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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

4. The market equilibrium wage is currently $12 per hour among hairdressers. At that wage, 17,323 hairdressers are currently employed in the province. The provincial legislature then sets a minimum
3. True or False? When a labour market consists of a single monopsony buyer of labour interacting with a single monopoly seller of labour (such as a trade union), the resulting quantity of labour
2. Because a perfectly competitive employer’s MFC curve is, it will hire workers than would a monoposony employer with the same MRP curve. [LO17.3]a. Upsloping; moreb. Upsloping; fewerc. Flat;
1. Brenda owns a construction company that employs bricklayers and other skilled tradesmen. Her firm’s MRP for bricklayers is $22.25 per hour for each of the first seven bricklayers,$18.50 for an
9. What is the principal–agent problem? Have you ever worked in a setting where this problem arose? If so, do you think increased monitoring would have eliminated the problem?Why don’t firms
8. What is meant by investment in human capital? Use this concept to explain (a) wage differentials and (b) the long-run rise of real wage rates in Canada. [LO17.7]
6. Have you ever worked for the minimum wage? If so, for how long? Would you favour increasing the minimum wage by a dollar? By two dollars? By five dollars? Explain your reasoning.[LO17.6]
4. Suppose the formerly competing firms in question 3 form an employers’ association that hires labour as a monopsonist would. Describe verbally the effect on wage rates and employment. Adjust the
3. Describe wage determination in a labour market in which workers are unorganized and many firms actively compete for the services of labour. Show this situation graphically, using W1 to indicate
2. Why is a firm in a perfectly competitive labour market a wagetaker? What would happen if that firm decided to pay less than the going market wage rate? [LO17.2]
1. Explain why the general level of wages is high in Canada and other industrially advanced countries. What is the single most important factor underlying the long-run increase in average real-wage
4. A rightward shift of the labour supply curve in graph(a) would shift curvea. d = mrp leftward in graph (b)b. d = mrp rightward in graph (b)c. s = MFC upward in graph (b)d. s = MFC downward in
3. In employing five workers, the firm represented in graph (b)a. Has a total wage cost of $6000b. Is adhering to the general principle of undertaking all actions for which the marginal benefit
2. This firm’s labour demand curve d in graph (b) slopes downward becausea. The law of diminishing marginal utility appliesb. The law of diminishing returns appliesc. The firm must lower its price
1. The supply of labour curve S slopes upward in graph(a) becausea. The law of diminishing marginal utility appliesb. The law of diminishing returns appliesc. Workers can afford to buy more leisure
LO17.6 Discuss how minimum wage laws affect labour markets.
LO17.2 Show how wages rates and employment are determined in a competitive labour market.
LO17.1 Explain why labour productivity and real hourly compensation track so closely over time.
4. Consider a small landscaping company run by Mr. Viemeister.He is considering increasing his firm’s capacity. If he adds 1 more worker, the firm’s total monthly revenue will increase from
3. Suppose a monopoly firm finds that its MR is $50 for the first unit sold each day, $49 for the second unit sold each day, $48 for the third unit sold each day, and so on. Further suppose that the
2. Suppose that marginal product tripled while product price fell by one-half in Table 16-1. What would be the new MRP values in the table? What would be the net impact on the location of the factor
1. A delivery company is considering adding another vehicle to its delivery fleet, all the vehicles of which are rented for $100 per day. Assume that the additional vehicle would be capable of
6. A software company in Silicon Valley uses programmers(labour) and computers (capital) to produce apps for mobile devices. The firm estimates that when it comes to labour, MPL = 5 apps per month
5. Suppose the productivity of capital and the productivity of labour are as shown in the table that follows. The output of these factors sells in a perfectly competitive market for $1 per unit. Both
3. Alice runs a shoemaking factory that uses both labour and capital to make shoes. Which of the following would shift the factory’s demand for capital? Select one or more answers from the choices
2. Complete the following labour demand table for a firm that is hiring labour competitively and selling its product in a competitive market. [LO16.2]
3. What are the determinants of the elasticity of factor demand?What effect will each of the following have on the elasticity or the location of the demand for factor C, which is being used to
2. In 2009 General Motors (GM) announced that it would reduce employment by 21,000 workers. What does this decision reveal about how it viewed its marginal revenue product(MRP) and marginal factor
1. What is the significance of factor pricing? Explain how the determinants of factor demand differ from those underlying product demand. Explain the meaning and significance of the fact that the
LO16.4 Discuss the determinants of elasticity of factor demand.
LO16.3 List the causes that increase or decrease factor demand.
4. Suppose a proposed merger of firms would simultaneously lessen competition and reduce unit costs through economies of scale. Do you think such a merger should be allowed?[LO15.1]
3. How would you expect competition authorities to react to [LO15.1]a. A proposed merger of Ford and General Motorsb. Evidence of secret meetings by contractors to rig bids for highway construction
2. Explain how strict enforcement of competition laws might conflict with (a) promoting exports to achieve a balance of trade and (b) encouraging new technologies. Do you see any dangers in using
2. A firm faces the following costs: total cost of capital = $1000;price paid for labour = $12 per labour unit; and price paid for raw materials = $4 per raw-material unit. [LO14.4]a. Suppose the
1. Suppose a firm expects that a $20 million expenditure on R&D in the current year will result in a new product that can be sold next year. Selling that product next year would increase the firm’s
5. Which statement about market structure and innovation is true? [LO14.7]a. Innovation helps only dominant firms.b. Innovation keeps new firms from ever catching up with leading firms.c. Innovation
4. The inverted-U theory suggests that R&D expenditures as a percentage of sales ____________ with industry concentration after the four-firm concentration ratio exceeds about 50 percent. [LO14.6]a.
3. An additional unit of Old Product X will bring Cindy an MU of 15 utils, an additional unit of New Product Y will bring Cindy an MU of 30 utils, and an additional unit of New Product Z will bring
2. A firm is considering three possible one-year investments, which we will name X, Y, and Z.• Investment X would cost $10 million now and would return$11 million next year, for a net gain of $1
1. Listed below are several possible actions by firms. Write “INV”beside those that reflect invention, “INN” beside those that reflect innovation, and “DIF” beside those that reflect
10. Evaluate: “Society does not need laws outlawing monopolization and monopoly. Inevitably, monopoly causes its own selfdestruction, since its high profit is the lure for other firms or
9. Make a case that neither perfect competition nor monopoly is conducive to a great deal of R&D spending and innovation.Why might oligopoly be more favourable to R&D spending and innovation than
8. Do you think the overall level of R&D would increase or decrease over the next 20 to 30 years if the lengths of new patents were extended from 20 years to, say, “forever”? What if the duration
7. Why might a firm making a large economic profit from its existing product employ a fast-second strategy in relationship to new or improved products? What risks does it run in pursuing this
6. Learning how to use software takes time. So once customers have learned to use a particular software package, it is easier to sell them software upgrades than to convince them to switch to new
5. Explain: “The success of a new product depends not only on its marginal utility but also on its price.” [LO14.4]
4. Answer the following lettered questions on the basis of the information in this table: [LO14.3]Amount of R&D, millions Expected rate of return on R&D, %$10 16 20 14 30 12 40 10 50 8 60 6a. If the
3. Consider the effect that corporate profit taxes have on investing. Look back at Figure 14-3. Suppose that the r line is the rate of return a firm earns before taxes. If corporate profit taxes are
2. Contrast the older and the modern views of technological advance as they relate to the economy. What is the role of entrepreneurs and other innovators in technological advance?How does research by
1. What is meant by technological advance, as broadly defined?How does technological advance enter into the definition of the very long run? Which of the following are examples of technological
LO14.7 Show how technological advance enhances productive efficiency and allocative efficiency.
LO14.6 Discuss the role of market structure in promoting technological advance.
LO14.5 Relate why firms can benefit from their innovation even though rivals have an incentive to imitate it.
LO14.4 Discuss how technological change can increase profits by raising revenues or lowering costs.
LO14.3 Summarize how a firm determines its optimal amount of research and development (R&D).
LO14.2 Explain how entrepreneurs and other innovators further technological advance.
LO14.1 Differentiate among invention, innovation, and technological diffusion.
3. Examine the following game tree. Fred and Sally are planning on running competing restaurants. Each must decide whether to rent space or buy space. Fred goes first at decision node F.Sally goes
2. Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible(believable). Look back at Figure 13-3. Imagine that the two firms will play this
1. Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 13-3. Suppose that if one firm sets a low price while the other sets a high price, the firm setting the
9. Look back at Figure 13-8. Suppose that the two firms switch places—the firm that was the follower now gets to go first while the firm that was the leader now has to go second. The new subgame
8. Look back at Figure 13-7. Suppose that the payouts at terminal node B change to (13, 12) while everything else in the game stays the same. The new subgame perfect Nash equilibrium will consist of
7. Property developers who build shopping malls like to have them “anchored” with the outlets of one or more famous national retail chains, like Hudson’s Bay Company or Canadian Tire. Having
6. True or False? Potential rivals may be more likely to collude if they view themselves as playing a repeated game rather than a one-time game. [LO13.6]
5. Collusive agreements can be established and maintained by [LO13.6]a. Credible threatsb. One-time gamesc. Empty threatsd. First-mover advantage
4. Some analysts consider oligopolies to be potentially less efficient than monopoly firms because at least monopoly firms tend to be regulated. Arguments in favour of a more benign view of
3. In an oligopoly, each firm’s share of the total market is typically determined by [LO13.4]a. Scarcity and competitionb. Payoff matricesc. Homogeneous products and import competitiond. Product
2. Consider an oligopoly industry whose firms have identical demand and cost conditions. If the firms decide to collude, then they will want to collectively produce the amount of output that would be
1. Which of the following apply to oligopoly industries? Select one or more answers from the choices shown. [LO13.1]a. A few large producersb. Many small producersc. Strategic behaviourd. Price taking
12. Can backward induction be readily applied when a sequential game is presented as a payoff matrix? Discuss. [LO13.
11. Are the subgames of a sequential game visible when the entire game is presented in strategic form? Explain. [LO13.6]
10. Advanced Analysis Suppose you are playing a game in which you and one other person each picks a number between 1 and 100, with the person closest to some randomly selected number between 1 and
9. Refer to the payoff matrix below. [LO13.6]Assuming this is a sequential game with no collusion, what is the outcome if firm A moves first to build a new type of commercial aircraft? Explain why
8. Refer to the payoff matrix in Discussion Question 3. First, assume this is a one-time game. Explain how the $60/$57 outcome might be achieved through a credible threat. Next, assume this is a
7. Is the game shown in Figure 13-3 a zero-sum game or a positive-sum game? How can you tell? Are there dominant strategies in this game? If so, what are they? What cell represents a Nash equilibrium
6. Advanced Analysis Construct a game theory matrix involving two firms and their decisions on high versus low advertising budgets and the effects of each decision on profits. Show a circumstance in
5. Why is there so much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? Why might it be excessive at times? [LO13.4]
4. Why might price collusion occur in oligopolistic industries?Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate why price leadership is legal
3. Explain the general meaning of the following payoff matrix for oligopolists X and Y. All profit figures are in thousands.[LO13.2]
2. Answer the following questions, which relate to measures of concentration: [LO13.1]a. What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of
1. Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition? [LO13.1]
Question Why have tech firms with near-monopolies in their own sectors sought to compete with tech firms that have extremely strong, near-monopoly positions in other sectors?
LO13.5 Discuss the efficiency of oligopoly from society’s standpoint and whether it is more or less efficient than monopoly.LO13.6 Utilize additional game-theory terminology and demonstrate how to
LO13.4 Contrast the potential positive and potential negative effects of advertising.
LO13.3 Explain the two main models of oligopoly pricing and output: collusive pricing and price leadership.
LO13.2 Discuss how game theory relates to oligopoly.
LO13.1 Describe the characteristics of oligopoly.
3. Suppose that an monopolistically competitive restaurant is currently serving 230 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to
2. Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that
1. Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold) 23, 22, 18, 12, 11, 8, and 6 percent. What is the
3. Which of the following best describes the efficiency of monopolistically competitive firms? [LO12.3]a. Allocatively efficient but productively inefficientb. Allocatively inefficient but
2. In the small town of Geneva, there are 5 firms that make watches. The firms’ respective output levels are 30 watches per year, 20 watches per year, 20 watches per year, 20 watches per year, and
1. There are 10 firms in an industry, and each firm has a market share of 10 percent. The industry’s Herfindahl index is [LO12.1]a. 10b. 100c. 1000d. 10,000
5. Critically evaluate and explain the following statements:[LO12.2]a. “In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid
4. “Competition in quality and service may be just as effective as price competition in giving buyers more for their money.” Do you agree? Why? Explain why monopolistically competitive firms
3. “Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point.” Explain. [LO12.2]
2. Compare the elasticity of a monopolistic competitor’s demand with that of a perfectly competitive firm and a monopolist.Assuming identical long-run costs, compare graphically the prices and
1. How does monopolistic competition differ from perfect competition in its basic characteristics? From monopoly? Explain fully what product differentiation may involve. Explain how the entry of
4. Which of the following pairs are both competition-like elements in monopolistic competition?a. Price exceeds MR (standardized product).b. Entry is relatively easy (only a normal profit in the long

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