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microeconomics

Questions and Answers of Microeconomics

1.14. Vera has decided to upgrade the operating system on her new PC. She hears that the new Linux operating system is technologically superior to Windows and substantially lower in price. However,
1.13. Suppose you are in charge of a toll bridge that costs essentially nothing to operate. The demand for bridge crossings Q is given by P = 15 -(1/2)Q.a. Draw the demand curve for bridge
1.12. You run a small business and would like to predict what will happen to the quantity demanded for your product if you raise your price. While you do not know the exact demand curve for your
1.11. Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is -1.0. Suppose also that Felicia spends $10,000 a year on food, the price of food is $2, and that
1.10. By observing an individual’s behavior in the situations outlined below, determine the relevant income elasticities of demand for each good (i.e., whether it is normal or inferior). If you
1.9. The ACME Corporation determines that at current prices, the demand for its computer chips has a price elasticity of -2 in the short run, while the price elasticity for its disk drives is –1.a.
1.8. Judy has decided to allocate exactly $500 to college textbooks every year, even though she knows that the prices are likely to increase by 5 to 10 percent per year and that she will be getting a
1.7. The director of a theater company in a small college town is considering changing the way he prices tickets. He has hired an economic consulting firm to estimate the demand for tickets. The firm
1.6. Two individuals, Sam and Barb, derive utility from the hours of leisure (L) they consume and from the amount of goods (G) they consume. In order to maximize utility, they need to allocate the 24
1.5. Each week, Bill, Mary, and Jane select the quantity of two goods, x1 and x2, that they will consume in order to maximize their respective utilities.They each spend their entire weekly income on
1.4.a. Orange juice and apple juice are known to be perfect substitutes. Draw the appropriate price-consumption curve (for a variable price of orange juice) and income-consumption curve.b. Left shoes
1.3. Jane always gets twice as much utility from an extra ballet ticket as she does from an extra basketball ticket, regardless of how many tickets of either type she has. Draw Jane’s
1.2. An individual consumes two goods, clothing and food. Given the information below, illustrate both the income-consumption curve and the Engel curve for clothing and food. Price Price Quantity
1.1. An individual sets aside a certain amount of his income per month to spend on his two hobbies, collecting wine and collecting books. Given the information below, illustrate both the
1.12. Explain the difference between a positive and a negative network externality and give an example of each.
1.11. Explain which of the following items in each pair is more price elastic.a. The demand for a specific brand of toothpaste and the demand for toothpaste in generalb. The demand for gasoline in
1.10. Which of the following three groups is likely to have the most, and which the least, price-elastic demand for membership in the Association of Business Economists?a. studentsb. junior
1.9. Suppose that the average household in a state consumes 800 gallons of gasoline per year. A 20-cent gasoline tax is introduced, coupled with a$160 annual tax rebate per household. Will the
1.8. For which of the following goods is a price increase likely to lead to a substantial income (as well as substitution) effect?a. saltb. housingc. theater ticketsd. food
1.7. Which of the following events would cause a movement along the demand curve for U.S. produced clothing, and which would cause a shift in the demand curve?a. the removal of quotas on the
1.6. Suppose that a consumer spends a fixed amount of income per month on the following pairs of goods:a. tortilla chips and salsab. tortilla chips and potato chipsc. movie tickets and gourmet
1.5. Which of the following combinations of goods are complements and which are substitutes? Can they be either in different circumstances?Discuss.a. a mathematics class and an economics classb.
1.4. Tickets to a rock concert sell for $10. But at that price, the demand is substantially greater than the available number of tickets. Is the value or marginal benefit of an additional ticket
1.3. Explain whether the following statements are true or false:a. The marginal rate of substitution diminishes as an individual moves downward along the demand curve.b. The level of utility
1.2. Suppose that an individual allocates his or her entire budget between two goods, food and clothing. Can both goods be inferior? Explain.
1.1. Explain the difference between each of the following terms:a. a price consumption curve and a demand curveb. an individual demand curve and a market demand curvec. an Engel curve and a demand
=+b. Cigarettes are subject to a federal tax, which was about $1.00 per pack in 2011. What does this tax do to the market-clearing price and quantity?
=+15. In 2011, Americans smoked 16 billion packs of cigarettes. They paid an average retail price of $5.00 per pack.a. Given that the elasticity of supply is 0.5 and the elasticity of demand is
=+ Suppose a special 20-percent sales tax is suddenly imposed on automobiles. Will the share of the tax paid by consumers rise, fall, or stay the same over time? Explain briefly. Repeat for a
=+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
=+pay 6.2 percent of the wages they receive. Suppose the tax were changed so that employers paid the full 12.4 percent and employees paid nothing. Would employees be better off?
=+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,
=+Congress is considering a tariff of 40 cents per pound. Find the domestic price of hula beans that will result if the tariff is imposed. Also compute the dollar gain or loss to domestic consumers,
=+12. The domestic supply and demand curves for hula beans are as follows:Supply: P = 50 + Q Demand: P = 200 - 2Q where P is the price in cents per pound and Q is the quantity in millions of pounds.
=+11. Example 9.6 (page 353) describes the effects of the sugar quota. In 2016, imports were limited to 6.1 billion pounds, which pushed the domestic price to 27 cents per pound. Suppose imports were
=+How large a deadweight loss would result if the maximum allowable price of natural gas were $3.00 per thousand cubic feet?
=+a. If the price of oil were $60 per barrel, what would be the free-market price of gas?
=+10. In Example 9.1 (page 332), 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
=+the U.S. industry is seeking a voluntary restraint agreement that would limit imports into the United States to 8 million ounces per year.
=+In recent years the U.S. industry has been protected by a tariff of $9 per ounce. Under pressure from other foreign governments, the United States plans to reduce this tariff to zero. Threatened
=+output in million ounces and P is the domestic price.The demand for the metal in the United States is QD = 40 - 2P, where QD is the domestic demand in million ounces.
=+United States at this price. The supply of this metal from domestic U.S. mines and mills can be represented by the equation QS = 2>3P, where QS is U.S.
=+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
=+ What is the quantity demanded?
=+What is the quantity demanded?
=+price per pound of coffee. World producers can harvest and ship coffee to U.S. distributors at a constant marginal (= average) cost of $8 per pound. U.S. distributors can in turn distribute
=+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 P
=+c. If the United States imposes a tariff of $3 per pound, what will be the U.S. price and level of imports?
=+a. Confirm that the demand curve is given by QD = 40 - 2P, and that the supply curve is given by QS = 2>3P.
=+6. In Exercise 4 in Chapter 2 (page 84), 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
=+ Under what conditions? Could it cost consumers less than $50 million per year? Under what conditions? Again, use a diagram to illustrate.
=+b. Could this program cost consumers (in terms of lost consumer surplus) more than $50 million per year?
=+Could it cost less than $50 million per year? Under what conditions? Illustrate with a diagram.
=+they have no estimates of the elasticities of jelly bean demand or supply.
=+and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at $1 per pound. However, government
=+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
=+Do taxpayers gain from the program? What potential problems does the program create?
=+How much do farmers gain? Do consumers gain or lose?
=+been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers?
=+from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have
=+b. Now suppose the government wants to lower the supply of wheat by 25 percent from the freemarket equilibrium by paying farmers to withdraw land from production. However, the payment is made in
=+is the price of wheat in dollars per bushel, and Q is the quantity in billions of bushels. Find the freemarket equilibrium price and quantity.
=+a. Suppose the demand function is QD = 28 - 2P and the supply function is QS = 4 + 4P, where P
=+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:
=+Which policy is the Japanese government likely to prefer?
=+Illustrate with supply-and-demand diagrams the equilibrium price and quantity, domestic rice production, government revenue or deficit, and deadweight loss from each policy.
=+ What amount per unit (including the subsidy) will the seller receive? What will be the total cost to the government?
=+What will the equilibrium quantity be?
=+c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed and a subsidy of $1 per unit granted to widget producers.
=+b. Suppose that instead of a minimum wage, the government pays a subsidy of $1 per hour for each employee. What will the total level of employment be now?
=+How many people would then be employed?
=+ Suppose the government sets a minimum wage of $5 per hour.
=+This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of lowskilled labor is given by Ls = 10w where LS is the quantity of low-skilled labor (in millions of
=+Can such a minimum price make producers as a whole worse off?Explain.
=+4. Suppose the government regulates the price of a good to be no lower than some minimum level.
=+Under what conditions might it make them worse off?
=+3. How can a price ceiling make consumers better off?
=+There are also situations in which government intervention can improve economic efficiency. Examples are externalities and cases of market failure. These situations, and the way government can
=+5. Government intervention in a competitive market is not always bad. Government—and the society it represents—might have objectives other than economic efficiency.
=+ this deadweight loss will be small, but in other cases—price supports and import quotas are examples—it is large. This deadweight loss is a form of economic inefficiency that must be taken
=+4. Government intervention generally leads to a deadweight loss; even if consumer surplus and producer surplus are weighted equally, there will be a net loss from government policies that shifts
=+ Why does a price ceiling usually result in a deadweight loss?
=+1. What is meant by deadweight loss?
=+c. If each vendor sells exactly 100 hot dogs a day and the demand for hot dogs from vendors in the city is Q = 4400 - 1200P, how many vendors are there?
=+sold and no fixed cost. Suppose the maximum number of hot dogs that any one vendor can sell is 100 per day.
=+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
=+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 + 0.08q2 and a marginal cost MC =
=+ find the level of output produced by the firm. Find the level of profit and the level of producer surplus.
=+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,
=+ Is profit positive, negative, or zero at this price? Explain.
=+d. What is the lowest price at which each firm would sell its output in the short run?
=+Is profit positive, negative, or zero at this price? Explain.
=+c. What is the lowest price at which each firm would sell its output in the long run?
=+Explain. What effect will entry or exit have on market equilibrium?
=+b. Would you expect to see entry into or exit from the industry in the long run?
=+What is the level of profit? Illustrate your answer on a cost-curve graph.
=+c. If price is $1000, how many units will the firm produce?
=+ identify the total cost function C(q).
=+ What is the total cost of producing a level of output q?
=+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.

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