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microeconomics

Questions and Answers of Microeconomics

LO4-2 State the law of supply and distinguish shifts in supply from movements along a supply curve.
LO4-1 State the law of demand and distinguish shifts in demand from movements along a demand curve.
24. Each of 20 firms in a Chamberlinian monopolistically competitive industry faces a dd curve given by P 10 0.001Q. What will each firm’s dd curve be following the entry of five new firms?
23. In the preceding example, what is the overall average cost per meal if we add a sixth restaurant around the loop?
22. A Stackelberg leader and follower face a market demand curve given by P 56 2Q. Each can produce output at a constant marginal cost of 20/unit.Find the equilibrium price and quantity.
21. If the market demand curve facing Bertrand duopolists is given by P 10 Q and each has a constant marginal cost of 2, what will be the equilibrium price and quantity for each firm?
20. The market demand curve for a Stackelberg leader and follower is given by P 10 Q. If each has a marginal cost of 2, what will be the equilibrium price and quantity for each?
19. Repeat Example 13.1 with the two firms facing a market demand curve of P 44 Q.
18. Does either firm have a dominant strategy in the game below? Does the game have a Nash equilibrium? High research budget High research budget II, = 200 II = 40 Firm I Low research budget II = 60
17. Suppose a monopolist sells in two separate markets, with demand curves given by P1 10 Q1 and P2 20 Q2, respectively. If her total cost curve is given by TC 5 2Q (for which the
16. Find the optimal price and quantity for the monopolist described by the information on the following table. P MR SMC AVC 0 100 100 150 150 15 86 71 71 107 25 75 50 41 84 34 66 33 33 72 50 50 0 63
15. A monopolist faces a demand curve of P 100 2Q and a short-run total cost curve of TC 640 20Q. The associated marginal cost curve is MC 20. What is the profit-maximizing price? How much
14. How would the profit-maximizing price and quantity change in Example 12.2 if the monopolist’s total cost curve were instead given by TC 640 40Q? The associated marginal cost curve is MC 40.
13. A. Smith, who is currently unemployed, is a participant in four welfare programs that offer daily benefits of $10 each to people with no earned income. Each program then curtails its benefits by
12. Smith is a hard-hearted person who favors giving the poor only sufficient aid to keep them from going hungry. Assuming everyone else in Smith’s community feels the same way he does, why might
11. A fraternity consisting of 20 sophomores, 20 juniors, and 20 seniors is about to elect its next president. Arnold, Bo, and Chuck are the three candidates. Members of each class have the ranking
10. True or false: The fact that the voter turnout is significantly greater in close presidential elections than in one-sided ones provides clear support for the proposition that voters are rational.
9. True or false: Because the issues at stake in national presidential elections are much more important than those at stake in a small village mayoral election, rational choice theory says a much
8. Colleges and universities commonly name buildings and business or medical schools after substantial donors (witness Ohio State’s Max Fisher School of Business and Schottenstein Center/Value City
7. Viewer-supported television stations often give contributors “free” gifts for making contributions at various levels. (“Two handsome News Hour coffee mugs for a donation of$120.”) Based on
6. Lumber and sawdust are joint products, whose demand functions are DL and DS, as shown in the diagram. The quantity axis measures the number of trees. Points on the demand schedules indicate
5. Chicken wings and chicken drumsticks are jointly produced private goods. The introduction of Buffalo wings—the fast-food sensation—has led to a sharp increase in the demand for chicken wings.
4. Consider the scenario described in Problem 3, but now consider that the marginal cost of providing parks measured in hundreds of dollars is Determine the optimal size of local parks.
3. Ten identical consumers all have individual willingness-to-pay curves for a public good—say, local parks (where P is measured in hundreds of dollars and Q is measured in acres). Construct and
2. On the assumption that the public good described in Problem 1 is provided at the optimal level, how much should the state charge each citizen each time he or she uses the public good?
1. A government is trying to decide how much of a public good to provide. The willingness-to-pay curves for each of its two citizens are as given in the diagram. The marginal cost curve for the
7. Why is a negative income tax, by itself, unable to solve the redistribution problem?
6. Describe two forms of inefficiency associated with rent seeking.
5. How does majority voting lead to intransitive social rankings?
4. In what way does a private good produced under conditions of increasing returns to scale resemble a public good?Describe the trade-off between flexibility and cost that confronts users of such
3. Why would even rich citizens be likely to oppose having equal tax payments by rich and poor alike?
2. How are jointly produced private goods analogous to public goods?
1. Why are the individual willingness-to-pay curves added vertically, not horizontally, to get the aggregate willingnessto-pay curve for a public good?
17. Same as Problem 16, except now payoff values of each person area. If Smith and Jones are payoff maximizers and make their decisions individually, what will they do?b. If Smith and Jones can make
16. Smith loves dogs and has a pair of West Highland terriers. Jones has an incredible fear of dogs and cannot stand to be within sight of them. Smith and Jones are deciding whether to live in
15. Same as Problem 14, except now the payoff values of each person area. If Smith and Jones are payoff maximizers and make their decisions individually, what will they do?b. If Smith and Jones can
14. Smith and Jones face the choice of driving to work early or late. If they both drive to work at the same time, each gets in the way of the other on the road, and so their daily commute takes
13. Suppose Smith owns and works in a bakery located next to an outdoor cafe owned by Jones. The patrons of the outdoor cafe like the smell that emanates from the bakery.When Smith leaves his windows
12. Once a week Smith purchases a six-pack of cola and puts it in his refrigerator for his two children to drink later. He invariably discovers that all six cans get drunk the first day. Jones also
*11. A small village has six people. Each can either fish in a nearby lagoon or work in a factory. Wages in the factory are $4/day. Fish sell in competitive markets for $1 apiece. If L persons fish
10. Suppose the government attempts to restrict pollution by mandating a maximum amount that each firm can pollute. In general, this will result in a higher cost for pollution control than is
9. Two firms, X and Y, have access to five different production processes, each one of which gives off a different amount of pollution. The daily costs of the processes and the corresponding number
8. A competitive fishing industry consists of five independently owned and operated fishing boats working out of the port of Ithaca. Assume that no other fishermen fish Cayuga Lake, and that the MC
6. A and B live on adjacent plots of land. Each has two potential uses for her land, the present values of each of which depend on the use adopted by the other, as summarized in the table. All the
5. A and B can live separately at a rent of $400/mo each, or together at a rent of $600.Each would be willing to give up $30/mo to avoid having to give up his privacy. In addition to the loss of
4. Smith and Jones are trying to decide whether to share an apartment. To live separately, each would have to pay $300/mo in rent. An apartment large enough to share can be rented for $450/mo. Costs
3. Smith can operate his sawmill with or without soundproofing. Operation without soundproofing results in noise damage to his neighbor Jones. The relevant gains and losses for Smith and Jones are
2. Smith can produce with or without a filter on his smokestack. Production without a filter results in greater smoke damage to Jones. The relevant gains and losses for the two individuals are listed
1. Every November, Smith and Jones each face the choice between burning their leaves or stuffing them into garbage bags. Burning the leaves is much easier but produces noxious smoke. The utility
4. Why do we permit airplanes but not real estate developers to use the airspace over private homes without prior consent?
7. Tony’s barbershop has four chairs and four barbers. Most of the time at least one barber is idle, except on Saturday mornings when all four are continuously booked. Explain, in terms a
6. Suppose a majority of investors do not care whether the companies whose stock they own do business in China. How, if at all, will the rate of return on stocks that do business in China differ from
5. If the interest rate on taxable government consols is 10 percent, what will happen to the price of an existing tax-exempt government consol if the government reduces everyone’s marginal tax rate
3. Suppose a perpetual bond pays $3000/yr to its owner. What is the price of the bond at 5 percent interest? At 6 percent?
2. A machine that costs $100 will yield returns of $30 at the end of each of the next 3 years, at which time it will be sold as scrap for $30. If the interest rate facing this firm is 10 percent,
1. You are deciding which of two computers to purchase. The interest rate is 0.09 and the maintenance rate of both machines is 0.01. The first computer costs $4000 and has a rate of physical and
6. Why is published investment advice unlikely to be worth very much?
4. Why do nominal interest rates rise approximately 1-for-1 with increases in inflation?
1. What is the difference between real capital and financial capital? Why does concern with one type of capital invariably involve concern with the other?
1. Why does equilibrium require the price of exhaustible resources to rise at the real rate of interest?
4. Suppose there are two kinds of oil left, underground oil and shale oil. The cost of extracting a unit of underground oil is $2/barrel, of shale oil $10/barrel. Once extracted from the earth, the
3. Suppose a certain species of tree grows according to the function where B is the volume of lumber in the tree, measured in board-feet, and t is the tree’s age in years.If the interest rate is
2. There are two remaining exhaustible energy sources, underground oil and offshore oil, with extraction costs of $2/barrel and $6/barrel, respectively. There is also solar energy with the price of
1. Suppose solar energy can be produced at a cost of $2 per unit of energy. Suppose the current price of oil is $1.80 per unit of energy and that there is currently enough oil to last 100 more years
*16. A firm produces output according to the production function Q K12L12. If it sells its output in a perfectly competitive market at a price of 10, and if K is fixed at 4 units, what is this
15. Consider a two-sector economy that employs a total of 80 units of a single input, labor.N1 of these units are allocated to sector 1, where the wage is 100 for the top five workers in that sector
14. A firm has a task to carry out that involves opportunities to shirk with little probability of detection. If it can hire a nonshirking employee for this task, it will make a lot of money. Its
13. Members of two groups, the blues and the greens, have productivity values that range from $5 to $15/hr. The average productivity of the blues is $6/hr and the corresponding average for the greens
12. Suppose vacation time comes in 1-week intervals, and that the total willingness to pay for total vacation time by younger and older workers in a competitive industry is as given in the following
11. The Ajax Coal Company is the only employer in its area. Its only variable input is labor, which has a constant marginal product equal to 5. Because it is the only employer in the area, the firm
10. A monopolist can hire any quantity of labor for $10/hr. If his marginal product of labor is currently 2, and his current product price is $5/unit, should he increase or decrease the amount of
9. The demand curve for labor facing a monopsonist is given as W 35 6L; the supply curve (AFC) for this monopsonist is W 3 L, with corresponding MFC 3 2L, where W represents the hourly
were not a monopsonist but a perfect competitor in the market for labor?8. Acme is the sole supplier of security systems in the product market and the sole employer of locksmiths in the labor market.
7. A monopsonist’s demand curve for labor is given by w 12 2L, where w is the hourly wage rate and L is the number of person-hours hired.a. If the monopsonist’s supply (AFC) curve is given by
6. Consider the following two antipoverty programs: (1) A payment of $10/day is to be given this year to each person who was classified as poor last year; and (2) each person classified as poor will
5. In his current job, Smith can work as many hours per day as he chooses, and he will be paid $1/hr for the first 8 hours he works, $2.50/hr for each hour over 8. Faced with this payment schedule,
4. A perfectly competitive firm has MPL 22 L. Find and graph its value of the marginal product of labor at a product price of P 5. Find its optimal quantity demanded of labor at a wage of w
3. Given the information in the following table, find the monopsonist’s optimal labor demand and wage paid. L AFC TFC MFC VMP 0 0 0 0 16 10 2 20 4 12 20 4 80 8 8 30 6 180 12 4
2. Given the information in the table below, graph the budget constraint (depicted for w $6/hr, where h is hours of leisure per day and M is income per day). Find and graph the new budget constraint
1. Given the information in the following table, fill in the value of the marginal product of labor for price P 4. Find the perfectly competitive firm’s optimal labor demand for a wage w $4/hr. L
4. Why does economic theory lead us to place more emphasis on discrimination by persons and institutions other than employers as a cause of wage differences that exceed productivity differences?
3. Why might local employers pay workers the value of what they produce even if workers are unable or unwilling to move to another area to accept a better job?
2. If a monopolist bought all the firms in a formerly competitive industry and acquired the legal right to exclude entry, how would the quantity of labor employed be affected?
1. What is the difference between the perfect competitor’s VMPL curve and the imperfect competitor’s MRPL curve?
14. The 1000 residents of Great Donut Island are all fishermen. Every morning they go to the nearest port to launch their fishing boats and then return in the evening with their catch. The residents
13. A toll road commission is planning to locate garages for tow trucks along a 100-mile circular highway. Each garage has a fixed cost of $5000 per day. Towing jobs are equally likely along any
12. State whether true or false and briefly expain why: If a business owner is delighted to accept additional orders at the current price, he or she cannot have been a profitmaximizing, perfectly
*11. Firm 1 and firm 2 are competing for a cable television franchise. The present value of the net revenues generated by the franchise is equal to R. Each firm’s probability of winning the
10. The state has announced its plans to license two firms to serve a market whose demand curve is given by P 100 Q. The technology is such that each can produce any given level of output at zero
9. Suppose we have the same payoff matrix as in Problem 8 except now firm 1 gets to move first and knows that firm 2 will see the results of this choice before deciding which type of car to build.a.
8. Firm 1 and firm 2 are automobile producers. Each has the option of producing either a big car or a small car. The payoffs to each of the four possible combinations of choices are as given in the
7. Suppose A and B know that they will interact in a prisoner’s dilemma exactly four times.Explain why the tit-for-tat strategy will not be an effective means for assuring cooperation.
6. While grading a final exam a professor discovers that two students have virtually identical answers. He talks to each student separately and tells them that he is sure that they shared answers,
5. Because of their unique expertise with explosives, the Zambino brothers have long enjoyed a monopoly of the U.S. market for public fireworks displays for crowds above a quarter of a million. The
4. The market demand curve for a pair of duopolists is given as P 36 3Q, where Q Q1 Q2. The constant per unit marginal cost is 18 for each duopolist. Find the equilibrium price, quantity, and
3. Solve the preceding problem for Bertrand duopolists.
2. The market demand curve for a pair of Cournot duopolists is given as P 36 3Q, where Q Q1 Q2. The constant per unit marginal cost is 18 for each duopolist. Find the Cournot equilibrium
1. The market demand curve for mineral water is given by P 15 Q. If there are two firms that produce mineral water, each with a constant marginal cost of 3 per unit, fill in the entries for each of
6. How is the optimal degree of product variety related to population density? To transportation cost? To the fixed costs of offering new products?
5. Describe the trade-off between cost and variety.

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