Questions and Answers of Modern Principles Of Economics

What is the price elasticity of supply? Can you explain it in your own words?
If demand is elastic, will shifts in supply have a larger effect on equilibrium quantity or on price?
Describe the general appearance of a demand or a supply curve with zero elasticity.
Describe the general appearance of a demand or a supply curve with infinite elasticity.
What shapes would you generally expect each of the following cost curves to have: fixed costs, variable costs, marginal costs, average total costs, and average variable costs?
Are there fixed costs in the long-run? Explain briefly.
Are fixed costs also sunk costs? Explain.
What are diminishing marginal returns as they relate to costs?
Which costs are measured on per-unit basis: fixed costs, average cost, average variable cost, variable costs, and marginal cost?
What is a production technology?
In choosing a production technology, how will firms react if one input becomes relatively more expensive?
What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?
What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?
Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?
Small “Mom and Pop firms,” like inner city grocery stores, sometimes exist even though they do not earn economic profits. How can you explain this?
A common name for fixed cost is “overhead.” If you divide fixed cost by the quantity of output produced, you get average fixed cost. Supposed fixed cost is $1,000. What does the average fixed
How does fixed cost affect marginal cost? Why is this relationship important?
Average cost curves (except for average fixed cost) tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the
What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run?
Return to Table 7.2. In the top half of the table, at what point does diminishing marginal productivity kick in? What about in the bottom half of the table? How do you explain this?Table 7.2 #
It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.
How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect the long-run average cost curve of a firm? Can you draw the old curve and the new one on
Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?
A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not
Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry.a. A patented inventionb.
Return to Figure 7.7. What is the marginal gain in output from increasing the number of barbers from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns?Figure 7.7
Compute the average total cost, average variable cost, and marginal cost of producing 60 and 72 haircuts. Draw the graph of the three curves between 60 and 72 haircuts.
A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: intensive labor with hand shovels,
Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table 12.8 shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing
The Gizmo Company is planning to develop new household gadgets. Table 13.4 shows the company’s demand for financial capital for research and development of these gadgets, based on expected rates of
Are the following goods non-rival in consumption?a. Slice of pizzab. Laptop computerc. Public radiod. Ice cream cone
Imagine that you can divide 50-year-old men into two groups: those who have a family history of cancer and those who do not. For the purposes of this example, say that 20% of a group of 1,000 men
To what sorts of customers would an insurance company offer a policy with a high copay? What about a high premium with a lower copay?
Table 14.12 shows the quantity demanded and supplied in the labor market for driving city buses in the town of Unionville, where all the bus drivers belong to a union.Table 14.12a. What would the
Explain in each of the following situations how market forces might give a business an incentive to act in a less discriminatory fashion.a. A local flower delivery business run by a bigoted white
For each of the following purchases, say whether you would expect the degree of imperfect information to be relatively high or relatively low:a. Buying apples at a roadside standb. Buying dinner at
Why is it difficult to measure health outcomes?
Why might it be difficult for a buyer and seller to agree on a price when imperfect information exists?
What do economists (and used-car dealers) mean by a “lemon”?
What are some ways a seller of goods might reassure a possible buyer who is faced with imperfect information?
What are some ways a seller of labor (that is, someone looking for a job) might reassure a possible employer who is faced with imperfect information?
What are some ways that someone looking for a loan might reassure a bank that is faced with imperfect information about whether the borrower will repay the loan?
In an insurance system, would you expect each person to receive in benefits pretty much what they pay in premiums or is it just that the average benefits paid will equal the average premiums paid?
What is an actuarially fair insurance policy?
What is the problem of moral hazard?
How can moral hazard lead to more costly insurance premiums than one was expected?
Define deductibles, copayments, and coinsurance.
How can deductibles, copayments, and coinsurance reduce moral hazard?
What is the key difference between a fee-for-service healthcare system and a system based on health maintenance organizations?
How might adverse selection make it difficult for an insurance market to operate?
What are some of the metrics economists use to measure health outcomes?
You are on the board of directors of a private high school, which is hiring new tenth-grade science teachers. As you think about hiring someone for a job, what are some mechanisms you might use to
A website offers a place for people to buy and sell emeralds, but information about emeralds can be quite imperfect. The website then enacts a rule that all sellers in the market must pay for two
Using Exercise 16.20, sketch the effects in parts (a) and (b) on a single supply and demand diagram. What prediction would you make about how the improved information alters the equilibrium quantity
Answer these three questions about early-stage corporate finance:a. Why do very small companies tend to raise money from private investors instead of through an IPO?b. Why do small, young companies
From a firm’s point of view, how is a bond similar to a bank loan? How are they different?
Calculate the equity each of these people has in his or her home:a. Fred just bought a house for $200,000 by putting 10% as a down payment and borrowing the rest from the bank.b. Freda bought a house
Which has a higher average return over time: stocks, bonds, or a savings account? Explain your answer.
Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?
What is the total amount of interest from a $5,000 loan after three years with a simple interest rate of 6%?
If you receive $500 in simple interest on a loan that you made for $10,000 for five years, what was the interest rate you charged?
You open a 5-year CD for $1,000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the five years?
What are the most common ways for start-up firms to raise financial capital?
Why can firms not just use their own profits for financial capital, with no need for outside investors?
Why are banks more willing to lend to wellestablished firms?
How do the shareholders who own a company choose the actual company managers?
Why are banks called “financial intermediaries”?
Name several different kinds of bank account. How are they different?
Why are bonds somewhat risky to buy, even though they make predetermined payments based on a fixed rate of interest?
Why should a financial investor care about diversification?
How is buying a house to live in a type of financial investment?
Why is it hard to forecast future movements in stock prices?
What are the two key choices U.S. citizens need to make that determines their relative wealth?
Is investing in housing always a very safe investment?
If you owned a small firm that had become somewhat established, but you needed a surge of financial capital to carry out a major expansion, would you prefer to raise the funds through borrowing or by
Explain how a company can fail when the safeguards that should be in place fail.
What are some reasons why the investment strategy of a 30-year-old might differ from the investment strategy of a 65-year-old?
Explain why a financial investor in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits.
Explain what happens in an economy when the financial markets limit access to capital. How does this affect economic growth and employment?
You and your friend have opened an account on E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices,
How do bank failures cause the economy to go into recession?
Imagine that a local water company issued $10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now
Suppose Ford Motor Company issues a five year bond with a face value of $5,000 that pays an annual coupon payment of $150.a. What is the interest rate Ford is paying on the borrowed funds?b. Suppose
How much money do you have to put into a bank account that pays 10% interest compounded annually to have $10,000 in ten years?
Many retirement funds charge an administrative fee each year equal to 0.25% on managed assets. Suppose that Alexx and Spenser each invest $5,000 in the same stock this year. Alexx invests directly
Based on the theory of rational ignorance, what should we expect to happen to voter turnout as the internet makes information easier to obtain?
What is the cost of voting in an election?
What is the main factor preventing a large community from influencing policy in the same way as a special interest group?
Anastasia, Emma, and Greta are deciding what to do on a weekend getaway. They each suggest a first, second, and third choice and then vote on the options. Table 18.2 shows their first, second, and
Why might legislators vote to impose a tariff on Egyptian cotton, when consumers in their districts would benefit from its availability?
Suppose there is an election for Soft Drink Commissioner. The field consists of one candidate from the Pepsi party and four from the Coca-Cola party. This would seem to indicate a strong preference
How does rational ignorance discourage voting?
How can a small special interest group win in a situation of majority voting when the benefits it seeks flow only to a small group?
How can pork-barrel spending occur in a situation of majority voting when it benefits only a small group?
Why do legislators vote for spending projects in districts that are not their own?
Why does a voting cycle make it impossible to decide on a majority-approved choice?
How does a government agency raise revenue differently from a private company, and how does that affect the way government makes decisions compared to business decisions?
What are some reasons people might find acquiring information about politics and voting rational, in contrast to rational ignorance theory?
What are some possible ways to encourage voter participation and overcome rational ignorance?
When Microsoft was founded, the company devoted very few resources to lobbying activities. After a high-profile antitrust case against it, however, the company began to lobby heavily. Why does it

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