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introduction to microeconomics

Questions and Answers of Introduction To Microeconomics

As explained in Chapter 6, a minimum-wage law distorts the market for low-wage labour. To reduce this distortion, in Australia the minimum wage for teenage workers is lower than the national minimum
University students sometimes take work-experience placements with private firms or the government. Many of these positions pay little or nothing.a What is the opportunity cost of taking such a job?b
The forces of competition in markets with free entry and exit tend to eliminate wage differentials that arise from discrimination by a employers.b customers.c government.d all of the above.
Measuring how much discrimination affects labour market outcomes is difficult because a data on wages are crucial but not readily available.b firms misreport the wages they pay to hide discriminatory
A business consulting firm hires Vivian because she was a math major in university. Her new job does not require any of the mathematics she learned, but the firm believes that anyone who can graduate
Fred runs a small manufacturing company. He pays his employees about twice what other firms in the area pay, even though he could pay less and still recruit all the workers he wants. He believes that
Lucy and Ethel work at a local department store. Lucy, who greets customers as they arrive, is paid less than Ethel, who cleans the bathrooms. This is an example of a a compensating differential.b
Ricky leaves his job as a high school math teacher and returns to school to study the latest developments in computer programming, after which he takes a higher paying job at a software firm. This is
Give an example of how discrimination might persist in a competitive market.
Do the forces of economic competition tend to intensify or reduce discrimination on the basis of race?
What difficulties arise in deciding whether a group of workers has a lower wage because of discrimination?
Give three reasons a worker’s wage might be above the level that balances supply and demand.
What conditions lead to highly compensated superstars? Would you expect to see superstars in dentistry? In music? Explain.
How might education raise a worker’s wage without raising the worker’s productivity?
In what sense is education a type of capital?
Why are coalminers paid more than other workers with similar amounts of education?
A storm destroys several factories, thereby reducing the stock of capital. What effect does this event have on factor markets?a Wages and the rental price of capital both rise.b Wages and the rental
In fourteenth-century Europe, the Black Death resulted in a significant ________ in wages, coupled with a significant ________ in the rental price of land.a rise, rise b rise, fall c fall, rise d
A technological advance that increases the marginal product of labour shifts the labour ________ curve to the ________.a demand, left b demand, right c supply, left d supply, right
A bakery operating in competitive markets sells its output for $20 per cake and hires labour at$10 per hour. To maximise profits, it should hire labour until the marginal product of labour is a 1/2
If firms are competitive and profit-maximising, the demand curve for labour is determined by a the opportunity cost of workers’ time.b the value of the marginal product of labour.c offsetting
The value of the marginal product of labour is a the amount of output produced by a typical worker.b the increase in output produced by hiring an additional worker.c the amount of output produced by
If the population of Australia suddenly grew because of a large wave of immigration, what would happen to wages? What would happen to the rents earned by the owners of land and capital?
Explain how wages can adjust to balance the supply and demand for labour while simultaneously equalling the value of the marginal product of labour.
Give two examples of events that could shift the supply of labour.
Give two examples of events that could shift the demand for labour.
Explain how a firm’s production function is related to its marginal product of labour, how a firm’s marginal product of labour is related to the value of its marginal product, and how a firm’s
In 2004, the ACCC successfully prosecuted a number of petrol sellers in a Victorian town for collusion. These petrol sellers advertised their prices on boards outside their petrol stations.When one
The Baxter case study presented in this chapter discussed how Baxter Healthcare was prosecuted under Australian competition laws for bundling two types of pharmaceutical products. But many products
Businesses are often accused of engaging in predatory pricing. However, competition regulators often have difficulties separating predatory pricing from vigorous competition. The Areeda–Turner test
Suppose that there are currently four producers of tyres in Australia – Allcar, Bootstone, Carstuff and Duddos. There are no imported tyres in Australia and there are significant barriers to new
While cartels are illegal, companies often have big incentives to form a cartel and raise prices. To understand these incentives, let’s analyse a game between two competing companies. Suppose that
The singer Pink has a monopoly over a scarce resource: herself. She is the only person who can produce a Pink concert. Does this fact imply that the government should regulate the prices of her
Natural monopoly firms are often regulated so that they can only charge prices set by the authorities. Under one approach, prices are based on the monopolist’s costs so that, for any given quantity
A firm that lowers its price is engaged in predatory pricing if a the firm recently reduced its costs.b a new competitor recently entered the market.c the purpose of the price reduction is to
A firm employing tying arrangements will only sell customers one product if they also buy a second product. Tying reduces competition when a firm uses tying to a increase its sales.b reduce its
The ACCC may oppose a merger between two firms if it reduces a the price of the products being sold by the firms.b competition in a market.c the average total cost of the merging firms.d the marginal
A regulation that requires a natural monopoly to set a price equal to its average total cost is similar to imposing a tax on the market because the regulated price is _____ the efficient price, and
In recent years, several government-owned monopolies have been privatised. Private ownership of a monopoly is sometimes desirable because a private owners have a greater incentive to reduce costs
The aim of competition laws is to a facilitate cooperation among firms in oligopolistic industries.b encourage mergers to take advantage of economies of scale.c discourage firms from moving
Explain how rules that create transparent pricing might also encourage cartels.
How can tying or bundling be used by a firm to raise its profits? Why is this business strategy controversial?
Describe the problems facing a firm if it decides to use predatory pricing to eliminate a competitor.
What is resale price maintenance and why is it controversial?
Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.
What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge.
Oligopoly is like the prisoners’ dilemma in that a a firm maximises its profits by producing a low quantity of output if the other firms in the oligopoly likewise produce low quantities of output.b
The prisoners’ dilemma is a two-person game illustrating that a the cooperative outcome could be worse for both people than the Nash equilibrium.b even if the cooperative outcome is better than the
As the number of firms in an oligopoly grows large, the industry approaches a level of output that is ________ the competitive level and ________ the monopoly level.a less than, more than b more
If an oligopoly does not cooperate and each firm chooses its own quantity, the industry will produce a quantity of output that is ________ the competitive level and ________ the monopoly level.a less
If an oligopolistic industry organises itself as a cooperative cartel, it will produce a quantity of output that is ________ the competitive level and ________ the monopoly level.a less than, more
The key feature of an oligopolistic market is that a each firm produces a different product from other firms.b a single firm chooses a point on the market demand curve.c each firm takes the market
Give two examples other than oligopoly to show how the prisoners’ dilemma helps to explain behaviour.
What is the prisoners’ dilemma and what does it have to do with oligopoly?
How does the number of firms in an oligopoly affect the outcome in the market?
Compare the quantity and price of an oligopoly with those of a competitive market.
Compare the quantity and price of an oligopoly with those of a monopoly.
If a group of sellers could form a cartel, what quantity and price would they try to set? Explain why this is the best outcome for the members of the cartel.
Sleek Sneakers Co. is one of many firms in the market for shoes.a Assume that Sleek is currently earning short-run economic profit. On a correctly labelled diagram, show Sleek’s profit-maximising
For each of the following pairs of firms, explain which firm would be more likely to engage in advertising:a a family-owned farm or a family-owned restaurant b a manufacturer of forklifts or a
The market for peanut butter in Nutville is monopolistically competitive and in long-run equilibrium. One day, consumer advocate Skippy Jif discovers that all brands of peanut butter in Nutville are
Consider a monopolistically competitive market with N firms. Each firm’s business opportunities are described by the following equations:Demand: Q = 100/N – P Marginal revenue: MR = 100/N – 2Q
Sparkle is one of the many firms in the market for toothpaste, which is in long-run equilibrium.a Draw a diagram showing Sparkle’s demand curve, marginal-revenue curve, average-total-cost curve and
You are hired as a consultant to a monopolistically competitive firm. The firm reports the following information about its price, marginal cost and average total cost. Can the firm possibly be
For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither:a faces a downward-sloping demand curve b has marginal
For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither:a sells a product differentiated from that of
Classify the following markets as perfectly competitive, monopoly or monopolistically competitive, and explain your answers:a wooden HB pencils b copper c local electricity supply d peanut butter e
Among monopoly, oligopoly, monopolistic competition and perfect competition, how would you classify the markets for each of the following drinks?a tap water b bottled water c soft drink d beer
If advertising makes consumers more loyal to particular brands, it could ________ the elasticity of demand and ________ the mark-up of price over marginal cost.a increase, increase b increase,
What is true of a monopolistically competitive market in long-run equilibrium?a Price is greater than marginal cost.b Price is equal to marginal revenue.c Firms make positive economic profits.d Firms
New firms will enter a monopolistically competitive market if a marginal revenue is greater than marginal cost.b marginal revenue is greater than average total cost.c price is greater than marginal
A monopolistically competitive firm will increase its production if a marginal revenue is greater than marginal cost.b marginal revenue is greater than average total cost.c price is greater than
Which of the following goods best fits the definition of monopolistic competition?a wheat b tap water c crude oil d soft drinks
Which of the following conditions does NOT describe a firm in a monopolistically competitive market?a It makes a product different from its competitors.b It takes its price as given by market
Explain two benefits that might arise from the existence of brand names.
How might advertising with no apparent informational content in fact convey information to consumers?
How might advertising reduce economic wellbeing? How might advertising increase economic wellbeing?
Does a monopolistic competitor produce too much or too little output compared with the most efficient level? What practical considerations make it difficult for policymakers to solve this problem?
Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost?
Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market.Now show what happens to this firm as new firms enter the industry.
Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition?
When a monopolist switches from charging a single price to perfect price discrimination, it reduces a the quantity produced.b the firm’s profit.c consumer surplus.d total surplus.
The deadweight loss from monopoly arises because a the monopoly firm makes higher profits than a competitive firm would.b some potential consumers who forgo buying the good value it more than its
Compared to the social optimum, a monopoly firm chooses a a quantity that is too low and a price that is too high.b a quantity that is too high and a price that is too low.c a quantity and a price
If a monopoly’s fixed costs increase, its price will _____, and its profit will _____.a increase, decrease b decrease, increase c increase, stay the same d stay the same, decrease
For a profit-maximising monopoly that charges the same price to all consumers, what is the relationship between price P, marginal revenue MR and marginal cost MC?a P = MR and MR = MC b P > MR and MR
A firm is a natural monopoly if it exhibits the following as its output increases:a decreasing marginal revenue.b increasing marginal cost.c decreasing average revenue.d decreasing average total cost.
Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.
In your diagram from the previous question, show the level of output that maximises total surplus.Show the deadweight loss from the monopoly. Explain your answer.
Draw the demand, marginal-revenue and marginal-cost curves for a monopolist. Show the profitmaximising level of output. Show the profit-maximising price.
Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.
Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly?
Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.
Coffee carts in Brisbane are a perfectly competitive industry in long-run equilibrium. One day, the Brisbane City Council imposes a $100 per month tax on each cart. How does this policy affect the
In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price P, marginal cost MC and average total cost ATC?a P > MC and P > ATC b P > MC and P =
If a profit-maximising, competitive firm is producing a quantity at which price is between average variable cost and average total cost, it will a keep producing in the short run but exit the market
A competitive firm’s short-run supply curve is its ________ cost curve above its ________ cost curve.a average total, marginal b average variable, marginal c marginal, average total d marginal,
A competitive firm maximises profit by choosing the quantity at which a average total cost is at its minimum.b marginal cost equals the price.c average total cost equals the price.d marginal cost
A perfectly competitive firm a chooses its price to maximise profits.b sets its price to undercut other firms selling similar products.c takes its price as given by market conditions.d picks the
Are market supply curves typically more elastic in the short run or in the long run? Explain.

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