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business
microeconomics principles
Microeconomics 8th edition Jeffrey M. Perloff - Solutions
A competitive firm’s production function is q = 2LK. What is its marginal revenue product of labor?
Suppose that firms are taxed to pay for workers’ medical care. How is the incidence of a specific tax per worker shared between competitive firms and workers? How does your answer change if the firm is a monopsony?
What effect does an ad valorem tax of v on the revenue of a competitive firm have on that firm’s demand for labor?
Starting in 2017, ESPN and Turner are paying the National Basketball Association $24 billion over nine years for the rights to broadcast games. That’s a 160% increase over the previous contract. What effect would you expect this deal to have on advertising rates and the number of commercials, and
Suppose that a modern plague (AIDS, SARS, Ebola virus, avian flu) wipes out or incapacitates a major share of a small country’s work force. If this country’s labor market is monopsonistic, what effect will this disaster have on wages in this country?
Many grocery stores charge manufacturers a slotting fee: a one-time fee to place a given good on the shelf. Although stores sometimes claim that these fees are to cover their transaction costs of relabeling shelves and updating their computer files, the fees are too large—$50,000 or more for that
A firm is a monopoly in the output market and a monopsony in the input market. Its only input is the finished good, which it buys from a competitive market with an upward-sloping supply curve. The firm sells the same good to competitive buyers in the output market. Determine its profit-maximizing
If the firm uses a fixed-proportion production process where one unit of labor and one unit of capital produce one unit of output, what is the marginal revenue product of labor?
Can a merger of an upstream and a downstream monopoly help consumers?
Compare the equilibrium in a market in which a firm is both a monopoly and a monopsony (as in the previous question) to the competitive equilibrium.
Suppose that a modern plague (AIDS, SARS, Ebola virus, avian flu) wipes out or incapacitates a major share of a small country’s work force. If this country’s labor market is competitive, what effect will this disaster have on wages in this country?
For the first five years after Apple introduced the iPhone, Apple sold it in the United States with the requirement that it be used only on the AT&T cell phone network. Indeed, Apple took a series of steps to prevent customers from “unlocking” the phone so that it could be used on other
Compare the equilibrium quantity and price in two markets: one in which a firm is both a monopsony and a monopoly and one in which the firm buys inputs competitively but has a monopoly in the output market.
Apple sold its iPhone to AT&T, which in turn sold it to the final consumers. Suppose that the consumers’ constant elasticity demand function for the iPhone was Q = Ap-ε , Apple’s marginal cost of production was m, and AT&T’s marginal cost of reselling the phone was c. If both Apple
The U.S. Department of Justice (DOJ) accused Apple and five publishers of colluding to fix ebook prices, which Apple wanted to sell for viewing on its iPad. The publishers settled with the DOJ and Apple was found guilty in 2013. Apple’s standard arrangement with book publishers and others who
Compare welfare in a market where a firm is both a monopsony and a monopoly to welfare in markets in which the firm has a monopsony in the input market but acts as a price taker in the output market.
By 2015, Apple, Google, Pixar, and other firms settle a U.S. Department of Justice lawsuit that alleged they had a cartel agreement that barred them from soliciting each other’s employees. What would be the purpose of such an agreement? What type of market structure would these firms be
Humphreys and Pyun (2016) estimated that (MRP - salary)/MRP = 0.89 for rookie major league baseball players, while the comparable figure for players who are eligible to be free agents is 0.21. Explain the reason for this difference.
Some past and current civilizations, believing that interest should not be charged, passed usury laws forbidding it. What are the private and social benefits or costs of allowing interest to be charged?
You have a barrel of oil that you can sell today for p dollars. Assuming no inflation and no storage cost, how high would the price have to be next year for you to sell the oil next year rather than now?
If the government bars foreign lenders from loaning money to its citizens, how does the capital market equilibrium change?
What is the effect of a usury law that limits the market interest rate if some potential lenders, hoping that the authorities do not catch them, are still willing to loan money at illegally high rates?
In the figure in Solved Problem 16.4, suppose that the government’s demand curve remains constant at D1g but the government starts to tax private earnings, collecting 1% of all interest earnings. How does the capital market equilibrium change? What is the effect on private borrowers?
If you buy a car for $100 down and $100 a year for two more years, what is the present value of these payments at a 5% interest rate?
Firms are increasingly offering retiring employees a choice of whether to take a lump-sum payment now or receive monthly payments for the rest of their lives (http://www.fidelity.com/viewpoints/personal finance/lump-sum-or-monthly-pension).Discuss the benefits and drawbacks of accepting the lump
What is the present value of $100 paid a year from now and another $100 paid two years from now if the interest rate is i?
What is the present value of a stream of payments of f per year for t years that starts T years from now if the interest rate is i?
As a resident of New York City, you are considering purchasing a new Toyota Prius. The Prius sells for $20,000. Your annual expense of owning and driving the car is $3,000 (most of which is the cost of parking the car in a Manhattan garage). If you do not purchase the car, you will spend $5,000 per
How much money do you have to put into a bank account that pays 10% interest compounded annually to receive annual payments of $200 forever?
Horizon Ford advertises that it will sell you a Taurus for $24,000 or lease it to you. To lease it, you must make a down payment of $3,000 and agree to pay $3,000 at the end of each of the next two years.After the last lease payment, you may buy the car for $20,000. If you plan to keep the car
Lewis Wolff and his investment group bought the Oakland A’s baseball team for $180 million in 2005. Forbes magazine estimated that the team’s net income for that year was $5.9 million. If the new owners believed that they would continue to earn this annual profit (after adjusting for inflation)
How much money do you have to put into a bank account that pays 10% interest compounded annually to receive perpetual annual payments of $200 in today’s dollars if the rate of inflation is 5%?
You rent an apartment for two years. You owe a payment of f today and another equal nominal payment next year. If the inflation rate is g and the real interest rate is i, what is the present value of these rental payments?
To virtually everyone’s surprise, the new Washington Nationals baseball team earned a pre-tax profit of $20 million in 2005, compared to a $10 million loss when the team was the Montreal Expos in 2004 (Thomas Heath, “Nationals’ Expected ’05 Profit Is $20 Million,” Washington Post, June
If you spend $4 a day on a latte (in real dollars) for the rest of your life (essentially forever), what is your present discounted value at a 3% interest rate?
According to Forbes, a typical National Basketball Association (NBA) franchise would sell for $372 million—though the Knicks were worth $600 million in 2007. NBA teams posted average earnings (before interest, taxes, depreciation, and amortization) of $9.8 million. Assuming that the team can
You win a lottery. Your prize is either two annual payments of $50,000 at the end of each year or a lump-sum payment of $87,000 today. You expect the rate of inflation to be 5% and the real interest rate to be 4%. Which prize has a higher present value?
A group that includes former Lakers star Magic Johnson bought the Los Angeles Dodgers for $2.15 billion in 2012. The Dodgers reported earnings of $11.3 million (John Gittelsohn and Nadja Brandt, “Dodgers Costing $2.15 Billion Hinges on Property Return,” http://www.businessweek.com, April 4,
A firm’s profit is π = revenue - labor costs - capital costs. Its capital cost can be stated as its internal rate of return on capital, irr, times the value of its capital, pKK, where pK is the price of a unit of capital and K is the number of units of capital. What is the firm’s implicit
According to the Associated Press, in 2015, Max Scherzer became the highest-paid right-handed pitcher in major league history by agreeing to a “$210 million, seven-year contract” with the Washington Nationals that includes a “record $50 million signing bonus.” Reportedly, he will be paid
Tiffany plans to sell pies that she will buy this evening at a street fair tomorrow. If the weather is nice, she will earn $200; however, if it rains, she will lose $60, the amount she would pay for the pies that she won’t be able to sell. The weather forecast says that the chance of rain is 25%.
Suppose that Laura’s utility function is U(W) = W0.5, where W is wealth. Is she risk averse? Show mathematically.
Suppose that most people will not speed if the expected fine is at least $500. The actual fine for speeding is $800. How high must the probability of being caught and convicted be to discourage speeding?
Because a state’s governor can substantially influence new laws, uncertainty about the outcome of a gubernatorial election may affect whether firms make new investments. Shelton and Falk (2016) estimate that in a state with average partisan polarization, doubling the electoral uncertainty causes
Farrell et al. (2000) estimated that the elasticity of demand for lottery tickets is about -1. If the U.K. National Lottery is running its game to make money (it gets a percentage of the total revenues), is it running the lottery optimally? Explain your answer
In the paper market example in this chapter, what are the optimal emissions fee and the optimal tax on output (assuming that only a single, constant fee or tax is applied)?
Suppose that the buyers in the previous question incur a transaction cost of $800 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium? Is it possible that no cars sell?
In Solved Problem 20.5, a firm calculated the optimal level of monitoring to prevent stealing. If G = $500 and θ = 20%, what is the minimum bond that deters stealing?
The Challenge points out that if a ball club raises a player’s salary, it increases its fixed cost but not its variable cost. Use a figure to show what effect such an increase has if (a) The firm is competitive (b) The firm is a monopoly.
What does a competitive firm’s labor demand curve look like at quantities of labor such that the marginal product of labor is negative? Why?
Suppose that Question 1.4 were modified so that GM has no subsidy but does have a head start over Toyota and can move first. What is the Nash equilibrium? Explain.Question 1.4 GM Enter Do Not Enter -40 Enter 10 250 Toyota 200 Do Not Enter
In the Application “Strategic Advertising,” would the cola advertising or cigarette advertising game be an example of a prisoners’ dilemma game?
Most major electric car manufacturers belong to two rival camps. Each group uses one of two incompatible technologies to charge their cars at recharging stations (similar to gas stations). Both technologies use direct current to charge car batteries to 80% of capacity in less than 20 minutes. The
Derive the mixed strategy equilibrium if both Intel and AMD act simultaneously in the game in the Challenge Solution. What is the expected profit of each firm?
How does your analysis in the previous question change if the government imposes a lump-sum franchise tax of 40 on each firm (that is, the payoffs in the matrix are all reduced by 40). Now explain how your analysis would change if the firms have an additional option of shutting down and avoiding
Draw a figure to illustrate the Intel-AMD Nash-Cournot equilibrium in Solved Problem 13.2. At what quantities do the best-response functions hit the axes?
How would the Intel-AMD equilibrium in Solved Problem 13.2 change if AMD faced the same demand function as Intel, Equation 13.10?Equation 13.10pI = 490 - 10qI - 6qA
Why do prices increase if oligopolistic firms differentiate their products?
Various firms use marketing to differentiate their bottles of water (see the Application “Bottled Water”). If the firms in this market engage in a Bertrand game, what is the effect of this differentiation on prices? What is the effect on welfare?
Two pizza parlors are located within a few feet of each other on the Avenue of the Americas in New York City. Both were selling a slice of pizza for $1 (Matt Flegenheimer, “$1 Pizza Slice Is Back After a Sidewalk Showdown Ends Two Parlors’ Price War,” New York Times, September 5, 2012). Then,
Zipcar (now owned by Avis) initiated the business of renting cars by the hour and is still the industry leader. However, car2go (owned by Daimler), Enterprise Car Share, and Hertz 24/7 have more recently entered the market. As of 2015, the four companies control about 95% of the U.S. car sharing
How would the airlines€™ Nash-Cournot equilibrium (Figure 13.3) change if United€™s marginal cost was $100 and American€™s was $200?Figure 13.3 192 Amorcarts besteponsecuve Nash-Carnot oquibrium 64 48 Uritods best eponsecuv 64 96 4. Thausand American pasengars pa
Lee et al. (2010) estimated that a 2009 tax of 10 New Taiwan Dollars ($0.30) per pack of cigarettes reduced Taiwanese cigarette consumption by 13.19%. Assuming that the market consists of two cigarette firms, show how this specific tax affects the Nash-Cournot equilibrium.
The Federation of Quebec Maple Syrup Producers supplies over three-quarters of the world€™s maple syrup (see the Application €œCheating on the Maple Syrup Cartel€). Under government rules, the member firms jointly market their syrup through the federation, which sets
If two quantity-setting firms act simultaneously, is the Stackelberg outcome likely? Why or why not?
In their study of cigarette advertising, Roberts and Samuelson (1988) found that the advertising of a particular brand affects overall market demand for cigarettes but does not affect the brand’s share of market sales. Suppose the demand for brand i is qi = a + b(Ai + Aj)0.5, where Ai is brand
In 2010 and 2011, the U.S. government gave incentives to new businesses. A new firm could write off $10,000 in start-up costs, they could write off new capital investment, investors who invested in start-ups and small businesses would be exempt from capital gains tax if they sold their stakes for a
What is the duopoly Nash-Cournot equilibrium if the market demand function is Q = 1,000 - 1,000p, and each firm’s marginal cost is $0.28 per unit?
Holding the number of firms in the market fixed, what happens to the price as the number of noncartel members rises? Why?
Using our duopoly airlines example, (falsely) assume that the corporation that owns United Airlines is located in one country and American’s is located in another.a. If only United’s government provides a $48 per passenger subsidy, determine the equilibrium prices, quantities, and profits.b.
On June 26, 2016, Hertz charged $88 to rent a Chevy Spark for one day in New York City, but only $29 a day in Miami. Is this price discrimination? Explain.
Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set around the world. Warner charged 33% more in Canada and 66% more in Japan than in the United States, where it charged $15. Given that Warner’s marginal cost was $1, determine what the elasticities of
A copyright gave Universal Studios the legal monopoly to produce and sell the Mama Mia! DVD. The DVD sold for $20 in the United States and $36 (£22) in the United Kingdom. I estimate that the inverse demand functions for the United States and the United Kingdom were pA = 39 - 3QA and pB = 71 -
Ticketmaster Corp. uses an Internet auction to sell tickets (http://www.ticketmaster.com/ticketauctions). Is it engaging in price discrimination? If so, what type?
A monopoly’s inverse demand function is p = 800 - 4Q + 0.2A0.5, where Q is its quantity, p is its price, and A is the level of advertising. Its marginal cost of production is 2, and its cost for a unit of advertising is 1. What are the firm’s profit-maximizing price, quantity, and level of
How would the answers to Solved Problem 12.1 and Table 12.1 change if seniors€™ reservation price was $2.50?Table 12.1 (a) No Extra Customers from Price Discrimination Profit from 10 Profit from 20 College Students Pricing Total Profit Senior Citizens $50 Uniform, $5 $100 $150 Uniform,
Can Table 12.1 be modified so that the movie theater in Solved Problem 12.1 does not earn more by perfectly price discriminating than from charging a single price? What changes to the table would increase the extra profit from perfectly price discriminating?Table 12.1(a) No Extra Customers from
Many television and radio stations broadcast O. J. Simpson€™s 1995 trial for murder. Viewership of other programs and sales sagged as viewers skipped program length product pitches to watch trial coverage on weekday mornings. Estimates of average infomercial sales declines due to the
Explain why charging a higher or lower price than p = 10 reduces the monopoly€™s profit in Figure 12.5. Show the monopoly€™s profit if p = 20 and compare it to its profit if p = 10.Figure 12.5 P) Picels Aboe Magina Cont (a) Picefquals Marginal Cost 80 A - 2.450 A, - $1800 20 10
Explain why in Table 12.2 the firm does not use mixed bundling.Table 12.2 Wond Pracessur Spreadsbeet Hundle Alisha $120 $50 $170 Bob Profit-maximizing price Units sold $90 $70 $160 $50 $160 $90
In our discussion of Figure 12.4, we assumed that the monopoly engaged in block-pricing by setting both block prices so that they were on the demand curve. However, suppose the monopoly sets the first block at 20 units but can choose a first-block price that is greater than $70. It then allows
Explain how a monopoly firm can price discriminate by advertising sales in newspapers or magazines that only some of its customers see. Is it a noisy monopoly?
In Solved Problem 18.3, suppose that the firms will split the cost of a guard if they both vote to hire one. Show the new payoff matrix. Do they hire a guard?
Countries around the world provide consumers with fossil fuel subsidies (Coady et al., 2016). In 2015, the subsidies reached $5.3 trillion (6.5% of global gross domestic product). Davis (2016) estimated that subsidies cause $4 billion in external costs annually. In a figure, show the effect of
Every dollar of collective advertising by the beef industry results in $5.67 in additional marginal revenue for producers (as discussed in the Application “What’s Their Beef?”). Is the industry advertising optimally? Explain your answer.
Northern Victoria, Australia, imposed a vomit tax on pubs in the Greater Shepparton area that remain open between 3:00 a.m. and 6:00 a.m. The tax was to be used to pay for cleaning up the mess left by drunks who get sick in the street. Pub owners objected that politicians assume that their
Patent trolls are firms that buy patents hoping to bring patent infringement lawsuits against major firms rather than to producing goods themselves. Recently, 53 firms such as Google, Microsoft, Ford Motor Company, JP Morgan Chase, Solar City, and Uber have joined the LOT (License of Transfer)
A pandemic influenza (akin to the severe 1918 flu epidemic) that kills 2 million or more people could also cause annual income loss of 4% to 5% of global national income (see Fan et al., 2016). Using the concepts in this chapter (such as externalities, free riding, and public goods), explain what a
Using the numerical example in Appendix 18A, determine the social optimum if the marginal harm of gunk is MCg = $84 (instead of Equation 18A.3). Can you think of a shortcut that would allow you to solve this problem without algebra?Appexdix 18Ap = a - bQ,
Half of the existing Florida manatees have made a startling discovery: the warm water pouring out of power plants makes an excellent winter refuge. The warm water prevents them from dying from cold stress. As a result, in 2016, the manatee was reclassified from endangered to threatened. Do power
In Figure 18.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?Figure 18.1
More than four times as many antibiotics are used to promote growth and prevent disease in animals than for human use (Teillant and Laxminarayan, 2015). The extensive use of antibiotics in livestock contributes to the increase in drug-resistant pathogens in animals that might be transmitted to
In the example in Table 18.2, suppose that the two parties cannot negotiate. The government imposes a tax on the auto body shop equal to the marginal harm it does to the tea house. What is that tax schedule? Does it result in the welfaremaximizing outcome? How does the outcome change if the tax is
Jack and Jill live in different cities. Regardless of which one chooses to fly to visit the other, they agree to split the cost of the flight equally. What is the implication of this fee-sharing arrangement?
Patrick, the owner, makes the same offer to the manager at each of his stores: “At the end of the year, pay me a lump-sum of $100,000, and you can keep any additional profit.” Astrid, a manager at one of the stores, gladly agrees, knowing that the total profit at the store will substantially
A publication of a major clinical trial showed that a common knee operation does not improve outcomes for patients with osteoarthritis. Howard et al. (2016) examined all these operations in Florida from 1998 to 2010. They discovered that after the publication of this article, the number of these
In the contract choice example in the chapter, what are the implications for risk bearing of the fixed-fee and contingent contract if the sales revenue varies with market conditions? Will a worker’s attitude toward risk affect which contract the worker chooses?
List as many ways as possible that a principal can reassure an agent that it will avoid opportunistic behavior.
In Solved Problem 19.2, would any of the firms produce high-quality wallets if the cost of producing a higher-quality wallet is only $11? Explain.
In Solved Problem 19.2, show that, if all the other firms were producing a high-quality wallet, it would pay a firm to start producing a low-quality wallet.
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