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introduction to microeconomics

Questions and Answers of Introduction To Microeconomics

Does a competitive firm’s price equal the minimum of its average total cost in the short run, in the long run or both? Explain.
Does a competitive firm’s price equal its marginal cost in the short run, in the long run or both?Explain.
Under what conditions will a firm exit a market? Explain.
Under what conditions will a firm shut down temporarily? Explain.
Draw the cost curves for a typical firm. Explain how a competitive firm chooses the level of output that maximises profit. At that level of output, show on your graph the firm’s total revenue and
Explain the difference between a firm’s revenue and its profit. Which do firms maximise?
What are the main characteristics of a competitive market?
Your aunt is thinking about opening a hardware store. She estimates that it would cost $500 000 per year to rent the store and buy the stock. In addition, she would have to quit her $50 000 per year
This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost and marginal cost. Fill in the type of cost that best completes the phrases
If a higher level of production allows workers to specialise in particular tasks, a firm will likely exhibit a increasing returns to scale and falling average total cost.b increasing returns to scale
The government imposes a $1000 per year licence fee on all pizza restaurants. Which cost curves shift as a result?a average total cost and marginal cost b average total cost and average fixed cost c
A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If the firm were to increase production to 21 units, which of the following must occur?a Marginal cost would
A firm is producing 1000 units at a total cost of $5000. If it were to increase production to 1001 units, its total cost would rise to $5008. What does this information tell you about the firm?a
Diminishing marginal product explains why, as a firm’s output increases, a the production function and total-cost curve both get steeper.b the production function and total-cost curve both get
Raj opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mown his neighbour’s lawn for $40. Raj has an
Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise.
How and why does a firm’s average-total-cost curve differ in the short run compared with the long run?
Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they intersect where they do.
Define total cost, average total cost and marginal cost. How are they related?
Draw a production function that exhibits diminishing marginal product of labour. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves
What is marginal product? What does it mean if marginal product is diminishing?
Give an example of an opportunity cost that an accountant would not count as a cost. Why would the accountant ignore this cost?
What is the relationship between a firm’s total revenue, profit and total cost?
In the 1980s the government introduced a ‘fringe benefits tax’. If employees received personal benefits from their employer, such as restaurant meals, then the company had to pay tax on this
Categorise each of the following funding schemes as examples of the benefits principle or the ability-to-pay principle.a Visitors to some national parks pay an entrance fee.b Local property taxes
Suppose that the government increases the GST rate from 10 per cent to 12.5 per cent. The Treasurer forecasts a 25 per cent increase in GST revenue. Is this plausible? Explain.6 Under Australian tax
When someone owns an asset (such as an investment property or shares in a company) that rises in value, he has an ‘accrued’ capital gain. If he sells the asset, he ‘realises’ the gains that
The GST does not apply to necessities such as basic foods, health-care services and education.Discuss the merits of these exclusions. Consider both efficiency and equity.
Suppose you are a typical person in the Australian economy. You pay the 2 per cent Medicare levy, and personal income taxes as in Table 12.2. How much tax do you pay if you earn $54 000 a year? What
Each year the Federal Treasurer and the Minister for Finance circulate the budget papers. Using a recent budget paper (you can find these at www.budget.gov.au), answer the following questions and
If the company income tax induces businesses to reduce their capital investment, then a the tax does not have any deadweight loss.b corporate shareholders benefit from the tax.c workers bear some of
In Australia, taxpayers in the top 20 per cent of the income distribution pay about ___ per cent of their income in federal taxes.a 7 b 15 c 21 d 28
A toll is a tax on people who use toll roads. This policy can be viewed as an application of a the benefits principle.b horizontal equity.c vertical equity.d tax progressivity.
If federal income tax rates are zero for the first $20 000 of income and 25 per cent for all income above that level, then a person who earns $50 000 has an average tax rate of ___ per cent and a
Andrea gives piano lessons. She has an opportunity cost of $50 per lesson and charges $60.Andrea has two students: Amy, who has a willingness to pay $70, and Carl, who has a willingness to pay $90.
The two largest sources of tax revenue for the Australian federal government are a individual and company income taxes.b individual income taxes and the GST.c corporate income taxes and the GST.d
What is the concept of horizontal equity and why is it hard to apply?
Give two arguments why wealthy taxpayers should pay more taxes than poor taxpayers.
What is the marginal tax rate on a lump-sum tax? How is this related to the efficiency of the tax?
Why might a GST lead to less distortion than an income tax? Could it lead to more distortion?How?
Why is the burden of a tax to taxpayers greater than the revenue received by the government?
Explain how the federal government avoids taxing company profits twice.
Over the past several decades, has the federal government grown more or less slowly than the rest of the economy?
Wireless, high-speed Internet is provided for free in the airport of the city of Communityville.a At first, only a few people use the service. What type of a good is this and why?b Eventually, more
Commercial radio stations are private firms that produce and broadcast programs without assistance from the government.a What type of good is a radio program? Explain your answer with reference to
Both public goods and common resources involve externalities.a Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market
Think about the goods and services provided by state and local governments.a Using the classification in Figure 11.1, explain what category each of the following goods falls into:i police protection
Common resources are a efficiently provided by market forces.b underprovided in the absence of government intervention.c overused in the absence of government intervention.d a type of natural
Public goods are a efficiently provided by market forces.b underprovided in the absence of government intervention.c overused in the absence of government intervention.d a type of natural monopoly.
Which of the following is an example of a common resource?a residential housing b national defence c restaurant meals d fish in the ocean
Which of the following is an example of a public good?a residential housing b national defence c restaurant meals d fish in the ocean
Which categories of goods are rival in consumption?a private goods and club goods b private goods and common resources c public goods and club goods d public goods and common resources
Which categories of goods are excludable?a private goods and club goods b private goods and common resources c public goods and club goods d public goods and common resources
Define and give an example of a common resource. Without government intervention, will people use this good too much or too little? Why?
What is cost–benefit analysis of public goods? Why is it important? Why is it hard?
Define and give an example of a public good. Can the private market provide this good on its own? Explain.
Explain what is meant by a good being ‘excludable’. Explain what is meant by a good being ‘rival in consumption’. Is a pizza excludable? Is it rival in consumption?
The Coase theorem does NOT apply if a there is a significant externality between two parties.b the court system vigorously enforces all contracts.c transaction costs make negotiating difficult.d both
The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of $25 000. This policy is equivalent to a corrective tax of ________ per unit of
Which of the following statements about corrective taxes is NOT true?a Economists tend to prefer them to command-and-control regulation.b They raise government revenue.c They cause deadweight
When the government levies a tax on a good equal to the external cost associated with the good’s production, it ________ the price paid by consumers and makes the market outcome ________
If the production of a good yields a negative externality, then the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity.a
Which of the following is an example of a positive externality?a Bob mows Hillary’s lawn and is paid $100 for performing the service.b While mowing the lawn, Bob’s lawnmower spews out smoke that
Imagine that you are a non-smoker sharing a room with a smoker. According to the Coase theorem, what determines whether your room-mate smokes in the room? Is this outcome efficient? How do you and
List some of the ways that the problems caused by externalities can be solved without government intervention.
What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution?
In what way does the patent system help society solve an externality problem?
Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm’s production process.
Give an example of a negative externality and of a positive externality.
Consider a small country that exports steel. Suppose that a ‘protrade’ government decides to subsidise the export of steel by paying a certain amount for each tonne sold abroad. How does this
Assume Australia is an importer of sofas and there are no trade restrictions. Australian consumers buy one million sofas per year, of which 400 000 are produced domestically and 600 000 are
Having rejected a tariff on steel (a tax on imports), the Prime Minister of Isoland is now considering the same-sized tax on steel consumption (including both imported and domestically produced
Consider a country that imports a good from abroad. For each of the following statements, say whether it is true or false. Explain your answer.a ‘The greater the elasticity of demand, the greater
China is a major producer of grains, such as wheat, corn and rice. Some years ago, the Chinese Government, concerned that grain exports were driving up food prices for domestic consumers, imposed a
The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is three million T-shirts. One day, after reading Adam
Consider the five arguments for restricting trade.a Imagine that you are a lobbyist for timber, an established industry suffering from low-priced foreign competition, and you are trying to get
When China’s clothing industry expands, the increase in world supply lowers the world price of clothing.a Draw an appropriate diagram to analyse how this change in price affects consumer surplus,
Suppose that the federal government imposes a tariff on imported cars to protect the Australian car industry from foreign competition. Assuming that Australia is a price taker in the world car
The world price of wine is below the price that would prevail in India in the absence of trade.a Assuming that Indian imports of wine are a small part of total world wine production, draw a graph for
The main difference between imposing a tariff and handing out licences under an import quota is that it is only under a tariff that a consumer surplus increases.b producer surplus increases.c
Which of the following trade policies would benefit producers, hurt consumers and increase the amount of trade?a the increase of a tariff in an importing country b the reduction of a tariff in an
If a nation that imports a good imposes a tariff, it will increase a the domestic quantity demanded.b the domestic quantity supplied.c the quantity imported from abroad.d all of the above.
When a nation opens itself to trade in a good and becomes an importer, a producer surplus decreases, but consumer surplus and total surplus both increase.b producer surplus decreases, consumer
When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation?a Domestic production of coffee rises,
If a nation that does not allow international trade in cars has a domestic price of cars lower than the world price, then a the nation has a comparative advantage in producing cars and would become a
What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each.
List five arguments often given to support trade restrictions. How do economists respond to these arguments?
Describe what a tariff is and describe its economic effects.
Draw the supply-and-demand diagram for an importing country. Identify consumer surplus and producer surplus before trade is allowed. Identify consumer surplus and producer surplus with free trade.
When does a country become an exporter of a good? An importer?
What does the domestic price that prevails without international trade tell us about a nation’s comparative advantage?
(This question refers to material in the appendix to this chapter.) Suppose that the government places a subsidy on petrol.a Is the deadweight loss from this subsidy likely to be greater in the first
(This question refers to material in the appendix to this chapter.) A market is characterised by a typical downward-sloping demand curve and an upward-sloping supply curve.a Draw the competitive
Suppose that a market is described by the following supply and demand equations:QS ¼ 2P QD ¼ 300 P a Solve for the equilibrium price and the equilibrium quantity.b Suppose that a tax of T is
Hotel rooms in Smalltown go for $100, and 1000 rooms are rented on a typical day.a To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the
The government places a tax on the purchase of socks.a Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the
After an economics lecture one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a‘good’
Suppose that the government imposes a tax on natural gas.a Is the deadweight loss from this tax likely to be greater in the first year after it is imposed or in the fifth year? Explain.b Is the
Consider the market for rubber bands.a If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use
Evaluate the following two statements. Do you agree? Why or why not?a ‘A tax that has no deadweight loss cannot raise any revenue for the government.’b ‘A tax that raises no revenue for the

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