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microeconomics

Questions and Answers of Microeconomics

1.17. Consider a firm with monopoly power that faces the demand curve P = 100 − 3Q + 4A1/2 and has the total cost function C = 4Q2 + 10Q + A where A is the level of advertising expenditures, and P
1.16. A cable TV company offers, in addition to its basic service, two products: a Sports Channel (Product 1) and a Movie Channel (Product 2).Subscribers to the basic service can subscribe to these
1.15. Your firm produces two products, the demands for which are independent. Both products are produced at zero marginal cost. You face four consumers (or groups of consumers) with the following
1.14. You are selling two goods, 1 and 2, to a market consisting of three consumers with reservation prices as follows:The unit cost of each product is $30.a. Compute the optimal prices and profits
1.13. Some years ago, an article appeared in the New York Times about IBM’s pricing policy. The previous day, IBM had announced major price cuts on most of its small and medium-sized computers. The
1.12. Look again at Figure 11.17 (p. 418). Suppose that the marginal costs c1 and c2 were zero. Show that in this case, pure bundling, not mixed bundling, is the most profitable pricing strategy.
1.11. Look again at Figure 11.12 (p. 415), which shows the reservation prices of three consumers for two goods. Assuming that marginal production cost is zero for both goods, can the producer make
1.10. As the owner of the only tennis club in an isolated wealthy community, you must decide on membership dues and fees for court time. There are two types of tennis players. “Serious” players
1.9. You are an executive for Super Computer, Inc. (SC), which rents out super computers. SC receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate
1.8. Sal’s satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two groups arewhere Q is in thousands of subscriptions per year and P
1.7. Many retail video stores offer two alternative plans for renting films:• A two-part tariff: Pay an annual membership fee (e.g., $40) and then pay a small fee for the daily rental of each film
1.6. Elizabeth Airlines (EA) flies only one route: Chicago–Honolulu. The demand for each flight is Q = 500 − P. EA’s cost of running each flight is$30,000 plus $100 per passenger.a. What is the
1.5. A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets areThe monopolist’s total
1.4. Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to $20,000 and a fixed cost of $10 billion. You are asked to advise the CEO as to what prices and quantities
1.3. In Example 11.1 (page 400), we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination. Although coupons are widely used in the United
1.2. If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee
1.1. Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting
1.15. How can a firm check that its advertising-to-sales ratio is not too high or too low? What information does it need?
1.14. Why is it incorrect to advertise up to the point that the last dollar of advertising expenditures generates another dollar of sales? What is the correct rule for the marginal advertising dollar?
1.13. How does tying differ from bundling? Why might a firm want to practice tying?
1.12. How does mixed bundling differ from pure bundling? Under what conditions is mixed bundling preferable to pure bundling? Why do many restaurants practice mixed bundling (by offering a complete
1.11. Why did MGM bundle Gone with the Wind and Getting Gertie’s Garter? What characteristic of demands is needed for bundling to increase profits?
1.10. In the town of Woodland, California, there are many dentists but only one eye doctor. Are senior citizens more likely to be offered discount prices for dental exams or for eye exams? Why?
1.9. Why is the pricing of a Gillette safety razor a form of two-part tariff? Must Gillette be a monopoly producer of its blades as well as its razors?Suppose you were advising Gillette on how to
1.8. How can a firm determine an optimal two-part tariff if it has two customers with different demand curves? (Assume that it knows the demand curves.)
1.7. How is peak-load pricing a form of price discrimination? Can it make consumers better off? Give an example.
1.6. When pricing automobiles, American car companies typically charge a much higher percentage markup over cost for “luxury option” items(such as leather trim, etc.) than for the car itself or
1.5. Show why optimal, third-degree price discrimination requires that marginal revenue for each group of consumers equals marginal cost. Use this condition to explain how a firm should change its
1.4. Give some examples of third-degree price discrimination. Can third-degree price discrimination be effective if the different groups of consumers have different levels of demand but the same
1.3. Electric utilities often practice second-degree price discrimination. Why might this improve consumer welfare?
1.2. How does a car salesperson practice price discrimination? How does the ability to discriminate correctly affect his or her earnings?
1.1. Suppose a firm can practice perfect, first-degree price discrimination. What is the lowest price it will charge, and what will its total output be?
1.18. A monopolist faces the following demand curve:Q = 144/P2 where Q is the quantity demanded and P is price. Its average variable cost is AVC = Q1/2 and its fixed cost is 5.a. What are its
1.17. A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split
1.16. There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 − P. Lake Wobegon Electric’s (LWE)cost of producing electricity is TC = 500 + Q.a. If the
1.15. 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.a. What price should DD set to maximize profit? What output
1.14. 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, where W is the wage (as an annual
1.13. You produce widgets for sale in a perfectly competitive market at a market price of $10 per widget. Your widgets are manufactured in two plants, one in Massachusetts and the other in
1.12. Michelle’s Monopoly Mutant Turtles (MMMT) has the exclusive right to sell Mutant Turtle t-shirts in the United States. The demand for these tshirts is Q = 10,000/P2. The firm’s short-run
1.11. 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.a. Draw the
1.10. One of the more important antitrust cases of the 20th century involved the Aluminum Company of America (Alcoa) in 1945. At that time, Alcoa controlled about 90 percent of primary aluminum
1.9. A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC1 = 20 + 2Q1 and MC>2 = 10 + 5Q2. The
1.8. A firm has two factories, for which costs are given by:The firm faces the following demand curve:p = 700 − 5Q where Q is total output—i.e., Q = Q1 + Q2.a. On a diagram, draw the marginal
1.7. Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of $40 per unit.a. If the elasticity of demand for the product is -2, find the marginal cost of
1.6. Suppose that an industry is characterized as follows:a. If there is only one firm in the industry, find the monopoly price, quantity, and level of profit.b. Find the price, quantity, and level
1.5. The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10:a. Calculate the firm’s marginal revenue curve.b. What are the firm’s
1.4. A firm faces the following average revenue (demand) curve:P = 120 − 0.02Q where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C =
1.3. A monopolist firm faces a demand with constant elasticity of -2.0. It has a constant marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost should increase by 25
1.2. Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise it on pricing policy. One of the things the company would like to know is how much a
1.1. Will an increase in the demand for a monopolist’s product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price?
1.14. Explain briefly how the U.S. antitrust laws are actually enforced.
1.13. How do the antitrust laws limit market power in the United States? Give examples of major provisions of these laws.
1.12. Why is there a social cost to monopsony power? If the gains to buyers from monopsony power could be redistributed to sellers, would the social cost of monopsony power be eliminated? Explain
1.11. What are some sources of monopsony power? What determines the amount of monopsony power an individual firm is likely to have?
1.10. What is meant by the term “monopsony power”? Why might a firm have monopsony power even if it is not the only buyer in the market?
1.9. How should a monopsonist decide how much of a product to buy? Will it buy more or less than a competitive buyer? Explain briefly.
1.8. 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
1.7. Why is there a social cost to monopoly power? If the gains to producers from monopoly power could be redistributed to consumers, would the social cost of monopoly power be eliminated? Explain
1.6. What factors determine the amount of monopoly power an individual firm is likely to have? Explain each one briefly.
1.5. What are some of the different types of barriers to entry that give rise to monopoly power? Give an example of each.
1.4. Why might a firm have monopoly power even if it is not the only producer in the market?
1.3. Why is there no market supply curve under conditions of monopoly?
1.2. We write the percentage markup of price over marginal cost as (P − MC)/P. For a profit-maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be
1.1. A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase profit?
1.15. In 2007, Americans smoked 19.2 billion packs of cigarettes. They paid an average retail price of $4.50 per pack.a. Given that the elasticity of supply is 0.5 and the elasticity of demand is
1.14. You know that if a tax is imposed on a particular product, the burden of the tax is shared by producers and consumers. You also know that the demand for automobiles is characterized by a stock
1.13. Currently, the social security payroll tax in the United States is evenly divided between employers and employees. Employers must pay the government a tax of 6.2 percent of the wages they pay,
1.12. The domestic supply and demand curves for hula beans are as follows:where P is the price in cents per pound and Q is the quantity in millions of pounds. The U.S. is a small producer in the
1.11. Example 9.5 (page 333) describes the effects of the sugar quota. In 2005, imports were limited to 5.3 billion pounds, which pushed the domestic price to 27 cents per pound. Suppose imports were
1.10. In Example 9.1 (page 314), we calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of $5.68 billion. This calculation was based on a
1.9. Among the tax proposals regularly considered by Congress is an additional tax on distilled liquors. The tax would not apply to beer. The price elasticity of supply of liquor is 4.0, and the
1.8. A particular metal is traded in a highly competitive world market at a world price of $9 per ounce. Unlimited quantities are available for import into the United States at this price. The supply
1.7. The United States currently imports all of its coffee. The annual demand for coffee by U.S. consumers is given by the demand curve Q = 250 −10P, where Q is quantity (in millions of pounds) and
1.6. In Exercise 4 in Chapter 2 (page 62), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of $9 per pound. U.S. domestic
1.5. About 100 million pounds of jelly beans are consumed in the United States each year, and the price has been about 50 cents per pound.However, jelly bean producers feel that their incomes are too
1.4. In 1983, the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let’s consider the wheat market:a. Suppose the
1.3. Japanese rice producers have extremely high production costs, due in part to the high opportunity cost of land and to their inability to take advantage of economies of large-scale production.
1.2. Suppose the market for widgets can be described by the following equations:where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:a. What is the equilibrium
1.1. In 1996, Congress raised the minimum wage from $4.25 per hour to $5.15 per hour, and then raised it again in 2007. (See Example 1.3 [page 13].) Some people suggested that a government subsidy
1.9. Why does a tax create a deadweight loss? What determines the size of this loss?
1.8. The burden of a tax is shared by producers and consumers. Under what conditions will consumers pay most of the tax? Under what conditions will producers pay most of it? What determines the share
1.7. Suppose the government wants to limit imports of a certain good. Is it preferable to use an import quota or a tariff? Why?
1.6. Suppose the government wants to increase farmers’ incomes. Why do price supports or acreage-limitation programs cost society more than simply giving farmers money?
1.5. How are production limits used in practice to raise the prices of the following goods or services: (a) taxi rides, (b) drinks in a restaurant or bar, (c) wheat or corn?
1.4. Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off? Explain.
1.3. How can a price ceiling make consumers better off? Under what conditions might it make them worse off?
1.2. Suppose the supply curve for a good is completely inelastic. If the government imposed a price ceiling below the market-clearing level, would a deadweight loss result? Explain.
1.1. What is meant by deadweight loss? Why does a price ceiling usually result in a deadweight loss?
1.15. A sales tax of 10 percent is placed on half the firms (the polluters) in a competitive industry. The revenue is paid to the remaining firms (the nonpolluters) as a 10 percent subsidy on the
1.14. A sales tax of $1 per unit of output is placed on a particular firm whose product sells for $5 in a competitive industry with many firms.a. How will this tax affect the cost curves for the
1.13. Consider a city that has a number of hot dog stands operating throughout the downtown area. Suppose that each vendor has a marginal cost of $1.50 per hot dog sold and no fixed cost. Suppose the
1.12. A number of stores offer film developing as a service to their customers. Suppose that each store offering this service has a cost function C(q)= 50 + 0.5q + 0.08q2and a marginal cost MC = 0.5
1.11. Suppose that a competitive firm has a total cost function C(q) = 450 + 15q + 2q2 and a marginal cost function MC(q) = 15 + 4q. If the market price is P = $115 per unit, find the level of output
1.10. Suppose you are given the following information about a particular industry:Assume that all firms are identical and that the market is characterized by perfect competition.a. Find the
1.9.a. Suppose that a firm’s production function is q = 9x1/2 in the short run, where there are fixed costs of $1000, and x is the variable input whose cost is $4000 per unit. What is the total
1.8. A competitive firm has the following short-run cost function: C(q) = q3 − 8q2 + 30q + 5.a. Find MC, AC, and AVC and sketch them on a graph.b. At what range of prices will the firm supply zero
1.7. Suppose the same firm’s cost function is C(q) = 4q2 + 16.a. Find variable cost, fixed cost, average cost, average variable cost, and average fixed cost. (Hint: Marginal cost is given by MC =
1.6. A firm produces a product in a competitive industry and has a total cost function C = 50 + 4q + 2q2 and a marginal cost function MC = 4 + 4q. At the given market price of $20, the firm is
1.5. Suppose that a competitive firm’s marginal cost of producing output q is given by MC(q) = 3 + 2q. Assume that the market price of the firm’s product is $9.a. What level of output will the
1.4. Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by C = 200 + 2q2, where q is the level of output and C is total cost. (The

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