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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

*2.3 Jen, in Exercise 2.2, may buy Stock A or Stock B.Stock A has a 50% chance of being worth $100 and 50% of being worth $200. Stock B’s value is $50 with a chance of a half or $250 with a
2.2 Jen’s utility function with respect to wealth is U(W) = 2W. Plot her utility function. Use your figure and calculus to show that Jen is risk averse.(Hint: You can also use calculus to see if
2.1 Guojun offers to bet Kristin that if a six-sided die comes up with one or two dots showing, he will pay her $3, but if it comes up with any other number of dots, she’ll owe him $2. Is that a
1.7 Suppose that most people will not speed if the expected fine is at least $500. The actual fine for speeding is$800. How high must the probability of being caught and convicted be to discourage
*1.6 To discourage people from breaking the traffic laws, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the
1.4 The EZ Construction Company is offered a $20,000 contract to build a new deck for a house. The company’s profit if they do not have to sink piers (vertical supports) down to bedrock will be
*1.3 Tarini wants to buy an apartment for investment purposes. It has an 80% chance of being worth 1,700,000 rupees ($25,400) within a year and a 20% probability of it being worth 1,600,000
*1.2 Asa buys a painting. With a 20% probability, the artist will become famous and the painting will be worth $1,000. With a 10% probability, a fire will destroy the painting so that it becomes
1.1 Georg travels regularly (260 times per year) from the center of the city where he works to his home in an outlying area. When the traffic lights “cooperate” (all show green), it takes him
4.4 In 2012, the Clarkson Community Schools in Clarkson, Michigan, paid its starting teachers$38,087 with a bachelor’s degree and $41,802 with a master’s degree. (For simplicity, assume that
4.3 Which is worth more to you: (a) a $10,000 payment today or (b) a $1,000-per-year higher salary for as long as you work? At what interest rate would (a)be worth more to you than (b)? Does your
4.2 At current interest rates, it pays for Bob to go to college if he graduates in four years. If it takes an extra year to graduate from college, does going to college still pay? Show how the figure
4.1 If the interest rate is near zero, should an individual go to college, given the information in the figure in the Challenge Solution? State a simple rule for determining whether this individual
3.3 Trees, wine, and cattle become more valuable over time and then possibly decrease in value. Draw a figure with present value on the vertical axis and years(age) on the horizontal axis and show
3.2 If all the coal in the ground, Q, is to be consumed in two years and the demand for coal is Qt = A(pt)e in each year t where e is a constant demand elasticity, what is the price of coal each
3.1 You can sell a barrel of oil today for p dollars.Assuming no inflation and no storage cost, how high would the price have to be next year for you to sell the oil next year rather than now? M
2.20 In the figure in Solved Problem 15.5, suppose that the government’s demand curve remains constant at Dg 1 but the government starts to tax private earnings, collecting 1% of all interest
2.19 If the government bars foreign lenders from loaning money to its citizens, how does the capital market equilibrium change?
2.18 Suppose a group of investors is considering purchasing a Norwegian firm for 650 million krone. The net income of the firm in 2016 was 20 million krone and financial analysts expect this level of
2.17 What would the net present value be in Solved Problem 15.3 if the interest rate were 3% instead of 2%? M
*2.16 Your gas-guzzling car gets only 10 miles to the gallon and has no resale value, but you are sure that it will last five years. You know that you can always buy a used car for $8,000 that gets
2.15 According to the Associated Press, in 2015, Max Scherzer became the highest-paid right-handed pitcher in major league history by agreeing to a“$210 million, seven-year contract” with the
2.14 Dell Computer makes its suppliers wait 37 days on average to be paid for their goods; however, Dell is paid by its customers immediately. Thus, Dell earns interest on this float, the money that
2.13 Suppose you work for a company that is downsizing its operations in order to increase its profitability. As part of this process, the company decides to offer an incentive to some of its
*2.12 A firm is considering an investment in which its cash flow is π1 = $1 (million), π2 = -$12, π3 = $20, and πt = 0 for all other t. The interest rate is 7%.Use the net present value rule to
2.11 At a 10% interest rate, do you prefer to buy a phone for $100 or to rent the same phone for $10 a year?Does your answer depend on how long you think the phone will last? M
2.10 If you spend $4 a day on a latte (in real dollars) for the rest of your life (essentially forever), what is your present discounted value at a 3% interest rate? M
2.9 If a person were to say that the total cost of tuition to complete a university education is about £ 20,000, or £ 5,000 per year for each of 4 years, what could you deduce about this person’s
2.8 You are buying a new $20,000 car and have the option to pay for the car with a 0% loan or to receive $500 cash back at the time of the purchase.With the loan, you pay $5,000 down when you
*2.7 A contractor is deciding whether to work for Firm A or Firm B. Firm A is offering €20,000 for her services, which she will receive one year from today when the work has been completed.Firm B
2.6 You want to buy a room air conditioner. The price of one machine is $200. It costs $20 a year to operate.The price of another air conditioner is $300, but it costs only $10 a year to operate.
2.5 You plan to buy a used refrigerator this year for$200 and to sell it when you graduate in two years.Assuming that you can get $100 for the refrigerator at that time, the rate of inflation is
2.4 Many new products being produced today use less electricity than in the past. Suppose you are told that you could save 2,630 pesos per year by using less electricity if you replace your current
2.3 How much money do you have to put into a bank account that pays 10% interest compounded annually to receive annual payments of $200? M
2.2 Igor wants to lease a new Lada car. He pays 10,000 rubles upfront and 5,000 rubles each year for two years. What is the present value of these payments at a 3% rate of interest? What is the
*2.1 How does an individual with a zero discount rate compare current and future consumption? How does your answer change if the discount rate is infinite?
1.15 An economic consultant explaining the effect on labor demand of increasing health care costs, interviewed for the Wall Street Journal’s Capital column(David Wessel, “Health-Care Costs Blamed
1.14 In Solved Problem 15.2, show how the results change if the share of workers killed by the Black Death was one-half.
1.13 What is a monopoly’s demand for labor if it uses a fixed-proportions production function in which each unit of output takes one unit of labor and one unit of capital?
1.12 Does a shift in the supply curve of labor have a greater effect on wages if the output market is competitive or if it is monopolistic? Explain.
1.11 How does a monopoly’s demand for labor shift if a second firm enters its output market and the result is a Cournot duopoly equilibrium?
1.9 Suppose that a firm’s production function is q = L + K. Can it be a competitive firm? Why?1.10 A monopoly with a Cobb-Douglas production function, Q = (Lρ + Kρ)1/ρ, faces a constant
*1.8 A competitive firm has a constant elasticity production function, q = (Lρ + Kρ)1/ρ. What is its marginal revenue product of labor? q = (Lρ + Kρ)1/ρ
1.6 Show that the quantity of labor or capital that a firm demands decreases with a factor’s own factor price and increases with the output price when the production function is Cobb-Douglas as in
1.5 Georges, the owner of Maison d’Ail, earned his coveted Michelin star rating by smothering his dishes in freshly minced garlic. Georges knows that he can save labor costs by using less garlic,
1.4 Oil companies, prompted by improvements in technology and increases in oil prices, are drilling in deeper and deeper water. Using a marginal revenue product and marginal cost diagram of drilling
1.3 How does a fall in the rental price of capital affect a firm’s demand for labor in the long run?
*1.2 If a local government starts collecting an ad valorem tax of α on the revenue of a competitive firm (and all other firms are located outside this jurisdiction), what happens to the firm’s
7.2 Using the Challenge Solution’s mathematical model, how much does Firm 1’s profit (ignoring the subsidy)change as the subsidy, s, increases?
7.1 In the Challenge Solution’s mathematical model, how much does Firm 1’s best-response curve shift as the subsidy, s, increases?
6.7 In Solved Problem 14.4, what fixed cost would result in four firms operating in the monopolistically competitive equilibrium? What are the equilibrium quantities and prices?
6.6 Exercise 6.5 shows that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity. Does this result depend upon whether firms produce identical or
*6.5 Show that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity or minimum efficient scale, which is the smallest quantity at which the
6.4 Does an oligopoly or a monopolistically competitive firm have a supply curve? Why or why not?(Hint: See the discussion in Chapter 11 of whether a monopoly has a supply curve.)
6.3 In a monopolistically competitive market, the government applies a specific tax of $1 per unit of output. What happens to the profit of a typical firm in this market? Does the number of firms in
6.2 In the monopolistically competitive airlines model, what is the equilibrium if firms face no fixed costs?
6.1 What is the effect of a government subsidy that reduces the fixed cost of each firm in an industry in a Cournot monopolistic competition equilibrium?
5.9 Two pizza parlors are located within a few feet of each other on the Avenue of the Americas in New York City. Both were selling a slice of pizza for $1(Matt Flegenheimer, “$1 Pizza Slice Is
5.8 Consider two firms that provide a differentiated product, which they produce at the same constant marginal cost, MC = 3. The demand function for Firm 1 is q1 = 10 - p1 - 0.5p2 and for Firm 2 is
5.7 Consider two price-setting oligopolies supplying consumers in a certain region of a country. Firm 1 employs many of the people living there and the local government subsidizes its operations. In
5.6 In the Coke and Pepsi example, what is the effect of a specific tax, τ, on the equilibrium prices? (Hint:What does the tax do to the firm’s marginal cost?You do not have to use math to provide
5.5 Solve for the Nash-Bertrand equilibrium for the firms described in Exercise 5.3 if Firm 1’s marginal cost is $30 per unit and Firm 2’s marginal cost is $10 per unit. M
5.4 Solve for the Nash-Bertrand equilibrium for the firms described in Exercise 5.3 if both firms have a marginal cost of $0 per unit. M
*5.3 Suppose that two oligopoly firms set prices to maximize their profits. Each faces the same constant marginal cost, m = 15. The demand function for Firm 1 is q1 = 120 - 6p1 - 2p2 and for Firm 2
*5.2 Will price be lower if duopoly firms set price or if they set quantity? Under what conditions can you give a definitive answer to this question?
5.1 What happens to the homogeneous-good NashBertrand equilibrium price if the number of firms increases? Why?
4.5 Being the first company to enter a market can provide a significant and sustained market-share advantage over later entrants. However, other companies may enter through innovative marketing or to
4.4 Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of
4.3 Show the effect of a subsidy on Firm 1’s bestresponse function in Solved Problem 14.3 if the firm faces a general demand function p(Q). M
4.2 Determine the Stackelberg equilibrium with one leader firm and two follower firms if the market demand curve is linear and each firm faces a constant marginal cost, m, and no fixed cost. M
*4.1 Duopoly quantity-setting firms face the market demand p = 200 - 5Q Each firm has a marginal cost of $20 per unit.a. What is the Nash-Cournot equilibrium?b. What is the Stackelberg equilibrium
*3.19 An incumbent firm, Firm 1, faces a potential entrant, Firm 2, that has a lower marginal cost. The market demand curve is p = 120 - q1 - q2. Firm 1 has a constant marginal cost of $20, while
3.18 In a market, duopoly firms produce differentiated products. The inverse demand function for Firm 1 is p1 = 104 - 10q1 - 2q2. The inverse demand function for Firm 2 is p2 = 42 - 2q2 - q1. Each
*3.17 To examine the trade-off between efficiency and market power from a merger, consider a market with two firms that sell identical products. Firm 1 has a constant marginal cost of 1, and Firm 2
3.16 How would the Nash-Cournot equilibrium change in the airline example if United’s marginal cost were$100 and American’s were $200? (Hint: See Solved Problem 14.1.) M
3.15 In 2015, Spirit reported that its “average cost per available seat mile excluding special items and fuel”was 5.7¢ compared to 8.5¢ for Southwest. Assuming that Spirit and Southwest compete
3.14 Graph the best-response curve of the second firm in Solved Problem 14.1 if its marginal cost is m and if it is m + x. Add the first firm’s best-response curve and show how the Nash-Cournot
3.13 A duopoly faces an inverse market demand function of p = 120 - Q. Firm 1 has a constant marginal cost of 20. Firm 2’s constant marginal cost is 40.Calculate the output of each firm, market
*3.12 Why does differentiating its product allow an oligopoly to charge a higher price?
*3.11 The viatical settlement industry enables terminally ill consumers, typically HIV patients, to borrow against equity in their existing life insurance contracts to finance their consumption and
3.10 The Application “Deadweight Losses in the Food and Tobacco Industries” shows that the deadweight loss as a fraction of sales varies substantially across industries. One possible explanation
3.9 Consider the Cournot model with n firms. The inverse linear market demand function is p = a - bQ. Each of the n identical firms has the same cost function C(qi) = Aqi + 1 2Bqi 2, where a 7 A. In
3.8 In 2005, the prices for 36 prescription painkillers shot up as much as 15% after Merck yanked its once-popular arthritis drug Vioxx from the market due to fears that it caused heart problems
3.7 Suppose there are n firms selling a homogeneous product at a constant marginal cost, m = 50, in a Cournot market. The inverse market demand curve is p = 200 - 2Q, where Q = nq. What is the output
*3.6 Your college is considering renting space in the student union to one or two commercial textbook stores. The rent the college can charge per square foot of space depends on the profit (before
*3.5 In a Nash-Cournot equilibrium, each of the n firms faces a constant marginal cost m, the inverse market demand function is p = a - bQ, and the government assesses a specific tax of τ per unit.
3.4 In 2008, cruise ship lines announced they were increasing prices from $7 to $9 per person per day because of increased fuel costs. According to one analyst, fuel costs for Carnival
3.3 According to Robert Guy Matthews, “Fixed Costs Chafe at Steel Mills,” Wall Street Journal, June 10, 2009, stainless steel manufacturers were increasing prices even though the market demand
3.2 In the initial Cournot oligopoly equilibrium, both firms have constant marginal costs, m, and no fixed costs, and the market has a barrier to entry. Use calculus to show what happens to the
3.1 What is the duopoly Nash-Cournot equilibrium if the market demand function is Q = 500 - 10p and each firm’s marginal cost is 5¢ per unit? M
2.7 In a market in which there are a larger number of firms, government may be less reluctant to prevent firms from merging. Do you agree with this view?
2.6 In May 2016, the European Union officially blocked the merger of British telecom companies Three U.K., owned by CK Hutchison, and O2, owned by Telefónica. The reason given was that the resulting
2.5 In 2013, a federal judge ruled that Apple colluded with five major U.S. publishers to artificially drive up the prices of e-books (which could be read on Apple’s iPad). Apple collects a 30%
14.1, describe a cartel’s price determination process and show how much more profit a firm would gain by cheating (producing more than the cartel’s quota).
2.4 Firms have an incentive to form cartels in which they collude in setting prices or quantities to increase profits. Examples of cartels, some being government sanctioned, vary among countries and
2.3 The European Union fined Sotheby’s auction house more than €20 million for operating a price-fixing cartel with Christie’s auction house (see “The Art of Price Fixing” in Pearson MyLab
2.2 A market has an inverse demand curve p = 100 - 2Q and four firms, each of which has a constant marginal cost of MC = 20. If the firms form a profit-maximizing cartel and agree to operate subject
2.1 Many retail stores offer to match or beat the price offered by a rival store. Explain why firms that belong to a cartel might make this offer.
1.1 Which market structure best describes (a) car manufacturing, (b) restaurants in a city, (c) farms that grow soybeans, and (d) electricity distribution in a city? Why?
5.2 Derive the mixed strategy equilibrium if both Intel and AMD act simultaneously in the game in the Challenge Solution. What is the expected profit of each firm? (Hint: see Solved Problems 13.1 and

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