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microeconomics principles

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

1.6. "Common sense" might say that a monopolist would produce more output than a competitive industry facing the same marginal costs. After all, if you're making a profit, you want to sell as much as you can, don't you? What's wrong with this line of reasoning? Why do monopolistic industries sell
1.5.a. Just based on elf-interest, who is more likely to support strong patents on pharmaceuticals:young people or old people? Why?b. Who is more likely to support strong patent and copyright protection on video games: people who really like old-fashioned videogames or people who want to play the
1.4. Earlier we mentioned the pecial case of a monopoly where MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. Since so much e-commerce is close to this model-where the fixed cost of inventing the product and satisfying government regulators is the only co
1.3. When a sports team hires an expensive new player or builds a new stadium, you often hear claims that ticket prices have to rise to cover the new, higher cost. Let's see what monopoly theory says about that. It's safe to treat these new expenses as fixed costs: something that doesn't change if
1.2.a. Sometimes, our discussion of marginal cost and marginal revenue unintentionally hides the real issue: the entrepreneur's quest to maximize total profits. Here is information on a firm:Demand: P = 50 - Q Fixed cost = 100 Marginal cost = 10 Using this information, calculate total profit for
1.1. In addition to the clove monopoly discussed in this chapter, Tommy Suharto, the son of Indonesian President Suharto (in office from 1967 to 1998), owned a media conglomerate, Bimantara Citra. In their entertaining book, Economic Gangsters (Princeton University Press, 2008), economists Raymond
1.10. True or False?a. When a monopoly is maximizing its profits, price is greater than marginal cost.b. For a monopoly producing a certain amount of output, price is less than marginal revenue.c. When a monopoly is maximizing its profits, marginal revenue equals marginal cost.d. Ironically, if a
1.9.a. Where will profits be higher: when demand for a patented drug is highly inelastic or when demand for a patented drug is highly elastic? (Figure 13.4 may be helpful.)b. Which of those two drugs are more likely to be "important?" Why?c. Now, consider the lure of profits: If a pharmaceutical
1.8.a. Consider a typical monopoly firm like that in Figure 13.3. If a monopolist finds a way to cut marginal costs, what will happen:Will it pass along some of the savings to the consumer in the form of lower prices, will it paradoxically raise prices to take advantage of these fatter profit
1.7. Which of the following is true when a monopoly is producing the profit-maximizing quantity of output? More than one may be true.Marginal revenue = Average cost Total cost = Total revenue Price = Marginal cost Marginal revenue = Marginal cost
1.6.a. An answer you can find on the Internet:How high did SpaceShipOne fly when it won the Ansari X Prize?b. How much did it cost to develop SpaceShipOne? Was the $10 million prize enough to cover the costs? Why do you think Microsoft cofounder Paul Allen invested so much money to win the prize?Do
1.5.a. What's the rule: Monopolists charge a higher markup when demand is highly elastic or when it s highly inelastic?b. What's the rule: Monopolists charge a higher markup when customers have many good substitutes or when they have few good substitutes?c. For the following pairs of goods, which
1.4.a. When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0.Let's think about a monopoly in this kind of market. If the monopolist is doing its best to maximize profits, what will marginal
1.3.a. In the textbook The Applied Theory of Price) D. N. McCloskey refers to the equation MR = MC as the rule of rational life. Who follows this rule: monopolies, competitive firms, or both?b. Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per
1.2.a. Consider a market like the one illustrated in Figure 13.5, where all firms have the same average co t curve. If a competitive firm in this market tried to set a price above the minimum point on its average cost curve, how many units would it sell?b. If a monopoly did the same thing, raising
1.1. In the following diagram, label the marginal revenue curve, the profit-maximizing price, the profit-maximizing quantity, the profit, and the deadweight loss.Price
1.2. Let's take a look at Invisible Hand Principle 2 in action using a mathematical example. Suppose an industry is characterized by the equations in the table below. (We're going to assume all individual firms are identical to make this problem a little simpler.)Demand Individual firm's supply
1.1. Now let's take a look at the equations for the marginal cost functions that are graphed in Thinking and Problem-Solving question 3, and see if we can combine them into one equation for industry-wide marginal cost. This is what the two equations for the graphs in the question look like:MC1= 2 +
1.6. Let's suppose that the demand for allergists increases in California. How does the invisible hand respond to this demand? There is more than one correct answer to this question: Try to come up with two or three.
1.5. Every year, American television introduces many new shows, only about one-third of which urvive past their first season.2 The few shows that last, however, prove to be very profitable.a. How does creative destruction explain why studios bother to make new shows if most of them will fail?b. In
1.4. In the process of creative destruction, what gets destroyed?Firms Workers Machines Buildings Business plans Valuable relationships Or some combination of these? The chapter itself contains quite a few ideas about how to answer this question, but you'll have to think hard about the "opportunity
1.3. We've seen already from this chapter that dividing up output over multiple producers even when one has higher costs than the other can lead to lower industry costs, so long as output is divided up such that MC1= MC2= MC!\, You've already done some practice in Facts and Tools question 3 above
1.2. How can the market mechanism guarantee that the marginal cost of production will be the same across all firms if those firms have different owners, are in different locations, and have unique cost functions known only to the firms themselves?Why don't these different firms need to have one
1.1. The elimination principle discussed in this chapter tells us what we can expect in the long run from perfectly competitive markets:zero (normal) profits across industries. If this were the case, and this fate were unavoidable, going into business would seem to be a fairly dismal choice, given
1.4. Let's review the basic mechanism of the elimination principle.a. When demand rises in Industry X, what happens to profits? Do they rise, fall, or remain unchanged?b. When that happens, do firms, workers, and capital tend to enter Industry X, or do they tend to leave?c. Does this tend to
1.3. We've claimed that the efficient way to spread out work across firms in the same industry is to set the marginal cost of production to be the same across firms. Let's see if this works in an example.Consider a competitive market for rolled steel (measured by the ton) with just two firms:Small
1.2. Suppose that two industries, the pizza industry and the calzone industry, are equally risky, but rates of return on capital investments are only 5% in the pizza industry and 8% in the calzone industry.V>co cr:0 uz z
1.1. Entrepreneurs shift capital and labor aero industries in pursuit of profit. Let's look at this a little more closely. Suppose there are two industries: a high-profit industry, Indu try H , and a low-profit industry, Industry L. Answer the questions below about these two industries.Joseph
1.5. Just to make sure you've gotten enough practice using the different formulas in this chapter, let's try a challenging exercise with them.Very little information is given in the table below, but surprisingly, there's enough information for you to fill in all of the missing values-if you
1.4. In Kolkata, India, it is very common to see beggars on the streets. Imagine that the visitors and residents of Kolkata become more generous in their donations; what will be the effect on the standard ofliving ofbeggars in Kolkata? Answer this question using supply and demand, making
1.3.a. In the nineteenth century, economist Alfred Marshall wrote about decreasing cost industries, writing in his Principles of Economics (available free online) that "when an industry has thus chosen a locality for itself. . . . [ t] he mysteries of the trade become no mysteries; but are as it
1.2. Frequent moviegoers often note that movies are rarely based on original ideas. Most of them are based on a television series, a video game, or, most commonly, a book. Why? To help you answer this question, start with the following.a. Does a movie or a book have a higher fixed cost of
1.1. The demand for most metals tends to increase over time. Moreover, as we discussed in this chapter and also in Chapter 5, these types of natural resource industries tend to be increasing cost industries. And yet the price of metals compared with other goods has tended to fall slowly over time
1.12. Sandy owns a firm with annual revenues of$1,000,000.Wages, rent, and other costs are$900,000.a. Calculate Sandy's accounting profit.b. Suppose that instead of being an entrepre neur, Sandy could get a job with one of the following annual salaries (i) $50,000; (ii)$100,000; or (iii)
1.11. Given the cost function for Simon, a housepainter in a competitive local market, below, answer the questions that follow. (You may want to calculate average cost.)Number of Rooms Painted per Week 02 34 56 Total Cost$100$120$125$145$200$300$460 What is the minimum price per room at which Simon
1.10. Let's explore the relationship between marginal and average a little more. Suppose your grade in your economics class is composed of 10 quizzes of equal weight. You start off the semester well, then your grades start to slip a little, but then you get back into the swing of things, your Costs
1.9. Suppose Carrie decides to lease a photocopier and open up a black-and-white photocopying service in her dorm room for use by faculty and students. Her total cost, as a function of the number of copies she produces per month, is given in the table below:Number of Photocopies Total Fixed
1.To keep things simple, let's assume that each winemaker has calculated the optimal quan tity to produce if they decide to stay in busi ness; your job is simply to figure out if she should produce that amount or just shut down.Annual Income Statement When Price = 5 euros Fixed Winemaker Costs
1.8. Paulette, Camille, and Hortense each own wineries in France. They produce inexpensive, mass-market wines. Over the last few years, such wines sold for 7 euros per bottle; but with a global recession, the price has fallen to 5 eu ros per bottle. Given the information below, let's find out which
1.7. You run a small firm. Two management consultants are offering you advice. The first says that your firm is losing money on every unit that you produce. To reduce your losses, the consultant recommends that you cut back production. The second consultant says that if your firm sells another
1.6. In the ancient Western world, incense was one of the first commodities transported long distances.It grew only in the south of the Arabian Peninsula (modern-day Yemen, known then as Arabia Felix), which was transported by camel to Alexandria and the Mediterranean civilizations, notably the
1.5. In the competitive children's pajama industry, a new government safety regulation raises the average cost of children's pajamas by $2 per pair.a. If this is a constant cost industry, then in the long run, what exactly happens to the price of children's pajamas?b. If this is an increasing cost
1.4. Ralph opened a small shop selling bags of trail mix. The price of the mix is $5, and the market for trail mix is very competitive. Ralph's cost curves are shown in the figure below.Price$8 65 43 22 MC 46 810 12 14 16 18 20 22 24a. At what quantity will Ralph produce? Why?b. When the price is
1.3. In this chapter, we discussed the story of Dalton, Georgia, and its role as the "carpet capital of the world." A similar story can be used to explain why some 60% of the motels in the United States are owned by people of Indian origin or why, as of 1995, 80% of doughnut shops in California
1.2. How long is the "long run?" It will vary from industry to industry. How long would you estimate the long run is in the following industries?a. The market for pretzels and soda sold from street carts in the Wall Street financial district in New Yorkb. The market for meals at newly trendy Korean
1.1. Suppose Sam sells apples in a competitive market, apples picked from his apple tree.Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So for him, the cost of grabbing an apple rises
1.10. The chapter pointed out that whenever money is used to purchase capital, interest costs are incurred. Sometimes those costs are explicit like when Alex borrowed the money from the bank-and sometimes those costs are implicit like when Tyler had to forgo the interest he could have earned had he
1.9. In November 2010 Netflix announced a new lower price for streaming video direct to home televisions. At the time, Netflix had no serious competitors-N etflix's share of the digital download market was more than 60% (the second firm's was only 8%).Just three months later, Amazon announced that
1.8. On January 27,2011, the price ofFord Motor Company stock hit an almost 1 0-year high at$18.79 per share. (Two years prior, in January 2009, Ford stock was trading for about a tenth of that price.)a. Suppose that on January 27, 2011, you owned 10,000 shares of Ford stock (a small fraction of
1.7.a. In the highly competitive TV manufacturing industry, a new innovation makes it possible to cut the average cost of a 50 inch plasma TV from $1,000 to $400. Most TV manufacturers quickly adopt this new innovation, earning massive short-run profits.In the long run, what will the price of a 50
1.6. Arguing about economics late one night in your dorm room, your friend says, "In a free market economy, if people are willing to pay a lot for something, then businesses will charge a lot for it." One way to translate your friend's words into a model is to think of a product with highly
1.5. Replacement parts for classic cars are expensive, even though these parts aren't any more complicated than parts for new cars.a. What kind of industry is the market for old car parts: an increasing cost industry, a constant cost industry, or a decreasing cost industry? H ow can you tell?b. If
1.4. We mentioned that carpet manufacturing looks like a decreasing cost industry. In American homes, carpets are much less popular than they were in the 1960s and 1970s, when"wall-to-wall carpeting" was fa hionable in homes. Suppose that carpeting became even le s popular than it is today: What
1.3. In Figure 11.6, you saw what happens in the long run when demand rises in a constant cost industry. Let's see what happens when demand falls in such an industry: For instance, think about the market for gasoline or pizza in a small city after the city's biggest textile mill Costs and Profit
1.2. In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike.To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same.a. What does this do to the marginal cost curve at Galt Inc.? Does it rise, does it
1.1. You've been hired as a management consultant to four different companies in competitive industries. They're each trying to figure out if they should produce a little more output or a little bit less in order to maximize their profits.The firms all have typical marginal cost curves:They rise as
1.4. At indoor shopping malls, who makes sure that no business plays music too loud, no store is closed too often, and that the common areas aren't polluted with garbage? What incentive does this party have to prevent these externalities? Does your answer help explain why parents are quite happy to
1.3. Palm Springs, California, was once the playground of the rich and famous-for example, the town has a Frank Sinatra Drive, a Bob Hope Drive, and a Bing Crosby Drive.The city once had a law against building any structure that could cast a shadow on anyone else's property between 9 AM and 3
1.2. A government is torn between selling annual pollution allowances and setting an annual pollution tax. Unlike in the messy real world, this government is quite certain that it can achieve the same price and quantity either way.It wants to choose the method that will pull in more government tax
1.1. Before Coase presented his theorem, economists who wanted economic efficiency argued that people should be responsible for the damage they do-they should pay for the social costs of their actions. This advice fits nicely with notions of personal responsibility.Explain how the Coase theorem
1.9. A government is deciding between command and control solutions versus tax and subsidy solutions to solve an externality problem. In each case, explain why you think one i better, u ing arguments from the chapter.a. Suppose that whale are threatened with extinction becau e a large number of
1.8. In the example ofhoneybees, we said that the farmers pay the beekeepers for pollination services. But why don't the beekeepers pay the fruit farmers? After all, the beekeepers need the fruit farmers to make honey, so why does the payment go one way and not the other? (Hint:The almond example
1.7. Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Victor Lavy and Analia Schlo ser. 2007. "Mechani ms and Impacts of Gender Peer Effects at School,"NBER Working Paper 13292). One key
1.6. In Chapter 6, we said that taxes create deadweight losses. When we tax goods with external costs should we worry about deadweight losses? Why or why not?
1.5. Green Pastures Apartments wants to build a playground to increase demand for it larger-sized apartments but is worried that it will be overcrowded with tenants from the Still Waters Mobile Estates and Twin Pine Townhomes developments nearby.a. What type of externality is the
1.4. Cultural influences often create externalities, for good and ill. A happy movie might make people smile more, which improves the lives of people who don't see the movie. A fashion trend for tight-fitting clothing might hurt the body image of people who think they won't look good in the trendy
1.3. "The environment is priceless." What evidence do you have that this statement is incorrect?
1.2. A flu shot typically costs about $25-$50 but some firms offer their employees free flu shots.Why might a firm prefer to offer its employees free flu shots if the alternative is an equally costly wage increase?
1.1. When someone is sick, the patient's decision to take an antibiotic imposes costs on others-it helps bacteria evolve resistance faster. But it also gives free benefits to others: It may slow down the spread of infectious disease the same way that vaccinations do. Thus, antibiotics can create
1.9. Maxicon is opening a new coal-fired power plant, but the government wants to keep pollution down.a. Based on what we've seen in this chapter, which is a more efficient way to reduce pol lution: commanding Maxicon to use one particular air-scrubbing technology that will reduce pollution by 25%
1.8. When the government expands the number of pollution allowances, does that increase the cost of polluting or cut it? What about when the number of pollution allowances is cut back?
1.7. With electricity, we saw that it was important to tax the pollutant rather than the final product itself In the following cases, will the proposed taxes actually hit at the source of the external cost, or will it only land an inefficient glancing blow?What kind of tax might be better?a.
1.6. In which cases are the Coase theorem's assumptions likely to be true? In other words, when will the parties be likely to strike an efficient bargain? How do you know?a. My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes an external cost on him
1.5. In the following cases, the markets are in equilibrium, but there are externalities. In each case, determine whether there is an external benefit or cost and estimate its size. Finally, decide between a tax or a subsidy as a simple way to compensate for the externality. Fill out the table
1.4. Considering what we've learned about externalities, should human-caused global warming be completely stopped? Explain, using the language of social benefits and social costs.
1.3.a. Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, are any externalities produced?b. Suppose that a family moves in next door to the smelly factory.Do we now have an externalities problem? If so, who
1.2. If the students at your school started saying"thank you" to friends who got flu shots, would this tend to reduce the undersupply of people who get flu shots? Why or why not?
1.1. Let's sort the following eight items into private costs, external costs, private benefits, or external benefits . There's only one correct answer for each of questions a-h.a. The price you pay for an iTunes downloadb. The benefit your neighbor receives from hearing you play your pleasant
1.4. One of the assumptions made in the chapter was that the U.S. market for sugar was small relative to the overall world market for sugar, so that when the United States entered the world market for sugar, and U.S. buyers began to buy imported sugar, the price did not change.If we relax this
1.3. Let's think a little more about Thinking and Problem Solving question 4. If quality weren't held constant, what would you expect to happen to the additional Chine e edan produced after the import ban? Would they be as good as the ones that used to be imported? (Hint: Which types of sedan do
1.2. In a 2005 Washington Post article ("The Road to Riches Is Called K Street"), Jeffrey Birnbaum noted that there were 35,000 regi tered lobbyist in Washington, DC, people whose primary job is asking the federal government for something. A lobbyist who comes with long experience as an aide to a
1.1. In the chapter, we focused on a sugar tariff that eliminated all imports. Let's now take a look at the case where the sugar tariff eliminates some but not all imports. We will also examine the closely related case of a quota on sugar imports.lnternationai Trade • CHAPTER 9 • 173 The figure
1.8. For each of the four parts of Question #7 above, calculate the values of these areas in dollars. How much of the deadweight loss is due to the overproduction of steel by higher cost U.S. steel producers, and how much is due to the underconsumption of steel by U.S. steel consumers?
1.1. 7 million metric tons, but the price of the imported steel rose to about $448 per metric ton. The supply and demand diagram below shows this situation (along with an estimated no-trade domestic equilibrium at a price of$625 per metric ton and a quantity of 8. 9 million metric
1.7. In March 2002, then President George W.Bush put a tariff on imported steel as a means of protecting the domestic steel industry. In February, before the tariff went into effect, the U.S. produced 7.4 million metric tons of crude steel and imported about 2.8 million metric tons of steel
1.6. Some people argue for protectionism by pointing out that other countries with whom we trade engage in "unfair trade practices,"and that we should retaliate with our own protectionist measures. One such policy is the policy of some countries to subsidize exporting industries. India, for
1.5. Many people will tell you that, whenever possible, you should always buy U.S.-made goods. Some will go further and tell you to spend your money on goods produced in your own state whenever possible. Gust do a simple Go ogle search for "Buy [any state]" and you'll find a Web site encouraging
1.4. According to Chinese government statistics, China imported 140,000 sedans in 2007.Let's see what would happen to consumer and producer surplus if China were to ban sedan imports. To keep things simple, let's assume that if sedan imports were banned, the equilibrium price of sedans (holding
1.3. In the text, we discuss sugar farmers in Florida who use unusually large amounts of fertilizer to produce their crops; they do so because their land isn't all that great for sugar production.If we translate this into the language of the supply curve, would these Florida sugar farms be those on
1.2. Figure 9.1 looks at a ca e where the world price is below the domestic no-trade price. Let's look at the case where the world price is above the domestic no-trade price. We'll work with the market for airplanes shown in the figure below.Price per plane(in millions of dollars)World supply World
1.1.a. Just to review: Back in Chapter 8, we illustrated price ceilings with a horizontal line below the equilibrium price. Did price ceilings create surpluses or shortages?b. The horizontal line in Figure 9.1 doesn't represent a surplus or a shortage. W hat does it represent?c. Figure 9.1
1.7. Of the three conditions that explain why a free market is efficient (from Chapter 4), which condition or conditions cease to hold in the case of a tariff on imported goods? Which condition or conditions continue to hold even in the case of a tariff on imports?
1.6. This chapter pointed out that trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. However, you are very unlikely to ever encounter bumper stickers that say things like "Out of money yet? Keep taxing foreign sugar!" or "Hungry? It's probably
1.5. Spend some time driving in Detroit, MI-the Motor City-and you're sure to see bumper stickers with messages like "Buy American" or"Out of a job yet? Keep buying foreign!" or"Hungry? Eat your foreign car!" Explain these lnternationai Trade • CHAPTER 9 • 171 bumper stickers in light of what
1.2. The supply curve for rice in Japan slopes upward, just like any normal supply curve.If Japan eliminated its trade barriers to rice, what would happen to the number of workers employed in the rice-producing industry in Japan: Would it rise or fall? What would these workers probably do over the
1.4. In his book The Choice} economist Russ Roberts asks how voters would feel about a machine that could convert wheat into automobiles.a. Do you think that voters would complain that this machine should be banned, since it would destroy jobs in the auto industry?b. Would this machine, in fact}
1.3. In Figure 9.3, consider triangles Band C.One of these could be labeled "Workers and machines who could be better used in another sector of the economy," while the other could be labeled "Consumers who have to pay more than necessary for their product." Which is which?
1.1. The Japanese people currently pay about four times the world price for rice. If Japan removed its trade barriers so that Japanese consumers could buy rice at the world price, who would be better off and who would be worse off: Japanese consumers or Japanese rice farmers? If we added all the
1.7. Labor unions are some of the strongest proponents of the minimum wage. Yet in 2008, the median full-time union member earned$886 per week, an average of over $22 per hour(http://www.bls.gov/ news.release/union2.nr0.htm). Therefore, a rise in the minimum wage doesn't directly raise the wage of
1.6. In a command economy such as the old Soviet Union, there were no prices for almost all goods. Instead, goods were allocated by a"central planner." Suppose that a good like oil becomes more scarce. What problems would a central planner face in reallocating oil to maximize consumer plus producer

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