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macroeconomics principles

Questions and Answers of Macroeconomics Principles

12. This chapter illustrates how the Coase Theorem can be applied to explain the outcome of a divorce in two different systems. In both cases, where the unhappy partner values the divorce at $5,000
11. Space heaters are dangerous. The U.S. Consumer Product Safety Commission estimates that more than 25,000 residential fires every year are associated with the use of space heaters, resulting in
10. Ronald Coase used the example of a farmer and railroad tracks to explain bargaining. Sparks from trains running on tracks near farmland would set off fires in the fields. To avoid this, railroad
9. The Johnson Steel Company generates water pollution when it makes steel. It could eliminate this pollution at a cost of $700. The Smith family lives downstream. It suffers $1,000 of damages from
8. Consider what would happen in the ultimatum game (with offers between $0 and $10) if the Responder were able to fully commit in advance. It would be as if the Responder had moved first; he would
7. The owners and the players’ union are negotiating over a contract for the upcoming hockey season. In October, the owners will make an offer to the union. If they reach an agreement, they will
6. You have learned that in a second-price auction you should always bid your actual willingness to pay; not a penny more and not a penny less. Proving why this is always best, no matter what others
5. U.S. Treasury notes are sold at a discount. For example, a buyer might offer $950 for a $1,000 note that will become due in 2 years because (as Chapter 15 explains) money received in the future
4. A town wants to build a new bridge. Construction firms are asked to submit sealed bids. The town will award the contract to the firm that submits the lowest bid and will pay the firm the amount of
3. The original Filene’s Basement in Boston had a unique pricing system. Every article in the store was marked with a tag showing the price and the date the article was first put on sale. Twelve
2. According to this chapter, in a first-price sealed bid auction (or a Dutch auction), a bidder should multiply her willingness to pay by the number of other bidders, then divide by the total
1. An escalation clause in a real estate contract specifies what a prospective buyer will offer for a home if the seller receives multiple offers. An escalation clause typically includes three
13. Explain the predictions of the Coase Theorem in the case of divorce law, depending on whether “need one to divorce” or “need two to divorce” applie
12. Why does experimental evidence differ from game theory predictions about the outcome of the Ultimatum Game?
11. In a bargaining situation, if the cost of not reaching an agreement increases for one of the parties, what happens to its bargaining power? Why?
10. Why is the expected revenue from an English auction and a second-price sealed-bid auction equivalent?
9. What is the main difference between an English auction and a Dutch auction?
8. Suppose a bet is placed on the outcome of the flip of a coin—if the coin comes up heads, you get $25 and if it comes up tails, you lose $25. If you accepted this bet, does it imply that you are
7. What is meant by risk neutrality?
6. What is a Dutch auction?
5. What is meant by sniping in an auction? Does it make sense to snipe to win an auction?
4. What is the dominant strategy for a bidder in a sealed-bid second-price auction?
3. What is an English auction?
2. What is the difference between an open-outcry auction and a sealed bid auction?
1. How does an auction encourage bidders to reveal their private valuations?
11. Suppose there are 1,001 sellers with used cars that they value at (i.e., their willingness to accept is) $0, $100, $200, $300, . . . , $9,900, $10,000. There are many buyers who place a higher
10. The government wants to reduce white-collar crime.a. Suppose for the moment that innocent people are never wrongly convicted of a crime. Explain why the Becker model of crime and punishment
9. Janet Yellen, the Chair of the Federal Reserve, is married to the Nobel Prize-winning economist George A. Akerlof. When they hired babysitters in the 1980s, they decided to pay wages that were
8. The U.S. government, like many governments throughout the world, bailed out large financial institutions that were thought to be “too big to fail” during the 2008 financial crisis. Some
7. Steven Levitt and Chad Syverson compared instances of home sales in which real estate agents were hired by others to sell a home to instances in which an agent sold his or her own home. They
6. The U.S. government, like many governments throughout the world, bailed out large financial institutions that were thought to be “too big to fail” during the 2008 financial crisis. Some
5. Suppose some workers are capable and others are extraordinary. Firms are willing to pay capable workers a salary of $14,000 and extraordinary workers a salary of $20,000. Workers know if they are
4. All used cars are lemons or peaches. Owners know whether or not their car is a lemon, but buyers do not; that is, the quality of a car is private information. There are many more buyers than
2. There are fifty low-risk people in a town and fifty highrisk people. A low-risk person has an average of $500 in medical expenses each year and is willing to pay $800 for medical insurance (this
1. Your new car is stolen just days after you buy it. You purchased it for $20,000 but the insurance company believes it is worth only $16,000.a. Why would the insurance company believe it is only
10. How can jumping a red light while driving be modeled as a principal–agent problem? How would you encourage drivers to obey the law?
9. Explain the potential costs of high-powered incentives by considering the case of providing incentives to police officers. Would it be a good idea to pay higher wages to police officers if they
8. How might unemployment benefits create a moral hazard problem?
7. Does the presence of asymmetric information necessarily imply that governments should intervene in a market?
6. Suppose a worker is offered a wage higher than the efficiency wage. Why would such a worker work harder?
5. What is the role of incentives in a principal-agent relationship?
4. How do third-party certifications and warranties solve the adverse selection problem in the used car market? Explain your answer.
3. Why does adverse selection occur in the health insurance market?
2. Explain how the second-hand market for heavy equipment in the construction sector could be an example of hidden characteristics.
1. Give an example of hidden actions. Who is the principal and who is the agent in this case?
12. Assume the interest rate is 50 percent. What is the present value of a payment of $60 paid 1 year from now? How about the present value of $60 paid today and $60 paid a year from now? Challenge
11. You are a venture capitalist who has just purchased a stake in a small company. You believe that a year from now this company may no longer exist, in which case your stake is worthless; there is
10. Your house is worth $100,000 and you have $50,000 in a savings account. There is a 2 percent chance of a fire in your house. If the fire occurs, there will be $50,000 in damages to your house.a.
9. You are considering playing a card game. The rules of the game are such that you pick a card from a standard deck of 52 cards and if the card is a face card (jack, queen, or king), you win $50.
8. Say whether or not each of the following statements assumes independence between events:a. “There is no such thing as a ‘hot hand’: A basketball player is just as likely to make her next
7. This chapter talked about the idea of independent events.a. Suppose you draw a card from a standard deck of cards, you put that card back in the deck, and draw a second card. Are the events
6. You observe a banker give $75 for a bond that pays out $100 in one year. Based on this observation, what do you conclude about the interest rate? Suppose that the price of this bond today suddenly
5. Stafford loans are student loans that the federal government provides to graduate and undergraduate students to fund their education. Since Stafford loans can be extended up to 30 years, the
4. You are considering purchasing a new piece of equipment for your factory. The equipment will cost $1,000 and can be used for three years. If you do purchase it, you will earn $350 one year from
3. Suppose you win a grand lottery on January 1, 2015. You can choose to receive the entire amount of $200 million either as a lump sum on January 1, 2015, or you can receive four equal payments of
2. When you were born, your parents deposited $20,000 in the bank. The bank offers a fixed interest rate of 6 percent. On your eighteenth birthday, your parents decide to withdraw the money that
1. The “Rule of 70” is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling time,
11. Why might it make sense to avoid paying for extended warranties on TVs and small home appliances?
10. Given a choice between two investments, one with fixed return and the other risky, how would a risk-neutral individual choose?
9. What is loss aversion?
8. Describe an example of outcomes that are not independent.
7. Is the outcome of tossing a coin a random event? What is the probability of getting a head? Explain your answer.
6. What is meant by a preference reversal?
5. What is meant by present bias?
4. Person A bases her current actions more on the future consequences of her decisions than Person B does. Who has the greater discount weight? Explain your answer.
3. How is net present value used to decide whether a project should be undertaken?
2. How is the present value of a future payment calculated?
1. Is $1,000 received today worth as much as $1,000 received 1 year from now? Explain your answer.
13. A firm in a monopolistically competitive environment discovers that in the long run it faces inverse demand P = 10 - 11>22Q, which means its marginal revenue is MR = 10 - Q. The firm’s marginal
12. Suppose all you know about Boeing and Airbus is that Boeing sells about 40 percent of all comercial aircraft, while Airbus sells around 25 percent.a. Based on this information, what is the
11. There are six petrol companies in City A, and each charges a different price. Consumers prefer the company that charges the lowest price and this has resulted in price war among the companies.
10. Suppose the world demand schedule for oil is as follows: Price per Barrel Quantity Demanded $50 40 $75 30 $125 20 There are two oil-producing countries, A and B. Each will produce either 10 or 20
9. Telesource and Belair are two of the largest firms in the wireless carrier market in a certain country. Together, these firms account for more than 80 percent of the market.a. Given that both
8. Major league baseball teams have imposed what is commonly called the “luxury tax” on themselves. A team is subject to the tax if its payroll exceeds a specified level. The annual threshold
7. Coke and Pepsi each choose one of two prices: “Low” 1P = $22 or “High” 1P = $32. There are 50 buyers who will pick the lowest price option. However, if the prices are the same, 25 will buy
6. Two cinemas, Golden Sun (GS) and Bright Moon (BM), are located next to each other at a major shopping center. Each of them is contemplating lowering the price of their tickets from $10 to $8 to
5. Make three copies of the following diagram and label them (i), (ii) and (iii). Add three different residual demand curves faced by a monopolist: (i) very steep (inelastic), (ii) relatively flat
4. A short-run monopolistically competitive firm has the demand curve P = 20 − 2Q, and the marginal revenue MR = 20 − 4Q. The firm also incurs a constant marginal and average total cost of MC =
3. Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price equal to the marginal cost
2. With the growth of the Internet, there are many online retailers and many buyers who shop online.a. Why, given the growth of the Internet, would you expect to find that different firms would
1. Acme is currently the only grocery store in town. Bi-Rite is thinking of entering this market. They will play the following game. First, Bi-Rite will decide whether or not to enter. If it does
13. Decide whether each of the following statements is true or false for each of three different types of markets: perfect competition, monopoly, and monopolistic competition.a. Firms equate price
12. Suppose the refrigerator industry has an HHI of 2,500 while the aluminum industry’s HHI is 6,850. Is this information sufficient to conclude that the aluminum market is more concentrated than
11. What will happen to a collusive agreement when more firms join the collusion?
10. Suppose there are four firms in a market and each of them sells differentiated products. Does it make sense for these firms to engage in a price war? Why or why not?
9. How do oligopolistic firms that sell differentiated products determine their prices?
8. Under what situation would an oligopoly behave like perfect competition and under what situation would it behave like a monopoly?
7. Consider a noncollusive duopoly model with both firms supplying bottled drinking water. The firms choose prices simultaneously. The marginal cost for each firm is $1.50. The market demand is shown
6. What happens in a monopolistically competitive market when all firms are incurring losses?
5. Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive
4. Will a monopolistically competitive firm earning economic profit in the short run continue to earn profit in the long run? Explain your answer.
3. Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a
2. How is a monopolistically competitive market similar to a perfectly competitive market? Do monopolistically competitive markets and monopolies share any common features?
1. How are the products sold by a monopolistically competitive firm different from the products sold in a perfectly competitive market?
13. Two competing firms must choose their quantity of production simultaneously. Each firm can choose either a High quantity of 3 or a Low quantity of 2. The price for both firms is 9 − Q, where Q
12. Consider a game with two players, China and Japan. They play the extensive-form game summarized in the following game tree: Red Line indicates investing in Southeast Asia, Green Line indicates
11. While at the airport, you hear over the loudspeaker an offer to be bumped off your current flight in exchange for $100 travel credit. After it becomes clear nobody will take this offer, the offer
10. Jones TV and Smith TV are the only two stores in your town that sell flat-panel TV sets. First, Jones will choose whether to charge high prices or low prices. Smith will see Jones’s decision
9. Consider a game with two players, 1 and 2. They play the extensive-form game summarized in the following game tree:a. Suppose Player 1 is choosing between Green and Red for his second move. Which

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