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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

1. 5. What is meant by sniping in an auction? Does it make sense to snipe to win an auction?
1. 4. What is the dominant strategy for a bidder in an English auction?
1. 3. What is an English auction?
1. 2. What is the difference between an open-outcry auction and a sealed bid auction?
1.1. How do auctions help in price discovery?
1. 11. Suppose there are 1,001 sellers with used cars that they value at(i.e., their willingness to accept is) $0, $100, $200, $300, . . . ,$9,900, $10,000. There are many buyers who place a higher
1.8. The problem of public goods provision (discussed earlier in the textbook) can also be thought of as a problem of asymmetric information. Suppose there is a house with five roommates. Each
1. 7. Steven Levitt and Chad Syverson compared instances of home sales in which real estate agents were hired by others to sell a home to instances in which an agent sold his or her own home.They
1. 3. Consider used mattresses. There are three types: “like-new”(value of $600), “lightly-used” (value of $300), and “bed-bug infested” (value of $0). Only the seller knows the type.a.
1. 2. There are fifty low-risk people in a town and fifty high-risk people. A low-risk person has an average of $1,000 in medical expenses each year and is willing to pay $1,200 for medical insurance
1.1. Your new car is stolen just days after you buy it. You purchased it for $20,000 but the insurance company believes it is worth only$16,000.a. Why would the insurance company believe it is only
1. 10. How can crime and punishment be modeled as a principal–agent problem? What does the model suggest about crime prevention?
1. 8. How might unemployment benefits create a moral hazard problem?
1. 7. Does the presence of asymmetric information necessarily imply that governments should intervene in a market?
1. 6. When do firms pay efficiency wages? What is the relationship between moral hazard and efficiency wages?
1. 5. Explain the following terms:a. Principal–agent relationshipb. Moral hazard
1. 3. Why does adverse selection occur in the health insurance market?
1. 2. Explain why “bad cars drive out the good ones” in the market for used cars.
1.1. What is asymmetric information? What are the two kinds of asymmetric information?
1. 12. Assume the interest rate is 50 percent. What is the present value of a payment of $60 paid 1 year from now? How about the present value of $60 paid today and $60 paid a year from now?Challenge
1. 11. You are a venture capitalist who has just purchased a stake in a small company. You believe that a year from now this company may no longer exist, in which case your stake is worthless; there
1. 10. Your house is worth $400,000, and you have $300,000 in a savings account. There is a 1 percent chance of a fire in your house during the next year. If the fire occurs, there will be$300,000 in
1. 9. You are considering playing a card game. The rules of the game are such that you pick a card from a standard deck of fifty-two cards and if the card is a diamond, you win $30. The catch is, you
1. 8. Say whether or not each of the following statements assumes independence between events:a. “There is no such thing as a ‘hot hand’: A basketball player is just as likely to make her next
1. 7. This chapter talked about the idea of independent events.a. Suppose you draw a card from a standard deck of cards, you put that card back in the deck, and draw a second card. Are the events
1. 6. You observe a banker give $75 for a bond that pays out $100 in one year. Based on this observation, what do you conclude about the interest rate? Suppose that the price of this bond today
1. 5. Stafford loans are student loans that the federal government provides to graduate and undergraduate students to fund their education. Since Stafford loans can be extended up to 30 years, the
1. 4. You are considering purchasing a new piece of equipment for your factory. The equipment will cost $3,000 right now and can be used for 3 years. If you purchase it, the machine will generate
1. 3. Suppose you won the Powerball lottery on January 1, 2017. You can choose to receive the entire amount of $400 million either as a lump sum on January 1, 2017, or you can receive four equal
1.1. The “Rule of 70” is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling
1. 11. Why might it make sense to avoid paying for extended warranties on TVs and small home appliances?
1. 10. What is meant by expected value? How is it calculated?
1. 9. When are outcomes said to be independent? What is meant by the gambler’s fallacy?
1. 8. How is the probability of an event defined?
1. 7. When is an outcome risky?
1. 6. What is meant by a preference reversal?
1. 5. What is meant by present bias?
1. 4. The greater your discount weight, the more your current decisions are driven by the future consequences of those decisions. Do you agree? Explain.
1. 3. How is net present value used to decide whether a project should be undertaken?
1. 2. How is the present value of a future payment calculated?
1.1. Is $1,000 received today worth as much as $1,000 received 1 year from now? Explain your answer.
1.13. A firm in a monopolistically competitive environment discovers that in the long run it faces inverse demand which means its marginal revenue is marginal cost is a constant P =10−(1/2)Q,
1. 12. Suppose all you know about Boeing and Airbus is that Boeing sells about 40 percent of all comercial aircraft, while Airbus sells around 25 percent.a. Based on this information, what is the
1. 11. Suppose there are five firms in an industry. Their sales (that is, total revenue) are as follows:Firm 1: $90 million Firm 2: $50 million Firm 3: $36 million Firm 4: $14 million Firm 5: $10
1. 9. Telesource and Belair are two of the largest firms in the wireless carrier market in a certain country. Together, these firms account for more than 80 percent of the market.a. Given that both
1. 8. Major league baseball teams have imposed what is commonly called the “luxury tax” on themselves. A team is subject to the tax if its payroll exceeds a specified level. The annual threshold
1. 7. Coke and Pepsi each choose one of two prices: “Low”“High”(P =$3)(P =$2). There are 50 buyers who will pick the lowest or price option. However, if the prices are the same, 25 will buy
1. 6. Tobacco companies have often argued that they advertise to attract more people who already smoke and not to persuade more people to begin smoking. Suppose there were just two cigarette
1.5. Make three copies of the following diagram and label them (i),(ii) and (iii). Add three different residual demand curves faced by a monopolist: (i) very steep (inelastic), (ii) relatively flat
1. 3. Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price equal to the marginal cost
1. 2. With the growth of the Internet, there are many online retailers and many buyers who shop online.a. Why, given the growth of the Internet, would you expect to find that different firms would
1. 11. When is a collusive agreement between two firms likely to break down?
1. 10. Suppose there are four firms in a market and each of them sells differentiated products. Does it make sense for these firms to engage in a price war? Why or why not?
1. 9. How do oligopolistic firms that sell differentiated products determine their prices?
1. 8. In the model of an oligopoly with identical (homogeneous)products, what is the price likely to be?
1. 6. What happens in a monopolistically competitive market with the entry of new firms?
1.13. Two competing firms must choose their quantity of production simultaneously. Each firm can choose either a High quantity of 3 or a Low quantity of 2. The price for both firms is 9 −Q, where Q
1. 12. Pat’s and Geno’s are two rival cheesesteak restaurants in Philadelphia, Pennsylvania, that are located across the street from each other. Since they serve almost the same food, they are
1. 11. While at the airport, you hear over the loudspeaker an offer to be bumped off your current flight in exchange for $100 travel credit.After it becomes clear nobody will take this offer, the
1. 9. Consider a game with two players, 1 and 2. They play the extensive-form game summarized in the following game tree:a. Suppose Player 1 is choosing between Green and Red for his second move.
1. 6. We might suppose a soccer player has three options when taking a penalty kick: Kick right (KR), kick left (KL), or kick down the center (KC). The goalie can choose to dive right (DR), dive
1. 5. A Beautiful Mind, a movie about John Nash, fails to properly demonstrate a Nash equilibrium. It attempts to do so in a bar scene where men at a bar (Nash and his friends) plan to ask women to
1. 4. It is possible for two-player games to be quite asymmetric: Each player might have a different set of options, and the payoffs may be quite different. Consider the following example between a
1. 3. In the movie The Princess Bride, the hero disguised as the pirate Westley is engaged in a game of wits with the villain Vizzini.Westley puts poison in either his own glass of wine or in
1. 2. Suppose Russia is deciding to Invade or Not Invade its neighbor Ukraine. The United States has to decide to Be Tough or Make Concessions. They will make their decisions simultaneously.Their
1.1. Suppose the cable TV companies Astounding Cable and Broadcast Cable are in your city. They both must decide on a high advertising budget, a moderate advertising budget, or a low advertising
1. 10. When can backward induction be used to arrive at the equilibrium for a game?
1. 7. What is the difference between a pure strategy and a mixed strategy?
1. 6. What is a zero-sum game? Can you think of any zero-sum games in real life?
1. 5. How can the tragedy of the commons be modeled as a prisoners’dilemma game?
1. 4. What is a Nash equilibrium? How is a Nash equilibrium different from a dominant strategy equilibrium?
1. 3. What is meant by the “prisoners’ dilemma”? Do the players in the prisoners’ dilemma game have a dominant strategy?
1. 2. Is a player’s best response in a game the same as his dominant strategy? Explain.
1.1. What is a dominant strategy equilibrium?
1. 12. A monopolist with constant marginal cost of $4 faces demand QD =20−2P.This implies that the inverse demand curve is P =10−(1/2)Q and that the marginal revenue is MR=10−Q.a. Sketch
1. 5. You are a monopolist facing the following demand schedule. You produce a good at a constant marginal cost of $4 per unit.Quantity Price 12$14 3$12$10 4$8a. Calculate the marginal revenue for
1. 4. You run a company that has a monopoly on a new drug that treats arthritis. The price is $10 per dose, and you sell 10 million doses per day. Market research shows that a reduction of price by$2
1. 10. Why does a monopoly firm not have a supply curve?
1. 11. For Acme Manufacturing, the marginal product of labor is Acme sells output for $10 per unit.MPL=10−2L.a. Sketch the value of the marginal product of labor(VMPL). How many workers will Acme
1. 9. Joey, Mandy, and Jim have the following labor supply (hours per day, based on hourly pay).Wage Joey Mandy$5$10 48 0Jim 2$15 412 86 9a. Who values their leisure most, Joey, Mandy, or Jim (or is
1. 5. The following table shows the average salary for major league baseball players. As you can see, the average salary of $3,440,000 in 2012 is nearly 20 times larger than the average salary in
1. 2. Consider the following daily production functions for Pleasanton’s three different coffee shops. Each cup of coffee sells for $1.Workers 01 23 Arabica Alley Total Product 0100 130 Marginal
1. 12. The following graph shows the supply(QD =12 =P)(Qs = 2P)and demand for cigarettes. The government decides to impose$6 tax on each cigarette.a. What is the producer surplus, consumer surplus,
1. 11. Consider the following reservation values for buyers and sellers of soccer balls.Buyers Willingness to Sellers Willingness to pay Alex Hope$70$50 accept Clint$10 Tim Carli Abby$30
1.7. This chapter has focused on the effect of taxes. Let’s consider the effect of subsidies, which also generate deadweight loss. A subsidy creates a gap between the price received by sellers and
1. 6. The following diagram shows the effect of a $4 tax.a. Complete the table using the letters from the diagram on the preceding page.b. Based on this calculation, what is the deadweight loss of
1.1. The following table gives the 2013 federal income tax rates for a single individual.Income Rate$0 to $8,925$8,925 to $36,250 10%15%$36,250 to $87,850$87,850 to $183,250 25%28%$183,250 to
1. 4. What are the factors underlying government taxation and spending decisions?
1.1. When does a government run a budget surplus?
1. 11. Three roommates—Tinker, Evers, and Chance—share an apartment. It is really cold outside, and they are considering turning up the thermostat in the apartment by 1, 2, 3, or 4 degrees. They
1. 11. When does the free-rider problem arise?
1. 11. Suppose domestic demand is Qs =P.QD =16−P and domestic supply is The world price is $2 and the import tariff is $3 per unit.First make a sketch, and then find the following values. Each
1. 6. Consider the following three countries. Each can produce wheat, sheep, ore, brick, or wood. Production per worker is shown in the table. Each country has an equal number of workers.Redistan
1. 5. Amanda is a student working part-time at an insurance company.Amanda can work only 5 hours a day. Her manager informs her that she needs to review 250 documents and process 250 insurance claims
1. 2. A country has two types of workers, skilled and unskilled.Workers can produce either computers or steel. Output per worker is as follows.Type of Worker Unskilled Skilled Output per Worker
1. 9. What are some of the common arguments against free trade?
1. 8. What are the sources of a country’s comparative advantage?
1. 3. What is meant by terms of trade? How is it determined?
1. 11. The equilibrium rent in a town is $500 per month, and the equilibrium number of apartments is 100. The city now passes a rent control law that sets the maximum rent at $400. The diagram that
1. 5. Sara and Jim are going to lunch together and rank the restaurant options in the following way. Which restaurant choices would be Pareto efficient?Sara’s Preferences Jim’s Preferences

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