the supply of workers
1.1. Construction jobs in New Chongqing pay $20 per hour. The job isn't that safe: a lot of sharp objects, a lot of ways to fall off a building. The city council ofNew Chongqing decides to set some job safety regulations for the construction industry.Let's assume that the government enforces these
1.9. True or false?a. The marginal product of labor is the amount of extra profit that a firm will earn if it hires one more worker.b. The benefit ofhaving a college education has increased since the 1960s.c. The wage gap between high school gradu ates and high school dropouts has fallen since the
1.8. Michael Lynn, a social psychologist in Cornell's School of Hotel Administration, has spent years studying tipping (his homepage has well-tested advice on how to increase your tips). He finds that men tip more when they have a female server, while women tend to tip more when they have a male
1.7. It is commonly said that women earn 80 cents for every dollar that a man earns, even when doing the same job. Let's assume this is literally true in order to see how an entrepreneur would respond to this fact.a. Netrovia, a battery manufacturer, has an all-male workforce. It pays $10 million
1.6. The director of human resources at ToyCo is hiring new engineers. She's got a stack of 250 applications, and she's going to do a little research. She sits down and does a little cyber-snooping on all 250, and she finds the following:Of the 150 who have Facebook pages, 50 are holding a bottle
1.5. As we mentioned, OSHA fines companies for unsafe workplaces. At the same time, the labor market al o "fines" companies that give their workers dangerous jobs. The fines of the marketplace are larger than the U .S.government's fines by about what factor: a factor of10, of100, of1,000, or
1.4. According to the theory of compensating differentials, which low-skilled jobs in the United States will tend to pay the most:a. The safe jobs or the dangerous jobs?b. The fun jobs or the boring jobs?c. The dead-end jobs or the first-rung-on-the ladder jobs?
1.· 3. Let's apply the idea of compensating differentials to janitorial jobs. Suppose there are two quite similar restaurants in the same town, OrangeBee's and the City Inn. Both have the same demand for janitorial labor. But all the i.janitors in town know that it's much more fun to work at City
1.2. Now let's do the same with shifts in Joe's labor supply from Figure 17 .2. We li ted five important supply shifters in Chapter 3. For each example below, state whether you think Joe's labor supply will tend to increa e or decrease as a result of the change, and state which of the five factor
1.1. In Chapter 3, we listed ix important demand shifters. Since the demand for labor is like the demand for any other good, those same factor apply here. Let's look at factors that might shift the demand for janitors at the McDonald's we di cussed. For each case below, tate whether labor demand
1.6. Imagine that two players are competing over a valuable resource. Each player has two options.He or she can either be aggressive and demand the entire resource, or the player can offer to split the resource equally. The literature uses the word "Hawk" to describe the aggressive behavior, and
1.5. The market for college textbooks is an interesting one. One thing that makes it unique is that the person who chooses the textbook (the professor)is not the person who purchases the textbook(the student). Therefore, much of a textbook publishing company's marketing is geared toward college
1.4. Nobel Laureate Paul Krugman once a ked,"Who would enter a demolition derby without the incentive of a prize?" (Source: Krugman, Paul. 1998. Soft microeconomics: The squi hy case against you-know-who. Slate. www. late.com/id/1933/. Posted April 24, 1998.)a. The "demolition derby" he was talking
1.3. Why doesn't everyone just switch to one language?
1.2. We mentioned research by Liebowitz and Margolis that poked some holes in the QWERTY story. In particular, they emphasized that in the age when typing first became common, many corporations had large "typing pools,"dozens of women (rarely men) who just typed up other people's handwritten notes.
1.1. Prisoner's dilemmas are common in real life, but not all real-life games are as dismal as the prisoner's dilemma. One game, known as "stag hunt," describes situations where cooperation is possible but fragile. The philosopher Jean-Jacques Rousseau described the game. He said that a lot of
1.6. It's more efficient to go shopping when everyone else is shopping: This is one explanation for the rise of Christmas as a shopping season. Even many people who don't celebrate Christmas do a lot of shopping and gift-giving during this season. At the other extreme, a "dead mall" is one of the
1.5. Consider the shipping container (the large box that stacks on cargo ships and attaches to trucks).If all containers are the same size and design, then the container can pass seamlessly between ships, trains, trucks, and cranes along the way.Today, the standard dimensions are 8 feet wide, 8.5
1.4. Suppose you and your friend Amy work together to develop a unique magic trick that either of you could perform alone. It turns out to be a tremendously popular trick and both of you make it big as professional magicians.Suppose you decide to conspire together and limit the number of
1.3. Deciding which side of the road to drive on is a kind of coordination game. In some countries, people drive on the right side of the road, and in other countries (notably the United Kingdom and some of its former colonies), they drive on the left. These customs developed hundreds of years ago.
1.2. Every so often, rumors float around Facebook claiming that the social networking site is going to begin charging its users a small monthly fee.So far, those rumors have always turned out to be false.a. Do you use Facebook? If so, how much would you be willing to pay per month for access to
1.1. If you get a crack in your windshield, you can take your car to an auto-glass repair shop where they will gladly try to repair your windshield, so you can avoid having to replace it. They guarantee their work, too; if the repair is not successful, they will allow you to apply the money you
1.6. The mantra of Amazon.com CEO JeffBezos is "Get big fast." As we saw in Chapter 13 on monopoly, one reason to "get big fast" is because in some industries the fim1's average cost will plummet as the finn expands-so size helps on the supply side. In this chapter, network effects illustrated how
1.5. In the following three games, is each a coordination game or a prisoner's dilemma?The best way to check is to see if there is exactly one Nash equilibrium; another way is to see if there is a dominant strategy for each player.To keep it a little challenging, we won't give the actions obvious
1.4. For each of the pairs below, determine which business is more likely to operate in a contestable market, and explain why.a. The only clothing store in a small town vs.the only natural gas provider in a small townb. The only clothing store in a small town vs. the only cable TV provider in a
1.3. Linkedin is an online professional networking site, much like Facebook or MySpace, except that it's for connecting with classmates and colleagues to create networks that may be helpful in, among other things, finding job opportunities. The site boasts more than 100 million members (as of March
1.2. Explain the difference between competition "in the market" and competition "for the market."What impact does each kind of competition have on prices and output in a market? Is one better than the other? How does the distinction make the application of antitrust laws more complicated?
1.1. Antitrust laws make certain "anticompetitive"practices illegal because these practices raisea. Characterized by network goodsb. Highly contestable
1.2. The diagram below shows the monthly demand for hot dogs in a large city. The marginal cost(and average cost) is a constant $2 per hot dog.$40 30 The Market for Hot Dogs Demand 80 90 Quantitya. If the market for hot dogs is perfectly competitive, how many hot dogs will be Cartels, Oligopolies,
1.What you have just constructed is what economists would call Firm X's reaction function.Even though Firm X thought about the different choices Firm Y could make, Firm Y is not actually going to choose just any random level of output. In fact, Firm Y has its own reaction function, where it
1.1. The French economist Antoine Cournot developed an interesting model of competition in an oligopoly that now bears his name. In a Cournot oligopoly, all of the firms know that the total output from all firms will determine the price (based on the downward sloping market demand curve), but they
1.9. In a famous article on advertising, 12 Gary Becker and Kevin Murphy wrote about advertisements that run during television programs: "One can say either that advertising pays for the programming-the usual interpretation-or that programming compensates for the advertising, which is our preferred
1.8. As you read in the textbook, the requirement for an industry to be considered monopolistically competitive are that there are many firms and those firms are producing unique, or differentiated, products. One industry in which we find differentiated products is the recording industry. Not only
1.7. Consider the demand schedule for Silly Bandz below. Assume that the marginal cost of producing a pack of Silly Bandz is a constant $0.50.Price($/pack of Silly Bandz)$3.50$3.00$2.50$2.00$1 .50$1.00 Quantity Demanded(packs of Silly Bandz)0 12 24 36 48 60 Cartels, Oligopolies, and Monopolistic
1.6. Suppose the five landscapers in your neighbor hood form a cartel and decide to restrict output to 16 lawns each per week (for a total of 80 lawns in the entire market) in order to keep prices high. The weekly demand curve for lawn-mowing services is shown below. Assume that the marginal cost
1.5. In 2005, economist Thomas Schelling won the Nobel Prize in economics, in part for hi development of the concept of the "focal point" in game theory. Focal points are a way to olve a coordination game. If two people both benefit by choosing the same option but cannot communicate, they will
1.4. In 1890, Senator Sherman (of the Sherman Antitrust Act, which we mentioned earlier)pushed through the legislation that bears his name, which gave the government significant power to "bust up" cartels, presumably in order to increase output. More than a century later, economist Thomas J.
1.3. In the late fifteenth century, Europe consumed about 2 million pounds of pepper per year. At this time, Venice (ruled by a small, tightly knit group of merchants) was the major player in the pepper trade. But after Portuguese explorer Vasco da Gama blazed a path around Mrica into the Indian
1.2. Firms in a cartel each have an incentive individually to lower the prices they charge.a. Suppose there was a government regula tion that set minimum prices. Would this regulation tend to strengthen cartels, weaken them, or have no effect?b. Another way that one firm can cheat on a cartel is to
1.1. Usually, we think of cheating as a bad thing.But in this chapter, cheating turns out to be a very good thing in some important cases.a. Who gets the benefit when a cartel collapse through cheating: consumers or producers?b. Does this benefit usually show up in a lower price, a higher quantity,
1.9. In a city like New York, the market for stand-up comedians is likely to be monopolistically competitive. Explain why this is. If the market is monopolistically competitive, then what can be said about prices, output, and profits in this market?
1.8. Though its name can sometimes cause confusion for students, the market structure we call "monopolistic competition" is so named because it has some features of monopoly and some features of competition.a. In what ways is a monopolistically competi tive market like a monopoly? In what ways is
1.7. As this chapter pointed out, most cartels fail to successfully maximize profits by restricting output and raising prices because of the incentive to cheat. However, even a cartel that can achieve sustained cooperation is not guaranteed to succeed; "success" in raising prices can actually harm
1.6. Suppose you have a suit that needs altering, and you take it to three different tailors in the same mall to get an estimate of the cost of the alterations. All three tailors give you the exact same estimate of $25. What are two different explanations for the similarity of the price quotes?
1.5. In many college towns, rumors abound that the gas stations in town collude to keep prices high.If this were true, where would you expect this conspiracy against the public to work best? Why?a. In towns with dozens of gas stations or in towns with less than 1 0?b. In towns where the city
1.4. Your professor probably grades on a curve, implicitly if not explicitly. This means that you and your classmates could each agree to study half as much, and you would all earn the same grade you would have earned without the agreement. What do you think would happen if you tried to enact this
1.In each cell in the table below, the first number is the number of years Butch will spend in prison, and the second is the number that Sundance will spend in prison given the strategies chosen by Butch and Sundance.If years in prison are minuses, then we can write up the problem like
1.3. The prisoner's dilemma game is one of the most important models in all of social science: Most games of trust can be thought of as some kind of prisoner's dilemma. Here's the classic game:Two men rob a bank and are quickly arrested.The police do not have an airtight case; they have just enough
1.2. Take a look at the reasons why cartels collapse presented in this chapter. For each pair below, choose the case where the cartel is more likely to stick together.a. An industry where it's easy for new firms to enter vs. an industry where the same firms stick around for decades.Demand
1.1. Let's start offby working out a few examples to illustrate the lure of the cartel. To keep it simple on the supply side, we'll assume that fixed costs are zero so marginal cost equals average cost. We'll compare the competitive outcome (P = MC) to what you'd get if the firms all agreed to act
1.6. We mentioned that airlines charge much more for flights booked at the last minute than for flights booked well in advance, even for exactly the same flight. This is because people who tend to book at the last minute tend to have inelastic demand. Think of other characteristics that airlines
1.5. Think about the kind of 40-year-old who pulls out a faded, obviously expired student ID to get a discount ticket at a movie theater: What can you predict about his or her willingness to pay for a full-price movie? Is the movie theater making a mistake when it lets him or her pay the student
1.Here's the two friend ' willingness to pay for the separate kinds of movies. As you can ee, both Amanda and Yvonne are annoyed by the idea of a hybrid movie: Each would rather see her favorite kind of movie.Maximum Willingness to Pay for a Movie Ticket Amanda Pure Action Pure Romance Action +
1.4. Amanda and Yvonne are thinking of going out to the movies. Amanda like action flicks more, but Yvonne likes a little bit of romance. Warner Bros. is trying to decide what kind of movies to make this year.Should it make one movie for release this summer, an action flick with a romantic subplot,
1.3.a. In competitive market in the long run, if there are two kinds of steaks, "regular" and"high-quality Angus beef," and the regular beef sell at a lower price, is this an example of price discrimination?b. How is this different from the HP printer tory in this chapter?
1.2. Consider the following eating arrangement for a concert hall:I Front row:Rows B-H Stage The front row only eats two people. Rows B- H, about 50 feet back from the front row, seat 20 people per row.a. Would these front-row seats sell for more or for less than the front-row seats at a typical
1.1. In the table below, we consider how Alex, Tyler, and Monique would fare under a la carte pricing and under bundling for cable TV when there are two channels: Lifetime and the Food Network.Alex and Tyler like to watch Project Runway so they each place a higher value on Lifetime than on the Food
1.11. At the Kennedy Center for the Performing Arts in Washington, DC, if you make a $120 donation per year, you are allowed to go to a small room before the concert and drink free coffee and eat free cookies. If you make a donation of$1,200 per year, you are allowed to go to a different small room
1.10. Let's calculate the profit from price discrimination. The average daily demand for dinners at Paradise Grille, an upscale casual restaurant, is as follows:Demand for dinners by senior citizens:P = 50- 0.5Q MR = 50- Q Demand for dinners by others: P = 100 - Q MR = 100-2Q Marginal cost = 10 in
1.9. True or false? A price-discriminating business will sometimes be willing to spend money to make a product worse.
1.8. When is a pharmaceutical company more likely to spend $100 million to research a new drug: when it knows it will be able to charge different prices in different countries or when it knows that it will be required to charge the same price in different countries? Why?
1.7. Isn't it surprising that movies, with tickets that cost around $10, often use vastly more economic resources than stage plays where tickets can easily cost $100?Compare, for example, a live stage performance of Shakespeare's Hamlet with a movie of Hamlet.a. In which field is the marginal cost
1.6. Where are you more likely to see businesses"bundling" a lot of goods into one package:in industries with high fixed costs and low marginal costs (like computer games or moviemaking), or in industries with low fixed costs and high marginal costs (like doctor visits, where the doctor's time is
1.5. Some people think that businesses create monopolies by destroying their competition, and there is certainly some truth to that. But as we learned from Obi-Wan Kenobi, "[Y]ou will find that man of the truths we cling to depend greatly on our own point of view."For instance, some people
1.4. As we saw in this chapter, drug companies often charge much more for the same drug in the United States than in other countries.Congre often con iders passing laws to make it easier to import drugs from these low-price countries (it also considers passing laws to make it illegal to import
1.3.a. When will a firm find it ea ier to price discriminate: before the exi tence of eBay or afterward?b. Which of the two "principles of price discrimination" doe this invoke?
1.2. A dry cleaner has a sign in its window:"Free Internet Coupons." The dry cleaner lists its Web site, and indeed there are good discounts available with the coupons. Most customers don't use the coupons.a. What probably would be the main difference between cu tomers who use the coupons and those
1.1. Subway, the fast-food chain, sells foot-long sandwiches for $5 each. However, Subway still sells 6-inch sandwiches for considerably more than $2.50 each, that is, at a higher price per inch of sub.a. Can you think of a way that in theory you could make money from Subway's pricing practices?
1.9. Some razors, like Gillette's Fusion and Venus razors, have disposable heads. The razor come with an initial pack with a razor handle plus three or four heads; after that, you need to buy refills separately.a. Where do you think Gillette gets more rev enue: by selling the initial pack or by
1.8. When will a monopoly create more output:when it is allowed to and can perfectly price discriminate or when the government bans price discrimination?
1.7. Where will you see more price discrimination:in monopoly-type markets with just a few firms or in competitive markets with many fim1.s? Why?
1.6. Why would a firm hand out coupons for its products rather than just lowering the price?Here's a hint: At your school, what kind of students use coupons to buy their pizza? What kind of students never use coupons to buy their pizza?Price Discrimination • CHAPTER 14 • 271
1.2. Two customers, Fred and Lamont, walk into Grady's Used Pickups. Who probably has a more inelastic demand for one of Grady's pickups: people like Lamont, who are good at shopping around, or people like Fred, who know what they like and just buy it?
1.5. If Congress passed a privacy law making it illegal for colleges to ask for parents' tax returns, would that tend to help students from high-income families or students from low-income fanlllies?
1.4. When arbitrage is easy in a market of would-be price discriminators, who is more likely to get priced out of the market: those with elastic demand or those with inelastic demand?
1.3. Who probably has more elastic demand for a Hertz rental car: someone who reserves a car online weeks before a trip, or someone who walks up to a Hertz counter after he walks off an airplane following a 4-hour flight? Who probably gets charged more?
1.1. True or False? A business that price discriminates will generally charge some customers more than marginal cost, and it will generally charge other customers less than marginal cost.
1.6.a. Let's imagine that the firm with cost curves illustrated in the left panel of the figure below is a large cable TV provider.Assuming that the firm is free to maximize profit, label the profit-maximizing price, quantity, and the firm's profit.b. Now assume that the firm is regulated and that
1.5. For Kremer's patent buyout proposal(mentioned in the chapter) to work, the government needs to pay a price that's high enough to encourage pharmaceutical companies to develop new drugs. How can the government find out the right price? Through an auction, of course. In Kremer's plan, it works
1.4. In 1983, Congress passed the Orphan Drug Act, which gave firms that developed pharmaceuticals to treat rare diseases (diseases with U.S. patient populations of 200,000 people or fewer) the exclusive rights to sell their pharmaceutical for 7 years, basically an extended patent life.In other
1.3.a. In 2006, Medicare Part D was created to subsidize spending on prescription drugs.What effect would you expect this expansion to have on pharmaceutical prices?What principle in the chapter would explain this result?b. Given your answer in parta, what effect would you predict on pharmaceutical
1.2. In Challenges question 1, what was the deadweight loss of monopoly in each of the three cases? (Hint: Where does the marginal cost curve cross the demand curve? The same place it does under competition.) Is this number measured in dollars, in units of the good, or in some other way?
1.1.a. For the following three cases, calculate i.The marginal revenue curve ii. The level of output where MR = MC(i .e., set the equation from i equal to marginal cost and solve for Q)Monopoly • CHAPTER 13 • 255 iii. The profit-maximizing price (i.e., plug your answer from equation ii into the
1.10. China developed gunpowder, paper, the compass, water-driven spinning machines, and many other inventions long before its European counterparts. Yet the Chinese did not adopt cannons, industrialization, and many other applications until after the West did.a. Suppose you are an inventor in
1.9. The lure of pices during the medieval period wasn't driven merely by the desire to improve the taste of food (Europe produced saffron, thyme, bay leaves, oregano, and other spices for that). The lure of nutmeg, mace, and cloves came from their mystique. Spices became a symbol of prestige Uust
1.8. This chapter told the story of how the 2000 California energy shortage was aggravated by price deregulation.a. Suppose you are an entrepreneur who is interested in building a power plant to take advantage of the high prices for energy.Seeing rising energy costs, would price de regulation make
1.7. In the early part of the twentieth century, it was cheaper to travel by rail from New York to San Francisco than it was to travel from New York to Denver, even though the train to San Francisco would stop in Denver on the way.a. Denver is a city in the mountains. Suggest alternate ways to get

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