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foundations of economics

Questions and Answers of Foundations Of Economics

2. What was U.S. GDP as measured by the income approach in 2010? By how much did gross domestic product and net domestic product differ in 2010?
1. Use the expenditure approach to calculate U.S. GDP in 2010.
2. Figure 1 shows the flows of expenditure and income on Lotus Island. In 2013, R was $10 billion; W was $30 billion; U was $12 billion; X was $15 billion;and Z was $3 billion. Calculate total
Net exports of goods and services
Government expenditure on goods and services
Investment
Consumption expenditure
3 Describe the uses of real GDP and explain its limitations as a measure of the standard of living
2 Describe how economic statisticians measure GDP and distinguish between nominal GDP and real GDP.
1 Define GDP and explain why the value of production, income, and expenditure are the same for an economy.
d. How does repeating the game change the equilibrium?
c. Assume some strategies and payoffs, and set out a payoff matrix for the game between Boeing and Airbus that shows their economic profit from selling airplanes. Find the equilibrium of the game.
b. What are some of the strategies used by Boeing and Airbus?
a. In what type of market do Airbus and Boeing compete?
4. Boeing vs. Airbus: Can’t we all just get along?Airbus beat out Boeing for a $24 billion contract to supply long-time Boeing customer Lion Air. Because Boeing has order backlogs, Lion Air is
b. What barriers to entry might limit competition in this market and give a firm like Reliance the power to influence the market price?
a. Explain why the news clip implies that the global market for petrol has monopolistic as well as competitive elements.
3. Oil city In the late 1990s, Reliance spent $6 billion to build a world-class oil refinery at Jamnagar, India. Now Reliance is more than doubling the size of the facility, which will make it the
b. Draw a graph to illustrate how the economic profit from Uggs is maximized.
a. Explain why it might be in Uggs’ self-interest to restrict the quantity of Uggs available.
2. The shoe that won’t quit Amy finally decided to take the plunge and buy a pair of Uggs, but when she got around to shopping for her Uggs, the style that she wanted was sold out.Source: Fortune,
b. Explain why these figures most likely underestimate the degree of competition in this market.
a. What do these numbers tell you about the market for travel agencies?
1. Suppose the four-firm concentration ratio for travel agencies in Turkey is 70% and the HHI is 2580.
6. Sparks fly for Energizer Energizer is gaining market share against competitor Duracell and its profit is rising despite the sharp rise in the price of zinc, a key battery ingredient
5. Which of the items in List 1 are sold by firms in monopolistic competition?Explain your selection.
4. In the long run, how will the number of pizza producers change? What are the excess capacity and the deadweight loss created? Explain your answer.
3. In the short run, what is the quantity that La Bella Pizza produces, the price it charges, and its excess capacity?
Cola wars: What’s your soft drink of choice?Soft drink sales have fallen for six straight years as consumers switched to healthier alternatives such as juices, and cut back on spending in the
Use the following information to work Problems 7 and 8.
6. If Ann and Zack play the game repeatedly, what additional strategies become available to them and how might the outcome change?
5. Create a payoff matrix for the game that Ann and Zack play, and find the Nash equilibrium for this game if it is played just once. Do the people of Isolated Island get the efficient quantity of
4. Do you expect firms to enter the running shoes market or exit from that market in the long run? Explain your answer.Use the following information to work Problems 5 and 6.Isolated Island has two
3. In the short run, does Lite and Kool have excess capacity and what is its markup?
2. In the short run, what quantity does Lite and Kool produce, what price does it charge, and does it make an economic profit?
Use Figure 1, which shows the demand curve, marginal revenue curve, and cost curves of Lite and Kool, Inc., a producer of running shoes in monopolistic competition, to work Problems 2 to 4.
1. Which of the items in List 1 are sold by firms in monopolistic competition?Explain your selections.
Oligopoly is usually inefficient because the price (marginal benefit)exceeds marginal cost and cost might not be the lowest attainable.
In a repeated game, a punishment strategy can lead to monopoly output, price, and economic profit.
Advertising and research and development create a prisoners’ dilemma for firms in oligopoly.
The oligopoly dilemma is whether to restrict or expand output.
Advertising expenditures might increase demand, but they might also increase competition and decrease the demand facing a firm.
Advertising expenditures increase total cost, but they might lower average total cost if the quantity sold increases by enough.
Firms in monopolistic competition innovate and develop new products to maintain economic profit.
3. If Bud and Wise play this game repeatedly, each produces 10,000 gallons a day and makes maximum economic profit. They can achieve this outcome by playing a tit-for-tat strategy
1. Table 1 shows the payoff matrix for the game that Bud and Wise must play.
Airbus produces 3 a week and Boeing produces 4 a week.
Both firms produce 4 a week.
Both firms produce 3 a week (monopoly outcome).
If neither of them confesses to the larger crime, each will receive a 2-year sentence for car theft
If he alone confesses and his accomplice does not, he will receive an even shorter sentence of 1 year, while his accomplice will receive a 10-year sentence.
If both of them confess to the larger crime, each will receive a reduced sentence of 3 years for both crimes.
2. If Bianca advertises, her average total cost will decrease. With no advertising, her average total cost is $5 a bag ($50 , 10). With advertising, her average total cost is $4.60 a bag ($115 , 25).
1. With no advertising, Bianca’s total revenue is $50 (10 bags at $5 a bag) and her total cost is $50 ($40 total fixed cost plus $10 total variable cost). Bianca’s economic profit is zero. With
3. If Bianca advertises, will she continue to sell her cookies for $5 a bag or will she raise her price or lower her price?
2. If Bianca advertises, will her average total cost increase or decrease at the quantity produced?
1. If Bianca’s belief about the effect of advertising is correct, can she increase her economic profit by advertising?
4 Use game theory to explain how price and quantity are determined in oligopoly.
3 Explain the dilemma faced by firms in oligopoly.
2 Explain why advertising costs are high in monopolistic competition.
1 Explain how a firm in monopolistic competition determines its price and quantity.
8. If Hawaii Cable is subject to a price cap regulation that enables it to break even, show in your graph the price, quantity, economic profit, consumer surplus, and deadweight loss.
7. If Hawaii Cable is regulated in the social interest, show in your graph the price, quantity, economic profit, consumer surplus, and deadweight loss.
6. If Hawaii Cable is unregulated and it gives householders a 50 percent discount for second and third connections, describe how its economic profit, consumer surplus, and deadweight loss would
5. If Hawaii Cable is unregulated and maximizes profit, show in your graph the price, quantity, economic profit, consumer surplus, and deadweight loss.
4. Blue Rose Inc. is the only flower grower to have cracked the secret of making a blue rose. Figure 1 shows the demand for blue roses and the marginal cost of producing a blue rose. What is Blue
3. Suppose that there are 1,000 springs, all able to produce this water at zero marginal cost and with zero fixed costs. Compare the equilibrium price and quantity produced with the price and
2. Compare Elixir’s profit-maximizing price with the marginal cost of producing the profit-maximizing output. At the profit-maximizing price, is the demand for Elixir water inelastic or elastic?
1. On a graph, show the demand curve for Elixir water and Elixir Spring’s marginal revenue curve. What are Elixir’s profit-maximizing price, output, and economic profit?
A price cap supported by earnings sharing regulation is the most effective practical method of regulating a natural monopoly.
A natural monopoly is efficient if its price equals marginal cost, but a second-best outcome is for price to equal average total cost.
Regulation might achieve an efficient use of resources or help the monopoly to maximize economic profit.
5. Explain why natural monopoly is regulated and the effects of regulation.
With perfect price discrimination, the monopoly is efficient but rent seeking uses some or all of the producer surplus.
Perfect price discrimination captures the entire consumer surplus. Prices are the highest that each consumer is willing to pay for each unit.
4. Explain how price discrimination increases profit.
Monopoly imposes a loss on society that equals its deadweight loss plus the cost of the resources devoted to rent seeking.
A single-price monopoly charges a higher price and produces a smaller quantity than does a perfectly competitive market and creates a deadweight loss.
3. Compare the performance of a single-price monopoly with that of perfect competition.
A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost and by charging the maximum price that consumers are willing to pay for that quantity.
The demand for a monopoly’s output is the market demand, and a singleprice monopoly’s marginal revenue is less than price.
2. Explain how a single-price monopoly determines its output and price.
Where resale is possible, a firm charges a single price.
A monopoly can price discriminate when there is no resale possibility.
In monopoly, a single producer of a good or service that has no close substitutes operates behind natural, ownership, or legal barriers to entry.
1. Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly.
3. Suppose that the government introduces an average cost pricing rule. What is the price of Elixir, the quantity sold, and the monopoly’s economic profit?
2. Suppose that the government introduces a marginal cost pricing rule. What is the price of Elixir, the quantity sold, and the monopoly’s economic profit?
1. How many bottles of Elixir does the monopoly sell and what is the price of a bottle of Elixir? Is the monopoly’s use of resources efficient?
4. On the graph, show the consumer surplus that is redistributed from consumers to the Township Gazette and the deadweight loss that arises because the Township Gazette is a monopoly.
3. Is the number of copies printed the efficient quantity? Explain your answer.
2. What is the efficient number of copies of the Township Gazette and what is the price at which the efficient number of copies could be sold?
1. How many copies of the Township Gazette are printed each day and what is the price of the Township Gazette?
2. Which are legal monopolies and which are natural monopolies? Can any of them price discriminate? If so, why?
1. Which of the six cases are monopolies or might give rise to monopoly?
f. A firm experiences economies of scale even when it produces the quantity that meets the entire market demand.
e. A firm can sell any quantity it chooses at the going price.
d. A museum offers discounts to students and seniors.
c. A barrier to entry exists, but the good has some close substitutes.
b. A single firm, protected by a barrier to entry, produces a personal service that has no close substitutes.

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