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microeconomics principles

Questions and Answers of Microeconomics Principles

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
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
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
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
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 =
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
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)
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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%
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
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
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
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
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,
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
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
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.
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
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
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
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
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
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)
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
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
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
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
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
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
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
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%
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
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
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
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

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