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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

If firms cooperated, they could earn the monopoly profit, but in a one-play game, they overproduce and can drive the price and economic profit to the levels of perfect competition.Advertising and
18.2 Explain the dilemma faced by firms in oligopoly.In the prisoners’ dilemma game, two players acting in their own interests harm their joint interest. Oligopoly is a prisoners’ dilemma game.
18.1 Describe and identify oligopoly and explain how it arises.
Oligopoly is a market type in which a small number of interdependent firms compete behind a barrier to entry.Both natural (economies of scale and market demand) and legal barriers to entry create
7. Each firm in monopolistic competition uses a brand name and advertising to achieve all of the following except to .A. differentiate its good from its competitors’ goods B. signal quality and
6. If one firm advertises and other firms in the market don’t, then.A. the demand for the advertised good becomes more elastic B. the profit-maximizing quantity of the advertised good decreases
5. In the long run, each firm in monopolistic competition .A. makes zero economic profit B. makes as much economic profit as it would if it were a monopoly C. has the same markup and excess capacity
4. A firm in monopolistic competition that is maximizing profit.A. always makes a positive economic profit in the short run B. never needs to shut down because its price always exceeds minimum
3. A firm in monopolistic competition maximizes its profit by .A. differentiating its good and producing the quantity at which price equals marginal revenue B. producing the quantity at which
2. The four largest firms in a market have the following market shares of total revenue: 20 percent, 15 percent, 10 percent, and 5 percent. The in this industry is .A. four-firm concentration ratio;
B. oligopoly because firms produce differentiated goods or services C. perfect competition because the goods or services produced are differentiated D. monopoly because the good produced by each firm
A. monopoly because firms cannot set their own price
1. Monopolistic competition differs from .
9. What happens to Tommy’s markup and its economic profit? Why?Multiple Choice Quiz
8. What is this shop’s average total cost of a jacket sold before it starts to advertise? What is its average total cost of a jacket with advertising?
brand names change the behavior of producers? Why would it not be efficient to make brand names illegal? 
Suppose that Tommy Hilfiger’s marginal cost of a jacket is a constant$100 and at one of the firm’s shops, total fixed cost is $2,000 a day. The profit-maximizing number of jackets sold in this
Use the following information to work Problems 8 and 9 .
7. Some people happily pay more for Coke or Pepsi than they are willing to pay for a nonbranded cola. And some people happily pay more for Tylenol than they are willing to pay for generic
6. Explain why the economic profit that Babolat and Sony make in this market is likely to be temporary. Draw a graph to illustrate the outcome in the long run. Show the excess capacity and markup in
4. If La Bella advertises its pizza online and demand increases, how will the number of pizzas sold change? How will the price of a pizza and La Bella’s excess capacity change? Explain your
3. What is the quantity that La Bella Pizza produces, the price it charges, its markup, and its excess capacity? Is the market in short-run or long-run equilibrium? Explain your answer.
Sony announces Smart Tennis Sensor Tennis racket maker Babolat introduced its smart racket Play Pure Drive in 2013. Smash and Shot Stats soon followed. Now Sony is partnering with Wilson to make
1. Washtenaw Dairy in Ann Arbor, Michigan, sells 63 flavors of Strohs Mooney’s ice cream, and Ben and Jerry’s Web site also lists 63 different flavors of ice cream. These numbers are similar to
Use Figure 1 to work Problems 3 and 4 .Figure 1 shows the demand curve, marginal revenue curve, and cost curves of La Bella Pizza, a firm in monopolistic competition.MyEconLab Homework, Quiz, or Test
identical. Use your graph to illustrate the effects of the firm introducing a new, differentiated smartphone.Figure 1 Instructor Assignable Problems and Applications
10. Read Eye on Smartphones and explain why smartphone producers offer such a large variety of their products. Draw a graph of a firm’s cost and revenue curves if all smartphones are
Explain why more firms have entered the streaming-video market and how the economic profit of firms in the market will likely change. What will economic profit be in the long run? Explain your answer.
9. Netflix profits slide Netflix has hit a bump in the road on its quest to reach 60 million to 90 million subscribers in the United States and, by the end of 2016, become fully global. Netflix faces
With advertising, Mike’s maximizes profit by producing 1,000 bikes a day and charging $50 a bike. How does advertising change Mike’s markup and excess capacity?
. Mike’s, a firm in monopolistic competition, produces bikes. With no advertising, Mike’s profit-maximizing output is 500 bikes a day and the price is $100 a bike. Now all firms begin to
7. In the long run, will new firms enter the shirt market or will firms exit from that market and will the price of a shirt rise or fall?Explain your answer.
6. In the short run, what is the quantity that Stiff Shirt produces, the price it charges, its economic profit, markup, and excess capacity?
Use Figure 2 , which shows the demand curve, marginal revenue curve, and cost curves of Stiff Shirt, Inc., a producer of shirts in monopolistic competition, to work Problems 6 and 7 .
5. Do you expect firms to enter the running shoes market or exit from that market in the long run? Explain your answer.Figure 2
4. In the short run, does Lite and Kool have excess capacity and what is its markup?
3. In the short run, what quantity does Lite and Kool produce, what price does it charge, and does it make an economic profit?
Which of these markets is an example of monopolistic competition? 
2. The four-firm concentration ratio for audio equipment makers is 30 and for electric lamp makers is 89. The HHI for audio equipment makers is 464 and for electric lamp makers is 2,850.
1. Think about the markets for cable television service, wheat, athletic shoes, soda, toothbrushes, and ready-mix concrete.Which of these markets are examples of monopolistic competition? Explain
Study Plan Problems and Applications 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
Click here to open your MyEconLab Study Plan and work these interactive problems online.Figure 1
Explain why firms develop new and improved products and incur large advertising costs.17.3 Key Terms MyEconLab Key Terms Quiz Efficient scale Excess capacity Four-firm concentration ratio
Product development, a brand name, and advertising increase profit but can also benefit buyers.
Advertising expenditures can lower average total cost and can increase competition and lower price.
Firms create a brand name to signal quality and to provide the incentive to maintain quality.
Explain how a firm in monopolistic competition determines its output and price in the short run and the long run.17.2
In monopolistic competition, price exceeds marginal cost but buyers benefit from product variety.17.1 Describe and identify monopolistic competition.
Entry and exit result in zero economic profit and excess capacity in long-run equilibrium.
The firm in monopolistic competition faces a downward-sloping demand curve and produces the quantity at which marginal revenue equals marginal cost and price exceeds marginal cost.
Monopolistic competition is identified by a low degree of concentration measured by either the four-firm concentration ratio or the HHI.
competition is a market structure in which a large number of firms compete; each firm produces a product that is slightly different from the products of its competitors; firms compete on price,
25.10 Suppose voters based their decisions on the ratio of utilities received from two candidates—that is, Equation 25.6 would bei fi[(Ui(1)/Ui(2)].Show that the results from a game involving
25.9 How does the free rider problem arise in the decision of eligible voters to vote? How might voter participation decisions affect median voter results? How might it affect probabilistic voting
25.8 The demand for gummy bears is given by Q 200 100P, and these confections can be produced at a constant marginal cost of $.50.a. How much will Sweettooth, Inc., be willing to pay in bribes to
25.7 Suppose individuals face a probability of u that they will be unemployed next year. If they are unemployed they will receive unemployment benefits ofb, whereas if they are employed they receive
25.6 Suppose there are three individuals in society trying to rank three social states (A, B, and C). For each of the methods of social choice indicated, develop an example to show how (at least) one
25.5 Suppose there are two individuals in an economy. Utilities of those individuals under five possible social states are shown in the following table:State Utility 1 Utility 2 A 50 50 B 70 40 C 45
25.4 Suppose seven individuals constitute a society in which individuals cast votes for their most preferred social arrangement and that the arrangement with the greatest number of votes is always
25.3 Suppose an economy is characterized by a linear production possibility function for its two goods (X and Y ) of the form X 2Y 180.There are two individuals in this economy, each with an
25.2 In the 1930s several authors suggested a “bribe criterion” for judging the desirability of social situations. This welfare criterion states that a movement from social state A to state B is
25.1 There are 200 pounds of food that must be allocated between two sailors marooned on an island. The utility function of the first sailor is given by utility F1, where F1 is the quantity of
24.10 The analysis of public goods in Chapter 24 exclusively used a model with only two individuals.The results are readily generalized to n persons—a generalization pursued in this problem.a. With
24.9 Suppose the production possibility frontier for an economy that produces one public good(P) and one private good (G) is given by G2 100P2 5,000.This economy is populated by 100 identical
24.8 Suppose there are N individuals in an economy with three goods. Two of the goods are pure(nonexclusive) public goods, whereas the third is an ordinary private good.a. What conditions must hold
24.7 Suppose there are only two individuals in society. The demand curve for mosquito control for person A is given by q a 100 P.For person B the demand curve for mosquito control is given by qb
24.6 Suppose a monopoly produces a harmful externality. Use the concept of consumer surplus to analyze whether an optimal tax on the polluter would necessarily be a welfare improvement.
24.5 Three types of contracts are used to specify the way in which tenants on a plot of agricultural land may pay rent to the landlord. Rent may be paid (1) in money (or a fixed amount of
24.4 There is considerable legal controversy about product safety. Two extreme positions might be termed caveat emptor (let the buyer beware) and caveat vendor (let the seller beware). Under the
24.3 Suppose the oil industry in Utopia is perfectly competitive and that all firms draw oil from a single (and practically inexhaustible) pool. Assume that each competitor believes that he or she
24.2 On the island of Pago Pago there are 2 lakes and 20 anglers. Each angler can fish on either lake and keep the average catch on his particular lake. On Lake X the total number of fish caught is
24.1 A firm in a perfectly competitive industry has patented a new process for making widgets.The new process lowers the firm’s average cost curve, meaning this firm alone (although still a price
23.10 Optimal control theory can be used to generalize the model of intertemporal consumption choice contained in Example 23.1. Consider the following simple life cycle model: An individual receives
23.9 Example 23.3 assumed that oil was produced in a competitive market. Assuming the other conditions of the example did not change, how would optimal resource use change if all oil were owned by a
23.8 Suppose an individual has W dollars to allocate between consumption this period (C0) and consumption next period (C1) and that the interest rate is given by r.a. Graph the individual’s initial
23.7 A high-pressure life insurance salesman was heard to make the following argument: “At your age a $100,000 whole life policy is a much better buy than a similar term policy. Under a whole life
23.6 This problem focuses on the interaction of the corporate profits tax with firms’ investment decisions.a. Suppose (contrary to fact) that profits were defined for tax purposes as what we have
23.5 The calculations in Problem 23.4 assume there is no difference between the decision on cutting a single tree and managing a woodlot. But managing a woodlot also involves replanting, which should
23.4 As in Example 23.2, suppose trees are produced by applying one unit of labor at time 0. The value of the wood contained in a tree is given at any time (t) by f(t). If the market wage rate is w
23.3 As scotch whiskey ages, its value increases. One dollar of scotch at year 0 is worth V(t) e 2t0.15t dollars at time t. If the interest rate is 5 percent, after how many years should a person
23.2 Assume an individual expects to work for 40 years and then retire with a life expectancy of an additional 20 years. Suppose also that the individual’s earnings rise at a rate of 3 percent per
23.1 An individual has a fixed wealth (W ) to allocate between consumption in two periods (C1 and C2). The individual’s utility function is given by U(C1, C2), and the budget constraint is W C1
22.4?b. Show that the alternative wage contract w L 4 is Pareto superior to the contract identified in part (a).c. Under what conditions would the contract described in part (b) be
22.9 Following in the spirit of the labor market game described in Example 22.4, suppose the firm’s total revenue function is given by TR 10L L2 and the union’s utility is simply a function of
22.8 Universal Fur is located in Clyde, Baffin Island, and sells high-quality fur bow ties throughout the world at a price of $5 each. The production function for fur bow ties (Q) is given by Q
22.7 Suppose a union has a fixed supply of labor to sell. If the union desires to maximize the total wage bill, what wage rate will it demand? How would your answer change if unemployed workers were
22.6 A welfare program for low-income people offers a family a basic grant of $6,000 per year. This grant is reduced by $.75 for each $1 of other income the family has.a. How much in welfare benefits
22.5 A family with two adult members seeks to maximize a utility function of the form U(C, H1, H2),
22.4 An individual receives utility from daily income (Y ), given by U(Y ) 100Y Y 2.
22.3 Using the concept of the opportunity cost of time, discuss the following:a. Which persons might you expect to pay the higher fares to fly the faster Concorde to Europe?b. Which individuals do
22.2 Mr. Peabody has a utility function U C H and is maximizing his utility at U 20 when he works 14 hours a day. Would he be willing to give up an hour of his leisure to drive Mrs.Atterboy to
22.1 Suppose there are 8,000 hours in a year (actually there are 8,760) and that an individual has a potential market wage of $5 per hour.a. What is the individual’s full income? If he or she
21.10 The town of Podunk has decided to provide security services to its residents by hiring workers (L) and guard dogs (D). Security services (S) are produced according to the production function S
21.9 The Ajax Coal Company is the only hirer of labor in its area. It can hire any number of female workers or male workers it wishes. The supply curve for women is given by Lf 100wf
21.8 Carl the clothier owns a large garment factory on an isolated island. Carl’s factory is the only source of employment for most of the islanders, and thus Carl acts as a monopsonist. The supply
21.7 In the early 1960s President John Kennedy’s Council of Economic Advisers recommended the institution of “Wage-Price Guideposts.” The basic idea of the guideposts was to require wages in
21.6 Suppose there are a fixed number of 1,000 identical firms in the perfectly competitive concrete pipe industry. Each firm produces the same fraction of total market output, and each firm’s
21.5 Assume the quantity of envelopes licked per hour by Sticky Gums, Inc., is Q 10,000L, where L is the number of laborers hired per hour by the firm. Assume further that the envelope-licking
21.4 The mowing of lawns requires only labor (gardeners) and capital (lawn mowers). These factors must be used in the fixed proportions of one worker to one lawn mower, and production exhibits
21.3 A landowner has three farms (A, B, and C) of differing fertility. The levels of output for the three farms with one, two, and three laborers employed are as given:Number of Level of Output

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