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microeconomics principles

Microeconomics 8th edition Jeffrey M. Perloff - Solutions

In the ability signaling model, suppose that firms can pay c* for a test that determines a worker’s ability. Does a firm benefit by testing workers?
Grocery stores, hotels, and other firms give their customers free loyalty cards. A customer who uses the card receives a discount. Are these firms signaling, screening, price discriminating, or engaging in other activities?
What are the answers to Solved Problem 19.1 if customers are willing to pay $10,000 for a good used car?
Some firms sell the same product under two brand names at different prices. For example, although the Chevy Tahoe and the GMC Yukon are virtually twins, the 2016 Yukon sells for $1,200 more than the 2016 Tahoe. Give an asymmetric information explanation as to why the firm might use pairs of brand
The Federal Trade Commission objected to the California Dental Association’s prohibitions against its members engaging in advertising about prices, calling them restraints on trade. What effect should such restraints have on equilibrium prices?
The Application “Reducing Consumers’ Information” notes that a food manufacturer may sell a national brand product for more than an identical private-label product. Is the firm a noisy monopoly (or oligopoly)?
Can you change the payoffs in the table in the Challenge Solution so that the firms choose to invest in safety? Explain.
As of 2016, 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 discounts on many prescription
The demand curve Q = A/p, where A is a positive constant, has the property that the elasticity of demand is ε = -1 everywhere.a. Use math to show that the revenue is the same at any given point on the constant elasticity of demand curve.b. Show that, for any point on the constant elasticity of
A demand curve Q = A/p, where A is a positive constant, has the property that the elasticity of demand is ε = -1. Accurately draw this demand curve. Now pick two different prices and show the associated revenue for each. (Draw a line from a given price on the vertical axis horizontally to the
In a figure, show the effect of an ad valorem tax (see Chapter 2) on a monopoly optimum, consumer surplus, producer surplus, welfare, and dead-weight loss.
According to one estimate, the parts for a Segway Human Transporter—which has five gyroscopes, two tilt sensors, dual redundant motors, ten microprocessors, and can travel up to 12.5 mph—cost at least $1,500 (Eric A. Taub, “Segway Transporter Slow to Catch On,” San Francisco Chronicle,
In 2013, the Oakland A’s were one of the hottest teams in baseball. They were regularly drawing “sellout” crowds, with many more fans wanting tickets. However, the A’s decided not sell all of the 56,000 seats. The A’s removed or put tarps over roughly 20,000 seats in most of the third
A monopoly manufactures its product in two factories with marginal cost functions MC1(Q1) and MC2(Q2), where Q1 is the quantity produced in the first factory and Q2 is the quantity manufactured in the second factory. The monopoly’s total output is Q = Q1 + Q2. Use a graph or math to determine how
Show that a monopoly will not necessarily lower its price by the same percentage as its constant marginal cost drops.
Water bottles are the best-selling item in airport stores. In many airports, the price charged is whatever the market will bear. However, some airports limit the price. San Francisco International and Dallas-Fort Worth International set a cap at “street prices” plus 10% (Scott McCartney, “The
If the linear inverse demand function is p = 100 - 2Q, what is the marginal revenue function? Draw the demand and marginal revenue curves.
For years, Buffalo wings, barbequed chicken wings, have been popular at bars and restaurants, especially during football season. Now, restaurants across the country are selling boneless wings, a small chunk of chicken breast that is fried and smothered in sauce. Part of the reason for this
If Jane and Denise have identical, linear production possibility frontiers, can they benefit by trading? Why?
Modify the figure in the Challenge Solution to show how much would be sold in both sectors in the absence of anti price gouging laws. Discuss how these quantities differ from those that result from implementing such laws.
Use a figure to illustrate why technological progress (which causes the supply curve to shift rightward) hurts the government and consumers in an agricultural market in which the government maintains a traditional price support as in Figure 9.8. Compare that result with the effects of technological
The Canadian government imposes a quota on the amount of milk that firms may produce. What are the effects on consumer surplus, producer surplus, and welfare? Who benefits from such a rule?
At the unregulated, competitive equilibrium, the demand curve of gasoline becomes more elastic over time as people can react to a higher gasoline price by buying more fuel-efficient cars, moving closer to work, or making other changes than they cannot make in the short run. Given a binding price
Oil companies heavily lobby some members of Congress, encouraging them to support laws that benefit these producers. Other more populist members of Congress advocate laws that benefit consumers.Another group supports laws that benefit society as a whole, seeking a favorable balance between
Use diagrams to compare the welfare implications of the traditional agricultural price support program and the deficiency payment program if both set the same price floor, p. Under what circumstances would farmers, consumers, or taxpayers prefer one program to the other?
In Solved Problem 9.4, what is the relationship between lost consumer surplus due to the tax, deadweight loss, and tax revenue? Discuss and reconcile the different results in Solved Problems 9.1 and 9.4.
In the first quarter of 2013, the world price for raw sugar, 23¢ per pound, was about 79% of the domestic price, 29¢ per pound, because of quotas and tariffs on sugar imports. Consequently, U.S.-made corn sweeteners can be profitably sold domestically. A decade ago, the U.S. Commerce Department
How would the analysis in Solved Problem 9.4 change if the supply curve were upward-sloping instead of horizontal?
In 2013, the United States accused India, China, and three other Asian countries of dumping shrimp in the United States at prices below their costs, and proposed duties (tariffs) as high as 62.74% (Uttara Choudhury, “U.S. Sets Preliminary Anti-dumping Duties on Indian Shrimp,” First Post
If the supply function is Q = 10 + p, what is the producer surplus if price is 20?
The Application “What’s a Name Worth?” notes that a successful entertainer such as Taylor Swift earns astronomical amounts. Other entertainers earn just a relatively small wage. Discuss why Taylor Swift’s earnings consist of the basic wage plus a rent.
A city may limit the number of liquor licenses for restaurants in many ways. It could issue a license that the owner keeps forever and that can be resold.Or, it could charge a high license fee each year, which is equivalent to the city’s issuing a license that lasts only a year. A third option is
Does a firm’s producer surplus differ from its profit if it has no fixed cost?
A shock causes the demand curve to shift to the right. What properties of the market are likely to lead to a large increase in the equilibrium price?
Derive Equation 8.7. 1 - 0
Redraw Figure 8.11 to show what happens if factor costs fall as the industry€™s quantity increases. (a) Firm (b) Market мс мс AC2 D2 D' P2 E, 9, 92 q, Units per year Q, = n,9, Q2 = n292 Q, Units per year p, $ per unit p, $ per unit
If the pre-tax cost function for John’s Shoe Repair is C(q) = 100 + 10q - q2 + 1/3q3, and it faces a specific tax of t = 10, what condition determines the profit-maximizing output if the market price is p?Can you solve for a single, profit-maximizing q in terms of p?
Draw a figure to illustrate why the size of ethanol processing plants has fallen in recent years (see “The Size of Ethanol Processing Plants” Application).
How would the answer to Solved Problem 8.2 change if, instead of a specific tax, Manitoba imposes an ad valorem tax (see Chapter 3) of v percent on lime produced in that province?
Based on Equation 8.2, by how much does the residual elasticity of demand facing a firm increase as the number of firms increases by one firm?
What is the long-run cost function if the production function is q = L + K?
Suppose in Solved Problem 7.2 that the government charges the firm a franchise tax each year (instead of only once). Describe the effect of this tax on the marginal cost, average variable cost, short-run average cost, and long-run average cost curves.
A firm manufactures boxes of cereal using a fixed proportion production function: One box and one unit (12 ounces) of cereal produce one box of cereal. What is the expansion path? What is the cost function?
In 2015 the U.S. Supreme Court was hearing a case about a federal rule to promote reduced electricity use. In discussing this rule, Chief Justice John Roberts related the regulation to the pricing of hamburgers:“If FERC is basically standing outside McDonald’s and saying, ‘We’ll give you $5
Platinum Pipeline Inc. needs a Caterpillar D6T dozer to install water and sewer lines. How does its fixed cost change if it can rent a dozer rather than buy one?
Use the tangency rule to determine the cost-minimizing bundles of labor and capital for a Japanese synthetic rubber firm’s production function q = L0.5K0.5 (Flath, 2011) where w = 10 and r = 10. How does your answer change if w = 20 and r = 10?
Using the information in Table 7.1, construct another table showing how a lump-sum franchise tax of $30 affects the various average cost curves of the firm.Table 7.1 Average Variable Cost, AVC = VC/q Fixed Cost, F Average Fixed Cost, AFC = Flq Average Cost, = Clq AC : Output, Variable Total
Initially a firm’s wage is w = 10 and its rental cost of capital is r = 10. After its wage rate doubles, how do its isocost lines change?
Is a boss a fixed or variable input in the Application “A Good Boss Raises Productivity”? How does having a good boss affect the marginal product of labor curve for this firm? Assuming that the production process also includes a capital input, what effect does a good boss have on a typical
Ben swims 50,000 yards per week in his practices.Given this amount of training, he will swim the 100-yard butterfly in 52.6 seconds and place tenth in a big upcoming meet. Ben’s coach calculates that if Ben increases his practice to 60,000 yards per week, his time will decrease to 50.7 seconds
Are the robots in the Application “Robots and the Food You Eat” an example of neutral, labor-saving, or capital-saving innovation? Explain.
Why do we expect the law of diminishing marginal returns to hold?
If the production function is q = f(L, K) = 3L + 2K, and capital is fixed at K̅ = 50, what is the short-run production function? What is the marginal product of labor?
How would the answer in the Challenge Solution change if we used the marginal product of labor rather than the average product of labor as our measure of labor productivity?
Vasco’s utility function is U = 10X2Z. The price of X is pX = $10, the price of Z is pz = $5, and his income is Y = $150. What is his optimal consumption bundle?
See the Application “Paying Employees to Relocate.” A firm transfers its employee Kiki to another country and agrees to pay her enough to buy the same bundle of goods as she currently buys. Kiki does not care where she lives. Draw a figure to illustrate that Kiki is better off in the new
Redraw Figure 5.4 using an equivalent variation rather than a compensating variation approach.Figure 5.4 40 30 20 10 -/1 12 16 24 30 40 60 T, Music tracks per quarter Income effect + Substitution effect Total effect M, Live music per quarter 2.
Derive the demand curve for pizza, Z, if Lisa’s utility function is U = Z0.25 B0.75, where B is burritos.
Suppose that Bill’s wage varies with the hours he works: w(H) = aH, a > 0. Show how the number of hours he chooses to work depends on his tastes.
Illustrate the effect of cheaper phones in the Philippines that is described in the Application €œSmoking Versus Eating and Phoning€ using a figure similar to Figure 5.1. (a) Indiffe rence Curves and Budget Constraints 12.0 Price-consumption curve 5.2 4.3 2.8 L' (P, = $12) L2
Could an individual’s Engel curve be the mirror image of the one in the Application “Fast-Food Engel Curve” (quantity is first decreasing and then increasing with income)? Illustrate in a figure. Can you think of a good that would have such an Engel curve?
Change Figure 5.5 so that L2is steeper than L1(but still goes through e1); that is, food increases by more than clothing in the second year. Show the conclusion that Klaas is still better off after receiving a CPI adjustment. Explain the logic behind the following statement: €œThe
Using a figure similar to Figure 5.4 or that in Solved Problem 5.3, discuss the substitution, income, and total effects of a price change for Coke for Mahdu who views Coke and Pepsi as perfect substitutes.Figure 5.4 40 30 20 10 -/1 12 16 24 30 40 60 T, Music tracks per quarter Income effect +
Using calculus, show that not all goods can be inferior. Start with the identity that y = p1q1 + p2q2 + c + pnqn
Alix views coffee and cream as perfect complements. In the first period, Alix picks an optimal bundle of coffee and cream, e1. In the second period, inflation occurs, the prices of coffee and cream change by different amounts, and Alix receives a cost-ofliving adjustment (COLA) based on the
Cori insists on having three pieces of toast for every two eggs she eats for breakfast. What is her utility function? If the price of eggs increases but we compensate Cori to make her just as “happy” as she was before the price change, what happens to her consumption of eggs? Draw a graph and
Hugo views donuts and coffee as perfect complements:He always eats one donut with a cup of coffee and will not eat a donut without coffee or drink coffee without a donut. Derive and plot Hugo’s Engel curve for donuts. How much does his weekly budget have to rise for Hugo to buy one more donut per
In Figure 5.1, how does Mimi’s utility at E1 on D1 compare to that at E2? As we move down from the highest point on an individual’s downward-sloping demand curve, must the individual’s utility rise?
During his first year at school, Ximing buys eight new college textbooks at a cost of $50 each. Used books cost $30 each. When the bookstore announces a 20% price increase in new texts and a 10% increase in used texts for the next year, Ximing’s father offers him $80 extra. Is Ximing better off,
Steve’s utility function is U = BC, where B = veggie burgers per week and C = packs of cigarettes per week. Here, MUB = C and MUC = B. What is his marginal rate of substitution if veggie burgers are on the vertical axis and cigarettes are on the horizontal axis? Steve’s income is $120, the
Draw diagrams similar to Figure 5.1 showing that the price consumption curve can be horizontal or downward sloping.Figure 5.1 (a) Indiffe rence Curves and Budget Constraints 12.0 Price-consumption curve 5.2 4.3 2.8 L' (P, = $12) L2 (P,= $6) L3 (P,- $4) Beer, Gallons per year 26.7 44.5 58.9 (b)
Governments generally limit the amount of the childcare subsidy. For example, in Washington State, the 2015 maximum subsidy for an infant is $31.47 per day. A binding limit on the subsidy creates a kink in the budget constraint. Show how a limit changes the analysis in the Challenge Solution.
Michelle spends all her money on food and clothing. When the price of clothing decreases, she buys more clothing.a. Does the substitution effect cause her to buy more or less clothing? Explain. (If the direction of the effect is ambiguous, say so.)b. Does the income effect cause her to buy more or
In Solved Problem 4.5, if the generic bleach increases its strength to equal that of Clorox without changing its price, what bundles will Chris buy if the price of Clorox is $3 or $2?
Is a wealthy person more likely than a poor person to prefer to receive a government payment of $100 in cash to $100 worth of food stamps? Why or why not?
Show how much an individual’s opportunity set increases if the government gives food stamps for free rather than sells them at subsidized rates.
Since 1979, the government has given recipients food stamps for free. Before 1979, people bought food stamps at a subsidized rate. For example, to get $1 worth of food stamps, a household paid about 15¢ (the exact amount varied by household characteristics and other factors). What is the budget
A poor person who has an income of $1,000 receives $100 worth of food stamps. Draw the budget constraint if the food stamp recipient can sell these coupons on the black market for less than their face value.
Crost and Guerrero (2012) found that when women turn 21, their cost of buying alcohol drops, and they reduce their consumption of marijuana by 17% (see the Application “Substituting Alcohol for Marijuana”). Illustrate this effect in a figure.
Maureen only drinks a cup of coffee with one teaspoon of sugar. In a figure, show the bundle of coffee and sugar that gives her the most pleasure. Are her indifference curve and the budget line tangent at that bundle?
Salvo and Huse (2013) found that roughly one fifth of owners of flexible-fuel cars (which can run on a mix of ethanol and gasoline) choose gasoline when the price of gas is 20% above that of ethanol (in energy-adjusted terms) and, similarly, one-fifth choose ethanol when ethanol is 20% more
Felix chooses between water and all other goods. If he spends all his money on water, he can buy 12 thousand gallons per week. At current prices, his optimal bundle is e1. Show e1 in a diagram. During a drought, the government limits the number of gallons per week that he may purchase to 10
Diogo has a utility function U(B, Z) = ABαZβ, where A, α, and β are constants, B is burritos, and Z is pizzas. If the price of burritos, pB, is $2 and the price of pizzas, pZ, is $1, and Y is $100, what is Diogo’s optimal bundle?
José Maria’s utility function is U(B, Z) = ABαZβ. What is his marginal utility of B? What is his marginal utility of Z? What is his marginal rate of substitution between B and Z?
David’s utility function is U = B + 2Z, so MUB = 1 and MUZ = 2. Describe the location of his optimal bundle (if possible) in terms of the relative prices of B and Z.
Julia consumes cans of anchovies, A, and boxes of biscuits, B. Each of her indifference curves reflects strictly diminishing marginal rates of substitution.Where A = 2 and B = 2, her marginal rate of substitution between cans of anchovies and boxes of biscuits equals -1 (= MUA/MUB). Will she prefer
If Joe views two candy bars and one piece of cake as perfect substitutes, what is his marginal rate of substitution between candy bars and cake?
What is the effect of a quota of 13 thousand gallons of water per month on the opportunity set of the consumer in Solved Problem 4.2?
Does the utility function V(Z, B) = α + [U(Z, B)]2 give the same ordering of bundles as does U(Z, B)?
What happens to a consumer’s optimum if all prices and income double?
Suppose Gregg consumes chocolate candy bars and oranges. He is given four chocolate bars and three oranges. He can buy or sell a candy bar for $2 each. Similarly, he can buy or sell an orange for $1. If he has no other source of income, draw his budget constraint and write the equation. What is the
For a tax on sugar or fat to reduce the consumption of fattening foods and drinks by a very large amount, what must the demand and supply elasticities be?
Cranfield (2012) estimated that the elasticity of demand for Canadian beef was -0.83. If the supply curve of beef is nearly inelastic in the short run and a change in the law causes the supply curve to shift to the left by 10%, how much will the price rise?
A 2014 report from the Motion Picture Association of America said that revenue rose to $10.9 billion in 2013 from $10.8 billion in 2012 even though the number of tickets sold fell from 1.36 billion to 1.34 billion. The reason that revenue increased was that the average U.S. movie ticket price rose
In the figure in the Application €œAmazon Prime,€ what do the areas A, A + B, A + C, and B - C represent?Amazon Prime 99 C = $0.36 billion 79 e, B= $0.158 billion A = $.1422 billion 18 20 Quantity, Q, Million members per year Price, p, $ per member
If the inverse demand function is p = a - bQ and the inverse supply function is p = c + dQ, show that the incidence of a specific tax of t per unit falling on consumers is b/(b + d) = η/(η - ε ).
What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly elastic and supply is perfectly inelastic?What is the incidence on consumers? Explain.
What is the effect of a $1 specific tax on equilibrium price and quantity if supply is perfectly inelastic? What is the incidence on consumers? Explain.
What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly elastic? What is the incidence on consumers? Explain.
If the demand elasticity is -1 at the initial equilibrium and price increases by 1%, by how much does revenue change?

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