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microeconomics

Questions and Answers of Microeconomics

==+15. Dayna’s Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is C = 100 - 5Q + Q2, and demand is P = 55 - 2Q.
==+b. If, instead, the university faced an infinite supply of TAs at the annual wage level of $10,000, how many TAs would it hire?
==+where W is the wage (as an annual salary) and n is the number of TAs hired. The supply of TAs is given by W = 1000 + 75n.
==+14. The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony.Suppose the demand for TAs is W = 30,000 - 125n,
==+in that plant increase. In response to this, should you shift production and produce more in your Massachusetts plant?
==+ Would it be better off shutting down in the short run?
==+ What quantity does it sell, and how much profit does it make?
==+a. What price should MMMT charge to maximize profit in the short run?
==+The firm’s short-run cost is SRTC = 2000 + 5Q, and its long-run cost is LRTC = 6Q.
==+What is that level of output?
==+c. What price ceiling yields the largest level of output?
==+ What happens to the degree of monopoly power?
==+What is the resulting profit? Calculate the firm’s degree of monopoly power using the Lerner index.
==+11. A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit.
==+b. Provide a clear argument against Alcoa’s position.
==+a. Provide a clear argument in favor of Alcoa’s position.
==+production in the United States, and the company had been accused of monopolizing the aluminum market. In its defense, Alcoa argued that although
==+10. One of the more important antitrust cases of the twentieth century involved the Aluminum Company of America (Alcoa) in 1945. At that time, Alcoa controlled about 90 percent of primary aluminum
==+a. On a diagram, draw the marginal cost curves for the two factories, the average and marginal revenue curves, and the total marginal cost curve(i.e., the marginal cost of producing Q = Q1 +
==+8. A firm has two factories, for which costs are given by:Factory #1: C1 (Q1) = 10Q1 2Factory #2: C2 (Q2) = 20Q2 2The firm faces the following demand curve:P = 700 - 5Q where Q is total
==+Verify that the two are numerically equivalent.
==+profit level of the monopoly and the profit level of the competitive industry in two different ways.
==+c. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average cost curve. Identify the difference between the
==+a. Calculate the firm’s marginal revenue curve.
==+5. The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10:Price Quantity 18 0 16 4 14 8 12 12 10 16 8 20 6 24 4 28 2 32 0 36
==+where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits.
==+5-percent increase in price is likely to reduce sales.What would you need to know to help the company with this problem? Explain why these facts are important.
==+to advise it on pricing policy. One of the things the company would like to know is how much a
==+ Why might a firm have monopsony power even if it is not the only buyer in the market?
==+10. What is meant by the term “monopsony power”?
==+ Will it buy more or less than a competitive buyer? Explain briefly.
==+9. How should a monopsonist decide how much of a product to buy?
==+8. Why will a monopolist’s output increase if the government forces it to lower its price? If the government wants to set a price ceiling that maximizes the monopolist’s output, what price
1.12. The Georges Bank, a highly productive fishing area off New England, can be divided into two zones in terms of fish population. Zone 1 has the higher population per square mile but is subject to
1.11. Reconsider the common resource problem given in Example 18.7. Suppose that crawfish popularity continues to increase, and that the demand curve shifts from C = 0.401 − 0.0064F to C = 0.50 −
1.10. There are three groups in a community. Their demand curves for public television in hours of programming, T, are given respectively bySuppose public television is a pure public good that can be
1.9. A beekeeper lives adjacent to an apple orchard. The orchard owner benefits from the bees because each hive pollinates about one acre of apple trees. The orchard owner pays nothing for this
1.8. Refer back to Example 18.5 on global warming. Table 18.3 (page 668) shows the annual net benefits from a policy that reduces GHG emissions by 1 percent per year. At what discount rate is the NPV
1.7. In a market for dry cleaning, the inverse market demand function is given by P = 100 − Q and the (private) marginal cost of production for the aggregation of all dry-cleaning firms is given by
1.6. The market for paper in a particular region in the United States is characterized by the following demand and supply curves:QD = 160,000 − 2000P and QS = 40,000 + 2000P where QD is the
1.5. Medical research has shown the negative health effects of “secondhand” smoke. Recent social trends point to growing intolerance of smoking in public areas. If you are a smoker and you wish
1.4. Four firms located at different points on a river dump various quantities of effluent into it. The effluent adversely affects the quality of swimming for homeowners who live downstream. These
1.3. Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions:where A is the quantity abated in millions of tons and the
1.2. A computer programmer lobbies against copyrighting software, arguing that everyone should benefit from innovative programs written for personal computers and that exposure to a wide variety of
1.1. A number of firms have located in the western portion of a town after single-family residences took up the eastern portion. Each firm produces the same product and in the process emits noxious
1.13. Explain why the median voter outcome need not be efficient when majority-rule voting determines the level of public spending.
1.12. Public television is funded in part by private donations, even though anyone with a television set can watch for free. Can you explain this phenomenon in light of the free rider problem?
1.11. A village is located next to 1000 acres of prime grazing land. The village presently owns the land and allows all residents to graze cows freely.Some members of the village council have
1.10. Public goods are both nonrival and nonexclusive. Explain each of these terms and show clearly how they differ from each other.
1.9. Why does free access to a common property resource generate an inefficient outcome?
1.8. An emissions fee is paid to the government, whereas an injurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of
1.7. George and Stan live next door to each other. George likes to plant flowers in his garden, but every time he does, Stan’s dog comes over and digs them up. Stan’s dog is causing the damage,
1.6. To encourage an industry to produce at the socially optimal level, the government should impose a unit tax on output equal to the marginal cost of production. True or false? Explain.
1.5. Externalities arise solely because individuals are unaware of the consequences of their actions. Do you agree or disagree? Explain.
1.4. Consider a market in which a firm has monopoly power. Suppose in addition that the firm produces under the presence of either a positive or a negative externality. Does the externality
1.3. When do externalities require government intervention? When is such intervention unlikely to be necessary?
1.2. Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain:(a) an emissions fee, (b) an emissions standard,
1.1. Which of the following describes an externality and which does not? Explain the difference.a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to rise—an
1.11. A firm’s short-run revenue is given by R = 10e − e2, where e is the level of effort by a typical worker (all workers are assumed to be identical). A worker chooses his level of effort to
1.10. As chairman of the board of ASP Industries, you estimate that your annual profit is given by the table below. Profit (Π) is conditional upon market demand and the effort of your new CEO. The
1.9. Two used car dealerships compete side by side on a main road. The first, Harry’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it
1.8. You have seen how asymmetric information can reduce the average quality of products sold in a market, as low-quality products drive out highquality products. For those markets in which
1.7. An insurance company is considering issuing three types of fire insurance policies: (i) complete insurance coverage, (ii) complete coverage above and beyond a $10,000 deductible, and (iii) 90
1.6. To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition? Why would a market be less
1.5. Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (e.g., a seven-year warranty on all
1.4. Professor Jones has just been hired by the economics department at a major university. The president of the board of regents has stated that the university is committed to providing top-quality
1.3. A major university bans the assignment of D or F grades. It defends its action by claiming that students tend to perform above average when they are free from the pressures of flunking out. The
1.1. Many consumers view a well-known brand name as a signal of quality and will pay more for a brand-name product (e.g., Bayer aspirin instead of generic aspirin, or Birds Eye frozen vegetables
1.10. What is an efficiency wage? Why is it profitable for the firm to pay it when workers have better information about their productivity than firms do?
1.9. Why are bonus and profit-sharing payment schemes likely to resolve principal–agent problems, whereas a fixed-wage payment will not?
1.8. How can the principal–agent model be used to explain why public enterprises, such as post offices, might pursue goals other than profit maximization?
1.7. Why might managers be able to achieve objectives other than profit maximization, which is the goal of the firm’s shareholders?
1.6. Joe earned a high grade-point average during his four years of college. Is this achievement a strong signal to Joe’s future employer that he will be a highly productive worker? Why or why not?
1.5. Why might a seller find it advantageous to signal the quality of a product? How are guarantees and warranties a form of market signaling?
1.4. Describe several ways in which sellers can convince buyers that their products are of high quality. Which methods apply to the following products: Maytag washing machines, Burger King
1.2. If the used car market is a “lemons” market, how would you expect the repair record of used cars that are sold to compare with the repair record of those not sold?
1.1. Why can asymmetric information between buyers and sellers lead to market failure when a market is otherwise perfectly competitive?
1.11. Suppose that country A and country B both produce wine and cheese. Country A has 800 units of available labor, while country B has 600 units.Prior to trade, country A consumes 40 pounds of
1.10. In the context of our analysis of the Edgeworth production box, suppose that a new invention changes a constant-returns-to-scale food production process into one that exhibits sharply
1.9. The Acme Corporation produces x and y units of goods Alpha and Beta, respectively.a. Use a production possibility frontier to explain how the willingness to produce more or less Alpha depends on
1.8. A monopsonist buys labor for less than the competitive wage. What type of inefficiency will this use of monopsony power cause? How would your answer change if the monopsonist in the labor market
1.7. Give an example of conditions when the production possibilities frontier might not be concave.
1.6. In the analysis of an exchange between two people, suppose both people have identical preferences. Will the contract curve be a straight line?Explain. Can you think of a counterexample?
1.5. Fill in the missing information in the following tables. For each table, use the information provided to identify a possible trade. Then identify the final allocation and a possible value for
1.4. Jennifer and Drew consume orange juice and coffee. Jennifer’s MRS of orange juice for coffee is 1 and Drew’s MRS of orange juice for coffee is 3. If the price of orange juice is $2 and the
1.3. Jane has 3 liters of soft drinks and 9 sandwiches. Bob, on the other hand, has 8 liters of soft drinks and 4 sandwiches. With these endowments, Jane’s marginal rate of substitution (MRS) of
1.2. Using general equilibrium analysis, and taking into account feedback effects, analyze the following:a. The likely effects of outbreaks of disease on chicken farms on the markets for chicken and
1.1. Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run (QG = 75 and QS =
1.13. What are the four major sources of market failure? Explain briefly why each prevents the competitive market from operating efficiently.
1.12. Do you agree or disagree with each of the following statements? Explain.a. If it is possible to exchange 3 pounds of cheese for 2 bottles of wine, then the price of cheese is 2/3 the price of
1.11. If Country A has an absolute advantage in the production of two goods compared to Country B, then it is not in Country A’s best interest to trade with Country B. True or false? Explain.
1.10. Why can free trade between two countries make consumers of both countries better off?
1.9. Explain why goods will not be distributed efficiently among consumers if the MRT is not equal to the consumers’ marginal rate of substitution.
1.8. What is the marginal rate of transformation (MRT)? Explain why the MRT of one good for another is equal to the ratio of the marginal costs of producing the two goods.
1.7. How is the production possibilities frontier related to the production contract curve?
1.6. In the Edgeworth production box diagram, what conditions must hold for an allocation to be on the production contract curve? Why is a competitive equilibrium on the contract curve?
1.5. How does the utility possibilities frontier relate to the contract curve?
1.4. “Because all points on a contract curve are efficient, they are all equally desirable from a social point of view.” Do you agree with this statement?Explain.
1.3. In the analysis of exchange using the Edgeworth box diagram, explain why both consumers’ marginal rates of substitution are equal at every point on the contract curve.
1.2. In the Edgeworth box diagram, explain how one point can simultaneously represent the market baskets owned by two consumers.

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