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business
microeconomics

Questions and Answers of Microeconomics

Do you agree or disagree with this statement: ‘‘A monopoly firm will charge an exorbitant price for its product’’? Explain your answer.
Do you agree or disagree with this statement: ‘‘A monopoly firm will run a much less safe business than a perfect competitor’’? Explain your answer.
State colleges and universities have two levels of tuition or fees. The less expensive is for residents of the state; the more expensive is for nonresidents. Assume that the universities are
Several electric utilities are providing customers with a choice of billing procedures. Customers can select a time-of-day meter that registers electric usage throughout the day, or they can select a
Suppose that a firm has a monopoly on a good with the following demand schedule.a. What price and quantity will the monopolist produce at if the marginal cost is a constant $4?b. Calculate the
Describe how ‘‘quantity discounts’’ can be price discrimination.
Illustrate with a perfectly competitive market (demand and supply) diagram what ‘‘gains from trade’’ are. Now introduce a marginal revenue curve, thereby converting the perfectly competitive
Disney, Universal, and MGM, among others, have movie studios in Hollywood. Each of these major studios also has one or several subsidiary studios. Disney, for example, has Touchstone. What market
Suppose that Disney was experiencing above normal profits. If Disney is a member of a monopolistically competitive industry, what would you predict would happen to the demand curve for Disney movies
Why is monopolistic competition said to be inefficient? Suppose that you counted the higher price the consumer pays for the monopolistically competitive firm’s product as part of consumer surplus.
Why might some people claim that the breakfast cereal industry is monopolistically competitive but that the automobile industry is an oligopoly? In both cases, about eight to ten firms dominate the
The graph that follows shows an individual firm in long-run equilibrium. In which market structure is this firm operating? Explain. Compare the long-run quantity and price to those of a perfectly
Explain what is meant by strategic behavior.
The NCAA is described as a cartel. In what way is it a cartel? What is the product being produced? How does the cartel stay together?
Almost every town has at least one funeral home, even if the number of deaths could not possibly keep the funeral home busy. What market structure does the funeral home industry best exemplify? Use
What is the cost to a firm in an oligopoly that fails to take rivals’ actions into account?
Suppose a firm in monopolistic competition has the demand schedule shown in the following table. Suppose the marginal cost is a constant $70. How much will the firm produce? Is this a long-or
The cement industry is an example of an undifferentiated oligopoly. The automobile industry is a differentiated oligopoly. Which of these two is more likely to advertise? Why?
The South American cocaine industry consists of several ‘‘families’’ that obtain the raw material, refine it, and distribute it in the United States. There are only about three large
Use the payoff matrix below for the following exercises. The payoff matrix indicates the profit outcome that corresponds to each firm’s pricing strategy.a. Firms A and B are members of an
What is the purpose of a brand name? What would occur if any maker of aspirin could put a Bayer Aspirin label on its product?
Explain the difference between a dominant strategy and a Nash equilibrium.
Explain why repeated interactions tends to break down the solution of a prisoners’ dilemma. Why does the dilemma go away?
Using the average-total-cost and marginal-cost curves, demonstrate what huge fixed costs and near-zero marginal costs mean for the average total-cost curve.
Explain why an externality might be a market failure. What does market failure mean?
Using the demand and cost curves of an individual firm in oligopoly, demonstrate the effects of each of the following:a. The Clean Air Actb. The Nutrition and Labeling Actc. A ban on smoking inside
Kodak has developed an important brand name through its advertising, innovation, and product quality and service. Suppose Kodak sets up a network of exclusive dealerships, and one of the dealers
Explain why a market in which broadcast licenses can be purchased might be more efficient than having the FCC assign licenses on some basis designed by the FCC.
Which of the three types of government policies—antitrust, social regulation, and economic regulation—is the basis for each of the following?a. Beautician education standardsb. Certified Public
Some airline executives have called for reregulation. Why might an executive of an airline prefer to operate in a regulated environment?
Suppose the Herfindahl index for domestic production of televisions is 5,000. Does this imply a very competitive or a noncompetitive environment?
Suppose a monopolist is practicing price discrimination and a lawsuit against the monopolist forces an end to the practice. Is it possible that the result is a loss in efficiency? Explain.
The Justice Department sued several universities for collectively setting the size of scholarships offered. Explain why the alleged price fixing on the part of universities might be harmful to
The FDA is considering the adoption of a higher standard of success in clinical trials for any pharmaceutical that the agency will permit to be sold in the United States. Explain how a cost–benefit
Suppose that in exercise 10, the benefits of the regulation were 1,000 lives saved per year. Would you support adoption of the regulation? Explain.Data from in exercise 10The FDA is considering the
Explain what the costs of the regulation are in the scenario in exercises 10 and 11.Data from in exercise 10The FDA is considering the adoption of a higher standard of success in clinical trials for
What does a loss of consumer surplus mean? In the case of exercises 10–12, exactly how do the losses of consumer surplus occur?Data from in exercise 10The FDA is considering the adoption of a
Go to http://www.heritage.org and find the Economic Freedom map. Use the map to determine the most economically free continent and the least economically free continent. Then do a search to find out
What is the pattern of U.S. government as a share of the total economy since the 1900s?
What is government debt? Why has it increased or decreased?
Is the United States the nation with the most government debt? If not, who is?
How would you derive the demand for milk at the local grocery store? How would you derive the demand for tuna? How would you derive the demand for national defense?
Use the accompanying table to answer the following questions.a. What is the external cost per unit of output?b. What level of output will be produced?c. What level of output should be produced to
What level of tax would be appropriate to internalize the externality in exercise 3?Data from in exercise 3Use the accompanying table to answer the following questions.a. What is the external cost
If the private cost and social cost columns were reversed in exercise 3, what would be the result?Would too much or too little of the good be produced?How would the market failure be resolved, by a
What is meant by the term overfishing? What is the fundamental problem associated with overfishing of the oceans? What might lead to underfishing?
Suppose the following table describes the marginal costs and marginal benefits of waste (garbage)reduction. What is the optimal amount of garbage?What is the situation if no garbage is allowed to be
How much pollution would exist if all externalities were internalized? Why would it not be zero? Use the same explanation to discuss the amount of health and safety that the government should require
Elephants eat 300 pounds of food per day. They flourished in Africa when they could roam over huge areas of land, eating the vegetation in one area and then moving on so that the vegetation could
Explain why the value of pollution permits in one area of the country rose 20 percent per year, while in another remained unchanged from year to year?What would you expect to occur as a result of
Smokers impose negative externalities on nonsmokers. Suppose the air in a restaurant is a resource owned by the restaurant owner.a. How would the owner respond to the negative externalities of
Discuss the argument that education should be subsidized because it creates a positive externality.
If the best solution to solving the positive externality problem of education is to provide a subsidy, explain why educational systems in all countries are government entities.
Amazon.com was the first mover in online book sales. It patented the one-click purchasing system. Barnes & Noble was a later entrant with bn.com. Is this a battle with a ‘‘winner takes all’’
Which of the three types of government policies—antitrust, social regulation, or economic regulation—is the basis for each of the following? Which market failure would provide a theoretical basis
Discuss the claim that social regulation is unnecessary. Does the claim depend on whether the structure of a market is primarily one of perfect competition or of oligopoly?
Explain why the government’s bailout of some banks in 2008 caused a moral hazard.
Describe what a lemons market is and give two examples.
Illustrate each of the following events using a demand and supply diagram for bananas.a. Reports surface that imported bananas are infected with a deadly virus.b. Consumers’ incomes drop.c. The
Answer true or false, and if the statement is false, change it to make it true. Illustrate your answers on a demand and supply graph.a. An increase in demand is represented by a movement up the
Using the following schedule, define the equilibrium price and quantity. Describe the situation at a price of \($10.\) What will occur? Describe the situation at a price of \($2.\) What will occur?
Suppose the government imposed a minimum price of \($7\) in the schedule of exercise 3.What would occur? Illustrate.Data from in exercise 3Using the following schedule, define the equilibrium price
In exercise 3, indicate what the price would have to be to represent an effective price ceiling. Point out the surplus or shortage that results. Illustrate a price floor and provide an example of a
A common feature of skiing is waiting in lift lines.Does the existence of lift lines mean that the price is not working to allocate the scarce resource? If so, what should be done about it?
Why don’t we observe barter systems as often as we observe the use of currency?
A severe drought in California has resulted in a nearly 30 percent reduction in the quantity of citrus grown and produced in California. Explain what effect this event might have on the Florida
The prices of the Ralph Lauren Polo line of clothing are considerably higher than those of comparablequality lines. Yet this line sells more than a J. C. Penney brand line of clothing. Does this
In December, the price of Christmas trees rises and the quantity of trees sold rises. Is this a violation of the law of demand?
In recent years, the price of artificial Christmas trees has fallen while the quality has risen. What impact has this event had on the price of cut Christmas trees?
Many restaurants don’t take reservations. You simply arrive and wait your turn. If you arrive at 7:30 in the evening, you have at least an hour wait. Notwithstanding that fact, a few people arrive,
Evaluate the following statement: ‘‘The demand for U.S. oranges has increased because the quantity of U.S. oranges demanded in Japan has risen.’’
In December 1992, the federal government began requiring that all foods display information about fat content and other ingredients on food packages.The displays had to be verified by independent
Draw a PPC. Which combination shown by the PPC will be produced? How is this combination determined? Does the combination that is produced depend on how goods and services are allocated?
The price of oil increased to more than $100 per barrel following the turmoil in the Mideast in 2011.Illustrate, using a market for oil, why the price rose.
Using exercise 16, illustrate what would have occurred had a price ceiling on oil of $80 per barrel existed.Data from in exercise 16The price of oil increased to more than $100 per barrel following
What is consumer sovereignty? What does it have to do with determining what goods and services are produced? Who determines how goods and services are produced? Who receives the goods and services in
Is a family a household? Is a household a family?
Which sector (households, business, or international) spends the most? Which sector spends the least?Which sector has the most volatility of spending?
What does it mean if net exports are negative?
Total spending in the economy is equal to consumption plus investment plus government spending plus net exports. If households want to save and thus do not use all of their income for consumption,
People sometimes argue that imports should be limited by government policy. Suppose a government quota on the quantity of imports causes net exports to rise. Explain why total expenditures and
Explain the effects of a decision by the household sector to increase saving.
Suppose there are three countries in the world.Country A exports \($11\) million worth of goods to country B and \($5\) million worth of goods to country C; country B exports \($3\) million worth of
List the four sectors of the economy along with the type of spending associated with each sector. Order the types of spending in terms of magnitude, and give an example of each kind of spending.
Using the interconnection between sectors of the economy, illustrate the effects of imposing an increase in taxes on the household sector.
Explain how the government can run budget deficits—that is, spend more than it receives in tax revenue.
What is the ratio of government spending to GDP?What is the ratio of payments on the debt (interest payments) to GDP? (You may find this at http://www.gpoaccess.gov/eop/tables11.html.)
See if you can find the ratio of debt to GDP for several developed nations. Who has the highest ratio?
The following table lists the stages in the production of a personal computer. What is the value of the computer in GDP? Stage Value Added Components manufacture $ 100 Assembly $ 250 Wholesaler
What is the difference between GDP and each of the following?a. Gross national productb. Net national productc. National incomed. Personal incomee. Disposable personal income
a. What is the growth rate of constant-dollar real GDP using year 1 as the base year?b. What is the growth rate of constant-dollar real GDP using year 2 as the base year? Year 1 Quantity Year 2 Price
Why do total expenditures on final goods and services equal total income in the economy?
Why don’t we measure national output by simply counting the total number of goods and services produced each year?
Why isn’t the CPI a useful measure of your cost of living? Use the following national income accounting information to answer exercises 7-11: Consumption Imports Net investment Government purchases
What is the GDP for this economy?
What is the GNP for this economy?
What is the NNP for this economy?
What is the national income for this economy?
What is the gross investment in this economy?
Indirect business taxes and capital consumption allowance are not income, yet they are included in the calculation of GDP as income received. Why do we add these two nonincome components to the other

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