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microeconomics principles

Microeconomics Principles, Problems and Policies 20th edition Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn - Solutions

Relate opportunity costs to why profits encourage entry into purely competitive industries and how losses encourage exit from purely competitive industries.
Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional
A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. Draw a
A purely competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost for the first 50 units? What about for the
Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC. a. P < minimum AVC.b. P > minimum ATC.c. Minimum AVC < P < minimum ATC.
A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC).
If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which: a. MR < MC.b. MR = MC.c. MR > MC.d. none of the above.
A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which: a. TR and TC are equal.b. TR exceeds TC by as much as possible.c. TC exceeds TR by as much as possible.d. None of the above.
Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is: a. A horizontal line at 2 cents per paper clip.b. A vertical line at 2 cents per paper
If a firm's current revenues are less than its current variable costs, when should it shut down? If it decides to shut down, should we expect that decision to be final? Explain using an example that is not in the book.
“That segment of a competitive firm’s marginal-cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and words.
Consider a firm that has no fixed costs and that is currently losing money. Are there any situations in which it would want to stay open for business in the short run? If a firm has no fixed costs, is it sensible to speak of the firm distinguishing between the short run and the long run?
“Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)?
Strictly speaking, pure competition is relatively rare. Then why study it?
There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs $10,000 per mile to set up. How much would it cost to fence a single property whose area is one square mile if that property also happens to be perfectly square, with sides that
You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can’t get out of. You also have a marginal printing cost of $0.25 per paper
Imagine you have some workers and some hand-held computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 100 items per hour. Two workers can together inventory 150 items per hour. Three workers
True or false. The U shape of the long-run ATC curve is the result of diminishing returns.
Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients and the bottles and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda’s accounting profit is _____________
Does additive manufacturing rely on economies of scale to deliver low costs? What are two ways in which additive manufacturing lowers costs? Besides what's written in the book, might there be another reason to expect 3-D blueprints to be inexpensive? (Hint: Think in terms of supply and
Ted has always had difficulty saving money. So on June 1 st , Ted enrolls in a Christmas savings program at his local bank and deposits $750. That money is totally locked away until December 1 st so that Ted can be certain that he will still have it once the holiday shopping season begins. Suppose
In the algebraic version of prospect theory, the variable x represents gains and losses. A positive value for x is a gain, a negative value for x is a loss, and a zero value for x represents remaining at the status quo. The so-called value function, v(x), has separate equations for translating
Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate. Her sense of loss aversion makes her more anxious about the larger loan. As a result, she plans to pay it off
Investigate how demand elasticities are affected by increases in demand. Shift each of the demand curves in Figures 6.2a, 6.2b, and 6.2c to the right by 10 units. For example, point a in Figure 6.2a would shift rightward from location (10 units, $2) to (20 units, $2) while point b would shift
The coffee shop near the local college normally sells 10 ounces of roasted coffee beans for $10. But the shop sometimes puts the beans on sale. During some sales, it offer “33 percent more for free”. Other weeks, it takes “33 percent off” the normal price. After reviewing the shop’s sales
“There’s no such thing as bad publicity.” Evaluate this statement in terms of the recognition heuristic.
Economist Gerd Gigerenzer characterizes heuristics as “fast and frugal” ways of reaching decisions. Are there any costs to heuristics being “fast and frugal”? Explain and give an example of how a fast and frugal method for doing something in everyday life comes at some costs in terms of
Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental processes?
Suppose that Joe enjoys and repeatedly does stupid things like getting heavily into debt and insulting police officers. Do these actions constitute systematic errors? If he gets what he wants each time, are his stupid actions even considered to be errors by economists? Explain.
Political advertising is often directed at winning over so-called swing voters, whose votes might go either way. Suppose that two political parties-the Freedom Party and the Liberty Party-disagree on whether to build a new road. Polling shows that of 1,000 total voters, 450 are firmly for
Look back at Figures 1a and 1b, which show the costs and benefits to voters Adams, Benson, and Conrad of two different public goods that the government will produce if a majority of Adams, Benson, and Conrad support them. Suppose that Adams, Benson, and Conrad have decided to have one single vote
Refer to Table 4.2. If the six people listed in the table are the only producers in the market and the equilibrium price is $6 (not the $8 shown), how much producer surplus will the market generate?TABLE 4.2 Producer Surplus (2) (3) Minimum Actual Price (4) (1) Person Acceptable Price (Equilibrium
Use marginal cost/marginal benefit analysis to determine if the following statement is true or false: “The optimal amount of pollution abatement for some substances, say, dirty water from storm drains, is very low; the optimal amount of abatement for other substances, say, cyanide poison, is
Suppose that you are the economic advisor to a local government that has to deal with a politically embarrassing surplus that was caused by a price floor that the government recently imposed. Your first suggestion is to get rid of the price floor, but the politicians don’t want to do that.
Consider the market for coffee beans. Suppose that the prices of all other caffeinated beverages go up 30 percent while at the same time a new fertilizer boosts production at coffee plantations dramatically. Can you tell what will happen to the equilibrium price? What about the equilibrium
Anne is a bargain-minded shopper. Normally, her favorite toothpaste costs the same at both of her local supermarkets, but the stores are having competing sales this week. At one store, there is a bonus offer: buy 2, get 1 free. At the other store, toothpaste is being sold at 40 percent off. Anne
You just accepted a campus job helping to raise money for your school’s athletic program. You are told to draft a fund-raising letter. The bottom of the letter asks recipients to write down a donation amount. If you want to raise as much money as possible, would it be better if the text of that
Suppose that Ike is loss averse. In the morning, Ike’s stockbroker calls to tell him that he has gained $1,000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1,000 in taxes. At the end of the day, does Ike feel emotionally neutral since the dollar
One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a local market. But he is unwilling to drive 20
In the early 1990’s, New Jersey and Pennsylvania both reformed their automobile insurance systems so that citizens could opt for either a less-expensive policy that did not allow people to sue if they got into accidents or a more-expensive policy that did allow people to sue if they got into
Many proposers in the ultimatum game offer half to the responder with whom they are paired. This behavior could be motivated by (select as many as might apply):a. Fear that an unequal split might be rejected by a fair-minded responder.b. A desire to induce the responder to reject the offer.c.
Erik wants to save more, but whenever a paycheck arrives, he ends up spending everything. One way to help him overcome this tendency would be to:a. Teach him about time inconsistency.b. Tell him that self-control problems are common.c. Have him engage in pre commitments that will make it
What does behavioral economics have to say about each of the following statements? a. “Nobody is truly charitable-they just give money to show off.”b. “America has a ruthless capitalist system. Considerations of fairness are totally ignored.”c. “Selfish people always get ahead.
Label each of the following behaviors with the correct bias or heuristic. a. Your uncle says that he knew all along that the stock market was going to crash in 2008.b. When Fred does well at work, he credits his intelligence. When anything goes wrong, he blames his secretary.c. Ellen
Do people playing the dictator game show only self-interested behavior? How much divergence is there in the splits given by dictators to the other player?
Identify each statement as being associated with neoclassical economics or behavioral economics.a. People are eager and accurate calculators.b. People are often selfless and generous.c. People have no trouble resisting temptation.d. People place insufficient weight on future events and outcomes.e.
Which of the following are systematic errors?a. A colorblind person who repeatedly runs red lights.b. An accountant whose occasional math errors are sometimes on the high side and sometimes on the low side.c. The tendency many people have to see faces in clouds.d. Miranda paying good money for a
Evaluate the following statement. “We shouldn’t generalize from what people do in the ultimatum game because $10 is a trivial amount of money. When larger amounts of money are on the line, people will act differently.”
What do you think of the ethics of using unconscious nudges to alter people’s behavior? Before you answer, consider the following argument made by economists RichardThaler and Cass Sunstein, who favor the use of nudges. They argue that in most situations we couldn’t avoid nudging even if we
Suppose that with a budget of $100, Deborah spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. But then, after the price of bagels falls to $1 per bagel, she spends $50 on sushi and $50 on bagels. How many pieces of sushi and how many bagels did
A “mathematically fair bet” is one in which the amount won will on average equal the amount bet, for example when a gambler bets, say, $100 for a 10 percent chance to win $1,000 ($100 = .10 x $1,000). Assuming diminishing marginal utility of dollars, explain why this is not a fair bet in
Lorena likes to play golf. The number of times per year that she plays depends on both the price of playing a round of golf as well as Lorena€™s income and the cost of other types of entertainment€”in particular, how much it costs to go see a movie instead of playing
Look at the demand curve in Figure 6.2a. Use the midpoint formula and points a and b to calculate the elasticity of demand for that range of the demand curve. Do the same for the demand curves in Figures 6.2b and 6.2c using, respectively, points c and d for Figure 6.2b and points e and f for Figure
Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?
Let MUA = z = 10 - x and MUB = z = 21 - 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Assume that the consumer has $10 to spend on A and B—that is, x + y = 10. How is the $10
In what way is criminal behavior similar to consumer behavior? Why do most people obtain goods via legal behavior as opposed to illegal behavior? What are society's main options for reducing illegal behavior?
True or false. The law of diminishing marginal utility predicts the consumption behavior of addicts quite well.
Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:a.
Demand curves slope downward because, other things held equal, a. An increase in a product’s price lowers MU.b. A decrease in a product’s price lowers MU.c. A decrease in a product’s price raises MU per dollar and makes consumers wish to purchase more units.d. An increase in a
Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will ______________ and Jermaine will _______________ cucumbers for lettuce.a. Fall; substituteb. Rise; substitutec. Fall; supplyd. Rise; demand
Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is as though her income __________________. a. Increasesb. Decreasesc. Stays the same
Mylie’s total utility from singing the same song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four repetitions, -50 utils after five repetitions, and -200 utils after six repetitions. Write down her marginal
John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. Does John show diminishing marginal utility for Coke or does he show increasing marginal utility for
Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup, no matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the second he eats, 8 for the third he eats, and so on (that is, declining
True or False. The median voter model explains why politicians so often stake out fringe positions that appeal only to a small segment of the electorate. Why?
The problem with our democratic institutions is that they don’t correctly reflect the will of the people! If the people-rather than self-interested politicians or lobbyists-had control, we wouldn’t have to worry about government taking actions that don’t maximize allocative and productive
“Majority voting ensures that government will produce only those public goods for which benefits exceed costs.” Why?
Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but they can’t do that unless they can bribe
Suppose that there are 1 million federal workers at the lowest level of the federal bureaucracy and that above them there are multiple layers of supervisors and supervisors-of-supervisors. Assume that each higher level is one-tenth the size of the one below it because the government is using a 10:1
___________________ occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. a. Budget deficitsb. Debt Crisesc. Loan guaranteesd. Unfunded liabilities
A few hundred U.S. sugar makers lobby the U.S. government each year to make sure that it keeps taxing imported sugar at a high rate. They do so because the policy drives up the domestic price of sugar and increases their profits. It is estimated that the policy benefits U.S. sugar producers by
Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must pay the $5-per-window cost—and by the way,
To an economist, any government program is too big if an analysis of that program finds that MB _______ MC. a. Is greater thanb. Is less thanc. Is equal tod. Is less than twice as large ase. Is more than twice as large as
Select all of the following that are true. To an economist, a coercive government can be useful in order to:a. Reallocate resources in order to improve efficiency.b. Fight negative externalities.c. Ensure low gasoline prices.d. Provide a low-risk economic environment for individuals and firms.
Critique: “Thank goodness we have so many government regulatory agencies. They keep Big Business in check.”
Discuss the political incentives that helped motivate federal politicians to approve budget deficits in all but four years between 1960 and 2012.
What is rent seeking and how does it differ from the kinds of profit maximization and profit seeking that we discussed in previous chapters? Provide an actual or hypothetical example of rent seeking by firms in an industry. By a union. By a professional association (for example, physicians, school
Jean Baptiste Colbert was the Minister of Finance under King Louis XIV of France. He famously observed, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” How does his comment relate to
Why might citizens interested in maximizing economic efficiency be happy to invest their government with the right to coerce them in at least some situations?
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a
True or False: A market may collapse and have relatively few transactions between buyers and sellers if buyers have more information than sellers.
Government inspectors who check on the quality of services provided by retailers as well as government requirements for licensing in various professions are both attempts to resolve:a. The moral hazard problem.b. The asymmetric information problem.
People drive faster when they have auto insurance. This is an example of:a. Adverse selection.b. Asymmetric information.c. Moral hazard.
Because medical records are private, an individual applying for health insurance will know more about his own health conditions than will the insurance companies to which he is applying for coverage. Is this likely to increase or decrease the insurance premium that he will be offered? Why?
Assume the following values for Figures 4.4a and 4.4b. Q1 = 20 bags. Q2 = 15 bags. Q3 = 27 bags. The market equilibrium price is $45 per bag. The price at a is $85 per bag. The price at c is $5 per bag. The price at f is $59 per bag. The price at g is $31 per bag. Apply the
Look at Tables 4.1 and 4.2 together. What is the total surplus if Bob buys a unit from Carlos? If Barb buys a unit from Courtney? If Bob buys a unit from Chad? If you match up pairs of buyers and sellers so as to maximize the total surplus of all transactions, what is the largest total surplus that
Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality.a. Overallocation of resources.b. Tammy installs a very nice front garden, raising the property values of all the other houses on her block.c. Market demand curves are
Efficiency losses ____________________________. a. Are not possible if suppliers are willing to produce and sell a product.b. Can only result from underproduction.c. Can only result from overproduction.d. None of the above.
Assume that candle wax is traded in a perfectly competitive market in which the demand curve captures buyers’ full willingness to pay while the supply curve reflects all production costs. For each of the following situations, indicate whether the total output should be increased, decreased, or
The LoJack car recovery system allows the police to track stolen cars. As a result, they not only recover 90% of LoJack-equipped cars that are stolen but also arrest many auto thieves and shut down many “chop shops” that take apart stolen vehicles to get at their used parts. Thus, LoJack
Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously?Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously? What
The table below shows two demand schedules for a given style of men€™s shoes€”that is, how many pairs per month will be demanded at various prices at a men€™s clothing store in Seattle called Stromnord.Suppose that Stromnord has exactly 65 pairs of this style of shoe
Demand and supply often shift in the retail market for gasoline. Here are two demand curves and two supply curves for gallons of gasoline in the month of May in a small town in Maine. Some of the data is missing.a. Use the following facts to fill in the missing data in the table. If demand
Governments can use subsidies to increase demand. For instance, the government can pay farmers to use organic fertilizers rather than traditional fertilizers. That subsidy increases the demand for organic fertilizer. Consider two industries, one in which supply is nearly vertical and the other in
Will the the equilibrium price of orange juice increase or decrease in each of the following situations? a. A medical study reporting that orange juice reduces cancer is released at the same time that a freak storm destroys half of the orange crop in Florida.b. The prices of all beverages
When asked for investment advice, humorist Will Rogers joked that people should "[b]uy land. They ain't making any more of the stuff." Explain his advice in terms of the supply and demand model.
Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?b. If the local government can enforce a
Refer to the expanded table below from review question 8.a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus-shortage column and use it to confirm your answers.b. Graph the demand for wheat and the supply of wheat. Be sure to
The figure below shows the supply curve for tennis balls,S1, for Drop Volley tennis, a producer of tennis equipment. Use the figure and the table below to give your answers to the following questions.a. Use the figure to fill in the quantity supplied on supply curve S1 for each price in the table
A price ceiling will result in a shortage only if the ceiling price is ____________ the equilibrium price. a. Less thanb. Equal toc. Greater thand. Louder than

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