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microeconomics

Questions and Answers of Microeconomics

LO15-4 Explain what antitrust policy is and give a brief history of it.
LO15-3 Describe two empirical methods of measuring market structure.
LO15-2 Distinguish two models of oligopoly.
LO15-1 Explain the distinguishing characteristics of oligopoly.
7. Any large grocery store carries at least seven different kinds of corn chips—baked, fried, salsa-flavored, white, yellow, blue, and lime-flavored.a. When is product differentiation real and when
6. Firms in a monopolistically competitive market depend on differentiating their products.a. How do firms differentiate their products?b. Aside from commodities such as gold and grain, how many
1. Austrian economists observe that most lasting monopolies are the result of government and that any attempt to make government strong enough to control monopolies may result in an abuse of
17. What are the ways in which a firm can differentiate its product from that of its competitors? What is the overriding objective of product differentiation? (LO14-5)
15. During the 2001 anthrax scare, the U.S. government threatened to disregard Bayer’s patent of ciprofloxacin, the most effective drug to fight anthrax, and license the production of the drug to
14. How is efficiency related to the number of firms in an industry characterized by strong economies of scale? (LO14-4)
13. In the late 1990s, the Government Accounting Office reported that airlines block new carriers at major airports. (LO14-4)a. What effect does this have on fares and the number of flights at those
12. What three things must a firm be able to do to pricediscriminate?
11. Will the welfare loss from a monopolist with a perfectly elastic marginal cost curve be greater or less than the welfare loss from a monopolist with an upward-sloping marginal cost curve? (LO14-3)
10. Demonstrate the welfare loss created by a monopoly. (LO14-3)
9. A monopolist with a straight-line demand curve finds that it can sell two units at $12 each or 12 units at $2 each.Its fixed cost is $20 and its marginal cost is constant at$3 per unit. (LO14-2)a.
8. True or false? Monopolists differ from perfect competitors because monopolists make a profit. Why? (LO14-2)
7. Demonstrate graphically the profit-maximizing positions for a perfect competitor and a monopolist. How do they differ? (LO14-2)
6. A monopolist is selling fish. But if the fish don’t sell, they rot. What will be the likely elasticity at the point on the demand curve at which the monopolist sets the price?(Difficult) (LO14-2)
5. Say you place a lump-sum tax (a tax that is treated as a fixed cost) on a monopolist. How will that affect its output and pricing decisions? (LO14-2)
4. State what’s wrong with the following graphs: Price Price P What's wrong? MC D MR Q (a) Quantity (b) What's wrong? Profit MC ATC Price Price What's wrong? ATC MR D Quantity What's wrong? MC ATC
3. Why is marginal revenue below average revenue for a monopolist?
2. Does a monopolist take market price as given? Why or why not? (LO14-1)
1. What is the key difference between a monopolist and a perfect competitor? (LO14-1)
Q-10 Why do monopolistically competitive firms advertise while perfect competitors do not?
Q-9 How does the equilibrium for a monopoly differ from that for a monopolistic competitor?
Q-8 Why is the competitive price impossible for an industry that exhibits strong economies of scale?
Q-7 Why does a pricediscriminating monopolist make a higher profit than a normal monopolist?
Q-6 Why is area C in Figure 14-5 not considered a loss to society from monopoly?
Q-5 Indicate the profit that the monopolist shown in the graph below earns. Price MC ATC Quantity Demand
Q-4 Why does a monopolist produce less output than would perfectly competitive firms in the same industry?
Q-3 In the graph below, indicate the monopolist’s profit-maximizing level of output and the price it would charge. Price Quantity Demand Marginal cost
Q-1 Why should you study rather than doodle?
LO14-5 Explain how monopolistic competition differs from monopoly and perfect competition.
LO14-4 Explain why there would be no monopoly without barriers to entry.
LO14-3 Show graphically the welfare loss from monopoly.
LO14-2 Determine a monopolist’s price, output, and profit graphically and numerically.
LO14-1 Summarize how and why the decisions facing a monopolist differ from the collective decisions of competing firms.
5. In 2004 FAO Schwartz closed its 89 Zany Brainy stores.a. Demonstrate graphically the relationship between ATC, AVC, and price faced by Zany Brainy stores when they decided to close.b. Assuming the
4. Hundreds of music stores have been closing in the face of stagnant demand for CDs and new competitors—online music vendors and discount retailers.a. How would price competition from these new
3. A California biotechnology firm submitted a tomato that will not rot for weeks to the U.S. Food and Drug Administration.It designed such a fruit by changing the genetic structure of the tomato.
2. The milk industry has a number of interesting aspects.Provide economic explanations for the following:a. Fluid milk is 87 percent water. It can be dried and reconstituted so that it is almost
1. If a firm is owned by its workers but otherwise meets all the qualifications for a perfectly competitive firm, will its price and output decisions differ from the price and output decisions of a
5. As the chapter points out, the Internet has made the U.S.economy more competitive by lowering barriers to entry and exit from industries.a. To what extent is the Internet itself competitive?b. Can
4. The perfectly competitive model assumes that firms know when marginal revenue equals marginal costs.a. If a firm doesn’t have this information, can it produce at the profit-maximizing level of
3. Perfect competition is analytically elegant.a. What percentage of an economy’s total production do you think is provided by perfectly competitive firms?b. Based on your answer toa, why does the
2. This chapter discusses perfect competition as a benchmark to think about the economy.a. Can labor market discrimination—hiring someone on the basis of race or gender rather than capability—
1. The book presents the perfectly competitive model as the foundation for economic analysis.a. How well does the theory of perfect competition reflect the real world?b. What role, if any, does the
24. Demonstrate the effect of the following on demand and supply in the short run and the long run. (LO13-4)a. Assume that a textile quota expires, reducing demand for textiles imported from Mexico.
23. A Wall Street Journal headline states: “A Nation of Snackers Snubs Old Favorite: The Beloved Cookie.” As U.S. consumers adopted more carbohydrate-conscious diets, the number of cookie boxes
22. Suppose an increasing-cost industry is in both long-run and short-run equilibrium. Explain what will happen to the following in the long run if the demand for that product declines: (LO13-4)a.
21. Use the accompanying graph, which shows the marginal cost and average total cost curves for the shoe store Zapateria, a perfectly competitive firm. (LO13-4)a. How many pairs of shoes will
20. Why is the long-run market supply curve horizontal in a constant-cost industry? (LO13-4)
19. Why is the long-run market supply curve downward-sloping in a decreasing-cost industry? (LO13-4)
18. Why is the long-run market supply curve upward-sloping in an increasing-cost industry? (LO13-4)
17. Based on the following table:a. What is the profit- maximizing output?b. What will happen to the market price in the long run? Output Price 01234569 $10 10 Total Costs $ 31 40 10 45 10 48 10 55
16. A farmer is producing where MC MR . Say that half of the cost of producing wheat is the rental cost of land(a fixed cost) and half is the cost of labor and machines(a variable cost). If the
15. A profit-maximizing firm is producing where MR MC and has an average total cost of $4, but it gets a price of$3 for each good it sells. (LO13-3)a. What would you advise the firm to do?b. What
14. Under what cost condition is the shutdown point the same as the point at which a firm exits the market?
13. Draw the ATC, AVC, and MC curves for a typical firm.Label the price at which the firm would shut down temporarily and the price at which the firm would exit the market in the long run. (LO13-3)
12. How is a firm’s marginal cost curve related to the market supply curve? (LO13-3)
11. Graphically demonstrate the quantity and price of a perfectly competitive firm. (LO13-3)a. Why is a slightly larger quantity not preferred?b. Why is a slightly lower quantity not preferred?c.
10. Each of 10 firms in a given industry has the costs given in the left-hand table. The market demand schedule is given in the right-hand table.a. What is the market equilibrium price and the price
9. Draw marginal cost, marginal revenue, and average total cost curves for a typical perfectly competitive firm in long-run equilibrium and indicate the profit-maximizing level of output and total
8. What will be the effect of a technological development that reduces marginal costs in a competitive market on short-run price, quantity, and profit? (LO13-3)
7. State what is wrong with each of the graphs. Price MC What's wrong? Price What's wrong? AFC P P D=MR MC (a) Q Quantity (b) Q Quantity Price What's MC Price wrong? What's MC wrong? AVC ATC ATC AVC
6. Draw marginal cost, marginal revenue, and average total cost curves for a typical perfectly competitive firm and indicate the profit-maximizing level of output and total profit for that firm. Is
5. A perfectly competitive firm sells its good for$20. If marginal cost is four times the quantity produced, how much does the firm produce? Why?(Difficult) (LO13-2)
4. You’re thinking of buying one of two firms. One has a profit margin of $8 per unit; the other has a profit margin of $4 per unit. Which should you buy? Why?(Difficult) (LO13-2)
3. If the conditions for perfect competition are generally not met, why do economists use the model? (LO13-1)
2. List three conditions for perfect competition. (LO13-1)
1. Why must buyers and sellers be price takers for a market to be perfectly competitive? (LO13-1)
Q-10 In the early 2000s, demand for burkhas (the garment the Taliban had required Afghani women to wear) declined when the Taliban were ousted. In the short run, what would you expect to happen to
Q-9 If berets suddenly became the “in” thing to wear, what would you expect to happen to the price in the short run? In the long run?
Q-8 If a competitive firm makes zero profit, why does it stay in business?
Q-7 In the early 2000s, many airlines were making losses, yet they continued to operate. Why?
Q-6 What is wrong with the following diagram? Price Profit What is wrong here? MC Quantity ATC - P = MR
Q-5 If the firm described in Figure 13-4 is producing 4 units, what would you advise it to do, and why?
Q- 4 Why do firms maximize total profit rather than profit per unit?
Q-3 What are the two things you must know to determine the profitmaximizing output?
Q-2 How can the demand curve for the market be downward-sloping but the demand curve for a competitive firm be perfectly elastic?
Q-1 Why is the assumption of no barriers to entry important for the existence of perfect competition?
LO13-4 Explain the adjustment process from short-run equilibrium to long-run equilibrium.
LO13-3 Determine the output and profit of a perfect competitor graphically and numerically.
LO13-2 Explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor.
LO13-1 Explain how perfect competition serves as a reference point.
7. Show graphically the analysis of the example in Figure A12-5 if the price of machines rises to $5.Demonstrate that the firm must reduce production if it keeps the same budget.
6. Show graphically the analysis of the example in Figure A12-5 if the price of labor falls to $3. Demonstrate that the firm can increase production given the same budget.
5. Draw a hypothetical isocost curve and an isoquant curve tangent to the isocost curve. Label the combination of inputs that represents an economically efficient use of resources.a. How does a
4. Demonstrate the difference between economic efficiency and technical efficiency, using isocost/isoquant analysis.
3. Show, using isocost/isoquant analysis, how firms in the United States use relatively less labor and relatively more land than Japan for the production of similar goods, yet both are behaving
2. Draw an isocost curve for a firm that has $100 to spend on producing jeans. Input includes labor and materials.Labor costs $8 and materials cost $4 a unit. How does each of the following affect
1. What happens to the marginal rate of substitution as a firm increases the use of one input, keeping output constant? What accounts for this?
6. The cost of setting up a steel mill is enormous. For example, a Gary, Indiana, hot-strip mill would cost an estimated$1.5 billion to build. Using this information and the cost concepts from the
5. When economist Jacob Viner first developed the envelope relationship, he told his draftsman to make sure that all the marginal cost curves went through both (1) the minimum point of the short-run
4. A major issue of contention at many colleges concerns the cost of meals that is rebated when a student does not sign up for the meal plan. The administration usually says that it should rebate
3. If you were describing the marginal cost of an additional car driving on a road, what costs would you look at? What is the likely shape of the marginal cost curve?
2. What inputs do you use in studying this book? What would the long-run average total cost and marginal cost curves for studying look like? Why?
1. A pair of shoes that wholesales for $28.79 has approximately the following costs:a. Which of these costs would likely be a variable cost?b. Which would likely be a fixed cost?c. If output were to
5. A major survey conducted by economists David Levine and Laura Tyson found that “In most reported cases the introduction of substantive shop floor participation (job redesign and participatory
4. Firms have an incentive to “externalize” their costs, that is, to make others face the opportunity costs of their actions while firms reduce their own accounting costs.a. Give some examples of

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