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microeconomics

Questions and Answers of Microeconomics

1.5. Does economic theory indicate that an ideal regulatory agency that forces a monopolist to charge a price equal to either marginal or average total cost will improve economic efficiency?Explain.
1.4. The retail liquor industry is potentially a competitive industry. However, the liquor retailers of a southern state, with the cooperation of the state legislature, organized a trade association
1.3. Do monopolists charge the highest prices for which they can sell their products? Do they maximize their average profit per sale? Are monopolistic firms always profitable? Why or why not?
1.2. “Monopoly is good for producers but bad for consumers.The gains of the former offset the losses of the latter. On balance, there is no reason to think that monopoly is bad for the economy.”
1.1. “Barriers to entry are crucial to the existence of long-run profits, but they cannot guarantee the existence of profits.” Evaluate.
1.● What policy alternatives might improve the operation of markets with high barriers to entry?
1.● Will competition keep large firms in check in markets that have high barriers to entry? What problems may arise in such markets?
1.● What is a monopoly? Does it guarantee the ability to make a profit?
1.● What are the barriers to entry that protect some firms against competition from potential rivals?
1.17. Rod N. Reel owns a dealership that sells fishing boats in an open, price-searcher market. To develop his pricing strategy, Rod hired an economist to estimate his demand curve. Columns (1) and
1.15. “The superiority of the competitive market is the positive stimuli it provides for constantly improving efficiency, innovating, and offering consumers diversity of choice.” This quotation
1.14. What keeps McDonald’s, Wal-Mart, General Motors, or any other business firm from raising prices, selling shoddy products, and providing lousy service?
1.13. What is the primary requirement for a market to be competitive? Is competition necessary for markets to work well? Why or why not? How does competition influence the following: (a) the cost
1.12. “When competition is intense, only the big firms survive. The little guy has no chance.” True or false? Explain.
1.11. Is price discrimination harmful to the economy?How does price discrimination affect the total amount of gains from exchange? Explain. Why do colleges often charge students different prices
1.10. Suppose that a group of investors wants to start a business operated out of a popular Utah ski area.The group is considering either building a new hotel complex or starting a new local airline
1.9. Would our standard of living be higher if the government“bailed out” troubled businesses? If a firm goes out of business, what happens to the firm’s assets, workers, and customers? Are
1.8.a. What determines whether corporations, individual proprietorships, employee-owned firms, consumer cooperatives, or some other form of business structure will dominate in a market?b. What
1.6. Is quality and style competition as important as price competition? Would you like to live in a country where government regulation restricted the use of quality and style competition? Why or
1.5. What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure?
1.3. What determines the variety of styles, designs, and sizes of different products? Why do you think there are only a few different varieties of toothpicks but lots of different types of napkins on
1.● Is price discrimination bad?
1.● Why do some economists criticize price-searcher behavior when entry barriers are low, while others like the results?
1.● Why is the role of the entrepreneur left out of economic models? How do the actions of entrepreneurs influence economic progress?
1.● Can markets be competitive when they consist of only one or two suppliers?
1.● Is there a linkage between innovative actions by some firms and business failures by others? Are business failures bad for the economy?
1.● What are the characteristics of competitive pricesearcher markets? How are price and output determined in such markets?
1.15. The accompanying table presents the expected cost and revenue data for the Tucker Tomato Farm. The Tuckers produce tomatoes in a greenhouse and sell them wholesale in a price-taker market.a.
1.8. Why does the short-run market supply curve for a product slope upward to the right? Why does the long-run market supply curve generally slope upward to the right? Why is the long-run market
1.7. “When the firms in the industry are just able to cover their cost of production, economic profit is zero. Therefore, if demand falls, causing prices to go down even a little bit, all of the
1.5. If coffee suppliers are price takers, how will an unanticipated increase in demand for their product affect each of the following, in a market that was initially in long-run equilibrium?a. the
1.2. If the firms in a price-taker market are making short-run profits, what will happen to the market price in the long run? Explain.
1.1. Farmers are often heard to complain about the high costs of machinery, labor, and fertilizer, suggesting that these costs drive down their profits. Does it follow that if, for example, the price
1.● Does competition provide an incentive for producers to supply goods that consumers want at a low cost?
1.● What must firms do in order to make profits? How do profits and losses influence the supply and market price of a product?
1.● How does time influence the elasticity of supply?
1.● How do price takers respond to changes in price in the short run? In the long run?
1.● What determines the output of a price taker?
1.● How do firms that are price takers differ from those that are price searchers?
1.16. What are implicit costs? Do implicit costs contribute to the opportunity cost of production? Should an implicit cost be counted as cost? Give three examples of implicit costs. Does the firm’s
1.15. What is shirking? If the managers of a firm are attempting to maximize its profits, will they have an incentive to limit shirking? How might they go about doing so?
1.14. Draw a U-shaped, short-run ATC curve for a firm.Construct the accompanying MC and AVC curves.
1.13. Why do economists consider normal returns to capital to be a cost? How does economic profit differ from normal profit?
1.10. “Firms that make a profit have increased the value of the resources they used; their actions created wealth. In contrast, the actions of firms that make losses reduce wealth. The discovery
1.8. Which of the following are relevant to a firm’s decision to increase output: (a) short-run average total cost, (b) short-run marginal cost, (c) long-run average total cost? Justify your answer.
1.5. “If a firm maximizes profit, it must minimize the cost of producing the profit-maximizing output.” Is this statement true or false? Explain your answer.
1.3. Suppose a firm produces bicycles. Will the firm’s accounting statement reflect the opportunity cost of the bicycles? Why or why not? What costs would an accounting statement reveal? Should
1.2. Which of the following statements do you think reflect sound economic thinking? Explain your answer.a. “I paid $400 for this economics course.Therefore, I’m going to attend the lectures even
1.● What are the major factors that would cause the firm’s costs to shift?
1.● How will increases in output influence the firm’s costs in the short run? How will costs vary with output in the long run?
1.● How does economic profit differ from accounting profit? Why is this difference important?
1.● What are explicit and implicit costs, and how do they guide the behavior of the firm?
1.● How are firms organized in market economies?
1.● Why are business firms used to organize production?
13. Suppose Bobby, the owner–manager of Bobby’s Red Hot BBQ restaurant, projects the following demand for his Baby Back Rib platter:a. Calculate the price elasticity of demand between $9 and
12. Patsy’s Specialty Bakery projects the following demand for Patsy’s pies:a. Calculate the price elasticity of demand between $9 and $10. Is demand in this range elastic or inelastic?b.
7. What are the major determinants of a product’s price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic.
4. A consumer is currently purchasing three pairs of jeans and five T-shirts per year. The price of jeans is $30, and T-shirts cost $10. At the current rate of consumption, the marginal utility of
20. If a senator trades his or her vote on an issue for a$10,000 payment, would you consider this corruption?If a senator votes a certain way in “exchange”for a $10,000 contribution to his
19. Suppose that in the election campaign of 2010, incumbent Representative Earmark is shown to have proposed and helped to pass twenty programs in her previous term, all of which were funded by the
18. If the power of special interests were reduced, for example, through the adoption of a supra-majority voting rule, would economic efficiency improve?How would contributions to political campaigns
17. “The United States is rich because it is a political democracy where the people decide what policies will be followed.” Is this statement true or false?Discuss.
16. The United States imposes highly restrictive sugar import quotas that result in a domestic price that is generally two or three times the world price.The quotas benefit sugar growers at the
15. Why does representative democracy often tax some people in order to provide benefits to others?When governments become heavily involved in taxtransfer activities, how will this involvement affect
14. What percentage of government income transfer payments go to the poor? Do you think that the political process in general works to the advantage of the poor? Why or why not?
13. “Since government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises.” Evaluate this view.
11. What is the shortsightedness effect? How does the shortsightedness effect influence the efficiency of public-sector action?
9. If a project is efficient (if its total benefits exceed its total costs), would it be possible to allocate the cost of the project in a manner that would provide net benefits to each voter? Why or
6. “The average person is more likely to make an informed choice when he or she purchases a personal computer than when he or she votes for a congressional candidate.” Evaluate this statement.
3. “If there are problems with markets, government will generally be able to intervene and correct the situation.” Is this statement true or false? Explain your response.
● How does economic organization influence the efficiency of resource use?
● What are the differences and similarities between market and government actions?
14. Apply the economic efficiency criterion to the role of government. When would a government intervention be considered economically efficient?When would a government intervention be considered
13. Suppose that Abel builds a factory next to Baker’s farm, and air pollution from the factory harms Baker’s crops. Is Baker’s property right to the land being violated? Is an externality
12. What are the necessary conditions for economic efficiency? In what four situations might a market fail to achieve ideal economic efficiency?
11. “Elementary education is obviously a public good. After all, it is provided by the government.”Evaluate this statement.
10. What are external costs? When are they most likely to be present? When external costs are present, what is likely to be the relationship between the market output of a good and the output
9. If sellers of toasters were able to organize themselves, reduce their output, and raise their prices, how would economic efficiency be affected?Explain.
8. “Unless quality and price are regulated by government, travelers would have no chance for a fair deal. Local people would be treated well, but the traveler would have no way to know, for
7. “If it’s worth doing, it’s worth doing to the best of your ability.” What is the economic explanation for why this statement is frequently said but rarely followed in practice? Explain.
6. English philosopher John Locke argued that the protection of each individual’s person and property(acquired without the use of violence, theft, or fraud) was the primary function of
5. Explain in your own words what is meant by external costs and external benefits. Why may market outcomes be less than ideal when externalities are present?
4. Which of the following are public goods? Explain, using the definition of a public good.a. an antimissile system surrounding Washington, D.C.b. a fire departmentc. tennis courtsd. Yellowstone
3. What are the distinguishing characteristics of “public goods”? Give two examples of a public good.Why are public goods difficult for markets to allocate efficiently?
2. In response to the terrorist attacks of September 11, 2001, airline security screening has increased dramatically. As a result, travelers must now spend considerably more time being screened
1. Why is it important for producers to be able to prevent nonpaying customers from receiving a good?
● If the market has shortcomings, does this mean the government should intervene?
● Why might markets fail to allocate goods and services efficiently?
● What are externalities? What are public goods?
● Why is it generally undesirable to pursue any goal to perfection?
● What is economic efficiency and how can it be used to evaluate markets?
17. During the summer of 2001, the combination of city and state taxes on cigarettes sold in New York City rose from $1.19 to more than $3.00 per pack.How will this tax increase affect (a) the
15. “We should impose a 20 percent luxury tax on expensive automobiles (those with a sales price of $50,000 or more) in order to collect more tax revenue from the wealthy.” Will the burden of the
14. Suppose Congress were to pass legislation requiring that businesses employing workers with three or more children pay these employees at least$15 per hour. How would this legislation affect the
13. Currently, the Social Security payroll tax is legally imposed equally on workers and employers:7.65 percent for employees and 7.65 percent for employers. Show this graphically, being careful to
12. The demand and supply schedules for a hypothetical labor market are given in the accompanying table.a. Find the equilibrium wage and number of workers hired.b. Suppose that a new law is passed
11. What is the nature of the deadweight loss accompanying taxes? Why is it often referred to as an“excess burden”?
10. What conditions must be met for buyers to bear the full burden of a tax? What conditions would cause sellers to bear the full burden? Explain.
9. What is meant by the incidence of a tax? Explain why the statutory and actual incidence of a tax can be different.
8. How do you think the markets for organ donation and child adoption would be affected if they were made fully legal with a well-functioning price mechanism? What would be the advantages and

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