Principles Of Microeconomics: The Way We Live First 1st Edition Feigenbaum S.K., Hafer R.W. - Solutions

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According to a 2010 survey of British students(www.leedsuniversityunion.org.uk/helpandadvice/money/costofliving), a typical student had a budget of £18.8 per week to spend on mobile telephones, Internet access, and music. That student spent about 45% on phones, 28% on Internet access, and 27%on
In 2005, Americans bought 9.1 million home radios for $202 million and 3.8 million home-theater-in-abox units for $730 million (TWICE, March 27, 2006, www.twice.com/article/CA6319031.html). Suppose that the average consumer has a Cobb-Douglas utility function and buys these two goods only. Given
Diogo’s utility function is U(q1, q2) = q1 0.75q2 0.25, where q1 is chocolate candy and q2 is slices of pie.If the price of a chocolate bar, p1, is $1, the price of a slice of pie, p2, is $2, and Y is $80, what is Diogo’s optimal bundle? (Hint: See Solved Problem 3.6.) M
A function f(X, Y) is homogeneous of degreeγ if, when we multiply each argument by a constant α, f(αX, αY) = αγf(X, Y). Thus, if a function is homogeneous of degree zero, f(αX, αY) = α0f(X, Y) = f(X, Y), because α0 = 1.Show that the optimality conditions for the CobbDouglas utility
The application “Indifference Curves Between Food and Clothing” postulates that there are minimum levels of food and clothing necessary to support life. Suppose that the amount of food one has is F, the minimum level to sustain life is F, the amount of clothing one has is C, and the minimum
For the utility function U(q1, q2) = q1ρ + q2ρ, solve for the optimal q1 and q2. (Hint: See Solved Problem 3.5.) M
Use indifference curve-budget line diagrams to illustrate the results in Table 3.2 for each of these utility functions.
Helen views raspberries and blackberries as perfect complements. Initially, she buys five pints of each this month. Suppose that the price of raspberries falls while the price of blackberries rises such that the bundle of five pints of each lies on her budget line. Does her optimal bundle change?
Some of the largest import tariffs, the tax on imported goods, are on shoes. Strangely, the higher the tariff, the cheaper the shoes. The highest U.S.tariff, 67%, is on a pair of $3 canvas sneakers, whereas the tariff on $12 sneakers is 37%, while$300 Italian leather imports have no tariff. (Adam
Mark consumes only cookies and books. At his current consumption bundle, his marginal utility from books is 10 and from cookies is 5. Each book costs$10, and each cookie costs $2. Is he maximizing his utility? Explain. If he is not, how can he increase his utility while keeping his total
Andy purchases only two goods, apples (q1)and kumquats (q2). He has an income of$40 and can buy apples at $2 per pound and kumquats at $4 per pound. His utility function is U(q1, q2) = 3q1 + 5q2. What is his marginal utility for apples, and what is his marginal utility for kumquats? What bundle of
Elise consumes cans of anchovies, q1, and boxes of biscuits, q2. Each of her indifference curves reflects strictly diminishing marginal rates of substitution.Where q1 = 2 and q2 = 2, her marginal rate of substitution between cans of anchovies and boxes of biscuits equals -1. Will she prefer a
What happens to the budget line if the government applies a specific tax of $1 per gallon on gasoline but does not tax other goods? What happens to the budget line if the tax applies only to purchases of gasoline in excess of 10 gallons per week?4. Constrained Consumer Choice
Governments frequently limit how much of a good a consumer can buy. During emergencies, governments may ration “essential” goods such as water, food, and gasoline rather than let their prices rise.Suppose that the government rations water, setting quotas on how much a consumer can purchase. If
What happens to a consumer’s optimal choice of goods if all prices and the consumer’s income double? (Hint: What happens to the intercepts of the budget constraint?)
Phil’s quasilinear utility function is U(q1, q2) = ln q1 + q2. Show that his MRS is the same on all of his indifference curves at a given q1.(Hint: Look at Solved Problem 3.3.) M 3. Budget Constraint
If José Maria’s utility function is U(q1, q2) = q1 +Aq1 a q2 b + q2, what is his marginal utility from q2? What is his marginal rate of substitution between these two goods? (Hint: Look at Solved Problem 3.2.) M
What is the MRS for the CES utility function (which is slightly different from the one in the text), U(q1,q2) = (aq1ρ + [1 - a]q2ρ)1/ρ ? (Hint: Look at Solved Problem 3.2.) M
Suppose we calculate the MRS at a particular bundle for a consumer whose utility function is U(q1, q2). If we use a positive monotonic transformation, F, to obtain a new utility function, V(q1, q2) = F(U(q1, q2)), then this new utility function contains the same information about the consumer’s
Tiffany’s constant elasticity of substitution (CES)utility function is U(q1, q2) = (q 1ρ + q 2ρ )1/ρ. Show that there is a positive monotonic transformation such that there is an equivalent utility function (one with the same preference ordering)U(q1, q2) = q 1ρ + q 2ρ . M
Miguel considers tickets to the Houston Grand Opera and to Houston Astros baseball games to be perfect substitutes. Show his preference map. What is his utility function?*2.2 Sofia will consume hot dogs only with whipped cream.Show her preference map. What is her utility function?Exercises=
Arthur spends his income on bread and chocolate.He views chocolate as a good but is neutral about bread, in that he doesn’t care if he consumes it or not. Draw his indifference map.2. Utility
Can an indifference curve be downward sloping in one section, but then bend backward so that it forms a “hook” at the end of the indifference curve?(Hint: Look at Solved Problem 3.1.)
Soon after the United States revealed the discovery of a single mad cow in December 2003, more than 40 countries slapped an embargo on U.S. beef. In addition, some U.S. consumers stopped eating beef.In the three weeks after the discovery, the quantity sold increased by 43% during the last week of
Are predictions using the supply-and-demand model likely to be reliable in each of the following markets? Why or why not?a. Applesb. Convenience storesc. Electronic games (a market dominated by three firms)d. Used cars 9. Challenge
An increase in the minimum wage could raise the total wage payment, W = wL(w), where w is the minimum wage and L(w) is the demand function for labor, despite the fall in demand for labor services. Show that whether the wage payments rise or fall depends on the elasticity of demand of labor. M 8.
Usury laws place a ceiling on interest rates that lenders such as banks can charge borrowers. Lowincome households in states with usury laws have significantly lower levels of consumer credit (loans)than comparable households in states without usury laws (Villegas, 1989). Why? (Hint: The interest
The Thai government actively intervenes in markets (Limsamarnphun, Nophakhun, “Govt Imposes Price Controls in Response to Complaints,” The Nation, May 12, 2012).a. The government increased the daily minimum wage by 40% to Bt300 (300 bahts L $9.63).Show the effect of a higher minimum wage on the
After Hurricane Katrina damaged a substantial portion of the nation’s oil-refining capacity in 2005, the price of gasoline shot up around the country. In 2006, many state and federal elected officials called for price controls. Had they been imposed, what effect would price controls have had? Who
Use calculus to show that an increase in a specific sales tax τ reduces quantity less and tax revenue more, the less elastic the demand curve. (Hint: The quantity demanded depends on its price, which in turn depends on the specific tax, Q(p(τ)), and tax revenue is R = p(τ)Q(p(τ)).) M
A subsidy is a negative tax through which the government gives people money instead of taking it from them. If the government applied a $1.05 specific subsidy instead of a specific tax in Figure 2.12, what would happen to the equilibrium price and quantity? Use the demand function and the
Green et al. (2005) estimate that for almonds, the demand elasticity is -0.47 and the long-run supply elasticity is 12.0. The corresponding elasticities are -0.68 and 0.73 for cotton and -0.26 and 0.64 for processing tomatoes. If the government were to apply a specific tax to each of these
Essentially none of the savings from removing the federal ad valorem tax were passed on to consumers for motion picture admissions and club dues(Brownlee and Perry, 1967; see Exercise 6.2). List the conditions (in terms of the elasticities or shapes of supply or demand curves) that are consistent
On July 1, 1965, the federal ad valorem taxes on many goods and services were eliminated. Comparing prices before and after this change, we can determine how much the price fell in response to the tax’s elimination. When the tax was in place, the tax per unit on a good that sold for p was αp. If
What effect does a $1 specific tax have on equilibrium price and quantity, and what is the incidence on consumers, if the following is true:a. The demand curve is perfectly inelastic.b. The demand curve is perfectly elastic.c. The supply curve is perfectly inelastic.d. The supply curve is perfectly
Solved Problem 2.4 claims that a new war in the Persian Gulf could shift the world oil supply curve to the left by 3 million barrels a day or more, causing the world price of oil to soar regardless of whether we drill in the ANWR. How accurate is this claim? Use the same type of analysis as in the
Show that the supply elasticity of a linear supply curve that cuts the price axis is greater than 1 (elastic), and the coefficient of elasticity of any linear supply curve that cuts the quantity axis is less than 1 (inelastic). (Hint: See Solved Problem 2.3.) M
Calculate the price and cross-price elasticities of demand for coconut oil. The coconut oil demand function (Buschena and Perloff, 1991) is Q = 1,200 - 9.5p + 16.2pp + 0.2Y, where Q is the quantity of coconut oil demanded in thousands of metric tons per year, p is the price of coconut oil in cents
In a commentary piece on the rising cost of health insurance (“Healthy, Wealthy, and Wise,” Wall Street Journal, May 4, 2004, A20), economists John Cogan, Glenn Hubbard, and Daniel Kessler stated,“Each percentage-point rise in health-insurance costs increases the number of uninsured by
Keeler et al. (2004) estimate that the U.S. Tobacco Settlement between major tobacco companies and 46 states caused the price of cigarettes to jump by 45¢ per pack (21%) and overall per capita cigarette consumption to fall by 8.3%. What is the elasticity of demand for cigarettes? Is cigarette
According to Borjas (2003), immigration to the United States increased the labor supply of working men by 11.0% from 1980 to 2000, and reduced the wage of the average native worker by 3.2%. From these results, can we make any inferences about the elasticity of supply or demand? Which curve(or
When the U.S. government announced that a domestic mad cow was found in December 2003, analysts estimated that domestic supplies would increase in the short run by 10.4% as many other countries barred U.S. beef. An estimate of the price elasticity of beef demand is -0.626 (Henderson, 2003).
In the application “Aggregating the Demand for Broadband Service” (based on Duffy-Deno, 2003), the demand function is Qs = 5.97p-0.563 for small firms and Ql = 8.77p-0.296 for larger ones. As the graph in the application shows, the two demand functions cross. What are the elasticities of demand
Calculate the elasticity of demand, if the demand function isa. Q = 120 - 2p + 4Y, at the point where p = 10, Q = 20,b. Q = 10p-2. (Hint: See Solved Problem 2.2.) M
The U.S. Tobacco Settlement Agreement between the major tobacco companies and 46 states caused the price of cigarettes to jump 45¢ (21%) in November 1998. Levy and Meara (2006) find only a 2.65%drop in prenatal smoking 15 months later. What is the elasticity of demand for prenatal smokers? M
Suppose the demand function for carpenters is Q = 100 - w, and the supply curve is Q = 10 + 2w - T, where Q is the number of carpenters, w is the wage, and T is the test score required to pass the licensing exam. By how much do the equilibrium quantity and wage vary as T increases?5. Elasticities
Given the answer to Exercise 2.3, what effect does a U.S. quota on steel of Q 7 0 have on the equilibrium in the U.S. steel market? (Hint: The answer depends on whether the quota binds: is low enough to affect the equilibrium.)
Lewit and Coate (1982) estimated that the price elasticity of demand for cigarettes is -0.42. Suppose that the daily market demand for cigarettes in New York City is Q = 20,000p-0.42 and that the inverse market supply curve of cigarettes in the city is p = 1.5pw, where pw is the wholesale price of
Due to a recession that lowered incomes, the 2008 market prices for last-minute rentals of U.S. beachfront properties were lower than usual. Suppose that the inverse demand function for renting a beachfront property in Ocean City, New Jersey, during the first week of August is p = 1,000 - Q + Y/20,
Using calculus, determine the effect of an increase in the price of beef, pb, from $4 to $4.60 on the equilibrium price and quantity in the Canadian pork example. (Hint: Conduct an analysis that differs from that in Solved Problem 2.1 in that the shock is to the demand curve rather than to the
The supply function is Q = 20 + 3p - 20r, and the demand function is Q = 220 - 2p, where r is the rental cost of capital. How do the equilibrium price and quantity vary with r? (Hint: See Solved Problem 2.1.) M
Ethanol, a fuel, is made from corn. Ethanol production increased more than 8.5 times from 1,630 million gallons in 2000 to 13,900 million gallons in 2011 (www.ethanolrfa.org/pages/statistics). Use a supply-and-demand diagram to show the effect of this increased use of corn for producing ethanol on
The 9/11 terrorist attacks caused the U.S. airline travel demand curve to shift left by an estimated 30% (Ito and Lee, 2005). Use a supply-anddemand diagram to show the likely effect on price and quantity (assuming that the market is competitive). Indicate the magnitude of the likely equilibrium
If the demand function is Q = 110 - 20p, and the supply function is Q = 20 + 10p, what are the equilibrium price and quantity? M*3.3 Green, Howitt, and Russo (2005) estimate the supply and demand curves for California processing tomatoes. The supply function is ln Q = 0.2+ 0.55 ln p, where Q is the
If the U.S. supply function of corn is Qa = 10 + 10p and the supply function of the rest of the world is Qr = 5 + 20p, what is the world supply function?*2.3 Between 1971 and 2006, the United States from time to time imposed quotas or other restrictions on importing steel. A quota says that no more
Given the pork supply function in Equation 2.6, how does the supply function that is only a function of price, Equation 2.7, change if the price of hogs doubles to $3 per kg? M
In the application “Aggregating the Demand for Broadband Service” (based on Duffy-Deno, 2003), the demand function is Qs = 5.97p-0.563 for small firms and Ql = 8.77p-0.296 for larger firms, where price is in cents per kilobyte per second and quantity is in millions of kilobytes per second
Suppose that the inverse demand function (where the demand curve is rearranged so that price is a function of quantity) for movies is p = 120 - Q1 for college students and p = 120 - 2Q2 for other town residents. What is the town’s total demand function (Q = Q1 + Q2 as a function of p)? Use a
Using the estimated demand function for processed pork in Canada, Equation 2.2, show how the quantity demanded, Q, at a given price changes as per capita income, Y, increases slightly (that is, calculate the partial derivative of the quantity demanded with respect to income). How much does Q change
Teachers often disagree when it comes to their grading philosophies. Some contend that the fair way to grade is to put significant weight on the effort put in by a student. Others say that fairness requires that grades be based largely on objective measures of academic performance such as exam and
Morissa is a 16 year old triplet. She argues that “fairness” means that she should be given the same opportunities and material goods as her two brothers. Her parents argue that “fairness” means “to each according to their needs.” Which perspective more closely parallels your notions
Carl Icahn, an infamous corporate “raider,” wants to buy Commercial Metals Company and combine parts of it with various metal recycling businesses that he already owns. He has offered to buy shares from Commercial Metals shareholders at $15 per share, which amounts to a 31 percent premium over
Richer countries often try to improve the welfare of children and “exploited”workers in less well-developed countries by urging their governments to enforce child-labor and minimum-wage laws. Do you think this is a good idea or not?Explain your answer.
The Kyoto Agreement, which the United States has not signed, requires that wealthier countries reduce their air pollution emissions by a far higher percentage than less well-developed countries. The rationale given is that the standard of living in wealthier countries is far higher than in
Costa Rica runs a trade deficit with its trading partner, the United States. This means that Costa Ricans buy more goods from U.S. suppliers than Americans purchase from Costa Rican suppliers. The U.S. government and some major U.S. corporations buy empty bottles from the Costa Rican government
Using the Rawlsian concept of justice, explain why there are richer government entitlement programs in Norway and Iceland than in the United States(Hint: Is there any reason to believe that behind the veil of ignorance, you will see your eventual position in society differently if you are Icelandic
If a family receives $145 in food stamps each month to purchase food, will the family end up spending $145 more on food each month? Why or why not.Explain your answer.
Suppose you decide to major in engineering and subsequently experience“a boom or a bust” in your earnings. Sometimes you are flush with job offers and high-wage opportunities, and at other times you are out of work. Your best friend majors in elementary education and faces a steady, if lower,
In the United States, a very strong relationship exists between poverty and health status: poorer people tend to be unhealthier, and unhealthier people tend to be poorer. Explain why this is the case.
One of the ways in which global poverty can be alleviated is by outsourcing production from richer countries to less-developed countries. Another way is for wealthier countries to donate foreign aid to less-developed nations. A third approach is to let foreigners from poor countries work in richer
Suppose the government is faced with a budget crisis and must choose whether to cut funds from a program that supplements the income of the elderly or from a program that supplements the income of families below the poverty line with young children. Is there any positive (versus normative) economic
There are several ways governments can reduce the costs that people incur as a result of market adjustments. A government can (1) provide a safety net that guarantees people’s basic needs are met; (2) require people to buy insurance in the event of an adverse market outcome—for example,
In the United States, many government entitlement programs establish eligibility standards based on earning thresholds established by the U.S. Department of Health and Human Services. As the following table shows, the department’s 20092010 guidelines established a cutoff, based on pretax cash
Do you think that the availability of unemployment benefits affects the amount of time an unemployed person spends searching for a new job? If so, how? What other factors do you think have an impact on the search process? Explain your answers.
Studies have shown that when the government gets heavily involved in redistributing income to people at the bottom of the income distribution, the amount of private charity given for the same purpose drops. In effect, the government’s activities crowd out private initiatives. Which
Berkeley (CA) Cares, a nonprofit charity, established one of the first programs in the United States to encourage people to give vouchers instead of money to local panhandlers. These vouchers, worth 25 cents each, could be redeemed for food, clothing personal-hygiene products, laundry services, and
Until 1992, there were only two comic book publishers—D.C. Comics and Marvel Comics. In 1992, Image Comics was created by a group of former Marvel artists. By 1994, Image accounted for 25 percent of the market, Marvel held 40 percent of the market, and D.C. represented 30 percent of the market.a)
Firms competing in the “big box super retailer” sector of the economy exhibit a great deal of interdependence in decision making. For example, Walmart expanded its grocery offerings to fresh fruits, vegetables, frozen foods, and milk products. For cost reasons, Target did not follow suit. When
Using game theory and the concept of repeat games, explain why parents punish their oldest children more for engaging in risky behaviors (drinking, speeding, etc.) than their younger children when they reach the same age.
Using a prisoners’ dilemma game-theory framework, show why it is always the dominant strategy for a professional baseball player to take performanceenhancing steroids. How, if at all, would your analysis change if there was mandatory drug testing before every game?
The largest automakers in the United States are often the biggest buyers of new tires each year. However, during the 2007 Great Recession, tire manufacturers sold more tires directly to car owners than to the automakers. Do you think that the tire manufacturers were better off or worse off in terms
Most government agencies solicit bids for contracts to provide goods and services to government entities. Examples include food services for the U.S. military, transportation services for government employees, and military equipment and supplies. Bidders usually make their proposals via sealed
Employees—who are suppliers of labor—will sometimes collude with each other to call in sick or walk off their jobs if they are not given a raise or enhanced benefits. This often occurs in workplaces—such as the automobile industry—where there are hundreds, if not thousands, of workers. How
Using a game-theory approach and the concept of repeat games, can you explain why more American League batters get “beaned” by pitchers than National League batters? (Hint: The American League permits designated hitters who often substitute for the teams’ pitchers.)
Sunkist, Inc. is a not-for-profit marketing cooperative that processes and markets the collective output of more than 6,000 citrus growers in California and Arizona. It is the largest supplier of lemon juice in the United States. In the United States, agricultural cooperatives whose membership is
The following table is a payoff matrix for the two major league baseball teams in Southern California: the L.A. Dodgers and the Anaheim Angels. It indicates the payoff to each team resulting from its decision to broadcast or blackout at-home games on local TV. Suppose that both would be better off
The beer industry is comprised of a small number of large, international brewers.Over the past decade or two, many local microbreweries have entered the market.Do you think that this has increased competition and lowered prices in the beer market? Explain your answer.
In the early decades of the airline industry, the CAB (Civil Aeronautics Board)set the fares for all airline routes and assigned these routes to the airlines. The routes with the greatest demand—for example, New York City to Los Angeles—were given to several airlines. Given that their prices
A common complaint in business is “cutthroat competition” (also known as predatory pricing) where a competitor supposedly cuts price below its rivals’ costs to drive them out of business. Under what conditions, if any, would this be a credible threat that antitrust regulators would have to
Some cartels have been known to survive and operate effectively for long periods of time; others have fallen apart in relatively short order. Economists believe they know something about the various conditions that determine the effectiveness and life expectancy of a cartel. Explain carefully how
Medicare, the federal medical insurance program for the over-65 population, is the predominant purchaser of medical services in the United States. It pays urban teaching hospitals a higher amount than rural hospitals for the same service (for example, hip replacement surgery). Explain whether such
Using a diagram for a typical monopsonist, indicate the deadweight loss that results from having just one buyer in a market.
Instead of rewarding innovation through a patent system, which creates monopolies, some economists suggest that the government should subsidize research and development and/or give cash “prizes” to successful innovators. Discuss how this alternative reward system differs from the patent system
Economists sometimes talk about a “second-best world” in which a market is dominated by one seller (monopolist) and one buyer (monopsonist). This is called a bilateral monopoly. Show this situation graphically by superimposing the market diagram for a monopolist onto the market diagram for a
Suppose that a major movie theater chain is about to debut a highly anticipated film. It faces two sets of demand curves—one for tickets in New York City and the other for tickets in a “sleepy” suburb upstate about 90 miles away. If the demand curves for tickets for opening night (where Q is
In 1949, the American Can Company—a producer of can-closing equipment—was prohibited by the U.S. government from continuing its practice of leasing its equipment and requiring lessees to also buy all of their cans from them. This business arrangement is called “tying” or “bundling.” Why
In the 1960s, one of the rationales offered for regulating the airfares and routes of airlines (or creating a public airline monopoly like Air France) was that the industry was a natural monopoly. Do you think that this was a reasonable justification for regulation? If so, what changed that
Another monopoly client is charging $12 per unit of output and selling 4,000 units of output. Its marginal cost of production is $6 a unit and marginal revenue is two-thirds of its price. Should the company change its level of output?Why or why not?
You have been hired by a monopolist to confirm whether it is producing at the profit-maximizing level of output. You observe that it is collecting $12,000 in revenue by selling 2,000 units of output. Furthermore, its average total cost is$5.20, which is 80 cents below its marginal cost. Should the
Explain why the marginal cost curve can never intersect the marginal revenue curve in the inelastic portion of a monopolist’s demand curve.

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Principles Of Microeconomics: The Way We Live First 1st Edition Feigenbaum S.K., Hafer R.W. - Solutions

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