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business
micro economics

Microeconomics 8th Edition Glenn Hubbard, Anthony Patrick O Brien - Solutions

Older oil wells that produce fewer than 10 barrels of oil a day are called "stripper" wells. Suppose that you and a partner own a stripper well that can produce 8 barrels of oil per day, and you estimate that the marginal cost of producing another barrel of oil is $80. In making your calculation,
Suppose a firm has no fixed costs, so all its costs are variable, even in the short run. a. If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape? b. If the
Santiago Delgado owns a copier store. He leases two copy machines for which he pays $20 each per day. He cannot increase the number of machines he leases without giving the office machine company six weeks' notice. He can hire as many workers as he wants, at a cost of $40 per day per worker. These
Is Jill Johnson correct when she states the following: "I am currently producing 10,000 pizzas per month at a total cost of $50,000.00. If I produce 10,001 pizzas, my total cost will rise to $50,011.00. Therefore, my marginal cost of producing pizzas must be increasing." Draw a graph to illustrate
Is Jill Johnson correct when she states the following: "I am currently producing 20,000 pizzas per month at a total cost of $75,000. If I produce 20,001 pizzas, my total cost will rise to $75,002. Therefore, my marginal cost of producing pizzas must be increasing." Illustrate your answer with a
As the level of output increases, what happens to the difference between the value of average total cost and the value of average variable cost?
Suppose the total cost of producing 10,000 tennis balls is $30,000 and the fixed cost is $10,000. a. What is the variable cost? b. When output is 10,000, what are the average variable cost and the average fixed cost? c. Assume that the cost curves have the usual shape. Is the dollar difference
One description of the costs of operating a railroad makes the following observation: "The fixed ... expenses which attach to the operation of railroads ... are in the nature of a tax upon the business of the road; the smaller the [amount of] business, the larger the tax." Briefly explain why fixed
In the ancient world, a book could be produced either on a scroll or as a codex, which was made of folded sheets glued together, something like a modern book. One scholar has estimated the following variable costs (in Greek drachmas) of the two methods:Another scholar points out that a significant
We saw in the chapter opener that some colleges and private companies have launched online courses that anyone with an Internet connection can take. The most successful of these massive open online courses (MOOCs) have attracted tens of thousands of students. Suppose that your college offers a MOOC
Use the information in the graph to find the values for the following at an output level of 1,000.a. Marginal cost b. Total cost c. Variable cost d. Fixed cost
List the errors in the following graph. Carefully explain why the curves drawn this way are incorrect. In other words, why can't these curves be as they are shown in the graph?
Explain how the events listed in (a) through (d) would affect the following costs at Southwest Airlines: 1. Marginal cost 2. Average variable cost 3. Average fixed cost 4. Average total cost a. Southwest signs a new contract with the Transport Workers Union that requires the airline to increase
Suppose that Henry Ford had continued to experience economies of scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.
In recent years, the United States has experienced large increases in oil production due in large part to a new technology, hydraulic fracturing ("fracking"). Fracking involves injecting a mixture of water, sand, and chemicals into rock formations at high pressure to release oil and natural gas. An
In his autobiography, T. Boone Pickens, a geologist, entrepreneur, and oil company executive, wrote: It's unusual to find a large corporation that's efficient.... When you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than
In 2012, then Barnes & Noble CEO William Lynch predicted that although the firm was suffering losses in selling its Nook tablet, "the Nook business will scale in fiscal 2013, reducing losses from last year." a. What did Lynch mean that "the Nook business will scale"? b. Why would the Nook business
What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?
What are economies of scale? What are four reasons that firms may experience economies of scale?
Why can short-run average cost never be less than long-run average cost for a given level of output?
An article in the Wall Street Journal described the Chinese automobile industry as "a hodgepodge of companies," most of which produce fewer than 100,000 cars per year. Ford Chief Executive Alan Mulally commented on the situation by saying, "If you don't have scale, you just won't be able to be
Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the graph below, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1, and the relationship between costs and output for the larger restaurant
An article in the Wall Street Journal discussed the purchase of the small Zipcar rental car firm by the much larger Avis. The article predicted that the purchase would be successful because of the "efficiencies gained by putting the two companies together." The article also observed: "On its own,
At one point, Time Warner and the Walt Disney Company discussed merging their news operations. Time Warner owns Cable News Network (CNN), and Disney owns ABC News. After analyzing the situation, the companies decided that a combined news operation would have higher average costs than either CNN or
What is an isoquant? What is the slope of an isoquant?
Use the following graph to answer the following questions about Jill Johnson's isoquant curve.a. Which combination of inputs yields more output: combination A (3 ovens and 2 workers) or combination B (2 ovens and 3 workers)? b. What will determine whether Jill selects A, B, or some other point
Draw an isoquant-isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for $2,000 per week and hire workers for $1,000 per week. She can minimize the cost of producing 20,000 pizzas per week by using 5 ovens and 10 workers, at a total cost of $20,000. She can
In Brazil, a grove of oranges is picked using 20 workers, ladders, and baskets. In Florida, a grove of oranges is picked using 1 worker and a machine that shakes the oranges off the trees and scoops up the fallen oranges. Using an isoquant-isocost line graph, illustrate why these two different
Jill Johnson is minimizing the costs of producing pizzas. The rental price of one of her ovens is $2,000 per week, and the wage rate is $600 per week. The marginal product of capital in her business is 12,000 pizzas. What must be the marginal product of her workers?
If Cade Massey and Richard Thaler are correct, should the team that has the f irst pick in the draft keep the pick or trade it to another team for a lower pick? Briefly explain. Does the 2011 agreement that limits the salaries of drafted players affect your answer?
Swift Ellis, Inc., manufactures running shoes. The following graph illustrates the combination of capital and labor (point A) that minimizes the firm's cost of producing 5,000 pairs of shoes. Suppose both the wage rate and the rental price of machinery doubles.a. Draw a new isocost line to reflect
What is an isocost line? What is the slope of an isocost line?
How do firms choose the optimal combination of inputs?
Draw an isoquant-isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for $400 per week and hire workers for $200 per week. She is currently using 5 ovens and 10 workers to produce 20,000 pizzas per week and has total costs of $4,000. Make sure to label your
During the eighteenth century, the American colonies had much more land per farmer than did Europe. As a result, the price of labor in the colonies was much higher relative to the price of land than it was in Europe. Assume that Europe and the colonies had access to the same technology for
Consider the information in the following table for Jill Johnson's restaurant:Marginal product of capital..............................4,000Marginal product of labor..................................100Wage rate.....................................................$10Rental price of pizza
Draw an isoquant-isocost line graph to illustrate the following situation: Jill Johnson can rent pizza ovens for $200 per week and hire workers for $100 per week. Currently, she is using 5 ovens and 10 workers to produce 20,000 pizzas per week and has total costs of $2,000. Jill's marginal rate of
Draw an isoquant-isocost line graph to illustrate the following situation and the change that occurs: Jill Johnson can rent pizza ovens for $2,000 per week and hire workers for $1,000 per week. Currently, she is using 5 ovens and 10 workers to produce 20,000 pizzas per week and has total costs of
What are the three conditions for a market to be perfectly competitive?
What is a price taker? When are firms likely to be price takers?
Draw a graph showing the market demand and supply curves for corn and the demand curve for the corn produced by one corn farmer. Be sure to indicate the market price and the price the corn farmer receives.
Explain whether each of the following is a perfectly competitive market. For each market that is not perfectly competitive, explain why it is not. a. Corn farming b. Coffee shops c. Automobile manufacturing d. New home construction
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition ... [is] that it is unrealistic." Since few firms sell identical products in markets where there are no barriers to entry, why do economists believe that the model
Explain whether you agree with the following remark: According to the model of perfectly competitive markets, the demand curve for wheat should be a horizontal line. But this can't be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the
In 2015, some beer drinkers filed a lawsuit against Anheuser-Busch, the brewer of Beck's beer. The beer drinkers claimed that Beck's was marketed as an authentic German beer but was actually brewed in St. Louis. Other breweries have established facilities in Canada so they can truthfully claim that
Explain why it is true that for a firm in a perfectly competitive market, P = MR = AR.
Explain why at the level of output where the difference between TR and TC is at its maximum positive value, MR must equal MC.
A student argues: "To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Briefly explain whether you agree
Why don't firms maximize revenue rather than profit? Briefly explain whether a firm that maximized revenue would be likely to produce a smaller or larger quantity than if it were maximizing profit.
Refer to Table 12.3 below. Suppose the price of wheat falls to $5.50 per bushel. How many bushels of wheat will Farmer Parker produce, and how much profit will he make? Briefly explain.
Refer to Table 12.3 below. Suppose that the marginal cost of wheat is $0.50 higher for every bushel of wheat produced. For example, the marginal cost of producing the eighth bushel of wheat is now $9.50. Assume that the price of wheat remains $7 per bushel. Will this increase in marginal cost
In Table 12.3 below, what are Farmer Parker's fixed costs? Suppose that his fixed costs increase by $10. Will this increase change the profit-maximizing level of production for Farmer Parker? Briefly explain. How much profit will Farmer Parker make now?
Draw a graph showing a firm that is making a profit in a perfectly competitive market. Be sure your graph includes the firm's demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve and make sure to indicate the area representing the
Draw a graph showing a firm that is operating at a loss in a perfectly competitive market. Be sure your graph includes the firm's demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve and make sure to indicate the area representing the
Frances sells pencils in the perfectly competitive pencil market. Her output per day and her costs are as follows:Output per Day Total
Review Solved Problem 12.3 and then answer the following: Suppose the equilibrium price of basketballs falls to $2.50. Now how many basketballs will Andy produce? What price will he charge? How much profit (or loss) will he make? Output per Day Total
A student examines the following graph and argues: "I believe that a firm will want to produce at Q1, not at Q2. At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its profit." Briefly explain whether you agree with the student's
An article in the Wall Street Journal discussed the financial results for BlackBerry, the smartphone and software company: "Revenue tumbled 32% from a year earlier to $658 million in the quarter ended May 30 from $966 million a year earlier... . BlackBerry posted profit of $68 million ... up from
Suppose that the price of oil doubles, raising the cost of home-heating oil and electricity. What effect would this development have on U.S. firms manufacturing solar panels? Illustrate your answer with two graphs: one showing the situation in the market for solar panels and another graph showing
The following graph represents the situation of Marguerite's Caps, a firm selling caps in the perfectly competitive cap industry:a. How much output should Marguerite produce to maximize her profits? b. How much profit will she earn? c. Suppose Marguerite decides to shut down. What would her loss be?
What is the difference between a firm's shutdown point in the short run and in the long run? Why are firms willing to accept losses in the short run but not in the long run?
According to an article in the Wall Street Journal, in 2007 the insurance company AXA Equitable signed a long-term lease on 2 million square feet of office space in a skyscraper on Sixth Avenue in Manhattan in New York City. In 2013, AXA decided that it only needed 1.7 million square feet of office
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
Consider a firm in each of the following three situations. For each situation, carefully explain whether the firm will produce in the short run or shut down in the short run.
Ed Scahill produces table lamps in the perfectly competitive desk lamp market.a. Fill in the missing values in the following table.b. Suppose the equilibrium price in the desk lamp market is $50. How many table lamps should Ed produce, and how much profit will he make? c. If next week the
Matt Rafferty produces hiking boots in the perfectly competitive hiking boots market.a. Fill in the missing values in the following table.b. Suppose the equilibrium price in the hiking boots market is $100. How many pairs of boots should Matt produce, what price should he charge, and how much
The following graph represents the situation of a perfectly competitive firm. Indicate on the graph the areas that represent the following:a. Total costb. Total revenuec. Variable costd. Profit or lossBriefly explain whether the firm will continue to produce in the short run.
Suppose you decide to open a copy store. You rent store space (signing a one-year lease to do so), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive
When are firms likely to enter an industry? When are they likely to exit an industry?
According to a news story, the Boston-based game company Proletariat launched its first mobile game, World Zombination, after having "spent nearly 18 months and $2 million to develop it." In the first three months following the game's release in February 2015, it was downloaded more than 3 million
Suppose that currently the market for gluten-free spaghetti is in long-run equilibrium at a price of $3.50 per box and a quantity of 4 million boxes sold per year. If the demand for gluten-free spaghetti permanently increases, which of the following combinations of equilibrium price and equilibrium
Suppose that each of the following is true: (1) The laptop computer industry is perfectly competitive and that the firms that assemble laptops do not also make the displays, or screens; (2) the laptop display industry is also perfectly competitive; and (3) because the demand for laptop displays is
According to an article in the Wall Street Journal, as a result of U.S. consumers increasing their demand for beef, in 2015 world beef prices increased. For example, according to the article, "Australian beef prices are up 40% this year, while New Zealand prices are 17% higher." The article
Suppose that at the beginning of a year, the price of corn is $3.80 per bushel and 14 billion bushels are harvested. There are approximately 400,000 corn farmers, so the average output per farmer is about 350,000 bushels. The following graphs assume that the market for corn is initially in long-run
Would a firm earning zero economic profit continue to produce, even in the long run?
Discuss the shape of the long-run supply curve in a perfectly competitive market. Suppose that a perfectly competitive market is initially at long-run equilibrium and then there is a permanent decrease in the demand for the product. Draw a graph showing how the market adjusts in the long run.
Suppose an assistant professor of economics is earning a salary of $75,000 per year. One day she quits her job, sells $100,000 worth of bonds that had been earning 3 percent per year, and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit of $80,000 on her
A study analyzed a pharmaceutical firm's costs to develop a prescription drug and receive government approval. An article in the Wall Street Journal describing the study noted that included in the firm's costs was "the return that could be gained if the money [used to develop the drug] were
The following questions are about long-run equilibrium in the market for cage-free eggs. a. As described in the chapter opener, was the market for cage-free eggs in 2015 in long run equilibrium? Briefly explain. b. What would we expect to happen to the price of cage-free eggs and the quantity of
According to an article in the Wall Street Journal, rapid growth in consumer demand for natural and organic food helped make the Whole Foods supermarket chain very profitable. But according to that same story, "its accomplishment drew broad new competition, from mainstream retailers like Kroger and
A student in a principles of economics course makes the following remark: The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would
Why are consumers so powerful in a market system?
Although New York State is second only to Washington State in production of apples, its production has been declining during the past 20 years. The decline has been particularly steep in counties close to New York City. In 1985, there were more than 11,000 acres of apple orchards in Ulster County,
What is meant by allocative efficiency? What is meant by productive efficiency? Briefly discuss the difference between these two concepts.
How does perfect competition lead to allocative and productive efficiency?
The chapter states, "Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them." A student objects to this statement, arguing, "I doubt that firms will really do this. After all, firms are in business to make a profit;
The following graph represents the situation of Karl's Kumquats, a kumquat grower.a. How much profit is Karl earning? b. Does the current situation of Karl's firm illustrate productive efficiency or allocative efficiency? If so, briefly explain how.
Suppose you read the following item in a newspaper article, under the headline "Price Gouging Alleged in Pencil Market": Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the
Sony suffered losses for a decade selling televisions before finally earning a profit in 2014. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn't Sony have been able to raise prices to earn a profit during that decade of losses? Briefly explain.
An article in the Wall Street Journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article notes: "Blockbusters ... often have thousands of visual effects shots. Even dramas and comedies today can include
What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
Sally runs a vegetable stand. The following table shows two points on the demand curve for the heirloom tomatoes she sells: Price Quantity Demanded per Week $5.00..................................................100,000 $3.25..................................................200,000 a. What would
Why does a local McDonald's face a downward-sloping demand curve for its Quarter Pounders? If McDonald's raises the price of Quarter Pounders above the prices other fast-food restaurants charge for hamburgers, won't it lose all its customers?
With a downward-sloping demand curve, why is average revenue equal to price? Why is marginal revenue less than price?
There are about 400 wineries in California's Napa Valley. Describe the reaction of consumers if the owner of one of the wineries-Jerry's Wine Emporium-raises the price of his wine by $5.00 per bottle, assuming the following: a. The industry is perfectly competitive. b. The industry is
Purell announced that the new chemical formula for its hand sanitizer was so effective that "just 1 squirt of Purell Advanced Hand Sanitizer kills as many germs as two squirts of any other national brand." If Purell succeeds in convincing consumers that its claim is correct, would its demand curve
Complete the following table, which shows the demand for snow skiing lessons per day:
There are many wheat farms in the United States, and there are also more than 1,800 Chipotle restaurants. Why, then, does a Chipotle restaurant face a downward-sloping demand curve, while a wheat farmer faces a horizontal demand curve?
Is it possible for marginal revenue to be negative for a firm selling in a perfectly competitive market? Is it possible for marginal revenue to be negative for a firm selling in a monopolistically competitive market? Briefly explain.
In the graph on the following page, consider the marginal revenue of the eleventh unit sold. When the firm cuts the price from $5.00 to $4.75 to sell the eleventh unit, what area in the graph denotes the output effect, and what is the dollar value of the output effect? What area in the graph

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