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microeconomics principles

Questions and Answers of Microeconomics Principles

Modify the payoff matrix in the game of chicken in Exercise 1.13 so that the payoff is -2 if neither driver swerves. How does the equilibrium change? M
Two guys (suffering from testosterone poisoning)engage in the game of chicken. They drive toward each other in the middle of a road. As they approach the impact point, each has the option of
Takashi Hashiyama, president of the Japanese electronics firm Maspro Denkoh Corporation, was torn between commissioning Christie’s or Sotheby’s to auction the company’s $20 million art
In the battle of the sexes game, the husband likes to go to the mountains on vacation, and the wife prefers the ocean, but they both prefer to take their vacations together.Husband–1–1–1 2–1
Suppose that Panasonic and Zenith are the only two firms that can produce a new type of 3D TV. The payoff matrix shows the firms’ profits (in millions of dollars):If the firms make their decisions
Suppose that Toyota and GM are considering entering a new market for electric automobiles and that their profits (in millions of dollars) from entering or staying out of the market are included a van
What is the mixed-strategy Nash equilibrium for the game in Exercise 1.7? M
Suppose that two firms face the following payoff matrix:Given these payoffs, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price. What, if any, are the
The Wall Street Journal (Lippman, John, “The Producers: ‘The Terminator’ Is Back,” March 8, 2002, A1) reported that Warner Brothers agreed to pay$50 million for its U.S. distribution rights,
Lori employs Max. She wants him to work hard rather than to loaf. She considers offering him a bonus or not giving him one. All else the same, Max prefers to loaf. The payoff matrix is If they choose
Suppose Procter & Gamble (PG) and Johnson &Johnson (JNJ) are simultaneously considering new advertising campaigns. Each firm may choose a high, medium, or low level of advertising.What are each
Two firms must simultaneously decide which quality to manufacture. The profit matrix (in tens of thousands of euros) is Identify all the Nash equilibria in this game. (See Solved Problem 13.1.)
Show that advertising is a dominant strategy for both firms in both panels of Table 13.3. Explain why that set of strategies is a Nash equilibrium.
Show the payoff matrix and explain the reasoning in the prisoners’ dilemma example where Larry and Duncan, possible criminals, will get one year in prison if neither talks; if one talks, one goes
Using a diagram similar to Figure 12.7 to illustrate the effect of social media on the demand for Super Bowl commercials. (Hint: See the Application“Super Bowl Commercials.”)8. Challenge
For every dollar spent on advertising pharmaceuticals, revenue increases by about $4.20 (CNN, December 17, 2004). If this number is accurate and the firms are operating rationally, what (if anything)
What is the monopoly’s profit-maximizing output, Q, and level of advertising, A, if it faces a demand curve of p = a - bQ + cAα, its constant marginal cost of producing output is m, and the cost
The demand a monopoly faces is p = 100 - Q + A0.5, where Q is its quantity, p is its price, and A is its level of advertising. Its marginal cost of production is 10, and its cost of a unit of
Show how a monopoly would solve for its optimal price and advertising level if it sets price instead of quantity. M
The publisher Elsevier uses mixed-bundling pricing strategy. The publisher sells a university access to a bundle of 930 of its journals for $1.7 million for one year. It also offers the journals
A computer hardware firm sells both laptop computers and printers. Through the magic of focus groups, their pricing team determines that they have an equal number of three types of customers, and
As described in the Application “Pricing iTunes,”Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing charging an annual access fee and a low price per song, it would raise
Joe in Question 5.3 marries Susan, who is also an enthusiastic golfer. Susan wants to join the Northlands Club. The manager believes that Susan’s inverse demand curve is p = 100 - 2q. The manager
Joe has just moved to a small town with only one golf course, the Northlands Golf Club. His inverse demand function is p = 120 - 2q, where q is the number of rounds of golf that he plays per year.The
Knoebels Amusement Park in Elysburg, Pennsylvania, charges an access fee, l, to enter its Crystal Pool. It also charges p per trip down the pool’s water slides. Suppose that 400 teenagers visit the
Using math, show why two-part pricing causes customers who purchase few units to pay more per unit than customers who buy more units. M
Consider the nonlinear price discrimination analysis in panel a of Figure 12.4.a. Suppose that the monopoly can make consumers a take-it-or-leave-it offer. The monopoly sets a price, p*, and a
Suppose that the nonlinear price discriminating monopoly in panel a of Figure 12.4 can set three prices, depending on the quantity a consumer purchases. The firm’s profit isπ = p1Q1 + p2(Q2 - Q1)
In panel b of Figure 12.4, the single-price monopoly faces a demand curve of p = 90 - Q and a constant marginal (and average) cost of m = $30. Find the profit-maximizing quantity (or price) using
Are all the customers of the monopoly that uses block pricing in panel a of Figure 12.4 worse off than they would be if the firm set a single price(panel b)? Why or why not?
Does a monopoly’s ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not? [Consider two cases: (a) the marginal cost is so high that the
According to a report from the Foundation for Taxpayer and Consumer Rights, gasoline costs twice as much in Europe than in the United States because taxes are higher in Europe. However, the amount
Show that the equilibrium elasticities in the two countries must be equal in Solved Problem 12.3. M
A monopoly sells to n1 consumers in Country 1 and n2 in Country 2, where each person in Country 1 has a constant elasticity demand function of q1 = pε1and every person in Country 2 has a demand
How would the analysis in Solved Problem 12.2 change if m = 7 or if m = 4? (Hint: Where m = 4, the marginal cost curve crosses the MR curve three times—if we include the vertical section. The
A monopoly sells its good in the United States, where the elasticity of demand is -2, and in Japan, where the elasticity of demand is -5. Its marginal cost is 10. At what price does the monopoly sell
Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set in China for about $3, which was only one-fifth the U.S. price, and sold about 100,000 units. The price
Universal Studios sold the Mamma Mia! DVD around the world. Universal charged $21.40 in Canada and $32 in Japan—more than the $20 it charged in the United States. Given that Universal had a
A monopoly sells its good in the U.S. and Japanese markets. The American inverse demand function is pA = 100 - QA, and the Japanese inverse demand function is pJ = 80 - 2QJ, where both prices, pA and
A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“eye-BO”). The Chihuahuasized robot could sit, beg, chase balls, dance, and play an electronic tune. When Sony started
Hershey Park sells tickets at the gate and at local municipal offices. There are two groups of people. Suppose that the demand function for people who purchase tickets at the gate is QG = 10,000 -
A monopoly sells in two countries, and resale between the countries is impossible. The demand curves in the two countries are p1 = 100 - Q1 and p2 = 120 - 2Q2. The monopoly’s marginal cost is m =
A firm charges different prices to two groups.Would the firm ever operate where it was suffering a loss from its sales to the low-price group? Explain.
A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price, p = $5. No
A firm is a natural monopoly (see Chapter 11).Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price
To promote her platinum-selling CD Feels Like Home in 2005, singer Norah Jones toured the country giving live performances. However, she sold an average of only two-thirds of the tickets available
See the Application “Google Uses Bidding for Ads to Price Discriminate,” which discusses how advertisers on Google’s Web site bid for the right for their ads to be posted when people search for
Using the information in the Application “Botox Revisited,” determine how much Allergan loses by being a single-price monopoly rather than a perfectly price-discriminating monopoly. Explain.
If a monopoly faces an inverse demand curve of p = 90 - Q, has a constant marginal and average cost of 30, and can perfectly price discriminate, what is its profit? What are the consumer surplus,
On July 12, 2012, Hertz charged $126.12 to rent a Nissan Altima for one day in New York City, but only $55.49 a day in Miami. Is this price discrimination? Explain.2. Perfect Price Discrimination
The 2002 production run of 25,000 new Thunderbirds included only 2,000 cars for Canada. Yet potential buyers besieged Canadian Ford dealers.Many hoped to make a quick profit by reselling the cars in
Disneyland price discriminates by charging lower entry fees for children than for adults and for local residents than for other visitors. Why does it not have a resale problem?
Many colleges provide students from low-income families with scholarships, subsidized loans, and other programs so that they pay lower tuitions than students from high-income families. Explain why
Spenser’s Superior Stoves advertises a one-day sale on electric stoves. The ad specifies that no phone orders will be accepted and that the purchaser must transport the stove. Why does the firm
Alexx’s monopoly currently sells its product at a single price. What conditions must be met so that he can profitably price discriminate?Exercises = exercise is available on MyEconLab; * = answer
As of 2012, the pharmaceutical companies Abbott Laboratories, AstraZeneca, Aventis Pharmaceuticals, Bristol-Myers Squibb Company, Eli Lilly, GlaxoSmithKline, Janssen, Johnson & Johnson, Novartis,
Bleyer Industries Inc., the only U.S. manufacturer of plastic Easter eggs, once manufactured 250 million eggs each year. However, imports from China cut into its business. In 2005, Bleyer filed for
A country has a monopoly that is protected by a specific tariff, τ, on imported goods. The monopoly’s profit-maximizing price is p*. The world price of the good is pw, which is less than p*.
For general functions, solve for the monopsony’s first-order condition if it is also a monopoly in the product market. M 8. Challenge
A monopsony faces a supply curve of p = 10 + Q.What is its marginal expenditure curve? If the monopsony has a demand curve of p = 50 - Q, what are the equilibrium quantity and price? How does this
What effect does a price support have on a monopsony? In particular, describe the equilibrium if the price support is set at the price where the supply curve intersects the demand curve.
Can a monopsony exercise monopsony power—that is, profitably set its price below the competitive level—if the supply curve it faces is horizontal?Why or why not?
What happens to the monopsony equilibrium if the minimum wage is set slightly above or below the competitive wage? (Hint: See Solved Problem 11.6.)
Suppose that the original labor supply curve, S1, for a monopsony shifts to the right to S2 if the firm spends $1,000 in advertising. Under what condition should the monopsony engage in this
A monopoly chocolate manufacturer faces two types of consumers. The larger group, the hoi polloi, loves desserts and has a relatively flat, linear demand curve for chocolate. The smaller group, the
A monopoly produces a good with a network externality at a constant marginal and average cost of$2. In the first period, its inverse demand curve is p = 10 - Q. In the second period, its demand is p
The price of wholesale milk dropped by 30.3% in 1999 when the Pennsylvania Milk Marketing Board lowered the regulated price. The price to consumers fell by substantially less than 30.3%. Why?
A monopoly drug company produces a lifesaving medicine at a constant cost of $10 per dose.The demand for this medicine is perfectly inelastic at prices less than or equal to the $100 (per day)income
Based on the information in the Botox Patent Monopoly application, what would happen to the equilibrium price and quantity if the government had set a price ceiling of $200 per vial of Botox?What
Describe the effects on output and welfare if the government regulates a monopoly so that it may not charge a price above p, which lies between the unregulated monopoly price and the optimally
Once the copyright runs out on a book or musical composition, the work can legally be put on the Internet for anyone to download. U.S. copyright law protects the monopoly for 95 years after the
In the Botox Patent Monopoly application, consumer surplus, area A, equals the deadweight loss, area C. Show that this equality is a result of the linear demand and constant marginal cost
Based on the information in the Botox Patent Monopoly application, what would happen to the equilibrium price and quantity if the government had collected a specific tax of $75 per vial of Botox?What
Can a firm operating in the upward-sloping portion of its average cost curve be a natural monopoly?Explain. (Hint: See Solved Problem 11.4.)
Can a firm be a natural monopoly if it has a U-shaped average cost curve? Why or why not?(Hint: See Solved Problem 11.4.)
What is the effect of a franchise (lump-sum) tax on a monopoly? (Hint: Consider the possibility that the firm may shut down.)4. Causes of Monopolies
Only Indian tribes can run casinos in California.These casinos are spread around the state so that each is a monopoly in its local community.California Governor Arnold Schwarzenegger negotiated with
In 1996, Florida voted on (and rejected) a 1¢-perpound excise tax on refined cane sugar in the Florida Everglades Agricultural Area. Swinton and Thomas(2001) used linear supply and demand
A monopoly with a constant marginal cost m has a profit-maximizing price of p1. It faces a constant elasticity demand curve with elasticity ε. After the government applies a specific tax of $1, its
If the inverse demand function facing a monopoly is p(Q) and its cost function is C(Q), show the effect of a specific tax, τ, on the monopoly’s profitmaximizing output. How does imposing τ affect
Suppose that many similar price-taking consumers (such as Denise in Chapter 10) have a single good (candy bars). Jane has a monopoly in wood, so she can set prices. Assume that no production is
Draw an example of a monopoly with a linear demand curve and a constant marginal cost curve.a. Show the profit-maximizing price and output, p*and Q*, and identify the areas of consumer surplus,
Suppose that all iPod owners consider only two options for downloading music to their MP3 players: purchasing songs from iTunes or copying songs from friends. With these two options, suppose the
In addition to the hard-drive-based iPod, Apple produces a flash-based audio player. Its 512MB iPod Shuffle (which does not have a hard drive) sold for$99 in 2005. According to iSuppli, Apple’s
When the iPod was introduced, Apple’s constant marginal cost of producing its top-of-the-line iPod was $200 (iSuppli), its fixed cost was approximately $736 million, and I estimate that its inverse
The U.S. Postal Service (USPS) has a constitutionally guaranteed monopoly on first-class mail. In 2012,it charged 44¢ for a stamp, which was not the profit-maximizing price—the USPS goal,
In 2009, the price of Amazon’s Kindle 2 was $359, while iSuppli estimated that its marginal cost was$159. What was Amazon’s Lerner Index? What elasticity of demand did it face if it was engaging
Under what circumstances does a monopoly set its price equal to its marginal cost?
Are major-league baseball clubs profit-maximizing monopolies? Some observers of this market contend that baseball club owners want to maximize attendance or revenue. Alexander (2001) said that one
Show why a monopoly may operate in the upwardor downward-sloping section of its long-run average cost curve but a competitive firm operates only in the upward-sloping section.
AT&T Inc., the large U.S. phone company and the one-time monopoly, left the payphone business because people were switching to wireless phones(Crayton Harrison, “AT&T to Disconnect PayPhone
Suppose that the inverse demand for San Francisco cable car rides is p = 10 - Q/1,000, where p is the price per ride and Q is the number of rides per day.Suppose the objective of San Francisco’s
Given that a monopoly’s marginal revenue curve is strictly downward sloping, use math and a graph(such as Figure 11.3) to show why a monopoly’s revenue curve reaches its maximum at a larger
If a monopoly’s inverse demand curve is p = 13 - Q and its cost function is C = 25 + Q + 0.5Q2, what Q* maximizes the monopoly’s profit (or minimizes its loss)? At Q*, what is the price and the
Suppose that the inverse demand function for a monopolist’s product is p = 9 - Q/20. Its cost function is C = 10 + 10Q - 4Q2 + 2 3 Q3. Draw marginal revenue and marginal cost curves. At what
The inverse demand curve that a monopoly faces is p = 10Q-0.5. The firm’s cost curve is C(Q) = 5Q.What is the profit-maximizing quantity and price? M
The inverse demand curve that a monopoly faces is p = 100 - Q. The firm’s cost curve is C(Q)= 10 + 5Q. What is the firm’s profit-maximizing quantity and price? How does your answer change if C(Q)
Show that the elasticity of demand is unitary at the midpoint of a linear inverse demand function and hence that a monopoly will not operate to the right of this midpoint. M
Given that the inverse demand function is p(Q) = a- bQ + (c/2)Q2, derive the marginal revenue function. Compare the corresponding marginal revenue curve to the linear one (where c = 0) and show how
If the inverse demand curve a monopoly faces is p = 10Q-0.5, what is the firm’s marginal revenue curve? (Hint: See Solved Problem 11.1.) M

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