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business
essentials of economics

Questions and Answers of Essentials of Economics

10. If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unit subsidy? Explain how this tax or subsidy would achieve the
9. Consider the relationship between monopoly pricing and price elasticity of demand:a. Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand
8. For many years, AT&T was a regulated monopoly, providing both local and long-distance telephone service.a. Explain why long-distance phone service was originally a natural monopoly.b. Over the
7. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible.Moe wants to
6. A company is considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain. The following table shows the company’s anticipated demand over the
5. Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows:Price Number of CDs$24 10,000 22 20,000
4. A small town is served by many competing supermarkets, which have constant marginal cost. p-987
3. Suppose the Clean Springs Water Company has a monopoly on bottled water sales in California.If the price of tap water increases, what is the change in Clean Springs’ profit-maximizing levels of
2. Suppose that a natural monopolist was required by law to charge average total cost. On a diagram, label the price charged and the deadweight loss to society relative to marginal-cost
1. A publisher faces the following demand schedule for the next novel of one of its popular authors:Price Quantity Demanded$100 0 novels 90 100,000 80 200,000 70 300,000 60 400,000 50 500,000 40
8. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost. p-987
7. What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge. p-987
6. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy. p-987
5. In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer. p-987
4. Draw the demand, marginal-revenue, averagetotal-cost, and marginal-cost curves for a monopolist. Show the profit-maximizing level of output, the profit-maximizing price, and the amount of
3. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain. p-987
2. Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly? p-987
1. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain. p-987
14. Analyze the two following situations for firms in competitive markets:a. Suppose that TC = 100 + 15q, where TC is total cost and q is the quantity produced.What is the minimum price necessary for
13. Assume that the gold-mining industry is competitive.a. Illustrate a long-run equilibrium using diagrams for the gold market and for a representative gold mine.b. Suppose that an increase in
12. Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward, and the
11. An industry currently has 100 firms, all of which have fixed costs of $16 and average variable cost as follows:Quantity Average Variable Cost 1 $1 2 2 3 3 4 4 5 5 6 6a. Compute marginal cost and
10. Suppose that the U.S. textile industry is competitive, and there is no international trade in textiles. In long-run equilibrium, the price per unit of cloth is $30.a. Describe the equilibrium
9. The market for fertilizer is perfectly competitive.Firms in the market are producing output, but are currently making economic losses.a. How does the price of fertilizer compare to the average
8. A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of$8, and fixed costs of $200.a. What is profit?b.
7. A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10.What is the average revenue, and how many units were sold? p-987
6. Suppose the book-printing industry is competitive and begins in a long-run equilibrium.a. Draw a diagram describing the typical firm in the industry.b. Hi-Tech Printing Company invents a new
5. Ball Bearings Inc. faces costs of production as follows:Total Total Fixed Variable Quantity Costs Costs 0 $100 $ 0 1 100 50 2 100 70 3 100 90 4 100 140 5 100 200 6 100 360a. Calculate the
4. Consider total cost and total revenue given in the following table:Quantity 0 1 2 3 4 5 6 7 Total cost $8 9 10 11 13 19 27 37 Total revenue $0 8 16 24 32 40 48 56a. Calculate profit for each
3. Bob’s lawn-mowing service is a profitmaximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can
2. You go out to the best restaurant in town and order a lobster dinner for $40. After eating half of the lobster, you realize that you are quite full. Your date wants you to finish your dinner
1. Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises.a. Using diagrams, show what happens to the cost curves of an individual boat-making
8. Are market supply curves typically more elastic in the short run or in the long run? Explain? p-987
7. Does a firm’s price equal the minimum of average total cost in the short run, in the long run, or both? Explain. p-987
6. Does a firm’s price equal marginal cost in the short run, in the long run, or both? Explain. p-987
5. Under what conditions will a firm exit a market? Explain. p-987
4. Under what conditions will a firm shut down temporarily? Explain? p-987
3. Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of output that maximizes profit. At that level of output, show on your graph the total revenue of
2. Explain the difference between a firm’s revenue and its profit. Which do firms maximize? p-987
1. What is meant by a competitive firm? p-987
12. Consider the following table of long-run total costs for three different firms:Quantity 1 2 3 4 5 6 7 Firm A $60 $70 $80 $90 $100 $110 $120 Firm B 11 24 39 56 75 96 119 Firm C 21 34 49 66 85 106
11. A firm has fixed cost of $100 and average variable cost of $5 × Q, where Q is the number of units produced.a. Construct a table showing total cost for Q from 0 to 10.b. Graph the firm’s curves
10. Jane’s Juice Bar has the following cost schedules:Quantity Variable Cost Total Cost 0 vats of juice $ 0 $ 30 1 10 40 2 25 55 3 45 75 4 70 100 5 100 130 6 135 165a. Calculate average variable
9. The city government is considering two tax proposals: p-9875
8. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:Quantity of Houses Painted 1 2 3 4 5 6 7 per Month Variable Costs $10 $20 $40 $80
7. You are thinking about setting up a lemonade stand. The stand itself costs $200. The ingredients for each cup of lemonade cost $0.50.a. What is your fixed cost of doing business?What is your
6. Consider the following cost information for a pizzeria:Quantity Total Cost Variable Cost 0 dozen pizzas $300 $ 0 1 350 50 2 390 90 3 420 120 4 450 150 5 490 190 6 540 240a. What is the
5. You are the Chief Financial Officer for a firm that sells digital music players. Your firm has the following average total cost schedule:Quantity Average Total Cost 600 players $300 601 301 Your
4. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus’s output in a given day? p-9875
3. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught: p-9875
2. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock.In addition, she would have to quit her $50,000 per
1. This chapter discusses many types of costs:opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost.Fill in the type of cost that best completes each
8. Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise. p-9875
7. How and why does a firm’s average-total-cost curve differ in the short run and in the long run? p-9875
6. Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do. p-9875
5. Define total cost, average total cost, and marginal cost. How are they related? p-9875
4. Draw a production function that exhibits diminishing marginal product of labor. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two
3. What is marginal product, and what does it mean if it is diminishing? p-9875
2. Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost? p-9875
1. What is the relationship between a firm’s total revenue, profit, and total cost? p-9875
11. High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features on cars. Do you think cost–benefit
10. The federal government tests the safety of car models and provides the test results free of charge to the public. Do you think this information qualifies as a public good? Why or why not? p-9875
9. Timber companies in the United States cut down many trees on publicly owned land and many trees on privately owned land. Discuss the likely efficiency of logging on each type of land in the
8. The Washington, D.C., Metro (subway) system charges higher fares during rush hours than during the rest of the day. Why might it do this? p-9875
7. The village of Ectenia has ten residents. Villagers can earn income by either weaving baskets or fishing. Because the lake has a limited number of fish, the more villagers fish, the less each
6. There is often litter along highways but rarely in people’s yards. Provide an economic explanation for this fact. p-9875
5. Some economists argue that private firms will not undertake the efficient amount of basic scientific research.a. Explain why this might be so. In your answer, classify basic research in one of the
4. Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch.Here is their willingness to pay for each film: p-9875
3. Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fundraising drives.a. What name do economists have for Charlie?b.
2. Both public goods and common resources involve externalities. p-9875
1. Think about the goods and services provided by your local government.a. Using the classification in Figure 1, explain which category each of the following goods falls into: p-9875
4. Define and give an example of a common resource. Without government intervention, will people use this good too much or too little?Why? p-9875
3. What is cost–benefit analysis of public goods?Why is it important? Why is it hard? p-9875
2. Define and give an example of a public good.Can the private market provide this good on its own? Explain. p-9875
1. Explain what is meant by a good being “excludable.” Explain what is meant by a good being“rival in consumption.” Is a slice of pizza excludable? Is it rival in consumption? p-9875
11. Suppose that the government decides to issue tradable permits for a certain form of pollution.a. Does it matter for economic efficiency whether the government distributes or auctions the
10. Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with
8. Ringo loves playing rock-’n’-roll music at high volume. Luciano loves opera and hates rock-’n’-roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin
7. Many observers believe that the levels of pollution in our society are too high.a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts
6. Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive.a. Illustrate the market for alcohol, labeling the demand curve,
5. A local drama company proposes a new neighborhood theater in San Francisco. Before approving the permit, the city planner completes a study of the theater’s impact on the surrounding
4. It is rumored that the Swiss government subsidizes cattle farming and that the subsidy is larger in areas with more tourist attractions.Can you think of a reason this policy might be efficient?
3. Consider the market for fire extinguishers.a. Why might fire extinguishers exhibit positive externalities?b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the
2. Do you agree with the following statements?Why or why not?a. “The benefits of corrective taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes
1. There are two ways to protect your car from theft. The Club makes it difficult for a car thief to take your car. Lojack makes it easier for the police to catch the car thief who has stolen
6. Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your room- mate smokes in the room? Is this outcome effi- cient? How do you
5. List some of the ways that the problems caused by externalities can be solved without govern- ment intervention. p-9875
4. What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution? p-9875
3. In what way does the patent system help society solve an externality problem? p-9875
2. Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm's production process. p-9875
1. Give an example of a negative externality and an example of a positive externality. p-9875
12. Assume the United States is an importer of televisions and there are no trade restrictions. U.S.consumers buy 1 million televisions per year, of which 400,000 are produced domestically and
11. Kawmin is a small country that produces and consumes jelly beans. The world price of jelly beans is $1 per bag, and Kawmin’s domestic demand and supply for jelly beans are governed by the
10. Consider a country that imports a good from abroad. For each of following statements, say whether it is true or false. Explain your answer.a. “The greater the elasticity of demand, the greater
9. China is a major producer of grains, such as wheat, corn, and rice. In 2008 the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax
8. The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam
6. Consider the arguments for restricting trade.a. Assume you are a lobbyist for timber, an established industry suffering from lowpriced foreign competition. Which two or three of the five arguments
5. Imagine that winemakers in the state of Washington petitioned the state government to tax wines imported from California. They argue that this tax would both raise tax revenue for the state
4. When China’s clothing industry expands, the increase in world supply lowers the world price of clothing.a. Draw an appropriate diagram to analyze how this change in price affects consumer
3. Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show

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