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business
foundations of economics

Questions and Answers of Foundations Of Economics

a. Coca-Cola cuts its price below that of Pepsi-Cola to increase profit.
5 Explain why natural monopoly is regulated and the effects of regulation.
4 Explain how price discrimination increases profit.
3 Compare the performance of a single-price monopoly with that of perfect competition.
2 Explain how a single-price monopoly determines its output and price.
1 Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly.
4. Suppose that the restaurant industry is perfectly competitive. Joe’s Diner is always packed in the evening but rarely has a customer at lunchtime. Why doesn’t Joe’s Diner close—temporarily
3. Look at the list to the right. In what type of market is each of the goods and services in the list sold? Explain your answers.
2. How does competition among online music retailers influence economic profit?
1. Why did Amazon enter the market for recorded music and why did independent record stores exit?
4. Suppose that the restaurant industry is perfectly competitive. Joe’s Diner is always packed in the evening but rarely has a customer at lunchtime. Why doesn’t Joe’s Diner close—temporarily
3. Look at the list to the right. In what type of market is each of the goods and services in the list sold? Explain your answers.
2. How does competition among online music retailers influence economic profit?
1. Why did Amazon enter the market for recorded music and why did independent record stores exit?
7. At a market price of $83 a batch, what quantity does Lin’s produce and what is the firm’s economic profit in the short run? Do firms enter or exit the market and what is Lin’s economic
6. Create Lin’s short-run supply schedule and make a graph of Lin’s short-run supply curve. Explain why only part of Lin’s short-run supply curve is the same as its marginal cost curve.
5. At a market price of $35.20 a batch, what quantity does Lin’s produce and what is the firm’s economic profit in the short run?
is the firm’s economic profit in the short run?
4. At a market price of $50 a batch, what quantity does Lin’s produce and what
Table 1 shows the demand schedule for Lin’s Fortune Cookies. Table 2 shows some cost data for Lin’s. Use this information to work Problems 4 to 7. (Hint:Make a sketch of Lin’s short-run cost
3. Table 1 shows the demand schedule for Lin’s Fortune Cookies. Calculate Lin’s marginal revenue for each quantity demanded. Compare Lin’s marginal revenue and price. In what type of market
2. Explain why in a perfectly competitive market, the firm is a price taker. Why can’t the firm choose the price at which it sells its good?
1. Look at the list to the left. In what type of market is each good or service in the list sold? Explain your answers.
Perfect competition is efficient because it makes marginal benefit equal marginal cost, and it is fair because trade is voluntary, consumers pay the lowest possible prices, and entrepreneurs earn
An advance in technology that lowers the cost of producing a good increases market supply, lowers the price, and increases the quantity.
An increase in demand increases the number of firms and increases the equilibrium quantity.
In the long run, economic profit is zero and there is no entry or exit.
Economic profit induces entry, which increases market supply and lowers price and profit. Economic loss induces exit, which decreases market supply, raises price, and lowers the losses.
2. In the long run, what is the price and the tulip grower’s economic profit?
1. What is a tulip grower’s economic profit in the short run and how does the number of tulip growers change in the long run?
3. What is each grower’s economic profit at the shutdown point?
2. What is the price at the grower’s shutdown point?
1. What is the economic profit that each grower is making in the short run?
4. What are two points on a trout farm’s supply curve?
3. If the price falls to $12 a fish, what will the trout farmer do?
2. If the price falls to $20 a fish, will a farm produce 200 fish a week?
4. One point on a farmer’s supply curve is 200 fish at $25 a fish. Another point is the shutdown point (Solution 3) or zero at a price below $12 a fish.
3. If the price falls to $12 a fish, farms cut output until marginal cost equals$12. Because $12 a fish is also minimum average variable cost, farms are at the shutdown point—some farms produce the
2. The farm will produce fewer than 200 fish a week. The marginal cost curve slopes upward, so to lower marginal cost to $20, the farm cuts production.
1. Profit is maximized when marginal cost equals marginal revenue. In perfect competition, marginal revenue equals the market price and is $25 a fish.Because marginal cost exceeded marginal revenue,
3 Explain how output, price, and profit are determined in the long run and explain why perfect competition is efficient.
2 Explain how output, price, and profit are determined in the short run.
1 Explain a perfectly competitive firm’s profit-maximizing choices and derive its supply curve.
e. If Ford’s research and development department developed a new machine that increased the productivity of the Wixom plant, how would the cost of production change?
d. Draw a graph of the cost curves for the Wixom plant and use your graph to explain why a low output rate means a high average total cost.
c. Someone tells you that Ford should be able to maintain its Wixom plant operations indefinitely. Explain why that person is wrong.
b. What costs does Ford avoid by dismantling or selling its Wixom plant?
a. What costs does Ford avoid by idling its Wixom plant but not dismantling or selling it?
6. Explain why the output at which average variable cost is at a minimum is smaller than the output at which average total cost is at a minimum.
5. At what output is Len’s average total cost at a minimum? At what output is Len’s average variable cost at a minimum?
4. Construct the average fixed cost, average variable cost, and average total cost schedules and the marginal cost schedule.
3. Construct Len’s total variable cost and total cost schedules. What does the difference between total cost and total variable cost at each output equal?
2. Len’s body board factory rents equipment for shaping boards and hires students.Table 1 sets out Len’s total product schedule. Construct Len’s marginal product and average product schedules.
1. Joe runs a shoe shine stand at the airport. Joe has no skills, no job experience, and no alternative job. Entrepreneurs in the shoe shine business earn $10,000 a year. Joe pays the rent of $2,000
The long-run average cost curve slopes downward with economies of scale and upward with diseconomies of scale.
The long-run average cost curve traces out the lowest attainable average total cost at each output when both the plant size and labor can be varied.
Long-run cost is the cost of production when all inputs have been adjusted to produce at the lowest attainable cost.
In the long run, the firm can change the size of its plant.
4. Derive and explain a firm’s long-run average cost curve.
As total product increases, average fixed cost decreases; average variable cost, average total cost, and marginal cost decrease at small outputs and increase at large outputs so their curves are
As total product increases, total fixed cost is constant, and total variable cost and total cost increase.
3. Explain the relationship between a firm’s output and costs in the short run.
As the quantity of labor increases, the marginal product of labor increases initially but eventually decreases—the law of decreasing returns.
A total product curve shows the limits to the output that the firm can produce with a given quantity of capital and different quantities of labor.
In the short run, the firm can change the output it produces by changing only the quantity of labor it employs.
2. Explain the relationship between a firm’s output and labor employed in the short run.
Total cost equals opportunity cost—the sum of explicit costs and implicit costs, which include normal profit.
Firms seek to maximize economic profit, which is total revenue minus total cost.
1. Explain and distinguish between the economic and accounting measures of a firm’s cost of production and profit.
3. At what output is Tom’s average total cost a minimum?
2. What is the marginal cost of picking a pineapple when the quantity increases from 360 to 400 pineapples a day?
1. What is Tom’s total cost and average total cost of 300 pineapples a day?
3. When marginal product increases, is average product greater than, less than, or equal to marginal product?
2. Over what range of numbers of students does marginal product increase?
1. Calculate the marginal product of the third student and the average product of three students.
2. Lee’s accountant recorded the depreciation on Lee’s cottage during 2011 as$7,000. What did the accountant say Lee’s profit or loss w
1. Calculate Lee’s explicit costs, implicit costs, and economic profit.
Normal profit is $25,000 a year.
He sold $160,000 worth of body boards.
He borrowed $40,000 at 10 percent a year from the bank.
He used $10,000 from his savings account, which pays 5 percent a year interest.
He paid $15,000 in wages.
He leased machines for $10,000 a year.
He spent $50,000 on materials, phone, utilities, etc.
He stopped renting out his cottage for $3,500 a year and used it as his factory.The market value of the cottage increased from $70,000 to $71,000.
4 Derive and explain a firm’s long-run average cost curve.
3 Explain the relationship between a firm’s output and costs in the short run.
2 Explain the relationship between a firm’s output and labor employed in the short run.
1 Explain and distinguish between the economic and accounting measures of a firm’s cost of production and profit.
of vaccinations and draw a graph to illustrate this outcome.
c. Explain how government intervention could achieve an efficient quantity
b. Draw a graph to illustrate a private market for vaccinations and show the deadweight loss.
a. Describe the private benefits and external benefits of vaccinations and explain why a private market for vaccinations would produce an inefficient outcome.
3. India makes polio vaccination mandatory for seven countries Having eradicated polio from within its borders, India has scaled up measures to prevent the polio virus from re-entering, making it
d. If a new road-use pricing system cuts travel times, will the road system be more efficient? Explain.
c. Will a charge for entering the city be more effective than, less effective than, or equally effective as a parking charge? Explain.
b. Will a parking charge make city streets less congested?
a. Will a charge on cars entering the city make city streets less congested?
Parking levies have been introduced in Perth, Sydney, and Melbourne to raise money from private car parking operators and spend it on encouraging other forms of transport into the cities.Source: The
2. City traffic congestion a $20 billion problem Australia’s big capital cities have been urged to introduce a London-style congestion tax payable on entry into the CBD traffic or make city parking

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