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microeconomics

Questions and Answers of Microeconomics

16.8. One of the implications of Walras’ Law is that the ratios of prices (rather than the absolute levels of prices) are determined in general equilibrium. In Learning-By-Doing Exercise 16.2, show
16.6. In an economy, there are 40 “white-collar”households, each producing 10 units of capital (and no labor); the income from each unit of capital is r. There are also 50 “blue-collar”
16.5. Consider a simple economy that produces two goods, beer (denoted by x) and quiche (denoted by y), using labor and capital (denoted by L and K, respectively) that are supplied by two types of
16.4. Suppose that the demand for steel in Japan is given by the equation where QS is the quantity of steel purchased (millions of tons per year), PS is the price of steel (yen per ton), PA is the
16.3. Studies indicate that the supply and demand schedules for ties (t) and jackets ( j) in a market are as follows:Demand for ties:Supply of ties:Demand for jackets:Supply of jackets:The estimates
16.2. Suppose that the demand curve for new automobiles is given by where QA and PA are the quantity (millions of vehicles) and average price (thousands of dollars per vehicle), respectively, of
16.1. Consider the markets for butter (B) and margarine (M), where the demand curves are and and the supply curves are anda) Find the equilibrium prices and quantities for butter and margarine.b)
12. What is comparative advantage? What is absolute advantage? Which of these two concepts is more important in determining the benefits from free trade?
11. Explain how the conditions of utility maximization, cost minimization, and profit maximization in competitive markets imply that the allocation arising in a general competitive equilibrium is
10. Explain how consumers in an economy can be made better off if the marginal rate of transformation does not equal consumers’ marginal rates of substitution.
9. What is the production possibilities frontier? What is the marginal rate of transformation? How does the marginal rate of transformation relate to the production possibilities frontier?
8. Suppose an economy has just two goods, X and Y.True or False: If the condition of input efficiency prevails, we can increase the production of X without decreasing the production of Y. Explain
7. How does exchange efficiency differ from input efficiency? Could an economy satisfy the conditions for exchange efficiency but not the conditions for input efficiency?
6. What is exchange efficiency? In an Edgeworth box diagram, how do efficient allocations and inefficient allocations differ?
5. What is an economically efficient allocation? How does an economically efficient allocation differ from an inefficient allocation?
4. What is Walras’ Law? What is its significance?
3. What role does consumer utility maximization play in a general equilibrium analysis? What is the role played by firm cost minimization in a general equilibrium analysis?
2. In a general equilibrium analysis with two substitute goods, X and Y, explain what would happen to the price in market X if the supply of good Y increased (i.e., if the supply curve for good Y
1. What is the difference between a partial equilibrium analysis and a general equilibrium analysis? When analyzing the determination of prices in a market, under what circumstances would a general
Explain how countries benefit from free trade combined with specialization in the production of goods for which a country has a comparative advantage.
Apply general equilibrium theory to explore the efficiency of resource allocation in an economy consisting of many competitive markets, all of which are interrelated and reach equilibrium at the same
Analyze the general equilibrium effects of an excise tax on a particular good.
Explain why Walras’ Law tells us that prices of goods and services are determined relative to the price of one good or input, and not determined absolutely.
Explain how one can use general equilibrium analysis to explore the total impact of government interventions with policies like an excise tax.
15.26. You are bidding against one other bidder in a first-price sealed-bid auction with private values. You believe that the other bidder’s valuation is equally likely to lie anywhere in the
15.24. A small biotechnology company has developed a burn treatment that has commercial potential. The company has to decide whether to produce the new compound itself or sell the rights to the
15.23. A large defense contractor is considering making a specialized investment in a facility to make helicopters.The firm currently has a contract with the government, which, over the lifetime of
15.22. A firm is considering launching a new product.Launching the product will require an investment of$10 million (including marketing expenses and the costs of new facilities). The launch is risky
15.21. An insurance company is considering offering a policy to railroads that will insure a railroad against damage or deaths due to the spillage of hazardous chemicals from freight cars. Different
15.20. Consider a market of risk-averse decision makers, each with a utility function Each decision maker has an income of $90,000, but faces the possibility of a catastrophic loss of $50,000 in
15.19. You are a relatively safe driver. The probability that you will have an accident is only 1 percent. If you do have an accident, the cost of repairs and alternative transportation would reduce
15.18. You are a risk-averse decision maker with a utility function , where I denotes your income expressed in thousands. Your income is $100,000(thus, I "100). However, there is a 0.2 chance that
15.17. If you remain healthy, you expect to earn an income of $100,000. If, by contrast, you become disabled, you will only be able to work part time, and your average income will drop to $20,000.
15.16. Consider a household that possesses $100,000 worth of valuables (computers, stereo equipment, jewelry, and so forth). This household faces a 0.10 probability of a burglary. If a burglary were
15.15. In the upcoming year, the income from your current job will be $90,000. There is a 0.8 chance that you will keep your job and earn this income. However, there is 0.2 chance that you will be
15.13. Suppose you are a risk-averse decision maker with a utility function given by where I denotes your monetary payoff from an investment in thousands. You are considering an investment that will
15.12. Suppose that your utility function is Compute the risk premium of the two lotteries described in Problem 15.7.
15.11. Suppose that I represents income. Your utility function is given by the formula U ! 10I as long as I is less than or equal to 300. If I is greater than 300, your utility is a constant equal to
15.10.a) Write down the equation of a utility function that corresponds to a risk-neutral decision maker. (Note:there are many possible answers to this part and the next two parts.)b) Write down the
15.14. You have a utility function given by U ! 10 lnI.where I represents the monetary payoff from an investment. You are considering making an investment which, if it pays off, will give you a
15.9. Sketch the graphs of the following utility functions as I varies over the range $0 to $100. Based on these graphs, indicate whether the decision maker is risk averse, risk neutral, or risk
15.8. Consider two lotteries A and B. With lottery A, there is a 0.8 probability that you receive a payoff of$10,000 and a 0.2 chance that you receive a payoff of$4,000. With lottery B, you will
15.7. Consider two lotteries, A and B. With lottery A, there is a 0.90 chance that you receive a payoff of $0 and a 0.10 chance that you receive a payoff of $400. With lottery B, there is a 0.50
15.6. You have a utility function given by You are considering two job opportunities.The first pays a salary of $40,000 for sure. The other pays a base salary of $20,000, but offers the possibility
15.5. Suppose that you have a utility function given by the equation Consider a lottery that provides a payoff of $0 with probability 0.75 and $200 with probability 0.25.a) Sketch a graph of this
15.4. Consider a lottery in which there are five possible payoffs: $9, $16, $25, $36, and $49, each occurring with equal probability. Suppose that a decision maker has a utility function given by the
15.3. Consider two lotteries. The outcome of each lottery is the same: 1, 2, 3, 4, 5, or 6. In the first lottery each outcome is equally likely. In the second lottery, there is a 0.40 probability
15.2. Suppose that you flip a coin. If it comes up heads, you win $10; if it comes up tails, you lose $10.a) Compute the expected value and variance of this lottery.b) Now consider a modification of
15.1. Consider a lottery with three possible outcomes: a payoff of !10, a payoff of 0, and a payoff of"20. The probability of each outcome is 0.2, 0.5, and 0.3, respectively.a) Sketch the probability
12. Why is it wise to bid conservatively in a commonvalues auction?
11. What is the winner’s curse? Why can the winner’s curse arise in a common-values auction but not in a private-values auction?
10. What is the difference between an auction in which bidders have private values and one in which they have common values?
9. Why does perfect information have value, even for a risk-neutral decision maker?
8. What is the difference between a chance node and a decision node in a decision tree?
7. What is fair insurance? Why will a risk-averse consumer always be willing to buy full insurance that is fair?
6. What is a risk premium? What determines the magnitude of the risk premium?
5. Suppose that a risk-averse decision maker faces a choice of two lotteries, 1 and 2. The lotteries have the same expected value, but Lottery 1 has a higher variance than Lottery 2. What lottery
4. Explain why diminishing marginal utility implies that a decision maker will be risk averse.
3. What is the difference between the expected value of a lottery and the expected utility of a lottery?
2. What is the expected value of a lottery? What is the variance?
1. Why must the probabilities of the possible outcomes of a lottery add up to 1?
What about bidding more than your maximum willingness to pay of $1,000, say$1,050? This might seem appealing because you don’t actually pay your bid.The problem is that this strategy can never help
If you bid less than your maximum willingness to pay of $1,000, you might win or you might not, depending on the valuation of the other player. But no matter what, you cannot hurt yourself by
Explain the concept of the winner’s curse?
Differentiate between different types of auctions.
Analyze risky decisions using a decision tree.
Contrast two different types of asymmetric information in insurance markets: moral hazard and adverse selection.
Explain why risk-averse individuals would purchase full insurance if it is fairly priced.
Compute the risk premium for a risk-averse decision maker.
Calculate expected utility as a way to evaluate risky outcomes.
14.24. Cities A, B, and C are located in different countries. The only airline serving the market between A and B is Ajax Air. Its total cost is CAjax ! 20QAB. The airfare between A and B is PAB.
14.22. The only two firms moving crude oil from an oil-producing region to a port in Atlantis are pipelines:Starline and Pipetran. The following table shows the annual profit (in millions of euros)
14.21. Two firms are competing in an oligopolistic industry. Firm 1, the larger of the two firms, is contemplating its capacity strategy, which could be either “aggressive”or “passive.” The
14.19. Boeing and Airbus are competing to fill an order of jets for Singapore Airlines. Each firm can offer a price of $10 million per jet or $5 million per jet. If both firms offer the same price,
14.18. Besanko, Inc. and Braeutigam, Ltd. compete in the high-grade carbon fiber market. Both firms sell identical grades of carbon fiber, a commodity product that will sell at a common market price.
14.13. Consider the following game, where x $ 0:a) For what values of x do both firms have a dominant strategy? What is the Nash equilibrium (or equilibria) in these cases?b) For what values of x
14.12. Suppose market demand is P ! 130 " Q.a) If two firms compete in this market with marginal cost c ! 10, find the Cournot equilibrium output and profit per firm.b) Find the monopoly output and
14.11. Lucy and Ricky are making plans for Saturday night. They can go to either a ballet or a boxing match.Each will make the choice independently, although as?
14.9. ABC and XYZ are the only two firms selling gizmos in Europe. The following table shows the profit (in millions of euros) that each firm earns at different prices(in euros per unit). ABC’s
14.2. Ignoring mixed strategies, does the following game have a Nash equilibrium? Does it have more than one Nash equilibrium? If so, what are they?
14.1. What is the Nash equilibrium in the following game?
10. What is a strategic move? Why must strategic moves be hard to reverse in order to have strategic value
8. What are the conditions that enhance the likelihood of a cooperative outcome in a repeated prisoners’dilemma game?
If just one player has a dominant strategy, that strategy will be the player’s Nash equilibrium strategy. We can find the other player’s Nash equilibrium strategy by identifying that player’s
Whenever both players have a dominant strategy, those strategies will constitute the Nash equilibrium in the game.
Explain how limiting your options can have strategic value.
Explain why some kinds of games can lead players to cooperate, while other kinds do not.
Solve for the Nash equilibria in simultaneous-move games and sequential games.
Solve for the Nash equilibria in one-shot games and repeated games.
Describe a Nash equilibrium.
Explain the difference between a pure strategy and a mixed strategy.
Identify dominant and dominated strategies in a game.
Explain the role of strategies and payoffs in a game.
13.34. The Thai food restaurant business in Evanston, Illinois, is monopolistically competitive. Suppose that each existing and potential restaurant has a total cost function given by TC " 10Q #
13.33. Let’s imagine that a local retail market is monopolistically competitive. Each firm (and potential entrant)is identical and faces a marginal cost that is independent?
13.32. Reconsider Problem 13.29, except suppose American and United take each other’s quantity as given rather than taking each other’s price as given. That is, assume that American and United
13.31. The Baldonian shoe market is served by a monopoly firm. The demand for shoes in Baldonia is given by Q ! 10 " P, where Q is millions of pairs of shoes (a right shoe and left shoe) per year,
13.30. Three firms compete as Bertrand price competitors in a differentiated products market. Each of the three firms has a marginal cost of 0. The demand curves of each firm are as follows:where P23
13.28. Suppose that Jerry and Teddy are the only two sellers of designer umbrellas, which consumers view as differentiated products. For simplicity, assume each seller has a constant marginal cost
13.27. When firms choose outputs, as in the Cournot model, reaction functions slope downward. But when firms choose prices, as in the Bertrand model with differentiated products, reaction functions

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