Questions and Answers of Principles Of Economics

Innovators in a country develop new technology which revolutionizes the way minerals can be extracted in mining industries, reducing the capital cost considerably. How would you expect this
To what extent do you think there is a link between the product cycle theory as developed by Vernon and the Linder theory? Explain.
The UK government has recognized the importance of information and behavioural economics to decision-making.The government partly funds the Behavioural Insights Team (BIT) in conjunction with an
Firms like Google, Facebook, Amazon, Apple and Netflix are relatively new players in their respective markets, albeit that all are basically part of the tech industry. They can all be seen as having
What are the four key assumptions of a perfectly contestable market?
Is it possible for an oligopolistic market and a monopoly to be contestable? Explain.
Why is costless exit as important a feature of a perfectly contestable market as costless entry?
Why is a time lag an important feature of a perfectly contestable market?
Explain the principle of hit-and-run entry in the context of a perfectly contestable market.
Explain why only normal or zero economic profits are possible in a perfectly contestable market.
In a perfectly contestable market, inefficiency does not exist. Explain why.
Why do regulators face a trade-off between competitiveness and the benefit of economies of scale in imperfectly competitive markets?
Why is it important to be clear about how costs can be classified to consider the degree of contestability of a market?
Are sunk costs, by definition, non-recoverable?
‘A perfectly competitive market is by definition perfectly contestable, but a perfectly contestable market is not necessarily a perfectly competitive market.’ Comment on this statement.
In the foreword to Contestable Markets and the Theory of Industrial Structure published in 1982, Elizabeth Bailey noted:‘The notion of contestable markets offers a generalization of the notion of
Is it possible for a firm or firms operating in a natural monopoly to be subject to contestability? Explain.
In what ways does the theory of contestable markets suggest that firm behaviour will be affected by the threat of entry into a market?
To what extent do you think that entry and exit can ever be completely costless?
In a number of university towns and cities across the UK and Europe, where universities have a long and highly respected tradition, businesses exist to provide tourists with tours around the town or
The low-cost airline business is often cited as an example of a highly contestable market. To what extent do the assumptions of a perfectly contestable market apply to the low-cost airline industry
‘If all markets were contestable, there would be no need for regulation.’ Do you agree with this statement? Provide reasons and justifications for your answer.
Internet service providers (ISPs) have been cited as an example of an industry that exhibits features of contestability.Consider some of the potential costs of entering such an industry and comment
Look at the following and comment on whether the points mentioned would increase the likelihood of entry and exit to and from an industry:a. A firm holds a patent relating to a key component of the
The debate between those in favour of a minimum wage and those who argue that government intervention in the labour market in this way merely increases unemployment and distorts labour markets, has
Give two examples of events that could shift the demand for labour and two that could shift the supply of labour.
If the population of Norway suddenly grew because of a large immigration, what would you expect to happen to wages?What would happen to the rents earned by the owners of land and capital?
Why do deep-sea divers assessing oil rigs in the North Sea get paid more than other workers with similar amounts of education?
Explain the idea of surplus value and why its existence means that workers do not get paid the full value of their labour, contrary to neo-classical explanations of wage rates.
What are the criticisms levelled against ‘mainstream’ theory of the labour market by feminist economists?
Isoquants are drawn as convex to the origin. Referring to the marginal rate of technical substitution, why do you think that isoquants are convex to the origin?
Look at the table of quantities below and sketch the isoquants implied by the data for the output levels Q 5110, Q 5150 and Q 5180. On your graph, put capital on the vertical axis and labour on the
Using the graph you have constructed for Question 2, calculate the marginal rate of technical substitution for the output level Q 5110 when the firm moves from a combination of 3 machine hours of
Look at the sketch of three production isoquants in the figure below. What do the shape of these isoquants tell you about the relationship between capital and labour in this particular instance?
Given the total cost function 50K 112L 5TCKL, calculate the total cost for a firm if it used the following combinations of capital and labour:a. 5 units of capital and 8 units of labour b.10 units
Given the total cost function 50K 112L 5TCKL, at the following total cost levels, solve for K and find the factor combinations that satisfy the equation from K 51 to K 55.a. TC 5170b. TC 5510c. TC
If a firm faced the following situation:what would be the incentives for the firm to change its production decisions? At what point would the firm stop changing its production decisions? Explain. MP
Sketch a diagram to show a firm’s least-cost input combination. On your diagram show what would happen to the firm’s optimum position if:a. the price of capital increased but the price of labour
A haulage firm uses containers to carry products for clients which currently measure 10 m long by 2 m wide by 4 m high.The owner of the firm has decided to invest in new containers which double their
Draw a diagram to show a firm operating at a least-cost input combination. Now assume that the input price of one factor increases while the other remains constant. How would this change the firm’s
In July 2018, the European Competition authorities imposed a fine on the technology firm Google of €4.3 billion for abuse of monopoly power associated with its mobile operating system, Android.
What are barriers to entry? What are the main barriers to entry to an industry?
What are the main sources of monopoly power?
Draw the demand, marginal revenue and marginal cost curves for a monopolist. Show the profit-maximizing level of output. Show the profit-maximizing price.
Consider the delivery of mail. In general, what is the shape of the average total cost curve? How might the shape differ between isolated rural areas and densely populated urban areas? How might the
Suppose the Eau de Jeunesse Water Company has a monopoly on bottled water sales in France. If the price of tap water increases, what is the change in Eau de Jeunesse’s profit-maximizing levels of
The Placebo Drug Company holds a patent on one of its discoveries.a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profitmaximizing
Pablo, Dirk and Franz run the only bar in town. Pablo wants to sell as many drinks as possible without losing money. Dirk wants the bar to bring in as much revenue as possible. Franz wants to make
The Best Computer Company just developed a new computer chip, on which it immediately acquires a patent.a. Draw a diagram that shows the consumer surplus, producer surplus and total surplus in the
Explain why a monopolist will always produce a quantity at which the demand curve is price elastic.
The market for alcohol is oligopolistic. It is dominated by four large firms and in recent years has become more concentrated as rival firms merge. In 2008, InBev and Anheuser-Busch merged to form
What is meant by the term concentration ratio?
What are the main characteristics of an oligopolistic market structure?
Compare the quantity and price of an oligopoly with those of a monopoly and a competitive market.
What effect might repeated playing of the prisoner’s dilemma have on the equilibrium of an oligopoly?
What ways might oligopolists use to restrict entry to an industry?
Why is it necessary to have credible threats in the case of sequential move games?
What kinds of behaviour do competition laws prohibit?
This chapter discusses companies that are oligopolists in the market for the goods they sell. Many of the same ideas apply to companies that are oligopolists in the market for the inputs they buy. If
Describe several activities in your life in which game theory could be useful. What is the common link between these activities?
Suppose that you and a fellow student are assigned a project on which you will receive one combined grade. You each want to receive a good grade (which means you must work), but you also want to do
In the 1970s, concern over the health effects of tobacco led to many countries banning tobacco advertising on television.a. Why might tobacco companies have not fought too hard against the ban?b. In
Assume that two airline companies decide to engage in collusive behaviour.Let’s analyze the game between two such companies. Suppose that each company can charge either a high price for tickets or
Farmer Wild and Farmer Scott graze their cattle on the same field. If there are 20 cows grazing in the field, each cow produces €4,000 of milk over its lifetime. If there are more cows in the
Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew sets a high price
Consider an oligopoly with four firms who decide to engage in a price war. Can there be any winners in this war?
When governments levy indirect taxes, they may have to take into account what type of goods are covered by those taxes, what the impact is likely to be on consumers and whether the impact is
What is the difference between the public sector and the private sector? Give an example of goods and services provided by each.
Explain what is meant by a good being ‘excludable’. Give three examples of goods which exhibit the characteristics of being excludable.
Explain what is meant by a good being ‘rival’. Give three examples of goods which exhibit the characteristics of being rival in consumption.
Explain how public goods might also lead to the free rider problem. Give an example to support your answer.
What is cost-benefit analysis of public goods? Why is it important? Why is it hard to quantify the full costs and benefits of the provision of public goods?
What is the marginal social benefit curve? How can the optimum provision of a public good be calculated?
Why are merit goods under-consumed?
How might governments prevent over-consumption of de-merit goods?
In the UK owners of TV sets are required by law to buy a licence. Alex is a student at university and loves watching live sport on TV. He uses digital access to watch live sport, but he has not
The text states that private firms will not undertake the efficient amount of basic scientific research.a. Explain why this is so. In your answer, classify basic research into one of the types of
Why is there litter along most major roads but rarely in people’s gardens?
An Economist article (19 March 1994) states: ‘In the past decade, most of the rich world’s fisheries have been exploited to the point of near exhaustion.’ The article continues with an analysis
The demand curve for a public park for two consumers who represent society is given by:Graph the two demand curves and show the marginal social benefit curve for this public park. If the marginal
In a market economy, information about the quality or function of goods and services is a valuable good in its own right.How does the private market provide this information? Can you think of any way
Do you think the Internet is a public good? Why or why not?
One debate over economics has been centred on the division between those who would adhere to the philosophy of the ‘invisible hand’ and those who point to the weaknesses in the assumptions that
Using examples, explain three sources of market failure.
Using an appropriate example, explain the difference between private and social costs, and private and social benefits.
Use a supply and demand diagram to explain the effect of a negative externality in production. Price of aluminium QMARKET Supply (private cost) - Equilibrium Demand (private value) Quantity of
Using a demand and supply diagram, represent the market for road use. What is the private market outcome and what is likely to be the socially efficient outcome? Explain and refer to your diagram to
Use an example to explain the idea of a positional externality.Example Positional Externalities Positional goods have the characteristic that the utility from consumption of a good is dependent on
How would an extension of property rights help reduce the instances of market failure?
Explain how government intervention in markets might not improve market outcomes.
In many countries, contributions to charitable organizations are deductible from income tax. In what way does this government policy encourage private solutions to externalities?
It is rumoured that the Swiss government subsidizes cattle farming, and that the subsidy is larger in areas with more tourist attractions. Can you think of a reason why this policy might be efficient?
Consider the market for train travel. At certain times of the day, trains are extremely crowded going to major towns and cities, but at other times of the day carriages are virtually empty.a. Is this
The Pristine River has two polluting firms on its banks. European Industrial and Creative Chemicals each dump 100 tonnes of effluent into the river a year. The cost of reducing effluent emissions per
Some people argue that the primary cause of global warming is carbon dioxide, which enters the atmosphere in varying amounts from different countries but is distributed equally around the globe
Many businesses require back-office functions to process information and transfer the information from one system to another. For example, the sales teams in a business may submit their expenses
What is the constrained optimization problem facing firms?
Explain the difference between capital, labour and land intensive production and give an example of a firm in each case to illustrate the principle.
What is a production isoquant?
What is the marginal rate of technical substitution?

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