Questions and Answers of Modern Principles Of Economics

If a country had perfect income equality what would the Lorenz curve look like?
How has the inequality of income changed in the U.S. economy since the late 1970s?
What are some reasons why a certain degree of inequality of income would be expected in a market economy?
What are the main reasons economists give for the increase in inequality of incomes?
Identify some public policies that can reduce the level of economic inequality.
Describe how a push for economic equality might reduce incentives to work and produce output. Then describe how a push for economic inequality might not have such effects.
What goods and services would you include in an estimate of the basic necessities for a family of four?
Exercise 15.2 and Exercise 15.3 asked you to describe the labor-leisure tradeoff for Jonathon. Since, in the first example, there is no monetary incentive for Jonathon to work, explain why he may
If a family of three earned $20,000, would they be able to make ends meet given the official poverty threshold?
Explain how you would create a government program that would give an incentive for labor to increase hours and keep labor from falling into the poverty trap.
Many critics of government programs to help lowincome individuals argue that these programs create a poverty trap. Explain how programs such as TANF, EITC, SNAP, and Medicaid will affect low-income
How does a perfectly competitive firm decide what price to charge?
What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
How does a perfectly competitive firm calculate total revenue?
Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.
What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
How does the average cost curve help to show whether a firm is making profits or losses?
What two lines on a cost curve diagram intersect at the zero-profit point?
Should a firm shut down immediately if it is making losses?
How does the average variable cost curve help a firm know whether it should shut down immediately?
What two lines on a cost curve diagram intersect at the shutdown point?
Why does entry occur?
Why does exit occur?
Do entry and exit occur in the short run, the long run, both, or neither?
Finding a life partner is a complicated process that may take many years. It is hard to think of this process as being part of a very complex market, with a demand and a supply for partners. Think
Will a perfectly competitive market display allocative efficiency? Why or why not?
Will a perfectly competitive market display productive efficiency? Why or why not?
What price will a perfectly competitive firm end up charging in the long run? Why?
Can you name five examples of perfectly competitive markets? Why or why not?
Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for
Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?
Many firms in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?
Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?
Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?
Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?
In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs
The AAA Aquarium Co. sells aquariums for $20 each. Fixed costs of production are $20. The total variable costs are $20 for one aquarium, $25 for two units, $35 for the three units, $50 for four
Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for $72 each. The fixed costs of production are $100. The total variable costs are $64 for one unit, $84
A computer company produces affordable, easy to use home computer systems and has fixed costs of $250. The marginal cost of producing computers is $700 for the first computer, $250 for the second,
Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive
If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?
Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much to charge to maximize profits. The first two columns in Table 10.5 provide the price and quantity for
Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box
Urban transit systems, especially those with rail systems, typically experience significant economies of scale in operation. Consider the transit system data in Table 11.4. Note that the quantity is
Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If
What is the relationship between product differentiation and monopolistic competition?
Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess
How is the perceived demand curve for a monopolistically competitive firm different from the perceived demand curve for a monopoly or a perfectly competitive firm?
How does a monopolistic competitor choose its profit-maximizing quantity of output and price?
Does each individual in a prisoner’s dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.
What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?
When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?
Is a monopolist allocatively efficient? Why or why not?
How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?
ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?
Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or
Draw the demand curve, marginal revenue, and marginal cost curves from Figure 9.6, and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for
Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the
Aside from advertising, how can monopolistically competitive firms increase demand for their products?
What is the usual shape of a total revenue curve for a monopolist? Why?
What is the usual shape of a marginal revenue curve for a monopolist? Why?
How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves?
How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs?
Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it
Is it true that a merger between two firms that are not already in the top four by size can affect both the four-firm concentration ratio and the Herfindahl-Hirshman Index? Explain briefly.
Is it true that the four-firm concentration ratio puts more emphasis on one or two very large firms, while the Herfindahl-Hirshman Index puts more emphasis on all the firms in the entire market?
Some years ago, two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the market in this case was “the market for
As a result of globalization and new information and communications technology, would you expect that the definitions of markets that antitrust authorities use will become broader or narrower?
Why would a firm choose to use one or more of the anticompetitive practices described in Regulating Anticompetitive Behavior?
Why are generic pharmaceuticals significantly cheaper than name brand ones?
For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies.
Intellectual property laws are intended to promote innovation, but some economists, such as Milton Friedman, have argued that such laws are not desirable. In the United States, there is no
Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice
If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?
Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say Q0
How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?
If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?
Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.
Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?
Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a
Make a case for why monopolistically competitive industries never reach long-run equilibrium.
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC
When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to
From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years
What is a “price taker” firm?
Name some factors that can cause a shift in the demand curve in labor markets.
How do economists define equilibrium in financial markets?
Would usury laws help or hinder resolution of a shortage in financial markets?
Whether the product market or the labor market, what happens to the equilibrium price and quantity for each of the four possibilities: increase in demand, decrease in demand, increase in supply, and
Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?
Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?
Are households demanders or suppliers in the goods market? Are firms demanders or suppliers in the goods market? What about the labor market and the financial market?
Name some factors that can cause a shift in the supply curve in labor markets.
Suppose the U.S. economy began to grow more rapidly than other countries in the world. What would be the likely impact on U.S. financial markets as part of the global economy?
If the government imposed a federal interest rate ceiling of 20% on all loans, who would gain and who would lose?
Why are the factors that shift the demand for a product different from the factors that shift the demand for labor? Why are the factors that shift the supply of a product different from those that
During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural
Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)a.
Predict how each of the following events will raise or lower the equilibrium wage and quantity of oil workers in Texas. In each case, sketch a demand and supply diagram to illustrate your answer.a.
Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.a.

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