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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

*Why is oligopolistic collusion more difcult when there is product variation than when the products of all rms are identical?
How will high entry barriers into a market inuencea. the long-run protability of the rms,b. the cost efciency of the rms in the industry,c. the likelihood that some inefcient (high-cost) rms
Is a monopolist subject to any competitive pressures?Explain. Would an unregulated monopolist have an incentive to operate and produce efciently? Why or why not?
Does economic theory indicate that an ideal regulatory agency that forces a monopolist to charge a price equal to either marginal or average total cost will improve economic ef-ciency? Explain. Does
Compare the price and output policy of a purely competitive industry with the policy that would be established by a prot-maximizing monopolist or cartel. Who benets and who is hurt? Construct the
*Do monopolists charge the highest prices for which they can sell their products? Do they maximize their average prot per sale? Are monopolistic rms always protable? Why or why not?
“Monopoly is good for producers but bad for consumers. The gains of the former offset the losses of the latter. On balance, there is no reason to think that monopoly is bad for the economy.”Is
“Barriers to entry are crucial to the existence of long-run prots, but they cannot guarantee the existence of prots.”Evaluate.
Rod N. Reel owns a dealership that sells shing boats in an open, price-searcher market. To develop his pricing strategy, Rod hired an economist to estimate his demand curve.Columns (1) and (2) of the
The accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry.a. What level of output will maximize the rm’s prot level?b. What
“The superiority of the competitive market is the positive stimuli it provides for constantly improving efciency, innovating, and offering consumers diversity of choice.” This quotation is from
*What keeps McDonald’s, Walmart, General Motors, or any other business rm from raising prices, selling shoddy products, and providing lousy service?
What is the primary requirement for a market to be competitive?Is competition necessary for markets to work well? Why or why not? How does competition inuence the following:(a) the cost efciency of
*“When competition is intense, only the big rms survive. The little guy has no chance.” True or false? Explain.
Is price discrimination harmful to the economy? How does price discrimination affect the total amount of gains from exchange?Explain. Why do colleges often charge students different prices based on
*Suppose that a group of investors wants to start a business operated out of a popular Utah ski area. The group is considering either building a new hotel complex or starting a new local airline
Would our standard of living be higher if the government“bailed out” troubled businesses? If a rm goes out of business, what happens to the rm’s assets, workers, and customers?Are business
*a. What determines whether corporations, individual proprietorships, employee-owned rms, consumer cooperatives, or some other form of business structure will dominate in a market?b. What determines
Suppose that a price searcher is currently charging a price that maximizes the rm’s total revenue. Will this price also maximize the rm’s prot? Why or why not? Explain.
Is quality and style competition as important as price competition?Would you like to live in a country where government regulation restricted the use of quality and style competition?Why or why not?
What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure?
What do competitive price searchers have to do to make economic prot?
*What determines the variety of styles, designs, and sizes of different products? Why do you think there are only a few different varieties of toothpicks but lots of different types of napkins on the
Because price searchers can set their prices, does this mean that their prices are unaffected by market conditions? In price-searcher markets with low barriers to entry, will therms be able to make
Price searchers can set the prices of their products. Does this mean that they will charge the highest possible price for their products? Why or why not?
In the accompanying table, you are given information about two rms that compete in a price-taker market. Assume thatxed costs for each rm are $20.a. Complete the table.b. What is the lowest price at
*The accompanying table presents the expected cost and revenue data for the Tucker Tomato Farm. The Tuckers produce tomatoes in a greenhouse and sell them wholesale in a price-taker market.a. Fill in
A combination of high crude oil prices and government subsidies for ethanol have led to a sharp increase in the demand for corn in recent years. How will this increase in demand for corn inuence (a)
Do business rms in competitive markets have a strong incentive to serve the interests of consumers? Are they motivated by a strong desire to help consumers? Are “good intentions”necessary if
Why is competition in a market important? Is there a positive or negative effect on the economy when strong competitive pressures drive various rms out of business? Discuss.
*During 2011, drought conditions throughout much of Europe substantially reduced the size of the corn, wheat, and soybean crops, three commodities for which demand is inelastic.Use the price-taker
Will rms in a price-taker market be able to earn prots in the long run? Why or why not? What determines protability?Discuss.
*How does competition among rms affect the incentive of each rm to (a) operate efciently (produce at a low per-unit cost) and (b) produce goods that consumers value? What happens to rms that fail
Why does the short-run market supply curve for a product slope upward to the right? Why does the long-run market supply curve generally slope upward to the right? Why is the long-run market supply
“When the rms in the industry are just able to cover their cost of production, economic prot is zero. Therefore, if demand falls, causing prices to go down even a little bit, all of the rms in
*Suppose that the development of a new drought-resistant hybrid seed corn leads to a 50 percent increase in the average yield per acre without increasing the cost to the farmers who use the new
If coffee suppliers are price takers, how will an unanticipated increase in demand for their product affect each of the following, in a market that was initially in long-run equilibrium?a. the
Suppose the government of a large city levies a 5 percent sales tax on hotel rooms. How will the tax affect (a) prices of hotel rooms, (b) the prots of hotel owners, and (c) gross
“In a price-taker market, if a business operator produces efciently—that is, if the cost of producing the good is minimized—the operator will be able to make at least a normal prot.” True
*If the rms in a price-taker market are making short-run prots, what will happen to the market price in the long run?Explain.
Farmers are often heard to complain about the high costs of machinery, labor, and fertilizer, suggesting that these costs drive down their prots. Does it follow that if, for example, the price of
Fill in the blanks in the accompanying table shown at the bottom of page and answer the following questions:a. What happens to total product when marginal product is negative?b. What happens to
*Investors seeking to take over a rm often bid a positive price for the business even though it is currently experiencing losses. Why would anyone ever bid a positive price for a rm operating at a
*Consider a machine purchased one year ago for $12,000. The machine is being depreciated $4,000 per year over a threeyear period. Its current market value is $5,000, and the expected market value of
What are implicit costs? Do implicit costs contribute to the opportunity cost of production? Should an implicit cost be counted as cost? Give three examples of implicit costs.Does the rm’s
What is shirking? If the managers of a rm are attempting to maximize its prots, will they have an incentive to limit shirking?How might they go about doing so?
*Draw a U-shaped, short-run ATC curve for a rm. Construct the accompanying MC and AVC curves.
Why do economists consider normal returns to capital to be a cost? How does economic prot differ from normal prot?
*What is the opportunity cost of (a) borrowed funds and (b)equity capital? Under current tax law, rms can record as an expense the opportunity cost of borrowed funds, but not equity capital. How
*Is prot maximization consistent with the self-interest of corporate owners? Is it consistent with the self-interest of corporate managers? Is there a conict between the self-interests of owners
“Firms that make a prot have increased the value of the resources they used; their actions created wealth. In contrast, the actions of rms that make losses reduce wealth. The discovery and
Economics students often confuse (a) diminishing returns related to the variable factors of production and (b) diseconomies of scale. Explain the difference between the two, and give one example of
Which of the following are relevant to a rm’s decision to increase output: (a) short-run average total cost, (b) short-run marginal cost, (c) long-run average total cost? Justify your answer.
Explain the factors that cause a rm’s short-run average total costs initially to decline but eventually to increase as the rate of output rises.
What are some of the advantages of the corporate business structure of ownership for large business rms? What are some of the disadvantages? Is the corporate form of business ownership cost
*“If a rm maximizes prot, it must minimize the cost of producing the prot-maximizing output.” Is this statement true or false? Explain your answer.
What is the principal–agent problem? When will the principal–agent problem be most severe? Why might there be a principal–agent problem between the stockholder owners and the managers of a
Suppose a rm produces bicycles. Will the rm’s accounting statement reect the opportunity cost of the bicycles? Why or why not? What costs would an accounting statement reveal? Should current
Which of the following statements do you think reect sound economic thinking? Explain your answer.a. “I paid $400 for this economics course. Therefore, I’m going to attend the lectures even if
The owners of a rm are residual income claimants. How does their property right to the residual income affect their incentive to (a) produce efciently and keep cost low and(b) supply goods that
Suppose Erin, the owner-manager of a local hotel projects the following demand for her rooms:a. Calculate the price elasticity of demand between $90 and $110.b. Is the price elasticity of demand
*Jill’s Sausage Dog Stand projects the following demand for Jill’s sausage dogs:a. Calculate the price elasticity of demand between $2 and $4. Is demand in this range elastic or inelastic?b.
*Sue loves ice cream but cannot stand frozen-yogurt desserts.In contrast, Carole likes both foods and can hardly tell the difference between the two. Who will have the more elastic demand for yogurt?
*Respond to the following questions: If you really like pizza, should you try to consume as much pizza as possible? If you want to succeed, should you try to make the highest possible grade in your
Are the following statements true or false? Explain your answers.a. A 10 percent reduction in price that leads to a 5percent increase in the amount purchased indicates a price elasticity of more
Most systems of medical insurance substantially lower the out-of-pocket costs consumers have to pay for additional units of physician services and hospitalization. Some reduce these costs to zero.
What are the major determinants of a product’s price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic. Why?
*People who are wealthy are widely believed to have more leisure time than people who are poor. However, even though we are a good deal wealthier today than our great-grandparents were 100 years ago,
Estimates presented in Exhibit 5 show that Android users have a higher price elasticity of demand for apps in the Google Play Store than do iPhone users in the Apple App Store. Why might Android
Is this consumer maximizing his or her utility? Would you suggest that he buy more jeans and fewer T-shirts, or more T-shirts and fewer jeans?
A consumer is currently purchasing three pairs of jeans andve T-shirts per year. The price of jeans is $30, and T-shirts cost $10. At the current rate of consumption, the marginal utility of jeans
*Recent research conrms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by
*A bus ticket between two cities costs $150 and the trip will take 25 hours, whereas an airplane ticket costs $450 and takesve hours. Kathy values her time at $12 per hour, and Rachel values her
Suppose that, in an attempt to raise more revenue, Nowhere State University (NSU) increases its tuition. Will this necessarily result in more revenue? Under what conditions will revenue (a) rise, (b)
The Federal Drug Administration will not approve new pharmaceutical products unless the developer can prove that its product is both safe and effective as a remedy for specied ailments. Do you think
The United States imposes highly restrictive sugar import quotas that result in a domestic price that is generally two or three times the world price. The quotas benet sugar growers at the expense
If a senator trades his or her vote on an issue for a $10,000 payment, would you consider this corruption? If a senator votes a certain way in “exchange” for a $10,000 contribution to his or her
“Because government-operated rms do not have to make a prot, they can usually produce at a lower cost and charge a lower price than privately owned enterprises.” Evaluate this view.
*“Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries such as airlines, railroads,
What is the shortsightedness effect? How does it inuence the attractiveness of government borrowing? Explain.
If a project is efcient (its total benets exceed its total costs), would it be possible to allocate the cost of the project in a manner that would provide net benets to each voter? Why or why not?
“Government action is based on majority rule, whereas market action is based on mutual consent. The market allows for proportional representation of minorities, but minorities must yield to the
“The average person is more likely to make a well-informed choice when purchasing a personal computer than when voting for a congressional candidate.” Is this statement true?Why or why not?
What is rent-seeking? When is it likely to be widespread?How does it inuence economic efciency? Explain.
*“The political process sometimes leads to economic inef-ciency because we elect the wrong people to political ofce.If the right people were elected, a democracy governed by majority rule would
*“The government can afford to take a long view when it needs to, while a private rm has a short-term outlook. Corporate of-cers, for example, typically care about the next 3 to 6 months, not the
Are voters likely to be well informed on issues and the positions of candidates? Why or why not?
Apply the economic efciency criterion to the role of government.When would a government intervention be considered economically efcient? When would a government intervention be considered
What is market failure? If market failure is present, does this imply that government intervention will lead to a more efcient allocation of resources? Why or why not?
What are the necessary conditions for economic efciency?In what four situations might a market fail to achieve ideal economic efciency?
What are external costs? When are they most likely to be present?When external costs are present, what is likely to be the relationship between the market output of a good and the output consistent
*If sellers of toasters were able to organize themselves, reduce their output, and raise their prices, how would economic ef-ciency be affected? Explain.
“Unless quality and price are regulated by government, travelers would have no chance for a fair deal. Local people would be treated well, but the traveler would have no way to know, for example,
“If it’s worth doing, it’s worth doing to the best of your ability.”What is the economic explanation for why this statement is frequently said but rarely followed in practice? Explain.
English philosopher John Locke argued that the protection of each individual’s person and property (acquired without the use of violence, theft, or fraud) was the primary function of government.
Explain in your own words what is meant by external costs and external benets. Why may market outcomes be less than ideal when externalities are present?
Which of the following are public goods? Explain, using the denition of a public good.a. an antimissile system surrounding Washington, D.C.b. a re departmentc. tennis courtsd. Yellowstone National
What are the distinguishing characteristics of “public goods”?Give two examples of a public good. Why are public goods difcult for markets to allocate efciently?
In response to the terrorist attacks of September 11, 2001, airline security screening increased dramatically. As a result, the travel time of airline passengers has increased substantially.Would it
Suppose the government subsidizes the production and sale of spinach. What impact would this have on the price and output of spinach? Who would benet and who would lose from this subsidy?

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