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microeconomics principles

Microeconomics 2nd Edition Paul Krugman, Robin Wells - Solutions

You have $1,000 that you can invest. If you buy General Motors stock, then, in one year’s time: with a probability of 0.4 you will get $1,600; with a probability of 0.4 you will get$1,100; and with a probability of 0.2 you will get $800. If you put the money into the bank, in one year’s time
You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get$1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put
Vicky N. Vestor’s utility function was given in Problem 2.As in Problem 2, Vicky currently has income of $4,000. She is considering investing in a startup company, but the investment now costs $4,000 to make. If the company fails, Vicky will get nothing from the company. But if the company
Vicky N. Vestor is considering investing some of her money in a startup company. She currently has income of $4,000, and she is considering investing $2,000 of that in the company.There is a 0.5 probability that the company will succeed and will pay out $8,000 to Vicky (her original investment
For each of the following situations, calculate the expected value.a. Tanisha owns one share of IBM stock, which is currently trading at $80. There is a 50% chance that the share price will rise to $100 and a 50% chance that it will fall to $70.What is the expected value of the future share
Tamara has 80 hours per week that she can allocate to work or leisure. Her job pays a wage rate of $20 per hour, but Tamara is being taxed on her income in the following way. On the first $400 that Tamara makes, she pays no tax. That is, for the first 20 hours she works, her net wage—what she
Florence is a highly paid fashion consultant who earns $100 per hour. She has 16 hours per day that she can allocate to work or leisure, and she decides to work for 12 hours.a. Draw Florence’s time allocation budget line for a typical day, and illustrate the indifference curve at her optimal
Leandro has 16 hours per day that he can allocate to work or leisure. His job pays a wage rate of $20. Leandro decides to consume 8 hours of leisure. His indifference curves have the usual shape: they slope downward, they do not cross, and they have the characteristic convex shape.a. Draw
A study by economists at the Federal Reserve Bank of Boston found that between 1965 and 2003 the average American’s leisure time increased by between 4 and 8 hours a week. The study claims that this increase is primarily driven by a rise in wage rates.a. Use the income and substitution effects to
You are the governor’s economic policy adviser. The governor wants to put in place policies that encourage employed people to work more hours at their jobs and that encourage unemployed people to find and take jobs. Assess each of the following policies in terms of reaching that goal. Explain
Greta is an enthusiastic amateur gardener and spends a lot of her free time working in her yard. She also has a demanding and well-paid job as a freelance advertising consultant. Because the advertising business is going through a difficult time, the hourly consulting fee Greta can charge falls.
Kendra is the owner of Wholesome Farms, a commercial dairy.Kendra employs labor, land, and capital. In her operations, Kendra can substitute between the amount of labor she employs and the amount of capital she employs. That is, to produce the same quantity of output she can use more labor and less
A New York Times article published in September 2007 observed that the wage of farmworkers in Mexico is $11 an hour but the wage of immigrant Mexican farmworkers in California is $9 an hour.a. Assume that the output sells for the same price in the two countries. Does this imply that the marginal
Dale and Dana work at a self-service gas station and convenience store. Dale opens up everyday, and Dana arrives later to help stock the store. They are both paid the current market wage of $9.50 per hour. But Dale feels he should be paid much more because the revenue generated from the gas pumps
Jameel runs a driver education school. The more driving instructors he hires, the more driving lessons he can sell. But because he owns a limited number of training automobiles, each additional driving instructor adds less to Jameel’s output of driving lessons. The accompanying table shows
A worker’s hourly wage rate was$10, and pizza sold for $2. Now Patty buys a new high-tech pizza oven that allows her workers to become twice as productive as before. That is, the first worker now produces 18 pizzas per hour instead of 9, and so on.a. Calculate the new marginal product of labor
Patty’s Pizza Parlor initially had the production function given in the table in Problem
Patty’s Pizza Parlor has the production function per hour shown in the accompanying table. The hourly wage rate for each worker is $10. Each pizza sells for $2.a. Calculate the marginal product of labor for each worker and the value of the marginal product of labor per worker.b. Draw the value of
Marty’s Frozen Yogurt has the production function per day shown in the accompanying table. The equilibrium wage rate for a worker is $80 per day. Each cup of frozen yogurt sells for $2.a. Calculate the marginal product of labor for each worker and the value of the marginal product of labor per
In 2007, national income in the United States was $11,186.9 billion. In the same year, 137 million workers were employed, at an average wage of $57,526 per worker per year.a. How much compensation of employees was paid in the United States in 2007?b. Analyze the factor distribution of income. What
The American National Election Studies conducts periodic research on the opinions of U.S. voters. The accompanying table shows the percentage of people, in selected years from 1952 to 2004, who agreed with the statement “There are important differences in what the Republicans and Democrats stand
The accompanying table shows data on the total number of people in the United States and the number of all people who were uninsured, for selected years from 1997 to 2005. It also shows data on the total number of poor children in the United States—those under 18 and below the poverty
In a private insurance market, there are two different kinds of people: some who are more likely to require expensive medical treatment and some who are less likely to require medical treatment and who, if they do, require less expensive treatment. One health insurance policy is offered, tailored
In the city of Notchingham, each worker is paid a wage rate of$10 per hour. Notchingham administers its own unemployment benefit, which is structured as follows: if you are unemployed(that is, if you do not work at all), you get unemployment benefits (a transfer from the government) of $50 per day.
The tax system in Taxilvania includes a negative income tax.For all incomes below $10,000, individuals pay an income tax of −40% (that is, they receive a payment of 40% of their income). For any income above the $10,000 threshold, the tax rate on that additional income is 10%. For the first three
The country of Marxland has the following income tax and social insurance system. Each citizen’s income is taxed at an average tax rate of 100%. A social insurance system then provides transfers to each citizen such that each citizen’s after-tax income is exactly equal. That is, each citizen
There are 100 households in the economy of Equalor. Initially, 99 of them have an income of $10,000 each, and one household has an income of $1,010,000.a. What is the median income in this economy? What is the mean income?Through its poverty programs, the government of Equalor now redistributes
The accompanying table presents data from the U.S. Census Bureau on median and mean income of male workers for the years 1972 and 2005. The income figures are adjusted to eliminate the effect of inflation.a. By what percentage has median income changed over this period? By what percentage has mean
In the city of Metropolis, there are 100 residents, each of whom lives until age 75.Residents of Metropolis have the following incomes over their lifetime: through age 14, they earn nothing.From age 15 until age 29, they earn 200 metros (the currency of Metropolis) per year. From age 30 to age 49,
The accompanying table contains data on the U.S. economy for the years 1983 and 2006. The second column shows the poverty threshold. The third column shows the consumer price index (CPI), a measure of the overall level of prices. And the fourth column shows U.S. gross domestic product (GDP)per
In developing a vaccine for the SARS virus a pharmaceutical company incurs a very high fixed cost. The marginal cost of delivering the vaccine to patients, however, is negligible (consider it to be equal to zero). The pharmaceutical company holds the exclusive patent to the vaccine. You are a
Software has historically been an artificially scarce good—it is nonrival because the cost of replication is negligible once the investment to write the code is made, but software companies make it excludable by charging for user licenses. Recently, however, open-source software has emerged, most
Butchart Gardens is a very large garden in Victoria, British Columbia, renowned for its beautiful plants. It is so large that it could hold many times more visitors than currently visit it.The garden charges an admission fee of C$25 (C$1 equals approximately U.S. $1). At this price, 1,000 people
The accompanying table shows six consumers’ willingness to pay (his or her individual marginal benefit) for one MP3 file copy of a Dr. Dre album. The marginal cost of making the file accessible to one additional consumer is constant, at zero.a. What would be the efficient price to charge for a
Prior to 2003, the city of London was often one big parking lot. Traffic jams were common, and it could take hours to travel a couple of miles. Each additional commuter contributed to the congestion, which can be measured by the total number of cars on London roads. Although each com muter suffered
The village of Upper Bigglesworth has a village “commons,” a piece of land on which each villager, by law, is free to graze his or her cows. Use of the commons is measured in units of the number of cows grazing on it. Assume that each resident has a constant marginal cost of sending cows to
Anyone with a radio receiver can listen to public radio, which is funded largely by donations.a. Is public radio excludable or nonexcludable? Is it rival in consumption or nonrival? What type of good is it?b. Should the government support public radio? Explain your reasoning.c. In order to finance
The accompanying table shows Tanisha’s and Ari’s individual marginal benefit of different amounts of street cleanings per month. Suppose that the marginal cost of street cleanings is constant at $9 each.a. If Tanisha had to pay for street cleaning on her own, how many street cleanings would
A residential community has 100 residents who are concerned about security. The accompanying table gives the total cost of hiring a 24-hour security service as well as each individual resident’s total benefit.a. Explain why the security service is a public good for the residents of the
In many planned communities, various aspects of community living are subject to regulation by a homeowners’ association. These rules can regulate house architecture; require snow removal from sidewalks; exclude outdoor equipment, such as backyard swimming pools; require appropriate conduct in
An economist gives the following advice to a museum director: “You should introduce ‘peak pricing’: at times when the museum has few visitors, you should admit visitors for free.And at times when the museum has many visitors, you should charge a higher admission fee.”a. When the museum is
The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it?Without government involvement, would the quantity provided be
a. EAuction and EMarketplace are two competing Internet auction sites, where buyers and sellers transact goods.Each auction site earns money by charging sellers for listing their goods. EAuction has decided to eliminate fees for the first transaction for sellers that are new to their site.Explain
Ronald owns a cattle farm at the source of a long river. His cattle’s waste flows into the river and down many miles to where Carla lives. Carla gets her drinking water from the river.By allowing his cattle’s waste to flow into the river, Ronald imposes a negative externality on Carla. In each
The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by
Fishing for sablefish has been so intensive that sablefish were threatened with extinction. After several years of banning such fishing, the government is now proposing to introduce tradable vouchers, each of which entitles its holder to a catch of a certain size. Explain how fishing generates a
According to a report from the U.S. Census Bureau, “the average [lifetime] earnings of a full-time, year round worker with a high school education are about $1.2 million compared with$2.1 million for a college graduate.” This indicates that there is a considerable benefit to a graduate from
Planting a tree improves the environment: trees transform greenhouse gases into oxygen, improve water retention in the soil, and improve soil quality. Assume that the value of thisa. Assume that the marginal cost of producing a tree for planting is constant at $20. Draw a diagram that shows the
Education is an example of an activity that generates a positive externality: acquiring more education benefits the individual student and having a more highly educated workforce is good for the economy as a whole. The accompanying table illustrates the marginal benefit to Sian per year of
Smoking produces a negative externality because it imposes a health risk on others who inhale second-hand smoke.Cigarette smoking also causes productivity losses to the economy due to the shorter expected life span of a smoker.The U.S. Centers for Disease Control (CDC) has estimated the average
Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain.The 33/50 program started by the Environmental
The accompanying table shows the total revenue and the total cost that accrue to steel producers from producing steel.Producing a ton of steel imposes a marginal external cost of$60 per ton.a. Calculate the marginal revenue per ton of steel and the marginal cost per ton of steel to steel producers.
Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal wastes. (One cow can produce up to 2 kilowatts a day.) This practice reduces the amount of methane gas released into the atmosphere. In addition to
The loud music coming from the sorority next to your dorm is a negative externality that can be directly quantified. The accompanying table shows the marginal social benefit and the marginal social cost per decibel (dB, a measure of volume) of music.Volume of Marginal social Marginal social music
What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the
McDonald’s spends millions of dollars each year on legal protection of its brand name, thereby preventing any unauthorized use of it. Explain what information this conveys to you as a consumer about the quality of McDonald’s products.
The accompanying table shows the Herfindahl–Hirschman Index (HHI) for the restaurant, cereal, movie, and laundry detergent industries as well as the advertising expenditures of the top 10 firms in each industry in 2006. Use the information in the table to answer the following questions.a. Which
In each of the following cases, explain how the advertisement functions as a signal to a potential buyer. Explain what information the buyer lacks that is being supplied by the advertisement and how the information supplied by the advertisement is likely to affect the buyer’s willingness to buy
For each of the following situations, decide whether advertising is directly informative about the product or simply an indirect signal of its quality. Explain your reasoning.a. Golf champion Tiger Woods drives a Buick in a TV commercial and claims that he prefers it to any other car.b. A newspaper
The market for clothes has the structure of monopolistic competition. What impact will fewer firms in this industry have on you as a consumer? Address the following issues:a. Variety of clothesb. Differences in quality of servicec. Price
“In both the short run and in the long run, the typical firm in monopolistic competition and a monopolist each make a profit.” Do you agree with this statement? Explain your reasoning.
“In the long run, there is no difference between monopolistic competition and perfect competition.” Discuss whether this statement is true, false, or ambiguous with respect to the following criteria:a. The price charged to consumersb. The average total cost of productionc. The efficiency of the
Magnificent Blooms is a florist in a monopolistically competitive industry. It is a successful operation, producing the quantity that minimizes its average total cost and making a profit. The owner also says that at its current level of output, its marginal cost is above marginal revenue.
The local hairdresser industry has the market structure of monopolistic competition. Your hairdresser boasts that he is making a profit and that if he continues to do so, he will be able to retire in five years. Use a diagram to illustrate your hairdresser’s current situation. Do you expect this
The market structure of the local gas station industry is monopolistic competition. Suppose that currently each gas station incurs a loss. Draw a diagram for a typical gas station to show this short-run situation. Then, in a separate diagram, show what will happen to the typical gas station in the
The restaurant business in town is a monopolistically competitive industry in long-run equilibrium. One restaurant owner asks for your advice. She tells you that, each night, not all tables in her restaurant are full. She also tells you that if she lowered the prices on her menu, she would attract
You are thinking of setting up a coffee shop. The market structure for coffee shops is monopolistic competition. There are three Starbucks shops, and two other coffee shops very much like Starbucks, in your town already. In order for you to have some degree of market power, you may want to
Use the three conditions for monopolistic competition discussed in the chapter to decide which of the following firms are likely to be operating as monopolistic competitors. If they are not monopolistically competitive firms, are they monopolists, oligopolists, or perfectly competitive firms?a. A
The industry for small, single-engine airplanes is oligopolistic, and it has achieved tacit collusion. Each firm currently sells 10 airplanes at a price of $200,000 each. Each firm believes that it will sell 1 fewer airplane if it raises the price by $5,000.And each firm also believes that it can
Suppose you are an economist working for the Antitrust Division of the Department of Justice. In each of the following cases you are given the task of determining whether the behavior warrants an antitrust investigation for possible illegal acts or is just an example of undesirable, but not
Over the last 30 years the Organization of Petroleum Exporting Countries (OPEC) has had varied success in forming and maintaining its cartel agreements. Explain how the following factors may contribute to the difficulty of forming and/or maintaining its price and output agreements.a. New oil fields
Philip Morris and R.J. Reynolds spend huge sums of money each year to advertise their tobacco products in an attempt to steal customers from each other. Suppose each year Philip Morris and R.J. Reynolds have to decide whether or not they want to spend money on advertising. If neither firm
Suppose that Coke and Pepsi are the only two producers of cola drinks, making them duopolists. Both companies have zero marginal cost and a fixed cost of $100,000.a. Assume first that consumers regard Coke and Pepsi as perfect substitutes. Currently both are sold for $0.20 per can, and at that
Untied and Air “R” Us are the only two airlines operating flights between Collegeville and Bigtown. That is, they operate in a duopoly. Each airline can charge either a high price or a low price for a ticket. The accompanying matrix shows their payoffs, in profits per seat (in dollars), for any
Suppose that the fisheries agreement in Problem 5 breaks down, so that the fleets behave noncooperatively. Assume that the United States and the EU each can send out either one or two fleets. The more fleets in the area, the more fish they catch in total but the lower the catch of each fleet. The
To preserve the North Atlantic fish stocks, it is decided that only two fishing fleets, one from the United States and the other from the European Union (EU), can fish in those waters. The accompanying table shows the market demand schedule per week for fish from these waters. The only costs are
In France, the market for bottled water is controlled by two large firms, Perrier and Evian. Each firm has a fixed cost of€1 million and a constant marginal cost of €2 per liter of bottled water (€1 = 1 euro). The following table gives the market demand schedule for bottled water in France.a.
The accompanying table shows the demand schedule for vitamin D. Suppose that the marginal cost of producing vitamin D is zero.a. Assume that BASF is the only producer of vitamin D and acts as a monopolist. It currently produces 40 tons of vitamin D at $4 per ton. If BASF were to produce 10 more
Prior to the late 1990s, the same company that generated your electricity also distributed it to you over high voltage lines.Since then, 16 states and the District of Columbia have begun separating the generation from the distribution of electricity, allowing competition between electricity
In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and challenging mergers that would likely lead to higher prices. In 1996, Staples and Office Depot, two of the largest office supply superstores, announced their agreement to merge.a. Some critics of the
A monopolist knows that in order to expand the quantity of output it produces from 8 to 9 units that it must lower the price of its output from $2 to $1. Calculate the quantity effect and the price effect. Use these results to calculate the monopolist’s marginal revenue of producing the 9th
The movie theater in Collegetown serves two kinds of customers: students and professors. There are 900 students and 100 professors in Collegetown. Each student’s willingness to pay for a movie ticket is $5. Each professor’s willingness to pay for a movie ticket is $10. Each will buy at most one
The accompanying diagram illustrates your local electricity company’s natural monopoly. The diagram shows the demand curve for kilowatt-hours (kWh) of electricity, the company’s marginal revenue (MR) curve, its marginal cost (MC) curve, and its average total cost (ATC) curve. The government
Download Records decides to release an album by the group Mary and the Little Lamb. It produces the album with no fixed cost, but the total cost of downloading an album to a CD and paying Mary her royalty is $6 per album. Download Records can act as a single-price monopolist. Its marketing division
Use the demand schedule for diamonds given in Problem 6.De Beers is a monopolist, but it can now price-discriminate perfectly among all five of its potential customers. De Beers’s marginal cost is constant at $100. There is no fixed cost.a. If De Beers can price-discriminate perfectly, to which
Use the demand schedule for diamonds given in Problem 6.The marginal cost of producing diamonds is constant at $100.There is no fixed cost.a. If De Beers charges the monopoly price, how large is the individual consumer surplus that each buyer experiences?Calculate total consumer surplus by summing
Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers:Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay.
Jimmy has a room that overlooks, from some distance, a major league baseball stadium. He decides to rent a telescope for$50.00 a week and charge his friends and classmates to use it to peep at the game for 30 seconds. He can act as a single-price monopolist for renting out “peeps.” For each
Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They are thinking about making the movie available for download on the Internet, and they can act as a single-price monopolist if they choose to.Each time the movie is downloaded, their Internet service
Consider an industry with the demand curve (D) and marginal cost curve (MC) shown in the accompanying diagram.There is no fixed cost. If the industry is a single-price monopoly, the monopolist’s marginal revenue curve would be MR. Answer the following questions by naming the appropriate points or
Skyscraper City has a subway system, for which a one-way fare is $1.50. There is pressure on the mayor to reduce the fare by one-third, to $1.00. The mayor is dismayed, thinking that this will mean Skyscraper City is losing one-third of its revenue from sales of subway tickets. The mayor’s
Each of the following firms possesses market power. Explain its source.a. Merck, the producer of the patented cholesterol-lowering drug Zetiab. WaterWorks, a provider of piped waterc. Chiquita, a supplier of bananas and owner of most banana plantationsd. The Walt Disney Company, the creators of
The accompanying table presents prices for washing and ironing a man’s shirt taken from a survey of California dry cleaners in 2004.a. What is the average price per shirt washed and ironed in Goleta? In Santa Barbara?b. Draw typical marginal cost and average total cost curves for California
The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S.Department of Agriculture about wheat production in the United States in 1998.a. The average variable cost per
Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it.a. A profit-maximizing firm in a perfectly competitive industry should select the output level at which the difference between the market price and marginal
A new vaccine against a deadly disease has just been discovered. Presently, 55 people die from the disease each year. The new vaccine will save lives, but it is not completely safe. Some recipients of the shots will die from adverse reactions. The projected effects of the inoculation are given in
A perfectly competitive firm has the following short-run total cost:Market demand for the firm’s product is given by the following market demand schedule:a. Calculate this firm’s marginal cost and, for all output levels except zero, the firm’s average variable cost and average total cost.b.
The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that
Consider Bob’s DVD company described in Problem 4.Assume that DVD production is a perfectly competitive industry. For each of the following questions, explain your answers.a. What is Bob’s break-even price? What is his shut-down price?b. Suppose the price of a DVD is $2. What should Bob do in
Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each

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