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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

1. A local pizza restaurant charges full price for the first pizza but offers 50% off on a second pizza. Using marginal utility, explain the restaurant’s pricing strategy. (p. 17)
4. What does it mean when we say that the marginal utility per dollar spent is equal for two goods? (p. 17)
3. How is diminishing marginal utility reflected in the law of demand? (p. 17)
2. What is the relationship between total utility and marginal utility? (p. 17)
1. After watching a movie, you and your friend both indicate that you liked it. Does this mean that each of you received the same amount of utility? Explain your response. (p. 17)
✷ What is the diamond-water paradox? (p. 17)
✷ How do consumers optimize their purchasing decisions? (p. 17)
✷ How do economists model consumer satisfaction? (p. 17)
7. Which antipoverty program (welfare, in-kind transfers, or EITC) creates the strongest incentive for recipients to work? Why? (p. 17)
6. Why do high rates of income mobility mitigate income inequality? (p. 17)
5. How does the degree of income inequality in the United States compare with that in similarly developed countries? How does U.S. income inequality compare with that in less developed nations? (p.
4. Discuss some of the reasons why full-time working women make, on average, 82% as much as full-time working men. (p. 17)
3. Why is it difficult to determine the amount of wage discrimination in the workplace? (p. 17)
2. What are efficiency wages? Why are some employers willing to pay them? (p. 17)
1. Why do garbage collectors sometimes make more than furniture movers?
✷ How do economists analyze poverty? (p. 17)
✷ What causes income inequality? (p. 17)
✷ What are the determinants of wages? (p. 17)
13. Why are most iPhones manufactured and assembled in China and then shipped to the United States, even though Apple was founded in California and most of Apple’s workforce still reside in this
12. What country made the shirt you are wearing?Go ahead and check the tag and write down your answer. Even though we can’t predict the exact country your shirt is from, there is a surprising
11. Suppose that the current wage rate is $20 per hour, the rental rate of land is $10,000 per acre, and the rental rate of capital is $2,500.The manager of a firm determines that the value of the
10. What will happen to the equilibrium wage of crop harvesters in Dystopia if the price of the crop falls by 50% and the marginal product of the workers increases by 25%? (p. 17)
9. Farmers in Utopia experience perfect weather throughout the entire growing season, and as a result their crop is double its normal size. How will this bumper crop affect each of the following ?a.
8. A football team is trying to decide which of two running backs (A or B) to sign to a oneyear contract.Predicted statistics Player A Player B Touchdowns 7 10 Yards gained 1,200 1,000 Fumbles 4 5
7. Illustrate each of the following changes with a labor supply and demand diagram. (Use a separate diagram for each part.) Diagram the new equilibrium point, and note how the wage and quantity of
6. A million-dollar lottery winner decides to quit working. How can you explain this behavior using economics? (p. 17)
5. In an effort to create a healthcare safety net, the government requires employers to provide healthcare coverage to all employees. What impact will this increased coverage have in the following
4. Jimi owns a music school that specializes in teaching guitar. Jimi has a limited supply of rooms for his instructors to use for lessons. As a result, each successive instructor adds less to
3. Pam’s Pretzels has a production function shown in the following table. It costs Pam’s Pretzels $80 per day per worker. Each pretzel sells for $3.Quantity of labor Quantity of pretzels 0 0 1
2. Would a burrito restaurant hire an additional worker for $10.00 an hour if that worker could produce an extra 30 burritos and each burrito made added $0.60 in revenues? (p. 17)
1. Maria is a hostess at a local restaurant. When she earned $8 per hour, she worked 35 hours per week. When her wage increased to$10 per hour, she decided to work 40 hours per week. However, when
9. How does outsourcing affect wages and employment in the short run and the long run? (p. 17)
8. How is economic rent different from rent seeking? (p. 17)
7. If workers became more productive (that is, produced more output in the same amount of time), what would happen to the demand for labor, the wages of labor, and the number of workers employed? (p.
6. What would happen to movie stars’ wages if all major film studios merged into a single firm, creating a monopsony for film actors? (p. 17)
5. If wages are below the equilibrium level, what would cause them to rise? (p. 17)
4. What can cause the labor supply curve to bend backward? (p. 17)
3. What are the two shifters of labor demand?What are the four shifters of labor supply? (p. 17)
2. What rule does a firm use when deciding to hire an additional worker? (p. 17)
1. Why is the demand for factor inputs a derived demand? (p. 17)
✷ What role do land and capital play in production? (p. 17)
✷ What are the determinants of demand and supply in the labor market? (p. 17)
✷ Where does the supply of labor come from? (p. 17)
✷ Where does the demand for labor come from? (p. 17)
✷ What are the factors of production? (p. 17)
11. On the TV show The Big Bang Theory, the characters have an interesting way of resolving disputes. Watch this link: www.youtube.com/watch?v=cSLeBKT7-sM. Is there a dominant strategy in
10. Two brands of coffee makers, Keurig and Tassimo, are vying for the convenience market.Keurig is the market-share leader and has the largest variety of cups that are used to make coffees and teas.
9. A small town has only one pizza place, The Pizza Factory. A small competitor, Perfect Pies, is thinking about entering the market. The profits of these two firms depend on whether Perfect Pies
7. Suppose that the marginal cost of mining gold is constant at $300 per ounce and the demand schedule is as follows:Price (per oz.) Quantity (oz.) (p. 17)$1,000 1,000 900 2,000 800 3,000 700 4,000
5. For which of the following are network externalities important?a. gas stationsb. American Association of Retired Persons(AARP)c. eHarmony, an Internet dating site 6. Your economics instructor is
4. After teaching a class on game theory, your instructor announces that if every student skips the last question on the next exam, everyone will receive full credit for that question. However, if
3. Imagine that your roommate’s alarm goes off at 4:30 every morning, and she hits snooze every 10 minutes until 6:00, when you both need to get up. She insists that this maddening procedure is the
2. Which of the following markets are oligopolistic?a. passenger airlinesb. cerealc. fast foodd. wheate. golf equipmentf. the college bookstore on your campus (p. 17)
1. Some places limit the number of hours that alcohol can be sold on Sunday. Is it possible that this sales restriction could help liquor stores? Use game theory to construct your answer. (Hint: Even
8. What are network externalities? Explain why network externalities matter to an oligopolist. (p. 17)
7. What practices do antitrust laws prohibit? (p. 17)
6. What is a Nash equilibrium? How does it differ from a dominant strategy? (p. 17)
5. What does the prisoner’s dilemma indicate about the longevity of collusive agreements? (p. 17)
4. How is game theory relevant to oligopoly?Does it help to explain monopoly? Give reasons for your response. (p. 17)
3. What is predatory pricing? (p. 17)
2. How does the addition of another firm affect the ability of the firms in an oligopolistic industry to form an effective cartel? (p. 17)
1. Compare the price and output under oligopoly with that of monopoly and monopolistic competition. (p. 17)
✷ What are network externalities? (p. 17)
✷ How do government policies affect oligopoly behavior? (p. 17)
✷ How does game theory explain strategic behavior? (p. 17)
✷ What is oligopoly? (p. 17)
10. Read the following online article:http://20somethingfinance.com/why-eyeglasses-are-so-expensive-how-you-can-pay-less/. Using your understanding of monopolistic competition and markup, explain why
9. Taste of India is a small restaurant in a small town. The owner of Taste of India marks up his dishes by 300%. Indian Cuisine is a small restaurant in a large city. The owner of Indian Cuisine
8. Titleist has an advertising slogan: “the #1 ball in golf.” Consumers can also buy generic golf balls. The manufacturers of generic golf balls do not engage in any advertising. Assume that the
7. In the diagram below, identify the demand curve consistent with a monopolistic competitor making zero long-run economic profit. Explain why you have chosen that demand curve and why the other two
6. Consider two different companies. The first manufactures cardboard, and the second sells books. Which firm is more likely to advertise? (p. 17)
5. Econoburgers, a fast-food restaurant in a crowded local market, has reached a long-run equilibrium.a. Draw a diagram showing demand, marginal revenue, average total cost, and marginal cost curves
4. In competitive markets, price is equal to marginal cost in the long run. Explain why this statement is not true for monopolistic competition. (p. 17)
3. Which of the following are the same under monopolistic competition and in a competitive market in the long run?a. the markup the firm chargesb. the price the firm charges to consumersc. the
2. Which of the following could be considered a monopolistic competitor?a. a local corn farmerb. the Tennessee Valley Authority, a large electricity producerc. pizza deliveryd. a grocery storee. Kate
1. At your high school reunion, a friend describes his plan to take a break from his florist shop and sail around the world. He says that if he continues to make the same economic profit for the next
7. How does advertising benefit society? In what ways can advertising be harmful? (p. 17)
6. Draw a typical demand curve for competitive markets, monopolistic competition, and monopoly. Which of these demand curves is the most inelastic? Why? (p. 17)
5. Monopolistic competition produces a result that is inefficient. Does this outcome mean that monopolistically competitive markets should be regulated? Discuss. (p. 17)
4. Draw a graph that shows a monopolistic competitor making an economic profit in the short run and a graph that shows a monopolistic competitor making no economic profit in the long run. (p. 17)
3. Why do monopolistically competitive firms produce less than those operating at the most efficient scale of production? (p. 17)
2. How is monopolistic competition like competitive markets? How is monopolistic competition like monopoly? (p. 17)
1. Why is product differentiation necessary for monopolistic competition? What are three (p. 17)types of product differentiation?
✷ Why is advertising prevalent in monopolistic competition? (p. 17)
✷ What are the differences between monopolistic competition, competitive markets, and monopoly? (p. 17)
✷ What is monopolistic competition? (p. 17)
3. At many amusement parks, customers who enter after 4 p.m. receive a steep discount on the price of admission. Explain how this practice is a form of price discrimination. (p. 17)
2. Which of the following are examples of price discrimination? Explain your answers.a. A cell phone carrier offers unlimited calling on the weekends for all of its customers.b. Tickets to the
1. Seven potential customers are interested in seeing a movie. Because the marginal cost of admitting additional customers is zero, the movie theater maximizes its profits by maximizing its
4. If perfect price discrimination reduces consumer surplus to zero, how can this situation lead to the most socially desirable level of output? (p. 17)
3. Why is preventing resale a key to successful price discrimination? (p. 17)
2. Why does price discrimination improve the efficiency of the market? (p. 17)
1. What two challenges must a price maker overcome to effectively price-discriminate? (p. 17)
✷ How is price discrimination practiced? (p. 17)
✷ What is price discrimination? (p. 17)
10. Suppose that a monopolist’s marginal cost curve shifts upward. What is likely to happen to the price the monopolist charges, the quantity it produces, and the profit it makes? Use a graph to
9. A local community bus service charges $2.00 for a one-way fare. The city council is thinking of raising the fare to $2.50 to generate 25% more revenue. The council has asked for your advice as a
8. A small community is served by five independent gas stations. Gasoline is a highly competitive market. Use the market demand curve to illustrate the consumer surplus and producer surplus created
7. Recalling what you have learned about elasticity, what can you say about the connection between the price a monopolist chooses to charge and whether or not demand is elastic, unitary, or inelastic
6. A new musical group called The Incentives cuts a debut single. The record company determines a number of price points for the group’s first single, “The Big Idea.”Price per Quantity of

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