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Microeconomics Theory And Applications With Calculus 3rd Edition Jeffrey M. Perloff - Solutions

As described in the Application “Pricing iTunes,”Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing charging an annual access fee and a low price per song, it would raise its profit by about 30% relative to what it would earn using uniform pricing or variable pricing.
Joe in Question 5.3 marries Susan, who is also an enthusiastic golfer. Susan wants to join the Northlands Club. The manager believes that Susan’s inverse demand curve is p = 100 - 2q. The manager has a policy of offering each member of a married couple the same two-part prices, so he offers them
Joe has just moved to a small town with only one golf course, the Northlands Golf Club. His inverse demand function is p = 120 - 2q, where q is the number of rounds of golf that he plays per year.The manager of the Northlands Club negotiates separately with each person who joins the club and can
Knoebels Amusement Park in Elysburg, Pennsylvania, charges an access fee, l, to enter its Crystal Pool. It also charges p per trip down the pool’s water slides. Suppose that 400 teenagers visit the park, each of whom has a demand function of q1 = 5 - p, and that 400 seniors also visit, each of
Using math, show why two-part pricing causes customers who purchase few units to pay more per unit than customers who buy more units. M
Consider the nonlinear price discrimination analysis in panel a of Figure 12.4.a. Suppose that the monopoly can make consumers a take-it-or-leave-it offer. The monopoly sets a price, p*, and a minimum quantity, Q*, that a consumer must pay to be able to purchase any units at all. What price and
Suppose that the nonlinear price discriminating monopoly in panel a of Figure 12.4 can set three prices, depending on the quantity a consumer purchases. The firm’s profit isπ = p1Q1 + p2(Q2 - Q1) + p3(Q3 - Q2) - mQ3, where p1 is the high price charged on the first Q1 units (first block), p2 is a
In panel b of Figure 12.4, the single-price monopoly faces a demand curve of p = 90 - Q and a constant marginal (and average) cost of m = $30. Find the profit-maximizing quantity (or price) using math. Determine the profit, consumer surplus, welfare, and deadweight loss. M
Are all the customers of the monopoly that uses block pricing in panel a of Figure 12.4 worse off than they would be if the firm set a single price(panel b)? Why or why not?
Does a monopoly’s ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not? [Consider two cases: (a) the marginal cost is so high that the monopoly is uninterested in selling to one group;(b) the marginal cost is low enough that the monopoly
According to a report from the Foundation for Taxpayer and Consumer Rights, gasoline costs twice as much in Europe than in the United States because taxes are higher in Europe. However, the amount per gallon net of taxes that U.S. consumers pay is higher than that paid by Europeans. The report
Show that the equilibrium elasticities in the two countries must be equal in Solved Problem 12.3. M
A monopoly sells to n1 consumers in Country 1 and n2 in Country 2, where each person in Country 1 has a constant elasticity demand function of q1 = pε1and every person in Country 2 has a demand function of q2 = pε2. Thus, the country demand functions are Q1 = n1pε1 and Q2 = n2pε2.Output can be
How would the analysis in Solved Problem 12.2 change if m = 7 or if m = 4? (Hint: Where m = 4, the marginal cost curve crosses the MR curve three times—if we include the vertical section. The single-price monopoly will choose one of these three points where its profit is maximized.)
A monopoly sells its good in the United States, where the elasticity of demand is -2, and in Japan, where the elasticity of demand is -5. Its marginal cost is 10. At what price does the monopoly sell its good in each country if resale is impossible? M
Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set in China for about $3, which was only one-fifth the U.S. price, and sold about 100,000 units. The price was extremely low in China because Chinese consumers are less wealthy and because (lowerquality)
Universal Studios sold the Mamma Mia! DVD around the world. Universal charged $21.40 in Canada and $32 in Japan—more than the $20 it charged in the United States. Given that Universal had a constant marginal cost of $1, determine what the elasticities of demand must be in Canada and in Japan if
A monopoly sells its good in the U.S. and Japanese markets. The American inverse demand function is pA = 100 - QA, and the Japanese inverse demand function is pJ = 80 - 2QJ, where both prices, pA and pJ, are measured in dollars. The firm’s marginal cost of production is m = 20 in both countries.
A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“eye-BO”). The Chihuahuasized robot could sit, beg, chase balls, dance, and play an electronic tune. When Sony started selling the toy in July 1999, it announced that it would sell 3,000 Aibo robots in Japan for about
Hershey Park sells tickets at the gate and at local municipal offices. There are two groups of people. Suppose that the demand function for people who purchase tickets at the gate is QG = 10,000 - 100pG and that the demand function for people who purchase tickets at municipal offices is QG = 9,000
A monopoly sells in two countries, and resale between the countries is impossible. The demand curves in the two countries are p1 = 100 - Q1 and p2 = 120 - 2Q2. The monopoly’s marginal cost is m = 30. Solve for the equilibrium price in each country. M
A firm charges different prices to two groups.Would the firm ever operate where it was suffering a loss from its sales to the low-price group? Explain.
A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price, p = $5. No one from the first group chose to purchase. Now the monopoly can prevent resale, so it decides to
A firm is a natural monopoly (see Chapter 11).Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price discriminate.Use a graph to show how much the monopoly produces, Q*. Show graphically and mathematically that a
To promote her platinum-selling CD Feels Like Home in 2005, singer Norah Jones toured the country giving live performances. However, she sold an average of only two-thirds of the tickets available for each show, T* (Robert Levine, “The Trick of Making a Hot Ticket Pay,” New York Times, June 6,
See the Application “Google Uses Bidding for Ads to Price Discriminate,” which discusses how advertisers on Google’s Web site bid for the right for their ads to be posted when people search for certain phrases. Should a firm that provides local services(such as plumbing or pest control)
Using the information in the Application “Botox Revisited,” determine how much Allergan loses by being a single-price monopoly rather than a perfectly price-discriminating monopoly. Explain.
If a monopoly faces an inverse demand curve of p = 90 - Q, has a constant marginal and average cost of 30, and can perfectly price discriminate, what is its profit? What are the consumer surplus, welfare, and deadweight loss? How would these results change if the firm were a single-price monopoly?
On July 12, 2012, Hertz charged $126.12 to rent a Nissan Altima for one day in New York City, but only $55.49 a day in Miami. Is this price discrimination? Explain.2. Perfect Price Discrimination
The 2002 production run of 25,000 new Thunderbirds included only 2,000 cars for Canada. Yet potential buyers besieged Canadian Ford dealers.Many hoped to make a quick profit by reselling the cars in the United States. Reselling was relatively easy, and shipping costs were comparatively low.When the
Disneyland price discriminates by charging lower entry fees for children than for adults and for local residents than for other visitors. Why does it not have a resale problem?
Many colleges provide students from low-income families with scholarships, subsidized loans, and other programs so that they pay lower tuitions than students from high-income families. Explain why universities behave this way.
Spenser’s Superior Stoves advertises a one-day sale on electric stoves. The ad specifies that no phone orders will be accepted and that the purchaser must transport the stove. Why does the firm include these restrictions?
Alexx’s monopoly currently sells its product at a single price. What conditions must be met so that he can profitably price discriminate?Exercises = exercise is available on MyEconLab; * = answer appears at the back of this book; M = mathematical problem.
As of 2012, the pharmaceutical companies Abbott Laboratories, AstraZeneca, Aventis Pharmaceuticals, Bristol-Myers Squibb Company, Eli Lilly, GlaxoSmithKline, Janssen, Johnson & Johnson, Novartis, Ortho-McNeil, and Pfizer provide low-income, elderly people with a card guaranteeing them discounts on
Bleyer Industries Inc., the only U.S. manufacturer of plastic Easter eggs, once manufactured 250 million eggs each year. However, imports from China cut into its business. In 2005, Bleyer filed for bankruptcy because the Chinese firms could produce the eggs at much lower costs (“U.S. Plastic Egg
A country has a monopoly that is protected by a specific tariff, τ, on imported goods. The monopoly’s profit-maximizing price is p*. The world price of the good is pw, which is less than p*. Because the price of imported goods with the tariff is pw + τ, no foreign goods are imported. Under WTO
For general functions, solve for the monopsony’s first-order condition if it is also a monopoly in the product market. M 8. Challenge
A monopsony faces a supply curve of p = 10 + Q.What is its marginal expenditure curve? If the monopsony has a demand curve of p = 50 - Q, what are the equilibrium quantity and price? How does this equilibrium differ from the competitive equilibrium? M
What effect does a price support have on a monopsony? In particular, describe the equilibrium if the price support is set at the price where the supply curve intersects the demand curve.
Can a monopsony exercise monopsony power—that is, profitably set its price below the competitive level—if the supply curve it faces is horizontal?Why or why not?
What happens to the monopsony equilibrium if the minimum wage is set slightly above or below the competitive wage? (Hint: See Solved Problem 11.6.)
Suppose that the original labor supply curve, S1, for a monopsony shifts to the right to S2 if the firm spends $1,000 in advertising. Under what condition should the monopsony engage in this advertising?(Hint: See the analysis of monopoly advertising.)
A monopoly chocolate manufacturer faces two types of consumers. The larger group, the hoi polloi, loves desserts and has a relatively flat, linear demand curve for chocolate. The smaller group, the snobs, is interested in buying chocolate only if the hoi polloi do not buy it. Given that the hoi
A monopoly produces a good with a network externality at a constant marginal and average cost of$2. In the first period, its inverse demand curve is p = 10 - Q. In the second period, its demand is p = 10 - Q unless it sells at least Q = 8 units in the first period. If it meets or exceeds this
The price of wholesale milk dropped by 30.3% in 1999 when the Pennsylvania Milk Marketing Board lowered the regulated price. The price to consumers fell by substantially less than 30.3%. Why? (Hint:Show that a monopoly will not necessarily lower its price by the same percentage as its constant
A monopoly drug company produces a lifesaving medicine at a constant cost of $10 per dose.The demand for this medicine is perfectly inelastic at prices less than or equal to the $100 (per day)income of the 100 patients who need to take this drug daily. At a higher price, nothing is bought.Show the
Based on the information in the Botox Patent Monopoly application, what would happen to the equilibrium price and quantity if the government had set a price ceiling of $200 per vial of Botox?What welfare effects would such a price ceiling have? (Hint: See Solved Problem 11.5.) M
Describe the effects on output and welfare if the government regulates a monopoly so that it may not charge a price above p, which lies between the unregulated monopoly price and the optimally regulated price (determined by the intersection of the firm’s marginal cost and the market demand
Once the copyright runs out on a book or musical composition, the work can legally be put on the Internet for anyone to download. U.S. copyright law protects the monopoly for 95 years after the original publication. But in Australia and Europe, the copyright holds for only 50 years. Thus, an
In the Botox Patent Monopoly application, consumer surplus, area A, equals the deadweight loss, area C. Show that this equality is a result of the linear demand and constant marginal cost assumptions. M
Based on the information in the Botox Patent Monopoly application, what would happen to the equilibrium price and quantity if the government had collected a specific tax of $75 per vial of Botox?What welfare effects would such a tax have? M
Can a firm operating in the upward-sloping portion of its average cost curve be a natural monopoly?Explain. (Hint: See Solved Problem 11.4.)
Can a firm be a natural monopoly if it has a U-shaped average cost curve? Why or why not?(Hint: See Solved Problem 11.4.)
What is the effect of a franchise (lump-sum) tax on a monopoly? (Hint: Consider the possibility that the firm may shut down.)4. Causes of Monopolies
Only Indian tribes can run casinos in California.These casinos are spread around the state so that each is a monopoly in its local community.California Governor Arnold Schwarzenegger negotiated with the state’s tribes, getting them to agree to transfer a fraction of their profits to the state in
In 1996, Florida voted on (and rejected) a 1¢-perpound excise tax on refined cane sugar in the Florida Everglades Agricultural Area. Swinton and Thomas(2001) used linear supply and demand curves(based on elasticities estimated by Marks, 1993) to calculate the incidence from this tax given that the
A monopoly with a constant marginal cost m has a profit-maximizing price of p1. It faces a constant elasticity demand curve with elasticity ε. After the government applies a specific tax of $1, its price is p2. What is the price change p2 - p1 in terms of ε?How much does the price rise if the
If the inverse demand function facing a monopoly is p(Q) and its cost function is C(Q), show the effect of a specific tax, τ, on the monopoly’s profitmaximizing output. How does imposing τ affect its profit? M
Suppose that many similar price-taking consumers (such as Denise in Chapter 10) have a single good (candy bars). Jane has a monopoly in wood, so she can set prices. Assume that no production is possible. Using an Edgeworth box, illustrate the monopoly optimum and show that it does not lie on the
Draw an example of a monopoly with a linear demand curve and a constant marginal cost curve.a. Show the profit-maximizing price and output, p*and Q*, and identify the areas of consumer surplus, producer surplus, and deadweight loss. Also show the quantity, Qc , that would be produced if the
Suppose that all iPod owners consider only two options for downloading music to their MP3 players: purchasing songs from iTunes or copying songs from friends. With these two options, suppose the weekly inverse market demand for the Rolling Stones’ song “Satisfaction” is p = 1.98- 0.00198Q.
In addition to the hard-drive-based iPod, Apple produces a flash-based audio player. Its 512MB iPod Shuffle (which does not have a hard drive) sold for$99 in 2005. According to iSuppli, Apple’s per-unit cost of manufacturing the Shuffle was $45.37. What was Apple’s price/marginal cost ratio?
When the iPod was introduced, Apple’s constant marginal cost of producing its top-of-the-line iPod was $200 (iSuppli), its fixed cost was approximately $736 million, and I estimate that its inverse demand function was p = 600 - 25Q, where Q is units measured in millions. What was Apple’s
The U.S. Postal Service (USPS) has a constitutionally guaranteed monopoly on first-class mail. In 2012,it charged 44¢ for a stamp, which was not the profit-maximizing price—the USPS goal, allegedly, is to break even rather than to turn a profit. Following the postal services in Australia,
In 2009, the price of Amazon’s Kindle 2 was $359, while iSuppli estimated that its marginal cost was$159. What was Amazon’s Lerner Index? What elasticity of demand did it face if it was engaging in short-run profit maximization? M
Under what circumstances does a monopoly set its price equal to its marginal cost?
Are major-league baseball clubs profit-maximizing monopolies? Some observers of this market contend that baseball club owners want to maximize attendance or revenue. Alexander (2001) said that one test of whether a firm is a profit-maximizing monopoly is to check whether it is operating in the
Show why a monopoly may operate in the upwardor downward-sloping section of its long-run average cost curve but a competitive firm operates only in the upward-sloping section.
AT&T Inc., the large U.S. phone company and the one-time monopoly, left the payphone business because people were switching to wireless phones(Crayton Harrison, “AT&T to Disconnect PayPhone Business After 129 Years,” Bloomberg.com, December 3, 2007). The number of wireless subscribers
Suppose that the inverse demand for San Francisco cable car rides is p = 10 - Q/1,000, where p is the price per ride and Q is the number of rides per day.Suppose the objective of San Francisco’s Municipal Authority (the cable car operator) is to maximize its revenues. What is the revenue
Given that a monopoly’s marginal revenue curve is strictly downward sloping, use math and a graph(such as Figure 11.3) to show why a monopoly’s revenue curve reaches its maximum at a larger quantity than does its profit curve. M
If a monopoly’s inverse demand curve is p = 13 - Q and its cost function is C = 25 + Q + 0.5Q2, what Q* maximizes the monopoly’s profit (or minimizes its loss)? At Q*, what is the price and the profit?Should the monopoly operate or shut down? M
Suppose that the inverse demand function for a monopolist’s product is p = 9 - Q/20. Its cost function is C = 10 + 10Q - 4Q2 + 2 3 Q3. Draw marginal revenue and marginal cost curves. At what outputs does marginal revenue equal marginal cost?What is the profit-maximizing output? Check the
The inverse demand curve that a monopoly faces is p = 10Q-0.5. The firm’s cost curve is C(Q) = 5Q.What is the profit-maximizing quantity and price? M
The inverse demand curve that a monopoly faces is p = 100 - Q. The firm’s cost curve is C(Q)= 10 + 5Q. What is the firm’s profit-maximizing quantity and price? How does your answer change if C(Q) = 100 + 5Q? M
Show that the elasticity of demand is unitary at the midpoint of a linear inverse demand function and hence that a monopoly will not operate to the right of this midpoint. M
Given that the inverse demand function is p(Q) = a- bQ + (c/2)Q2, derive the marginal revenue function. Compare the corresponding marginal revenue curve to the linear one (where c = 0) and show how its curvature depends on whether c is positive or negative. (Hint: See Solved Problem 11.1.) M
If the inverse demand curve a monopoly faces is p = 10Q-0.5, what is the firm’s marginal revenue curve? (Hint: See Solved Problem 11.1.) M
If the inverse demand function is p = 300 - 3Q, what is the marginal revenue function? Draw the demand and marginal revenue curves. At what quantities do the demand and marginal revenue lines hit the quantity axis? (Hint: See Solved Problem 11.1.) M
A competitive industry with an upward-sloping supply curve sells Qh of its product in its home country and Qf in a foreign country, so the total quantity it sells is Q = Qh + Qf . No one else produces this product. There is no shipping cost. Determine the equilibrium price and quantity in each
Initially, electricity is sold in New York and in other states at a competitive single price. Now suppose that New York restricts the quantity of electricity that its citizens can buy. Show what happens to the price of electricity and the quantities sold in New York and elsewhere.
A central city imposes a rent control law that places a binding ceiling on the rent that can be charged for an apartment. The suburbs of this city do not have rent control. What happens to the rental prices in the suburbs and to the equilibrium number of apartments in the total metropolitan area,
Peaches are sold in a competitive market. There are two types of demanders: consumers who eat fresh peaches and canners. If the government places a binding price ceiling only on peaches sold directly to consumers, what happens to prices and quantities of peaches sold for each use?
Suppose that society used the “opposite” of a Rawlsian welfare function: It tried to maximize the wellbeing of the best-off member of society. Write this welfare function. What allocation maximizes welfare in this society?6. Challenge
Give an example of a social welfare function that leads to the egalitarian allocation that everyone should be given exactly the same bundle of goods.
A society consists of two people with utilities U1 and U2, and the social welfare function is W = α1U1 + α2U2. Draw a utility possibilities frontier similar to the ones in Figure 10.8. Use calculus to show that where social welfare is maximized, as α1/α2 increases, Person 1 benefits, and Person
Mexico and the United States can both produce food and toys. Mexico has 100 workers and the United States has 300 workers. If they do not trade, the United States consumes 10 units of food and 10 toys, and Mexico consumes 5 units of food and 1 toy. The following table shows how many workers are
Modify Solved Problem 10.5 to show that the PPF more closely approximates a quarter of a circle if there are six people. One of these new people, Bill, can produce five cords of wood, or four candy bars, or any linear combination. The other, Helen, can produce four cords of wood, or five candy
If Jane and Denise have identical, linear production possibility frontiers (see the Jane and Denise example in the text), are there gains to trade? Explain.(Hint: See Solved Problem 10.5.)
Suppose that Britain can produce 10 units of cloth or 5 units of food per day (or any linear combination) with available resources and that Greece can produce 2 units of food per day or 1 unit of cloth (or any combination). Britain has an absolute advantage over Greece in producing both goods. Does
In panel c of Figure 10.5, the joint production possibility frontier is concave to the origin. When the two individual production possibility frontiers are combined, however, the resulting PPF could have been drawn so that it was convex to the origin.How do we know which of these two ways of
In an Edgeworth box, illustrate that a Paretoefficient equilibrium, pointa, can be obtained by competition, given an appropriate endowment. Do so by identifying an initial endowment point, b, located somewhere other than at pointa, such that the competitive equilibrium (resulting from competitive
Continuing with Exercise 2.7, determine p, the competitive price of G, where the price of H is normalized to equal one. (Hint: See Solved Problem 10.4.) M 3. Competitive Exchange
In a pure exchange economy with two goods, G and H, the two traders have Cobb-Douglas utility functions. Suppose that Tony’s utility function is Ut = Gt Ht and Margaret’s utility function is Um = Gm(Hm)2. Between them, they own 100 units of G and 50 units of H. Solve for their contract curve.
Continuing with Exercise 2.5, what are the competitive equilibrium prices, where one price is normalized to equal one? (Hint: See Solved Problem 10.4.) M
Adrienne and Stephen consume pizza, Z, and cola, C. Adrienne’s utility function is UA = ZACA, and Stephen’s is UA = Z0.5 s C0.5 s . Their endowments are ZA = 10, CA = 20, ZS = 20, and CS = 10.a. What are the marginal rates of substitution for each person?b. What is the formula for the contract
Two people trade two goods that they cannot produce. Suppose that one consumer’s indifference curves are bowed away from the origin—the usual type of curves—but the other’s are concave to the origin. In an Edgeworth box, show that a point of tangency between the two consumers’
The two people in a pure exchange economy have identical utility functions. Will they ever want to trade? Why or why not?
Explain why point e in Figure 10.3 is not on the contract curve. (Hint: See Solved Problem 10.2.)

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