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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

5.1 In the game between Intel and AMD in the Challenge Solution, suppose that each firm earns a profit of 9 if both firms advertise. What is the new subgame perfect Nash equilibrium outcome? Show in
4.2 A prisoners’ dilemma game is played for a fixed number of periods. The fully rational solution is for each player to defect in each period. However, in experiments with students, players often
4.1 Draw a game tree that represents the ultimatum game in which the proposer is a first mover who decides how much to offer a responder and the responder then decides to accept or reject the
3.3 Charity events often use silent auctions. A donated item, such as a date with a movie star (Colin Firth and Scarlett Johansson in 2008) or a former president (Bill Clinton in 2013), is put up for
3.2 At the end of performances of his Broadway play“Cyrano de Bergerac,” Kevin Kline, who starred as Cyrano, the cavalier poet with a huge nose, auctioned his prosthetic proboscis, which he and
3.1 To try to maximize her commission, a real estate agent decides to sell a property in a very active market using a second-price sealed-bid auction. The market price of comparable properties that
2.13 David received a parking ticket but feels he did not deserve it! He can either pay it or go to court to contest it. In making his decision, he considers the amount of the ticket (worth 1 point),
2.12 Due to learning by doing (Chapter 7), the more that an incumbent firm produces in the first period, the lower its marginal cost in the second period. If a potential entrant expects the incumbent
*2.10 Suppose that an incumbent can commit to producing a large quantity of output before the potential entrant decides whether to enter. The incumbent chooses whether to commit to produce a small
*2.9 A monopoly manufacturing plant currently uses many workers to pack its product into boxes. It can replace these workers with an expensive set of robotic arms. Although the robotic arms raise the
2.8 Levi Strauss and Wrangler are planning new generation jeans and must decide on the colors for their products. The possible colors are white, black, and violet. The payoff to each firm depends on
2.7 A thug wants the contents of a safe and is threatening the owner, the only person who knows the code, to open the safe. “I will kill you if you don’t open the safe, and let you live if you
2.6 Two firms operate in a market. Solve for the Stackelberg subgame-perfect Nash equilibrium for this duopoly given the following game tree. Is the joint-profit maximizing outcome the outcome of
2.5 In Solved Problem 13.2, suppose that Mimi can move first. What are the equilibria, and why? Now repeat your analysis if Jeff can move first.
2.4 A small tourist town has two Italian restaurants, Romano’s and Giardino’s. Normally both restaurants prosper with no advertising. Romano’s could take some of Giardino’s customers by
*2.3 The airlines play the game in Table 13.1 repeatedly.What happens if the players know the game will last five periods? What happens if they repeat the game indefinitely but one or both firms care
2.2 Jagtar and Ravi both grow mangoes, which they sell in the same local market. They are deciding whether to pick 5 baskets worth of mangoes or 10 baskets, and have the following profit matrix:.a.
2.1 In a repeated game, how does the outcome differ if firms know that the game will be (a) repeated indefinitely, (b) repeated a known, finite number of times, (c) repeated a finite number of times
1.17 In the Application “Strategic Advertising,” would the cola advertising or cigarette advertising game be an example of a prisoners’ dilemma game?
1.16 The 100-meter Olympic gold medalist and the 200-meter Olympic gold medalist have agreed to a 150-meter duel. Before the race, each athlete decides whether to improve his performance by taking
1.15 Suppose that you and a friend play a matching pennies game in which each of you uncovers a penny.If both pennies show heads or both show tails, you keep both. If one shows heads and the other
1.14 In the novel and film The Princess Bride, the villain Vizzini kidnaps the princess. In an attempt to rescue her, the hero, Westley, challenges Vizzini to a battle of wits. Consider this
1.13 Modify the payoff matrix in the game of chicken in Exercise 1.12 so that the payoff is -2 if neither driver swerves. How does the equilibrium change? M
1.12 Eva and Ethan love attending sports events, especially when they go together. However, Eva prefers watching field hockey while Ethan would rather go to a cricket match. If they go together, the
1.11 Suppose that Panasonic and LG are the only two firms that can produce a new type of holographic TV. The payoff matrix shows the firms’ profits (in millions of dollars):a. If both firms move
1.10 Takashi Hashiyama, president of the Japanese electronics firm Maspro Denkoh Corporation, was torn between commissioning Christie’s or Sotheby’s to auction the company’s $20 million art
1.9 In the battle of the sexes game, the husband likes to go to the mountains on vacation, and the wife prefers the ocean, but they both prefer to take their vacations together.
*1.8 Suppose that Toyota and GM are considering entering a new market for self-driving automobiles and that their profits (in millions of dollars) from entering or staying out of the market are If
*1.7 What is the mixed-strategy Nash equilibrium for the game in Exercise 1.6? M
1.6 Suppose that two firms face the following payoff matrix:Given these payoffs, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price. What, if any, are the
1.5 Ambi wants her daughter, Aasa, to succeed at school.She decides to reward Aasa if her grades are above 90% of her class. If it is not, then Aasa will not be rewarded. The payoff matrix is If they
1.4 Suppose Procter & Gamble (PG) and Johnson & Johnson (JNJ) are simultaneously considering new advertising campaigns. Each firm may choose a high, medium, or low level of advertising. What are each
1.2 Show that advertising is a dominant strategy for both firms in both panels of Table 13.3. Explain why that set of strategies is a Nash equilibrium.*1.3 Two firms must simultaneously decide which
*1.1 Show the payoff matrix and explain the reasoning in the prisoners’ dilemma example where Larry and Duncan, possible criminals, will get one year in prison if neither talks; if one talks, one
8.2 In the Challenge Solution, did the sales method achieve the same group-price-discrimination outcome that Heinz would achieve if it could set separate prices for loyal customers and for
7.5 Use a diagram similar to Figure 12.7 to illustrate the effect of social media on the demand for Super Bowl commercials. (Hint: See the Application “Super Bowl Commercials.”)
7.4 For every dollar spent on advertising pharmaceuticals, revenue increases by about $4.20 (CNN, December 17, 2004). If this number is accurate and the firms are operating rationally, what (if
7.3 What is the monopoly’s profit-maximizing output, Q, and level of advertising, A, if it faces a demand curve of p = a - bQ + cAα, its constant marginal cost of producing output is m, and the
6.1 A monopoly sells two products, of which consumers want only one. Assuming that it can prevent resale, can the monopoly increase its profit by bundling them, forcing consumers to buy both goods?
5.1 Using math, show why two-part pricing causes customers who purchase few units to pay more per unit than customers who buy more units. M
3.14 Does a monopoly’s ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not? [Consider two cases: (a) the marginal cost is so high that
3.13 According to a report from the Foundation for Taxpayer and Consumer Rights, gasoline costs twice as much in Europe than in the United States because taxes are higher in Europe. However, the
3.12 Show that the equilibrium elasticities in the two countries must be equal in Solved Problem 12.3. M
*3.11 A monopoly sells to n1 consumers in Country 1 and n2 in Country 2, where each person in Country 1 has a constant elasticity demand function of q1 = pe1 and every person in Country 2 has a
3.10 How would the analysis in Solved Problem 12.2 change if m = 7 or if m = 4? (Hint: Where m = 4, the marginal cost curve crosses the MR curve three times—if we include the vertical section. The
3.9 A monopoly sells its good in the United States, where the elasticity of demand is -2, and in Japan, where the elasticity of demand is -5. Its marginal cost is 10. At what price does the monopoly
*3.8 Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set in China for about $3, which was only one-fifth the U.S. price, and sold about 100,000 units. The
3.7 Universal Studios sold the Mamma Mia! DVD around the world. Universal charged $21.40 in Canada and $32 in Japan—more than the $20 it charged in the United States. Given that Universal had a
*3.6 A profit-maximizing monopoly produces a good with constant marginal cost, MC = 20, that it sells in two countries. The inverse linear demand curve is p1 = 60 - Q1 in Country 1 and p2 = 60 - 2Q2
*3.5 A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“eye-BO”). The Chihuahuasized robot could sit, beg, chase balls, dance, and play an electronic tune. When Sony started
3.4 Hershey Park sells tickets at the gate and at local municipal offices to two groups of people. Suppose that the demand function for people who purchase tickets at the gate is QG = 10,000 - 100pG
3.3 A profit-maximizing monopoly produces a good with constant marginal cost, MC = 20, that it sells in two countries. The inverse linear demand curve is p1 = 60 - 2Q1 in Country 1 and p2 = 40 - Q2
3.2 A firm charges different prices to two groups. Would the firm ever operate where it was suffering a loss from its sales to the low-price group? Explain.
3.1 A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price, p = $5.
2.5 A firm is a natural monopoly (see Chapter 11).Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price
2.4 Many people enjoy going to music concerts, sports events, and theater productions. Tickets to see these events are often made available to the public only through primary ticket
2.3 See the Application “Google Uses Bidding for Ads to Price Discriminate,” which discusses how advertisers on Google’s Web site bid for the right for their ads to be posted when people search
2.2 Using the information in the Application “Botox and Price Discrimination,” determine how much Allergan loses by being a single-price monopoly rather than a perfectly price-discriminating
2.1 If a monopoly faces an inverse demand curve of p = 90 - Q, has a constant marginal and average cost of 30, and can perfectly price discriminate, what is its profit? What are the consumer surplus,
1.8 In 2015, the European Commission charged six U.S.studios and a U.K. pay television company, Sky UK, with unfairly blocking access to films and other content. The charges challenge the studios’
1.7 While Europcar charged €56 to rent a Fiat Punto for one day in both Milan and Naples in September 2016, its one-day rental price for both a Renault Kadjar and an Audi A3 Cabrio was about
1.6 A monopoly that sells internationally will often try to sell its product at different prices in different countries. Consider distributors for a monopoly that are located in two countries that
1.5 Disneyland price discriminates by charging lower entry fees for children than for adults and for local residents than for other visitors. Why does it not have a resale problem?
*1.3 Spenser’s Superior Stoves advertises a one-day sale on electric stoves. The ad specifies that the store will not accept phone orders and that the purchaser must transport the stove. Why does
1.2 Alexx’s monopoly currently sells its product at a single price. What are the necessary conditions so that he can profitably price discriminate?
1.1 As of 2015, the pharmaceutical companies Abbott Laboratories, AstraZeneca, Aventis Pharmaceuticals, Bristol-Myers Squibb Company, Eli Lilly, GlaxoSmithKline, Janssen, Johnson & Johnson, Novartis,
2.13 Look at the Application “The Sharing Economy and the Short Run.” How does the sharing economy affect variable and fixed costs in the short run?
2.7 In 1796, Gottfried Christoph Härtel, a German music publisher, calculated the cost of printing music using an engraved plate technology and used these estimated cost functions to make production
2.1 A firm’s short-run cost function is C(q) = 200q -6q2 + 0.3q3 + 400. Determine the fixed cost, F; the EXERCISES All exercises are available on Pearson MyLab Economics; * = answer appears at the
6.4 A U.S. apparel manufacturer is considering moving its production abroad. Its production function is q = L0.7K0.3 (based on Hsieh, 1995). In the United States, w = 7 and r = 3. At its Asian plant,
*6.3 A manufacturer is considering moving its production abroad to reduce its overall costs. Its production function is q = 4L0.5K0.5, where L is labor and K is capital. Wages, w, are 40% lower
6.2 If it manufactures at home, a firm faces input prices for labor and capital of w and r and produces q units of output using L units of labor and K units of capital.Abroad, the wage and cost of
6.1 In the Challenge Solution, show that for some wage and rental cost of capital the firm is indifferent between using the wafer-handling stepper technology and the stepper technology. How does this
5.3 According to Haskel and Sadun (2009), the United Kingdom started regulating the size of grocery stores in the early 1990s, and today the average size of a typical U.K. grocery store is roughly
*5.2 A refiner produces heating fuel and gasoline from crude oil in virtually fixed proportions. What can you say about economies of scope for such a firm?What is the sign of its measure of economies
5.1 What can you say about Laura’s economies of scope if her time is valued at $10 an hour and her production possibility frontier is PPF1 in Figure 7.10?
*4.3 A firm’s learning curve, which shows the relationship between average cost and cumulative output (the sum of its output since the firm started producing), is AC = a + bN-r; where AC is its
*4.2 A firm’s average cost is AC = αqβ, where α 7 0.How can you interpret α? (Hint: Suppose that q = 1.)What sign must β have if this cost function reflects learning by doing? What happens to
4.1 A U-shaped long-run average cost curve is the envelope of U-shaped short-run average cost curves. On what part of the curve (downward sloping, flat, or upward sloping) does a short-run curve
3.16 See the Application “3D Printing.” When fully incorporated by firms, how will 3D printing affect the shape of short-run and long-run cost curves?
3.15 A firm can obtain one of its factors of production from either of two sources: locally or from a neighboring region. The price and quality of each input is identical. Each region levies its own
3.14 A water heater manufacturer produces q water heaters per day, q, using L workers and S square feet of sheet metal per day, using a constant elasticity of substitution production function, q =
3.13 In Solved Problem 7.6, Equation 7.26 gives the longrun cost function of a firm with a constant-returnsto-scale Cobb-Douglas production function. Show how, for a given output level, cost changes
3.12 A production function is homogeneous of degreeγ and involves three inputs, L, K, and M (materials). The corresponding factor prices are w, r, and e.Derive the long-run cost curve. M
3.11 Suppose that your firm’s production function has constant returns to scale. What is the long-run expansion path?
3.10 The Bouncing Ball Ping Pong Company sells table tennis sets, which include two paddles and one net.What is the firm’s long-run expansion path if it incurs no costs other than what it pays for
3.9 For a Cobb-Douglas production function, how does the expansion path change if the wage increases while the rental rate of capital stays the same? (Hint:See Solved Problem 7.5.) M
3.8 Derive the long-run cost function for the constant elasticity of substitution production function q = (Lρ + Kρ)d/ρ. (Hint: See Solved Problem 7.4.) M
3.7 Replace the production function in Solved Problem 7.4 with a Cobb-Douglas q = ALa Kb, and use calculus to find the cost minimizing capital-labor ratio. M
3.6 If a firm has the Cobb-Douglas production function, q = La Kb, where a + b 7 1, show that its cost function exhibits economies to scale. M
*3.5 The all-American baseball is made using cork from Portugal, rubber from Malaysia, yarn from Australia, and leather from France, and it is stitched(108 stitches exactly) by workers in Costa Rica.
3.4 Governments sometimes use wage subsidies to encourage firms to hire certain kinds of workers, for example, students, persons with disabilities, and unemployed workers in certain regions or
*3.3 You have 60 minutes to complete an exam with two questions. You want to maximize your score.Toward the end of the exam, the more time you spend on either question, the fewer extra points per
*3.2 A company uses capital, K, and labor, L, to produce its output. The isoquants have the usual smooth shape. The rental rate of a unit of capital is £1,000 per day to run, and the wage rate is
3.1 What is the long-run cost function if the production function is q = L + K? M
*2.12 What is the effect of a lump-sum franchise tax ℒon the quantity at which a firm’s after-tax average cost curve reaches its minimum, given that the firm’s before-tax average cost curve is
2.11 If the estimated short-run cost function for a manufacturing firm is C(q) = 0.5q1.8 + 400, at what quantity does the average cost function reach its minimum? If a 200 euro lump-sum tax is
2.10 A firm has two plants that produce identical output.The cost functions are C1 = 10q - 4q2 + q3 and C2 = 10q - 2q2 + q3.a. At what output level does the average cost curve of each plant reach its
2.9 A Japanese synthetic rubber manufacturer’s production function is q = 10L0.5K0.5 (Flath, 2011). Suppose that its wage, w, is $1 per hour and the rental cost of capital, r, is $4.a. Draw an
2.8 A Chinese high technology firm has a production function of q = 10L0.28K0.66 (Zhang et al., 2012).It faces factor prices of w = 10 and r = 20. What are its short-run marginal and average variable

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