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microeconomics

Questions and Answers of Microeconomics

Why does the existence of an externality prevent the market from working properly?
If a positive externality exists, does that mean that the market works better than if no externality exists?
It is sometimes said that there is a trade-off between fairness and efficiency. Explain one way in which that is true and one way in which that is false.
In what sense is the tax incentive approach to externalities fair?
What are two reasons to be dubious of solutions based on voluntary action that is not in people’s self-interest?
Why is it so difficult for government to decide the efficient quantity of a public good to provide?
How would you expect medical insurance rates to change if medical insurers could use information contained in DNA to predict the likelihood of major medical illnesses?
Who would benefit and who would lose if an informational alternative to licensing doctors were used?
Would an economist necessarily believe that we should simply let the market deal with a pollution problem?
If one accepts the three reasons for market failure, why might one still oppose government intervention?
A dressmaker can sew 800 garments with 160 bolts of fabric and 3,000 hours of labor. Another dressmaker can sew 800 garments with 200 bolts of fabric and 2,000 hours of identical labor. Fabric costs
A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect?
Why could diseconomies of scale never occur if production relationships were only technical relationships?
In the early 2000s carmakers began to design vehicles’chassis, engines, and transmissions so that different models could be produced on the same assembly line.Within the first year of implementing
Draw a long-run average total cost curve. a. Why does it slope downward initially?b. Why does it eventually slope upward?c. How would your answers to a and b differ if you had drawn a short-run cost
Why are long-run costs always less than or equal to shortrun costs?
Draw a short-run marginal cost curve, short-run average cost curve, and long-run average total cost curve for an efficient firm producing where there are diseconomies of scale.
Where along the long-run average total cost curve will an efficient firm try to produce in the long run?
What is the role of the entrepreneur in translating cost of production into supply?
Your average total cost is $30; the price you receive for the good is $15. Should you keep on producing the good?Why?
True or false? Because entrepreneurs are motivated by opportunities to sell an item at a price higher than the average cost of producing it, they do not start for-benefit firms. Explain your answer.
A student has just written on an exam that technological change will mean that the cost curve is downward-sloping.Why did the teacher mark it wrong?
How does learning by doing affect average total costs?
If a firm is experiencing learning by doing, what is likely true about the long-run average total cost curve? Explain your answer.
Adam Smith argued that at birth most people were similarly talented, and that differences in individual abilities, and hence productivity, are largely the effect of the division of labor, not its
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
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 work
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?
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 only
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
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
Why are larger production runs often cheaper per unit than smaller production runs?
If production involved only technical relationships and had no social dimension, what would the long-run average total cost curve look like?
Why is the short-run average cost curve a U-shaped curve?
Why is the long-run average total cost curve generally considered to be a U-shaped curve?
Why is the role of the entrepreneur central to the production process in the economy?
What is the difference between an economy of scope and an economy of scale?
Does learning by doing cause the average cost curve to be downward-sloping?
As the owner of the firm, Jim pays himself $1,000. All other expenses of the firm add up to $2,000. What would an economist say are the total costs for Jim’s firm?
Why must buyers and sellers be price takers for a market to be perfectly competitive?
List three conditions for perfect competition.
If the conditions for perfect competition are generally not met, why do economists use the model?
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)
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)
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 the
State what is wrong with each of the graphs. P Price What's wrong? MC AFC D = MR P Price What's wrong? MC (a) Q Quantity (b) Q Quantity D
What will be the effect of a technological development that reduces marginal costs in a competitive market on short-run price, quantity, and profit?
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
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 each
Graphically demonstrate the quantity and price of a perfectly competitive firm.a. Why is a slightly larger quantity not preferred?b. Why is a slightly lower quantity not preferred?c. Label the
How is a firm’s marginal cost curve related to the market supply curve?
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.
Under what cost condition is the shutdown point the same as the point at which a firm exits the market?
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.a. What would you advise the firm to do?b. What would you
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 average
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 Total Cost 0 $10 $ 31 1 10 40 23 10 45 10 48 4 10 55 5 10 65
Why is the long-run market supply curve horizontal in a constant-cost industry?
Use the accompanying graph, which shows the marginal cost and average total cost curves for the shoe store Zapateria, a perfectly competitive firm.a. How many pairs of shoes will Zapateria produce if
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 sold
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
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—exist
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
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
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
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
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
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. What
Hundreds of music stores have been closing in the face of stagnant demand for CDs because of new competition by online music vendors.a. How would price competition from these new sources cause a
In 2018, Sears closed 275 of its stores.a. Demonstrate graphically the relationship between ATC, AVC, and price faced by Sears stores when they decided to close.b. Assuming the market is perfectly
Why is the assumption of no barriers to entry important for the existence of perfect competition?
How can the demand curve for the market be downward-sloping but the demand curve for a competitive firm be perfectly elastic?
What are the two things you must know to determine the profitmaximizing output?
Why do firms maximize total profit rather than profit per unit?
What is wrong with the following diagram? Price Profit What is wrong here? MC ATC Quantity P = MR
In the early 2000s, many airlines were making losses, yet they continued to operate. Why?
If a competitive firm makes zero profit, why does it stay in business?
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?
In the early 2000s, demand for burkas (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 the price
What is the key difference between a monopolist and a perfect competitor?
Does a monopolist take market price as given? Why or why not?
Why is marginal revenue below average revenue for a monopolist?
State what’s wrong with the following graphs: (c) Price Price P (a) MR! Profit What's wrong? MC Q Quantity (b) What's wrong? MC ATC Price Price MR What's wrong? Quantity What's wrong? MR D Quantity
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?
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)
Demonstrate graphically the profit-maximizing positions for a perfect competitor and a monopolist. How do they differ?
True or false? Monopolists differ from perfect competitors because monopolists make a profit. Why?
A monopolist with a straight-line demand curve finds that it can sell 2 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.a. Draw the MC,
Demonstrate the welfare loss created by a monopoly.
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?
What three things must a firm be able to do to price-discriminate?
The Government Accounting Office reported that airlines block new carriers at major airports.a. What effect does such blocking have on fares and the number of flights at those airports?b. How much
How is efficiency related to the number of firms in an industry characterized by strong economies of scale?
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
Econocompany is under investigation by the U.S.Department of Justice for violating antitrust laws.The government decides that Econocompany has a natural monopoly and that, if it is to keep the
What is the first-mover advantage and how does it affect platform monopolies?
What are the benefits of platform monopolies? What are the costs?
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?
What are the “monopolistic” and the “competitive”elements of monopolistic competition?
Suppose a monopolistic competitor in long-run equilibrium has a constant marginal cost of $6 and faces the demand curve given in the following table:a. What output will the firm choose?b. What will
If a monopolistic competitor is able to restrict output, why doesn’t it earn economic profits?

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