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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

5. If demand falls, what is likely to happen to a monopolist’s price, output, and economic profit? (p. 18)
4. The year is 2278, and the starship Enterprise is running low on dilithium crystals, which are used to regulate the matter-antimatter reactions that propel the ship across the universe.Without the
3. A monopolist has the following fixed and variable costs:Fixed Variable Price Quantity cost cost$10 0 $8 $0$9 1 8 5$8 2 8 8$7 3 8 10$6 4 8 11$5 5 8 13$4 6 8 16$3 7 8 20$2 8 8 25 At what level of
2. Which of the following could be considered a monopoly?a. your local water companyb. Boeing, a manufacturer of airplanesc. Brad Pittd. Walmarte. the only gas station along a 100-mile stretch of
1. In the figure below, identify the price the monopolist will charge and the output the monopolist will produce. How do these two decisions on the part of the monopolist compare with the efficient
7. Why is it difficult to regulate a natural monopoly? (p. 18)
6. Why does a monopolist operate inefficiently?Draw a demand curve, a marginal revenue curve, and a marginal cost curve to illustrate the deadweight loss from monopoly. (p. 18)
5. What is the monopolist’s rule for determining the profit-maximizing output? What two steps does the monopolist follow to maximize profits? (p. 18)
4. Why is a monopolist’s marginal revenue curve less than the price of the good it sells? (p. 18)
3. Explain why a monopoly is a price maker but a perfectly competitive firm is a price taker. (p. 18)
2. What are barriers to entry, and why are they crucial to the creation of potential long-run monopoly profits? Give an example of a barrier that can lead to monopoly. (p. 18)
1. Describe the difference between a monopoly and a natural monopoly. (p. 18)
✷ What are the problems with, and solutions for, monopoly? (p. 18)
✷ How much do monopolies charge, and how much do they produce? (p. 18)
✷ How are monopolies created? (p. 18)
3. Determine whether the following statements are true or false. Explain your answers.a. A firm will make a profit when the price it charges exceeds the average variable cost of the chosen output
2. A local snow cone business sells snow cones in one size for $3 each. It has the following cost and output structure per hour:Output (cones per hour) Total cost (per hour) (p. 18)0 $60 10 90 20 110
1. Using the definition of a price taker as your guide, explain why each of the following industries does not meet the definition.a. the pizza delivery businessb. the home improvement businessc. cell
7. Why do competitive firms earn zero economic profit in the long run? (p. 18)
6. What are sunk costs? Give an example from your own experience. (p. 18)
5. How do profits and losses act as signals that guide producers to use resources to make what society wants most? (p. 18)
4. What is the difference between the decision to go out of business and the decision to shut down? (p. 18)
3. Under what circumstances will a firm have to decide whether to operate or to shut down? (p. 18)
2. Describe the two-step process used to identify the profit-maximizing level of output. (p. 18)
1. What are the necessary conditions for a perfectly competitive market to exist? (p. 18)
Use the idea of sunk costs to analyze switching majors in college. (p. 18)
What eect do you think the reduced seating capacities of the new stadiums has on ticket prices, and why? (p. 18)
✷ What does the supply curve look like in perfectly competitive markets? (p. 18)
✷ How do firms maximize profits? (p. 18)
✷ How do competitive markets work? (p. 18)
12. Watch the Reebok commercial on “Terry Tate, Office Linebacker” (www.youtube.com/watch?v=tbSpAsJSZPc). Is the firm that hires Terry Tate experiencing economies, constant returns, or
11. If you are a fan of cold dessert treats, you’ll recognize that the production process at Cold Stone Creamery differs a great deal from frozen yogurt places. At Cold Stone you give the server
10. Use the information provided in the following table to fill in the blanks.? (p. 18)
9. Suppose that you own a yard care business.You have your own mower, flatbed truck, and other equipment. You are also the primary employee. Why might you have trouble calculating your profits?
8. Many amusement parks offer two-day passes at dramatically discounted prices. If a one-day pass costs $40 but the two-day pass costs $50, what is the average cost for the two-day pass?What is the
7. An airline has a marginal cost per passenger of$30 on a route from Boston to Detroit. At the same time, the typical fare charged is $300.The planes that fly the route are usually full, yet the
6. Digital media distributed over the Internet often have marginal costs of zero. For instance, people can download music and movies instantly through many providers. Do these products exhibit
5. True or false?a. The AFC curve can never rise.b. Diminishing marginal product is a long-run constraint that prevents lower costs.c. The MC curve intersects the AVC and ATC curves at the minimum
4. A firm is considering changing its plant size, so it calculates the average cost of production for various plant sizes, shown below. If the firm is currently using plant size C, is the firm
3. A pizza business has the cost structure described below. The firm’s fixed costs are$25 per day. Calculate the firm’s average fixed costs, average variable costs, average total costs, and
2. The following table shows a short-run production function for laptop computers. Use the data to determine where diminishing product begins.Total output of Number of workers laptop computers 0 0 1
1. Go to www.lemonadegame.com. This free online game places you in the role of a lemonade seller. Nothing could be simpler, right?Not so fast! You still need to control costs and ensure that you have
7. Name examples of industries that illustrate each of the following: economies of scale, constant returns to scale, and diseconomies of scale. Think creatively; do not use the textbook examples. (p.
6. Compare the short-run and long-run cost curves. In a few sentences, explain their differences. (p. 18)
5. Explain why marginal cost is the glue that connects average variable cost and average total cost. (p. 18)
4. Describe what happens to the total product of a firm when marginal product is increasing, decreasing, and negative. (p. 18)
3. What role does diminishing marginal product play in determining the ideal mix of labor and capital a firm should use? (p. 18)
2. Why is economic profit a better measure of profitability than accounting profit? Give an example. (p. 18)
1. What is the equation for the profit (or loss) of a firm? (p. 18)
Your friend owns a business and is looking to expand.Describe the risks and rewards of such a move using economies of scale and costs. (p. 18)
Calculate the reduced productivity in a company of 1,000 employees when there are 2 executive managers, 6 line managers, and 12 supervisors for every 80 workers. (p. 18)
✷ What costs do firms consider in the short run and the long run? (p. 18)
✷ How much should a firm produce? (p. 18)
✷ How are profits and losses calculated? (p. 18)
10. In most areas, developers are required to submit an environmental impact study before work can begin on a new construction project. Suppose that a commercial developer wants to build a new
9. A study finds that leaf blowers make too much noise, so the government imposes a $10 tax on the sale of every unit to correct for the social cost of the noise pollution. The tax completely
8. Two companies, Toxic Waste Management and Sludge Industries, both pollute a nearby lake.Each firm dumps 1,000 gallons of goo into the lake every day. As a consequence, the lake has lost its
7. Two roommates are opposites. One enjoys playing Modern Warfare with his friends all night. The other likes to get to bed early for a full 8 hours of sleep. If Coase is right, the roommates have an
6. The students at a crowded university have trouble waking up before 10 a.m., and most work jobs after 3 p.m. As a result, there is a great deal of demand for classes between 10 a.m. and 3 p.m., and
5. Which of the following activities give rise to the free-rider problem?a. recycling programsb. bikingc. studying for an examd. riding a bus (p. 18)
4. Can you think of a reason why making cars safer would create negative externalities?Explain. (p. 18)
3. Indicate whether the following are private goods, club goods, common-resource goods, or public goods:a. a bacon double cheeseburgerb. an NHL hockey game between the Detroit Red Wings and Boston
2. Indicate whether the following activities create a positive or negative externality:a. Late-night road construction begins on a new bridge. As a consequence, traffic is rerouted past your house
1. Many cities have noise ordinances that impose especially harsh fines and penalties for earlymorning and late-evening disturbances.Explain why these ordinances exist. (p. 18)
7. Give an example of a good that is nonrival in consumption and nonexcludable. What do economists call goods that share these characteristics? (p. 18)
6. What are the four incentives of private property? How do they differ from the incentives found in common property? (p. 18)
5. What is the tragedy of the commons? Give an example that is not in the chapter. (p. 18)
4. Does cost-benefit analysis apply to public goods only? If yes, why? If not, name situations in which economists would use costbenefit analysis. (p. 18)
3. Describe all of the ways in which externalities can be internalized. (p. 18)
2. Is it possible to use bargaining to solve externality problems involving many parties?Explain your reasoning. (p. 18)
1. Does the market overproduce or underproduce when third parties enjoy positive externalities?Show your answer on a supply and demand graph. (p. 18)
✷ What are the challenges of providing nonexcludable goods? (p. 18)
✷ What are private goods and public goods? (p. 18)
✷ What are externalities, and how do they affect markets? (p. 18)
10. Approximately 4,000 people in the United States die each year because they cannot find a suitable kidney donor. Under U.S. law, citizens cannot sell their spare kidney, which effectively means
9. Most of us would agree that movie theater popcorn is outrageously priced. Why don’t price gouging laws result in arrests and prosecutions of theater operators and other firms that charge prices
8. Demand and supply curves can be represented with equations. Suppose that the demand for low-skilled labor, QD, is represented by the following equation, where W is the wage rate: (p. 18)
7. Examine the following graph, showing the market for low-skilled laborers. (p. 18)
6. Imagine that local suburban leaders decide to enact a minimum wage. Will the community lose more jobs if the nearby city votes to increase the minimum wage to the same rate?Discuss your answer.
5. Many local governments use parking meters on crowded downtown streets. However, the parking spaces along the street are typically hard to find because the metered price is often set below the
4. Suppose that a group of die-hard sports fans are upset about the high price of tickets to many games. As a result of their lobbying efforts, a new law caps the maximum ticket price to any sporting
3. Suppose that the federal government places a binding price floor on chocolate. To help support the price floor, the government purchases all of the leftover chocolate that consumers do not buy. If
2. Imagine that the community you live in decides to enact a rent control of $700 per month on every one-bedroom apartment. Using the following table, determine the market price and equilibrium
1. In the song “Minimum Wage,” the punk band Fenix TX comments on the inadequacy of the minimum wage for making ends meet. Using the poverty thresholds provided by the Census Bureau,* determine
6. Why do most economists oppose attempts to control prices? Why does the government attempt to control prices anyway in a number of markets? (p. 18)
5. What will happen to the market price when a price control is nonbinding? (p. 18)
4. Are price gouging laws an example of a price floor or a price ceiling? (p. 18)
3. Will a surplus or a shortage caused by a price control become smaller or larger over time? Explain. (p. 18)
2. Does a nonbinding price floor cause a shortage or a surplus? Provide an example to support your answer. (p. 18)
1. Does a binding price ceiling cause a shortage or a surplus? Provide an example to support your answer. (p. 18)
✷ What effects do price floors have on economic activity? (p. 18)
✷ When do price floors matter? (p. 18)
✷ What effects do price ceilings have on economic activity? (p. 18)
✷ When do price ceilings matter? (p. 18)
7. What happens to tax revenues as tax rates increase? (p. 18)
6. Suppose that the government taxes a good that has very elastic demand. Illustrate what will happen to consumer surplus, producer surplus, tax revenue, and deadweight loss on a supply and demand
5. What type of goods should be taxed in order to minimize deadweight loss? (p. 18)
4. How do economists define efficiency? (p. 18)
3. Why do economists focus on consumer and producer surplus and not on the possibility of consumer and producer loss? Illustrate your answer on a supply and demand graph. (p. 18)
2. Explain how producer surplus is derived from the difference between the willingness to sell and the market equilibrium price. (p. 18)

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