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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

LO11.6 Describe why a monopolist might prefer to charge different prices in different markets.
LO11.5 Discuss the economic effects of monopoly.
LO11.4 Explain how a monopolist sets its maximizing output and price.
LO11.3 Explain how demand is seen by a monopolist.
LO11.2 List and explain the barriers to entry that shield monopolies from competition.
LO11.1 List the characteristics of monopoly.
3. There are 300 farms in the perfectly competitive local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested. What is their
2. A firm in a perfectly competitive industry is currently producing 1000 units per day at a total cost of $450. If it produced 800 units per day, its total cost would be $300, and if it produced 500
1. A firm in a perfectly competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders.
5. Suppose that firms in a perfectly competitive industry producing cashews discover that P exceeds MC. Is their combined output of cashews too little, too much, or just right to achieve allocative
4. Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium. Assuming constant costs, employ these diagrams to show how (a) an increase and (b) a
3. Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases.If the mobile phone industry features perfect competition, we would expect the
2. Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with
1. When discussing perfect competition, the term long run refers to a period of time long enough to allow [LO10.16]a. Firms already in an industry to either expand or contract their capacitiesb. New
6. “Ninety percent of new products fail within two years—so you shouldn’t be so eager to innovate.” Do you agree? Explain why or why not. [LO10.547]
5. The basic model of perfect competition reviewed in this chapter finds that in the long run all firms in a perfectly competitive industry will earn normal profits. If all firms will only earn a
4. In long-run equilibrium, P = minimum ATC = MC. Of what significance for economic efficiency is the equality of P and minimum ATC? The equality of P and MC? Distinguish between productive
3. How do the entry and exit of firms in a perfectly competitive industry affect resource flows and long-run profits and losses? [LO10.269]
2. Relate opportunity costs to why profits encourage entry into perfectly competitive industries and how losses encourage exit from perfectly competitive industries. [LO10.274]
1. Explain how the long run differs from the short run in perfect competition. [LO10.74]
Question How can patents speed up the process of creative destruction?How can patents slow down the process of creative destruction? How do differences in manufacturing costs affect which industries
4. When P = MC = lowest ATC for individual firms, in the marketa. Consumer surplus necessarily exceeds producer surplusb. Consumer surplus plus producer surplus is at a maximumc. Producer surplus
3. The equality of P, MC, and minimum ATCa. Occurs only in constant-cost industriesb. Encourages entry of new firmsc. Means that the “right goods” are being produced in the “right ways”c.
2. At this firm’s profit-maximizing outputa. Total revenue equals total costb. It is earning an economic profitc. Allocative, but not necessarily productive, efficiency is achievedd. Productive,
1. We know the firm is a price-taker becausea. Its MC curve slopes upwardb. Its ATC curve is U-shapedc. Its MR curve is horizontald. MC and ATC are equal at the profit-maximizing output(p. 18)
LO10.5 Discuss creative destruction and the profit incentives for innovation.
LO10.4 Show how long-run equilibrium in perfect competition produces an efficient allocation of resources.
LO10.3 Explain the differences between constant-cost, increasing-cost, and decreasing-cost industries.
LO10.2 Describe how profits and losses drive the long-run adjustment process of perfect competition.
LO10.1 Explain how the long run differs from the short run in perfect competition.
4. Assume that the following cost data are for a firm in perfect competition: [LO9.5]
2. A wheat farmer in a perfectly competitive industry can sell any wheat he grows for $10 per bushel. His five hectares of land show diminishing returns because some are better suited for wheat
1. A perfectly competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for
6. Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC.[LO9.5]a. P <
4. If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which [LO9.5]a. MR < MCb. MR =
3. A perfectly competitive firm whose goal is to maximize profit will choose to produce the amount of output at which [LO9.4]a. TR and TC are equalb. TR exceeds TC by as much as possiblec. TC exceeds
2. Use the following demand schedule to determine total revenue and marginal revenue for each possible level of sales: [LO9.3]a. What can you conclude about the structure of the industry in which
6. “That segment of a competitive firm’s marginal-cost curve that lies above its average variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and
5. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures?Explain why price can be substituted for marginal revenue in the MR = MC rule
3. “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)? [LO9.5]
2. Strictly speaking, perfect competition is relatively rare. Then why study it? [LO9.2]
1. Briefly state the basic characteristics of perfect competition, monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most
2. At a price of $131 and seven units of outputa. MR exceeds MC, and the firm should expand its outputb. Total revenue is less than total costc. AVC exceeds ATCd. The firm would earn only a normal
LO9.6 Explain why a competitive firm’s marginal cost curve is the same as its supply curve.
LO9.5 Explain how perfectly competitive firms can use the marginal-revenue–marginal-cost approach to maximize profits or minimize losses in the short run.
LO9.4 Convey how firms in perfect competition can use the total-revenue–total-cost approach to maximize profits or minimize losses in the short run.
LO9.3 Explain how demand is seen by a perfectly competitive seller.
LO9.2 List the conditions required for perfectly competitive markets.
LO9.1 Give the names and the main characteristics of the four basic market models.
4. There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs $10,000 per kilometre to set up. How much would it cost to fence a single
2. Imagine you have some workers and some hand-held computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he
6. Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the figure below.What plant size will the firm choose in producing (a) 50, (b) 130,(c) 160, and
5. True or False? The U shape of the long-run ATC curve is the result of diminishing returns. [LO8.4]
3. A firm has $60 in fixed costs and variable costs as indicated in the table below. Complete the table; check your calculations by referring to Problem 4 at the end of Chapter 9. [LO8.3]
2. Which of the following are short-run and which are long-run adjustments? [LO8.1]a. Wendy’s builds a new restaurant.b. Scotiabank hires 200 more workers.c. A farmer increases the amount of
1. Linda sells 100 bottles of homemade ketchup for $10 each.The cost of the ingredients, the bottles, and the labels was$700. In addition, it took her 20 hours to make the ketchup and to do so she
5. List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 2000 kilometres for spring break. Which
4. Why can the distinction between fixed costs and variable costs be made in the short run? Explain the following statement:There are no fixed costs in the long run; all costs are variable.Then
3. Complete the following table by calculating marginal product and average product from the data given. [LO8.2]
1. Distinguish between explicit and implicit costs, giving examples of each. What are some explicit and implicit costs of attending college or university? [LO8.1]
Question Does additive manufacturing rely on economies of scale to deliver low costs? What are two ways in which additive manufacturing lowers costs? Besides what’s written in the Last Word, might
2. The unlabelled light blue curves in this figure derive their shapes froma. Decreasing, then increasing, short-run returnsb. Increasing, then decreasing, short-run returnsc. Economies, then
1. The unlabelled light blue curves in this figure illustrate thea. Long-run average-total-cost curves of various firms constituting the industryb. Short-run average-total-cost curves of various
LO8.5 Give business examples of short-run costs, economies of scale, and minimum efficient scale (MES).
LO8.4 Use economies of scale to link a firm’s size and production costs in the long run.
LO8.3 Describe the distinctions between fixed and variable costs, and among total, average, and marginal costs.
LO8.2 Relate the law of diminishing returns to a firm’s short-run production costs.
6. Ted has always had difficulty saving money, so on June 1, he enrolls in a Christmas savings program at a local bank and deposits $750. That money is locked away until December 1 so that Ted can be
5. Advanced Analysis In the algebraic version of prospect theory, the variable x represents gains and losses. A positive value for x is a gain, a negative value for x is a loss, and a zero value for
4. Angela owes $500 on a credit card and $2000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate.Her sense of loss
3. The coffee shop near the local university normally sells 250 grams of roasted coffee beans for $10. But the shop sometimes puts the beans on sale. During some sales, it offers “33 percent more
2. Anne is a bargain-minded shopper. Normally, her favourite toothpaste costs the same at both of her local supermarkets, but the stores are having competing sales this week. At one store, there is a
5. Many proposers in the ultimatum game offer half to the responder with whom they are paired. This behaviour might be motivated by (select as many as might apply): [LO7B.5]a. Fear that an unequal
4. Erik wants to save more, but whenever a paycheque arrives, he ends up spending everything. One way to help him overcome this tendency would be to [LO7B.4]a. Teach him about time inconsistencyb.
2. Identify each statement as being associated with neoclassical economics or behavioural economics. [LO7B.1]a. People are eager and accurate calculators.b. People are often selfless and generous.c.
1. Which of the following are systematic errors? [LO7B.1]a. A color-blind person who repeatedly runs red lightsb. An accountant whose occasional math errors are sometimes on the high side and
12. Evaluate the following statement: “We shouldn’t generalize from what people do in the ultimatum game because $10 is a trivial amount of money; when larger amounts o
11. Do people playing the dictator game show only self-interested behaviour? How much divergence is there in the splits given by dictators to the other player? [LO7B.5]
9. Give an example from your own life of a situation where you or someone you know used a precommitment to overcome a self-control problem. Describe why the precommitment is useful and what it
4. “There’s no such thing as bad publicity.” Evaluate this statement in terms of the recognition heuristic. [LO7B.2]
2. Why do behavioural economists consider it helpful to base a theory of economic behaviour on the actual mental processes that people use to make decisions? Why do neoclassical economists not care
LO7B.5 Define fairness and give examples of how it affects behaviour in the economy, and in the dictator and ultimatum games.
LO7B.4 Describe how time inconsistency and myopia cause people to make suboptimal long-run decisions.
LO7B.3 Relate how prospect theory helps to explain many consumer behaviours, including framing effects, mental accounting, anchoring, loss aversion, and the endowment effect.
LO7B.2 Discuss the evidence for the brain being modular, computationally restricted, reliant on heuristics, and prone to various forms of cognitive error.
LO7B.1 Define behavioural economics and explain how it contrasts with neoclassical economics.
2. Bill spends his money on flowers and cookies so as to maximize his total utility. Both flowers and cookies start off costing$2 each. At that price, Bill buys three flowers and two cookies.When the
1. Consider two bundles of coffee and chocolate and how Ted feels about them. The first bundle consists of two cups of coffee and two chocolate bars. The second bundle consists of one cup of coffee
3. Using Figure A7-4, explain why the point of tangency of the budget line with an indifference curve is the consumer’s equilibrium position. Explain why any point where the budget line intersects
1. What information is embodied in a budget line? What shifts occur in the budget line when money income (a) increases and (b) decreases? What shifts occur in the budget line when the price of the
7. Suppose that with a budget of $100, Deborah spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. But then, after the price of bagels falls to $1 per
6. Advanced Analysis Let MUA = z = 10 − x and MUB =z = 21 − 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product
5. You are choosing between two goods, X and Y, and your marginal utility from each is as shown below. If your income is $9 and the prices of X and Y are $2 and $1, respectively, what quantities of
4. Columns 1 through 4 in the following table show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the
3. Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup no matter how many cups he drinks.On the other hand, his marginal utility per doughnut is 10 utils for
2. John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50
1. Miley’s total utility from singing the same song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four
1. True or False? The law of diminishing marginal utility predicts the consumption behaviour of addicts quite well. [LO7.1]
9. Rank each of the following three gift possibilities in terms of how much utility they are likely to bring, and explain your reasoning. A store-specific gift card worth $15, a $15 item from that
8. Advanced Analysis A mathematically “fair bet” is one in which a gambler bets, say, $100 for a 10 percent chance to win$1000 ($100 = 0.10 × $1000). Assuming diminishing marginal utility of

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