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Questions and Answers of Economics

A firm in a perfectly competitive industry has patented a new process for making widgets. The new process lowers the firm's average costs, meaning this firm alone (although still a price taker) can
On the island of Pago-Pago, there are two lakes and 20 fishers. Each fisher gets to fish on either lake and gets to keep the average catch on that lake. On Lake X, the total number of fish caught is
Suppose that the oil industry in Utopia is perfectly competitive and that all firms draw oil from a single (and practically inexhaustible) pool. Each competitor believes that he or she can sell all
Mr. Wile E. Coyote purchases a variety of equipment with which to catch roadrunners. Invariably he finds that the equipment fails to work as promised. For example, the Acme Road Runner Rocket he
As an illustration of the apple-bee externality, suppose that a beekeeper is located next to a 20-acre apple orchard. Each hive of bees is capable of pollinating¼ acre of apple trees, thereby
A government study has concluded that the marginal benefits from controlling cow-induced methane production are given byMB = 100 – RWhere R represents the percentage reduction from unregulated
Suppose there are only two people in society. The demand curve for person A for mosquito control is given byqA = 100 – PFor person B, the demand curve for mosquito control is given byqB = 200 –
Suppose there are three people in society who vote on whether the government should undertake specific projects. Let the net benefits of a particular project be $150, $140, and $50 for persons A, B,
The town of Pleasantville is thinking of building a swimming pool. Building and operating the pool will cost the town $5,000 per day. There are three groups of potential pool users in
The demand for gummy bears is given byQ = 200 – 100Pand these confections can be produced at a constant marginal cost of $0.50.a. How much will Sweet tooth, Inc., be willing to pay in bribes to
A queen gives a dragon-slaying hero a choice between two prizes. The first provides $100,000 a day for d-days; the second provides an amount of money that doubles in size each day for d-days starting
Imagine that you are a subject in one of Maurice Allais lab experiments involving the same four gambles as in the chapter. Gamble A provides a 89% chance of winning $1,000, a 10% chance of winning
Refer back to Chapter 5, in particular to the Prisoners' Dilemma in Figure. Imagine that these payoffs are monetary payoffs, with negative numbers being money that is taken away from a player.a.
Refer back to Chapter, in particular to the Battle of the Sexes in Table. Imagine that these payoffs are monetary payoffs.a. Suppose that players only care about monetary payoffs, with $1 = 1 utile.
Refer to the Ultimatum Game in Figure. Recall that the payoffs are monetary payoffs.a. Suppose that players only care about monetary payoffs, with $1 = 1 util. find the sub game- perfect
Julia visits her local grocery store to buy a jar of jam. She is overwhelmed to see the twenty-four varieties shown in Figure there.a. Suppose she makes her decision by evaluating every pair wise
In period 1, Mr. Consistency and Mr. Hyperbola are each trying to come up with a plan for how much they will exercise in period 2. Exercise is less enjoyable than other leisure activities, leading to
Prospect Pete's preferences are given by the following utility function. His wealth prior to taking a gamble serves as a reference point. He gains 1 utile for each dollar of wealth in the reference
Trans-fatty potato chips are competitively supplied. The supply curve is Demand for these potato chips isQD = 100 – 2P.a. Compute the equilibrium price, quantity, consumer surplus, producer
Why must profits be zero in long-run competitive equilibrium?a. If profits are not zero, firms will enter or exit the industry.b. If profits are not zero, firms will produce higher-quality goods.c.
A study has estimated the effect of changes in interest rates and consumer confidence on the demand for money to be: log M = 14.666 + .021 log C - .036 log r, where M denotes real money balance. C is
You hear that the unemployment rate has dropped over the last month from 5.6% to 5.5%. Statistically speaking, is this a real decline? What other information do you need to determine if this is a
Suppose that an excise tax of 50¢ apiece is imposed on oranges. If the original supply and demand curves are as in Exercise,Suppose the demand curve for oranges is given by the equationQ = −200
Repeat Exercise for a 50¢ sales tax instead of a 50¢ excise tax.Suppose the demand curve for oranges is given by the equationQ = −200 • P + 1,000With quantity (Q) measured in oranges per day
Suppose that an excise tax of 20¢ apiece and a sales tax of 30¢ apiece are imposed simultaneously. Answer again all of the questions in Exercise.Suppose the demand curve for oranges is given by the
True or False: If a law were passed requiring all cars sold in the United States to get at least 40 miles per gallon of gasoline, then Americans would surely use less gasoline.
True or False: The discovery of a new method of birth control that is safer, cheaper, more effective, and easier to use than any other method would reduce the number of unwanted pregnancies.
Can you think of some other "goods," such as murder and reckless driving, that are not traded in the traditional economic marketplace but for which people nevertheless have demand curves? For each of
True or False: If the demand for lettuce falls, the price will fall, causing the demand to go back up.
Nosmo King is an anti-smoking crusader who finds that people who don't recognize him sometimes offer him a cigarette. He always takes the cigarette and throws it away. This happens ten times a year,
The following item appeared in a major daily newspaper: Does this observation in fact violate the laws of supply anddemand?
A socially conscious student has decided to reduce his meat consumption by one pound per week. True or False: That way, there will be one more pound of meat each week for somebody else to eat.
True or False: If we observe that fewer cars are being purchased this year than last year, then we should expect the price of cars to fall.
In 2003, mad cow disease was first detected in American cattle.a. What do you expect happened to the demand for American beef?b. What do you expect happened to the price of American beef?c. In fact,
a. Suppose in problem that a sales tax of $2 per pound is imposed on catnip. What is the new market price of catnip? What price do demanders actually pay? What is the new equilibrium quantity?b.
In each of the following circumstances, what would happen to the price and the quantity consumed of corn?a. The price of fertilizer goes up.b. The price of wheat goes up.c. An epidemic wipes out half
How would each of the following circumstances affect the price and quantity of beef sold?a. The price of chicken falls.b. The price of grazing land falls.c. There is a report that beef consumption
Suppose that the demand curve for lettuce is perfectly vertical. How will an excise tax on lettuce affect the market price?
At a price of $10,000 apiece, Japanese producers are willing to sell any quantity of compact cars that Americans want to buy. True or False: An excise tax on Toyotas sold in the United States would
Upper Slobbovians smoke 10 million cigarettes per year; so do Lower Slobbovians. To discourage smoking, each country imposes an excise tax of 50¢ per pack. As a result, the price of cigarettes rises
True or False: If there are currently 5,000 homeless people in New York City, and if the city builds housing for 1,000 people, then there will be 4,000 homeless people in New York City. (Answer
Answer the following questions (and fully justify your answers):a. If the demand curve for eggs shifts to the right by 100 eggs, in which direction does the price change?b. If the supply curve for
Apples currently sell for 20¢ apiece. Label each of the following sentencescertainly true, possibly true, or certainly false and justify your answers.a. A 10¢ sales tax would cause the price of
Gasoline currently sells for $3 a gallon. Suppose the government simultaneously institutes a sales tax of 10¢ per gallon and an excise subsidy of 10¢ per gallon.(The "excise subsidy" means that
The diagram below shows the demand and supply for hamburgers on your college campus.a. Suppose your college announces a new plan to improve student life: Any time you buy a hamburger anywhere on
Suppose that the government wants to increase Social Security taxes by $1 per hour of work and is undecided between increasing the tax on workers and increasing the tax on employers. According to the
Eggs currently sell for $10 a dozen. Suppose the government imposes both a sales tax of $1 per egg and an excise subsidy of $5 per egg ("excise subsidy" means that sellers receive $5 from the
It currently costs $500 to install a new shower in your house. A new law requires each new shower to come with digital hot and cold water controls instead of the old-fashioned knobs that everyone
Suppose that the amount of time required for the electrician or the carpenter to complete a job of rewiring or paneling is given by the following table:a. Compute the costs of performing each of
Suppose that there is a fall in the cost of shipping goods by railroad. What will happen to the difference between the average quality of oranges sold in Florida and the average quality of oranges
Where would you expect to find a larger percentage of childless couples: at a cheap movie or at an expensive show?
In the 1920s, it was illegal to manufacture or sell whiskey in the United States. Nevertheless, much whiskey was produced and sold, though at higher prices that reflected the cost of evading law
Suppose that an acre of land in Iowa can yield either 50 bushels of wheat or 100 bushels of corn, while an acre of land in Oklahoma can yield either 20 bushels of wheat or 30 bushels of corn.a. What
Dell computers contain hard drives made by other manufacturers. True or False:If Dell made its own hard drives, Dell computers would be cheaper.
True or False: If George types 50 words per minute and Mary types 120, then it certainly makes more sense for Mary to be employed as a secretary than for George to be.
True or False: A farmer with a lot of children will find it less costly to harvest his crops than a farmer with no children, since he can put his children to work without pay.
True or False: It would be a good thing if only those students with the most talent for medicine were allowed to become doctors. (Assume that there are enough such students so that we could still
True or False: A small country with widespread starvation would be well advised to concentrate its resources in the production of food rather than in the production of decorative jewelry.
True or False: A country that is poor in natural resources and has an unskilled population may be unable to trade profitably because it has no comparative advantage at anything.
Suppose that the Winkies and the Munchkins are initially identical in terms of their abilities to produce a wide variety of goods, including food and automobiles. One day, the Munchkins discover a
Explain exactly where the following argument goes wrong: The Anderson-Little clothing store buys clothes directly from the manufacturers, whereas Brand X clothing stores buy from middlemen. In each
True or False: If everyone had the same income, substandard housing would disappear.
Every day Fred buys wax lips and candy cigarettes. After deciding how many of each to buy, he multiplies the number of sets of wax lips times the number of packs of candy cigarettes. The higher this
Judith loves cats, hates dogs, and is completely indifferent to tropical fish. Draw her indifference curves between (a) Cats and dogs, (b) Cats and fish, (c) Dogs and fish.
Suppose that you hate typing and hate filing.a. Draw a graph with "hours of typing" on the horizontal axis and "hours of filing" on the vertical. Do your indifference curves slope upward or downward?
Filbert is indifferent between baskets (3, 2) and (4, 1). Lychee is indifferent between baskets (1, 4) and (2, 3). Note that all four baskets lie along a straight line.a. Can you determine whether
Suppose your indifference curves between food and clothing were nonconvex as in Exhibit.True or False: In this case a very small change in price could lead to either no change at all in your
Suppose that you consume nothing but beer and pizza. In 2010, your income is $10 per week, beer costs $1 per bottle, pizza costs $1 per slice, and you buy 6 bottles of beer and 4 slices of pizza per
In 2010, you buy shoes for $2 a pair and socks for $1 a pair, and your income is $30, with which you buy 12 pairs of shoes and 6 pairs of socks. In 2011, you buy shoes for $1 a pair and socks for $2
Your income is $48, which you spend on eggs and wine. Eggs sell for $4 a dozen. Every day you buy 5 dozen eggs. One day the egg salesman offers you a deal: "If you pay $10 a day to join the egg club,
If the price of eggs were to double from $1 per egg to $2 per egg, Freddy would consume 6 fewer eggs without changing his consumption of other goods. Which would he prefer: The price increase, or
Aubrey buys only apples and peaches. In June, apples sell for $2 each and peaches sell for $1 each. In July, apples sell for $1 each and peaches sell for $2 each. Aubrey's income is $20 in June and
Cassie shops at Wegman's supermarket, where she spends $20 a week to buy 10 apples and 5 bananas. If she bought the same 10 apples and 5 bananas at Top's supermarket, she'd pay $30. True or False:
Gregorian and Boudicca each have incomes of $30 and each shop at Star Market, where apples cost $2 each and bananas cost $1 each. Every day, Gregorian buys 6 apples and 18 bananas, and so does
Amelia buys coffee for $1 per cup and tea for 50¢ per cup; every day she drinks 1 cup of coffee and 2 cups of tea. Bernard buys coffee for 50¢ per cup and tea for $1 per cup; every day he drinks 2
In each of the three circumstances (a, b, and c below), determine which of the following conclusions (1, 2, or 3) holds and justify your answer:(1) John and Mary have identical tastes.(2) John and
John buys shoes for $1 a pair and socks for $1 a pair. His annual income is $20.a. Now suppose the government institutes two new programs: First, it taxes shoes, so that shoes now cost John $2 a
a. Suppose you have 16 waking hours per day, which you can allocate between leisure and working for a wage of $10 an hour. Draw your budget constraint between "leisure" (measured in hours) and
The Pullman Company has a lot of pull in the town of Pullman. Everybody in town is identical, and they all work for the company, which pays them each $10 a day. Their favorite food is apples, which
Suppose that you can work anywhere from 0 to 24 hours per day at a wage of $1 per hour. You are subject to a tax of 50% on all wages over $5 per day (the first $5 per day is untaxed). You elect to
Suppose that you have 24 hours per day to allocate between leisure and working at a wage of $1 per hour. Draw your budget line between leisure and dollars. One day the government simultaneously
Suppose the government imposes a temporary sales tax-one that is in effect for a short time, but will disappear in the future. The government is considering two different tax policies:A. A big excise
Suppose the government imposes a temporary sales tax-one that is in effect for a short time, but will disappear in the future. In a diagram relating current consumption to future consumption, how
Suppose your indifference curves are all described by equations of the form x y = constant, with a different constant for each indifference curve.a. Show that for any point P = (x, y), the
Suppose that your Engel curve for X is given by the equationX = a + bIwhere I is income and a and b are constants.a. If your income increases from I to I + ΔI, by how much does X increase?b. Write
Suppose that your demand curve for X is given by the equationX = c − dPwhere P is price and c and d are positive constants.a. Derive a formula for your price elasticity of demand for X, and write
Suppose the only goods you buy are circus tickets and accounting textbooks. One day the price of circus tickets goes up, the price of accounting textbooks goes down, and you notice that you are
Suppose the only goods you consume are wine and roses. On Tuesday, the price of wine goes up, and at the same time your income increases by just enough so that you are equally as happy as you were on
The only goods you consume are wine and roses. Between Monday and Tuesday, your income falls. Between Tuesday and Wednesday, your income remains at the Tuesday level, but the price of roses falls. On
For Henry, eggs are inferior but not Giffen. On Henry's indifference curve diagram, illustrate the income and substitution effects when the price of eggs goes up.How does your diagram illustrate that
Suppose that the only two goods you purchase are X and Y. One day the price of X goes down.a. Illustrate your old and new budget lines.b. Illustrate the substitution and income effects on your
Suppose the only goods you buy are wine and roses.a. Between Monday and Tuesday, the price of wine goes up (while your income remains fixed). Draw a diagram, with wine on the horizontal axis and
Suppose the only two goods you consume are X and Y. On Tuesday, the price of Y (not X!) goes up. On Wednesday, there are no new price changes, but your income rises by just enough so that you can
The only goods you consume are eggs and wine. Between Monday and Tuesday, your income rises. On Wednesday, the price of eggs goes up. On Wednesday, you are just as happy as you are on Monday. True or
The only goods you consume are eggs and wine. On Tuesday, the price of wine increases. On Wednesday, the price of wine returns to its original level, but the price of eggs increases. You are equally
The following diagram shows your indifference curves for goods X and Y.a. Is X an ordinary good or a Giffen good? How do you know?b. Is X a normal good or an inferior good? How do you know?c. Suppose
Suppose you buy only X and Y, both of which are normal goods. Suppose also that almost all of your income is spent on Y. When the price of X goes up, does the quantity of Y go up or down?
When the price of shoes goes up, Tara goes right on buying just as many shoes as before. True or False: Shoes could not possibly be an inferior good for Tara.
Tara buys only shoes and socks. When the price of shoes goes up, Tara continues buying exactly the same number of socks as before. True or False:Socks could not possibly be an inferior good for Tara.
Sam consumes only green eggs and ham. Ham is an inferior good for Sam. One day the price of green eggs goes up.a. Illustrate Sam's old and new optimum points, and show both the substitution and the

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