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economics

Questions and Answers of Economics

Because of changing demographics, a small, private liberal arts college predicts a fall in enrollments over the next five years. How would it apply marginal analysis to plan for the decreased
Suppose a firm’s inverse demand curve is given by P = 120 - .5Q and its cost equation is C = 420 + 60Q + Q2.a. Find the firm’s optimal quantity, price, and profit (1) By using the profit and
a. As in Problem 4, demand continues to be given by P = 120, but the firm’s cost equation is linear: C = 420 + 60Q. Graph the firm’s revenue and cost curves. At what quantity does the firm break
A television station is considering the sale of promotional videos. It can have the videos produced by one of two suppliers. Supplier A will charge the station a set-up fee of $1,200 plus $2 for each
The college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text— published by Old School Inc (OS)—has a demand curve: P
Firm Z is developing a new product. An early introduction (beating rivals to market) would greatly enhance the company’s revenues. However, the intensive development effort needed to expedite the
As the exclusive carrier on a local air route, a regional airline must determine the number of flights it will provide per week and the fare it will charge. Taking into account operating and fuel
A producer of photocopiers derives profits from two sources: the immediate profit it makes on each copier sold and the additional profit it gains from servicing its copiers and selling toner and
Suppose the microchip producer discussed in this chapter faces demand and cost equations given by Q = 8.5 - .05P and C = 100 + 38Q. Choosing to treat price as its main decision variable, it writes
Modifying a product to increase its “value added” benefits customers and can also enhance supplier profits. For example, suppose an improved version of a product increases customer value added by
Suppose a firm’s inverse demand and cost equations are of the general forms P = a - bQ and C = F + cQ, where the parameters a and b denote the intercept and slope of the inverse demand function
Under the terms of the current contractual agreement, Burger Queen (BQ) is entitled to 20 percent of the revenue earned by each of its franchises. BQ’s best-selling item is the Slopper (it slops
Suppose a firm assesses its profit function asπ = -10 - 48Q + 15Q2 - Q3.a. Compute the firm’s profit for the following levels of output: Q = 2, 8, and 14.b. Derive an expression for marginal
During a five-year period, the ticket sales of a city’s professional basketball team have increased 30 percent at the same time that average ticket prices have risen by 50 percent. Do these changes
A retail store faces a demand equation for Roller Blades given by: Q = 180 - 1.5P,where Q is the number of pairs sold per month and P is the price per pair in dollars.a. The store currently charges P
Management of McPablo’s Food Shops has completed a study of weekly demand for its “old-fashioned” tacos in 53 regional markets. The study revealed thatQ = 400 - 1,200P + .8A + 55Pop +
Four firms have roughly equal shares of the market for farm-raised catfish. The price elasticity of demand for the market as a whole is estimated at -1.5.a. If all firms raised their prices by 5
As economic consultant to the dominant firm in a particular market, you have discovered that, at the current price and output, demand for your client’s product is price inelastic. What advice
A minor league baseball team is trying to predict ticket sales for the upcoming season and is considering changing ticket prices. a. The elasticity of ticket sales with respect to the size of the
a. General Motors (GM) produces light trucks in several Michigan factories, where its annual fixed costs are $180 million, and its marginal cost per truck is approximately $20,000. Regional demand
During the 1990s, Apple Computer saw its global share of the personal computer market fall from above 10 percent to less than 5 percent. Despite a keenly loyal customer base, Apple found it more and
a. Triplecast was NBC’s and Cablevision’s joint venture to provide pay-per-view cable coverage of the 1992 Summer Olympics in Barcelona. Based on extensive surveys of potential demand, the
A New Hampshire resort offers year-round activities: in winter, skiing and other cold-weather activities and, in summer, golf, tennis, and hiking. The resort’s operating costs are essentially the
In 1996, the drug Prilosec became the best-selling anti-ulcer drug in the world. (The drug was the most effective available, and its sales outdistanced those of its nearest competitor.) Although
Explain how a firm can increase its profit by price discriminating. How does it determine optimal prices? How does the existence of substitute products affect the firm’s pricing policy?
Often, firms charge a range of prices for essentially the same good or service because of cost differences. For instance, filling a customer’s onetime small order for a product may be much more
In what respects are the following common practices subtle (or not-so-subtle) forms of price discrimination?a. Frequent-flier and frequent-stay programsb. Manufacturers’ discount coupon programsc.
A private-garage owner has identified two distinct market segments:Short-term parkers and all-day parkers with respective demand curves of PS = 3 - (QS/200) and PC = 2 - (QC/200). Here P is the
A golf-course operator must decide what greens fees (prices) to set on rounds of golf. Daily demand during the week is: PD = 36 - QD/10 where QD is the number of 18-hole rounds and PD is the price
Discuss and compare the advantages and disadvantages of survey methods and test marketing.
Coca-Cola Company introduced New Coke largely because of Pepsiâ€™s success in taste tests head to head with Coke Classic.a. Consider the following hypothetical information:(1) In blind taste
A financial analyst seeks to determine the relationship between the return on PepsiCo’s common stock and the return on the stock market as a whole. She has collected data on the monthly returns of
To what extent do you agree with the following statements?a. The best test of the performance of two different regression equations is their respective values of R2.b. Time-series regressions should
A study of cigarette demand resulted in the following logarithmic regression equation:Here, Q denotes annual cigarette consumption, P is the average price of cigarettes, Y is per capita income, A is
The following regression was estimated for 23 quarters between 2004 and 2011 to test the hypothesis that tire sales (T) depend on new automobile sales (A) and total miles driven (M). Standard errors
A water expert was asked whether increased water consumption in a California community was lowering its water table. To answer this question, the expert estimated a linear regression equation of the
A food-products company has recently introduced a new line of fruit pies in six U.S. cities: Atlanta, Baltimore, Chicago, Denver, St. Louis, and Fort Lauderdale. Based on the pie€™s
In preparation for their 2008 merger, Delta Airlines and Northwest Airlines undertook a comparative study of their on-time performance.The following table shows each airline€™s on-time
The following table lists your company€™s sales during the last four years.a. A fellow manager points to the 15-unit increase between year 3 and year 4. Extrapolating this trend, he
Consider again the data in Problem 10.a. Using a computer program, estimate the linear increasing trend equation, S = a + bt, using OLS regression.b. According to your regression statistics, how well
As the name suggests, a lagging indicator is an economic variable whose movements occur after movements in the overall economy.a. A number of employment measures are lagging indicators. Consider the
A chemical company uses large amounts of shredded steel scrap metal in its production processes. Most of this scrap comes from 12-ounce beverage cans (soft-drink and beer cans). On behalf of the
Studies of automobile demand suggest that unit sales of compact cars depend principally on their average price and consumers€™ real personal income. Consider the historical record of sales
Does optimal use of an input (such as labor) mean maximizing average output (per unit of input)? Explain.
One-tenth of the participants produce over one-third of the output. Increasing the number of participants merely reduces the average output. If this statement were true, would it be consistent with
Consider the production function Q = 10L -.5L2 + 24K - K2 for L and K in the range 0 to 10 units. Does this production function exhibit diminishing returns to each input? Does it exhibit decreasing
a. Suppose the inputs in Problem 3 can be purchased at the same price per unit. Will production be relatively labor intensive or capital intensive? Explain.b. Suppose input prices are PL = 40 and PK
Explain the difference between diminishing returns and decreasing returns to scale.
Making dresses is a labor-intensive process. Indeed, the production function of a dressmaking firm is well described by the equation Q = L - L2/800, where Q denotes the number of dresses per week and
A 200-pound steer can be sustained on a diet calling for various proportions of grass and grain. These combinations are shown in the table. Pounds of Grass Pounds of Grain50 ..........8056
A trendy French restaurant is one of the first businesses to open in a small corner of a commercial building still under construction. The restaurant has received rave reviews and has lines of diners
Steel can be produced using three different methods:(1) A basic process using coke that produces steel ingots,(2) Continuous casting, or(3) An electric furnace using steel scrap.The following table
In recent years, Chrysler Corporation initiated three-shift or nearly continuous (21-hours-per-day) production at a number of its plants.Explain why Chrysler’s decision might have been prompted by
A firm is producing a given amount of output at least cost using a mix of labor and capital (which exhibit some degree of substitutability). Using an isoquant graph, show that if one input price
Consider the production function Q = 100L.5K.4. Suppose L = 1 and K = 1 so that Q = 100.a. If L is increased by 1 percent, that is, to L = 1.01, with capital unchanged, what is the resulting
In her last-minute preparations for final exams, a student has set aside five hours to split between studying for two subjects, finance and economics. Her goal is to maximize the average grade
Let Q = Lα Kβ. Suppose the firm seeks to produce a given output while minimizing its total input cost: TC = PLL + PKK. Show that the optimal quantities of labor and capital satisfy L/K =
In a particular region, there are two lakes rich in fish. The quantity of fish caught in each lake depends on the number of persons who fish in each, according to Q1 = 10N1 -.1N12 and Q2 = 16N2
The development of a new product was much lengthier and more expensive than the company’s management anticipated. Consequently, the firm’s top accountants and financial managers argue that the
Comment on the following statement: “Average cost includes both fixed and variable costs, whereas marginal cost only includes variable costs. Therefore, marginal cost is never greater than average
A company produces two main products: electronic control devices and specialty microchips. The average total cost of producing a microchip is $300; the firm then sells the chips to other high-tech
The last decade has witnessed an unprecedented number of megamergers in the banking industry: Bank of America’s acquisitions of Fleet Bank, MBNA, and U.S. Trust; Bank of New York’s acquisition of
An entrepreneur plans to convert a building she owns into a video-game arcade. Her main decision is how many games to purchase for the arcade. From survey information, she projects total revenue per
Suppose the manufacturer of running shoes has collected the following quantitative information. Demand for the boys’ shoe is estimated to be Q = 9,600 - 200P, or, equivalently, P = 48 - Q/200. The
You are a theater owner fortunate enough to book a summer box office hit into your single theater. You are now planning the length of its run. Your share of the film’s projected box office is R =
Firm A makes and sells motorcycles. The total cost of each cycle is the sum of the costs of frames, assembly, and engine. The firm produces its own engines according to the cost equation:CE = 250,000
A firm’s long-run total cost function isC = 360 + 40Q + 10Q2.a. What is the shape of the long-run average cost curve?b. Find the output that minimizes average cost.c. The firm faces the fixed
A firm uses a single plant with costs C = 160 + 16Q + .1Q2 and faces the price equation P = 96 - .4Q.a. Find the firm’s profit-maximizing price and quantity. What is its profit?b. The firm’s
As noted in Problem 5 of Chapter 3, General Motors (GM) produces light trucks in its Michigan factories. Currently, its Michigan production is 50,000 trucks per month, and its marginal cost is
a. Firm K is a leading maker of water-proof outerwear. During the winter months, demand for its main line of water-proof coats is given by:P = 800 - .15Q,Where P denotes price in dollars and Q is
A manufacturing firm produces output using a single plant. The relevant cost function is C = 500 + 5Q2. The firm’s demand curve is P = 600 - 5Q.a. Find the level of output at which average cost is
A firm produces digital watches on a single production line serviced during one daily shift. The total output of watches depends directly on the number of labor-hours employed on the line. Maximum
The renowned Spaniard, Pablo Picasso, was a prolific artist. He created hundreds of paintings and sculptures as well as drawings and sketches numbering in the thousands. (He is said to have settled
Consider the regional supply curve of farmers who produce a particular crop.a. What does the supply curve look like at the time the crop is harvested? (Show a plausible graph.)b. Depict the crop’s
Potato farming (like farming of most agricultural products) is highly competitive. Price is determined by demand and supply. Based on U.S. Department of Agriculture statistics, U.S. demand for
a. In 2009, the Japanese beer industry was affected by two economic events: (1) Japan’s government imposed on producers a tax on all beer sold, and (2) Consumer income fell due to the continuing
The Green Company produces chemicals in a perfectly competitive market. The current market price is $40; the firm’s total cost is C = 100 + 4Q + Q2.a. Determine the firm’s profit-maximizing
In a competitive market, the industry demand and supply curves are P = 200 - .2Qd and P = 100 + .3Qs, respectively.a. Find the market’s equilibrium price and output.b. Suppose the government
In a perfectly competitive market, industry demand is given by Q =1,000 - 20P. The typical firm’s average cost is AC = 300/Q + Q/3.a. Confirm that Qmin = 30. (Set AC equal to MC.) What is ACmin?b.
Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C = 50 + 4Q + 2Q2. The associated marginal
Demand for microprocessors is given by P = 35 - 5Q, where Q is the quantity of microchips (in millions). The typical firm’s total cost of producing a chip is Ci = 5qi, where qi is the output of
In 2007, dairy farmers faced an (equilibrium) wholesale price for their milk of about 1 cent per ounce. Because of changes in consumer preferences, the demand for milk has been declining steadily
In a competitive market, the industry demand and supply curves are P = 70 - QD and P = 40 + 2QS, respectively.a. Find the market’s equilibrium price and output.b. Suppose that the government
The market for rice in an East Asian country has demand and supply given by QD = 28 - 4P and QS = -12 + 6P, where quantities denote millions of bushels per day.a. If the domestic market is perfectly
In 1989, the Detroit Free Press and Detroit Daily News (the only daily newspapers in the city) obtained permission to merge under a special exemption from the antitrust laws. The merged firm
A pharmaceutical company has a monopoly on a new medicine. Under pressure by regulators and consumers, the company is considering lowering the price of the medicine by 10 percent. The company has
The ready-to-eat breakfast cereal industry is dominated by General Mills, Kellogg, Kraft Foods, and Quaker Oats that together account for 90 percent of sales. Each firm produces a bewildering
Formerly, the market for air travel within Europe was highly regulated. Entry of new airlines was severely restricted, and air fares were set by regulation. Partly as a result, European air fares
Consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is in millions of units. (The total cost function is C = 16 + Q.)
Firm S is the only producer of a particular type of foam fire retardant and insulation used in the construction of commercial buildings. The inverse demand equation for the product is P = 1,500 -
Suppose that, over the short run (say, the next five years), demand for OPEC oil is given by Q = 57.5 - .5P or, equivalently, P = 115 - 2Q.(Here Q is measured in millions of barrels per day.)
Consider once again the microchip market described in Problem 9 of Chapter 7. Demand for microprocessors is given by P = 35 - 5Q, where Q is the quantity of microchips (in millions). The typical
Consider again the New York taxi market, where demand is given by Q = 7 - .5P, each taxi’s cost is C = 910 + 1.5q, and ACmin = $8 at 140 trips per week.a. Suppose that, instead of limiting
Firms A and B make up a cartel that monopolizes the market for a scarce natural resource. The firms’ marginal costs are MCA = 6 + 2QA and MCB = 18 + QB, respectively. The firms seek to maximize the
A single buyer who wields monopoly power in its purchase of an item is called a monopsonist. Suppose that a large firm is the sole buyer of parts from 10 small suppliers. The cost of a typical
a. When a best-selling book was first released in paperback, the Hercules Bookstore chain seized a profit opportunity by setting a selling price of $9 per book (well above Hercules’ $5 average cost
Firm 1 is a member of a monopolistically competitive market. Its total cost function is C = 900 + 60Q1 + 9Q12. The demand curve for the firm’s differentiated product is given by P = 660 - 16Q1.a.
Consider a regulated natural monopoly. Over a 10-year period, the net present value of all the investment projects it has undertaken has been nearly zero. Does this mean the natural monopoly is
Venture capitalists provide funds to finance new companies (start-ups), usually in return for a share of the firm’s initial profits (if any). Of course, venture capitalists look to back experienced
In granting (or prohibiting) proposed acquisitions or mergers in an industry, government regulators consider a number of factors, including the acquisition’s effect on concentration, ease of entry

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