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introduction to microeconomics

Questions and Answers of Introduction To Microeconomics

The competitive price of coconuts is $6 per pound and the price of fish is $3 per pound. If society were to give up 1 pound of coconuts, how many more pounds of fish could be produced?
If the value of excess demand in 8 out of 10 markets is equal to zero, what must be true about the remaining two markets?
John decides that he will save $5 this week and $10 next week. But when next week arrives, he decides to save only $8. What is the term used to describe this sort of inconsistent behavior?
What is the probability that a fair coin will come up heads three times in a row when tossed?
You are the human resources director for a medium-size company and are trying to decide how many mutual funds to offer in your employees’ pension plan. Would it be better to offer 10 choices or 50
Subjects are allowed to buy tickets in a lottery. One group is told that they have a 55 percent chance of winning, the other group is told that they have a 45 percent chance of not winning. Which
A contractor says that he intends to “low-ball the bid and make up for it on change orders.” What does he mean?
The text claims that row scores 62 percent of the time in equilibrium. Where does this number come from?
Look at the best responses for row and column in the section on mixed strategies. Do these give rise to best response functions?
Suppose that player B rather than player A gets to move first in the sequential game described in this chapter. Draw the extensive form of the new game. What is the equilibrium for this game? Does
What is the dominant Nash equilibrium strategy for the repeated prisoner’s dilemma game when both players know that the game will end after one million repetitions? If you were going to run an
We know that the single-shot prisoner’s dilemma game results in a dominant Nash equilibrium strategy that is Pareto inefficient. Suppose we allow the two prisoners to retaliate after their
Consider the tit-for-tat strategy in the repeated prisoner’s dilemma. Suppose that one player makes a mistake and defects when he meant to cooperate. If both players continue to play tit for tat
Suppose there are n identical firms in a Cournot equilibrium. Show that the absolute value of the elasticity of the market demand curve must be greater than 1/n. (Hint: in the case of a monopolist, n
Consider a cartel in which each firm has identical and constant marginal costs. If the cartel maximizes total industry profits, what does this imply about the division of output between the firms?
Suppose that we have two firms that face a linear demand curve p(Y ) = a − bY and have constant marginal costs,c, for each firm. Solve for the Cournot equilibrium output.
In our examination of the upstream and downstream monopolists we derived expressions for the total output produced. What are the appropriate expressions for the equilibrium prices, p and k?
In our example of the minimum wage, what would happen if the labor market was dominated by a monopsonist and the government set a wage that was above the competitive wage?
We saw that a monopolist never produced where the demand for output was inelastic. Will a monopsonist produce where a factor is inelastically supplied?
Disneyland also offers a discount on admissions to residents of Southern California. (You show them your zip code at the gate.) What kind of price discrimination is this? What does this imply about
Suppose that the amusement park owner can practice perfect first-degree price discrimination by charging a different price for each ride. Assume that all rides have zero marginal cost and all
The marginal cost of production is constant atc. What price is charged to each group?
Suppose that a monopolist sells to two groups that have constant elasticity demand curves, with elasticity 1 and
What kinds of economic and technological conditions are conducive to the formation of monopolies?
True or false? Imposing a quantity tax on a monopolist will always cause the market price to increase by the amount of the tax.
The government is considering subsidizing the marginal costs of the monopolist described in the question above. What level of subsidy should the government choose if it wants the monopolist to
If the demand curve facing the monopolist has a constant elasticity of 2, then what will be the monopolist’s markup on marginal cost?
What is the answer to the above question if the demand curve facing the monopolist has constant elasticity?
The government imposes a quantity tax of $6 per unit of output. If the demand curve facing the monopolist is linear, how much does the price rise?
A monopolist is operating at an output level where || =
If D(p) = 100/p and c(y) = y2, what is the optimal level of output of the monopolist? (Be careful.)
The monopolist faces a demand curve given by D(p) = 10p−3. Its cost function is c(y)=2y. What is its optimal level of output and price?
The monopolist faces a demand curve given by D(p) = 100−2p. Its cost function is c(y)=2y. What is its optimal level of output and price?
The market demand curve for heroin is said to be highly inelastic. Heroin supply is also said to be monopolized by the Mafia, which we assume to be interested in maximizing profits. Are these two
A New York City cab operator appears to be making positive profits in the long run after carefully accounting for the operating and labor costs. Does this violate the competitive model? Why or why
The model of entry presented in this chapter implies that the more firms in a given industry, the (steeper, flatter) is the long-run industry supply curve.
According to the model presented in this chapter, what determines the amount of entry or exit a given industry experiences?
In the short run the demand for cigarettes is totally inelastic. In the long run, suppose that it is perfectly elastic. What is the impact of a cigarette tax on the price that consumers pay in the
If S1(p) = p−10 and S2(p) = p−15, then at what price does the industry supply curve have a kink in it?
In a perfectly competitive market what is the relationship between the market price and the cost of production for all firms in the industry?
If average variable costs exceed the market price, what level of output should the firm produce? What if there are no fixed costs?
In a purely competitive market a firm’s marginal revenue is always equal to what? A profit-maximizing firm in such a market will operate at what level of output?
What is the major assumption that characterizes a purely competitive market?
Classify each of the following as either technological or market constraints: the price of inputs, the number of other firms in the market, the quantity of output produced, and the ability to
If the long-run cost function is c(y) = y2 + 1, what is the long-run supply curve of the firm?
If the price changes from 10 to 20, what is the change in its profits?
A firm has a supply function given by S(p)=4p. Its fixed costs are
If the supply curve is given by S(p) = 100 + 20p, what is the formula for the inverse supply curve?
True or false? In the long run a firm always operates at the minimum level of average costs for the optimally sized plant to produce a given amount of output.
A firm produces identical outputs at two different plants. If the marginal cost at the first plant exceeds the marginal cost at the second plant, how can the firm reduce costs and maintain the same
Which of the following are true? (1) Average fixed costs never increase with output; (2) average total costs are always greater than or equal to average variable costs; (3) average cost can never
If a firm uses n inputs (n > 2), what inequality does the theory of revealed cost minimization imply about changes in factor prices (Δwi) and the changes in factor demands (Δxi) for a given level
The price of paper used by a cost-minimizing firm increases. The firm responds to this price change by changing its demand for certain inputs, but it keeps its output constant. What happens to the
Suppose that a cost-minimizing firm uses two inputs that are perfect substitutes. If the two inputs are priced the same, what do the conditional factor demands look like for the inputs?
If a firm is producing where MP1/w1 > MP2/w2, what can it do to reduce costs but maintain the same output?
Suppose a firm is maximizing profits in the short run with variable factor x1 and fixed factor x2. If the price of x2 goes down, what happens to the firm’s use of x1? What happens to the firm’s
If pMP1 > w1, then should the firm increase or decrease the amount of factor 1 in order to increase profits?
A gardener exclaims: “For only $1 in seeds I’ve grown over $20 in produce!” Besides the fact that most of the produce is in the form of zucchini, what other observations would a cynical
If a firm had decreasing returns to scale at all levels of output and it divided up into two equal-size smaller firms, what would happen to its overall profits?
If a firm had everywhere increasing returns to scale, what would happen to its profits if prices remained fixed and if it doubled its scale of operation?
In the short run, if the price of the fixed factor is increased, what will happen to profits?
In a production process is it possible to have decreasing marginal product in an input and yet increasing returns to scale?
True or false? If the law of diminishing marginal product did not hold, the world’s food supply could be grown in a flowerpot.
The technical rate of substitution between factors x2 and x1 is −4. If you desire to produce the same amount of output but cut your use of x1 by 3 units, how many more units of x2 will you need?
It turns out that the type of returns to scale of this function will depend on the magnitude of a +b. Which values of a + b will be associated with the different kinds of returns to scale?
The Cobb-Douglas production function is given by f(x1, x2) = Axa 1xb
Consider the production function f(x1, x2)=4x 1 2 1 x 1 3 2 . Does this exhibit constant, increasing, or decreasing returns to scale?
Does this exhibit constant, increasing, or decreasing returns to scale?
Consider the production function f(x1, x2) = x2 1x2
A game theorist fills a jar with pennies and auctions it off on the first day of class using an English auction. Is this a private-value or a common-value auction? Do you think the winning bidder
Suppose that we have two copies of Intermediate Microeconomics to sell to three (enthusiastic) students. How can we use a sealed-bid auction that will guarantee that the bidders with the two highest
Suppose that there are only two bidders with values of $8 and $10 for an item with a bid increment of $1. What should the reservation price be in a profit-maximizing English auction?
Consider an auction of antique quilts to collectors. Is this a private-value or a common-value auction?
Suppose we estimate a demand function of the form x = ec+bp, where p is price, x is the quantity consumed, and b is a parameter. What is this functional form called?
Suppose that you want to test the hypothesis that a coin has a probability of 1/2 of coming up heads when you flip it. You flip it 5 times and it comes up heads every time. How likely is it that you
When the Titanic sank in 1912, both male and female crew members had a higher survival rate than the third-class passengers. However, overall the third-class passengers had a higher survival rate
Consider the tax treatment of borrowing and lending described in the text. How much revenue does this tax system raise if borrowers and lenders are in the same tax bracket?
Suppose that the supply curve is vertical. What is the deadweight loss of a tax in this market?
The United States imports about half of its petroleum needs. Suppose that the rest of the oil producers are willing to supply as much oil as the United States wants at a constant price of $25 a
Suppose that all consumers view red pencils and blue pencils as perfect substitutes. Suppose that the supply curve for red pencils is upward sloping. Let the price of red pencils and blue pencils be
What is the effect of a subsidy in a market with a horizontal supply curve? With a vertical supply curve?
Suppose that the demand curve for a good is given by D(p) = 100/p. What price will maximize revenue?
Suppose that a consumer is consuming 10 units of a discrete good and the price increases from $5 per unit to $6. However, after the price change the consumer continues to consume 10 units of the
Suppose that the demand curve is given by D(p) = 10 − p. What is the gross benefit from consuming 6 units of the good?
A good can be produced in a competitive industry at a cost of $10 per unit. There are 100 consumers are each willing to pay $12 each to consume a single unit of the good (additional units have no
If a stock has a β of 1.5, the return on the market is 10%, and the riskfree rate of return is 5%, what expected rate of return should this stock offer according to the Capital Asset Pricing Model?
If the risk-free rate of return is 6%, and if a risky asset is available with a return of 9% and a standard deviation of 3%, what is the maximum rate of return you can achieve if you are willing to
3. A risk-averse individual is offered a choice between a gamble that pays $1000 with a probability of 25% and $100 with a probability of 75%, or a payment of $325. Which would he choose?
Which of the following utility functions have the expected utility property? (a) u(c1, c2, π1, π2) = a(π1c1 + π2c2), (b) u(c1, c2, π1, π2) = π1c1 + π2c2 2, (c) u(c1, c2, π1, π2) = π1 ln
Suppose that a scarce resource, facing a constant demand, will be exhausted in 10 years. If an alternative resource will be available at a price of $40 and if the interest rate is 10%, what must the
The payments of certain types of bonds (e.g., municipal bonds) are not taxable. If similar taxable bonds are paying 10% and everyone faces a marginal tax rate of 40%, what rate of return must the
A house, which you could rent for $10,000 a year and sell for $110,000 a year from now, can be purchased for $100,000. What is the rate of return on this house?
Suppose that a scarce resource, facing a constant demand, will be exhausted in 10 years. If an alternative resource will be available at a price of $40 and if the interest rate is 10%, what must the
The payments of certain types of bonds (e.g., municipal bonds) are not taxable. If similar taxable bonds are paying 10% and everyone faces a marginal tax rate of 40%, what rate of return must the
A house, which you could rent for $10,000 a year and sell for $110,000 a year from now, can be purchased for $100,000. What is the rate of return on this house?
Suppose that by some miracle the number of hours in the day increased from 24 to 30 hours (with luck this would happen shortly before exam week). How would this affect the budget constraint?
The prices are (p1, p2) = (2, 3), and the consumer is currently consuming (x1, x2) = (4, 4). There is a perfect market for the two goods in which they can be bought and sold costlessly. Will the
In the case of the gasoline tax, what would happen if the rebate to the consumers were based on their original consumption of gasoline, x, rather than on their final consumption of gasoline, x ?
Suppose a consumer has preferences between two goods that are perfect substitutes. Can you change prices in such a way that the entire demand response is due to the income effect?
When prices are (p1, p2) = (2, 1) a consumer demands (x1, x2) = (1, 2), and when prices are (q1, q2) = (1, 2) the consumer demands (y1, y2) = (2, 1). Is this behavior consistent with the model of

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