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Questions and Answers of Economics

How can time be incorporated into the theory of consumer behavior? Explain the following comment: “Want to make millions of dollars? Devise a product that saves Americans lots of time.”
Explain: a. Before economic growth, there were too few goods; after growth, there is too little time.b. It is irrational for an individual to take the time to be completely rational in economic
In the last decade or so there has been a dramatic expansion of small retail convenience stores (such as Kwik Shops, 7 Elevens, Gas, N Shops), although their prices are generally much higher than
Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having
Using the utility-maximization rule as your point of reference, explain the income and substitution effects of an increase in the price of product B, with no change in the price of product A.
A mathematically “fair bet” is one in which a gambler bets, say, $100 for a 10 percent chance to win $1000 ($100 = .10 x $1000). Assuming diminishing marginal utility of dollars, explain why this
Let MUA = z = 10 – x and MUB = z = 21 – 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Assume that the
People at buffets put more on their plates and eat more the greater the variety of items they have to select from. How does this relate to the idea that diminishing marginal utility must be
What information is embodied in a budget line? What shifts occur in the budget line when money income (a) Increases. (b) Decreases? What shifts occur in the budget line when the price of the product
What information is contained in an indifference curve?Why are such curves (a) downward-sloping (b) Convex to the origin? Why does total utility increase as the consumer moves to indifference curves
Using Figure 4, explain why the point of tangency of the budget line with an indifference curve is the consumer’s equilibrium position. Explain why any point where the budget line intersects an
Assume that the data in the accompanying table give an indifference curve for Mr. Chen. Graph this curve, putting A on the vertical axis and B on the horizontal axis. Assuming that the prices of A
Explain graphically how indifference analysis can be used to derive a demand curve.
First, graphically illustrate a doubling of income without price changes in the indifference curve model. Next, on the same graph, show a situation in which the person whose indifference curves you
Distinguish between explicit and implicit costs, giving examples of each. What are some explicit and implicit costs of attending college? Why does the economist classify normal profit as a cost? Is
Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in
Which of the following are short-run and which are long-run adjustments? a. Wendy’s builds a new restaurant.b. Harley-Davidson Corporation hires 200 more production workers.c. A farmer increases
Complete the table directly below by calculating marginal product and average product.Plot the total, marginal, and average products and explain in detail the relationship between each pair of
Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued
List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1000 miles to Florida for spring break. Which
A firm has fixed costs of $60 and variable costs as indicated in the table at the bottom of this page. Complete the table and check your calculations by referring to question 4 at the end of
Indicate how each of the following would shift the (1) Marginal-cost curve, (2) Average-variable-cost curve, (3) Average-fixed-cost curve, (4) Average-total-cost curve of a manufacturing firm. In
Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the accompanying figure.What plant size will the firm choose in producing?(a) 50,(b) 130,(c) 160,(d)
Use the concepts of economies and diseconomies of scale to explain the shape of a firm’s long-run ATC curve. What is the concept of minimum efficient scale? What bearing can the shape of the
What is a sunk cost? Provide an example of a sunk cost other than one from this book. Why are such costs irrelevant in making decisions about future actions?
Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most
Strictly speaking, pure competition has never existed and probably never will. Then why study it?
Use the following demand schedule to determine total revenue and marginal revenue for each possible level of sales:a. What can you conclude about the structure of the industry in which this firm is
a. At a product price of $56, will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? Explain. What
Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule
Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium.Assuming constant costs employ these diagrams to show how (a) an increase (b) a decrease in
In long-run equilibrium, P = minimum ATC = MC. Of what significance for economic efficiency is the equality of P and minimum ATC? The equality of P and MC? Distinguish between productive efficiency
Suppose that purely competitive firms producing cashews discover that P exceeds MC. Will their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? In
How does a generic drug differ from its brand-name, previously patented equivalent? Explain why the price of a brand-name drug typically declines when an equivalent generic drug becomes available?
No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist. Do you agree? Explain. How might you use Chapter concept of
Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially
How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure
Use the demand schedule to the upper right to calculate total revenue and marginal revenue at each quantity. Plot the demand, total-revenue, and marginal-revenue curves and explain the relationships
Suppose a pure monopolist is faced with the demand schedule shown below and the same cost data as the competitive producer discussed in question 4 at the end of Chapter. Calculate the missing
Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers, the first group described by the demand and revenue data that you developed for questions 5. The
Assume that a pure monopolist and a purely competitive firm have the same unit costs. Contrast the two with respect to (a) Price, (b) Output, (c) Profits, (d) Allocation of resources, (e) Impact on
Critically evaluate and explain each statement: a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will
Assume a monopolistic publisher has agreed to pay an author 15 percent of the total revenue from the sales of a text. Will the author and the publisher want to charge the same price for the text?
U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these
Explain verbally and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between(a) Socially optimal (marginal-cost) pricing(b) Fair-return
It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to
How was De Beers able to control the world price of diamonds over the past several decades even though it produced only 45 percent of the diamonds? What factors ended its monopoly? What is its new
How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms
Compare the elasticity of the monopolistic competitor’s demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs compare graphically the prices and outputs
Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point. Explain.
Competition in quality and service may be just as effective as price competition in giving buyers more for their money. Do you agree? Why? Explain why monopolistically competitive firms frequently
Critically evaluate and explain: a. In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid reason to criticize the performance and
Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition?
Answer the following questions, which relate to measures of concentration: a. What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of
Explain the general meaning of the following profit payoff matrix for oligopolists C and D. All profit figures are in thousands.a. Use the payoff matrix to explain the mutual interdependence that
What assumptions about a rival’s response to price changes underlie the kinked-demand curve for oligopolists? Why is there a gap in the oligopolist’s marginal-revenue curve? How does the
Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate as to why price leadership is
Why is there so much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? Why might it be excessive at times?
Construct a game-theory matrix involving two firms and their decisions on high versus low advertising budgets and the effects of each on profits. Show a circumstance in which both firms select high
What firm dominates the U.S. beer industry? What demand and supply factors have contributed to “fewness” in this industry?
Is the game shown by Figure in the chapter (not this appendix) a zero-sum game or is it a positive-sum game?How can you tell? Are there dominant strategies in this game? If so, what are they? What
Refer to the payoff matrix in question 8 at the end of this chapter. First, assume this is a one-time game. Explain how the $60/$57 outcome might be achieved through a credible threat. Next, assume
Refer to the payoff matrix belowAssuming this is a sequential game with no collusion, what is the outcome if Firm A moves first to build a new type of commercial aircraft? Explain why first-mover
Suppose you are playing a game in which you and one other person each picks a number between 1 and 100, with the person closest to some randomly selected number between 1 and 100 winning the jackpot.
What is meant by technological advance, as broadly defined? How does technological advance enter into the definition of the very long run? Which of the following are examples of technological
Listed below are several possible actions by firms. Write “INV” beside those that reflect invention, “INN” beside those that reflect innovation, and “DIF” beside those that reflect
Contrast the older and the modern views of technological advance as they relate to the economy. What is the role of entrepreneurs and other innovators in technological advance? How does research by
Suppose a firm expects that a $20 million expenditure on R&D will result in a new product that will increase its revenue by a total of $30 million 1 year from now. The firm estimates that the
Answer the following lettered questions on the basis of the information in this table: Expected Rate ofAmount of R&D, Millions Return on R&D, %$10 ................. 16 20
Refer to Table 11W.1 and suppose the price of new product C is $2 instead of $4.TABLE 11W.1Utility Maximization with the Introduction of a New Product (Income = $10)*How does this affect the optimal
Learning how to use software takes time. So once customers have learned to use a particular software package, it is easier to sell them software upgrades than to convince them to switch to new
Answer the following questions on the basis of this information for a single firm: total cost of capital = $1000; price paid for labor = $12 per labor unit; price paid for raw materials = $4 per
Why might a firm making a large economic profit from its existing product employ a fast-second strategy in relationship to new or improved products? What risks does it run in pursuing this strategy?
Do you think the overall level of R&D would increase or decrease over the next 20 to 30 years if the lengths of new patents were extended from 20 years to, say, “forever”? What if the duration
Make a case that neither pure competition nor pure monopoly is conducive to a great deal of R&D spending and innovation. Why might oligopoly be more favorable to R&D spending and innovation than
Evaluate: “Society does not need laws outlawing monopolization and monopoly. Inevitably, monopoly causes its own self-destruction since its high profit is the lure for other firms or entrepreneurs
Identify a specific example of each of the following in this chapter’s Last Word: (a) Entrepreneurship,(b) Invention, (c) Innovation, (d) Diffusion.
What is the significance of resource pricing? Explain how the factors determining resource demand differ from those determining product demands. Explain the meaning and significance of the fact that
At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market.a. How many workers will the firm hire if the
Suppose that marginal product tripled while product price fell by one-half in Table.The Demand for Labor:Pure Competition in the Sale of the ProductWhat would be the new MRP values in Table? What
In 2005 General Motors (GM) announced that it would reduce employment by 30,000 workers. What does this decision reveal about how it viewed its marginal revenue product (MRP) and marginal resource
What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used to produce
Suppose the productivity of capital and labor are as shown in the accompanying table. The output of these resources sells in a purely competitive market for $1 per unit. Both capital and labor are
In each of the following four cases, MRPL and MRPC refer to the marginal revenue products of labor and capital, respectively, and P L and P C refer to their prices. Indicate in each case whether the
Explain the economics of the substitution of ATMs for human tellers. Some banks are beginning to assess transaction fees when customers use human tellers rather than ATMs. What are these banks trying
Explain why the general level of wages is high in the United States and other industrially advanced countries. What is the single most important factor underlying the long-run increase in average
Why is a firm in a purely competitive labor market a wage taker? What would happen if it decided to pay less than the going market wage rate?
Describe wage determination in a labor market in which workers are unorganized and many firms actively compete for the services of labor. Show this situation graphically, using W1 to indicate the
Complete the following labor supply table for a firm hiring labor competitively:a. Show graphically the labor supply and marginal resource (labor) cost curves for this firm. Explain the relationship
Suppose the formerly competing firms in question 3 form an employers’ association that hires labor as a monopsonist would. Describe verbally the effect on wage rates and employment. Adjust the
Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker. Draw the firm’s labor supply and marginal resource cost
Assume a monopsonistic employer is paying a wage rate of Wm and hiring Qm workers, as indicated in Figure.Bilateral monopoly in the labor market.Now suppose an industrial union is formed that forces
Have you ever worked for the minimum wage? If so, for how long? Would you favor increasing the minimum wage by a dollar? By two dollars? By five dollars? Explain your reasoning.
Many of the lowest-paid people in society—for example, short-order cooks—also have relatively poor working conditions. Hence, the notion of compensating wage differentials is disproved. Do you
What is meant by investment in human capital? Use this concept to explain (a) Wage differentials (b) The long-run rise of real wage rates in the United States.
What is the principal-agent problem? Have you ever worked in a setting where this problem has arisen? If so, do you think increased monitoring would have eliminated the problem? Why don’t firms
Do you think exceptionally high pay to CEOs is economically justified? Why or why not?
Which industries and occupations have the highest rates of unionization? Which the lowest? Speculate on the reasons for such large differences.
What percentage of wage and salary workers are union members? Is this percentage higher, or is it lower, than in previous decades? Which of the factors explaining the trend do you think is most
Suppose that you are president of a newly established local union about to bargain with an employer for the first time. List the basic areas you want covered in the work agreement. Why might you

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