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Questions and Answers of Economics

There is currently a sales tax on all cars, foreign and domestic. In order to help the American car industry, the government is thinking of eliminating the sales tax.Plan A is to eliminate the tax
The American supply and demand curves for bananas cross at $5. Foreigners will buy as many bananas as Americans want to sell at $10. The government subsidizes exports by giving sellers $2 for each
The American supply and demand curves for widgets are illustrated at the top of the shown below. Foreign widget makers will sell any quantity of widgets to Americans at a price of $2 apiece.Suppose
Suppose that the government successfully maintains a price P0 for wheat that is above the equilibrium price. At this price, consumers want to purchase Qd bushels of wheat and farmers want to produce
The American demand and supply curves for labor cross at a wage rate of $25 per hour. However, American firms can hire as many foreign workers as they want to at a wage of $15 per hour. (Assume that
Widgets are produced by a constant-cost industry. Suppose the government decides to institute an annual subsidy of $8,000 per year to every firm that produces widgets.a. Explain why, in the long run,
True or False: If all thieves are identical, then the social cost of robbery is equal to the value of the stolen goods.
Popeye and Wimpy trade only with each other. Popeye has 8 hamburgers and 2 cans of spinach, and Wimpy has 2 hamburgers and 8 cans of spinach. Their indifference, somewhat unusually, are all straight
Robinson Crusoe lives alone on an island, producing nuts and berries and trading with people on other islands. True or False: If nuts are an inferior good for Robinson, then his supply curve for nuts
A race of timid elves passes the time by sneaking out at night, locating machinery that is in disrepair, and fixing it while people are sleeping. The human beneficiaries of this largesse are, of
A chemical company is considering locating a plant on the outskirts of a certain town. Although the town welcomes the benefits that this plant will bring, some residents have expressed concern about
In 1993, the Mississippi River flooded, causing widespread devastation and leaving midwesterners desperate to acquire basic necessities such as food and ice (for food storage). Profiteers soon
True or False: In a large corporation it is usually better for the central management to make decisions rather than divisional managers, because the central management has access to a wider range of
Aramis, Porthos, and Athos have the following marginal value schedules for swords:Aramis, Porthos, and Athos are the only buyers of swords in the community, and swords are produced at a constant
Evaluate the following methods of providing an army. Rank them in order of preference from the point of view of (a) Young people, (b) Consumers of military service, (c) Economic efficiency. Assume
Suppose that the supply curve for land is perfectly vertical.a. True or False: Although the Fabians were wrong to argue that a 100% tax on land rents entails no social loss, it would be right to
Suppose the equilibrium price of haircuts is $2 per haircut. A new law sets the price at $5 per haircut and requires certain demanders to buy as many haircuts as suppliers want to sell at that
The University of Rochester has a fixed number of parking spaces for students on campus. They are currently sold at a price that clears the market. It has been proposed that the price should be
Pizza is provided by a competitive industry. Suppose that in a burst of generosity, the producers of pizza decided to continue producing the same quantity as always, but to give their pizzas away for
Santa Claus always gives away exactly 1,000,000 toys per year, at a price of zero. It costs him nothing to produce these toys. There is also a market where toys can be purchased from commercial toy
No coffee is produced in the United States. Americans can buy as much coffee as they want from foreign producers at a price of $10 per pound. At this price, they buy 1,000 pounds per week. The U.S.
In equilibrium, 500 widgets are sold at $40 apiece. Suppose a new law prohibits the sale of widgets but requires certain firms to produce a total of 600 widgets and give them away for free. The
Suppose that a bright student can get through college for a cost of $A, a dull student can get through college for a cost of $B, and that it is worth $C to convince an employer that you are bright.
a. What are some of the consequences of prohibiting insurance companies from charging higher rates to people who are in high-risk groups for AIDS?b. What are some of the consequences of prohibiting
The government is considering a law that would require all sellers of used cars to provide independent certification of their quality. Make an argument in defense of such a law, from the viewpoint of
Many insurance companies sell group policies that cover all of the employees at a particular firm, or all of the members of a particular organization. How could this policy help to overcome the
If all used cars were required to come with warranties, we might solve an adverse selection problem while creating a moral hazard problem to take its place. Explain.
Many insurance companies sell auto insurance that includes a "deductible" of $250 or $500. If you have an accident, your insurance covers all of your costs minus the amount of the deductible. The
Suppose that a monopolist faces the demand curve:Q = a − bPwhere a and b are constants. Show that his marginal revenue curve is given approximately by the equation:MR = a − 2Q/b(This
Suppose that a monopolist sells in two markets with demand curves:QA = 100 − 10PAQB = 8 − 2PBa. Show that for any given quantity, demand is more elastic in market A than in market B.b. Suppose
A monopoly barber sells haircuts to adults for $30 and to children for $10. Let ηΑ represent adults’ elasticity of demand for haircuts and let ηC represent children’s elasticity of demand.a.
Rework problem 1 from Chapter, on the assumption that Gus is the only cab driver in town.a. The price of gas falls.b. The rental price of cabs falls.c. Word gets out that Gus is a really lousy
True or False: Unlike competitors monopolists have the option of earning higher profits by raising their prices.
A monopolistic firm produces widgets at a constant marginal cost of $10 apiece. One day it discovers a new production process that would lower its marginal cost by $1 per widget. Use a graph to show
True or False: If they could, the customers of an ordinary (non-price-discriminating, non-admission-charging) monopolist would get together and bribe the monopolist to charge lower prices. Justify
We know that for a competitively supplied good the economic incidence of a tax is independent of the legal incidence; that is, a sales tax and an excise tax of equal magnitudes have exactly the same
True or False: An excise tax on a monopolist that causes quantity to fall by one unit is just as detrimental to social welfare as an excise tax on a competitive industry that causes quantity to fall
True or False: If the supply of land is fixed, then it can be equally efficient for land to be supplied by a monopolist or by competitors.
Fuzzy dice are produced only by Americans and consumed only by non-Americans. Can an excise tax on fuzzy dice improve the welfare of Americans? If so, use a graph to illustrate the optimal size of
The following table shows the total cost of producing various quantities of shoehorns and the total value of those shoehorns to consumers. What are the price and quantity produced if the shoehorn
The following diagram shows the (industrywide) demand for widgets and the associated marginal revenue curve. When the industry is monopolized, the marginal cost curve is MCM. When the industry is
True or False: To make a natural monopolist behave more efficiently, subsidies will work better than price controls.
True or False: If a natural monopolist is required to earn zero profits, it will produce less than is optimal, but if any other kind of monopolist is required to earn zero profits, it will produce
True or False: A regulated monopoly is more likely to engage in discriminatory hiring practices than is an unregulated monopoly.
Bad Ideas Inc. is the world's only manufacturer of disposable sweaters. After a sweater is made, Bad Ideas can attach buttons on the right, making it suitable for men, or on the left, making it
Many hotels allow children to stay in their parents' rooms for free. Why?
Some Canadian restaurants (especially in tourist areas) will accept U.S. currency at a more favorable exchange rate than the banks will give. Why?
In many cities, when three people share a taxicab to exactly the same address, the fare depends on whether the three were traveling together at the time they hailed the cab. Riders who know each
The Taos Pueblo is an ancient American Indian community in New Mexico that admits tourists. The admission fee is $5 per car plus $5 per camera.a. Give an explanation of this pricing strategy that is
Many cable television services will allow you to purchase viewing rights to several channels but will not allow you to purchase viewing rights to just one. Why might this be a profit-maximizing
The Fredonia Gas and Electric Company is required by law to distribute all its profits to the citizens of Fredonia. True or False: The average Fredonian won't mind paying a monopoly price for
Suppose Wegman's is the only grocery store in Rochester, and there is an admission fee to enter Wegman's. True or False: If the admission fee were outlawed, consumers would be better off and social
Snidely Whiplash owns all the houses in the Yukon Territory, where he charges the highest rent the citizens (who are all identical) are willing to pay. Snidely has just bought all the grocery stores
All Oxbridge University students are identical, and they are all indifferent between attending Oxbridge and the next best alternative. Students eat at the student union.a. If Oxbridge rents space in
All Oxbridge University students are identical, and they are all indifferent between attending the Oxbridge and their next best alternative. The only place students can buy textbooks is at the Barnes
In downtown Whoville, there are several department stores and several parking lots. The department stores face upward sloping marginal cost curves. Parking spaces are provided at zero marginal cost.
Hughes Tool produces a patented drill bit (thus, it has a monopoly on the bit). Only Hughes Tool can resharpen the bit. Suppose it costs Hughes Tool exactly $100 to resharpen a drill bit.a. True or
Suppose you are a monopoly seller of potatoes, facing a constant marginal cost of $10 per potato. Your customers are all identical, and they all have the following demand curve:a. Suppose you
You're the monopoly owner of a movie theater with two customers, Thelma and Louise. Thelma doesn't care at all about the movie; she just comes to buy popcorn. Louise doesn't like popcorn; she just
Suppose you are the owner of the only widget store in town. You purchase your widgets from the manufacturer at $50 apiece. Inside your store, you charge a single price for widgets; you can also
Suppose you are the monopoly owner of a movie theater. You can provide popcorn at a marginal cost of 50¢ per bag. It costs you nothing to allow people to enter the theater. You have two
Suppose that a monopoly steel producer produces steel at zero marginal costs and sells to a monopoly automaker at a price Psteel. The automaker has no costs other than the cost of steel, which is
Suppose that Microsoft is the only producer of operating systems and Netscape is the only producer of Web browsers. Suppose also that nobody wants an operating system without a Web browser and nobody
Dr. Miles is a monopolist who sells a type of patent medicine through competitive retailers. The demand curve for this patent medicine is given by Q = 100 − 2P, where P is the price and Q is the
Only one road goes from Hereville to Thereville, and along that road you must cross two toll bridges. The number of travelers from Hereville to Thereville is given by Q = 100 − P where P is the
Consider a competitive industry where the demand and supply curves are straight lines of equal absolute value and the supply curve goes through the origin. If all of the firms in the industry merge
Suppose that a monopoly supplier selling in two distinct markets wants to price discriminate. How might the monopolist benefit from a vertical merger?
Candy makers sometimes print retail prices directly on the wrappers. Is this a form of resale price maintenance? If so, what are its benefits? If not, what is the reason for the practice?
Many firms employ salespeople who are assigned exclusive territories. No salesperson may enter another's territory and attempt to sell the manufacturer's product there. Construct a theory to explain
Suppose that bicycle dealers serve their customers by providing fancy showrooms and knowledgeable sales-forces to answer questions, but that only a small number of customers value these services.
Suppose that airplane flights are provided at a constant marginal cost PC. (That is, the marginal cost curve in the airline industry is flat at the price PC.) If there were a single monopoly airline,
True or False: Resale price maintenance can be good for consumers because it means there will be more dealer services. Thus, if the marginal value of dealer services decreases rapidly, then the
Can you think of a reason why some manufacturers might want to set a maximum retail price for their products, and forbid sellers from charging more than the preset maximum?
In many industries workers are required to belong to a union and to pay union dues, even if they would prefer not to. True or False: Workers would be better off if each one could choose whether to
In the example of Exhibit, suppose that the firms merge, but the market is contestable. What quantity does the merged firm produce, and at what price?A Horizontal MergerDo any new firms actuallyenter?
Suppose that there are exactly N identical firms in an industry, all with flat marginal cost curves. Industry demand is linear. How much does each firm produce, compared with the competitive
Consider an industry where there are two firms having identical flat marginal cost curves. Price and output in the industry are determined as follows: First Firm 1 announces how much it will produce,
Suppose there are three ice cream vendors on the beach depicted in Exhibit.Ice Cream Vendors on a BeachHow will they locate themselves inequilibrium?
Suppose there are four ice cream vendors on the beach depicted in Exhibit.Ice Cream Vendors on a BeachHow will they locate themselves in equilibrium? What can you say if there are five vendors? What
a. Suppose that two ice cream vendors are located on a circular beach that goes all the way around a lake. How will they locate themselves in equilibrium?b. Suppose instead that there are three ice
The problems in this problem set refer to the following game matrices. In each case, Jack chooses €œleft or right€ and Jill chooses €œup or down.€The
A competitive beekeeper sells honey at $5 per pound. In the course of producing a pound of honey, the bees pollinate apple trees in neighboring orchards, thereby saving the orchard owners $1 worth of
The City of Rochester is thinking of expanding its airport. The expansion will increase travelers' consumers' surplus by $100 and airlines' producers' surplus by $200, while costing taxpayers only
True or False: If universities were made liable to their students for the effects of assaults that occur on campus, the number of such assaults might go up.
True or False: If a new law requires married men to do at least half the housework, then a lot of men will have to do more housework than they do today.
Farmer Jones keeps rabbits; Farmer Smith grows lettuce on adjoining land. The rabbits like to visit Farmer Smith. True or False: Farmer Jones should reimburse Farmer Smith for the damage, since it is
True or False: In the absence of transactions costs, every monopolist would act like a competitor.
Suppose that you are the judge in the lawsuit described in the following article. Under various assumptions, discuss the senses in which your decision "matters" and the senses in which it might not.
True or False: Monopolies lead to inefficient allocation of resources. Externalities lead to inefficient allocation of resources. Therefore, a firm that is both a monopoly and a source of negative
Suppose that you are attempting to study for your economics final and are distracted by noise from your roommate's stereo. In some dormitories, there are rules allowing you to throw the stereo out
A factory is located next to a laundromat, and soot from the factory accumulates on the freshly washed clothes, significantly reducing demand for the laundromat's services. The owner of the
The workers at a certain firm are exposed to radiation. This exposure can cause birth defects if the workers have children in future years. (If they don't have children, no health problems arise.)
Suppose that Japanese cars and American cars are identical from the viewpoint of their owners, but that Japanese cars cause harmful pollution while American cars do not. Each American owner of a
In the preceding problem, suppose that instead of imposing a $1,000 tariff on Japanese cars, the government imposes a sales tax of $1,000 on all cars sold in the United States whether foreign or
In problem, suppose that instead of imposing a tariff on Japanese cars, the government offers a $1,000 subsidy to each American who buys an American car.Suppose that Japanese cars and American cars
People who suffer from mange can purchase either of two cures: Mange-Away, which is made in the United States and sold by producers who have an upward-sloping supply curve, or Look-Ma-No-Mange, which
Widgets are provided by a single monopolist, whose production process pollutes the surrounding environment. The U.S. government is thinking about breaking the monopoly up into a large number of small
A single competitive firm pollutes the air. There are no transactions costs between this firm and the neighbors who suffer from the pollution. In terms of the following diagram, what is the maximum
A competitive firm pollutes the air. The following graph shows the demand for the firm€™s product and the private and social marginal cost curves. The numbers in the graph represent
Snidely Whiplash owns all the houses in the Yukon Territory, for which he charges the highest possible rent. He also owns the only electric company, which pollutes the territory's air. There is no

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