Questions and Answers of Principles Of Economics

An interview is an integral part of any hiring process.Explain the nature of asymmetric information in this setting. Use the concepts of adverse selection and moral hazard to explain why an interview
Signals are also used in social settings. In a new place, what signals do you look for to find people who share your interests?
Find a product advertisement in a magazine, in a newspaper, or on a Web site, for which the missing information tells you something important about this product. Explain what information is missing,
Do you think companies that issue health insurance should be allowed to inquire about family medical history and the results of genetic testing before deciding to issue insurance policies? Why or why
Valentino wants to purchase a classic motorcycle and sees a 1974 Triumph Bonneville T140 listed on Cycletrader.com for $5,950. He is willing to pay $7,500 if the motorcycle is reliable, but only
One way insurance companies reduce adverse selection problems is by offering group medical coverage to large firms and requiring all employees to participate in the coverage. Explain how this reduces
Included in the Tax Cuts and Jobs Act of 2017 was the elimination of the individual mandate penalty for not having health insurance. Starting in 2019, individuals who do not have health insurance
The five busiest airports in the United States are in Atlanta, Chicago, Los Angeles, Dallas-Ft. Worth, and New York City. At these airports there are more than 450 food outlets, with each airport
The issue of asymmetric information in news reporting has acquired greater importance in the age of the Internet.In 2013, the Oxford Internet Survey reported that traditional media like TV and the
Simon likes to watch movies and his Internet service provider offers streaming movies on a pay-per-view basis for $3 each. The provider also offers a service for unlimited streaming of movies for $15
People engaged in the hospitality sector usually receive lower wages, and tips make up a certain percentage of their income. However, some occupations in a hotel may provide considerably lower daily
Some economists argue that people who buy fire insurance should never buy lottery tickets, and that people who buy lottery tickets should never buy fire insurance. Why would these economists make
Economists worry that salaried employees who work more or less independently do not have a strong incentive to work hard at their jobs. Their level of effort is not easily observed by their employer,
Identify which of the three basic sources of income is represented by each of the following:a. George receives free accommodation from his employer while he is on a deputation.b. Andrew earns $1,000
By using the data in the following table, create two graphs. The first graph should plot the Lorenz curves for left-handed people and right-handed people. The second graph should plot the Lorenz
Refer to the following Lorenz curve to answer the questions.a. Explain whether the distribution of income was more equal in 2017 or 2018.b. If area A = 2,450 and area B = 450, what is the value of
The tiny Kingdom of Arugula has five residents, and the following table lists the annual income of each of these people. Fill in the table and draw a Lorenz curve showing the distribution of income
Some employers offer tuition reimbursement for their employees who wish to further their education. Do a Web search to find a list of companies that contribute to tuition for their employees. Do you
Economists call education “an investment in human capital.” Define capital. In what sense is education capital?Investments are undertaken to earn a rate of return. Describe the return to an
Following is a list of establishment categories and average weekly earnings for nonsupervisory employees in a recent year. Using the concepts of “human capital” and “compensating
New PhDs in economics entering the job market find that academic jobs (jobs teaching at colleges and universities) pay about 30 percent less than nonacademic jobs such as working at a bank or a
Should welfare benefits be higher in Sweden and Denmark than in Romania? Defend your answer.
Executive compensation remains a much-debated topic in the United States. Over the past four decades, compensation for CEOs of U.S. corporations has risen dramatically, both in real dollars and in
“Income inequality is evidence that our economic system is working well, not poorly.” Do you agree or disagree? Defend your answer.
Poverty among the elderly has been sharply reduced in the last quarter-century. How has this reduction been accomplished?
Explain how a state government transfer program such as unemployment compensation may actually result in a higher unemployment rate than would occur if the program did not exist.
Different countries have different ways to determine the poverty line. The European Union (EU) and many other countries use 60 percent of median household income as the poverty threshold. That is, if
The European Union (EU) classifies minimum wage into three categories: high range, mid-range, and low range. In 2018, a Hungarian would have received €444.1 (about 143,133 Hungarian forints) a
Suppose the prevailing equilibrium wage in a labor market is $24.00 per hour. What would be the impact of a minimum wage law that sets the minimum wage in this market at $32.00 per hour? What if the
Member states of the European Union (EU) vary dramatically by their nominal per capita incomes. In 2017, the per capita income of the EU was $41,192, some member states had a much higher per capita
Many workers who move to New York City for a new job get a raise in their pay, but this raise in pay does not completely cover the increased cost of living. What does this say about the desirability
When a minimum wage is imposed, the number of people who lose their job will be less than the amount of any unemployment that may be created. Why is this?
The following table lists the tax rates for the United Kingdom in 2018:For income levels of $10,000; $30,000; $50,000; $140,000; and $200,000, calculate taxes due and compute the average tax rate.
When excise taxes are levied on any good, the burden is shared between consumers and producers. The burden, however, typically falls on the less elastic group. Why is this?
Many taxes in the United States are collected according to the “ability-to-pay” principle. Can you think of a government service that is taxed according to the “benefits received” principle?
A sporting goods store has estimated the demand curve for a popular brand of running shoes as a function of price. Use the diagram to answer the questions that follow.a. Calculate demand elasticity
For each of the following scenarios, decide whether you agree or disagree and explain your answer.a. Suppose that elasticity of demand for hospital services is -0.15 and that the British government
For the following statements, decide whether you agree or disagree and explain your answer.a. The demand curve in Figure a is elastic.b. The demand curve in Figure b is inelastic. Price Price 0 a. b.
In 2013, three major newspapers in Hong Kong—Apple Daily, Oriental Daily News, and The Sun—raised their prices from HK$6 to HK$7, representing a 20 percent increase. They anticipated that
Studies have found the short-run price elasticity of demand for HPV vaccines to be -0.25. Suppose that a transportation strike causes the supply of HPV vaccines to drop by 20 percent.a. If HPV
Describe what will happen to total revenue in the following situations.a. Price decreases and demand is elastic.b. Price decreases and demand is inelastic.c. Price increases and demand is elastic.d.
At Leticia’s Delicatessen, Leticia noticed that the elasticity of customers differed in the short and long term. She also noticed that her increase in the price of sandwiches had other effects on
For each of the following products, explain whether demand is likely to be elastic or inelastic.a. Saltb. Apple juicec. Kebabsd. HAART, a type of combination therapy for HIV/AIDSe. Nintendo’s Wii
In 2018, China’s house prices were expected to rise by 5 percent and by 3.3 percent in the first half of 2019. While it seems like house prices in China always rise and never fall, it was not the
For each of the following statements, state the relevant elasticity and state what its value should be (negative, positive, greater than one, zero, and so on).a. The supply of labor is inelastic but
The cross-price elasticity values for three sets of products are listed in the table below. What can you conclude about the relationships between each of these sets of products? Cross-price
Income elasticity of demand measures the responsiveness of demand to changes in income. Explain what is happening to demand and what kind of good is being represented in the following situations.a.
The Captain Candy store (earlier known as Pirate Candy) in Prague, Czech Republic, manufactures unique pirate-themed candy products. Assume that the town currently levies a €1 per-bag tax on all
In 2017, the Spanish government revised a law to change a regulation, known as the “Beckham law”, on foreign athletes. This revised law now requires foreign professional athletes to pay the
Small businesses typically do not observe the demand curves for the products they sell. For example, a local bakery could not draw the demand curve for its loaves of sourdough bread. Without this
The government taxes both clothing and tobacco. For a similarly sized tax, would you expect the quantity demanded of clothing or tobacco to be more affected?
Suppose the price of X is $5 and the price of Y is $10 and a hypothetical household has $500 to spend per month on goods X and Y.a. Sketch the household budget constraint.b. Assume that the household
Kristine is a fan of both action movies and classical concerts. This month she has €480 to spend on the two activities. The original budget constraint is shown in the graph below. Let X represent
Michelle keeps fit by either doing yoga or Thai boxing. She has a budget of £72 per month. One yoga session costs Michelle £6, and one session of Thai boxing costs her £6. Use the information in
Jonas has been living in the United Kingdom for the past four years while pursuing an undergraduate degree in Economics.In each of the last four years, he has made trips back home to Germany for
The average cost of living is approximately the same in the following three cities in the United Kingdom: Nottingham, Manchester, and Bristol. Use the information you have learned about marginal
In July 2015, Britain’s finance minister, George Osborne, pledged to tackle tax evasion, ease the tax burden on workers, and lift the threshold on the 40 percent tax bracket (known as “Tory
Suppose that you have season passes for your favorite sports team. The team’s new managers have decided to double the price of a season ticket to raise more revenue. The managers plan to spend this
Banks rely on the money that you deposit into your savings account to finance the loans they make to borrowers. That is, your savings are the money that banks use to make loans.Explain how the
Carmen has $84 to spend on California rolls and eel sashimi, and the data in the following table represents an indifference curve for these two products. If California rolls are $4.00 each and eel
The following graph shows three indifference curves and the accompanying budget constraints for products X and Y. The graph represents the price of product X falling from P1x to P2x and then to P3x.
Suppose that in 2019, you win a lottery and with your prize money, which is quite a large amount, you procure a fast-food restaurant. The restaurant has a maximum capacity of 100 people and all the
Steve Collins runs the SC Steak House in London. The restaurant has been in business for 30 years and is one of the most recommended steak houses in London.The total value of the restaurant’s
In 2017, an article in Forbes reported on the findings of the marketing research firm IHS Markit that it costs $307.5 to produce one unit of the Samsung Galaxy S8 smartphone, and an unlocked phone
Which of the following are short-run decisions and which are long-run decisions?a. The head of the Lim family decides to put money in a private pension plan at a major Indonesian bank, Bank Central
The data in the table represent annual costs and revenue for Anna’s Bakery, a bakery specializing in wedding cakes. Anna works 60 hours a week at the store. She also owns the building that houses
The following is a production function.a. Draw a graph of marginal product as a function of output.b. Does this graph exhibit diminishing returns? Explain your answer.
A supply chain is a specific order of steps taken by a company to get its product or service to the public. Supply chain management involves managing the flows of goods and services by linking
The number of motorcycles assembled at a factory depends on the number of workers as follows:Assume that all inputs (raw materials, machinery, and utilities) other than labor are fixed in the short
The following table represents data for Alia’s Salon. Draw a graph showing the total product, marginal product of labor, and average product of labor. Identify where increasing returns, diminishing
An employee who works on the fifth floor of the headquarters of Patterson & Millers, a multinational law firm based in central London, is assigned to a new office on the eighth floor during his third
Robert has entered a competition in which he must drive from his home town of Paris to London, a distance of approximately 450 km. If he arrives in 5 hours (an average speed of 90 km/h), he will
In recent years, the manufacturing and heavy industries in the European Union (EU) have been steadily moving out of cities into the country side, whereas the banking, finance, and advertising
A firm can use three different production technologies, with capital and labor requirements at each level of output as follows: Daily Output 100 150 200 250 Technology 1 K 456N 7 L 6925 15 Technology
Automatic irrigation systems are widely used in agriculture. These systems are expensive to purchase, but they reduce the amount of labor needed to care for crops. How would the demand for automatic
Coffee shops often have different numbers of employees working at different times of day. At peak times, they typically have more people scheduled to work. When the second person is added to the
Assume that MPL = 10 and MPK = 6. Assume also that PL = 4 and PK = 2. This implies that the firm should substitute capital for labor. Explain why.
In the isoquant/isocost diagram (Figure 1), suppose the firm is producing 1,000 units of output at point A using 100 units of labor and 200 units of capital. As an outside consultant, what actions
Using the information from the isoquant/isocost diagram (Figure 2 ) and assuming that PL = PK = $2, complete Table 1.Data from Figure 2Data from Table 1 Units of capital (K) 150 100 75 50 25 0 25 q =
Each month, a company can rent capital for $7,500 per unit and can hire workers for $2,500 each. Currently, the company is using 4 units of capital and 6 workers to produce 10,000 units of output.
Fashion Fantasy Company and Silky Style Company are each capable of minimizing their costs and can produce 8,000 pieces of clothing per month. Fashion Fantasy’s factory is located in an area where
Consider the following costs of owning and operating a car. A ¥2,300,000 Toyota RAV4 financed over 48 months at 4 percent interest means a monthly payment of approximately ¥52,000. Insurance costs
As of 2018, Dan Brown’s novel Origin has been on The New York Times Best Sellers list for at least 23 weeks and has sold about 5.8 million copies. In book publishing, fixed costs (author royalty,
While charging a general admission price of HK$10 for adults most days of the week, the Hong Kong Museum of History offers free admission every Wednesday. Why do you suppose that museums often price
For each of the following businesses, what is the likely fixed factor of production that defines the short run?a. Airportb. Concert hallc. Accounting officed. Car factorye. Resort
Explain which of the following is a fixed cost or a variable cost for Toyota Motor Corporation.a. The cost of aluminum used for its automobiles.b. The property taxes on its Toyota City assembly
West End theater, London, is considered to represent one of the highest levels of commercial theater in the English speaking world. The “theater land” contains approximately 50 venues,
Felicity runs her family’s small cupcake shop, which designs and bakes cupcakes in different flavors. The capital stock of the firm consists of three machines of various vintages, each of which can
The following curve is a production function for a firm that uses just one variable factor of production, labor. It shows total output, or product, for every level of labor input.a. Derive and graph
The market for soybeans is a perfectly competitive market, and the government subsidizes the production of soybeans through various agricultural support programs. Suppose that the government
Wonder World is a competitive firm operating under the following conditions: Price of output is €12, the profit maximizing level of output is 60,000 units, and the total cost (full economic cost)
You are given the following cost data:If the price of output is £12, how many units of output will this firm produce? What is the total revenue? What is the total cost? Will the firm operate or shut
Construct a graph with AVC, ATC, and MC curves. On this graph add a marginal revenue curve for a representative firm in a perfectly competitive industry that is maximizing profits at a price of p*1.
For each of the following, decide whether you agree or disagree and explain your answer:a. Firms that exhibit constant returns to scale have U-shaped long-run average cost curves.b. Firms that
Explain why it is possible that a firm with a production function that exhibits increasing returns to scale can run into diminishing returns at the same time.
Do you agree or disagree with the following statements? Explain in a sentence or two.a. A firm will never sell its product for less than it costs to produce it.b. If the short-run marginal cost curve
The Languedoc-Roussillon region in southern France is home to three vineyards. Château Beauregard Mirouze produces 2,500 bottles of wine per month at a total cost of €40,000. Château de Bruthel
According to Eurostat, a Directorate-General of the European Commission (EC), the number of unemployed individuals in the European Union (EU) was at an all-time low of just over 16 million people in
Each year, lists of the fastest-growing and fastest-dying industries in the world are published by various sources. Do some research to find three industries from each of these two lists for the
You learned that a firm should shut down in the short run if the price it receives falls below the minimum value of its average variable cost. If the price is exactly equal to the minimum of the

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