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Microeconomics Theory And Applications With Calculus 3rd Edition Jeffrey M. Perloff - Solutions
Initially, Michael has 10 candy bars and 5 cookies, and Tony has 5 candy bars and 10 cookies. After trading, Michael has 12 candy bars and 3 cookies.In an Edgeworth box, label the initial allocation A and the new allocation B. Draw some indifference curves that are consistent with this trade being
Competitive firms in Africa sell their output only in Europe and the United States (which do not produce the good themselves). The industry’s supply curve is upward sloping. Europe puts a tariff of t per unit on the good, but the United States does not.What is the effect of the tariff on the
Suppose that the government gives a fixed subsidy of T per firm in one sector of the economy to encourage firms to hire more workers. What is the effect on the equilibrium wage, total employment, and employment in the covered and uncovered sectors?
What is the effect of a subsidy of s per hour on labor in only one sector of the economy on the equilibrium wage, total employment, and employment in the covered and uncovered sectors? (Hint: See Solved Problem 10.1.)
Philadelphia collects an ad valorem tax of 3.928%on its residents’ earnings (see the Application“Urban Flight”), unlike the surrounding areas.Show the effect of this tax on the equilibrium wage, total employment, employment in Philadelphia, and employment in the surrounding areas. (Hint: See
Initially, all workers are paid a wage of w1 per hour.The government taxes the cost of labor by t per hour only in the “covered” sector of the economy.That is, if the wage workers receive in the covered sector is w2 per hour, firms pay w2 + t per hour.Show how the wages in the covered and
The demand curve in Sector 1 of the labor market is L1 = a - bw. The demand curve in Sector 2 is L2 = c - dw. The supply curve of labor for the entire market is L = e + fw. In equilibrium, L1 + L2 = L.a. Solve for the equilibrium with no minimum wage.Exercises = exercise is available on MyEconLab;
The market demand for medical checkups per day is QF = 25(198 + nC /20,000 - pF), where nC is the number of patients per day who are at least 40 years old, and pF is the price of a checkup. The market demand for the number of dental checkups per day, QT, is QT = 100(150 - pT)/3, where pT represents
The demand functions for each of two goods depend on the prices of the goods, p1 and p2: Q1 = 15 - 3p1 + p2 and Q2 = 6 - 2p2 + p1.However, each supply curve depends only on its own price: Q1 = 2 + p1 and Q2 = 1 + p2. Solve for the equilibrium: p1, p2, Q1, and Q2. M
The demand functions for the only two goods in the economy are Q1 = 10 - 2p1 + p2 and Q2 = 10 - 2p2 + p1. There are five units of each good. Solve for the equilibrium: p1, p2, Q1, and Q2. M
There are many possible ways to limit the number of cabs in a city. The most common method is an explicit quota using a fixed number of medallions that are good forever and can be resold. One alternative is to charge a high license fee each year, which would reduce supply by as much as would a
In 2002, Los Angeles imposed a ban on new billboards. Owners of existing billboards did not oppose the ban. Why? What are the implications of the ban for producer surplus, consumer surplus, and welfare? Who are the producers and consumers in your analysis? How else does the ban affect welfare in
A government is considering a quota and a tariff, both of which will reduce imports by the same amount. Why might the government prefer one of these policies to the other?7. Challenge
During the Napoleonic Wars, Britain blockaded North America, seizing U.S. vessels and cargo and impressing sailors. At President Thomas Jefferson’s request, Congress imposed a nearly complete—perhaps 80%—embargo on international commerce from December 1807 to March 1809. Just before the
In the first quarter of 2012, the world price for raw sugar, 24¢ per pound, was about 70% of the domestic price, 34¢ per pound, because of quotas and tariffs on sugar imports. Consequently, American-made corn sweeteners can be profitably sold domestically.A decade ago, the U.S. Commerce
After Mexico signed the North American Free Trade Agreement (NAFTA) with the United States in 1994, corn imports from the United States doubled within a year, and today U.S. imports make up nearly onethird of the corn consumed in Mexico. According to Oxfam (2003), the price of Mexican corn has
Given that the world supply curve is horizontal at the world price for a given good, can a subsidy on imports raise welfare in the importing country?Explain your answer.
Show that if the importing country faces an upwardsloping foreign supply curve (excess supply curve), a tariff may raise welfare in the importing country.
The U.S. government claimed that China and Vietnam were dumping shrimp in the United States at a price below cost, and proposed duties as high as 112%. Suppose that China and Vietnam were subsidizing their shrimp fisheries. In a diagram, show who gains and who loses in the United States (compared
and supply function in Equation 9.4, use calculus to determine the change in deadweight loss from a marginal increase in a tariff, evaluated where the tariff is initially zero.(Hint: You are being asked to determine how an area similar to that of C + E in Figure 9.8 changes when a small tariff is
Based on the estimates of the U.S. daily oil demand function in Equation
In Solved Problem 9.4, if the domestic demand curve is Q = 20p-0.5, the domestic supply curve is Q = 5p0.5, and the world price is 5, use calculus to determine the changes in producer surplus, consumer surplus, and welfare from eliminating free trade. M
Canada has 20% of the world’s known freshwater resources, yet many Canadians believe that the country has little or none to spare. Over the years, U.S. and Canadian firms have struck deals to export bulk shipments of water to drought-afflicted U.S.cities and towns. Provincial leaders have blocked
to evaluate the effect of the Court’s decision on the price of wine in New York.b. Evaluate the increase in New York consumer surplus, producer surplus, and welfare.
The U.S. Supreme Court ruled in May 2005 that people can buy wine directly from out-of-state vineyards. The Court held that state laws requiring people to buy directly from wine retailers within the state violate the Constitution’s commerce clause.a. Suppose the market for wine in New York is
Although 23 states barred the sale of self-service gasoline in 1968, most removed the bans by the mid-1970s. By 1992, self-service outlets sold nearly 80% of all U.S. gas, and only New Jersey and Oregon continued to ban self-service sales. Johnson and Romeo (2000) estimated that the ban in those
A mayor wants to help renters in her city. She considers two policies that will benefit renters equally.One policy is a rent control, which places a price ceiling, p, on rents. The other is a government housing subsidy of s dollars per month that lowers the amount renters pay (to p). Who benefits
What are the welfare effects of a binding minimum wage? Use a graphical approach to show what happens if all workers are identical. Then describe in writing what is likely to happen to workers who differ by experience, education, age, gender, and race.
What were the welfare effects (who gained, who lost, what was the deadweight loss) of the gasoline price controls described in Chapter 2? Add the relevant areas to a drawing like Figure 2.14. (Hint: See Solved Problem 9.3.)
The government wants to drive the price of soybeans above the equilibrium price, p1, to p2. It offers growers a payment of x to reduce their output from Q1(the equilibrium level) to Q2, which is the quantity demanded by consumers at p2. Show in a figure how large x must be for growers to reduce
Suppose that the demand curve for wheat is Q = 100 - 10p and the supply curve is Q = 10p.The government imposes a price ceiling of p = 3.a. Describe how the equilibrium changes.b. What effect does this ceiling have on consumer surplus, producer surplus, and deadweight loss? M
Suppose that the demand curve for wheat is q = 100 - 10p and the supply curve is q = 10p.The government imposes a price support at p = 6 using a deficiency payment program.a. What is the quantity supplied, the price that clears the market, and the deficiency payment?b. What effect does this program
The United States not only subsidizes producers of cotton (in several ways, including a water subsidy and a price support) but also pays $1.7 billion to U.S. agribusiness and manufacturers to buy American cotton. It has paid $100 million each to Allenberg Cotton and Dunavant Enterprises and large
What is the welfare effect of a lump-sum tax, l, assessed on each competitive firm in a market?(Hint: See the Challenge Solution in Chapter 8.)
What is the long-run welfare effect of a profit tax(the government collects a specified percentage of a firm’s profit) assessed on each competitive firm in a market?
What is the welfare effect of an ad valorem sales tax, α, assessed on each competitive firm in a market?
shows the original demand and supply curves.)What is the effect of the subsidy on the equilibrium prices and quantity, consumer surplus, producer surplus, government expenditures, welfare, and deadweight loss?
Suppose that the government gives rose producers a specific subsidy of s = 11. per stem. (Figure
Suppose that the demand curve for wheat is Q = 100 - 10p and that the supply curve is Q = 10p. What are the effects of a subsidy (negative tax) of s = 1 per unit on the equilibrium, government subsidy cost, CS, PS, welfare, and DWL? M
The initial equilibrium ise, where the linear supply curve intersects the linear demand curve. Show the welfare effects of imposing a specific tax τ. Now suppose the demand curve becomes flatter, but still goes through pointe, so that it is more elastic at e than originally. Discuss how the tax
Suppose that the demand curve for wheat is Q = 100 - 10p and that the supply curve is Q = 10p. What are the effects of a specific tax ofτ = 1 per unit on the equilibrium, government tax revenue, CS, PS, welfare, and DWL? M
If the inverse demand function for books is p = 60 - q and the supply function is q = p, what is the initial equilibrium? What is the welfare effect of a specific tax of τ = $2 per unit on the equilibrium, CS, PS, welfare, and DWL? M
The park service wants to restrict the number of visitors to Yellowstone National Park to Q*, which is fewer than the current volume. It considers two policies: (a) raising the price of admissions and (b) setting a quota. Compare the effects of these two policies on consumer surplus and welfare.
The government imposes a restriction on firms that shifts the supply curve in Figure 9.3 so that it intersects the demand curve at e2. Discuss the effects on CS, PS, welfare, and DWL.
Use an indifference curve diagram (gift goods on one axis and all other goods on the other) to illustrate that one is better off receiving cash than a gift.(Hint: See the discussion of gifts in this chapter and the discussion of food stamps in Chapter 5.) Relate your analysis to the Application
The U.S. Department of Agriculture’s (USDA)minimum general recommendation is five servings of fruits and vegetables a day. Jetter et al. (2004)estimated that if consumers followed that guideline, the equilibrium price and quantity of most fruits and vegetables would increase substantially. For
Suppose that the inverse market demand for silicone replacement tips for Sony EX71 earbud headphones is p = pN - 0.1Q, where p is the price per pair of replacement tips, pN is the price of a new pair of headphones, and Q is the number of tips per week. Suppose that the inverse supply function of
Suppose that the market demand for 32-oz. wide mouth Nalgene bottles is Q = 50,000p-1.076, where Q is the quantity of bottles per week and p is the price per bottle. The market supply is Q = 0.01p7.208. What is the equilibrium price and quantity? What is the consumer surplus? What is the producer
If society cared only about the well-being of consumers so that it wanted to maximize consumer surplus, would a competitive market achieve that goal given that the government cannot force or bribe firms to produce more than the competitive level of output? How would your answer change if society
If the supply function is q = apη, what is the producer surplus if price is p*? (Hint: See Solved Problem 9.1.) M 3. How Competition Maximizes Welfare
If the supply curve is q = 2 + 2p, what is the producer surplus if the price is 10? (Hint: See Solved Problem 9.1.) M
For a firm, how does the concept of producer surplus differ from that of profit?
The reputations of some of the world’s most prestigious museums have been damaged by accusations that they obtained antiquities that were looted or stolen in violation of international laws and treaties aimed at halting illicit trade in art and antiquities(Ron Stodghill, “Do You Know Where That
Only a limited amount of high-quality wine-growing land is available. The firms that farm the land are identical. Because the demand curve hits the market supply curve in its upward sloping section, the firms initially earn positive profit.a. The owners of the land raise their rents to capture the
Answer the Challenge problem using calculus.(Note: This comparative statics problem is difficult because you will need to solve two or three equations simultaneously, and hence you may need to use matrix techniques.) M 1. Zero Profit for Competitive Firms in the Long Run
The finding that the average real price of abortions has remained relatively constant over the last 25 years suggests that the supply curve is horizontal.Medoff (1997) estimated that the price elasticity of demand for abortions ranges from -0.70 to -0.99.By how much would the market price of
In a perfectly competitive market, all firms are identical, there is free entry and exit, and an unlimited number of potential entrants. Now, the government starts collecting a specific tax τ, how do the longrun market and firm equilibria change?
The North American Free Trade Agreement provides for two-way, long-haul trucking across the U.S.-Mexican border. U.S. truckers have objected, arguing that the Mexican trucks don’t have to meet the same environmental and safety standards as U.S. trucks. They are concerned that the combination of
Answer the Challenge for the short run rather than for the long run. (Hint: The answer depends on where the demand curve intersects the original short-run supply curve.)
In the Challenge Solution, would it make a difference to the analysis whether the lump-sum costs such as registration fees are collected annually or only once when the firm starts operation?How would each of these franchise taxes affect the firm’s long-run supply curve? Explain your answer.
In late 2004 and early 2005, the price of raw coffee beans jumped as much as 50% from the previous year. In response, the price of roasted coffee rose about 14%. Similarly, in 2012, the price of raw beans fell by a third, yet the price of roasted coffee fell by only a few percentage points. Why
Cheap handheld video cameras have revolutionized the hard-core pornography market.Previously, making movies required expensive equipment and some technical expertise. Today, anyone with a couple hundred dollars and a moderately steady hand can buy and use a video camera to make a movie.
The Application “Upward-Sloping Long-Run Supply Curve for Cotton” shows a supply curve for cotton. Discuss the equilibrium if the world demand curve crosses this supply curve in either(a) a flat section labeled “Brazil” or (b) the vertical section to its right. What do farms in the United
In 2009, the voters of Oakland, California, passed a measure to tax medical cannabis (marijuana), effectively legalizing it. In 2010, the City Council adopted regulations permitting industrial-scale marijuana farms with no size limits but requiring each to pay a $211,000 per year fee.17 One
A 2010 law requires that people who buy food or alcohol in Washington, D.C., have to pay an extra nickel for every paper or plastic bag the store provides them. Does such a tax affect marginal cost(and of what good)? If so, by how much? How much of the tax is likely to be passed on to consumers?
Navel oranges are grown in California and Arizona. If Arizona starts collecting a specific tax per orange from its firms, what happens to the long-run market supply curve? (Hint: You may assume that all firms initially have the same costs. Your answer may depend on whether unlimited entry occurs.)
Is the long-run supply curve for a good horizontal only if the long-run supply curves of all factors are horizontal? Explain.
To reduce pollution, the California Air Resources Board in 1996 required the reformulation of gasoline sold in California. Since then, every few years, occasional disasters at California refineries have substantially cut the supply of gasoline and contributed to temporary large price increases.
The federal specific tax on gasoline is 18.4¢ per gallon, and the average state specific tax is 20.2¢, ranging from 7.5¢ in Georgia to 25¢ in Connecticut. A statistical study (Chouinard and Perloff, 2004) finds that the incidence of the federal specific tax on consumers is substantially lower
Derive the residual supply elasticity in Equation 8.17 using the definition of the residual demand function in Equation 8.16. What is the formula if there are n identical countries? M
The major oil spill in the Gulf of Mexico in 2010 caused the oil firm BP and the U.S. government to greatly increase purchases of boat services, various oil-absorbing materials, and other goods and services to minimize damage from the spill. Use side-by-side firm and market diagrams to show the
Each firm in a competitive market has a cost function of C = q + q2 + q3. There are an unlimited number of potential firms in this market. The market demand function is Q = 24 - p. Determine the long-run equilibrium price, quantity per firm, market quantity, and number of firms. How do these values
What is the effect on firm and market equilibrium of the U.S. law requiring a firm to give its workers six months’ notice before it can shut down its plant?
Redraw Figure 8.10 to show the situation where the short-run plant size is too large, relative to the optimal long-run plant size.
Given the information in the previous exercise, what effect does a specific tax of $2.40 per unit have on the equilibrium price and quantities? (Hint:See Solved Problem 8.3.) M 4. Competition in the Long Run
Each of the 10 firms in a competitive market has a cost function of C = 25 + q2. The market demand function is Q = 120 - p. Determine the equilibrium price, quantity per firm, and market quantity. M
Many marginal cost curves are U-shaped. Consequently, the MC curve can equal price at two output levels. Which is the profit-maximizing output?Why?
A Christmas tree seller has a cost function C = 6,860 + (pT + t + 7/12)q + 37/27,000,000q3, where pT = $11.50 is the wholesale price of each tree and t = $2.00 is the shipping price per tree.What is the seller’s marginal cost function? What is the shutdown price? What is the seller’s short-run
If a competitive firm’s cost function is C(q) = a + bq+ cq2 + dq3, wherea, b,c, and d are constants, what is the firm’s marginal cost function? What is the firm’s profit-maximizing condition? (Hint: See Solved Problem 8.2.) M
When gasoline prices spike, producers consider using oil fields that once had been passed over because of the high costs of extracting oil.a. In a figure, show what this statement implies about the shape of the oil extraction cost function.b. Use the cost function you drew in part a to show how an
For Red Delicious apple farmers in Washington, 2001 was a terrible year (Linda Ashton, “Bumper Crop a Bummer for Struggling Apple Farmers,”San Francisco Chronicle, January 9, 2001, C7). The average price for Red Delicious apples was $10.61 per box, well below the shutdown level of $13.23.Many
According to the Application “Oil, Oil Sands, and Oil Shale Shutdowns,” due to technological advances, the minimum average variable cost of processing oil sands dropped from $25 a barrel in the 1960s to $18 today. In a figure, show how this change affects the supply curve of a typical
What is the effect of an ad valorem tax of α (the share of the price that goes to the government) on a competitive firm’s profit-maximizing output? (Hint:See Solved Problem 8.1.)
If a specific subsidy (negative tax) of s is given to only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change? Use a graph to illustrate your answer. (Hint: See Solved Problem 8.1.)
If the pre-tax cost function for John’s Shoe Repair is C(q) = 100 + 10q - q2 + 1 3 q3, and it faces a specific tax of τ = 10, what is its profit-maximizing condition if the market price is p? Can you solve for a single, profit maximizing q in terms of p? (Hint:See Exercise 3.3 and Solved Problem
The government imposes a specific tax of τ = 2 on laundry. Acme Laundry’s pre-tax cost function is C(q) = 10 + 10q + q2. How much should the firm produce to maximize its after-tax profit if the market price is p? How much does it produce if p = 50? (Hint: See Exercise 3.2 and Solved Problem
If the cost function for John’s Shoe Repair is C(q) = 100 + 10q - q2 + 1 3 q3, what is the firm’s marginal cost function? What is its profit-maximizing condition if the market price is p? What is its supply curve? M
The cost function for Acme Laundry is C(q) = 10 + 10q + q2, where q is tons of laundry cleaned. What q should the firm choose to maximize its profit if the market price is p? How much does it produce if p = 50? M
In Figure 8.3, why is the revenue curve a straight line in panel a? What is the slope of the revenue curve? What is the slope of the profit curve at the q where profit is maximized? What can you say about the slopes of the cost and revenue curves at the q where profit is maximized? Why is profit
A firm’s profit function is π(q) = R(q) - C(q)= 120q - (200 + 40q + 10q2). What is the positive output level that maximizes the firm’s profit(or minimizes its loss)? What is the firm’s revenue, variable cost, and profit? Should it operate or shut down in the short run?3. Competition in the
Mercedes-Benz of San Francisco advertises on the radio that it has been owned and operated by the same family in the same location for 50 years (as of 2012). It then makes two claims: first, that it has lower overhead than other nearby auto dealers because it has owned this land for 50 years, and
A competitive firm’s bookkeeper, upon reviewing the firm’s books, finds that the company spent twice as much on its plant, a fixed cost, as the firm’s manager had previously thought. Should the manager change the output level because of this new information? How does this new information
Should a firm shut down (and why) if its revenue is R = $1,000 per week anda. its variable cost is VC = $500, and its sunk fixed cost is F = $600?b. its variable cost is VC = $1,001, and its sunk fixed cost F = $500?c. its variable cost is VC = $500, its fixed cost is$800, of which $600 is
Why would high transaction costs or imperfect information tend to prevent price-taking behavior?2. Profit Maximization
A large city has nearly 500 restaurants, with new ones entering regularly as the population grows.The city decides to limit the number of restaurant licenses to 500. Which characteristics of this market are consistent with perfect competition and which are not? Is this restaurant market likely to
Rosenberg (2004) reports the invention of a new machine that serves as a mobile station for receiving and accumulating packed flats of strawberries close to where they are picked, reducing workers’time and the burden of carrying full flats of strawberries. A machine-assisted crew of 15 pickers
A U.S. apparel manufacturer is considering moving its production abroad. Its production function is q = L0.7K0.3 (based on Hsieh, 1995). In the United States, w = 7 and r = 3. At its Asian plant, the firm will pay a 50% lower wage and a 50% higher cost of capital: w = 7/1.5 and r = 3 * 1.5. What
A U.S. electronics firm is considering moving its production to a plant in Asia. Its estimated production function is q = L0.5K0.5 (based on Hsieh, 1995). In the United States, w = 10 = r. At its Asian plant, the firm will pay a 10% lower wage and a 10% higher cost of capital: w* = 10/1.1 and r* =
If it manufactures at home, a firm faces input prices for labor and capital of wn and nr and produces qn units of output using Ln units of labor and Kn units of capital. Abroad, the wage and cost of capital are half as much as at home. If the firm manufactures abroad, will it change the amount of
In the Challenge Solution, show that for some wage and rental cost of capital the firm is indifferent between using the wafer-handling stepper technology and the stepper technology. How does this wage/cost-of-capital ratio compare to those in the C2 and C3 isocosts?
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