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introduction to microeconomics

Questions and Answers of Introduction To Microeconomics

The notion of utility is an “ordinal” one for which it is assumed that people can rank combinations of goods as to their desirability, but that they cannot assign a unique numerical (cardinal)
Suppose frequent-flier coupons were transferable among people. How would this affect Figure 1 and, more generally, the overall viability of the program?
How do the details of loyalty programs affect consumer purchasing decisions? What kinds of constraints do the programs you participate in impose? How do they affect your buying behavior?
Would the requirement that the uncle make Willie “whole”by paying the amount suggested in question 1 provide the right incentives for the uncle to stick to the original deal?(This is an example
Suppose that the uncle’s heirs had offered to settle by making Willie as well-off as he would have been by acting sinfully in his teenage years. In Figure 1, how could you show the amount they
How do you interpret the utility-maximizing conditions when goods are perfect complements, such as those shown in Figure 3.9(d)? If left and right shoes were sold separately, would any price ratio
Explain how the condition should be changed for “boundary” issues such as those shown in Figures 3.8(c) and 3.9(c), where people buy zero amounts of some goods. Use this to explain why your
Anti-resale laws are just one example of a wide variety of laws that prevent individuals from undertaking voluntary transactions. Other examples include banning the sale of certain drugs, making it
If an individual’s current stock of CDs and DVDs yields an MRS of 2 for 1 (that is, they are willing to trade two CDs for one DVD), how should consumption patterns be changed to increase utility?
Why does the price ratio PX yPY show the rate at which any person can trade Y for X in “the market”? Illustrate this principle for the case of music CDs (which cost $10 each) and movie DVDs
How would your graph change if Frisbee and beach ball prices doubled to $40 and $20, respectively, with total spending of $200?
How would your graph change if this person decided to spend $200 (rather than $100) on these two items?
Graph this person’s budget constraint if Frisbees cost $20 and beach balls cost $10.
Automobile manufacturers provide “options packages” to their buyers. Most offer relatively few specific packages, each of which offers a predefined set of added accessories. For example, an
Our discussion of product positioning in this application paid no attention to the costs of providing various characteristics to consumers. Assuming that consumers will have to pay the costs
Explain why the MRS (which is the absolute value of the slope of an indifference curve) cannot be calculated for point E in Figure 3.2 without additional information.
Explain why the slope of an indifference curve would not be expected to be positive for economic “goods.”
What kinds of “irrational” economic decisions do you make? Why do you make these decisions? Can you develop a “rational” explanation for them?
There is currently considerable controversy about how Google or Amazon use consumer information to affect purchases. Is it “unfair” for Google to place paid advertising before its normal search
If it were known that a particular point in the “?” area in the figure was preferred to point X*, Y*, how could transitivity be used to rank some other points in that area?
What does the assumption of completeness imply about all of the points in the figure?
A wide variety of indices of well-being are used in recent years to rank countries. For example, compare the Human Development Index ([HDI] on which the United States ranks 15th) to the Happy Planet
Happiness is usually measured by using a series of categorical answers such as “very happy” or “mildly unhappy.”To use these responses to generate the types of quantitative results reported
Consider the function Y 5 X · Z, X, Z $ 0.a. Graph the Y 5 4 contour line for this function. How does this line compare to the Y 5 2 contour line in Figure 2.5? Explain the reasons for any
Suppose again that the production possibility frontier takes the form X2 1 4Y2 5 100 and also that the consumers in this economy wish to consume X and Y in equal amounts.a. How much of each good
Suppose an economy has a production possibility frontier characterized by the equation X2 1 4Y2 5 100.a. In order to sketch this equation, first compute its intercepts. What is the value of X if Y 5
The following data show the production possibilities for a hypothetical economy during one year:a. Plot these points on a graph. Do they appear to lie along a straight line? What is that straight
Taxes in Oz are calculated according to the formula T 5 .01I 2, where T represents thousands of dollars of tax liability and I represents income measured in thousands of dollars. Using this formula,
This problem involves solving demand and supply equations together to determine price and quantity.a. Consider a demand curve of the form QD 5 22P 1 20, where QD is the quantity demanded of a good
In several places, we have warned you about the decision of Marshall to “reverse the axes” by putting price on the vertical axis and quantity on the horizontal axis.This problem shows that it
With the original data shown in Problem 2.1, the equilibrium price is P 5 3.This is an equilibrium because at this price, quantity demanded is precisely equal to quantity supplied (Q 5 500). One
Marshall defined an equilibrium price as one at which the quantity demanded equals the quantity supplied.a. Using the data provided in Problem 1.1, show that P 5 3 is the equilibrium price in the
The following data represent five points on the supply curve for orange juice:and these data represent 5 points on the demand curve for orange juice:a. Graph the points of these supply and demand
Economists differentiate between “exogenous” variables whose values are determined within their models and“exogenous” variables whose values are set outside the models. This distinction can
A professor well-known to your authors would sometimes put the following system of simultaneous equations on the board: X 1 Y 5 3; X 2 Y 5 1.He would then ask students for the solution to these
Can the contour lines on a map ever intersect? Explain why such a map would be nonsensical. Would the same observation apply if we tried to draw intersecting contour lines for the function Y 5 ÏXZ?
Functions of several variables also have slopes. One way to see this is to reduce them to a function of a single variable by choosing a constant value for other variables in the equation.For example,
In economics the units of measurement often matter in creating a function. Suppose it takes 4 hours (X) to produce 1 widget (Y). How would you express this fact in an equation that used the following
Sometimes it is convenient to refer to nonlinear functions by the nature of their curvature. “Concave functions”are everywhere below tangent lines drawn to points on them, whereas “convex
In many places we have pointed out the problems Marshall posed for students by putting the independent variable in a demand curve (P) on the vertical axis. Let’s look at the algebra behind this
Throughout this book we will be concerned with the effect of “shifting” some curve. Explain why changing the intercept of a straight line shifts the line in a parallel way whereas changing the
A straight line has a constant slope which means that a unit change in X always yields the same change in Y.In some situations, this sort of relationship makes sense though in others it might not.
We have all heard the expression that “two points determine a straight line.” Suppose we know that the point X 5 1, Y 5 11 and the point X 5 5, Y 5 21 both lie on the same line. What is the
Working’s solution might not work if shifts in supply curves were correlated with shifts in demand curves. Use a simple supply-demand graph to explain this.
Working thought that for manufactured goods pricequantity data were more likely to trace out supply curves.Can you explain why?
Futures contracts allow people to agree to either buy or sell crude oil at a set price sometime in the future. Why would someone buy such a contract? Why would someone be willing to sell it? Do
In later sections of this book we will show that simple models of supply and demand are only appropriate for competitive markets. But the crude oil is dominated by a cartel-like organization
Explain how the changes illustrated in Figure 2.6 might occur in a supply-demand context in the real world.
Explain how the changes illustrated in Figure 2.6 represent a change in “something else.”
Then calculate the values that X must take on to keep Y at 3 if Z takes on every unit value between 9 and 1.
Show the numerical reasoning behind your answers to Questions 1 and
If Z is further reduced from 3 to 1, by how much will X have to increase to keep Y at 3?
If Z is reduced from 9 to 3, by how much will X have to be increased to keep Y at 3?
What is the average productivity when 10 workers are hired? When 20 workers are hired? When 50 workers are hired?
How many additional grapes are harvested by the 10th worker? The 20th worker? The 50th worker?
Zillow’s methods are also applied to making house price estimates on which to base real estate taxes. How might taxpayers react to using such methods to determine their taxes?
Figure 1 has the same slope for houses with and without a view. Can you think of any reason why the slopes of these two lines might be different?
What do you learn by comparing the graphs in Figure 2.2 to those in Figure 2.3?
What would happen to the X-intercept in the figure if the slope changed to 25/6?
How would this equation change if flounder catch were measured in pounds and price measured in cents per pound?
What are the units of the intercept and the slope in this equation?
The following conversation was heard among four economists discussing whether the minimum wage should be increased:Economist A. “Increasing the minimum wage would reduce employment of minority
A key concept in the development of positive economic theories is the notion of “refutability”—a “theory” is not a “theory” unless there is some evidence that, if true, could prove it
Housing advocates often claim that “the demand for affordable housing vastly exceeds the supply.” Use a supplydemand diagram to show whether you can make any sense out of this statement. In
“Gasoline sells for $4.00 per gallon this year, and it sold for $3.00 per gallon last year. But consumers bought more gasoline this year than they did last year. This is clear proof that the
Marshall’s model pictures price and quantity as being determined simultaneously by the interaction of supply and demand. Using this insight, explain the fallacies in the following paragraph:A rise
Classical economists struggled with the “Water-Diamond Paradox,” which seeks an explanation for why water(which is very useful) has a low price, whereas diamonds(which are not particularly
The Production Possibility Frontier (PPF), shown in Figure 1.1, has a “concave” shape (you can remember that this shape is called “concave” because it resembles part of the entrance to a
“To an economist, a resource is ‘scarce’ only if it has a positive price. Resources with zero prices are, by definition, not scarce.” Do you agree? Or does the term scarce convey some other
As Table 1 shows, a significant majority of economists believe that tariffs reduce economic welfare. Yet President Donald Trump used increased tariffs in 2019 to try to get China to agree to
The 2020 presidential election featured much discussion about tax policy. Especially prominent were discussions of raising the maximum tax rate on capital income (that is, dividends and capital
How many economists does it take to change a light-bulb?Two—one to turn the bulb and one to say repeatedly,“Turn it the other way.”
If all economists in the world were laid end-to-end, they would never reach a decision.
The price figures quoted in this application refer to wholesale prices—that is the prices paid by grocery stores for eggs. Do you think grocery stores were also able to take advantage of the
Sharp price increases often occur when natural disasters strike. Prices of flashlights, bottled water, or electric generators can easily double or triple. Should the government pass laws that prevent
Why would a change in the price of personal computers shift neither curve? Indeed, would this price ever change if all of the factors identified previously did not change?
What factors might shift the demand or supply curve for, say, personal computers?
Why no other P, Q point on the graph meets this definition of equilibrium?
Why the fact that P *, Q * occurs where the supply and demand curves intersect implies that both parties to the transaction are content with this result?
Over-the-air television is highly regulated in many countries, including the United States. The purported goal of such regulation is to provide better and more consistent services to consumers. Video
Joseph Schumpeter coined the term “creative destruction” to refer to the dynamic relationship between changing consumer demands and the responses of existing and new firms to meet them. This
Why do some companies grow whereas others decline?Name one company for which the failure to adapt to a changing environment was catastrophic.
Does it make sense to assume that animals consciously choose an optimal strategy for dealing with the scarcity of resources (see the discussion of Friedman’s pool player later in this chapter)?
This curve has a “concave” shape. Would the opportunity cost of clothing production increase if the shape of the curve were convex instead?
Why is this curve called a “frontier”?
Given the setup of the previous problem, what would the worker be willing to pay to rent the production technology?
A worker can produce x units of output at a cost of c(x) = x2/2. He can achieve a utility level of u = 0 working elsewhere. What is the optimal wage-labor incentive scheme s(x) for this worker?
Consider the model of the used-car market presented in this chapter. What is the maximum amount of consumers’ surplus that is created by trade in the market equilibrium?
Suppose that 10 people live on a street and that each of them is willing to pay $2 for each extra streetlight, regardless of the number of streetlights provided. If the cost of providing x
Suppose that the marginal cost of producing an extra video is zero and the transactions cost of renting a video is zero. Does a producer make more money by selling the video or by renting it?
If the cost to a customer from switching long-distance carriers is on the order of $50, how much should a long-distance carrier be willing to pay to acquire a new customer?
Suppose that the government wants to control the use of the commons, what methods exist for achieving the efficient level of use?
The ability to set the voting agenda can often be a powerful asset. Assuming that social preferences are decided by pair-wise majority voting and that the preferences given in Table 34.1 hold,
Suppose that an allocation is Pareto efficient, and that each individual only cares about his own consumption. Prove that there must be some individual that envies no one, in the sense described in
Suppose that the utility possibilities set is a convex set and that consumers care only about their own consumption. What kind of allocations represent welfare maxima of the Nietzschean welfare
A Rawlsian welfare function counts only the welfare of the worst off agent. The opposite of the Rawlsian welfare function might be called the “Nietzschean” welfare function—a welfare function
Suppose that we say that an allocation x is socially preferred to an allocation y only if everyone prefers x to y. (This is sometimes called the Pareto ordering, since it is closely related to the
Suppose that Robinson and Friday both want 60 pounds of fish and 60 pounds of coconuts per day. Using the production rates given in the chapter, how many hours must Robinson and Friday work per day
If Robinson’s marginal rate of substitution between coconuts and fish is −2 and the marginal rate of transformation between the two goods is −1, what should he do if he wants to increase his
What would happen if the firm depicted in Figure 33.2 decided to pay a higher wage?

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