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Questions and Answers of Economics

Leopold consumes only kidneys and liver. When the price of kidneys rises, Leopold responds by eating less liver.a. Can you determine whether liver is an inferior good for Leopold?b. Can you determine
Bugs consumes carrots and lettuce, both of which are normal goods. Suppose the price of carrots rises.a. Illustrate the substitution and income effects.b. Does the substitution effect lead to an
In January, root beer and orange soda each cost $1 a bottle. Judith's income is $20. She buys 5 root beers and 15 orange sodas. In February, the price of root beer falls to 50￠, the price of orange
In April, Frieda pays $2 apiece for eggs and $1 apiece for sodas. Her income is $40. She buys 18 eggs and 4 sodas. In May, Frieda pays $1 apiece for eggs and $2 apiece for sodas. Her income is $40.
Herman consumes Munster cheese and no other goods.a. Munster cheese could not possibly be an inferior good for Herman.b. Munster cheese could not possibly be a Giffen good for Herman.
Herman consumes Munster cheese and no other goods.a. What is the shape of Herman's ordinary (uncompensated) demand curve for Munster cheese?b. What is the shape of Herman's compensated demand curve
Suppose your indifference curves between X and Y are shaped as in Exhibit.The Consumer€™s Choice with Nonconvex Indifference Curvesa. What is the shape of your ordinary (uncompensated)
True or False: For a normal good, the compensated demand curve is steeper than the uncompensated demand curve, but for an inferior good the reverse is true.
True or False: Your compensated and uncompensated demand curves for bubble gum are likely to be very similar to each other, but your compensated and uncompensated demand curves for college tuition
A luxury is defined to be a good with income elasticity greater than 1. Explain what this means without the technical jargon. Is it possible for all the goods you consume to be luxuries? Why or why
Which is likely to have a higher elasticity: The demand for gasoline from Gus's gas station or the demand for gasoline generally? Why?
In 2003, tolls were raised on seven bridges across the Delaware River, connecting Pennsylvania to New Jersey. In the first two months of the year, bridge traffic fell by 17%, but revenue increased by
Suppose that without a seat belt, drivers who travel at 0 mph have a 100% chance of staying alive, while drivers who travel at 100 mph have 0% chance of staying alive. Suppose that with a seat belt,
Suppose you have 24 hours per day that you can allocate between leisure and working at a wage of $2 per hour.a. Draw your budget constraint between "leisure hours" on the horizontal axis and "income"
Suppose you have $1,000 today and expect to receive another $1,000 one year from today. Your savings account pays an annual interest rate of 25%, and your bank is willing to lend you money at that
Write a formula for the marginal cost of production when y centiliters are produced. Your formula gives the marginal cost in dollars per centiliter. Express the same formula in terms of dollars per
Now measure orange juice in milliliters (there are 1,000 milliliters in a liter). Write formulas for total cost and marginal cost when orange juice is measured in milliliters. Convert your marginal
The government has undertaken a highway project that was originally projected to cost $1 billion and provide benefits of $1.5 billion. Unfortunately, the costs have been much higher than anticipated.
The ABC Company has a problem with vandals, who throw bricks through its windows at random times. The XYZ Company has a problem with pilferage: Of everything it produces, about 10% is stolen. True or
The RH Snippet Company has one president and 1000 assembly line workers. Which of the following events would have a bigger impact on the price of RH Snippets and why?a. The president gets a raise of
There is only one doctor in the town of Erewhon. Every time she treats a patient, she must use a pair of disposable rubber gloves, which costs her $1. She also finds it necessary to keep an X-ray
In the town of Smallville, there are many dentists but just one eye doctor.Suppose the town institutes a new rule requiring every doctor and every dentist to take an expensive retraining course once
Suppose that a new law requires every department store in Springfield to carry $10 million worth of fire insurance. True or False: If there is only one department store in Springfield, then none of
Which of the following might affect the price of a hamburger at Waldo's Lunch counter and why?a. The price of meat goes up.b. A new restaurant tax of 50¢ per hamburger is imposed.c. Waldo's is
Suppose you own a river that many people want to cross by car. You've recently bought a fleet of ferry boats, and you've been charging people to take their cars across the river. It's just occurred
a. Suppose that a famous Chicago Cubs baseball player threatens to quit unless his salary is doubled, and the management accedes to his demand.True or False: The fans will have to pay for this
A firm faces the following demand and total cost schedules:Suppose that the firm is required to produce a whole number of items each month. How much does it produce and at what price? How do youknow?
A firm faces the following demand and total cost schedules, with all quantities listed on a per-month basis. Suppose that it is required to produce a whole number of items each month.a. How much does
Fred and Wilma have noticed that prices tend to be higher in stores that are located in high-rent districts. Fred thinks that the high rents cause the high prices, whereas Wilma thinks that the high
A firm discovers that when it uses K units of capital and L units of labor, it is able to produce √K L units of output.a. Draw the isoquants corresponding to 1, 2, 3, and 4 units of output.b.
Suppose that you hire workers to address and stamp envelopes. Each worker earns $5 per hour and produces 50 addressed, stamped envelopes per hour. You have unlimited free office space and can
Suppose in the preceding problem that you rent a stamping machine with unlimited capacity, for $10 per hour. This makes it possible for workers to increase their output to 100 addressed, stamped
In the situation of problems 1 and 2, suppose that you have a choice between renting the machine or not renting it. For what levels of output will you choose to rent the machine? For what levels of
Suppose that your factory faces a total product curve that contains the following points:Quantity of Labor Total Product6 ................ 110 ............... 213 ............... 315
Suppose that a firm is operating at a point off its expansion path, whereMRTSLK >PL/PKExplain how this firm could increase its output without changing its total expenditure on inputs. Use this to
Widgets are produced using thingamabobs and doohickeys. For some reason, a certain firm always produces exactly three widgets per day. True or False: If the price of thingamabobs increases, then in
A firm faces the following total product curves depending on how much capital it employs:a. Suppose that the firm currently employs 1 unit of capital and 3 of labor.Compute MRTSLK. Compute MPL.
Terry's Typing Service produces manuscripts. The only way to produce a manuscript is for 1 secretary to use 1 typewriter for 1 day. Two secretaries with 1 typewriter or 1 secretary with 2 typewriters
The desert town of Dry Gulch buys its water from LowTech Inc. LowTech hires residents to walk to the nearest oasis and carry back buckets of water. Thus, the inputs to the production of water are
Every firm in the widget industry has fixed costs of $6 and faces the following marginal cost curve:Quantity Marginal Cost1 ..........$22 .......... 43 .......... 64 .......... 85 ..........10a.
Moose-nose pies are produced by a constant-cost industry where all firms are identical and each firm has fixed costs of $15. The following chart shows the industry-wide demand curve and the marginal
Widgets are produced by a constant-cost industry. The following chart shows the industry-wide demand curve and the marginal cost curve of each firm.There are currently 600 firms in the industry. Each
Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of $30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical
In the widget industry, each firm has fixed costs of $10 and faces the following marginal cost curve: Quantity Marginal Cost1 ............... $2 per widget2
In the gadget industry, each firm must have one gadget press, regardless of how many gadgets it produces. The cost of a gadget press is the only fixed cost that firms face in this industry. Entry by
Kites are manufactured by identical firms. Each firm’s long-run average and marginal costs of production are given by:AC = Q + 100/Q and MC = 2Qwhere Q is the number of kites produced.a. In
Suppose that a law is passed requiring each kite maker to have one fire extinguisher on the premises. (These are the same kite makers we met in the preceding exercise.) The supply curve of fire
Gus the cab driver rents a cab and pays for gas. In each of the following circumstances, describe the short-run effect on the price and quantity of rides Gus offers.a. The price of gas falls.b. The
True or False: In the short run, any firm earning a negative profit will shut down.
In the Woody Allen film Radio Days, a character who has never been successful in business decides to start a career engraving gold jewelry. He argues that this should be especially lucrative, because
Books with many mathematical formulas are generally more expensive than similar books written entirely in prose. True or False: Because typesetting is not part of the marginal cost of producing a
True or False: In a competitive constant-cost industry, an excise tax is partly passed on to demanders in the short run but completely passed on to demanders in the long run.
If New York City provides better shelters for the homeless, then in the long run homeless New Yorkers will be better off.
The town of Whoville has 100 identical consumers and 50 identical car washes. Each consumer has an income of $24. The diagram and chart below show the indifference curves of a typical consumer and
Redo all the parts of Problem, describing the long-run effects instead of the short-run effects. Assume that cab driving is a constant-cost industry.a. The price of gas falls.b. The rental price of
Redo all the parts of Problem, describing the long-run effects instead of the short-run effects. Assume that cab driving is an increasing-cost industry.a. The price of gas falls.b. The rental price
Redo all the parts of Problem, describing the long-run effects instead of the short-run effects. Assume that cab driving is a decreasing-cost industry.a. The price of gas falls.b. The rental price of
Suppose the government institutes a new sales tax on shoes, which are provided by a competitive constant-cost industry.a. Does the price of shoes change by more in the short run or in the long run?b.
Suppose that shoes are provided by a competitive constant-cost industry.Suppose the government starts requiring each shoemaker to pay an annual license fee.a. Does the price of shoes change by more
Suppose there is a fall in the demand for shoes, which are provided by a competitive constant-cost industry.a. Does the price of shoes change by more in the short run or in the long run?b. Does the
Widgets are provided by a constant-cost industry. Each firm employs one executive and a variable number of workers. Consider the following two scenarios:Scenario A. Executive salaries rise, causing
Suppose the government imposes an excise tax of $10 per pair of shoes, but simultaneously launches a program of giving a gift of $10,000 per year to each shoestore.a. In the short run, what happens
Suppose health clinics form a competitive constant-cost industry. One day, the government unexpectedly opens a new clinic, which treats 800 patients a day for free.a. In the short run, what happens
The widget industry is a constant-cost industry, so that all firms are identical. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm:The industry
In Problem, suppose that the city imposes a license fee of $11 per firm.a. In the short run, what is the new price of a widget?b. In the long run, what is the new price of a widget?c. In the long
In problem, suppose the city imposes a sales tax of $6 per widget.a. In the short run, what is the new price of a widget?b. In the long run, what is the new price of a widget?c. In the long run, how
In Problem, suppose the city imposes an excise subsidy of $3 per widget. (That is, widget manufacturers receive $3 from the government for each widget they produce.)a. In the short run, what is the
In Problem, suppose that the demand for widgets doubles (so that, for example, on the new demand curve, prices of $2, $3, and $5 go with quantities of 1,000, 800, and 600).a. In the short run, what
Widgets are made only in America. They are provided by a constant-cost industry, which is in long-run equilibrium. The following charts show the American demand curve for widgets, the foreign demand
True or False: In the long run, profit-maximizing firms seek to minimize their average cost.
Suppose the wholesale price of gasoline falls by 50¢ a gallon. Does the retail price fall by more than 50¢, by 50¢, or by less than 50¢?a. Answer assuming that gas stations constitute a
Upper, Middle, and Lower Slobbovia are distant countries that do not trade with each other or the rest of the world. In Upper Slobbovia, kites are provided by a competitive constant-cost industry. In
True or False: An excise tax on the product of a decreasing-cost industry would raise the price by more than the amount of the tax.
Suppose the demand for seafood increases one year and then unexpectedly returns to its former level the following year. True or False: As soon as the demand returns to its former level, price and
True or False: If consumers buy 1,000 heads of lettuce per week, and if the price of lettuce falls by 10￠ per head, then the consumer's surplus will increase by $100.
Suppose that your demand curves for gadgets and widgets are both straight lines but your demand curve for gadgets is much more elastic than your demand curve for widgets. Each is selling at a market
Adam and Eve consume only apples. Of the following allocations of apples, which are preferred to which others according to (a) the Pareto criterion, and (b) the efficiency criterion?a. Adam has 12
True or False: Cheap foreign goods hurt American producers and are therefore bad according to the efficiency criterion.
True or False: If there is a fixed amount of land in Wyoming, then a sales tax on Wyoming land will have no effect on social welfare.
Home insulation is currently subsidized. Draw a graph (as in Exhibit) that shows the gains and losses to all relevant groups. Explain how you could, in principle, make everyone happier by eliminating
In the preceding problem, suppose that there is also a country of Middle Slobbovia, where the value of various people's time ranges between $1 and $10. If Middle Slobbovia imposes a price ceiling on
Suppose the equilibrium price of potatoes is $5 per pound, but the government imposes a price ceiling of $2 per pound, creating a deadweight loss. True or False: If the government imposes an excise
Suppose the equilibrium price of potatoes is $5 per pound, but the government imposes a price ceiling of $2 per pound, creating a deadweight loss. True or False:If the government imposes a sales tax
Suppose there is a federal excise tax on gasoline of 4.3￠ per gallon. A United States senator has proposed eliminating this tax, but requiring oil companies to pass all of the savings on to the
True or False: A price ceiling on wheat would cause the price of bread to fall.
In equilibrium, 500 pounds of potatoes are sold each week. However, the government prints up and randomly distributes 250 non-reusable ration tickets each week, and requires that buyers present one
The American supply and demand curves for potatoes cross at $5 a pound, but potatoes are available in any quantity from abroad at $2 a pound. Each week, American sellers produce 500 pounds of
Widgets are produced by a competitive industry and sold for $5 apiece. The government requires each widget firm to have a license, and charges the highest license fee firms are willing to pay. If the
In equilibrium, 2,000 pounds of potatoes are sold each month. A new law requires sellers to buy permits before they can sell potatoes. One permit allows you to sell one pound, and permits can't be
Toys are produced by a competitive industry. Santa Claus gives away one million free toys each year. Illustrate Santa's effect on (a) The price of toys, (b) The consumer surplus, (c) The producer
Suppose the government sets an effective price floor (i.e., a price above equilibrium) in the market for oranges and agrees to buy all oranges that go unsold at that price. The oranges purchased by
The American demand and supply curves for oranges cross at a price of $8, but all Americans are free to buy or sell oranges on the world market at a price of $5.One day, the U.S. government announces
In the tariff example of Exhibit, divide the two triangles of deadweight loss into individual rectangles of loss, as in Exhibit.A Tariff When There Is a Domestic IndustryDeadweight LossGive an
Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government imposes a $2,000
The equilibrium price of an apple is 25￠. The government sets a price ceiling of 15￠ per apple, and requires sellers to provide as many apples as buyers want to buy at that price. Draw a graph to
Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government imposes a $2,000
Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers a subsidy
Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers U.S.
Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 and that (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers a
The American supply and demand curves for cars cross at $15,000. Foreigners will sell us any number of cars at the world price of $10,000. Now the government announces two new taxes: a sales tax of

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