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10.2 In game 1, no matter what Chrysler does, GM will do better to invest, and no matter what GM does, Chrysler will do better to invest. Each has a dominant strategy, but in following it, each does
10.1 No matter what American does, United will do better to leave ad spending the same. No matter what United does, American will do better to raise ad spending. So each player will play its
10. Jill and Jack both have two pails that can be used to carry water down from a hill. Each makes only one trip down the hill, and each pail of water can be sold for $5. Carrying the pails of water
The implication of these payoffs is that the market demand is large enough to support only one manufacturer. If both firms enter, both will sustain a loss. LO2a. Identify two possible equilibrium
8. Consider the following game. Harry has four quarters. He can offer Sally from one to four of them. If she accepts his offer, she keeps the quarters Harry offered her and Harry keeps the others.
7. Consider the following game, called matching pennies, which you are playing with a friend. Each of you has a penny hidden in your hand, facing either heads up or tails up (you know which way the
6. Newfoundland’s fishing industry has recently declined sharply due to overfishing, even though fishing companies were supposedly bound by a quota agreement. If all fishermen had abided by the
5. Imagine yourself sitting in your car in a campus parking lot that is currently full, waiting for someone to pull out so that you can park your car. Somebody pulls out, but at the same moment a
4. The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of
3. Blackadder and Baldrick are rational, self-interested criminals imprisoned in separate cells in a dark medieval dungeon. They face the prisoner’s dilemma displayed in the matrix.
2. Consider the following “dating game,” which has two players, A and B, and two strategies, to buy a movie ticket or a baseball ticket. The payoffs, given in points, are as shown in the matrix
1. In studying for his economics final, Sam is concerned about only two things: his grade and the amount of time he spends studying. A good grade will give him a benefit of 20; an average grade, a
LO4 5. Describe the commitment problem that narrowly self-interested diners and waiters would confront at restaurants located on interstate highways. Given that in such restaurants tipping does seem
4. How is your incentive to defect in a prisoner’s dilemma altered if you learn that you will play the game not just once but rather indefinitely many times with the same partner?
3. Suppose General Motors is trying to hire a small firm to manufacture the door handles for Pontiac sedans. The task requires an investment in expensive capital equipment that cannot be used for
2. Why did Warner Brothers make a mistake by waiting until the filming of Analyze This was almost finished before negotiating with Tony Bennett to perform in the final scene? LO5
1. Explain why a military arms race is an example of a prisoner’s dilemma. LO4
6. Discuss commitment problems and explain how altering preferences can solve commitment problems.
5. Show how games in which timing matters differ from games in which it does not.
4. Define and explain the Prisoner’s Dilemma and how it applies to realworld situations.
3. Recognize and show the effects of dominant strategies.
1. Describe the basic elements of a game. 2. Define and find an equilibrium for a game.
2. Suppose you are a monopolist in the market for a specific video game. Your demand curve is given by P 80 Q 2; your marginal cost curve is MC Q. Your fixed costs equal $400. LO4, LO5a. Graph the
1. Suppose that the University of Michigan Cinema is a local monopoly whose demand curve for adult tickets on Saturday night is P 12 2Q, where P is the price of a ticket in dollars and Q is the
10. Beth is a second-grader who sells lemonade on a street corner in your neighborhood. Each cup of lemonade costs Beth 20 cents to produce; she has no fixed costs. The reservation prices for the 10
9. In the preceding question, how much total surplus would result if Serena could act as a perfectly price-discriminating monopolist? LO6
8. Serena is a single-price, profit-maximizing monopolist in the sale of her own patented perfume, whose demand and marginal cost curves are as shown. Relative to the consumer surplus that would
7. TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter
6. What is the socially desirable price for a natural monopoly to charge? Why will a natural monopoly that attempts to charge the socially desirable price invariably suffer an economic loss? LO7
5. Explain why price discrimination and the existence of slightly different variants of the same product tend to go hand in hand. Give an example from your own experience. LO2, LO6
4. If a monopolist could perfectly price-discriminate: LO6a. The marginal revenue curve and the demand curve would coincide.b. The marginal revenue curve and the marginal cost curve would coincide.c.
3. A single-price, profit-maximizing monopolist: LO4a. Causes excess demand, or shortages, by selling too few units of a good or service.b. Chooses the output level at which marginal revenue begins
2. State whether the following statements are true or false, and explain why. LO1, LO7a. In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is
1. Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $10,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000, calculate the average
5. True or false: Because a natural monopolist charges a price greater than marginal cost, it necessarily earns a positive economic profit. LO7
4. Why is marginal revenue always less than price for a monopolist but equal to price for a perfectly competitive firm? LO4
3. Why do most successful industrial societies offer patents and copyright protection, even though these protections enable sellers to charge higher prices? LO2
2. True or false: A firm with market power can sell whatever quantity it wishes at whatever price it chooses. LO2
1. What important characteristic do all three types of imperfectly competitive firms share? LO1
7. Discuss public policies that are often applied to natural monopolies.
6. Describe price discrimination and its effects.
5. Show how monopoly alters consumer surplus, producer surplus, and total economic surplus relative to perfect competition.
4. Understand and use the concepts of marginal cost and marginal revenue to find the output level and price that maximize a monopolist’s profit.
3. Explain how start-up costs affect economics of scale and market power.
2. Define market power and show how this affects the demand curve facing the firm.
1. Define imperfect competition and describe how it differs from perfect competition.
8.4 PV $1,728 (1.2)3 $1,000.
8.3 If the taxi medallion were available for free, it would still command an economic profit of $20,000 per year. So its value is still the answer to the question “How much would you need to put
8.2 If each lane did not move at about the same pace, any driver in a slower lane could reduce his travel time by simply switching to a faster one. People will exploit these opportunities until each
8.1 As shown in the table below, Pudge’s accounting profit is now $10,000, the difference between his $20,000 annual revenue and his $10,000-per-year payment for land, equipment, and supplies. His
10.*Louisa, a renowned chef, owns one of the 1,000 spaghetti restaurants in Sicily. Each restaurant, including her own, currently serves 100 plates of spaghetti a night at $5 per plate. Louisa knows
9. You have an opportunity to buy an apple orchard that produces $25,000 per year in total revenue. To run the orchard, you would have to give up your current job, which pays $10,000 per year. If
8. You have a friend who is a potter. He holds a permanent patent on an indestructible teacup whose sale generates $30,000 a year more revenue than production costs. If the annual interest rate is
7. Unskilled workers in a poor cotton-growing region must choose between working in a factory for $6,000 a year and being a tenant cotton farmer. One farmer can work a 120-acre farm, which rents for
6. The government of the Republic of Self-Reliance has decided to limit imports of machine tools in order to encourage development of locally made machine tools. To do so, the government offers to
5. Explain carefully why, in the absence of a patent, a technical innovation invented and pioneered in one tofu factory will cause the supply curve for the entire tofu industry to shift to the
4. The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000 a year. Paying this salary, each of the 199 firms makes a normal
3. John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows:a. Calculate John’s annual accounting profit.b. John could earn $1,000 per year
2. Explain why new software firms that give away their software products at a short-run economic loss are nonetheless able to sell their stock at positive prices. LO4
1. True or False: Explain why the following statements are true or false:a. The economic maxim “There’s no cash on the table” means that there are never any unexploited economic opportunities.
5. Why is a payment of $10,000 to be received one year from now more valuable than a payment of $10,000 to be received two years from now? LO4
4. Why did airlines that once were regulated by the government generally fail to earn an economic profit, even on routes with relatively high fares? LO4
3. Why do market forces drive economic profit but not economic rent toward zero? LO3
2. How can a businessowner who earns $10 million per year from his business credibly claim to earn zero economic profit? LO1
1. Why do most cities in the United States now have more radios but fewer radio repair shops than they did in 1960? LO2
5. Understand and explain the relationship between a market equilibrium and a social optimum.
4. Use the theory of the invisible hand to analyze events in everyday life.
3. Explain the difference between economic profit and economic rent.
2. Show how economic profit and economic loss affect the allocation of resources across industries.
1. Define and explain the differences between accounting profit and economic profit.
7.5 At a consumption level of 2 million gallons per day, the marginal source of water is the lake, which has a marginal cost of 0.8 cent per gallon. The city should charge everyone 0.8 cent per
7.4 Under first-come, first-served, Dana will have to postpone his lesson. Since Dana would be willing to pay up to $10 to avoid postponing it, he will be better off if the pro asks for a
7.3 With a $0.50 per loaf subsidy, the new domestic price becomes $1.50 per loaf. The new lost surplus is the area of the small shaded triangle in the diagram: (1 2)($0.50/loaf)(1,000,000
7.2 As shown in the accompanying diagram, the new loss in total economic surplus is $200 per day.
7.1 At a price of 50 cents per gallon, there is excess demand of 4,000 gallons per day. Suppose a seller produces an extra gallon of milk (marginal cost 50 cents) and sells it to the buyer who values
10.*Refer to problem 9. Suppose each of the 1 million Islandian households has the same demand curve for heating oil. LO2a. What is the household demand curve?b. How much consumer surplus would each
9.*The government of Islandia, a small island nation, imports heating oil at a price of $2 per gallon and makes it available to citizens at a price of $1 per gallon. If Islandians’ demand curve for
8.*Phil’s demand curve for visits to the Gannett walk-in medical clinic is given by P 48 8Q, where P is the price per visit in dollars and Q is the number of visits per semester. The marginal cost
7. The municipal water works of Cortland draws water from two sources: an underground spring and a nearby lake. Water from the spring costs 2 cents per 100 gallons to deliver and the spring has a
6. In Charlotte, North Carolina, citizens can get their electric power from two sources: a hydroelectric generator and a coal-fired steam generator. The hydroelectric generator can supply up to 100
5. Is a company’s producer surplus the same as its profit? (Hint: A company’s total cost is equal to the sum of all marginal costs incurred in producing its output, plus any fixed costs.) LO1
4. Suppose the weekly demand for a certain good, in thousands of units, is given by the equation P 8 Q and the weekly supply of the good is given by the equation P 2 Q, where P is the price in
3. The Kubak crystal caves are renowned for their stalactites and stalagmites. The warden of the caves offers a tour each afternoon at 2 p.m. sharp. The caves can be shown to only four people per day
2. Refer to problem 1. Suppose a coalition of students from Lincoln High School succeeds in persuading the local government to impose a price ceiling of $7.50 on used DVDs, on the grounds that local
1. Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram. Calculate LO1a. The weekly consumer surplus.b. The weekly producer surplus.c. The
4. Why is compensating volunteers to relinquish their seats on overbooked flights more efficient than a policy of first-come, first-served? LO3 5. Why do price ceilings reduce economic surplus? LO3
3. Why does the loss in total economic surplus directly experienced by participants in the market for a good that is taxed overstate the overall loss in economic surplus that results from the tax?
2. You are a senator considering how to vote on a policy that would increase the economic surplus of workers by $100 million per year but reduce the economic surplus of retirees by $1 million per
1. Why do economists emphasize efficiency as an important goal of public policy? LO1
4. Examine the ways in which the imposition of taxes affects efficiency
3. Explain how the concept of efficiency helps determine the “right” price for public services.
2. Analyze how consumer surplus, producer surplus, total economic surplus, and efficiency are affected by public and private policies.
1. Define efficiency as economists use this term.
6.5 The fact that each of the city’s 60,000 residents is willing to pay 0.00005 cent for each bottle removed means that the collective benefit of each bottle removed is (60,000)(0.00005) 3 cents.
6.4 Because the firm makes its smallest loss when it hires zero employees, it should shut down in the short run.
6.3 The relevant costs are now as shown in the table on the next page. With each variable and marginal cost entry half what it was in the original example, the firm should now hire six employees and
6.2 If bottles sell for 62 cents each, the firm should continue to expand up to and including the sixth employee (350 bottles per day). LO3
6.1 Since Harry will find 300 containers if he searches a third hour, we find his reservation price for searching a third hour by solving p(300) $6 for p 2 cents. His reservation prices for
slice?
10.*For the pizza seller whose marginal, average variable, and average total cost curves are shown in the accompanying diagram (who is the same seller as in problem 9), what is the profit-maximizing

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