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Questions and Answers of Economics

Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward and the market
What are the three reasons that a market might have a monopoly? Give two examples of monopolies and explain the reason for each.
Explain how a monopolist chooses the quantity of output to produce and the price to charge.
How does a monopolist’s quantity of output compare to the quantity of output that maximizes total surplus? How does this difference relate to the concept of deadweight loss?
Give two examples of price discrimination. How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus?
Describe the ways policymakers can respond to the inefficiencies caused by monopolies. List a potential problem with each of these policy responses.
Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.
Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly?
Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.
Draw the demand, marginal-revenue, average total- cost, and marginal-cost curves for a monopolist. Show the profit-maximizing level of output, the profit-maximizing price, and the amount of profit.
In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer.
Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.
What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge.
Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.
A publisher faces the following demand schedule for the next novel from one of its popular authors:Price Quantity Demanded$100......... 0 novels90......... 100,00080......... 200,00070.........
A small town is served by many competing supermarkets, which have the same constant marginal cost.a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and
Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows: Price Number of CDs$24........ 10,000
A company is considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain.Number of Crossings,Price per Crossing in Thousands$8...........
Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to
The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum. The museum has a fixed cost of $2,400,000 and no variable costs. There are 100,000 town
For many years, AT&T was a regulated monopoly, providing both local and long-distance telephone service.a. Explain why long-distance phone service was originally a natural monopoly.b. Over the past
Consider the relationship between monopoly pricing and price elasticity of demand:a. Explain why a monopolist will never produce a quantity at which the demand curve is inelastic.b. Draw a diagram
If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unit subsidy? Explain how this tax or subsidy would achieve the
You live in a town with 300 adults and 200 children, and you are thinking about putting on a play to entertain your neighbors and make some money. A play has a fixed cost of $2,000, but selling an
Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins, international trade in soccer balls is prohibited. The following equations describe the monopolist’s
Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD:Demand: P = 1,000 – 10QTotal Revenue: TR =
Many schemes for price discriminating involve some cost. For example, discount coupons take up the time and resources of both the buyer and the seller. This question considers the implications of
Define oligopoly and monopolistic competition and give an example of each.
List the three key attributes of monopolistic competition. Draw and explain a diagram to show the long-run equilibrium in a monopolistically competitive market. How does this equilibrium differ from
How might advertising make markets less competitive? How might it make markets more competitive? Give the arguments for and against brand names.
Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition?
Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market. Now show what happens to this firm as new firms enter the industry.
Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost?
Does a monopolistic competitor produce too much or too little output compared to the most efficient level? What practical considerations make it difficult for policymakers to solve this problem?
How might advertising reduce economic well- being? How might advertising increase economic well-being?
How might advertising with no apparent informational content in fact convey information to consumers?
Explain two benefits that might arise from the existence of brand names.
Among monopoly, oligopoly, monopolistic competition, and perfect competition, how would you classify the markets for each of the following drinks?a. Tap waterb. Bottled waterc. Colad. Beer
Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive, and explain your answers.a. Wooden no. 2 pencilsb. Copperc. Local telephone serviced. Peanut
For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither.a. Sells a product differentiated from that of
For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither.a. Faces a downward-sloping demand curveb. Has marginal
You are hired as the consultant to a monopolistically competitive firm. The firm reports the following information about its price, marginal cost, and average total cost. Can the firm possibly be
Sparkle is one firm of many in the market for toothpaste, which is in long-run equilibrium.a. Draw a diagram showing Sparkle’s demand curve, marginal-revenue curve, average total- cost curve, and
Consider a monopolistically competitive market with N firms. Each firm’s business opportunities are described by the following equations:Demand: Q = 100/N – PMarginal Revenue: MR = 100/N –
The market for peanut butter in Nutville is monopolistically competitive and in long-run equilibrium. One day, consumer advocate Skippy Jif discovers that all brands of peanut butter in Nutville are
For each of the following pairs of firms, explain which firm would be more likely to engage in advertising.a. A family-owned farm or a family-owned restaurantb. A manufacturer of forklifts or a
Sleek Sneakers Co. is one of many firms in the market for shoes.a. Assume that Sleek is currently earning short run economic profits. On a correctly labeled diagram, show Sleek’s profit-maximizing
The market for chicken was once perfectly competitive. Then Frank Perdue began marketing chicken under his name.a. How do you suppose Perdue created a brand name for chicken? What did he gain from
The makers of Tylenol pain reliever do a lot of advertising and have loyal customers. In contrast, the makers of generic acetaminophen do no advertising, and their customers shop only for the lowest
If the members of an oligopoly could agree on a total quantity to produce, what quantity would they choose? If the oligopolists do not act together but instead make production decisions individually,
Tell the story of the prisoners’ dilemma. Write down a table showing the prisoners’ choices and explain what outcome is likely. What does the prisoners’ dilemma teach us about oligopolies?
What kind of agreement is illegal for businesses to make? Why are the antitrust laws controversial?
If a group of sellers could form a cartel, what quantity and price would they try to set?
Compare the quantity and price of an oligopoly to those of a monopoly.
Compare the quantity and price of an oligopoly to those of a competitive market.
How does the number of firms in an oligopoly affect the outcome in its market?
What is the prisoners’ dilemma, and what does it have to do with oligopoly?
Give two examples other than oligopoly that show how the prisoners’ dilemma helps to explain behavior.
What kinds of behavior do the antitrust laws prohibit?
What is resale price maintenance, and why is it controversial?
A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $1,000 per diamond, and the demand for diamonds is
The New York Times (Nov. 30, 1993) reported that “the inability of OPEC to agree last week to cut production has sent the oil market into turmoil . . . [leading to] the lowest price for domestic
This chapter discusses companies that are oligopolists in the market for the goods they that are oligopolists in the market for the inputs they buy.a. If sellers who are oligopolists try to increase
Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are as follows:a. What is the dominant
Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the following payoff matrix as they decide upon the size of their research budget:a. Does Synergy have a dominant
You and a classmate are assigned a project on which you will receive one combined grade. You each want to receive a good grade, but you also want to avoid hard work. In particular, here is the
A case study in the chapter describes a phone conversation between the presidents of American Airlines and Braniff Airways. Let’s analyze the game between the two companies. Suppose that each
Two athletes of equal ability are competing for a prize of $10,000. Each is deciding whether to take a dangerous performance-enhancing drug. If one athlete takes the drug, and the other does not, 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
Let’s return to the chapter’s discussion of Jack and Jill’s water duopoly. Suppose that Jack and Jill are at the duopoly’s Nash equilibrium (80 gallons) when a third person, John, discovers a
Define marginal product of labor and value of the marginal product of labor. Describe how a competitive, profit-maximizing firm decides how many workers to hire.
Who has a greater opportunity cost of enjoying leisure—a janitor or a brain surgeon? Explain. Can this help explain why doctors work such long hours?
How does an immigration of workers affect labor supply, labor demand, the marginal product of labor, and the equilibrium wage?
What determines the income of the owners of land and capital? How would an increase in the quantity of capital affect the incomes of those who already own capital? How would it affect the incomes of
Explain how a firm’s production function is related to its marginal product of labor, how a firm’s marginal product of labor is related to the value of its marginal product, and how a firm’s
Give two examples of events that could shift the demand for labor, and explain why they do so.
Explain how the wage can adjust to balance the supply and demand for labor while simultaneously equaling the value of the marginal product of labor.
If the population of the United States suddenly grew because of a large immigration, what would happen to wages? What would happen to the rents earned by the owners of land and capital?
Suppose that the president proposes a new law aimed at reducing healthcare costs: All Americans are required to eat one apple daily.a. How would this apple-a-day law affect the demand and equilibrium
Show the effect of each of the following events on the market for labor in the computer manufacturing industry.a. Congress buys personal computers for all U.S. college students.b. More college
Suppose that labor is the only input used by a perfectly competitive firm. The firm’s production function is as follows:Days of Labor Units of Output0 days............0 units1
Smiling Cow Dairy can sell all the milk it wants for $4 a gallon, and it can rent all the robots it wants to milk the cows at a capital rental price of $100 a day. It faces the following production
The nation of Ectenia has 20 competitive apple orchards, which sell apples at the world price of $2. The following equations describe the production function and the marginal product of labor in each
Your enterprising uncle opens a sandwich shop that employs 7 people. The employees are paid $6 per hour, and a sandwich sells for $3. If your uncle is maximizing his profit, what is the value of the
Suppose a freeze destroys part of the Florida orange crop.a. Explain what happens to the price of oranges and the marginal product of orange pickers as a result of the freeze. Can you say what
Leadbelly Co. sells pencils in a perfectly competitive product market and hires workers in a perfectly competitive labor market. Assume that the market wage rate for workers is $150 per day.a. What
During the 1980s, 1990s, and the first decade of the 20th century, the United States experienced a significant inflow of capital from abroad. For example, Toyota, BMW, and other foreign car companies
In recent years, some policymakers have proposed requiring firms to give workers certain fringe benefits, such as health insurance. Let’s consider the effects of such a policy on the labor
This chapter has assumed that labor is supplied by individual workers acting competitively. In some markets, however, the supply of labor is determined by a union of workers.a. Explain why the
Define compensating differential and give an example. Give two reasons more educated workers earn more than less educated workers.
Why is it hard to establish whether a group of workers is being discriminated against? Explain how profit-maximizing firms tend to eliminate discriminatory wage differentials. How might a
Why are coal miners paid more than other workers with similar amounts of education?
What conditions lead to economic superstars? Would you expect to see superstars in dentistry? In music? Explain.
Give three reasons a worker’s wage might be above the level that balances supply and demand.
What difficulties arise in deciding whether a group of workers has a lower wage because of discrimination?
Do the forces of economic competition tend to exacerbate or ameliorate discrimination based on race?
Give an example of how discrimination might persist in a competitive market.
College students sometimes work as summer interns for private firms or the government. Many of these positions pay little or nothing.a. What is the opportunity cost of taking such a job?b. Explain
As explained in Chapter 6, a minimum-wage law distorts the market for low-wage labor. To reduce this distortion, some economists advocate a two-tiered minimum-wage system, with a regular minimum wage
A basic finding of labor economics is that workers who have more experience in the labor force are paid more than workers who have less experience (holding constant the amount of formal education).

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