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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

Writing in his Wealth of Nations in 1776, Adam Smith was the first to suggest that competitive markets send resources to the uses in which they have the highest value. Smith believed that each
Buyers and sellers each attempt to do the best they can for themselves—they pursue their self-interest. No one plans for an efficient outcome for society as a whole. No one worries about the social
In Figure 6.8 , if production is less than 10,000 pizzas a day, someone is willing to buy a pizza for more than it costs to produce. Buyers and sellers will gain if production increases. If
Another way of checking that the equilibrium is efficient is to look at the total surplus that it generates. Total surplus is the sum of producer surplus and consumer surplus. A price above the
Does this competitive equilibrium deliver the efficient quantity of pizza?Marginal Benefit Equals Marginal Cost To check whether the equilibrium in Figure 6.8 is efficient, recall the interpretation
(4) the efficient quantity of pizza is produced. The sum of the (5)consumer surplus and (6) producer surplus is maximized.Watch An Efficient Market for Pizza
(3) The demand curve is also the marginal benefit curve.Because at the market equilibrium, marginal benefit equals marginal cost,
(2) The supply curve is also the marginal cost curve.
(1) Market equilibrium occurs at a price of $10 a pizza and a quantity of 10,000 pizzas a day.
You’ve seen (here ) that an efficient allocation of resources is the highest-valued allocation, and it occurs when marginal benefit equals marginal cost. Continuing with the pizza example, the
6.4 Are Markets Efficient?
Watch Solutions Video: Cost, Price, and Producer Surplus Click here to open your MyEconLab Study Plan and work these interactive problems online.Key Terms Quiz Watch Concept Video: Are Markets
For BlackBerry, the demand for its phones decreased, the price fell, and quantity sold decreased. BlackBerry’s producer surplus decreased.For Apple and the Android smartphone makers, demand
Producer surplus is the excess of the price of a good over the marginal cost of producing it, summed over the quantity produced.
3. If the price falls to $10, the quantity sold decreases to 10 a day. The producer surplus decreases to(the area of the blue triangle in Figure 3 ). The change in producer surplus is a decrease of
2. The quantity sold is 20 a day. Producer surplus equals, which is $100 (the area of the blue triangle in Figure 2 ). The total revenue is price multiplied by quantity sold, which equals. The cost
. The minimum supply price of the 20th DVD is the marginal cost of the 20th DVD, which is $15 (Figure 2 ).The marginal cost of the 10th DVD is equal to the minimum supply price for the 10th DVD,
As people have switched from BlackBerry to Android and Apple smartphones, how has BlackBerry’s producer surplus changed? How has the producer surplus of Apple and the Android smartphone makers such
BlackBerry is now betting its future on using the Android operating system.
3. If the price of a DVD falls to $10, what is the change in producer surplus?Source: Financial Times, November 6, 2015 In the News BlackBerry looks for reboot with Android BlackBerry, the pioneer of
2. What is the quantity of DVDs sold? Calculate the producer surplus, the total revenue from the DVDs sold, and the cost of producing the DVDs sold.
1. What is the minimum supply price of the 20th DVD?Calculate the marginal cost of the 10th DVD and the producer surplus on the 10th DVD.
The total cost of producing pizza is the amount received from selling it,$100,000, minus the producer surplus, $40,000 (the area of the blue triangle), and is $60,000 (the red area beneath the MC
To calculate producer surplus, we must find the producer surplus on each pizza and add these surpluses together. For the 10,000th pizza, marginal cost equals $10 and producers receive $10, so the
2) The supply curve shows that the marginal cost of the 5,000th pizza a day is $6, so producers receive a producer surplus of $4 on the 5,000th pizza.(3) Producer surplus from the 10,000 pizzas sold
(1) The market price of a pizza is $10. At this price, producers plan to sell 10,000 pizzas a day and receive a total revenue of $100,000 a day.
Figure 6.7 illustrates the producer surplus for pizza producers. The supply curve of pizza tells us the quantity of pizza that producers plan to sell at each price. The supply curve also tells us the
When the price exceeds marginal cost, the firm obtains a producer surplus. Producer surplus is the excess of the price of a good over the marginal cost of producing it, summed over the quantity
(2) The supply curve shows the minimum price that firms must be offered to supply a given quantity. The minimum supply price equals marginal cost, which for the 10,000th pizza is $10. The supply
Figure 6.6 Supply, Minimum Supply Price, and Marginal Cost(1) The supply curve of pizza, S, shows the quantity of pizza supplied at each price, other things remaining the same. At $10 a pizza, the
A supply curve is a marginal cost curve. The supply curve of pizza tells us the dollars’ worth of other goods and services that people must forgo if firms produce one more pizza.
Just as buyers distinguish between value and price, so sellers distinguish between cost and price. Cost is what a seller must give up to produce the good, and price is what a seller receives when the
which parallels what you’ve learned about value, price, and consumer surplus.Supply and Marginal Cost
Watch Concept Video: Cost, Price, and Producer Surplus 6.3 Cost, Price, and Producer Surplus You are now going to learn about cost, price, and producer surplus,
Click here to open your MyEconLab Study Plan and work these interactive problems online.Key Terms Quiz Watch Solutions Video: Value, Price, and Consumer Surplus
Being equally happy to travel on any of the three days means that Jodi’s marginal benefit from the trip was the same on each day. Because Saturday’s price of $1,143 was the most she was willing
3. If the price of a DVD rises to $20, the quantity bought decreases to 10 a day. Consumer surplus decreases to(the area of the green triangle in Figure 3 ). Consumer surplus decreases by$75 (from
2. The quantity of DVDs bought is 20 a day. The consumer surplus from DVDs is (the area of the green triangle in Figure 2 ). The amount spent on DVDs is the price multiplied by the quantity bought,
1. The willingness to pay for the 20th DVD is the price on the demand curve at 20 DVDs, which is $15 (Figure 2 ).The value of the 10th DVD is its marginal benefit, which is also the maximum price
Jodi planned a trip from New York to Los Angeles and was equally happy to travel on Friday, Saturday, or Sunday. The Saturday price was the most she was willing to pay. On which day do you predict
The airlines change prices from day to day. For example, the fare on one Delta flight from New York to Los Angeles jumped from $755 to $1,143 from a Friday to Saturday in April, then fell to $718 on
3. If the price of a DVD rises to $20, what is the change in consumer surplus?Source: boston.com, June 22, 2011 In the News Airfares stacked against consumers
2. What is the quantity of DVDs bought? Calculate the consumer surplus, the amount spent on DVDs, and the total benefit from the DVDs bought.
1. What is the willingness to pay for the 20th DVD?Calculate the value of the 10th DVD and the consumer surplus on the 10th DVD.
7. A 2 percent increase in income increases the quantity demanded of a good by 1 percent. The income elasticity of demand for this good is . The good is a good.A. 2; normal B. ; inferior C. 1/2;
6. The cross elasticity of demand for good A with respect to good B is 0.2. A 10 percent change in the price of good B will lead to a percent change in the quantity of good A demanded. Goods A and B
. When the price of a good rises from $5 to $7 a unit, the quantity supplied increases from 110 to 130 units a day. The price elasticity of supply is . The supply of the good is .A. 60; elastic B.
4. If the price of a good falls and expenditure on the good rises, the demand for the good is .A. elastic B. perfectly elastic C. inelastic D. unit elastic
3. The price elasticity of demand for a good is 0.2. A 10 percent rise in the price will the total revenue from sales of the good.A. decrease B. increase C. decrease the quantity sold with no change
2. In Pioneer Ville, the price elasticity of demand for bus rides is 0.5.When the price of a bus ticket rises by 5 percent, .A. the demand for bus rides increases by 10 percent B. the quantity of bus
1. When the price of ice cream rises from $3 to $5 a scoop, the quantity of ice cream bought decreases by 10 percent. The price elasticity of demand for ice cream is .A. 5 B. 0.2 C. 50 D. 2.5
8. What is the magnitude of the elasticity that you can estimate using the information provided? Explain your answer.Multiple Choice Quiz Click here to open your MyEconLab Study Plan and work these
7. Does the information about the market for roses enable us to estimate an elasticity, and if so, which one: the price elasticity of demand, the price elasticity of supply, an income elasticity, or
6. “In a market in which demand is price inelastic, producers can gouge consumers and the government should set high standards of conduct for producers to ensure that consumers get a fair
If pasta makers estimate that this change in the price of wheat will increase the price of pasta by 25 percent and decrease the quantity demanded of pasta by 8 percent, what is the pasta makers’
5. Drought cuts the quantity of wheat grown by 2 percent. If the price elasticity of demand for wheat is 0.5, by how much will the price of wheat rise?
Use the following information to work Problems 7 and 8 .Valentine roses On Valentine’s Day 2015, 257 million roses were sold for about double the normal price. On a normal day, 3 million roses are
4. The income elasticity of demand for haircuts is 1.5, and the income elasticity of demand for food is 0.14. You take a weekend job, and the income you have available to spend on food and haircuts
3. When rain ruined the banana crop in Central America, the price of bananas rose from $1 to $2 a pound. Growers sold fewer bananas, but their total revenue was unchanged. By what percentage did the
2. Explain the difference between the responses to Elle’s price hike and price cut. Why did the price increase bring a large response in the quantity sold while the price cut had only a small
1. Calculate the price elasticity of demand for Elle’s Espresso Bar coffee and the price elasticity of demand for coffee.
Use the following data to work Problems 1 and 2 .When Elle’s Espresso Bar increased its prices by 10 percent, the quantity of coffee that Elle sold decreased by 40 percent. When Elle and all her
9. Read Eye on Elasticity at the Coffee Shop and then explain why the demand for latte is inelastic while the demand for a Starbucks latte is elastic. Which demand is likely to be more inelastic: the
The price of pumpkin increased from $286 per ton in 2000 to$732 per ton in 2014 (both prices in 2014 dollars) and the quantity produced increased from 423,000 tons in 2000 to 657,150 in 2014.
8. Did Starbucks start a pumpkin boom?Ever since Starbucks introduced its famed pumpkin spice latte about a decade ago, pumpkin sales have skyrocketed.
7. A survey found that when incomes increased by 10 percent, the following changes in quantities demanded occurred: spring water up by 5 percent; sports drinks down by 2 percent; cruises up by 15
4. The price elasticity of demand for Pete’s chocolate chip cookies is 1.5. Pete wants to increase his total revenue. Would you recommend that Pete raise or lower his price of cookies? Explain your
Use the following information to work Problems 5 and 6 .The price of a plane ride rises by 10 percent. The price elasticity of demand for plane rides is 0.5 and the price elasticity of demand for
3. Figure 1 shows the demand for movie tickets. Is the demand for movie tickets elastic or inelastic over the price range $7 to $9 a ticket? If the price falls from $9 to $7 a ticket, explain how the
2. If the price of a wool sweater did not change, calculate the cross elasticity of demand for wool sweaters with respect to the price of home heating oil. Are home heating oil and wool sweaters
When the price of home heating oil increased by 20 percent, the quantity demanded decreased by 2 percent and the quantity of wool sweaters demanded increased by 10 percent. Use this information to
Define the cross elasticity of demand and the income elasticity of demand, and explain the factors that influence them.5.3 Key Terms Cross elasticity of demand Elastic demand Elastic supply Income
explain the factors that influence it.5.2
Define and calculate the price elasticity of supply, and
Cross elasticity is positive for substitutes and negative for complements.Income elasticity of demand shows how the demand for a good changes when income changes. For a normal good, the income
The supply of a good is inelastic if, when its price changes, the percentage change in the quantity supplied is less than the percentage change in price.The main influences on the price elasticity of
The supply of a good is elastic if, when its price changes, the percentage change in the quantity supplied exceeds the percentage change in price.
Define and calculate the price elasticity of demand, and explain the factors that influence it.5.1
If demand is elastic, a rise in price leads to a decrease in total revenue. If demand is unit elastic, a rise in price leaves total revenue unchanged. And if demand is inelastic, a rise in price
Price elasticity of demand equals the percentage change in the quantity demanded divided by the percentage change in price.
The demand for a good is inelastic if, when its price changes, the percentage change in the quantity demanded is less than the percentage change in price.The price elasticity of demand for a good
The demand for a good is elastic if, when its price changes, the percentage change in the quantity demanded exceeds the percentage change in price.
Click here to open your MyEconLab Study Plan and work these interactive problems online.Key Terms Quiz Watch Solutions Video: Cross Elasticity and Income Elasticity*As before, these percentage
To know whether the demand for a good is income elastic, we need to calculate the income elasticity of demand. A good with an income elastic demand is one that has an income elasticity of demand
As income rises, the quantity demanded of good C increases. The demand for good C increases (Figure 2 ).demand = Percentage A ÷ Percentage increase demand = 5 ÷ 10demand = Percentage C ÷
2. Income elasticity of change in the quantity demanded of good in income.Income elasticity of , or 0.2.Income elasticity of demand is positive, so good C is a normal good.
1. Cross elasticity of change in the quantity demanded of good in the price of good B.Cross elasticity of , or 0.5.Goods A and B are substitutes because the cross elasticity of demand is positive.
2. When income rises by 5 percent and other things remain the same, the quantity demanded of good C increases by 1 percent. Calculate the income elasticity of demand for good C. Is good C a normal
Define the cross elasticity of demand and the income elasticity of demand, and explain the factors that influence them.5.3 1. The quantity demanded of good A increases by 5 percent when the price of
fWhat about your iTunes and Hulu or Netflix? Is your demand for these items elastic or inelastic? Is your demand for textbooks elastic or inelastic? You can estimate all these elasticities
What do you do if the price of smartphone service falls? Do you spend less on smartphone service, as you would if your demand for smartphone service is inelastic? Or do you spend more on smartphone
Most likely, as we noted in the Eye on Elasticity at the Coffee Shop , when the price of a latte rises, you drink almost as many lattes as you did at the lower price. A latte has poor substitutes and
Think about why your demand for a good might be elastic, unit elastic, or inelastic by checking back to the list of influences on the price elasticity of demand here .
When the price of a good rises, your demand for that good is Elastic if your expenditure on it decreases.Unit elastic if your expenditure on it remains constant.MyEconLab Critical Thinking Exercise
You can determine whether your demand for a good is elastic, unit elastic, or inelastic by noting how your total expenditure on a good changes when its price changes.
But recall that a seller’s total revenue is equal to the price of the good multiplied by the quantity sold.Because your expenditure on a good is equal to the seller’s total revenue, the total
Your expenditure on a good is equal to the price of the good multiplied by the quantity that you buy.
As our incomes grow, we’ll spend a decreasing percentage on clothing, phone calls, and food. The income elasticity of demand for food is less than one, even for the poorest people. So we can
Percentage change in quantity supplied Percentage change in price.
25 percent divided by 10 percent, or 2.5. The supply of the good has become more elastic over the year since the price rise. Possibly other producers have gradually started producing the good and

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