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introduction to microeconomics

Questions and Answers of Introduction To Microeconomics

Supposea consumerwith $160 to spend has the utility function (for bundles of bread, cheese, salami, and money left over) given by U(b,c, s,m) = 6 ln(b) + 2 ln(c) + ln(s) + m.What choices maximize
Suppose that a particular consumer has utility function (for bundles of bread, cheese, and salami) given by U(b,c, s) = 6 ln(b) + 3 ln(c) + ln(s), and the consumer has $20 to spend. The prices of
Three consumers rank bundles consisting of b loaves of bread, c kilos of cheese, and s kilos of salami according to the following three utility functions:Consumer 1 ranks them according to the
Redo the analysis of this chapter with the following assumptions: Retail inverse demand is 131 − x/100. The total cost of manufacturing x units is TC(x) = 10,000 + 11x + x2/100. If the retailer is
In the example of bundling that is presented in the chapter, the values a given consumer attach to Day 1 and Day 2 are independent. That is, if I pick one of the 10,000 consumers at random and tell
Nonlinear prices can give rise to a number of counterintuitive phenomena.Here is a (hard!) example to illustrate some of the things that can happen.To give a model in which we can explore nonlinear
Regarding the Malvino Bakery problem:(a) If the tourists have an elasticity of demand of −1 at the price $2.50 and buy 300 loaves, and the locals have an elasticity of −5 at that price and buy 90
A manufacturer with a constant-marginal-cost production technology sells 10,000 units at a price of $10 per unit. The elasticity of demand facing this manufacturer at this price is −3. The price of
Suppose a firm sells to senior citizens and others at a single price of $10 per unit. At this price, it sells 10,000 units in total; 2,000 to seniors and 8,000 to the others. At the price of $10,
On October 10, 2000, a particular book about human resource management was being sold by Amazon.com for $102.75. At precisely the same time, this book could be purchased at the Amazon.uk website for
A bakery in the seaside town of Malvino sells freshly baked bread at a store it operates along the highway to two categories of customers: residents of the town and tourists. During the summer
(a) A consumer marketing firm has been test marketing a new product in a number of markets. This firm believes that demand for its product comes entirely from women between the ages of 15 and 35, and
Go back to page 168 and the firm selling to the three consumer groups mentioned there. Suppose that the inverse demand functions facing this firm for the three groups are, respectively, Py(xy) = 10
Go back to pages 165-6 and the problem discussed there. We said that$44 was not profit maximizing but, per the information given, $41.67 would be.By how much (approximately) would the firm’s profit
Brigadier Motors (BM), a profit-maximizing firm, produces a single variety of light truck. It sells this truck for $20,000, at which price it sells approximately 1.6 million light trucks per year. BM
Aprofit-maximizingfirm sells its goods at a price of $40 apiece. Its marginal cost of production at its profit-maximizing level of production is $10. For this firm, what is ⌫($40)?
A firm sells its product for $8 apiece and sells 10,000 units per month at that price. It estimates that for small changes in price, a 1% change in price means a 3% change in the quantity sold (in
Consider a firm with the demand function D(p) = 2000(50−p) and the total cost function TC(x) = 10,000 + 10x.(a) Just for the practice, find the profit-maximizing price and quantity for this
Google sells “advertising” on its website in the form of keywords: If someone searches using a keyword that you “bought,” your advertisement appears as a result of the search. (Where your
Amongthemanydecisions facing designers of Americansports stadiums is the number of luxury boxes—plush suites that look out onto the playing field—to build. Suppose that, for a particular stadium
(For people interested in cost accounting) (a) In our simple example of why you shouldn’t take seriously full-cost contributions, overhead was allocated equally among the three product lines. You
Imagine a firm with total-cost function TC(x) = F +Kx facing an inversedemand function of the form P(x) = A − Bx, for constants A,B, and K all strictly positive and F $ 0.(a) Assuming that A > K
Suppose the total-cost function of a one-output firm is given by TC(x) =⇢20x − x2/20,000 for x  50,000, and 10x + x2/20,000 + 250,000 for x $ 50,000.Draw the AC–MC picture for this firm.
Here are four total-cost functions. For each one, ifwedraw the firms average and marginal cost functions, does the picture look like Figure 6.3, 6.4(a), 6.4(b), or none of these? If the answer is
Imaginea single-outputfirmwith the total cost function TC(x) = 10,000,000+50x + x2/16,000, where x is the level of the firm’s output.(a) Draw (roughly) on a single graph the firm’s average and
. (a) Suppose that, in the stadium problem, the data are changed as follows.After allocating seats to season ticket holders, the general manager has 30,000 seats to allocate between Wolverton and
. (Here is a slightly harder version of the two-tablet problem.) Let x be the number of Model X’s the firm sells and y the number of Model Y’s. The two inverse demand functions are PX = 100 −x
On page 132, you are given the system of inverse demand functions for the problem of the two-output firm that sells the two models of tablets. Suppose instead you were given the following system of
Consider the Freedonian steel company example discussed in the chapter.(a) The story in the chapter asserts that average cost at efficient scale is 400.Using the methods discussed around pages 140
A firm that produces a single product sells its output for p = 20 − x/1000, where x is the quantity that it produces and sells. Its total cost function is TC(x) = 5000 + 4x. What are its
Suppose a firm that produces a single product can sell its output for p =100−x/100 for each unit that it produces, where x is its level of output. Its total cost function is TC(x) = 200+20x+x2/300.
Two firms, Yaki Industries and Zenith Enterprise, are contemplating a joint venture. Yaki owns a proprietary technology that, unfortunately for Yaki, is unpatentable. This technology, if made
The European Economic Community was formed in part to lower trade barriers and standardize trading relations within the community. But another rationale concerned trading relations between member
In the United States, real estate brokerage fees for private residences are usually 6% of the gross price of the property. 10 That is, if a property is sold through a broker for $200,000, then
Among the earliest application of game-theoretic ideas in economics was the investigation of equilibria in duopolies, by A. Cournot (in 1838), J. Bertrand(1883), and H. Von Stackelberg (1934). As the
Figure 2.19 shows two extensive-form games of complete and perfect information:the threat game in panela, and the trust game in panelb. Solve each by backward induction. Then, do you think that your
A common procedure for selling a single indivisible object is a sealed-bid auction. In sealed-bid auctions, all prospective buyers are given the opportunity to examine the object, then each places a
Apply iterated dominance to the game in Figure 2.18.column 1 column 2 column 3 column 4 1, 9 3, 3 0, 10 2, 2 2, 9 4, 4 1, 7 0, 0 2, 8 1, 1 2, 9 3, 3 7, 3 6, 3 2, 1 1, 0 row 1 row 2 row 3 row 4 Figure
Apply iterated dominance to the game in Figure 2.17.column 1 column 2 column 3 column 4 6,1 8,0 4,4 2, 1 10, 1 10, 0 5, 2 4, 5 3, 0 2, 3 1, 2 1, 1 row 1 row 2 row 3 Figure 2.17. Problem 2.3: A
Find all the Nash equilibria in the game in Figure 2.16.column 1 column 2 column 3 column 4 1, 9 3, 3 0, 10 2, 2 2, 9 4, 4 1, 7 0, 0 2, 8 1, 1 2, 9 3, 3 7, 3 6, 3 2, 1 1, 0 row 1 row 2 row 3 row 4
(a) In the game in Figure 2.15(a), is row 1–column 2 a Nash equilibrium? (In all the strategic form games in these problems, the payoff of the person selecting the row is given first.)column 1
Ken walks into an ice-cream parlour.Waiter:We have vanilla and chocolate today.Ken: I’ll take vanilla.Waiter: I almost forgot. We also have strawberry.Ken: In that case, I’ll take chocolate.What
In Australia, health insurance laws include the following two provisions:i Insurance companies must offer health insurance to everyone who applies, and charge them the same price.ii Everyone who
The case study in this chapter describes how a boyfriend can signal his love to his girlfriend by giving her an appropriate gift. Do you think saying ‘I love you’ can also serve as a signal? Why
Suppose that the Live-Long-and-Prosper Health Insurance Company charges $5000 annually for a family insurance policy. The company’s president suggests that the company raise the annual price to
Each of the following situations involves moral hazard. In each case, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce the
The experiment called the ultimatum game illustrates that people a are overconfident in their own abilities.b play the Nash equilibrium in strategic situations.c care about fairness, even to their
Two political candidates are standing for election as mayor, and the key issue is how much to spend on the Australia Day fireworks. Forty voters want to spend $30 000, 30 voters want to spend $10
The Condorcet paradox illustrates Arrow’s impossibility theorem by showing that pairwise majority voting a is inconsistent with the principle of unanimity.b leads to social preferences that are not
Before selling anyone a health insurance policy, the Kramer Insurance Company requires that applicants undergo a medical examination. Those with significant pre-existing medical problems are charged
George has a life insurance policy that pays his family $1 million if he dies. As a result, he does not hesitate to enjoy his favourite hobby of bungee jumping. This is an example of a moral hazard.b
Because Elaine has a family history of significant medical problems, she buys health insurance, while her friend Jerry, who has a healthier family, goes without. This is an example of a moral
What is moral hazard? List three things an employer might do to reduce the severity of this problem.
Economist George Stigler once wrote that, according to consumer theory, ‘if consumers do not buy less of a commodity when their incomes rise, they will surely buy less when the price of the
Draw the indifference curve for someone deciding how to allocate time between work and leisure. Suppose the wage increases. Is it possible that the person’s consumption would fall? Is this
Sarah is awake for 100 hours per week. Using one diagram, show Sarah’s budget constraints if she earns $12 per hour, $16 per hour and $20 per hour. Now draw indifference curves such that Sarah’s
Consider your decision about how many hours to work.a Draw your budget constraint assuming that you pay no taxes on your income. On the same diagram, draw another budget constraint assuming that you
A university student has two options for meals: eating at the food hall for $6 per meal, or eating instant noodles for $1.50 per meal. His weekly food budget is $60.a Draw the budget constraint
Jim buys only milk and biscuits.a In year 1, Jim earns $100, milk costs $2 per litre, and biscuits cost $4 per dozen. Draw Jim’s budget constraint.b Now suppose that all prices increase by 10 per
Mario consumes only cheese and crackers.a Could cheese and crackers both be inferior goods for Mario? Explain.b Suppose that cheese is a normal good for Mario whereas crackers are an inferior good.
You consume only Pepsi and pizza. One day, the price of Pepsi goes up, the price of pizza goes down, and you are just as happy as you were before the price changes.a Illustrate this situation on a
Compare the following two pairs of goods:● Coke and Pepsi● skis and ski bindings.a In which case are the two goods complements? In which case are they substitutes?b In which case do you expect
Jennifer divides her income between coffee and croissants. An early frost in Brazil causes a large increase in the price of coffee in Australia.a Show the effect of the frost on Jennifer’s budget
The labour supply curve slopes upwards if a leisure is a normal good.b consumption is a normal good.c the income effect on leisure is greater than the substitution effect.d the substitution effect on
If the price of pasta increases and a consumer buys more pasta, we can infer that a pasta is a normal good, and the income effect is greater than the substitution effect.b pasta is a normal good, and
Charlie buys only milk and cereal. Milk is a normal good, while cereal is an inferior good. When the price of milk rises, Charlie buys a less of both goods.b more milk and less cereal.c less milk and
Matthew and Susan are both optimising consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for a hat. Matthew buys 4 shirts and 16 hats, while Susan buys 6 shirts and
At any point on an indifference curve, the slope of the curve measures the consumer’s a income.b willingness to trade one good for the other.c perception of the two goods as substitutes or
Emilio buys pizza for $10 and lemonade for $2. He has income of $100. His budget constraint will experience a parallel outward shift if which of the following events occur?a The price of pizza falls
Can an increase in the price of cheese possibly induce a consumer to buy more cheese?Explain.
The price of cheese rises from $6 to $10 a kilogram and the price of wine remains $3 a glass. For a consumer with a constant income of $3000, show what happens to consumption of wine and cheese.
A person who consumes wine and cheese gets a raise, so his income increases from $3000 to$4000. Show what happens if both wine and cheese are normal goods. Now show what happens if cheese is an
Show a consumer’s budget constraint and indifference curves for wine and cheese. Show the optimum consumption choice. If the price of wine is $3 a glass and the price of cheese is $6 a kilogram,
Pick a point on an indifference curve for wine and cheese and show the marginal rate of substitution. What does the marginal rate of substitution tell us?
A consumer has income of $3000. Wine costs $3 a glass and cheese costs $6 a kilogram. Draw the consumer’s budget constraint with wine on the vertical axis. What is the slope of this budget
Suppose that a family’s tax liability equalled half its income minus $10 000. Under this system, some families would pay taxes to the government and some families would receive money from the
Do you think a person who believes that the government should help poor children but not poor adults would be more likely to advocate cash welfare payments or in-kind transfers?
Suppose there are two possible income distributions in a society of 10 people. In the first distribution, nine people have incomes of $30 000 and one person has an income of $10 000. In the second
The chapter uses the analogy of a ‘leaky bucket’ to explain one constraint on the redistribution of income.a What elements of the Australian system for redistributing income create the leaks in
Consider two communities. In one community, 10 families have incomes of $100 000 each and 10 families have incomes of $20 000 each. In the other community, 10 families have incomes of$200 000 each
This chapter discusses the importance of economic mobility.a What policies might the government pursue to increase economic mobility within a generation?b What policies might the government pursue to
Table 21.2 shows that income inequality in Australia has increased during the past 30 years.Some factors contributing to this increase were discussed in Chapter 20. What are they?
If the benefits from an antipoverty program are phased out as an individual’s income increases, then the program will a encourage greater work effort from the poor.b lead to an excess supply of
A negative income tax is a policy under which a individuals with low income get transfers from the government.b the government raises tax revenue without distorting incentives.c everyone pays less
Rawls’s thought experiment of the ‘original position’ behind the ‘veil of ignorance’ is meant to draw attention to the fact that a most of the poor do not know how to find better jobs and
A utilitarian believes that the redistribution of income from the rich to the poor is worthwhile as long as a the worst-off members of society benefit from it.b those contributing to the system are
When income inequality is compared across countries, one finds that Australia a is one of the most equal nations in the world.b is one of the least equal nations in the world.c has more equality than
In Australia, the poorest fifth of the population earns about _____ per cent of all income, while the richest fifth earns about _____ per cent.a 2, 65 b 4, 48 c 10, 35 d 15, 25
Describe how antipoverty programs can discourage the poor from working. How might you reduce this disincentive? What are the disadvantages of your proposed policy?
What are the pros and cons of in-kind (rather than cash) transfers to the poor?
How would a utilitarian, a liberal and a libertarian each determine how much income inequality is permissible?
When gauging the amount of inequality, why do transitory and life-cycle variations in income cause difficulties?
What groups in the population are most likely to live in poverty?
Does the richest fifth of the Australian population earn three, six or 11 times the income of the poorest fifth?
Alan runs a consulting firm. He hires primarily female economists because, he says, ‘I always value men and women equally, and I find that because others do not, good women economists are cheaper
A current debate in education is whether teachers should be paid on a standard pay scale, based solely upon their years of training and teaching experience, or whether part of their salary should be
When recording devices were first invented almost 100 years ago, musicians could suddenly supply their music to large audiences at low cost. How do you suppose this event affected the income of the
Imagine that someone offered you a choice: you could spend four years studying at the world’s best university, but you would have to keep your attendance there a secret; or you could be awarded an
At some universities, academics in business-related disciplines receive higher salaries than academics in some other fields.a Why might this be true?b Some other universities have a policy of paying
A basic finding of labour economics is that workers who have more experience in the labour force are paid more than workers who have less experience (holding constant the amount of formal education).

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