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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

In short-run equilibrium, a firm can make a positive economic profit, make zero economic profit, or incur an economic loss.
Market demand and market supply determine price.Firms choose the quantity to produce that maximizes profit, which is the quantity at which marginal cost equals price.
A firm’s supply curve is the upward-sloping part of its marginal cost curve at all prices at or above minimum average variable cost (the shutdo wn point) and the vertical axis at all prices below
The firm produces the output at which price equals marginal cost.If price is less than minimum average variable cost, the firm temporarily shuts down.
A perfectly competitive firm is a price taker.Marginal revenue equals price.
Click here to open your MyEconLab Study Plan and work these interactive problems online.Watch Solutions Video: Output, Price, and Profit In The Long Run Chapter Summary Key Points
Economic profit is an incentive for new firms to enter the market. In the long run, entry increases supply, which lowers the price and increases the quantity of drones demanded. As the price of a
With customers finding ever more creative ways to use drones, the demand for drones is increasing. In the short run, an increase in demand brings a rise in the price of a drone and an increase in the
2. In the long run, the price will be such that economic profit is zero. That is, as growers exit, the price will rise until it equals minimum average total cost. In the long run, the price will be
Because tulip growers are incurring economic losses, some growers will exit in the long run. The number of tulip growers will decrease.
1. The price is less than average total cost, so the tulip grower is incurring an economic loss in the short run.Because the price exceeds minimum average variable cost, the tulip grower continues to
How would you expect the economic profit of a drone producer such as 3D Robotics to change in the short run and in the long run?Solutions to Practice Problems Figure 1
How would you expect the price of a drone to change in the short run and the long run?
Explain what is happening in the market for commercial drones.
California’s commercial drone industry is taking off Customers are finding ever more creative ways to use drones, and 3D Robotics Inc., America’s largest producer of consumer drones, expects
2. In the long run, what is the price and the tulip grower’s economic profit?Source: Los Angeles Times, June 13, 2015 In the News
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?
15.3 Explain how output, price, and profit are determined in the long run and explain why perfect competition is efficient.
Tulip growing is a perfectly competitive industry, and all tulip growers have the same cost curves. The market price of tulips is $15 a bunch, and each grower maximizes profit by producing 1,500
It is no exaggeration or hype to say that your entire life is influenced by and benefits immeasurably from the forces of competition. Adam Smith’s invisible hand might be hidden from view, but it
When either demand or technology changes and makes the current allocation of resources the wrong one, the market swiftly and silently acts. It sends signals to entrepreneurs that bring entry and exit
Just about every good or service that you buy and take for granted, no matter where you buy it, is available because of the forces of competition. Your home, your food, your clothing, your books,
StubHub takes a commission and makes a profit. But competition between StubHub, Ticketmaster, and other ticket brokers ensure that profits are competed away in the long run, with entrepreneurs
If you have a ticket for a game between the Giants and the Braves but can’t use it, you can sell it on StubHub for the going market price (minus a commission). And if you’re desperate to see the
Many of the markets that you encounter every day are highly competitive and almost perfectly competitive. While you don’t run into perfect competition on a daily basis, you do have dealings in some
The situations we’ve described appear to be fair on both views. Perfect competition places no restrictions on anyone’s actions, all trade is voluntary, consumers pay the lowest possible prices,
You studied the fairness of markets in Chapter 6 (here ) and saw two views of what is fair: fair rules and a fair result. According to the fair-rules view, an outcome is fair if property rights are
When a natural disaster such as extreme weather or an earthquake strikes, the prices of essential items sold in competitive markets shoot upward, bringing gains for sellers and pain for buyers. Is
When a technological change lowers costs, entrepreneurs who are quick to adopt the technology gain and others who respond slowly lose. Is it fair that some entrepreneurs gain and others lose?
You’ve seen many situations in which perfect competition brings gains and losses. When the demand for an item decreases, most producers incur at least a temporary loss and some of them go out of
3. If the price of an e-book falls to $5 but the price of a latte and Marc’s budget remain unchanged, what quantities of lattes and eSource:Billboard, December 18, 2015 books does Marc now buy?
2. What quantities of lattes and e-books does Marc buy? At his consumption point, calculate his marginal rate of substitution of e-books for lattes.
1. What is the relative price of a latte in terms of e-books and what is the opportunity cost of a latte? Draw a graph of Marc’s budget line with e-books on the x-axis.
Marc has a budget of $20 a month to spend on lattes and e-books. The price of a latte is $5, and the price of an e-book is $10. Figure 2 illustrates his preferences. Use Figure 2 to work Problems 1
Draw a graph to illustrate how a tax on sugary drinks changes the budget line, the best affordable point, and the demand for sugary drinks.Figure 2 Instructor Assignable Problems and Applications
5. Taxes on sugary drinks work as intended Governments around the world have put a tax on sugary drinks, and the demand for these drinks has decreased.
4. In most states, there is no sales tax on food. Some people say that a consumption tax—a tax on all goods and services—would be better. If all sales taxes are replaced by a consumption tax,
3. Suppose that the price of nuts falls to $1.50 a bag and the price of popcorn and Sara’s budget remain unchanged. What quantities of popcorn and nuts does Sara buy now? What are two points on
2. What quantities of popcorn and nuts does Sara buy and what is her marginal rate of substitution of popcorn for nuts at her consumption point?
1. What is the relative price of nuts and what is the opportunity cost of a bag of nuts? Draw a graph of Sara’s budget line with nuts on the x-axis.
7. The paradox of value arises when people .A. prefer to buy cheap goods rather than expensive goods B. spend more on expensive useless goods than on cheap useful goods C. buy so much of a useful
6. When Joe’s budget increases, he will spend the increase in his budget on .A. normal goods B. inferior goods C. more of all the goods he usually buys D. essential goods
5. Sara buys bread and bananas and is maximizing her total utility.If the price of bananas rises, Sara will maximize her total utility by.A. increasing her budget so that she can buy the same
4. Tom will maximize his total utility if he buys the quantities of pasta and milk at which .A. the marginal utility from pasta equals the marginal utility from milk B. he spends all of his budget
3. Total utility and marginal utility as more of a good is consumed.A. increases; increases B. diminishes; diminishes C. increases; diminishes D. diminishes; increases
2. Jane’s budget line .A. shifts outward with no change in its slope if her budget increases and prices don’t change B. rotates inward if the prices of both goods double and her budget doesn’t
1. A consumer’s consumption possibilities depend on all of the following items except .A. the prices of the goods that the consumer wants to buy B. the consumer’s budget C. the quantities of the
10. Compare the marginal utility of a downloaded song with that of a streamed song.Multiple Choice Quiz Click here to open your MyEconLab Study Plan and work these interactive problems online.
9. Compare the budget line for a streaming subscription with that for song downloads at $1 per song.
8. When Ali allocates his budget so as to maximize his utility, what does he buy and what is the marginal utility per dollar? 
7. If Ali buys 4 smoothies a week and sees 3 movies, does he spend all $30? What is his utility from smoothies and his utility from movies? Does he maximize his utility? If not, which good must he
6. When the price of a burger is $4, Martha has $24 to spend, and the price of pasta falls from $8 to $4 a dish, how many burgers and dishes of pasta does Martha buy? What are two points on
Use the following information to work Problems 7 and 8 .Table 2 shows the marginal utility that Ali gets from smoothies and movies. Ali has $30 a week to spend. The price of a movie ticket is $6, and
5. When the price of a burger is $4, the price of pasta is $8 a dish, and Martha has $24 a week to spend, she buys 2 burgers and 2 dishes of pasta. Does she maximize her total utility? Explain your
4. When Martha buys 3 burgers and 2 dishes of pasta a week, what is her total utility and her marginal utility from the third burger? If the price of a burger is $4, what is her marginal utility per
3. Jim spends all his income on apartment rent, food, clothing, and vacations. He gets a pay raise from $3,000 a month to $4,000 a month. At the same time, airfares and other vacation-related
2. Tim buys 2 smoothies and sees 1 movie a week when he has $16 to spend, the price of a movie ticket is $8, and the price of a smoothie is $4. What is the relative price of a movie ticket? If the
1. In 2015, Americans downloaded 1,200 million singles at $1.20 each and 100 million albums at $10 each. They also bought 1 million singles on vinyl at $11 each and 100 million albums on CDs at
Use Table 1 , which shows Martha’s total utility from burgers and pasta, to work Problems 4 to 6 .MyEconLab Homework, Quiz, or Test if assigned by instructor
10. Read Eye on Song Downloads and Streaming , then draw a student’s budget lines for single songs versus other goods and services in 2000 and 2015. Explain why the budget line changed between 2000
Explain why the prices of printer ink and gasoline might provide an example of the paradox of value.
9. Compared to other liquids, gasoline is cheap In 2008, when gasoline hit $4 a gallon, motorists complained, but they didn’t complain about $18 for 16 ml of HP ink ($4,294.58 per gallon).
8. Watch video without dinging data caps Verizon, the biggest wireless company, will let its customers watch ad-sponsored video free from data caps.other things remain the same, how many sundaes will
7. When Erin has $25 to spend, she sees 2 movies at $10 a movie ticket and buys 1 six-pack of soda. Calculate the price of soda. If her budget for soda and movies increases to $50, what is the change
6. Susie spends $28 a week on sundaes and magazines. The price of a sundae is $4 and the price of a magazine is $4. Table 2 shows Susie’s marginal utility from sundaes and magazines. How many
5. Every day, Josie buys 2 cups of coffee and 1 sandwich for lunch.The price of coffee is $2 a cup and the price of a sandwich is $5.Josie’s choice of lunch maximizes her total utility, and she
3. Calculate the values of A, B, C, and D in the table. Does the principle of diminishing marginal utility apply to Ben’s consumption of orange juice? Why or why not?
2. Suppose that the price of soda remains at $1 a can but the price of coffee rises to $3 a cup. Draw Amy’s new budget line. If she buys 6 cans of soda, what is the maximum number of cups of coffee
1. Draw a graph of Amy’s budget line. Can Amy buy 7 cans of soda and 2 cups of coffee a week? Can she buy 7 cups of coffee and 2 cans of soda a week? What is the relative price of a cup of coffee?
7. The healthcare system in the United States costs per person what it costs in other rich countries and U.S. health outcomes rank .A. double; lower B. half; higher C. double; higher D. half; lower
6. The private market delivers too little healthcare because .A. insurance companies cannot avoid the problems of moral hazard and adverse selection B. too many young healthy people buy insurance C.
5. Moral hazard arises in the insurance market because .A. buyers of insurance have private information that they can use B. insurance companies can offer a range of premiums to buyers C. buyers can
4. In a used-car market in which dealers offer cars with warranties,.A. there is private information B. a separating equilibrium does not occur C. a lemons problem does not arise D. the market is
3. In the market for used cars with no warranties, lemons are bought and the equilibrium is a equilibrium.A. too few; separating B. too many; separating C. only; pooling D. no; pooling
2. The lemons problem arises in markets in which .A. sellers are better informed than buyers about which products are reliable B. buyers are better informed than sellers about which products are
1. A market with asymmetric information is one in which .A. sellers offer a product for sale at a low price and buyers are pleased to get a bargain B. sellers know how reliable the product is and
9. What is Laurence Kotlikoff’s proposal for fixing healthcare in the United States? Draw a graph to illustrate how his proposal would work and show whether it could be efficient.Multiple Choice
8. What is the cost of healthcare in the United States compared to that in Canada and the United Kingdom? Do health outcomes correlate with healthcare costs? Can you think of explanations for the
6. What are the three alternative approaches for supplementing or replacing the market in healthcare services and how does each address the sources of healthcare market failure?
4. Oilers, Jets top NHLers’ no-trade lists ESPN asked 10 player agents to name their top three most frequent no-trade teams. The top three, in order, were the Edmonton Oilers, the Winnipeg Jets,
3. Suppose that there are two national football leagues: The Time League and The Bonus for Win League. The players have private information about their effort. In The Time League, players receive a
2. Zaneb is a high-school teacher and is well known in her community for her honesty, integrity, and sense of social responsibility. She is shopping for a used car. She plans to buy the car from a
11. Read Eye on the Market For Used Cars and then explain how a warranty signals that a car isn’t a lemon and why it is in a usedcar dealer’s self-interest to offer a warranty.Instructor
10. If U.S. healthcare were delivered like basic education is, how would the healthcare system compare to that in Canada? Would it be efficient?
What data might be relevant?
Does the United States overprovide? Do other countries underprovide? What economic concepts do you need to answer?
9. U.S. healthcare per person costs twice that of other rich countries.
7. If health insurance were optional, would healthy people be more likely or less likely to buy insurance?
support making health insurance mandatory with the cost covered by employers, but those who could not afford to pay and small businesses would be exempt.or a no-claim bonus are you likely to take the
Use the following information to work Problems 7 to 9 .President Obama campaigned on a healthcare reform plan that did not include mandatory health insurance. Hillary Clinton wanted mandatory health
6. If you have private information that you are a more aggressive driver than your driving record indicates, would you buy collision insurance? If the insurance company offers you a large deductible
In 2014, GM recalled 2.6 million vehicles to repair a safety defect in their ignition switches. Some of the recalled vehicles stalled and locked up, but a concerned GM said the problem with the
3. Stalling complaints about fixed GM cars
Use the following information to work Problems 4 and 5 .Mary is an 18-year-old student, who recently bought a used car. Mary is looking to buy car insurance. Insurance companies compete for her
Explain the information problems and other economic problems in healthcare markets.12.3 Key Terms MyEconLab Key Terms Quiz Adverse selection Asymmetric information Lemons problem Moral hazard Pooling
Obamacare provides subsidized insurance and compels everyone to make a minimum contribution for health coverage.Healthcare vouchers could cut cost, increase coverage, and retain choice.
In some countries, governments provide healthcare at a zero or low price and ration with wait times.U.S. private insurance, 0Medicare, and Medicaid possibly overprovide for those covered.
A free market would underprovide healthcare and distribute it unfairly.
Governments provide healthcare because asymmetric information, underestimation of its value, failure to look far enough into the future, and the inability of many to pay for it bring healthcare
Without screening, too few low-risk people would be insured.Moral hazard arises in insurance: An insured person has less incentive than an uninsured person to avoid the insured loss.The no-claim

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